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, 1999
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)
1021 Main Street, Suite 2100
Houston, Texas 77002
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (713) 652-0706
1331 Lamar, Suite 1650
Houston, Texas 77010
(Former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
As of August 12, 1999, the number of outstanding shares of the Registrant's
common stock was 19,878,417.
NUEVO ENERGY COMPANY
INDEX
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets:
June 30, 1999 (Unaudited) and December 31, 1998................... 3
Condensed Consolidated Statements of Operations (Unaudited):
Three and six months ended June 30, 1999
and June 30, 1998................................................. 5
Condensed Consolidated Statements of Cash Flows (Unaudited):
Six months ended June 30, 1999 and June 30, 1998.................. 7
Notes to Condensed Consolidated Financial Statements (Unaudited)... 8
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 15
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk. 32
PART II. OTHER INFORMATION.......................................... 33
2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
NUEVO ENERGY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands)
ASSETS
June 30, 1999 December 31, 1998
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents............................ $ 53,639 $ 7,403
Accounts receivable.................................. 26,555 25,096
Product inventory.................................... 4,992 5,998
Assets held for sale................................. 10,000 120,055
Prepaid expenses and other........................... 5,157 2,700
---------- ----------
Total current assets............................... 100,343 161,252
---------- ----------
PROPERTY AND EQUIPMENT, at cost:
Land................................................. 51,038 51,038
Oil and gas properties (successful efforts method)... 1,025,896 959,348
Gas plant facilities................................. 17,786 17,112
Other facilities..................................... 9,130 6,696
---------- ----------
1,103,850 1,034,194
Accumulated depreciation, depletion and
amortization....................................... (446,966) (417,622)
---------- ----------
656,884 616,572
---------- ----------
DEFERRED TAX ASSETS, net.............................. 22,010 27,534
OTHER ASSETS.......................................... 11,037 12,327
---------- ----------
$ 790,274 $ 817,685
========== ==========
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, 1999 December 31,1998
(Unaudited)
CURRENT LIABILITIES:
Accounts payable............................................................................. $ 18,318 $ 24,393
Accrued interest............................................................................. 4,211 4,161
Accrued liabilities.......................................................................... 19,846 17,917
Current maturities of long-term debt......................................................... 2,051 3,152
-------- ---------
Total current liabilities................................................................. 44,426 49,623
-------- ---------
LONG-TERM DEBT, net of current maturities...................................................... 380,000 419,150
OTHER LONG-TERM LIABILITIES.................................................................... 3,066 2,034
CONTINGENCIES
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 shares issued at June
30, 1999 and December 31, 1998, respectively................................................ 203 203
Additional paid-in capital................................................................... 355,720 355,600
Treasury stock, at cost, 449,255 and 473,876 shares, at
June 30, 1999 and December 31, 1998, respectively............................................ (19,053) (19,335)
Stock held by benefit trust, 71,630 and 47,759 shares, at
June 30, 1999 and December 31, 1998, respectively............................................ (2,014) (1,732)
Accumulated deficit.......................................................................... (87,074) (102,858)
-------- ---------
Total stockholders' equity............................................................... 247,782 231,878
-------- ---------
$790,274 $ 817,685
======== =========
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,
1999 1998
-------- ---------
REVENUES:
Oil and gas revenues....................... $ 52,172 $ 59,903
Gas plant revenues......................... 704 577
Pipeline and other revenues................ --- 480
Gain on sale of assets, net................ (1,387) ---
Interest and other income.................. 1,371 552
-------- --------
52,860 61,512
-------- --------
COSTS AND EXPENSES:
Lease operating expenses................... 29,333 32,738
Gas plant operating expenses............... 965 685
Pipeline and other operating expenses...... 62 576
Exploration costs.......................... 7,874 916
Depreciation, depletion and amortization... 22,937 21,774
General and administrative expenses........ 3,367 3,841
Outsourcing fees........................... 3,636 3,440
Interest expense........................... 8,401 7,618
Dividends on Guaranteed Preferred
Beneficial Interests in Company's
Convertible Debentures (TECONS).......... 1,653 1,653
Other expense.............................. 395 1,036
-------- --------
78,623 74,277
-------- --------
Loss before income taxes.................... (25,763) (12,765)
Benefit for income taxes.................... (10,205) (5,143)
-------- --------
NET LOSS.................................... $(15,558) $ (7,622)
======== ========
LOSS PER SHARE:
Basic and Diluted:
Loss per common share $ (0.78) $ (0.39)
======== ========
Weighted average common shares outstanding 19,853 19,772
======== ========
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,
-------------------------
1999 1998
--------- ---------
REVENUES:
Oil and gas revenues.................... $ 95,052 $123,045
Gas plant revenues...................... 1,288 1,405
Pipeline and other revenues............. 4 1,722
Gain on sale of assets, net............. 80,312 1,677
Interest and other income............... 2,847 1,324
--------- ---------
179,503 129,173
--------- ---------
COSTS AND EXPENSES:
Lease operating expenses................ 57,876 65,774
Gas plant operating expenses............ 2,336 1,423
Pipeline and other operating expenses... 143 1,842
Exploration costs....................... 9,999 2,331
Depreciation, depletion and
amortization........................... 46,257 46,556
General and administrative expenses..... 7,199 8,526
Outsourcing fees........................ 6,846 7,199
Interest expense........................ 16,400 14,444
Dividends on Guaranteed
Preferred Beneficial Interests in
Company's Convertible Debentures
(TECONS).............................. 3,306 3,306
Other expense........................... 2,836 1,846
--------- ---------
153,198 153,247
--------- ---------
Income (loss) before income taxes......... 26,305 (24,074)
Provision (benefit) for income taxes...... 10,521 (9,870)
--------- ---------
NET INCOME (LOSS)......................... $ 15,784 $ (14,204)
========= =========
EARNINGS (LOSS) PER SHARE:
Basic:
Earnings (loss) per common share.......... $ 0.80 $ (0.72)
========= =========
Weighted average common shares
outstanding.............................. 19,848 19,759
========= =========
Diluted:
Earnings (loss) per common share.......... $ 0.79 $ (0.72)
========= =========
Weighted average common and dilutive
potential common shares outstanding...... 19,915 19,759
========= =========
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,
1999 1998
--------- ---------
Cash flows from operating activities:
Net income (loss)............................................ $ 15,784 $ (14,204)
Adjustments to reconcile net income (loss) to
net cash (used in)/provided by operating activities:
Depreciation, depletion and amortization................ 46,257 46,556
Gain on sale of assets, net............................. (80,312) (1,677)
Dry hole costs.......................................... 7,297 138
Amortization of other costs............................. 811 758
Deferred revenues....................................... --- (1,227)
Deferred taxes.......................................... 5,521 (10,245)
Appreciation of deferred compensation plan.............. 111 ---
Other................................................... 120 ---
--------- ---------
(4,411) 20,099
Changes in assets and liabilities:
Accounts receivable...................................... (1,459) 11,240
Accounts payable and accrued liabilities................. (5,606) (5,149)
Other.................................................... (1,680) (4,273)
--------- ---------
Net cash (used in)/provided by operating activitie........... (13,156) 21,917
--------- ---------
Cash flows from investing activities:
Additions to oil and gas porperties........................ (35,497) (90,329)
Acquisitions of oil and gas properties..................... (61,416) (7,810)
Additions to gas plant facilities.......................... (674) (1,091)
Additions to other facilities.............................. (2,434) (1,184)
Proceeds from sales of properties.......................... 199,663 5,811
--------- ---------
Net cash provided by/(used in) investing activities.......... 99,642 (94,603)
--------- ---------
Cash flows from financing activities:
Proceeds from borrowings.................................... 120,090 193,000
Deferred financing costs.................................... --- (2,636)
Payments of long-term debt.................................. (160,340) (121,902)
Treasury stock sale......................................... --- 100
Proceeds from issuance of common stock --- 1,280
--------- ---------
Net cash (used in)/provided by financing activities........... (40,250) 69,842
--------- ---------
Net increase/(decrease) in cash and cash equivalents........ 46,236 (2,844)
Cash and cash equivalents at beginning of period............ 7,403 9,208
--------- ---------
Cash and cash equivalents at end of period.................... $ 53,639 $ 6,364
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of amounts capitalized)....................... $ 15,646 $ 14,389
Income taxes............................................... $ 2,250 $ 475
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, 1999 and December 31, 1998 and the
results of operations and changes in cash flows for the periods ended June
30, 1999 and 1998. These financial statements should be read in conjunction
with the financial statements and notes to financial statements in the 1998
Form 10-K of Nuevo Energy Company (the "Company").
