UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 0-25058
OCEAN ENERGY, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 72-1277752
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1201 LOUISIANA, SUITE 1400
HOUSTON, TEXAS 77002
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (713) 654-9110
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 [ ]
The number of shares outstanding of the registrant's common stock, all of which
comprise a single class with a $0.01 par value, as of August 10, 1998, the
latest practicable date, was 100,907,108.
OCEAN ENERGY, INC.
FORM 10-Q
JUNE 30, 1998
TABLE OF CONTENTS
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Statement of Income for the Three Months and
Six Months Ended June 30, 1998 and 1997................... 1
Consolidated Balance Sheet at June 30, 1998 and
December 31, 1997......................................... 2
Consolidated Statement of Changes in Stockholders' Equity
for the Year Ended December 31, 1997 and for the Six
Months Ended June 30, 1998................................ 4
Consolidated Statement of Cash Flows for the Six Months
Ended June 30, 1998 and 1997.............................. 5
Notes to Consolidated Financial Statements................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 18
PART II OTHER INFORMATION
Item 1. Legal Proceedings.......................................... 19
Item 2. Changes in Securities...................................... 19
Item 3. Defaults Upon Senior Securities............................ 19
Item 4. Submission of Matters to a Vote of Security
Holders................................................... 19
Item 5. Other Information.......................................... 19
Item 6. Exhibits and Reports on Form 8-K........................... 20
SIGNATURES ........................................................... 20
EXHIBITS
Index to Exhibits.................................................... 21
OCEAN ENERGY, INC.
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- -------------------------
1998 1997 1998 1997
-------- -------- -------- ---------
Operating revenues:
Gas sales.................................... $ 58,330 $ 42,974 $ 115,934 $ 95,777
Oil sales.................................... 74,626 75,622 158,031 150,776
Contract settlements and other............... 251 1,120 1,125 1,818
--------- -------- --------- --------
133,207 119,716 275,090 248,371
--------- -------- --------- --------
Costs and expenses:
Production costs............................. 36,923 29,763 74,230 58,297
General and administrative................... 10,559 7,169 20,200 13,553
Depreciation, depletion and amortization..... 74,727 57,762 147,498 105,810
Write-down of oil and gas properties......... 218,392 -- 218,392 --
--------- -------- --------- --------
340,601 94,694 460,320 177,660
--------- -------- --------- --------
Income (loss) from operations................. (207,394) 25,022 (185,230) 70,711
Other income, expenses and deductions:
Interest and debt expense.................... 9,437 11,593 21,941 22,741
Merger costs................................. -- -- 39,000 --
Interest and other expense (income).......... (24) (632) 317 (2,112)
--------- -------- --------- --------
Income (loss) before income taxes............. (216,807) 14,061 (246,488) 50,082
Income tax provision (benefit):
Current...................................... 648 1,392 2,591 2,674
Deferred..................................... (82,609) 3,070 (86,100) 16,423
--------- -------- --------- --------
Net income (loss)............................. $(134,846) $ 9,599 $(162,979) $ 30,985
========= ======== ========= ========
Basic earnings (loss) per share............... $ (1.34) $ 0.10 $ (1.62) $ 0.34
========= ======== ========= ========
Weighted average number of common
shares outstanding........................... 100,569 92,279 100,351 92,083
========= ======== ========= ========
Diluted earnings (loss) per share............. $ (1.34) $ 0.10 $ (1.62) $ 0.32
========= ======== ========= ========
Weighted average number of common shares
and common share equivalents
outstanding................................. 100,569 96,703 100,351 96,587
========= ======== ========= ========
The accompanying notes are an integral part of these
consolidated financial statements.
1
OCEAN ENERGY, INC.
CONSOLIDATED BALANCE SHEET
(In thousands)
JUNE 30, DECEMBER 31,
ASSETS 1998 1997
------------ ------------
(UNAUDITED)
Current assets:
Cash and cash equivalents.............................. $ 14,348 $ 11,689
Accounts receivable
Oil and gas sales................................... 58,433 75,642
Joint interest and other............................ 59,270 49,289
Deferred income taxes.................................. 24 1,547
Inventory.............................................. 17,901 11,097
Prepaid expenses and other............................. 13,352 10,630
----------- ----------
163,328 159,894
----------- ----------
Property and equipment, at cost:
Oil and gas (full cost method)
Evaluated properties................................ 2,374,886 2,043,700
Unevaluated properties excluded from amortization... 310,093 232,726
Other.................................................. 34,486 28,182
----------- ----------
2,719,465 2,304,608
Accumulated depreciation, depletion and amortization... (1,245,462) (880,771)
----------- ----------
1,474,003 1,423,837
----------- ----------
Other assets:
Gas imbalances receivable.............................. 5,856 6,227
Deferred income taxes.................................. 97,509 130
Deferred financing costs............................... 14,994 19,661
Restricted deposits and other.......................... 20,440 33,246
----------- ----------
138,799 59,264
----------- ----------
TOTAL ASSETS........................................ $ 1,776,130 $1,642,995
=========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
2
OCEAN ENERGY, INC.
CONSOLIDATED BALANCE SHEET
(In thousands)
JUNE 30, DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
----------- ------------
(UNAUDITED)
Current liabilities:
Accounts payable......................................... $ 135,068 $ 188,429
Advances from joint owners............................... 13,807 8,491
Interest payable......................................... 20,090 16,476
Accrued liabilities...................................... 10,277 6,572
Current maturities of long-term debt..................... 951 911
---------- ----------
180,193 220,879
---------- ----------
Long-term debt............................................. 987,277 672,298
---------- ----------
Deferred credits and other liabilities:
Deferred income taxes.................................... 17,254 11,159
Gas imbalances payable................................... 4,777 5,861
Other.................................................... 16,257 7,461
---------- ----------
38,288 24,481
---------- ----------
Commitments and contingencies
Stockholders' equity:
Common stock............................................. 1,007 1,001
Additional paid-in capital............................... 832,548 823,956
Accumulated other comprehensive income (loss) foreign
currency translation adjustment....................... (7,423) (6,839)
Retained earnings (deficit).............................. (255,760) (92,781)
---------- ----------
570,372 725,337
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............... $1,776,130 $1,642,995
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
3
OCEAN ENERGY, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
For the year ended December 31, 1997 and six months ended June 30, 1998
Common Stock Additional Accumulated Other Retained Total
----------------------- Paid-In Comprehensive Earnings Stockholders'
Shares Amount Capital Income (Deficit) Equity
----------- -------- ---------- ----------------- ---------- -------------
Balance, December 31, 1996............ 91,741,503 $ 918 $632,111 $(4,257) $(135,700) $ 493,072
OEI common stock offering........... 7,254,000 73 177,674 -- -- 177,747
Common shares issued in exchange for
shares tendered from a prior
acquisition....................... 3,461 -- -- -- -- --
Exercise of common stock options.... 1,110,277 10 14,171 -- -- 14,181
Comprehensive income:
Net income........................ -- -- -- -- 42,919 42,919
Other comprehensive income (loss):
Foreign currency translation
adjustment....................... -- -- -- (2,582) -- (2,582)
----------- ------ -------- ------- --------- ---------
Balance, December 31, 1997............ 100,109,241 $1,001 $823,956 $(6,839) $ (92,781) $ 725,337
Exercise of common stock options.... 631,071 6 8,592 -- -- 8,598
Comprehensive income:
Net loss.......................... -- -- -- -- (162,979) (162,979)
Other comprehensive income:
Foreign currency translation
adjustment....................... -- -- -- (584) -- (584)
