UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
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
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 August 11, 1998, the number of outstanding shares of the Registrant's
common stock was 19,825,878.
NUEVO ENERGY COMPANY
INDEX
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets:
June 30, 1998 (Unaudited) and December 31, 1997 (Restated).............. 3
Condensed Consolidated Statements of Operations (Unaudited):
Three and six months ended June 30, 1998 and June 30, 1997 (Restated)... 5
Condensed Consolidated Statements of Cash Flows (Unaudited):
Six months ended June 30, 1998 and June 30, 1997 (Restated)............. 7
Notes to Condensed Consolidated Financial Statements (Unaudited)......... 8
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 14
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
------
June 30, 1998 December 31, 1997
-------------- ------------------
(Unaudited) (Restated)
CURRENT ASSETS:
Cash and cash equivalents............................ $ 6,364 $ 9,208
Accounts receivable.................................. 26,956 38,196
Product inventory.................................... 2,882 1,627
Prepaid expenses and other........................... 10,837 9,829
---------- ----------
Total current assets............................... 47,039 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)... 1,082,014 984,273
Pipeline and other facilities........................ 5,004 4,304
Gas plant facilities................................. 16,590 15,500
---------- ----------
1,157,127 1,059,015
Accumulated depreciation, depletion and
amortization....................................... (371,247) (324,904)
---------- ----------
785,880 734,111
---------- ----------
DEFERRED TAX ASSETS................................... 5,283 ---
OTHER ASSETS.......................................... 13,185 11,315
---------- ----------
$ 851,387 $ 804,286
========== ==========
See accompanying notes to condensed consolidated financial statements.
3
NUEVO ENERGY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Amounts in Thousands, Except Share Data)
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, 1998 December 31,1997
-------------- -----------------
(Unaudited) (Restated)
CURRENT LIABILITIES:
Accounts payable............................................................................. $ 8,567 $ 17,759
Accrued interest............................................................................. 4,024 4,285
Accrued liabilities.......................................................................... 28,147 23,843
Current maturities of long-term debt......................................................... 3,703 3,716
-------- --------
Total current liabilities................................................................. 44,441 49,603
-------- --------
OTHER LONG-TERM LIABILITIES.................................................................... 2,962 4,018
LONG-TERM DEBT, NET OF CURRENT MATURITIES...................................................... 377,051 305,940
DEFERRED TAX LIABILITIES....................................................................... --- 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, 20,308,462 and 20,237,537 shares
issued at June 30, 1998 and December 31, 1997, respectively................................. 203 202
Additional paid-in capital................................................................... 355,576 354,296
Treasury stock, at cost, 490,290
and 497,372 shares, at June 30, 1998
and December 31, 1997, respectively.......................................................... (19,553) (19,929)
Stock held by benefit trust, 38,051
and 45,119 shares, at June 30, 1998
and December 31, 1997, respectively.......................................................... (1,503) (1,244)
Accumulated deficit.......................................................................... (22,790) (8,586)
-------- --------
Total stockholders' equity............................................................... 311,933 324,739
-------- --------
$851,387 $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 June 30,
---------------------------
1998 1997
------ ------
(Restated)
REVENUES:
Oil and gas revenues......................... $ 59,903 $78,573
Gas plant revenues........................... 577 2,773
Pipeline and other revenues.................. 710 1,240
Gain on sale................................. --- 3,039
Interest and other income.................... 467 351
-------- -------
61,657 85,976
-------- -------
COSTS AND EXPENSES:
Lease operating expenses..................... 32,738 28,602
Gas plant operating expenses................. 685 2,349
Pipeline and other operating expenses........ 576 975
Exploration costs............................ 2,097 827
Depreciation, depletion and amortization..... 21,774 26,838
General and administrative expenses.......... 4,976 4,480
Outsourcing fees............................. 2,305 3,068
Interest expense............................. 7,618 7,263
Dividends on Guaranteed Preferred
Beneficial Interests in Company's
Convertible Debentures (TECONS)............ 1,653 1,655
Other expense................................ --- 11
-------- -------
74,422 76,068
-------- -------
(Loss) income before income taxes, minority
interest and extraordinary item.............. (12,765) 9,908
(Benefit) provision for income taxes.......... (5,143) 3,911
Minority interest............................. --- 9
-------- -------
(Loss) income before extraordinary item....... (7,622) 5,988
Extraordinary loss on early extinguishment
of debt, net of income tax benefit.......... --- 3,024
-------- -------
NET (LOSS) INCOME............................. $ (7,622) $ 2,964
======== =======
(LOSS) EARNINGS PER SHARE:
Basic:
(Loss) income before extraordinary item....... $ (0.39) $ 0.30
Extraordinary loss on early extinguishment
of debt, net of income tax benefit.......... --- (0.15)
-------- -------
(Loss) earnings per common share - Basic...... $ (0.39) $ 0.15
======== =======
Weighted average common shares outstanding.... 19,772 19,695
======== =======
DILUTED:
(Loss) income before extraordinary item....... $ (0.39) $ 0.30
Extraordinary loss on early extinguishment
of debt, net of income tax benefit.......... --- (0.15)
-------- -------
(Loss) earnings per common share - Diluted.... $ (0.39) $ .15
======== =======
Weighted average common and dilutive
potential common shares outstanding.......... 19,772 20,298
======== =======
See accompanying notes to condensed consolidated financial statements.