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.
Comprehensive Income
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. 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, swap and option contracts,
which are used to hedge natural gas and 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, 1999 or December 31, 1998. 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 reduced by
$9.0 million and increased by $0.1 million in the second quarter of 1999 and
1998, respectively. During the first six months of 1999 and 1998, oil and
gas revenues were reduced by $8.8 million and increased by $0.2 million,
respectively, as a result of these transactions.
The Company entered into a swap arrangement with a major financial
institution that effectively converts the interest rate on $16.4 million
notional amount of the 9 1/2 % Senior Subordinated Notes due 2006 to a
variable LIBOR-based rate through February 25, 2000. Based on LIBOR rates in
effect at June 30, 1999, this amounted to a net reduction in the carrying
cost of the 9 1/2 % Senior Subordinated Notes due 2006 from 9.5%
8
NUEVO ENERGY COMPANY
Notes to Condensed Consolidated Financial Statements
(Unaudited)
to 5.64%, or 386 basis points. In addition, the swap arrangement also
effectively hedges the price at which these Notes can be repurchased by the
Company at 101.16% of their face amount. Based on the market price of 101.23%
for the Notes at June 30, 1999, an early termination of this arrangement
would result in a payment of approximately $11,000 from the institution to
Nuevo.
For the second half of 1999, the Company is party to crude oil swaps on an
average of 31,500 barrels of oil ("Bbls") per day, or 65% of its estimated
crude oil production, at an average NYMEX price of $16.35 per Bbl. For
calendar year 2000, the Company has entered into crude oil swaps on 16,500
Bbls per day, or 30% of its estimated crude oil production, at an average
NYMEX price of $17.94 per Bbl. In addition, for calendar year 2000, the
Company has hedged an additional 30% of its estimated crude oil production
through the purchase of put options on 16,500 Bbls per day at a NYMEX price
of $16.00 per Bbl, and the sale of call options on 16,500 Bbls per day at an
average NYMEX price of $21.21 per Bbl. There was no net cost to the Company
for these options.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities".
This statement, as amended by SFAS No. 137, establishes standards of
accounting for and disclosures of derivative instruments and hedging
activities. This statement requires all derivative instruments to be carried
on the balance sheet at fair value and is effective for the Company beginning
January 1, 2001, 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 proved property is sold, ceases to produce
or is abandoned, a gain or loss is recognized. When an entire interest in an
unproved property is sold for cash or cash equivalent, gain or loss is
recognized, taking into consideration any recorded impairment. When a
partial interest in an unproved property is sold, the amount received is
treated as a reduction of the cost of the interest retained.
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. An impairment of unproved leasehold costs of $8.1 million was
recognized as of December 31, 1998. Exploration costs, including geological
and geophysical expenses, exploratory dry holes and delay rentals, are
charged to expense as incurred.
Costs of productive wells, development 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 dismantlement,
abandonment and 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
9
NUEVO ENERGY COMPANY
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 the undiscounted expected future net revenues computed by application of
estimated future oil and gas prices, production and expenses, as determined
by management, to estimated future production of oil and gas reserves over
the economic life of the reserves. If the carrying value exceeds the
undiscounted future net revenues, an impairment is recognized equal to the
difference between the carrying value and the discounted estimated future net
revenues of that depletable unit. The Company considers probable reserves and
escalated commodity pricing in its estimate of future net revenues. A fair
value impairment of $60.8 million was recognized as of December 31, 1998.
Interest costs associated with non-producing leases and exploration and
development projects are capitalized only for the period that activities are
in progress to bring these projects to their intended use. The
capitalization rates are based on the Company's weighted average cost of
funds used to finance expenditures.
3. Deferred Tax Assets
As a result of the net loss generated during 1998, the Company has deferred
tax assets, net of valuation allowances, of $22.0 million and $27.5 million
as of June 30, 1999 and December 31, 1998, respectively. The Company
believes that sufficient future taxable income will be generated and has
concluded that these net deferred tax assets will more likely than not be
realized.
4. Industry Segment Information
As of December 31, 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information", which was issued by the
FASB in June 1997. 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 periods.
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. The Company's non-core gas
gathering, pipeline and gas storage assets were reclassified to assets held
for sale as of December 31, 1997, consistent with the Company's intention to
dispose of these assets during 1998 and 1999. The Company completed the sale
of its Bright Star gas gathering system in July 1998 and the 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 by the
end of 1999, pending finalization of a purchase and sale agreement and
certain regulatory approvals. The Company's policy is to record revenues and
expenses associated with these assets, which are no longer being depreciated,
until they are sold.
For the Six Months
Ended June 30,
-------------------
1999 1998
-------- --------
Sales to unaffiliated customers:
Oil and gas--East................. $ 7,682 $ 24,218
Oil and gas--West................. 76,455 90,689
Oil and gas--International........ 10,915 8,138
Gas plant, pipelines and other.... 1,292 3,127
-------- --------
Total sales......................... 96,344 126,172
Gain on sale of assets, net....... 80,312 1,677
Other revenues.................... 2,847 1,324
-------- --------
Total revenues...................... $179,503 $129,173
======== ========
10
NUEVO ENERGY COMPANY
Notes to Condensed Consolidated Financial Statements
(Unaudited)
For the Six Months
Ended June 30,
--------------------
1999 1998
-------- --------
Operating profit before income taxes:
Oil and gas--East (a)..................... $ 81,141 $ 12,644
Oil and gas--West......................... (18,165) (552)
Oil and gas--International................ (806) (1,288)
Gas plant, pipelines and other............ (1,786) (538)
-------- --------
60,384 10,266
Unallocated corporate expenses.............. 14,373 16,590
Interest expense............................ 16,400 14,444
Dividends on TECONS......................... 3,306 3,306
-------- --------
Income (loss) before income taxes......... $ 26,305 $(24,074)
======== ========
Depreciation, depletion and amortization:
Oil and gas--East......................... $ 4,307 $ 6,467
Oil and gas--West......................... 37,344 36,817
Oil and gas--International................ 3,855 2,529
Gas plant, pipelines and other............ 412 400
-------- --------
$ 45,918 $ 46,213
======== ========
(a) Includes an $80.3 million net gain on sale of the East Texas gas properties
for the six months ended June 30, 1999.
5. Long-Term Debt
Long-term debt consists of the following (amounts in thousands):
June 30, December 31,
1999 1998
--------- -------------
9 1/2% Senior Subordinated Notes due 2006 (a).... $160,000 $160,000
8 7/8% Senior Subordinated Notes due 2008 (a)..... 100,000 100,000
Bank credit facility (b).......................... 120,000 158,400
OPIC credit facility.............................. 2,051 3,902
-------- --------
Total debt................................ 382,051 422,302
Less: current maturities.......................... (2,051) (3,152)
-------- --------
Long-term debt.................................... $380,000 $419,150
======== ========
(a) In July 1999, the Company authorized a new issuance of $260.0 million of
9 1/2% senior subordinated notes due June 1, 2008. The Company has offered
to exchange the new notes for its outstanding $160.0 million of 9 1/2%
senior subordinated notes due 2006 and $100.0 million of 8 7/8% senior
subordinated notes due 2008. In connection with the exchange offers, the
Company has solicited consents to proposed amendments to the indentures
under which the old notes were issued. These amendments delete most of the
covenants in the old indentures. The purpose of the exchange offers is to
combine the Company's two existing issues of senior subordinated notes into
a single new issue in the aggregate principal amount of $260.0 million. The
purpose of the consent solicitations is to streamline the Company's
covenant structure and to provide the Company with additional flexibility
to pursue its operating strategy. The exchange offers were conditioned on
receipt of tenders of at least a majority of the outstanding principal
amount of each of the old notes and satisfaction of other customary
conditions. As of August 9, 1999, tenders had been received from holders of
a majority of each issue of the old notes. Accordingly, the Company and the
trustee for the old notes executed supplemental indentures containing the
proposed amendments relating to the consent solicitations. In addition to
the consideration equal to 3% of the outstanding principal amount of the
9 1/2% notes exchanged that the Company will pay to the holders of the
9 1/2% notes who tendered in the exchange offer, which will be accounted
for as deferred financing costs, the Company
11
NUEVO ENERGY COMPANY
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
expects to incur approximately $4.0 million of expenses during the third
quarter of 1999, in connection with this exchange offer.