----------- ------ -------- ------- --------- ---------
Balance, June 30, 1998 (Unaudited).... 100,740,312 $1,007 $832,548 $(7,423) $(255,760) $ 570,372
=========== ====== ======== ======= ========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
4
OCEAN ENERGY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
----------------------
1998 1997
--------- ---------
Cash flows from operating activities:
Net income (loss)................................................. $(162,979) $ 30,985
Adjustments to reconcile net income (loss) to
cash provided by operating activities:
Depreciation, depletion and amortization........................ 147,498 105,810
Write-down of oil and gas properties............................ 218,392 --
Amortization of debt issue cost................................. 6,308 1,411
Deferred income tax provision (benefit)......................... (86,100) 15,731
Deferred hedge revenue.......................................... (98) (75)
--------- ---------
123,021 153,862
Changes in assets and liabilities:
Decrease in receivables......................................... 10,644 18,907
Increase (decrease) in payables and other current liabilities... (24,259) 16,733
Increase (decrease) in net gas imbalances....................... (713) 85
Other........................................................... 3,122 (977)
--------- ---------
Net cash provided by operating activities...................... 111,815 188,610
--------- ---------
Cash flows from investing activities:
Additions to oil and gas properties.............................. (421,988) (350,700)
Additions to other property and equipment........................ (5,633) (3,559)
Net proceeds from sale of assets................................. 739 47,053
Increase in restricted deposits.................................. (1,085) (1,068)
--------- ---------
Net cash used in investing activities.......................... (427,967) (308,274)
--------- ---------
Cash flows from financing activities:
Repayment of long-term debt...................................... (364,480) (65,984)
Additions to total debt.......................................... 679,438 139,236
Deferred financing costs......................................... (1,590) (2,802)
Proceeds from common stock options exercised..................... 5,443 4,897
--------- ---------
Net cash provided by financing activities...................... 318,811 75,347
--------- ---------
Net increase (decrease) in cash and cash equivalents............... 2,659 (44,317)
Cash and cash equivalents, beginning of the period................. 11,689 60,701
--------- ---------
Cash and cash equivalents, end of the period....................... $ 14,348 $ 16,384
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
5
OCEAN ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF FINANCIAL STATEMENTS
The accompanying consolidated financial statements of Ocean Energy, Inc. (OEI
or the Company), a Delaware corporation, included herein have been prepared,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC). Although certain information normally included in
financial statements prepared in accordance with generally accepted accounting
principles has been condensed or omitted, OEI believes that the disclosures are
adequate to make the information presented not misleading.
Effective March 27, 1998, pursuant to the Agreement and Plan of Merger dated
December 22, 1997, United Meridian Corporation (UMC) was merged into the Company
(the Merger). As a result of the Merger, each outstanding share of UMC common
stock was converted into 1.3 shares of OEI common stock with approximately 46
million shares issued to the shareholders of UMC representing approximately 46%
of all of the issued and outstanding shares of OEI. The Company's shareholders
received 2.34 shares of OEI shares for each share outstanding immediately
preceding the Merger representing approximately 54% of all of the issued and
outstanding shares of OEI. The Merger was accounted for as a pooling of
interests. Accordingly, the consolidated financial statements for periods prior
to the Merger have been restated to conform accounting policies and combine the
historical results of OEI and UMC and have been included in the Form 8-K filed
May 6, 1998.
The accompanying consolidated financial statements of OEI should be read in
conjunction with the supplemental consolidated financial statements and notes
thereto for the year ended December 31, 1997 included in the Form 8-K filed May
6, 1998.
The financial statements reflect all normal recurring adjustments that, in the
opinion of management, are necessary for a fair presentation.
NOTE 2 INVESTMENT IN OIL AND GAS PROPERTIES
As part of its on-going operations, the Company continually acquires and sells
producing and undeveloped reserves and related assets. Certain transactions
occurring in the periods presented are discussed below.
On January 3, 1997, the Company completed the sale of its interest in the
South Marsh Island 269 field, realizing proceeds of $37.2 million from the sale.
No gain or loss was recognized on the sale. During the six months ended June 30,
1997, the Company sold various non-strategic North American properties for total
proceeds of $13.6 million.
On March 7, 1997, the Company completed the acquisition of certain interests
in various state leases in the Main Pass Block 69 field for a net purchase price
of $55.9 million. Through July 1997, the Company acquired additional interests
in various properties from several of its institutional partners. In conjunction
with one of these acquisitions, the Company sold a portion of the acquired
interests. The net cost of the additional interests was approximately $25.9
million.
As required under the full cost method of accounting, capitalized costs are
limited to the sum of the present value of future net revenues using current
unescalated pricing discounted at 10% related to estimated production of proved
reserves and the lower of cost or estimated fair value of unevaluated
properties, all net of expected income tax effects. At June 30, 1998, the
Company recognized a non-cash impairment of oil and gas properties in the amount
of $218.4 million pre-tax ($135.4 million after-tax) pursuant to this ceiling
limitation required by the full cost method of accounting for oil and gas
properties, using certain improvements in pricing experienced after period end.
The write-down is primarily a result of the precipitous decline in world crude
oil prices experienced during the second quarter 1998.
6
Note 3 Financial Instruments
The Company hedges certain of its production through master swap agreements
(Swap Agreements) which provide for separate contracts tied to the NYMEX light
sweet crude oil and natural gas futures contracts. In addition, the Company has
combined contracts which have agreed upon price floors and ceilings (Costless
Collars). As of June 30, 1998, the fair market value of all hedging contracts
was approximately $10.1 million.
Oil revenues have been increased by $6.3 million and $11.1 million for the
three and six months ended June 30, 1998 as a result of the hedge contracts in
place for each period. As of June 30, 1998, the Company's open forward position
on its outstanding crude oil Swaps was 2,100 MBbls at an average price of $19.87
per Bbl for the year ended December 31, 1998. The Company currently has no
outstanding natural gas swaps.
As of June 30, 1998, the Company's open forward position on its outstanding
natural gas Costless Collars was as follows:
Effective Contracted Contracted Contracted
-------------- Volumes Floor Ceiling
Year From Through (MMBTU/day) Price Price
---- ---- ------- ----------- ---------- ----------
1998 July August 40,000 $2.00 $2.54
1998 July July 20,000 $2.00 $2.50
1998 July August 10,000 $2.00 $2.50
The Company currently has certain agreements in place to reduce interest rate
fluctuation risk on a portion of its debt, resulting in an increase in interest
and debt expense of $0.2 million during the six months ended June 30, 1998.
NOTE 4 SUBSEQUENT EVENT
On July 8, 1998, the Company closed an offering of $500.0 million Senior and
Senior Subordinated Notes receiving net proceeds of approximately $487.8
million, after deducting underwriting discounts and expenses. The offering, made
pursuant to Rule 144A, comprised three separate indentures including $125.0
million of 7 5/8% Senior Notes due July 1, 2005, $125.0 million of 8 1/4% Senior
Notes due July 1, 2018, and $250.0 million of 8 3/8% Senior Subordinated Notes
due July 1, 2008. The proceeds from the offering were used to pay off amounts
then outstanding under the OEI Credit Facility. The excess net proceeds of the
offering over the amounts outstanding under the OEI Credit Facility have since
been used for capital expenditures and general corporate purposes.