5
NUEVO ENERGY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in Thousands, Except per Share Data)
Six Months Ended June 30,
-------------------------
1998 1997
------ ------
(Restated)
REVENUES:
Oil and gas revenues..................................... $123,045 $168,710
Gas plant revenues....................................... 1,405 11,597
Pipeline and other revenues.............................. 2,224 2,737
Gain on sale............................................. 1,677 4,400
Interest and other income................................ 967 942
-------- --------
129,318 188,386
-------- --------
COSTS AND EXPENSES:
Lease operating expenses................................. 65,774 59,361
Gas plant operating expenses............................. 1,423 10,220
Pipeline and other operating expenses.................... 1,842 2,301
Exploration costs........................................ 4,094 1,627
Depreciation, depletion and amortization................. 46,556 48,199
General and administrative expenses...................... 10,913 8,620
Outsourcing fees......................................... 4,812 6,187
Interest expense......................................... 14,444 14,008
Dividends on Guaranteed Preferred Beneficial Interests in
Company's Convertible Debentures (TECONS)............... 3,306 3,270
Other expense............................................ 228 259
-------- --------
153,392 154,052
-------- --------
(Loss) income before income taxes, minority interest, and
extraordinary item.......................................... (24,074) 34,334
(Benefit) provision for income taxes......................... (9,870) 13,741
Minority interest............................................ --- (5)
-------- --------
(Loss) income before extraordinary item...................... (14,204) 20,598
Extraordinary loss on early extinguishment of debt, net of
income tax benefit.......................................... --- 3,024
-------- --------
NET (LOSS) INCOME............................................ $(14,204) $ 17,574
======== ========
(LOSS) EARNINGS PER SHARE:
BASIC:
(Loss) income before extraordinary item...................... $ (0.72) $ 1.03
Extraordinary loss on early extinguishment of debt, net of
income tax benefit........................................... --- (0.15)
-------- --------
(Loss) earnings per common share - Basic...................... $ (0.72) $ 0.88
======== ========
Weighted average common shares outstanding.................... 19,759 19,890
======== ========
DILUTED:
(Loss) income before extraordinary item....................... $ (0.72) $ 1.00
Extraordinary loss on early extinguishment of debt,
net of income tax benefit.................................... --- (0.15)
-------- --------
(Loss) earnings per common share - Diluted..................... $ (0.72) $ 0.85
======== ========
Weighted average common and dilutive potential common shares
outstanding.................................................. 19,759 20,572
======== ========
See accompanying notes to condensed consolidated financial statements.
6
NUEVO ENERGY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Amounts in Thousands)
Six Months Ended June 30,
-------------------------
1998 1997
------ --------
(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income.................................................... $ (14,204) $ 17,574
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation, depletion and amortization........................ 46,556 48,199
Gain on sale.................................................... (1,677) (4,400)
Dry hole costs.................................................. 138 1,469
Amortization of other costs..................................... 758 821
Extraordinary loss on early extinguishment of debt.............. --- 5,061
Deferred revenues............................................... (1,227) (1,692)
Deferred taxes.................................................. (10,245) 11,355
Minority interest............................................... --- (5)
Employee stock awards........................................... --- 646
---------- ---------
20,099 79,028
Changes in assets and liabilities:
Accounts receivable............................................. 11,240 654
Accounts payable and accrued liabilities........................ (5,149) 594
Other........................................................... (4,273) 307
---------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES............................ 21,917 80,583
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties............................ (98,139) (102,160)
Additions to gas plant facilities.............................. (1,091) (704)
Additions to pipeline and other facilities..................... (1,184) (897)
Proceeds from sale of gas plant................................ --- 24,992
Proceeds from sale of properties............................... 5,811 2,150
---------- ---------
NET CASH USED IN INVESTING ACTIVITIES................................ (94,603) (76,619)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings....................................... 193,000 140,500
Deferred financing costs....................................... (2,636) ---
Payments of long-term debt..................................... (121,902) (135,651)
Premium to retire long-term debt............................... --- (3,440)
Proceeds from sale of put options.............................. --- 1,630
Treasury stock sale (purchase)................................. 100 (21,173)
Proceeds from issuance of common stock......................... 1,280 5,408
---------- ---------
NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES.................. 69,842 (12,726)
---------- ---------
Net decrease in cash and cash equivalents (2,844) (8,762)
Cash and cash equivalents at beginning of period.................... 9,208 13,636
---------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........................... $ 6,364 $ 4,874
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amounts capitalized)........................... $ 14,389 $ 15,366
Income taxes.................................................... $ 475 $ 350
See accompanying notes to condensed consolidated financial statements.