(b) Nuevo's Restated Credit Agreement dated June 30, 1999, provides for secured
revolving credit availability of up to $400.0 million (subject to a semi-
annual borrowing base determination) from a bank group led by Bank of
America, N.A. and Morgan Guaranty Trust Company of New York, until its
expiration on April 1, 2003. Effective January 6, 1999, the borrowing base
on the Company's credit facility was reduced from $380.0 million to $200.0
million, reflecting the sale on that date of the Company's East Texas
natural gas reserves, and also reflecting a significant decline in current
and projected oil prices since the previous determination. The Company and
its banks have begun discussions regarding the reset of the borrowing base
to be effective as of October 15, 1999. Given the significant increase in
crude oil prices since the prior determination, management anticipates a
material increase in the borrowing base. The restatement of the Credit
Agreement also provided Nuevo with relief under the covenant requiring
minimum levels of EBITDA / Fixed Charge coverage. The Company was in
compliance with all covenants as of June 30, 1999, and does not anticipate
any issues of non-compliance arising in the foreseeable future. At June
30, 1999, outstanding borrowings under the revolving credit agreement were
$109.0 million. Additionally, Nuevo had $11.0 million of outstanding
borrowings under an uncommitted line of credit. Accordingly, $91.0 million
of committed revolving credit capacity was unused and available at June 30,
1999.
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-
month periods ended June 30, 1999 and 1998 and six-month period ended June
30, 1998, weighted average potential dilutive common shares of 184,000,
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,
------------------------------------------------------------
1999 1998
---------------------------- -----------------------------
Loss Shares Loss Shares
------------ ------------- ------------ -------------
Loss per Common share--Basic............................. $(15,558) 19,853 $(7,622) 19,772
Effect of dilutive securities:
Stock options............................................ --- --- --- ---
------------ ------------- ------------ -------------
Loss per Common share--Diluted........................... $(15,558) 19,853 $(7,622) 19,772
============ ============= ============ =============
For the Six Months Ended June 30,
-----------------------------------------------------------
1999 1998
---------------------------- ----------------------------
Income Shares Loss Shares
------------ ------------- ------------ ------------
Earnings (loss) per Common share--Basic.................. $15,784 19,848 $(14,204) 19,759
Effect of dilutive securities:
Stock options............................................ --- 67 --- ---
------------ ------------- ------------ ------------
Earnings (loss) per Common share--Diluted................ $15,784 19,915 $(14,204) 19,759
============ ============= ============ ============
7. Contingencies
The Company has been named as a defendant in Gloria Garcia Lopez and Husband,
Hector S. Lopez, Individually, and as successors to Galo Land & Cattle
Company v. Mobil Producing Texas & New Mexico, et al. in the 79th Judicial
District Court of Brooks County, Texas. The plaintiffs allege: i)
underpayment of royalties and claim damages, on a gross basis, of $27.7
million plus $26.2 million in interest for the period from 1985 to date; ii)
that their production was improperly commingled with gas produced from an
adjoining lease, resulting in damages, including interest of $40.8 million
(gross); and iii) numerous other claims that may result in unspecified
damages. Nuevo's working interest in these properties is 20%. The Company,
along with
12
NUEVO ENERGY COMPANY
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
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 March 1999, the Company discovered that a non-officer employee had
fraudulently authorized and diverted for personal use Company funds totaling
$5.9 million, $4.3 million in 1998 and the remainder in 1999, that were
intended for international exploration. Accordingly, the Company has
reclassified the amounts lost in 1998 to other expense. Based on its review
of the facts, management is confident that only one employee was involved in
the matter and that all misappropriated funds have been identified. The
Board engaged a Certified Fraud Examiner to conduct an in-depth review of the
fraudulent transactions to determine the scope of the fraud, the possibility
of recovery of amounts lost from insurance, from the terminated employee
and/or from third parties, and to make recommendations regarding what, if
any, new internal control procedures should be implemented.
In September 1997, there was a spill of crude oil into the Santa Barbara
Channel from a pipeline that connects the Company's Point Pedernales field
with shore-based processing facilities. The volume of the spill was
estimated to be 163 barrels of oil. The costs of the clean up and the cost
to repair the pipeline either have been or are expected to be covered by
insurance, less the Company's deductibles, which in total are $120,000.
Repairs were completed by the end of 1997, and production recommenced in
December 1997. The Company also has exposure to certain costs that may not
be recoverable from insurance, including fines, penalties, and damages. Such
costs are not quantifiable at this time, but are not expected to be material
to the Company's operating results, financial condition or liquidity.
The Company's international investments involve risks typically associated
with investments in emerging markets such as an uncertain political,
economic, legal and tax environment and expropriation and nationalization of
assets. In addition, if a dispute arises in its foreign operations, the
Company may be subject to the exclusive jurisdiction of foreign courts or may
not be successful in subjecting foreign persons to the jurisdiction of the
United States. The Company attempts to conduct its business and financial
affairs so as to protect against political and economic risks applicable to
operations in the various countries where it operates, but there can be no
assurance that the Company will be successful in so protecting itself. A
portion of the Company's investment in the Republic of Congo in West Africa
("Congo") is insured through political risk insurance provided by the
Overseas Private Investment Corporation ("OPIC"). The Company is currently
investigating its options for political risk insurance in the Republic of
Ghana in West Africa ("Ghana").
The Company and its partners underwent a tax examination related to their
ownership interests in the Yombo field offshore the Republic of Congo, for
the years 1994 through 1997. On June 25, 1999, the Company and its partners
settled this tax assessment for a total of $1.0 million, of which the
Company's share was $400,000.
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
13
NUEVO ENERGY COMPANY
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
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.
8. Acquisitions
In June 1999, the Company acquired oil properties located onshore and
offshore California for $61.4 million from Texaco, Inc. To purchase these
assets, the Company used funds from a $100.0 million interest-bearing escrow
account that provided "like-kind exchange" tax treatment for the purchase of
domestic oil and gas producing properties. The escrow account was created
with proceeds from the Company's January 1999 sale of its East Texas natural
gas assets (see discussion in Note 9 below). Following the Texaco
transaction, the $41.0 million remaining in the escrow account, which
included $2.4 million of interest income, was used to repay a portion of
outstanding bank debt in early July 1999.
The acquired properties had estimated net proved reserves at June 30, 1999 of
33.7 million barrels of oil equivalent ("BOE") and will increase the
Company's production from California by approximately 5.0 thousand BOE per
day. All of these properties are additional interests in the Company's
existing properties or are located near its existing properties. The
acquisition includes interests in Cymric, East Coalinga, Dos Cuadras and
other fields the Company operates.
9. Divestitures
On January 6, 1999, the Company completed the sale of its East Texas natural
gas assets to an affiliate of Samson Resources Company for an adjusted
purchase price of approximately $191.0 million. Of the proceeds, $100.0
million was set aside to fund an escrow account, as discussed above in Note
8. The remainder of the proceeds were used to repay outstanding senior bank
debt. The Company realized an $80.3 million adjusted pre-tax gain on the
sale of the East Texas natural gas assets resulting in the realization of
$14.6 million of the Company's deferred tax asset. A $5.2 million gain on
settled hedge transactions was realized in connection with the closing of
this sale in 1999. The effective date of the sale is July 1, 1998. The
Company reclassified these assets to assets held for sale and discontinued
depleting these assets during the third quarter of 1998. Estimated net
proved reserves associated with these properties totaled approximately 329.0
billion cubic feet of natural gas equivalent at January 1, 1999.
14
NUEVO ENERGY COMPANY
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Forward Looking Statements
This document includes "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934 ("Exchange Act"). All
statements other than statements of historical facts included in this
document, including without limitation, statements under "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
regarding the Company's financial position, estimated quantities and net
present values of reserves, business strategy, plans and objectives of
management of the Company for future operations and covenant compliance, are
forward-looking statements. Although the Company believes that the
assumptions upon which such forward-looking statements are based are
reasonable, it can give no assurances that such assumptions will prove to
have been correct. Important factors that could cause actual results to
differ materially from the Company's expectations ("Cautionary Statements")
are disclosed below and elsewhere in this document and in the Company's
Annual Report on Form 10-K and other filings made with the Securities and
Exchange Commission. 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 expanded its operations through a series of
disciplined, low-cost acquisitions of oil and gas properties and the
subsequent exploitation and development of these properties. The Company has
complemented these efforts with strategic divestitures and an opportunistic
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, bank
financing, private and public placements of debt and equity securities,
property divestitures and joint ventures with industry participants. Net
cash (used in) provided by operating activities was $(13.2) million and $21.9
million for the six months ended June 30, 1999 and 1998, respectively. The
Company invested $96.9 million and $98.1 million in oil and gas properties
for the six months ended June 30, 1999 and 1998, respectively. Such amounts
include $64.1 million and $7.8 million for acquisitions of oil and gas
properties during the first half of 1999 and 1998, respectively.