In addition, the Company announced the simultaneous amendment and restatement
of the OEI Credit Facility. Concurrent with the closing of the Merger on March
27, 1998, the Company had entered into a $750.0 million five-year unsecured
revolving credit facility (OEI Credit Facility) with an initial borrowing base
of $600.0 million. As of June 30, 1998, total borrowings outstanding against
the facility were approximately $472.1 million, leaving approximately $127.9
million of available credit. In connection with the $500.0 million notes
offering made by the Company in July 1998, the OEI Credit Facility was restated
and amended to a $400.0 million, five-year revolving credit facility, with an
initial borrowing base of $300.0 million. No amounts were outstanding under the
OEI Credit Facility immediately following the $500.0 million notes offering.
NOTE 5 IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes a new model for accounting
for derivatives and hedging activities. SFAS 133, which will be effective for
the Company's fiscal year 2000, requires that all derivatives be recognized in
the balance sheet as either assets or liabilities and measured at fair value.
The statement also requires that changes in fair value be reported in earnings
unless specific hedge accounting criteria are met. The Company is currently
evaluating the effect of the adoption of the Statement on its consolidated
financial position and results of operations.
7
NOTE 6 SUPPLEMENTAL GUARANTOR INFORMATION
Ocean Energy, Inc., a Louisiana corporation (Ocean Louisiana), the Company's
only direct subsidiary, has unconditionally guaranteed the full and prompt
performance of the Company's obligations under certain of the notes and related
indentures, including the payment of principal, premium (if any) and interest.
None of the referenced indentures place significant restrictions on a wholly-
owned subsidiary's ability to make distributions to the parent. Other than
intercompany arrangements and transactions, the consolidated financial
statements of Ocean Louisiana are equivalent in all material respects to those
of the Company and therefore the separate consolidated financial statements of
Ocean Louisiana are not material to investors and have not been included herein.
However, in an effort to provide meaningful financial data relating to the
guarantor (i.e., Ocean Louisiana on an unconsolidated basis), the following
condensed consolidating financial information has been provided following the
policies set forth below:
(1) Investments in subsidiaries are accounted for by the Company on the cost
basis. Earnings of subsidiaries are therefore not reflected in the related
investment accounts.
(2) Certain reclassifications were made to conform all of the financial
information to the financial presentation on a consolidated basis. The
principal eliminating entries eliminate investments in subsidiaries and
intercompany balances.
Certain intercompany notes and the related accrued interest were transferred
from the Company to a newly formed non-guarantor subsidiary effective as of
January 1, 1997.
8
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the three months ended June 30, 1998 and 1997
(In thousands)
Unconsolidated
-----------------------------------------------------------
Guarantor Non-Guarantor Consolidated
OEI Subsidiary Subsidiaries OEI
-------- --------------- -------------- -------------
1998
- ----
Revenues..................................... $ -- $ 106,325 $26,882 $ 133,207
------- --------- ------- ---------
Costs and expenses:
Production costs........................... -- 30,470 6,453 36,923
General and administrative................. 60 9,997 502 10,559
Depreciation, depletion and amortization... -- 62,436 12,291 74,727
Write-down of oil and gas properties....... -- 218,392 218,392
------- --------- ------- ---------
Income (loss) from operations................ (60) (214,970) 7,636 (207,394)
Interest expense (income), net............. 4,028 9,789 (4,380) 9,437
Other expense (credits), net............... -- 106 (130) (24)
------- --------- ------- ---------
Income (loss) before income taxes............ (4,088) (224,865) 12,146 (216,807)
Income tax benefit........................... (78) (80,176) (1,707) (81,961)
------- --------- ------- ---------
Net income (loss)............................ $(4,010) $(144,689) $13,853 $(134,846)
======= ========= ======= =========
1997
- ----
Revenues..................................... $ -- $ 90,932 $28,784 $ 119,716
------- --------- ------- ---------
Costs and expenses:
Production costs........................... -- 25,186 4,577 29,763
General and administrative................. 60 6,707 402 7,169
Depreciation, depletion and amortization... -- 41,409 16,353 57,762
------- --------- ------- ---------
Income (loss) from operations................ (60) 17,630 7,452 25,022
Interest expense (income), net............. (4,879) 13,691 2,781 11,593
Other credits, net......................... -- (502) (130) (632)
------- --------- ------- ---------
Income before income taxes................... 4,819 4,441 4,801 14,061
Income tax provision......................... 2,181 1,184 1,097 4,462
------- --------- ------- ---------
Net income................................... $ 2,638 $ 3,257 $ 3,704 $ 9,599
======= ========= ======= =========
9
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the six months ended June 30, 1998 and 1997
(In thousands)
Unconsolidated
--------------------------------------------
Guarantor Non-Guarantor Consolidated
OEI Subsidiary Subsidiaries OEI
--------- --------------- -------------- -------------
1998
- ----
Revenues..................................... $ -- $ 216,733 $58,357 $ 275,090
-------- --------- ------- ---------
Costs and expenses:
Production costs........................... -- 62,888 11,342 74,230
General and administrative................. 60 19,139 1,001 20,200
Depreciation, depletion and amortization... -- 116,197 31,301 147,498
Write-down of oil and gas properties....... -- 218,392 -- 218,392
-------- --------- ------- ---------
Income (loss) from operations............... (60) (199,883) 14,713 (185,230)
Interest expense (income), net............. 8,057 20,338 (6,454) 21,941
Merger costs............................... -- 39,000 -- 39,000
Other expense, net......................... -- 222 95 317
-------- --------- ------- ---------
Income (loss) before income taxes............ (8,117) (259,443) 21,072 (246,488)
Income tax benefit........................... (21,900) (60,444) (1,165) (83,509)
-------- --------- ------- ---------
Net income (loss)............................ $ 13,783 $(198,999) $22,237 $(162,979)
======== ========= ======= =========
1997
- ----
Revenues..................................... $ -- $ 193,378 $54,993 $ 248,371
-------- --------- ------- ---------
Costs and expenses:
Production costs........................... -- 50,068 8,229 58,297
General and administrative................. 90 12,591 872 13,553
Depreciation, depletion and amortization... -- 76,619 29,191 105,810
-------- --------- ------- ---------
Income (loss) from operations................ (90) 54,100 16,701 70,711
Interest expense (income), net............. (9,640) 25,306 7,075 22,741
Other credits, net......................... -- (2,006) (106) (2,112)
-------- --------- ------- ---------
Income before income taxes................... 9,550 30,800 9,732 50,082
Income tax provision......................... 3,904 11,334 3,859 19,097
-------- --------- ------- ---------
Net income................................... $ 5,646 $ 19,466 $ 5,873 $ 30,985
======== ========= ======= =========
10
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
At June 30, 1998 and December 31, 1997
(In thousands)
Unconsolidated
---------------------------------------------
Guarantor Non-Guarantor Eliminating Consolidated
OEI Subsidiary Subsidiaries Entries OEI
---------- --------------- -------------- ------------ ------------
JUNE 30, 1998
- -------------
ASSETS
Current assets............................. $ 2 $ 95,205 $ 68,121 $ -- $ 163,328
Intercompany investments................... 1,338,677 (206,451) 287,437 (1,419,663) --
Property and equipment, net................ -- 1,052,463 421,540 -- 1,474,003
Other assets............................... 17,964 106,047 14,788 -- 138,799
---------- ---------- -------- ----------- ----------