7
NUEVO ENERGY COMPANY
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 June 30, 1998 and December 31, 1997 and the
results of operations and changes in cash flows for the periods ended June
30, 1998 and 1997. These financial statements should be read in conjunction
with the financial statements and notes to financial statements in the 1997
Form 10-K of Nuevo Energy Company (the "Company") and in the Form 8-K that
was filed with the Securities and Exchange Commission on May 20, 1998. The
Form 8-K was filed in connection with the Company's conversion from the full
cost to the successful efforts method of accounting for its investments in
oil and gas properties (see discussion below) and includes restated financial
statements as of December 31, 1997 and 1996, and for the years ended December
31, 1997, 1996 and 1995.
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, the condensed
consolidated statement of operations for the three and six months ended June
30, 1997, and the condensed consolidated statement of cash flows for the six
months ended June 30, 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 condensed consolidated statement
of operations for the three months ended June 30, 1997, the effect of the
accounting change was to decrease net income by $3.0 million, or $0.15 per
common share basic and diluted. For the condensed consolidated statement of
operations for the six months ended June 30, 1997, the effect of the
accounting change was to decrease net income by $2.2 million, or $0.11 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.
COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards ("SFAS") 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.
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
8
NUEVO ENERGY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 June 30, 1998 or December 31, 1997. Gains or losses on derivative
financial instruments that do not qualify as a hedge are recognized in income
currently.
As a result of hedging transactions, oil and gas revenues were increased by
$0.1 million in the second quarter of 1998 and 1997. During the first six
months of 1998 and 1997, oil and gas revenues were increased by $0.2 million
and reduced by $1.7 million, respectively, as a result of these transactions.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related
Information". This statement establishes standards for reporting information
about operating segments in annual financial statements and requires that
enterprises report selected information about operating segments in interim
reports. The Company will adopt the provisions of SFAS No. 131 during 1998.
As SFAS No. 131 establishes standards for reporting and display, the Company
does not expect the adoption of this statement to have a material impact on
its financial condition or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes standards of
accounting for and disclosures of derivative instruments and hedging
activities. This statement is effective for the Company beginning in the
first quarter of the year 2000, however, early adoption is permitted. The
Company has not yet determined the impact of this statement on its financial
condition or results of operations or whether it will adopt the statement
early.
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.
9
NUEVO ENERGY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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. The Company recorded an impairment loss of
$30.0 million in the fourth quarter of 1997, however, no such impairment was
recognized during the three month or six month periods ended June 30, 1998 or
1997.
Interest costs related to exploration and development activities on unproved
properties are capitalized until the related properties are evaluated and are
subject to depletion. The capitalization rates are 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. DEFERRED TAX ASSETS
As a result of the net loss generated during the first six months of 1998,
the Company has deferred tax assets of $5.3 million as of June 30, 1998. The
Company believes that sufficient future taxable income will be generated and
has concluded that these deferred tax assets will more likely than not
be realized.
10
NUEVO ENERGY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
4. INDUSTRY SEGMENT INFORMATION
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 has and will continue
to record the associated revenues and expenses, but has not depreciated these
assets. (See Note 10 for further discussion of these asset sales).
Historically, the Company's operations were concentrated primarily in two
segments: the exploration and production of oil and natural gas and gas
plant, pipeline and gas storage operations.
For the Six Months Ended
--------------------------
June 30, June 30,
1998 1997
----------- ------------
(Restated)
SALES TO UNAFFILIATED CUSTOMERS:
Oil and gas.............................................. $123,045 $168,710
Gas plant, pipelines and other(1)........................ 3,629 14,334
-------- --------
Total sales........................................... 126,674 183,044
Gain on sale............................................. 1,677 4,400
Other revenues........................................... 967 942
-------- --------
Total revenues........................................ $129,318 $188,386
======== ========
OPERATING (LOSS) PROFIT BEFORE INCOME TAXES:
Oil and gas.............................................. $ 9,041 $ 63,609
Gas plant, pipelines and other(1)........................ (36) 2,467
-------- --------
9,005 66,076
Unallocated corporate expenses........................... 15,329 14,464
Interest expense......................................... 14,444 14,008
Dividends on Guaranteed Preferred Beneficial Interests
in Company's Convertible Debentures (TECONS)........... 3,306 3,270
-------- --------
(Loss) income before income taxes, minority
interest, and extraordinary item....................... $(24,074) $ 34,334
======== ========
DEPRECIATION, DEPLETION AND AMORTIZATION:
Oil and gas.............................................. $ 45,813 $ 46,226
Gas plant, pipelines and other(1)........................ 400 1,633
-------- --------
$ 46,213 $ 47,859
======== ========
(1) The Company sold its interest in the Benedum Plant System in May 1997.