Effective January 6, 1999, the borrowing base on the Company's credit
facility was reduced from $380.0 million to $200.0 million, reflecting the
sale on that date of the Company's East Texas natural gas reserves, and also
reflecting a significant decline in current and projected oil prices since
the previous determination. The Company and its banks have begun discussions
regarding the reset of the borrowing base to be effective as of October 15,
1999. Given the significant increase in crude oil prices since the prior
determination, management anticipates a material increase in the borrowing
base. At June 30, 1999, outstanding borrowings under the revolving credit
agreement were $109.0 million. Additionally, Nuevo had $11.0 million of
outstanding borrowings under an uncommitted line of credit. Accordingly,
$91.0 million of committed revolving credit capacity was unused and available
at June 30, 1999. Also at June 30, 1999, the Company had $55.9 million of
working capital.
In July 1999, the Company authorized a new issuance of $260.0 million of
9 1/2% senior subordinated notes due June 1, 2008. The Company has offered to
exchange the new notes for its outstanding $160.0 million of 9 1/2% senior
subordinated notes due 2006 and $100.0 million of 8 7/8% senior subordinated
notes due 2008. In connection with the exchange offers, the Company has
solicited consents to proposed amendments to the indentures under which the
old notes were issued. These amendments delete most of the covenants in the
old indentures. The purpose of the exchange offers is to combine the
Company's two existing issues of senior subordinated notes into a single new
issue in the aggregate principal amount of $260.0 million. The purpose of the
consent solicitations is to streamline the Company's covenant structure and
to provide the Company with additional flexibility to pursue its operating
strategy. The exchange offers were conditioned on receipt of tenders of at
least a majority of the outstanding principal amount of each of the old notes
and satisfaction of other customary conditions. As of August 9, 1999, tenders
had been received from holders of a majority of each issue of the old notes.
Accordingly, the Company and the trustee for the old notes executed
supplemental indentures containing the proposed amendments relating to the
consent solicitations. In addition to the consideration equal to 3% of the
outstanding principal amount of the 9 1/2% notes exchanged that the Company
15
NUEVO ENERGY COMPANY
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
will pay to the holders of the 9 1/2% notes who tendered in the exchange
offer, which will be accounted for as deferred financing costs, the Company
expects to incur approximately $4.0 million of expenses during the third
quarter of 1999, in connection with this exchange offer.
In June 1999, the Company acquired oil properties located onshore and
offshore California for $61.4 million from Texaco, Inc. To purchase these
assets, the Company used funds from a $100.0 million interest-bearing escrow
account that provided "like-kind exchange" tax treatment for the purchase of
domestic oil and gas producing properties. The escrow account was created
with proceeds from the Company's January 1999 sale of its East Texas natural
gas assets. Following the Texaco transaction, the $41.0 million remaining in
the escrow account was used to repay a portion of outstanding bank debt in
early July 1999.
The Company plans to sell some of its surface real estate assets in Orange
County, California during 1999 and use the proceeds to fund a portion of the
1999 capital program. 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
In June 1999, the Company acquired oil properties located onshore and
offshore California for $61.4 million from Texaco, Inc. The acquired
properties had estimated net proved reserves at June 30, 1999 of 33.7 million
barrels of oil equivalent ("BOE") and will increase the Company's production
from California by approximately 5.0 thousand BOE per day. All of these
properties are additional interests in the Company's existing properties or
are located near its existing properties. The acquisition includes interests
in Cymric, East Coalinga, Dos Cuadras and other fields the Company operates.
Due to lower average realized oil prices in 1998 which continued into the
first quarter of 1999, the Company's capital spending plans for 1999 were
reduced significantly from levels in previous years. In the Company's
original 1999 capital budget, approximately $40.0 million was allocated to
exploitation and development projects and approximately $17.0 million was
directed to prospect generation and exploration. The Company anticipates
spending an additional $33.0 million on exploration and development
activities during the remainder of 1999. This includes a $13.0 million
increase in the Company's capital spending plans relating to the addition of
the Texaco properties acquired in June 1999, which brings the 1999 capital
budget up from $57.0 million to $70.0 million. Development activities for the
remainder of the year will primarily be focused in California.
Exploration and development expenditures for the first six months of 1999 and
1998 are as follows (amounts in thousands):
For the Six Months Ended
June 30,
--------------------------------------------------
1999 1998
---------------------- ----------------------
Domestic--East $ 3,762 $15,899
Domestic--West 13,512 70,434
International 19,421 7,952
---------------------- ----------------------
Total $36,695 $94,285
====================== ======================
16
NUEVO ENERGY COMPANY
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Following is a description of significant exploration and development
activity during the first six months of 1999.
Exploration Activity
Domestic - East
The Company plugged and abandoned the DeBord #1 well in the Fuller Prospect
and the LL&E 12-14 well at Four Isle Dome during the first half of 1999.
Dry hole costs for these wells totaled $0.8 million for the six months ended
June 30, 1999.
Domestic - West
In the first half of 1999, much progress was made in the Company's
preparations for additional exploratory drilling in California. The Company
has completed the 3-D seismic work at Belridge Road. This 12,000 acre area
is adjacent to the Monument Junction field, and the initial project, Sosa, is
currently scheduled to be drilled in September 1999. This prospect will test
multiple objectives on an anticline updip to a well drilled in the 1970's,
which previously tested oil. In the second quarter of 1999, the Company
decided to plug and abandon the Cree Fee #1 well in the Midway Peak prospect
area onshore California after it tested at non-commercial rates. The dry
hole costs associated with this well were $6.5 million.
International
The Company is nearing completion of its interpretations on both blocks in
the Republic of Ghana in West Africa ("Ghana") (East Cape Three Points and
Accra-Keta). The 2.7 million acre Accra-Keta block is an excellent candidate
for a 3-D seismic survey as the Company has identified several prospects
along the margin, some with multiple objectives. A seismic program at Accra-
Keta should begin late this year or early next year. Mapping of the East Cape
Three Points area has been updated and is currently under review.
Development Activity
Domestic - East
No significant activity during the first half of 1999.
Domestic - West
In the Bakersfield area, the Company drilled four horizontal wells in its
Cymric Field and three horizontal wells in its Belridge Field during the
first half of 1999. A fourth horizontal well is currently being drilled in
the Belridge Field. Also at Belridge, the Company is starting the continuous
injection of steam on a new steamdrive project. A significant facility
expansion is underway at the Brea Olinda field. Currently, the Company flares
approximately 2 MMCF of natural gas per day. The Company is in the process of
installing a cogeneration unit, which will utilize the flared gas and convert
it to electricity to supply all of the field electrical needs as well as sell
excess electricity. In addition, the Company has started up a propane
extraction facility in the Brea Olinda field. The implementation of the
cogeneration project and the propane extraction facility should result in
significant cost savings for the Brea Olinda property, and is expected to be
on-stream by the end of the year.
International
During the first half of 1999, the Company drilled eight wells as part of its
waterflood project on its property in the Republic of Congo in West Africa
("Congo"). As a result, Congo production is currently at a net production
rate of over 6,000 BOPD, compared to a fourth quarter 1998 net production
rate of 4,000 BOPD and a first quarter 1999 net production rate of 4,300
BOPD.
17
NUEVO ENERGY COMPANY
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
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, swap and option contracts,
which are used to hedge natural gas and 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, 1999 or December 31, 1998. 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 reduced by
$9.0 million and increased by $0.1 million in the second quarter of 1999 and
1998, respectively. During the first six months of 1999 and 1998, oil and
gas revenues were reduced by $8.8 million and increased by $0.2 million,
respectively, as a result of these transactions.
The Company entered into a swap arrangement with a major financial
institution that effectively converts the interest rate on $16.4 million
notional amount of the 9 1/2% Senior Subordinated Notes due 2006 to a
variable LIBOR-based rate through February 25, 2000. Based on LIBOR rates in
effect at June 30, 1999, this amounted to a net reduction in the carrying
cost of the 9 1/2% Senior Subordinated Notes due 2006 from 9.5% to 5.64%, or
386 basis points. In addition, the swap arrangement also effectively hedges
the price at which these Notes can be repurchased by the Company at 101.16%
of their face amount. Based on the market price of 101.23% for the Notes at
June 30, 1999, an early termination of this arrangement would result in a
payment of approximately $11,000 from the institution to Nuevo.