Total assets............................. $1,356,643 $1,047,264 $791,886 $(1,419,663) $1,776,130
========== ========== ======== =========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities........................ $ 16,107 $ 137,050 $ 27,036 $ -- $ 180,193
Long-term debt............................. 509,213 460,300 17,764 -- 987,277
Deferred credits and other liabilities..... -- 22,246 16,042 -- 38,288
Stockholders' equity....................... 831,323 427,668 731,044 (1,419,663) 570,372
---------- ---------- -------- ----------- ----------
Total liabilities & stockholders' equity... $1,356,643 $1,047,264 $791,886 $(1,419,663) $1,776,130
========== ========== ======== =========== ==========
DECEMBER 31, 1997
- -----------------
ASSETS
Current assets............................. $ 11,480 $ 103,243 $ 56,649 $ (11,478) $ 159,894
Intercompany investments................... 1,094,737 (19,479) 335,024 (1,410,282) --
Property and equipment, net................ -- 1,033,193 390,644 -- 1,423,837
Other assets............................... 5,395 89,189 (35,320) -- 59,264
---------- ---------- -------- ----------- ----------
Total assets............................. $1,111,612 $1,206,146 $746,997 $(1,421,760) $1,642,995
========== ========== ======== =========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities........................ $ 14,804 $ 180,345 $ 37,208 $ (11,478) $ 220,879
Long-term debt............................. 509,152 147,800 15,346 -- 672,298
Deferred credits and other liabilities..... -- 27,936 (3,455) -- 24,481
Stockholders' equity....................... 587,656 850,065 697,898 (1,410,282) 725,337
---------- ---------- -------- ----------- ----------
Total liabilities & stockholders' equity... $1,111,612 $1,206,146 $746,997 $(1,421,760) $1,642,995
========== ========== ======== =========== ==========
11
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the six months ended June 30, 1998 and 1997
(In thousands)
Unconsolidated
--------------------------------------------
Guarantor Non-Guarantor Consolidated
OEI Subsidiary Subsidiaries OEI
--------- --------------- -------------- -------------
1998
- ----
Cash flows from operating activities:
Net income (loss)..................................... $ 13,783 $(198,999) $ 22,237 $(162,979)
Adjustments to reconcile net income (loss) to
cash from operating activities..................... (21,091) 279,409 27,682 286,000
Changes in assets and liabilities..................... 1,865 (92,600) 79,529 (11,206)
-------- --------- --------- ---------
Net cash provided by (used in)
operating activities.............................. (5,443) (12,190) 129,448 111,815
Cash flows used in investing activities................. -- (299,138) (128,829) (427,967)
Cash flows provided by financing activities............. 5,443 310,910 2,458 318,811
-------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents.... -- (418) 3,077 2,659
Cash and cash equivalents at beginning of period........ 2 2,653 9,034 11,689
-------- --------- --------- ---------
Cash and cash equivalents at end of period.............. $ 2 $ 2,235 $ 12,111 $ 14,348
======== ========= ========= =========
1997
- ----
Cash flows from operating activities:
Net income............................................ $ 5,646 $ 19,466 $ 5,873 $ 30,985
Adjustments to reconcile net income to
cash from operating activities..................... 4,180 88,050 30,647 122,877
Changes in assets and liabilities..................... 2 36,781 (2,035) 34,748
-------- --------- --------- ---------
Net cash provided by operating activities.......... 9,828 144,297 34,485 188,610
Cash flows used in investing activities................. -- (208,832) (99,442) (308,274)
Cash flows provided by (used in) financing activities... (9,829) 20,737 64,439 75,347
-------- --------- --------- ---------
Net decrease in cash and cash equivalents............... (1) (43,798) (518) (44,317)
Cash and cash equivalents at beginning of period........ 3 47,518 13,180 60,701
-------- --------- --------- ---------
Cash and cash equivalents at end of period.............. $ 2 $ 3,720 $ 12,662 $ 16,384
======== ========= ========= =========
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
On December 23, 1997, the Company announced that it entered into a Merger
Agreement with UMC that provided in part for a stock-for-stock merger of UMC
with and into the Company. Pursuant to the Merger Agreement, at the effective
time of the Merger, the Company's stockholders received 2.34 shares of the
combined company's common stock for each share of the Company's common stock
then owned and UMC stockholders received 1.30 shares of the combined company's
common stock for each share of UMC stock then owned. The Merger, effective
March 27, 1998, was treated as a pooling of interests for accounting purposes.
This financial review summarizes the combined financial condition and results
of operations giving retroactive effect to the Merger and should be read in
conjunction with the Company's supplemental consolidated financial statements
and the notes thereto included in the Form 8-K filed May 6, 1998. The
consolidated financial statements previously filed in the Company's Form 10-K
for the year ended December 31, 1997, have been restated therein to reflect the
combination of the historical results of OEI and UMC and conforming of
accounting policies in accordance with the pooling of interests method of
accounting.
RESULTS OF OPERATIONS
The following table sets forth certain operating information of the Company for
the periods shown:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- ------------------------
1998 1997 1998 1997
------------ ----------- ----------- ----------
Production:
Oil (MBO)
U.S............................................. 3,819 2,776 7,635 5,320
Canada.......................................... 111 110 218 212
Cote d'Ivoire................................... 184 274 393 568
Equatorial Guinea............................... 1,494 929 2,888 1,679
------- ------- ------- -------
Total......................................... 5,608 4,089 11,134 7,779
======= ======= ======= =======
Natural gas (MMCF)
U.S............................................. 25,356 19,829 49,886 37,172
Canada.......................................... 2,471 1,834 4,729 3,470
Cote d'Ivoire................................... 1,771 1,209 3,615 2,160
------- ------- ------- -------
Total......................................... 29,598 22,872 58,230 42,802
======= ======= ======= =======
AVERAGE WELLHEAD SALES PRICE, INCLUDING HEDGING:
Oil ($ per bbl)
U.S............................................. $ 14.19 $ 18.55 $ 14.76 $ 19.89
Canada.......................................... $ 11.23 $ 16.59 $ 12.04 $ 18.88
Cote d'Ivoire................................... $ 13.83 $ 17.22 $ 14.81 $ 18.61
Equatorial Guinea............................... $ 11.14 $ 18.91 $ 12.77 $ 18.10
Average....................................... $ 13.31 $ 18.49 $ 14.19 $ 19.38
Natural Gas ($ per MCF)
U.S............................................. $ 2.06 $ 1.95 $ 2.08 $ 2.33
Canada.......................................... $ 1.28 $ 1.13 $ 1.30 $ 1.49
Cote d'Ivoire................................... $ 1.65 $ 1.79 $ 1.68 $ 1.82
Average....................................... $ 1.97 $ 1.88 $ 1.99 $ 2.24
ADDITIONAL DATA ($ PER BOE):
Production and operating costs (1)............... $ 3.01 $ 3.16 $ 3.04 $ 3.20
General and administrative expense............... $ 1.00 $ 0.91 $ 0.97 $ 0.91
Oil and natural gas depletion and depreciation... $ 6.99 $ 7.19 $ 6.98 $ 6.97
- ----------
(1) Costs incurred to operate and maintain wells and related equipment,
excluding ad valorem and production taxes of $0.49 and $0.61 per BOE for
the three months ended June 30, 1998 and 1997, and $0.52 and $0.71 per BOE
for the six months ended June 30, 1998 and 1997, respectively.
13
SIX MONTHS ENDED JUNE 30, 1998 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1997
Operating revenues. The Company's total operating revenues increased
approximately $26.7 million, or 11%, to $275.1 million for the six months ended
June 30, 1998, from $248.4 million for the comparable period in 1997.
Production levels for the six months ended June 30, 1998, increased 40% to
20,839 MBOE from 14,913 MBOE for the comparable period in 1997. The increase in
oil and gas revenues is due to increased oil volumes in the Gulf of Mexico and
Equatorial Guinea and overall higher U.S. gas volumes.