5. FINANCING ACTIVITIES
On June 8, 1998, the Company issued $100.0 million of 8 7/8% Senior
Subordinated Notes due 2008. Net proceeds from this offering of $97.6
million were used to repay borrowings under the Company's credit facility.
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.
11
NUEVO ENERGY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
6. (LOSS) EARNINGS PER SHARE COMPUTATION
SFAS No. 128 requires a reconciliation of the numerator (income) and
denominator (shares) of the basic earnings per share ("EPS") computation to
the numerator and denominator of the diluted EPS computation. In the three
and six month periods ended June 30, 1998, weighted average potential
dilutive common shares of 506,000 and 451,000, respectively, are not
included in the calculation of diluted loss per share due to their anti-
dilutive effect. The Company's reconciliation is as follows:
For the Three Months Ended June 30,
-----------------------------------------------------------
1998 1997
------------------------------ ---------------------------
Loss Shares Income Shares
-------------- ------------- ------------ ------------
(Loss) earnings per Common share--Basic.................. $(7,622) 19,772 $2,964 19,695
Effect of dilutive securities:
Stock options............................................ -- -- -- 603
------- ------ ------ ------
(Loss) earnings per Common share--Diluted................ $(7,622) 19,772 $2,964 20,298
======= ====== ====== ======
For the Six Months Ended June 30,
------------------------------------------------------------
1998 1997
------------------------------ ---------------------------
Loss Shares Income Shares
-------------- ------------- ------------ ------------
(Loss) earnings per Common share--Basic.................. $(14,204) 19,759 $17,574 19,890
Effect of dilutive securities:
Stock options............................................ -- -- -- 682
-------- ------ ------- ------
(Loss) earnings per Common share--Diluted................ $(14,204) 19,759 $17,574 20,572
======== ====== ======= ======
7. 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 in 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.
8. 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 to all working
interest owners, 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.
12
NUEVO ENERGY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
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 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. The Company is currently
investigating its options for political risk insurance in the Republic of
Ghana in West Africa ("Ghana").
During 1997, a new government was established in the Congo. Political unrest
has continued during the first half of 1998, with insurgents challenging the
new government of the Congo. Although the political situation in the Congo
has not to date had a material adverse effect on the Company's operations in
the Congo, no assurances can be made that continued political unrest in the
Congo will not have a material adverse effect on the Company and its
operations in the Congo.
9. ACQUISITIONS
In April 1998, the Company acquired a third party's interest in the Yombo
field in the Congo for $7.8 million. Such acquisition added 3.4 million
barrels of oil equivalent to the Company's December 31, 1997 reserve base and
increased the Company's net working interest in the Congo from 43.75% to
50.0%.
10. SUBSEQUENT EVENTS
On July 2, 1998, the Company announced that it anticipates receiving
approximately $14.0 million from three separate transactions for its
remaining non-core gas gathering, pipeline and storage assets. The Company
completed the sale of its Bright Star gas gathering system in July 1998 and
Richfield gas storage assets in February 1998, at their approximate carrying
values, and has signed a letter of intent with a third party to sell the
remaining asset, the Illini pipeline. Closing of the Illini pipeline sale is
expected in August 1998, pending finalization of a purchase and sale
agreement and certain regulatory approvals.
13
NUEVO ENERGY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ITEM 2.
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, the effect of political
contingencies in foreign countries, plans and objectives of management of the
Company for future operations and covenant compliance, are forward-looking
statements. The Company can give no assurances that the assumptions upon
which such forward looking statements were based 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. Additional Cautionary
Statements are set forth in the Company's Form 10-K for the year ended
December 31, 1997 under the caption "Risk Factors" and elsewhere, and are
incorporated herein by reference. Such Cautionary Statements include a
description of risks associated with the volatility of oil and gas prices,
uncertainties in estimating oil and gas reserves, the need to replace
reserves, the substantial capital requirements associated with oil and gas
operations, risks of foreign investment, operating risks, risks associated
with competition and markets for production, as well as the effect of
environmental and other regulations on the Company's business. 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 inception, the Company has grown and diversified its operations through
a series of opportunistic acquisitions of oil and gas properties and the
subsequent exploitation of these properties. The Company has complemented
these efforts with an active exploration program, which provides exposure to
prospects that have the potential to add substantially to the growth of the
Company. The funding of these activities has historically been provided by
operating cash flows, debt and bank financing, private and public placements
of debt and equity securities, property divestitures and joint ventures with
industry participants. Net cash provided by operating activities was $21.9
million and $80.6 million for the six months ended June 30, 1998 and 1997,
respectively. The reduction in cash flows was attributable to lower oil
prices in the first six months of 1998, compared with the first six months of
1997, which is described under "Results of Operations (Six months ended June
30, 1998 and 1997)". The Company invested $98.1 million and $102.2 million
in oil and gas properties for the six months ended June 30, 1998 and 1997,
respectively. As of June 30, 1998, the Company had $2.6 million of working
capital. 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 $265.0 million as
of June 30, 1998, subject to borrowing base determination.