For the second half of 1999, the Company is party to crude oil swaps on an
average of 31,500 barrels of oil ("Bbls") per day, or 65% of its estimated
crude oil production, at an average NYMEX price of $16.35 per Bbl. For
calendar year 2000, the Company has entered into crude oil swaps on 16,500
Bbls per day, or 30% of its estimated crude oil production, at an average
NYMEX price of $17.94 per Bbl. In addition, for calendar year 2000, the
Company has hedged an additional 30% of its estimated crude oil production
through the purchase of put options on 16,500 Bbls per day at a NYMEX price
of $16.00 per Bbl, and the sale of call options on 16,500 Bbls per day at an
average NYMEX price of $21.21 per Bbl. There was no net cost to the Company
for these options.
Contingencies
-------------
The Company has been named as a defendant in Gloria Garcia Lopez and Husband,
Hector S. Lopez, Individually, and as successors to Galo Land & Cattle
Company v. Mobil Producing Texas & New Mexico, et al. in the 79th Judicial
District Court of Brooks County, Texas. The plaintiffs allege: i)
underpayment of royalties and claim damages, on a gross basis, of $27.7
million plus $26.2 million in interest for the period from 1985 to date; ii)
that their production was improperly commingled with gas produced from an
adjoining lease, resulting in damages, including interest of $40.8 million
(gross); and iii) numerous other claims that may result in unspecified
damages. Nuevo's working interest in these properties is 20%. The Company,
along with the other defendants in this case, denies these allegations and is
vigorously contesting these claims.
18
NUEVO ENERGY COMPANY
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
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 March 1999, the Company discovered that a non-officer employee had
fraudulently authorized and diverted for personal use Company funds totaling
$5.9 million, $4.3 million in 1998 and the remainder in 1999, that were
intended for international exploration. Accordingly, the Company has
reclassified the amounts lost in 1998 to other expense. Based on its review
of the facts, management is confident that only one employee was involved in
the matter and that all misappropriated funds have been identified. The
Board engaged a Certified Fraud Examiner to conduct an in-depth review of the
fraudulent transactions to determine the scope of the fraud, the possibility
of recovery of amounts lost from insurance, from the terminated employee
and/or from third parties, and to make recommendations regarding what, if
any, new internal control procedures should be implemented.
In September 1997, there was a spill of crude oil into the Santa Barbara
Channel from a pipeline that connects the Company's Point Pedernales field
with shore-based processing facilities. The volume of the spill was
estimated to be 163 barrels of oil. The costs of the clean up and the cost
to repair the pipeline either have been or are expected to be covered by
insurance, less the Company's deductibles, which in total are $120,000.
Repairs were completed by the end of 1997, and production recommenced in
December 1997. The Company also has exposure to certain costs that may not
be recoverable from insurance, including fines, penalties, and damages. Such
costs are not quantifiable at this time, but are not expected to be material
to the Company's operating results, financial condition or liquidity.
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
("OPIC"). The Company is currently investigating its options for political
risk insurance in Ghana.
The Company and its partners underwent a tax examination related to their
ownership interests in the Yombo field offshore the Republic of Congo, for
the years 1994 through 1997. On June 25, 1999, the Company and its partners
settled this tax assessment for a total of $1.0 million, of which the
Company's share was $400,000.
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
19
NUEVO ENERGY COMPANY
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
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.
Recent Accounting Pronouncements
--------------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities".
This statement, as amended by SFAS No. 137, establishes standards of
accounting for and disclosures of derivative instruments and hedging
activities. This statement requires all derivative instruments to be carried
on the balance sheet at fair value and is effective for the Company beginning
January 1, 2001, 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
----------
Nuevo, like all other enterprises that utilize computer technology, faces a
threat of business disruption from the Year 2000 Issue. The Year 2000 Issue
("Y2K") refers to the inability of computer and other information technology
systems to properly process date and time information, stemming from the
outdated programming practice of using two digits rather than four to
represent the year in a date. The consequence of Y2K is that computer and
embedded processing systems are at risk of malfunctioning, particularly
during the transition from 1999 to 2000.
The effects of Y2K are exacerbated by the interdependence of computer and
telecommunication systems throughout the world. This interdependence also
exists among Nuevo and its vendors, customers and business partners, as well
as with regulators in the United States and host governments abroad.
The risks associated with Y2K fall into three general areas: i) financial and
administrative systems, ii) embedded systems in field process control units,
and iii) third party exposures. Nuevo intends to address each of these three
areas through a readiness process that seeks to:
a) increase the awareness of the issue among all employees;
b) identify areas of potential risk;
c) assess the relative impact of these risks and the Company's ability to
manage them;
d) remediate high priority risks wherever possible; and
e) engage in contingency planning for identifiable risks that cannot be
remediated.
The Company's Board of Directors has assigned the oversight of Y2K to the
Audit Committee of the Board. From the Audit Committee, all responsibility
for the readiness effort runs through the Chief Executive Officer ("CEO") of
the Company, and from the CEO through the Chief Financial Officer (for
financial and administrative systems) and the Vice President of Exploitation
(for embedded systems in field process control units). As a matter of
routine, management of the Company updates the Audit Committee, and the
entire Board, of its efforts to increase Nuevo's readiness for Y2K.
The Company and Torch Energy Advisors, Inc. ("Torch") have jointly developed
a plan to address Nuevo's risks associated with Y2K. Torch provides the
financial and administrative systems for Nuevo and operates a substantial
portion of its properties. (As used in the remainder of this Y2K discussion,
references to the Company may include the Torch employees assisting the
Company in its Y2K readiness program). As of August 1, 1999, the Company was
in various stages of implementation of the plan, as summarized below:
Financial and Administrative Systems
Awareness. Nuevo has conducted numerous Y2K informational programs with its
employees and the employees of Torch who provide input to or utilize the
output of the financial and administrative systems of the Company. Employees
at all levels of the organization have been asked to participate in the
identification
20
NUEVO ENERGY COMPANY
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
of potential Y2K risks which might otherwise go unnoticed by higher level
employees and officers of Nuevo, and as a result, awareness of the issue is
considered high.
Risk Identification. Nuevo's most significant financial and administrative
systems exposure is the Y2K status of the accounting and land administration
software package that Torch uses to collect and manage data for internal
management decision making and for external financial reporting purposes.
Other concerns include network hardware and software, desktop computing
hardware and software, telecommunications and office space readiness.
Risk Assessment. The failure to identify and correct a material Y2K problem
could result in inaccurate or untimely financial information for management
decision-making or financial reporting purposes. The severity of any such
problems will impact the time period during which the quality of management
information comes under question. At this time, management is confident that
any Y2K disruptions associated with its or Torch's financial and
administrative systems will not have a material effect on the Company.
Remediation. Following upgrades to its accounting software, Nuevo achieved
full Y2K compliance for its Oracle-based financial and administrative systems
in July 1999. In addition, Torch has inventoried all network and desktop
software applications used by Nuevo and believes them to be generally Y2K
compliant. The costs of all such risk assessments and remediation for
financial and administrative systems are borne by Torch under the terms of
Nuevo's outsourcing agreements.
Contingency Planning. Notwithstanding the previously described efforts,
should there be significant unanticipated disruptions in Nuevo's financial
and administrative systems, a number of accounting processes that are
currently automated will need to be performed manually. Based on current
information, Nuevo has not concluded that contingency arrangements for
temporary staffing to accommodate such situations will be warranted.
Embedded Systems
Awareness. The Company's Y2K program has involved all levels of management
of field assets from production foremen and higher. Employees at all levels
of the organization have been asked to participate in the identification of
potential Y2K risks, which might otherwise go unnoticed by higher level
employees and officers of Nuevo, and as a result, awareness of the issue is
considered high.
Risk Identification. Nuevo has completed a comprehensive inventory of
embedded computer components within the process control systems of its
operated oil and natural gas fields and processing plants. Nuevo identified
approximately 1,900 embedded components in these computerized systems. Nuevo
researched the manufacturer and/or installer of each component to determine
the anticipated compliance or non-compliance of the component. To date, the
vast majority of embedded components so researched have been deemed either
date insensitive or Y2K compliant. The Y2K compliance status is unknown for
approximately 16% of the embedded components identified, and research is
continuing on these components. However, the complexity of embedded systems
is such that a small minority of non-compliant components, even a single non-
compliant component, can corrupt an entire system.