Oil revenues increased $7.2 million, or 5%, to $158.0 million for the six
months ended June 30, 1998, from $150.8 million for the six months ended June
30, 1997, the result of significantly increased worldwide production volumes
offset by a decline in the average realized price received. Oil production
increased 43% to 11,134 MBO for the first six months of 1998 as compared to the
same period in 1997 due primarily to increased oil production in the Gulf of
Mexico and Equatorial Guinea. The average sales price before hedging for oil
decreased 32% to $13.20 in the first six months of 1998 compared to $19.43 in
the same period in 1997.
Natural gas revenues increased $20.1 million, or 21%, to $115.9 million for
the six months ended June 30, 1998, from $95.8 million for the six months ended
June 30, 1997, the result of increased worldwide production which more than
offset the decline in prices received for gas. Natural gas production for the
six months of 1998 was 58,230 MMCF, an increase of 36% over 1997 volumes due
primarily to increased production in the Gulf of Mexico, Cote d'Ivoire and
Canada and the impact of acquisitions, offset by property sales and natural
production declines in North America. The average sales price before hedging for
natural gas decreased 11% to $1.99 per MCF in the first six months of 1998 as
compared to $2.24 in the first six months of 1997.
For the six months ended June 30, 1998, the Company's total revenues were
further affected by a $6.3 million increase in hedging revenues. In order to
manage its exposure to price risks in the sale of its crude oil and natural gas,
the Company from time to time enters into price hedging arrangements. The
Company's average sales prices including hedging for oil and natural gas for the
six months ended June 30, 1998 were $14.19 per Bbl and $1.99 per Mcf compared to
$19.38 per Bbl and $2.24 per Mcf in the comparable 1997 period.
Production costs. Total production costs increased $15.9 million, or 27%, to
$74.2 million for the six months ended June 30, 1998 from $58.3 million for the
comparable 1997 period. This increase primarily results from fluctuations in
normal operating expenses, including operating expenses associated with
increased production from new facilities. Production and operating costs (costs
incurred to operate and maintain wells and related equipment, excluding ad
valorem and production taxes) decreased $0.16 per BOE, or 5%, to $3.04 per BOE
for the six months ended June 30, 1998, from $3.20 per BOE in the comparable
1997 period. This decrease is primarily the result of increased production in
the Company's offshore Gulf of Mexico and Equatorial Guinea fields and resulting
higher utilization of existing facilities.
General and administrative expenses. General and administrative expenses
increased $6.6 million, or 49%, to $20.2 million for the six months ended June
30, 1998, from $13.6 million in the comparable 1997 period. This increase is
primarily due to costs of increased corporate staffing associated with both an
increase in drilling activities and the Company's property acquisitions in 1997.
In addition, costs related to a new systems implementation partially offset by
an increase in the capitalization of a portion of the salaries paid to employees
directly engaged in the acquisition, exploration and development of oil and gas
properties in accordance with the full cost method of accounting contributed to
the increase. As a result of these factors, general and administrative expenses
per BOE increased slightly by $0.06 per BOE, or 7%, to $0.97 per BOE for the six
months ended June 30, 1998, from $0.91 per BOE for the comparable 1997 period.
Depreciation, depletion and amortization expense. Depreciation, depletion and
amortization (DD&A) expense increased $41.7 million, or 39%, to $147.5 million
for the six months ended June 30, 1998, from $105.8 million for the comparable
1997 period. This variance is primarily attributable to the Company's increased
production and related current and future capital costs from the 1997 and 1998
Gulf of Mexico and international drilling programs and acquisitions, partially
offset by the effect of an increase in proved reserves resulting from such
programs and acquisitions. Oil and gas DD&A increased $0.01 per BOE, or less
than 1%, to $6.98 per BOE for the six months ended June 30, 1998, from $6.97 per
BOE for the comparable 1997 period. The non-cash write-down of oil and gas
properties recognized in the second quarter of 1998 should lower oil and gas
DD&A per BOE in future periods.
Write-down of oil and gas properties. As required under the full cost method
of accounting, capitalized costs are limited to the sum of the present value of
future net revenues using current unescalated pricing discounted at 10% related
to estimated production of proved reserves and the lower of cost or estimated
fair value of unevaluated properties, all net of expected income
14
tax effects. At June 30, 1998, the Company recognized a non-cash impairment of
oil and gas properties in the amount of $218.4 million pre-tax ($135.4 million
after-tax) pursuant to this ceiling limitation required by the full cost method
of accounting for oil and gas properties, using certain improvements in pricing
experienced after period end. The write-down is primarily a result of the
precipitous decline in world crude oil prices experienced during the second
quarter 1998.
Interest and debt expense. Reported interest and debt expense decreased $0.8
million, or 4%, to $21.9 million for the six months ended June 30, 1998, from
$22.7 million in the comparable 1997 period. This decrease is primarily the
result of an increase in capitalized interest for the period. Average total debt
outstanding for the six months ended June 30, 1998, was $830.7 million as
compared to $478.6 million for the same period in 1997.
Merger Costs. Merger costs of $39.0 million were recorded in the first quarter
of 1998. These costs consist primarily of investment banking and other
transaction fees, employee severance and relocation costs as well as the write-
off of deferred financing costs related to the former credit facilities replaced
by the OEI Credit Facility in March 1998.
Income tax provision (benefit). An income tax benefit of $83.5 million (of
which $2.6 million is a current provision and $86.1 million is a deferred
benefit) was recognized for 1998, compared to a provision of $19.1 million (of
which $2.7 million was a current provision and $16.4 million was a deferred
provision) for 1997. A significant portion of current taxes is a non-cash
provision representing current taxes incurred in Cote d'Ivoire which, under the
terms of the production sharing contract, will be paid by the Ivorian government
from their production proceeds. The deferred tax benefit for the six months
ended June 30, 1998 is further impacted by the non-cash write-down of oil and
gas properties and the tax treatment of certain Merger costs, a portion of which
is not deductible for tax purposes. Consistent with Statement of Financial
Accounting Standards (SFAS) No. 109, Accounting for Income Taxes, the deferred
income tax provision or benefit was derived primarily from changes in deferred
income tax assets and liabilities recorded on the balance sheet.
Net income (loss). Due to the factors described above, the net loss for the
six months ended June 30, 1998, was $(163.0) million, a decrease of $194.0
million from net income of $31.0 million for the comparable 1997 period.
THREE MONTHS ENDED JUNE 30, 1998 COMPARED WITH THE THREE MONTHS ENDED JUNE 30,
1997.
Material changes in the results of operations between the three months ended
June 30, 1998 and 1997, primarily reflect the significant increases in oil and
natural gas production volumes offset by decreases in prices received and other
activities as previously discussed.