On July 2, 1998, the Company announced that it anticipates receiving
approximately $14.0 million from three separate transactions for its
remaining non-core gas gathering, pipeline and storage assets. The Company
completed the sale of its Bright Star gas gathering system in July 1998 and
Richfield Gas Storage facility ("Richfield") in February 1998, at their
approximate carrying values, and has signed a letter of intent with a third
party to sell the remaining asset, the Illini pipeline. Closing of the Illini
pipeline sale is expected in August 1998, pending finalization of a purchase
and sale agreement and certain regulatory approvals.
On June 8, 1998, the Company issued $100.0 million of 8 7/8% Senior
Subordinated Notes due 2008. Net proceeds from this offering of $97.6
million were used to repay borrowings under the Company's credit facility.
In the second quarter of 1998, the Company announced that it had retained an
investment banking firm to evaluate options for maximizing the value of its
gas producing properties in East Texas, including the possible sale of such
properties. Estimated net proved reserves associated with these properties
totaled approximately
14
NUEVO ENERGY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ITEM 2.
275.0 billion cubic feet of natural gas 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.
In February 1998, the Company sold its 48.5% interest in 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.
The Company believes its working capital, 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 the remainder of 1998, which it believes offer meaningful
opportunities to grow reserves and increase production. The Company
anticipates spending an additional $44.0 million on development activities
during the second half of 1998, primarily in California and in East Texas.
The Company also has an active and growing exploration program targeting
high-potential reserve opportunities in California and the onshore Gulf Coast
region, as well as offshore the Republic of Ghana in West Africa ("Ghana")
and Tunisia in West Africa. The Company anticipates spending an additional
$25.0 million during the second half of 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 1998. 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 delayed 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. Drilling of the remaining five exploration projects has
been deferred until 1999.
In April 1998, the Company acquired a third party's interest in the Yombo
field in the Congo for $7.8 million. Such acquisition added 3.4 million
barrels of oil equivalent to the Company's December 31, 1997 reserve base and
increased the Company's net working interest in the Congo from 43.75% to
50.0%.
EXPLORATION AND DEVELOPMENT ACTIVITIES
During the first six months of 1998, the Company drilled or participated in
approximately 120 wells. Following is a description of significant
exploration and development activity during the first six months of 1998.
Exploration Activity
In California, low-risk exploratory drilling in the Monument Junction area
continued, and two new fault blocks were successfully logged and tested by
the Twisselman 6-14 and Mongoose #8 exploratory wells. These successes
continue to prove up expansions of the aerial extent of this play, which is
the company's largest onshore development project at present. At the Cymric
field, the McKittrick Front 700 well was logged through the Point of Rocks
formation in the first quarter of 1998. The Company has not been able to
complete this well at the current depth due to mechanical problems. The
Company is trying to resolve the problem, but if it is unable to do so,
completion will occur in shallower sections. In, July 1998, at Midway Peak
in California, the Company began drilling the Cree Fee #1 well, a 17,000
plus foot test of multiple
15
NUEVO ENERGY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
ITEM 2.
horizons, including the Point of Rocks formation. Completion and testing of
this well is expected to occur in the latter part of 1998.
At Four Isle Dome in Louisiana, the Company completed two wells, the B-1
sidetrack well and the B-2 well. The B-1 sidetrack well is currently
producing 15.3 Mmcf of gas per day and 360 net barrels of oil per day. The B-
2 well is delivering 18.2 Mmcf of gas per day and 390 net barrels of oil per
day. Also at Four Isle Dome, the Company logged the TLDC #1 well, which
should be dually completed later this year.
Internationally, operations have begun on both of the Company's African
exploration prospects, Chott Fejaj onshore Tunisia and East Cape Three Points
offshore Ghana. The Tunisia location is complete and the rig is on location.
The Chott Fejaj #3 well is anticipated to spud around the middle of the third
quarter. Drilling is expected to take approximately 70 days. The Company
also has a rig on location at the NECTP #1X well to test the Ghana prospect.
This well will require approximately 70 days to evaluate.
The Company is currently participating in additional exploration activity in
the Monument Junction area in California and at Four Isle Dome and Weeks
Island in Louisiana.