Risk Assessment. The failure to identify and correct a material Y2K problem
could result in outcomes ranging from errors in data reporting, to
curtailments or shutdowns in production, to environmental or safety
incidents. In attempt to prevent such failures, Nuevo conducted system-level
testing of assets owned at June 30, 1999. The component-level evaluation is
complete, with the status of 16% of components still unknown and research on
these components continuing. The system-level evaluation is virtually
complete with approximately 90% of all critical systems owned at June 30,
1999 fully tested. Testing on the remaining systems is expected to be
completed by September 30, 1999. For properties acquired after June 30,
1999, evaluation is ongoing and the extent of testing required is to be
determined. To assist in this effort, Nuevo and Torch Operating Company have
retained consultants who are knowledgeable and experienced in the assessment
of Y2K issues impacting field operations. Nuevo completed risk assessment of
all mission critical
21
NUEVO ENERGY COMPANY
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
systems in the second quarter of 1999 for all properties the Company owned as
of June 30, 1999. Remediation will extend to September 30, 1999 for
properties owned at June 30, 1999. Costs incurred through June 30, 1999, were
not material to Nuevo's results of operations, and the cost of the assessment
is not expected to be material to Nuevo's future financial results. However,
at this time, management is unable to express any degree of confidence that
there will not be material production disruptions associated with Y2K non-
compliance. Depending on the magnitude of any such disruptions and the time
required to correct them, such failures could materially and adversely impact
the Company's results of operations, liquidity and financial condition.
Remediation. The Company has prioritized the remediation of embedded
components and systems that are either known to be Y2K non-compliant or that
have higher risk of Y2K failures. Nuevo's intent is to give first priority to
the remediation of any situation which could potentially impact human health
and safety or the environment. Nuevo has prioritized remediation targets by
the anticipated financial impact of any such situations on the Company. Nuevo
is testing, upgrading and re-testing those embedded components and systems in
field process control units deemed to pose the greatest risk. It is
important to note that in some circumstances, the procedures that are used to
test embedded components for Y2K compliance themselves pose a risk of
damaging the component or corrupting the system, thereby accelerating the
consequences of Y2K failures. Accordingly, in some situations, it may be
deemed the most prudent decision not to test certain embedded components and
systems. The amount of capital that Nuevo budgeted for these anticipated
costs to remediate or replace embedded components and systems that pose the
greatest risk of Y2K non-compliance, is approximately $1.6 million and is not
considered to be material to the liquidity or financial condition of the
Company. However, it is expected that some additional risks may be
identified during 1999, so there can be no assurances that actual capital
spending on Y2K remediation will not significantly exceed any amounts
originally budgeted.
Contingency Planning. Should material production disruptions occur as a
result of Y2K failures in field operations, Nuevo's operating cash flow will
be impacted. This contingency is being factored into deliberations on
capital budgeting, liquidity and capital adequacy. It is management's
intention to maintain adequate financial flexibility to sustain the Company
during any such period of cash flow disruption. Nuevo is currently
evaluating all alternatives and is assessing its levels of risks based on the
testing performed to date. The Company should have a better understanding of
these issues by the end of the third quarter, which will enable it to execute
the best contingency plan given the aforementioned risks.
Third-Party Exposures
Awareness. Nuevo has conducted numerous Y2K informational programs with its
employees and the employees of Torch who have significant interaction with
outside vendors, customers, and business partners of the Company. All such
employees have been asked to participate in the identification of potential
third party Y2K risks, which might otherwise go unnoticed by higher level
employees and officers of Nuevo, and as a result, awareness of the issue is
considered high.
Risk Identification. Nuevo's most significant third-party Y2K exposure is to
the refinery customers who purchase its oil production, on the customer side,
and from electricity and other utility companies supplying field operations,
on the supplier side. Other significant concerns include the readiness of
third-party crude oil and natural gas pipeline facilities involved in the
transportation of Nuevo's products, the integrity of global telecommunication
systems, the readiness of commercial banks to execute electronic fund
transfers, and of the ability of the financial community to maintain an
orderly market in Nuevo's securities.
Risk Assessment. Refineries are extremely complex operations containing
hundreds or thousands of computerized processes. The failure on the part of
a Nuevo refining customer to identify and correct a material Y2K problem
could result in material disruptions in the sale of Nuevo's production to
that refinery. In many cases, affected Nuevo production may not be easily
shifted to other markets, and the result can range from reduced realizations
on crude oil produced, curtailed production or even shut-in production.
Failures of pipelines that connect Nuevo's production to markets may have
similar effects. Although the Company has
22
NUEVO ENERGY COMPANY
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
made inquiries to key third parties on the subject of Y2K readiness and will
continue to do so, it has no ability to require responses to such inquiries
or to independently verify their accuracy. Accordingly, management is unable
to express any degree of confidence that there will not be material
production disruptions associated with third party Y2K non-compliance.
Depending on the magnitude of any such disruptions and the time required to
correct them, such failures could materially and adversely impact the
Company's results of operations, liquidity and financial condition.
Remediation. Where Nuevo perceives significant risk of Y2K non-compliance
that may have a material impact on the Company, and where the relationship
between the Company and a vendor, customer or business partner permits, Nuevo
may pursue joint testing during 1999. Joint testing would occur following
upgrades and other remediation to hardware, software and communication links,
as applicable, with the intent of determining that the remediated system
being tested will perform as expected on December 31, 1999.
Contingency Planning. Should material production disruptions occur as a
result of Y2K failures of third parties, Nuevo's operating cash flow will be
impacted. This contingency is being factored into deliberations on capital
budgeting, liquidity and capital adequacy. It is management's intention to
maintain adequate financial flexibility to sustain the Company during any
such period of cash flow disruption. Nuevo is currently evaluating all
alternatives and is assessing its levels of risks based on the testing
performed to date and the Company's confidence in the Y2K readiness programs
of major/critical suppliers and customers. The Company should have a better
understanding of these issues by the end of the third quarter, which will
enable it to execute the best contingency plan given the aforementioned
risks.
23
NUEVO ENERGY COMPANY
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Results of Operations (Three months ended June 30, 1999 and 1998)
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/
1999 1998 (Decrease)
------ ------ ----------
Production:
Oil and condensate - East (MBBLS)......................... 131 224 (42%)
Oil and condensate - West (MBBLS)......................... 3,699 4,110 (10%)
Oil and condensate - International (MBBLS)................ 460 387 19%
------ ------
Oil and condensate - Total (MBBLS)........................ 4,290 4,721 (9%)
Natural gas - East (MMCF)................................. 1,004 4,677 (79%)
Natural gas - West (MMCF)................................. 3,131 3,440 (9%)
------ ------
Natural gas - Total (MMCF)................................ 4,135 8,117 (49%)
Natural gas liquids - East (MBBLS)........................ 13 25 (48%)
Natural gas liquids - West (MBBLS)........................ 37 46 (20%)
------ ------
Natural gas liquids - Total (MBBLS)....................... 50 71 (30%)
Equivalent barrels of production - East (MBOE)............ 311 1,028 (70%)
Equivalent barrels of production - West (MBOE)............ 4,258 4,729 (10%)
Equivalent barrels of production - International (MBOE)... 460 387 19%
------ ------
Equivalent barrels of production - Total (MBOE)........... 5,029 6,144 (18%)
Average Sales Price:
Oil and condensate - East................................. $15.73 $12.60 25%
Oil and condensate - West................................. $ 9.28 $ 8.49 9%
Oil and condensate - International........................ $15.73 $11.88 32%
Oil and condensate - Total................................ $10.17 $ 8.95 14%
Natural gas - East........................................ $ 1.89 $ 1.94 (3%)
Natural gas - West........................................ $ 1.93 $ 2.26 (15%)
Natural gas - Total....................................... $ 1.92 $ 2.05 (6%)
Lease Operating Expense:
Average unit production cost/(1)/ per BOE - East.......... $ 2.82 $ 3.17 (11%)
Average unit production cost/(1)/ per BOE - West.......... $ 5.90 $ 5.67 4%
Average unit production cost/(1)/ per BOE - International. $ 7.28 $ 6.86 6%
Average unit production cost/(1)/ per BOE - Total......... $ 5.83 $ 5.33 9%
Depletion, Depreciation and Amortization:
Average depletion per BOE - East.......................... $ 8.79 $ 2.83 211%
Average depletion per BOE - West.......................... $ 4.14 $ 3.71 12%
Average depletion per BOE - International................. $ 4.47 $ 3.41 31%
Average depletion per BOE - Total......................... $ 4.46 $ 3.55 26%
Average DD&A per BOE - Total.............................. $ 4.56 $ 3.54 29%
/(1)/ Costs incurred to operate and maintain wells and related equipment and
facilities, including ad valorem and severance taxes.