LIQUIDITY AND CAPITAL RESOURCES
The following summary table reflects comparative cash flows for the Company
for the six months ended June 30, 1998 and 1997 (in thousands):
Six Months Ended June 30,
---------------------------
1998 1997
------------ ------------
Net cash provided by operating activities $ 111,815 $ 188,610
Net cash used in investing activities (427,967) (308,274)
Net cash provided by financing activities 318,811 75,347
15
Capital requirements. The Company's capital investments to date have focused
primarily on exploration, acquisitions and development of proved properties. The
Company's expenditures for property acquisition, exploration and development for
the six months ended June 30, 1998 and 1997 are as follows:
Six months ended June 30,
-------------------------
1998 1997
----------- -----------
(in thousands)
Property acquisition costs:
Proved......................................... $ 6,879 $ 92,980
Unproved....................................... 16,916 30,280
Exploration costs................................ 140,914 99,827
Development costs................................ 216,160 151,562
Capitalized interest on unevaluated properties... 15,049 5,001
Capitalized general and administrative costs..... 11,469 6,589
-------- --------
Total costs incurred............................. $407,387 $386,239
======== ========
The Company makes, and will continue to make, substantial capital expenditures
for the acquisition, exploration, development, production and abandonment of its
oil and natural gas reserves. The Company has historically funded its
operations, acquisitions, exploration and development expenditures from cash
flows from operating activities, bank borrowings, sales of equity and debt
securities, sales of non-strategic oil and natural gas properties, sales of
partial interests in exploration concessions and project finance borrowings.
The Company intends to finance remaining 1998 capital expenditures related to
this strategy primarily with funds provided by operations, borrowings or other
capital market activities.
The Company's capital expenditure budget for 1998 is expected to be
approximately $650 million focused on the Company's three operating regions. In
addition, the Company will evaluate its level of capital spending throughout the
year based upon drilling results, commodity prices, cash flows from operations
and property acquisitions. Actual capital spending may vary from the capital
expenditure budget.
The Company's debt to total capitalization ratio has increased to 63.4% at
June 30, 1998, from 48.1% at December 31, 1997. The Company's interest coverage
ratio (calculated as the ratio of income from operations plus DD&A and
impairment of proved oil and gas properties to reported interest expense plus
capitalized interest less non-cash amortization of debt issue costs) was 5.1 to
1 for the first six months of 1998 compared with 6.7 to 1 for the first six
months of 1997.
The Company currently has certain agreements in place to reduce interest rate
fluctuation risk on a portion of its debt, resulting in an increase in interest
and debt expense of $0.2 million during the six months ended June 30, 1998.
Concurrent with the closing of the Merger on March 27, 1998, the Company
entered into a $750.0 million five-year unsecured revolving credit facility (OEI
Credit Facility) which combined and replaced the Revolving Credit Facility and
the Global Credit Facility. The OEI Credit Facility, which is with a group of
commercial banks, provides for various borrowing options under either a base
rate or Eurodollar margin rates. As of June 30, 1998, the OEI Credit Facility
provided a $600.0 million initial borrowing base. As of June 30, 1998, total
borrowings outstanding against the facility were approximately $472.1 million,
leaving approximately $127.9 million of available credit. These borrowings were
repaid in July 1998 with the proceeds from a $500.0 million Notes Offering made
by the Company pursuant to Rule 144A. At that time, the credit facility was
amended and restated to a $400.0 million, five-year revolving credit facility
with an initial borrowing base of $300.0 million.
Liquidity. The ability of the Company to satisfy its obligations and fund
planned capital expenditures will be dependent upon its future performance,
which will be subject to prevailing economic conditions, including oil and gas
prices, and subject to financial and business conditions and other factors, many
of which are beyond its control, supplemented if necessary with existing cash
balances and borrowings under the OEI Credit Facility. The Company currently
expects that its cash flow from operations and availability under the OEI Credit
Facility will be adequate to execute its 1998 business plan. However, no
assurance can be given that the Company will not experience liquidity problems
from time to time in the future or on a long-term basis. If the Company's cash
flow from operations and availability under the OEI Credit Facility are not
sufficient to satisfy its cash requirements, there can be no assurance that
additional debt or equity financing will be available to meet its requirements.
16
Effects of Leverage. The Company has outstanding long-term indebtedness of
approximately $987.3 million as of June 30, 1998. The Company's level of
indebtedness has several important effects on its future operations, including
(i) a substantial portion of the Company's cash flow from operations must be
dedicated to the payment of interest on its indebtedness and will not be
available for other purposes, (ii) the covenants contained in the various
indentures require the Company to meet certain financial tests, and contain
other restrictions which limit the Company's ability to borrow additional funds
or to dispose of assets and may affect the Company's flexibility in planning
for, and reacting to, changes in its business, including possible acquisition
activities and (iii) the Company's ability to obtain additional financing in the
future for working capital, expenditures, acquisitions, general corporate
purposes or other purposes may be impaired. None of the indentures place
significant restrictions on a wholly-owned subsidiary's ability to make
distributions to the parent company.
The Company believes it is currently in compliance with all covenants
contained in the respective indentures.
The Company's ability to meet its debt service obligations and to reduce its
total indebtedness will be dependent upon the Company's future performance,
which will be subject to oil and gas prices, general economic conditions and to
financial, business and other factors affecting the operations of the Company,
many of which are beyond its control. There can be no assurance that the
Company's future performance will not be adversely affected by such economic
conditions and financial, business and other factors.
OTHER MATTERS
Energy swap agreements. The Company hedges certain of its production through
master swap agreements (Swap Agreements) which provide for separate contracts
tied to the NYMEX light sweet crude oil and natural gas futures contracts. In
addition, the Company has combined contracts which have agreed upon price floors
and ceilings (Costless Collars). As of June 30, 1998, the fair market value of
all hedging contracts was approximately $10.1 million.
Oil revenues have been increased by $6.3 million and $11.1 million for the
three and six months ended June 30, 1998 as a result of the hedge contracts in
place for each period. As of June 30, 1998, the Company's open forward position
on its outstanding crude oil Swaps was 2,100 MBbls at an average price of $19.87
per Bbl for the year ended December 31, 1998. The Company currently has no
outstanding natural gas swaps.
It is the Company's current intention to commit no more than 50% of its
production on a BOE basis to such arrangements at any point in time. As the
current Swap Agreements expire, the portion of the Company's oil and natural gas
production which is subject to price fluctuations will increase substantially
unless the Company enters into additional hedging transactions.
Price fluctuations and volatile nature of markets. Despite the measures taken
by the Company to attempt to control price risk, the Company remains subject to
price fluctuations for natural gas and oil sold on the spot market. Prices
received for natural gas sold on the spot market are volatile due primarily to
seasonality of demand and other factors beyond the Company's control. Domestic
oil prices generally follow worldwide oil prices which are subject to price
fluctuations resulting from changes in world supply and demand. Any significant
decline in prices for oil and gas could have a material adverse effect on the
Company's financial position, results of operations and quantities of reserves
recoverable on an economic basis.
Environmental. The Company's business is subject to certain federal, state,
and local laws and regulations relating to the exploration for, and the
development, production and transportation of, oil and natural gas, as well as
environmental and safety matters. Many of these laws and regulations have
become more stringent in recent years, often imposing greater liability on a
larger number of potentially responsible parties. Although the Company believes
it is in substantial compliance with all applicable laws and regulations, the
requirements imposed by such laws and regulations are frequently changed and
subject to interpretation, and the Company is unable to predict the ultimate
cost of compliance with these requirements or their effect on its operations.
Under certain circumstances, the MMS may require any Company operations on
federal leases to be suspended or terminated. Any such suspensions, terminations
or inability to meet applicable bonding requirements could materially and
adversely affect the Company's financial condition and operations. Although
significant expenditures may be required to comply with governmental laws and
regulations applicable to the Company, to date such compliance has not had a
material adverse effect on the earnings or competitive position of the Company.
It is possible that such regulations in the future may add to the cost of
operating offshore drilling equipment or may significantly limit drilling
activity. The Company has included approximately $10.0 million in its 1998
exploration and development capital budget
17
to reformat operations for alternative disposal of water produced from its
offshore wells in accordance with an approved zero discharge plan.