Development Activity
During the first six 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
the Midway Sunset and Cymric fields. During the first six months of 1998,
the Company increased Midway Sunset production by 600 net barrels of oil per
day and Cymric production by 1,000 net barrels of oil per day, with the use
of triple completion technology and development drilling. The Company's
Hopkins area redevelopment efforts in the Belridge field, which was an
abandoned steamflood, is still producing over 900 net barrels of oil per day
from a combination of both vertical and horizontal producers. Nuevo
continues to drill successful horizontal wells in the Cymric, Midway Sunset
and Belridge fields, with initial rates averaging approximately 200 net
barrels of oil per day. Also during the first six months of 1998, the
Company drilled 14 wells in the Monument Junction area, bringing current
volumes to approximately 3,200 net barrels of oil equivalent per day. The
Company utilized frac-pac technology for the third time in offshore
California at Santa Clara. This third completion initially produced 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 half of 1998, the
Company drilled 44 wells, since the inception of the drilling program, 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.
16
NUEVO ENERGY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
ITEM 2.
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 June 30, 1998 or December 31, 1997. Gains or losses on derivative
financial instruments that do not qualify as a hedge are recognized in income
currently.
As a result of hedging transactions, oil and gas revenues were increased by
$0.1 million in the second quarter of 1998 and 1997. During the first six
months of 1998 and 1997, oil and gas revenues were increased by $0.2 million
and reduced by $1.7 million, respectively, as a result of these transactions.
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 to all working
interest owners, 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
17
NUEVO ENERGY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
ITEM 2.
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 Congo is insured through political
risk insurance provided by the Overseas Private Investment Corporation.
The Company is currently investigating its options for political risk
insurance in Ghana.
During 1997, a new government was established in the Congo. Political unrest
has continued during the first half of 1998, with insurgents challenging the
new government of the Congo. Although the political situation in the Congo
has not to date had a material adverse effect on the Company's operations in
the Congo, no assurances can be made that continued political unrest in the
Congo will not have a material adverse effect on the Company and its
operations in the Congo.
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, the condensed
consolidated statement of operations for the three and six months ended June
30, 1997, and the condensed consolidated statement of cash flows for the six
months ended June 30, 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 condensed consolidated statement
of operations for the three months ended June 30, 1997, the effect of the
accounting change was to decrease net income by $3.0 million, or $0.15 per
common share basic and diluted. For the condensed consolidated statement of
operations for the six months ended June 30, 1997, the effect of the
accounting change was to decrease net income by $2.2 million, or $0.11 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.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards ("SFAS") 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.
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related
Information". This statement establishes standards for reporting information
about operating segments in annual financial statements and requires that
enterprises report selected information about operating segments in interim
reports. The Company will adopt the provisions of SFAS No. 131 during 1998.
As SFAS No. 131 establishes standards for reporting and display, the Company
18
NUEVO ENERGY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
ITEM 2.
does not expect the adoption of this statement to have a material impact on
its financial condition or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes standards of
accounting for and disclosures of derivative instruments and hedging
activities. This statement is effective for the Company beginning in the
first quarter of the year 2000, however, early adoption is permitted. The
Company has not yet determined the impact of this statement on its financial
condition or results of operations or whether it will adopt the statement
early.
YEAR 2000
All major financial and administrative information processing services are
provided to the Company by Torch Energy Advisors Inc. ("Torch"), which is
conducting a review of its computer systems to identify and upgrade systems
that could be affected by the Year 2000 issue. The Year 2000 issue results
from computer programs written with date fields that cannot distinguish
between the years 1900 and 2000. The Company believes that its financial and
administrative systems should be Year 2000 compliant in the first half of
1999. The Company does not believe that costs incurred to address the Year
2000 issue with respect to its financial and administrative systems will have
a material effect on the Company. The information systems in the Company's
field operations are currently not believed to be fully Year 2000 compliant.
The Company and Torch are currently studying the steps necessary to make the
Company's operations Year 2000 compliant and to otherwise effect a smooth
transition to the Year 2000. These steps include: upgrading, testing and
certifying its computer systems and field operation services and obtaining
Year 2000 compliance certification from all of Torch's and Nuevo's important
business suppliers. The Company anticipates making significant progress
between now and December 1999, but acknowledges that important business
functions may be disrupted. Costs to address these disruptions are not known
at this time. The Company is also uncertain as to the impact that the Year
2000 issue will have on the companies with which it conducts business. In
these cases, the effect of the Year 2000 issue may be material.
OIL AND GAS PRICES
The Company's revenues, cash flows, results of operations and liquidity are
dependent on oil and gas prices, as is its ability to acquire financing for
its operations. Approximately 76% of the Company' production for the first
six months of 1998 was oil. Oil prices during 1998 have been very low
compared to historical prices. As a result, the Company's revenues, earnings
and cash flows have been materially reduced compared to 1997, even though
production levels have increased during 1998. In response to low oil prices,
the Company has reduced its capital expenditure budget, postponing projects
which are not expected to generate an acceptable rate of return at current
low oil prices. Although the Company believes that its cash flows from
operations and borrowing capacity will be sufficient to meet the Company's
needs for the foreseeable future, continued low oil prices will continue to
adversely affect the Company.