24
NUEVO ENERGY COMPANY
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Revenues
Oil and Gas Revenues:
Oil and gas revenues for the three months ended June 30, 1999 were $52.2
million, or 13% lower than oil and gas revenues of $59.9 million for the same
period in 1998. This decrease is primarily due to reduced gas volumes as a
result of the sale of the East Texas natural gas properties on January 6, 1999,
and reduced oil volumes due to the effects of reduced capital spending and the
sale of several non-core assets. This decrease was partially offset by an
increase in realized oil prices.
East: Oil and gas revenues in the Eastern division for the three months ended
June 30, 1999 were $4.1 million, or 66% lower than oil and gas revenues of $12.0
million for the same period in 1998. The decrease results primarily from lower
natural gas production due to the sale of the East Texas natural gas properties.
West: Oil and gas revenues for the three months ended June 30, 1999 were $40.9
million, or 6% lower than oil and gas revenues of $43.3 million for the same
period in 1998. This decrease is primarily due to a 10% decrease in production
due to the effects of reduced capital spending, partially offset by a 9%
increase in realized oil prices. The realized oil price of $9.28 per barrel of
oil for the three months ended June 30, 1999, includes a hedging loss of $2.60
per barrel of oil produced.
International: Oil revenues for the three months ended June 30, 1999 were $7.2
million as compared to $4.6 million for the same period in 1998. The 57%
increase results from a 19% increase in oil production coupled with a 32%
increase in oil price realizations to $15.73 per barrel.
Gain on Sale, net:
Gain on sale, net, for the three months ended June 30, 1999 was ($1.4) million,
representing a negative revision for final accounting adjustments in connection
with the January 1999 sale of the Company's East Texas natural gas properties.
There was no gain on sale for the three months ended June 30, 1998.
Interest and Other Income:
Interest and other income for the three months ended June 30, 1999 includes $1.1
million associated with interest earned on the $100.0 million in proceeds from
the sale of the East Texas natural gas properties funded into an escrow account
to provide "like-kind exchange" tax treatment in the event the Company acquired
domestic producing oil and gas properties in the first half of 1999. This
escrow account was liquidated in late June and early July 1999, in connection
with the Company's June 1999 acquisition of certain California oil properties
from Texaco, Inc. and the repayment of a portion of bank debt, respectively.
Expenses
- --------
Lease Operating Expenses:
Lease operating expenses for the three months ended June 30, 1999 totaled $29.3
million, or 10% lower than $32.7 million for the three months ended June 30,
1998. Lease operating expenses per barrel of oil equivalent were $5.83 in the
second quarter of 1999, compared to $5.33 in the same period in 1998.
East: Lease operating expenses for the three months ended June 30, 1999 totaled
$0.9 million, or 73% lower than $3.3 million for the three months ended June 30,
1998. The decrease is primarily attributable to the sale of the East Texas
natural gas properties in January of 1999. Lease operating expenses per barrel
of oil equivalent were $2.82 in the second quarter of 1999, compared to $3.17 in
the same period in 1998.
25
NUEVO ENERGY COMPANY
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
West: Lease operating expenses for the three months ended June 30, 1999 totaled
$25.1 million, or 6% lower than $26.8 million for the three months ended June
30, 1998. Lease operating expenses per barrel of oil equivalent were $5.90 in
the second quarter of 1999, compared to $5.67 in the same period in 1998.
Reduced workover costs onshore contributed to the lower lease operating expenses
quarter over quarter. The 10% decrease in production contributed to the higher
lease operating expenses per barrel.
International: Lease operating expenses for the three months ended June 30,
1999 totaled $3.3 million, or 26% higher than $2.7 million for the three months
ended June 30, 1998. Lease operating expenses per barrel of oil equivalent were
$7.28 in the second quarter of 1999, compared to $6.86 in the same period in
1998. The increase in lease operating expenses is primarily attributable to the
Company's second quarter 1998 acquisition of an additional interest in the Yombo
field in the Congo.
Gas Plant Operating Expenses:
Gas plant operating expenses were $1.0 million for the three months ended June
30, 1999 as compared to $0.7 million for the three months ended June 30, 1998.
The 41% increase in gas plant expenses in 1999 compared to 1998 is due to
increased ad valorem taxes.
Exploration Costs
Exploration costs, including geological and geophysical ("G&G") costs, dry hole
costs, delay rentals and expensed project costs, were $7.9 million and $0.9
million for the three months ended June 30, 1999 and 1998, respectively. For the
three months ended June 30, 1999, exploration costs are comprised of $6.5
million in dry hole costs, $0.7 million in G&G, $0.1million in delay rentals and
$0.6 million in expensed project costs. For the three months ended June 30,
1998, exploration costs are comprised of $0.6 million in G&G, $0.2 million in
delay rentals and $0.1 million in dry hole costs.
East: The second quarter of 1999 includes $0.1 million of G&G costs associated
with the LeLeux prospect in South Louisiana.
West: During the second quarter of 1999, the Company decided to plug and abandon
the Cree Fee #1 well in the Midway Peak prospect area onshore California. The
dry hole costs associated with this well were $6.5 million.
International: During the second quarter of 1999, $0.4 million in G&G costs
were expensed associated with the Accra Keta and the East Cape Three Points
prospects in Ghana.
Depreciation, Depletion and Amortization:
Depreciation, depletion and amortization of $22.9 million for the three months
ended June 30, 1999 reflects a 5% increase from $21.8 million in the same period
in 1998, due primarily to a higher depletion rate per barrel of oil equivalent
on the Company's oil and gas properties. The weighted average depletion rate
per barrel of oil equivalent in the second quarter of 1999 was $4.56 versus
$3.54 in the second quarter of 1998. Several factors contributed to the change
in the average depletion rate per barrel of oil equivalent. First, the property
mix changed as the lower cost East Texas natural gas properties were sold in
January. Second, the Company's year-end reserves decreased by approximately 12%
from the previous year primarily as a result of lower crude oil prices utilized
in computing proved reserves at year-end 1998. Finally, the impairment of $68.9
million recognized in the fourth quarter of 1998 reduced the capitalized costs
to be depleted and partially offset the increase in the depletion rate per
barrel of oil equivalent.
East: Depreciation, depletion and amortization of $2.7 million for the three
months ended June 30, 1999 reflects a 13% decrease from $3.1 million in the same
period in 1998, due primarily to decreased production volumes as a result of the
sale of the East Texas natural gas properties in January 1999.
26
NUEVO ENERGY COMPANY
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
West: Depreciation, depletion and amortization of $17.7 million for the three
months ended June 30, 1999 reflects a 4% increase from $17.1 million in the same
period in 1998, due primarily to an increased average depletion rate per barrel
of oil equivalent partially offset by decreased production volumes.
International: Depreciation, depletion and amortization of $2.1 million for the
three months ended June 30, 1999 reflects a 50% increase from $1.4 million in
the same period in 1998, due primarily to an increased average depletion rate
per barrel of oil equivalent as well as increased production volumes.
General and Administrative Expenses:
General and administrative expenses were $3.4 million and $3.8 million in the
three months ended June 30, 1999 and 1998, respectively. The 12% decrease is
due primarily to a reduction in bonus accruals, engineering costs and third-
party consulting studies.
Interest Expense:
Interest expense of $8.4 million incurred in the three months ended June 30,
1999 reflects an increase of 10% as compared to interest expense of $7.6 million
in the three months ended June 30, 1998. The increase is primarily attributable
to the Company's issuance of $100.0 million of 8 7/8% Senior Subordinated Notes
due 2008 in June 1998, which was used to repay lower-interest bank debt.
Other Expense:
In March 1999, the Company discovered that a non-officer employee had
fraudulently authorized and diverted for personal use Company funds totaling
$5.9 million, $4.3 million in 1998 and the remainder in the first quarter of
1999, that were intended for international exploration. Accordingly, amounts
lost in the second quarter of 1998 were reclassified from exploration costs to
other expense.
Net Loss
Net loss of $15.6 million, $0.78 per common share - basic and diluted, was
generated for the three months ended June 30, 1999, as compared to a net loss of
$7.6 million, $0.39 per common share - basic and diluted, in the same period in
1998.