The Oil Pollution Act of 1990 (OPA) imposes ongoing requirements on a
responsible party including proof of financial responsibility to cover at least
some costs in a potential spill. For tank vessels, including mobile offshore
drilling rigs, the OPA imposes on owners, operators and charterers of the
vessels, an obligation to maintain evidence of financial responsibility of up to
$10.0 million depending on gross tonnage. With respect to offshore facilities,
proof of greater levels of financial responsibility may be applicable. This
amount is subject to upward regulatory adjustment up to $150.0 million.
Year 2000 compliance. The Company is currently in the process of evaluating
its information technology infrastructure for the year 2000 (Year 2000)
compliance. The Company's primary information systems are in the process of
being replaced with fully compliant new systems as part of a regularly scheduled
upgrade to meet the Company's growing capacity and performance requirements.
These replacements are expected to be completed by early 1999.
The Company does not expect that the cost to modify and replace its
information technology infrastructure to be Year 2000 compliant will be material
to its financial condition or results of operations. The Company does not
anticipate any material disruption in its operations as a result of any failure
by the Company to be in compliance. The costs of these projects and the date on
which the Company plans to complete modifications and replacements are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events including the continued availability of certain resources,
third party modification plans and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those plans.
The Company does not currently have any information concerning the Year 2000
compliance status of its suppliers and customers. In the event that any of the
Company's significant suppliers or customers do not successfully and timely
achieve Year 2000 compliance, the Company's business or operations could be
adversely affected.
The Company has not incurred significant costs related to Year 2000 compliance
prior to December 31, 1997, other than internal costs to evaluate the extent of
compliance.
Forward-looking statements. Certain statements in this report, including
statements of the Company's and management's expectation, intentions, plans and
beliefs, including those contained in or implied by "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the Notes to
Consolidated Financial Statements, are "forward-looking statements", within the
meaning of Section 21E of the Securities Exchange Act of 1934, that are subject
to certain events, risk and uncertainties that may be outside the Company's
control. These forward-looking statements include statements of management's
plans and objectives for the Company's future operations and statements of
future economic performance; information regarding drilling schedules, expected
or planned production or transportation capacity, future production levels of
international and domestic fields, the Company's capital budget and future
capital requirements, the Company's meeting its future capital needs, the
Company's realization of its deferred tax assets, the level of future
expenditures for environmental costs and the outcome of regulatory and
litigation matters; and the assumptions described in this report underlying such
forward-looking statements. Actual results and developments could differ
materially from those expressed in or implied by such statements due to a number
of factors, including, without limitation, those described in the context of
such forward-looking statements, fluctuations in the price of crude oil and
natural gas, the success rate of exploration efforts, timeliness of development
activities, risk incident to the drilling and completion for oil and gas wells,
future production and development costs, the political and economic climate in
which the Company conducts operations and the risk factors described from time
to time in the Company's other documents and reports filed with the Securities
and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
18
OCEAN ENERGY, INC.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On December 29, 1997, a class action complaint (Newman v. Carson, et al.,
Civil Action No. 16109-NC) was filed in the Court of Chancery of the State of
Delaware, by a person claiming to represent the stockholders of UMC against UMC
and each of its directors. On January 9, 1998, a similar class action complaint
(Ross v. Brock. et al., Civil Action No. 98-00845) was filed in the District
Court of Harris County, Texas, 164th Judicial District by another person
claiming to represent the stockholders of UMC against UMC and each of its
directors. Preliminary settlements have been reached in each of these
complaints, the effects of which are not material to the consolidated financial
statements.
The U.S. Environmental Protection Agency has indicated that the Company may
be potentially responsible for costs and liabilities associated with alleged
releases of hazardous substances at two sites in Louisiana under the
Comprehensive Environmental Response, Compensation and Liability Act. Given the
extremely large number of companies that have been identified as potentially
responsible for releases of hazardous substances at the sites and the small
volume of hazardous substances allegedly disposed of by the companies whose
properties the Company acquired, management believes that the Company's
potential liability arising from these sites, if any, will not have a material
adverse impact on the Company.
In February 1998, the Tulane Environmental Law Clinic (Clinic), claiming to
represent several southeastern Louisiana environmental groups, gave notice that
it intends to file a Clean Water Act citizens' suit against the Company after a
sixty-day waiting period expires in connection with the discharge of produced
water in East Bay. The Clinic claims that the Company is violating the Clean
Water Act by discharging produced water from its East Bay Central Facilities
into Southwest Pass, and has stated that it will seek an injunction to require
the Company to cease its discharge of produced water, and will seek civil
penalties and attorney's fees. If the Clinic were to successfully obtain an
injunction, certain production operations at the Company's East Bay Facilities
could be interrupted until favorable resolution of the issue in court or
accelerated completion of the Company's plan to reformat operations to provide
for alternative produced water disposal. The Company believes that its zero
discharge compliance plan, which permits the temporary continued discharge of
produced water into Southwest Pass through July 1, 1999, is completely lawful as
authorized by a Compliance Order issued by the Louisiana Department of
Environmental Quality, and intends to vigorously defend any such citizens' suit,
if filed. The Clinic has delivered similar notices to other Louisiana coastal
producers.
The Company is a named defendant in lawsuits and is a party in governmental
proceedings from time to time arising in the ordinary course of business. While
the outcome of such lawsuits or other proceedings against the Company cannot be
predicted with certainty, management does not expect these matters to have a
material adverse effect on the financial position or results of operations of
the Company.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
[A] Exhibits: See Index to Exhibits on page 21.
[B] Reports on Form 8-K
A Form 8-K dated May 6, 1998 was filed containing the Company's
Supplemental Consolidated Financial Statements and Related Management's
Discussion and Analysis of Financial Condition and Results of Operations
giving retroactive effect of the merger between United Meridian Corporation
and Ocean Energy, Inc.
A Form 8-K dated May 29, 1998 was filed announcing 30 days of combined
operating results of the Company to satisfy the requirements of Accounting
Series Release 135 issued by the SEC.
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.
Signature Title Date
--------- ----- ----
/s/ JONATHAN M. CLARKSON Executive Vice President and August 12, 1998
- ------------------------- Chief Financial Officer
Jonathan M. Clarkson
/s/ CHRISTOPHER E. CRAGG Vice President and Controller August 12, 1998
- ------------------------ (Chief Accounting Officer)
Christopher E. Cragg
20
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
- ----------- ------------------------------------------------------------------------------------------------------
3.1 Certificate of Incorporation of the Company, as amended, incorporated by reference to Exhibit 99.1
to the Company's Form 8-K filed with the Securities and Exchange Commission on March 31, 1998.
3.2 Amended and Restated Bylaws of the Company, incorporated by reference to Exhibit 99.2 to the
Company's Form 8-K filed with the Securities and Exchange Commission on March 31, 1998.
10.1 Employment Agreement, dated as of March 27, 1998, among the Company and John B. Brock,
incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed with the Securities and
Exchange Commission on March 31, 1998.
10.2 Employment Agreement, dated as of March 27, 1998, among the Company and James C. Flores,
incorporated by reference to Exhibit 10.2 to the Company's Form 8-K filed with the Securities and
Exchange Commission on March 31, 1998.
10.3* Amended and Restated Global Credit Agreement, dated as of July 8, 1998, by and among the Company,
Chase Bank of Texas, National Association ("Chase Texas") as Administrative Agent, Morgan Guaranty
Trust Company of New York ("Morgan Guaranty") as Syndication Agent, Barclays Bank PLC as
Documentation Agent, and the other Lenders named therein.