19
NUEVO ENERGY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
ITEM 2.
RESULTS OF OPERATIONS (THREE MONTHS ENDED JUNE 30, 1998, AND 1997)
The following table sets forth certain operating information of the Company
(inclusive of the effect of crude oil and natural gas hedging) for the periods
presented:
Three Months
Ended June 30,
-------------- %
Increase/
1998 1997 (Decrease)
---- ---- ----------
Production:
Oil and condensate (MBBLS) 4,721 4,309 9.6%
Natural gas (MMCF) 8,117 8,806 (7.8%)
Natural gas liquids (MBBLS) 71 67 6.0%
Average Sales Price:
Oil and condensate ($ per barrel) $8.95 $14.44 (38.0%)
Natural gas ($ per mcf) $2.05 $ 1.75 17.1%
Average unit production cost(1) per BOE $5.33 $ 4.89 9.0%
(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 June 30, 1998 were $59.9
million, or 24% lower than oil and gas revenues of $78.6 million for the same
period in 1997. This decrease is primarily due to lower realized oil prices in
the second quarter of 1998, which was partially offset by increased production
and higher gas prices during the period.
Gas plant revenues of approximately $0.6 million and $2.8 million are reflected
in the three months ended June 30, 1998 and 1997, respectively. The 79% decrease
in gas plant revenues is due to the sale of the Company's interest in the
Benedum Plant System in May 1997.
The Company sold its interest in the Benedum Plant System during the second
quarter of 1997 recognizing a $3.0 million gain on sale. The $3.0 million was
adjusted downward by $0.7 million in the third quarter of 1997, as a result of
final accounting.
Expenses
Lease operating expenses for the three months ended June 30, 1998 totaled $32.7
million, or 14% higher than $28.6 million for the three months ended June 30,
1997, primarily due to an increase in workovers, as compared to the second
quarter of 1997. These increases resulted in lease operating expenses per barrel
of oil equivalent of $5.33 in the second quarter of 1998, compared to $4.89 in
the same period in 1997.
Gas plant operating expenses were $0.7 million for the three months ended June
30, 1998 as compared to $2.3 million for the three months ended June 30, 1997.
The 71% 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 $2.1 million and $0.8 million for the three months
ended June 30, 1998 and 1997, respectively. Exploration costs for the
20
NUEVO ENERGY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
ITEM 2.
three months ended June 30, 1998 included $1.5 million of G&G related to
exploration activity in Ghana. Exploration costs for the three months ended June
30, 1997 included $0.8 million of dry hole costs.
Depreciation, depletion and amortization of $21.8 million for the three months
ended June 30, 1998 reflects a 19% decrease from $26.8 million in the same
period in 1997, due primarily to the year-end 1997 impairment of $30.0 million
related to the excess of capitalized costs over future net revenues, as well as
certain adjustments to the Company's depletion calculation in connection with
the conversion to the successful efforts method of accounting.
Extraordinary Item
In June 1997, the Company redeemed its 12 1/2% Senior Subordinated Notes at a
total cost of $78.0 million, representing $75.0 million face value of the debt
plus a 4% premium of $3.0 million. The redemption resulted in an extraordinary
loss on early extinguishment of debt, net of the related tax benefit, of $3.0
million. The Company used proceeds from its bank facility to fund the
redemption.
Net (Loss) Income
A net loss of $7.6 million, ($0.39) per common share basic and diluted, was
generated for the three months ended June 30, 1998, as compared to net income of
$3.0 million, $0.15 per common share basic and diluted, in the same period in
1997.
RESULTS OF OPERATIONS (SIX MONTHS ENDED JUNE 30, 1998, AND 1997)
The following table sets forth certain operating information of the Company
(inclusive of the effect of crude oil and natural gas hedging) for the periods
presented:
Six Months
Ended June 30,
-------------------- %
Increase/
1998 1997 (Decrease)
---------- ------- -----------
Production:
Oil and condensate (MBBLS)........... 9,248 8,457 9.4%
Natural gas (MMCF)................... 16,736 17,760 (5.8%)
Natural gas liquids (MBBLS).......... 116 130 (10.8%)
Average Sales Price:
Oil and condensate ($ per barrel).... $ 9.48 $ 15.43 (38.6%)
Natural gas ($ per mcf).............. $ 2.01 $ 1.97 2.0%
Average unit production cost(1) per BOE... $ 5.41 $ 5.14 5.3%
(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 six months ended June 30, 1998 were $123.0 million,
or 27% lower than oil and gas revenues of $168.7 million for the same period in
1997. This decrease is primarily due to lower realized oil prices in 1998,
which were partially offset by increased production during the period.
Gas plant revenues of $1.4 million and $11.6 million are reflected in the six
months ended June 30, 1998 and 1997, respectively. The 88% decrease in revenues
is due to the sale of the Company's interest in the Benedum Plant System during
the second quarter of 1997.
21
NUEVO ENERGY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
ITEM 2.
Gain on sale for the six months ended June 30, 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 six months ended June 30,
1997 was $4.4 million, $1.4 million of which relates to the sale of the
Company's interest in Second Bayou, Weeks Island, Louisiana in the first quarter
of 1997, and $3.0 million of which relates to the sale of the Company's interest
in the Benedum Plant System during the second quarter of 1997. The $3.0 million
gain on the sale of the Company's interest in the Benedum Plant System was
adjusted downward by $0.7 million in the third quarter of 1997, as a result of
final accounting.
Expenses
Lease operating expenses for the six months ended June 30, 1998 totaled $65.8
million, compared to $59.4 million for the same period in 1997. This 11%
increase is 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
and additional workovers that were performed in 1998, as compared to the same
period in 1997. Lease operating expenses per BOE were $5.41 in the first six
months of 1998, compared to $5.14 in the same period in 1997.
Plant operating expenses of $1.4 million are reflected in the six months ended
June 30, 1998 as compared to $10.2 million for the six months ended June 30,
1997. The 86% decrease in gas plant expenses is due to the sale of the
Company's interest in the Benedum Plant System during the second quarter of
1997.
Exploration costs, including G&G costs, dry hole costs and delay rentals, were
$4.1 million and $1.6 million for the six months ended June 30, 1998 and 1997,
respectively. Exploration costs for the six months ended June 30, 1998 included
$3.8 million of G&G costs ($3.4 of which relates to G&G in Ghana), $0.2 million
of delay rentals and $0.1 million of dry hole costs. Exploration costs for the
six months ended June 30, 1997 primarily included $1.5 million of dry hole
costs.
Depreciation, depletion and amortization of $46.6 million for the six months
ended June 30, 1998 reflects a decrease of 3% from $48.2 million in the same
period in 1997, due primarily to the year-end 1997 impairment of $30.0 million
related to the excess of capitalized costs over future net revenues, as well as
certain adjustments to the Company's depletion calculation in connection with
the conversion to the successful efforts method of accounting.
General and administrative expenses, along with outsourcing fees, were $15.7
million for the six months ended June 30, 1998, as compared to $14.8 million for
the same period in 1997. The 6% increase is due primarily to non-recurring costs
associated with outside engineering costs and third-party consulting studies
associated with the upcoming re-negotiation of the Company's outsourcing
agreements.
Interest expense increased to $14.4 million for the six months ended June 30,
1998 from $14.0 million in the same period of 1997. This increase in interest
expense in the first six months of 1998 is primarily the result of additional
borrowings under the Company's credit facility and the issuance of $100.0
million of 8 7/8% Senior Subordinated Notes due 2008.
Extraordinary Item
In June 1997, the Company redeemed its 12 1/2% Senior Subordinated Notes at a
total cost of $78.0 million, representing $75.0 million face value of the debt
plus a 4% premium of $3.0 million. The redemption resulted in an extraordinary
loss on early extinguishment of debt, net of the related tax benefit, of $3.0
million. The Company used proceeds from its bank facility to fund the
redemption.
Net (Loss) Income
A net loss of $14.2 million, ($0.72) per common share--basic and diluted, was
generated for the six months ended June 30, 1998, as compared to net income of
$17.6 million, $0.88 per common share--basic and $0.85 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
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
10. Material Contracts
10.1 None.
27. Financial Data Schedule
Reports on Form 8-K.
1. Report filed on Form 8-K on May 14, 1998 regarding
the Company's conversion from the full cost to the
successful efforts method of accounting for its
investments in oil and gas properties, first
quarter 1998 financial results, the potential sale
of the Company's East Texas natural gas assets, the
senior subordinated note offering, and the
reduction of the 1998 capital spending budget.
2. Report filed on Form 8-K on May 20, 1998 regarding
the Company's conversion from the full cost to the
successful efforts method of accounting for its
investments in oil and gas properties. Includes
restated financial statements as of December 31,
1997 and 1996, and for the years ended December 31,
1997, 1996 and 1995.
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: August 13, 1998 By:/s/ Douglas L. Foshee
---------------- ----------------------------
Douglas L. Foshee
Chairman, President and Chief
Executive Officer
Date: August 13, 1998 By:/s/ Robert M. King
--------------- -----------------------------
Robert M. King
Senior Vice President and Chief Financial
Officer
24