10.4* Amended and Restated Guaranty Agreement, dated as of July 8, 1998, by and among the Company, Chase
Manhattan Bank of Canada as Administrative Agent, Morgan Guaranty as Syndication Agent, Barclays
Bank PLC as Documentation Agent, and the other Lenders named therein.
10.5* Amended and Restated Intercreditor Agreement, dated as of July 8, 1998, by and among the Company,
OEI Louisiana, Ocean Energy Resources Canada, Ltd., (Resources Canada), Chase Texas as
Administrative Agent and Paying Agent, Morgan Guaranty as Syndication Agent, Barclays Bank PLC as
Documentation Agent, and the other Lenders named therein.
10.6* Amended and Restated Credit Agreement, dated as of July 8, 1998, by and among Resources Canada,
the Chase Manhattan Bank of Canada ("Chase Canada") as Administrative Agent, and the other Lenders
named therein.
10.7* Amended and Restated Guaranty Agreement, dated as of July 8, 1998, by and among the Company, Chase
Canada as Administrative Agent, and the other Lenders named therein.
10.8* Guaranty Agreement, dated as of July 8, 1998, by and among OEI Louisiana, Chase Texas as
Administrative Agent, Morgan Guaranty as Syndication Agent, Barclays Bank PLC as Documentation
Agent, and the other Lenders named therein.
10.9 Third Supplemental Indenture, dated as of March 27, 1998, among Ocean Energy, Inc., a Delaware
corporation, Ocean Energy, Inc., a Louisiana corporation, and State Street Bank and Trust Company,
relating to the 13 1/2% Senior Notes due 2004, incorporated by reference to Exhibit 10.9 to the
Company's Form 8-K filed with the Securities and Exchange Commission on March 31, 1998.
10.10 First Supplemental Indenture, dated as of March 27, 1998, among Ocean Energy, Inc. a Delaware
corporation, Ocean Energy, Inc., a Louisiana corporation, and State Street Bank and Trust Company,
relating to the 9 3/4% Senior Subordinated Notes due 2006, incorporated by reference to Exhibit
10.10 to the Company's Form 8-K filed with the Securities and Exchange Commission on March 31,
1998.
10.11 First Supplemental Indenture, dated as of March 27, 1998, among Ocean Energy, Inc., a Delaware
corporation, Ocean Energy, Inc., a Louisiana corporation, and State Street Bank and Trust Company,
relating to the 8 7/8% Senior Subordinated Notes due 2007, incorporated by reference to Exhibit 10.11
to the Company's Form 8-K filed with the Securities and Exchange Commission on March 31, 1998.
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10.12 Second Supplemental Indenture, dated as of March 27, 1998, among Ocean Energy, Inc. a Delaware
corporation (successor by merger to United Meridian Corporation), Ocean Energy, Inc., a Louisiana
corporation, (successor by merger to UMC Petroleum Corporation), and U.S. Bank Trust National
Association, relating to the 10 3/8% Senior Subordinated Notes due 2005, incorporated by reference to
Exhibit 10.12 to the Company's Form 8-K filed with the Securities and Exchange Commission on March
31, 1998.
10.13 Ocean Energy, Inc. 1998 Long Term Incentive Plan, incorporated by reference to Exhibit 10.13 to
the Company's Form 8-K filed with the Securities and Exchange Commission on March 31, 1998.
10.14 Petroleum Production Sharing Contract on Block CI-11 dated June 27, 1992 among the Republic of
Cote d'Ivoire, UMIC Cote d'Ivoire Corporation and Societe Nationale d'Operations Petrolieres de la
Cote d'Ivoire (including English translation), incorporated herein by reference to Exhibit 10.5 to
Amendment No. 3 to United Meridian Corporation's Form S-1 (No. 33-63532) filed with the Securities
and Exchange Commission on July 20, 1993.
10.15 Production Sharing Contract dated August 18, 1992 between the Republic of Equatorial Guinea and
United Meridian International Corporation (Area A - Offshore NE Bioco), incorporated herein by
reference to Exhibit 10.6 to Amendment No. 1 to United Meridian Corporation's Form S-1 (No.
33-63532) filed with the Securities and Exchange Commission on June 18, 1993.
10.16 Production Sharing Contract dated June 29, 1992 between the Republic of Equatorial Guinea and
United Meridian International Corporation (Area B - Offshore NW Bioco), incorporated herein by
reference to Exhibit 10.7 to Amendment No. 1 to United Meridian Corporation's Form S-1 (No.
33-63532) filed with the Securities and Exchange Commission on June 18, 1993.
10.17 Production Sharing Contract dated June 29, 1994 between the Republic of Equatorial Guinea and
United Meridian International Corporation (Area C - Offshore Bioco), incorporated herein by
reference to Exhibit 10.15 to United Meridian Corporation's 1994 Form 10-K filed with the
Securities and Exchange Commission on March 10, 1995.
10.18 Production Sharing Contract on Block CI-01 dated December 5, 1994 among The Republic of Cote
d'Ivoire, UMIC Cote d'Ivoire Corporation and Societe Nationale d'Operations Petrolieres de la Cote
d'Ivoire (English translation), incorporated by reference to Exhibit 10.16 to United Meridian
Corporation's 1994 Form 10-K filed with the Securities and Exchange Commission on March 10, 1995.
10.19 Production Sharing Contract on Block CI-02 dated December 5, 1994 among The Republic of Cote
d'Ivoire, UMIC Cote d'Ivoire Corporation and Societe Nationale d'Operations Petrolieres de la Cote
d'Ivoire (English translation), incorporated by reference to Exhibit 10.17 to United Meridian
Corporation's 1994 Form 10-K filed with the Securities and Exchange Commission on March 10, 1995.
10.20 Production Sharing Contract of Block CI-12 dated April 27 1995 among The Republic of Cote
d'Ivoire, UMIC Cote d'Ivoire Corporation and others (English translation), incorporated by
reference to Exhibit 10.18 to United Meridian Corporation's 1995 Form 10-K filed with the
Securities and Exchange Commission on March 7, 1996.
10.21 Production Sharing Contract dated April 5, 1995 between The Republic of Equatorial Guinea and UMIC
Equatorial Guinea Corporation (Area D - Offshore Bioco), incorporated by reference to Exhibit 10.20
to United Meridian Corporation's Form 10-Q for the period ended September 30, 1995 filed with the
Securities and Exchange Commission on August 10, 1995.
10.22* Indenture, dated as of July 8, 1998, among the Company, its Subsidiary Guarantors, and U.S. Bank
Trust National Association, relating to the 8 3/8% Series A Senior Subordinated Notes due 2008 and
the 8 3/8% Series B Senior Subordinated Notes due 2008.
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10.23* Indenture, dated as of July 8, 1998, among the Company, its Subsidiary Guarantors, and Norwest
Bank Minnesota, National Association (Norwest Bank) as Trustee, relating to the 7 5/8% Senior Notes
due 2005.
10.24* Indenture, dated as of July 8, 1998, among the Company, its Subsidiary Guarantors, and Norwest
Bank as Trustee, relating to the 8 1/4% Senior Notes due 2018.
10.25* Registration Rights Agreement, dated as of July 8, 1998, among the Company as Issuer, OEI
Louisiana as Subsidiary Guarantor and Merrill Lynch & Co., Chase Securities, Inc., Lehman
Brothers, Inc., and Salomon Brothers, Inc.
27.1* Financial Data Schedule, included solely in the Form 10-Q filed electronically with the Securities
and Exchange Commission.
___________________________________________
* Filed herewith
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