27
NUEVO ENERGY COMPANY
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Results of Operations (Six months ended June 30, 1999 and 1998)
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/
1999 1998 (Decrease)
------ ------ ----------
Production:
Oil and condensate - East (MBBLS)......................... 302 426 (29%)
Oil and condensate - West (MBBLS)......................... 7,513 8,110 (7%)
Oil and condensate - International (MBBLS)................ 849 712 19%
------ ------
Oil and condensate - Total (MBBLS)........................ 8,664 9,248 (6%)
Natural gas - East (MMCF)................................. 1,983 9,500 (79%)
Natural gas - West (MMCF)................................. 6,244 7,236 (14%)
------ ------
Natural gas - Total (MMCF)................................ 8,227 16,736 (51%)
Natural gas liquids - East (MBBLS)....................... 26 41 (37%)
Natural gas liquids - West (MBBLS)........................ 67 75 (11%)
------ ------
Natural gas liquids - Total (MBBLS)....................... 93 116 (20%)
Equivalent barrels of production - East (MBOE)............ 658 2,051 (68%)
Equivalent barrels of production - West (MBOE)............ 8,621 9,391 (8%)
Equivalent barrels of production - International (MBOE)... 849 712 19%
------ ------
Equivalent barrels of production - Total (MBOE)........... 10,128 12,154 (17%)
Average Sales Price:
Oil and condensate - East................................. $ 13.31 $ 13.47 (1%)
Oil and condensate - West................................. $ 8.47 $ 9.10 (7%)
Oil and condensate - International........................ $ 12.86 $ 11.42 13%
Oil and condensate - Total................................ $ 9.07 $ 9.48 (4%)
Natural gas - East........................................ $ 1.75 $ 1.89 (7%)
Natural gas - West........................................ $ 1.91 $ 2.20 (13%)
Natural gas - Total....................................... $ 1.87 $ 2.01 (7%)
Lease Operating Expense:
Average unit production cost/(1)/ per BOE - East.......... $ 2.36 $ 3.07 (23%)
Average unit production cost/(1)/ per BOE - West.......... $ 5.80 $ 5.74 1%
Average unit production cost/(1)/ per BOE - International. $ 7.44 $ 7.79 (5%)
Average unit production cost/(1)/ per BOE - Total......... $ 5.71 $ 5.41 6%
Depletion, Depreciation and Amortization:
Average depletion per BOE - East.......................... $ 6.56 $ 3.02 117%
Average depletion per BOE - West.......................... $ 4.32 $ 3.76 15%
Average depletion per BOE - International................. $ 4.55 $ 3.40 34%
Average depletion per BOE - Total......................... $ 4.49 $ 3.77 19%
Average DD&A per BOE Total............................... $ 4.57 $ 3.83 19%
/(1)/ Costs incurred to operate and maintain wells and related equipment and
facilities, including ad valorem and severance taxes.
28
NUEVO ENERGY COMPANY
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Revenues
Oil and Gas Revenues:
Oil and gas revenues for the six months ended June 30, 1999 were $95.1 million,
or 23% lower than oil and gas revenues of $123.0 million for the same period in
1998. This decrease is primarily due to lower realized oil and gas prices in
the first half of 1999, reduced oil volumes due to reduced capital spending and
the sale of several non-core assets in 1999, and reduced gas volumes as a result
of the sale of the East Texas natural gas properties on January 6, 1999.
East: Oil and gas revenues in the Eastern division for the six months ended
June 30, 1999 were $7.7 million, or 68% lower than oil and gas revenues of $24.2
million for the same period in 1998. The decrease results primarily from lower
natural gas production due to the sale of the East Texas natural gas properties
as well as lower realized natural gas prices.
West: Oil and gas revenues for the six months ended June 30, 1999 were $76.5
million, or 16% lower than oil and gas revenues of $90.7 million for the same
period in 1998. This decrease is primarily due to a 7% lower realized oil price
in the first half of 1999 as well as reduced oil volumes due to reduced capital
spending. The realized oil price of $8.47 per barrel for the six months ended
June 30, 1999, includes a hedging loss of $1.28 per barrel of oil produced.
International: Oil revenues for the six months ended June 30, 1999 were $10.9
million as compared to $8.1 million for the same period in 1998. The 34%
increase results from a 19% increase in oil production along with a 13% increase
in oil price realizations to $12.86 per barrel.
Gain on Sale, net:
Gain on sale, net, for the six months ended June 30, 1999 was $80.3 million.
Such gain was recognized in connection with the sale of the Company's East Texas
natural gas properties for proceeds of $191.1 million, as adjusted for final
accounting, along with the sale of several non-core assets. Gain on sale for
the six months ended June 30, 1998 was $1.7 million, which relates to the sale
of the Company's interest in the Coke field in Chapel Hill, Texas.
Interest and Other Income:
Interest and other income for the six months ended June 30, 1999 includes $2.4
million associated with interest earned on the $100.0 million in proceeds from
the sale of the East Texas natural gas properties funded into an escrow account
to provide "like-kind exchange" tax treatment in the event the Company acquired
domestic producing oil and gas properties in the first half of 1999. The escrow
account was liquidated in late June and early July 1999, in connection with the
Company's June 1999 acquisition of certain California oil properties from
Texaco, Inc. and repayment of a portion of bank debt, respectively.
Expenses
Lease Operating Expenses:
Lease operating expenses for the six months ended June 30, 1999 totaled $57.9
million, or 12% lower than $65.8 million for the six months ended June 30, 1998.
Lease operating expenses per barrel of oil equivalent were $5.71 in the first
half of 1999, compared to $5.41 in the same period in 1998.
East: Lease operating expenses for the six months ended June 30, 1999 totaled
$1.6 million, or 75% lower than $6.3 million for the six months ended June 30,
1998. The decrease is primarily attributable to the sale of the East Texas
natural gas properties in January of 1999. Lease operating expenses per barrel
of oil equivalent were $2.36 in the first half of 1999, compared to $3.07 in the
same period in 1998.
29
NUEVO ENERGY COMPANY
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
West: Lease operating expenses for the six months ended June 30, 1999 totaled
$50.0 million, or 7% lower than $53.9 million for the six months ended June 30,
1998. Lease operating expenses per barrel of oil equivalent were $5.80 in the
first quarter of 1999, compared to $5.74 in the same period in 1998. In the
first quarter of 1998, poor weather conditions in California caused landslides
and power outages, which resulted in $2.3 million of incremental, unusual costs.
Reduced workover costs onshore in 1999 also contributed to the lower lease
operating expenses year over year.
International: Lease operating expenses for the six months ended June 30, 1999
totaled $6.3 million, or 14% higher than $5.6 million for the six months ended
June 30, 1998. Lease operating expenses per barrel of oil equivalent were $7.44
in the first half of 1999, compared to $7.79 in the same period in 1998.
Gas Plant Operating Expenses:
Gas plant operating expenses were $2.3 million for the six months ended June 30,
1999 as compared to $1.4 million for the six months ended June 30, 1998. The
64% increase in gas plant expenses in 1999 compared to 1998 is due to increased
ad valorem taxes.
Exploration Costs
Exploration costs, including G&G costs, dry hole costs, delay rentals and
expensed project costs, were $10.0 million and $2.3 million for the six months
ended June 30, 1999 and 1998, respectively. For the six months ended June 30,
1999, exploration costs are comprised of $7.3 million in dry hole costs, $1.5
million in G&G, $0.3 million in delay rentals and $0.9 million in expensed
project costs. For the six months ended June 30, 1998, exploration costs were
comprised of $2.0 million in G&G, $0.2 million in delay rentals and $0.1 million
in dry hole costs.
East: During the first half of 1999, the Company decided to plug and abandon
the DeBord #1 well in the Fuller prospect area. The dry hole costs associated
with this well were $0.6 million. The first half of 1999 also includes $0.2
million of G&G costs associated with the LeLeux prospect in South Louisiana.
Exploration costs in the first half of 1998 were $0.5 million.
West: During the first half of 1999, the Company decided to plug and abandon
the Cree Fee #1 well in the Midway Peak prospect area onshore California. The
dry hole costs associated with this well were $6.5 million. Exploration costs in
the first half of 1998 were $0.5 million.
International: During the first half of 1999, $1.0 million in G&G costs were
expensed associated with the Accra Keta and the East Cape Three Points prospects
in Ghana. Exploration costs of $1.3 million in the first half of 1998 relate to
G&G in Ghana.
Depreciation, Depletion and Amortization:
Depreciation, depletion and amortization of $46.3 million for the six months
ended June 30, 1999 reflects a slight decrease from $46.6 million in the same
period in 1998, due primarily to decreased production volumes offset by a higher
depletion rate per barrel of oil equivalent on the Company's oil and gas
properties. The weighted average depletion rate per barrel of oil equivalent in
the first half of 1999 was $4.57 versus $3.83 in the first half of 1998.
Several factors contributed to the change in the average depletion rate per
barrel of oil equivalent. First, the property mix changed as the lower cost
East Texas natural gas properties were sold in January. Second, the Company's
year end reserves decreased by approximately 12% from the previous year
primarily as a result of lower crude oil prices utilized in computing proved
reserves at year end 1998. Finally, the impairment of $68.9 million recognized
in the fourth quarter of 1998 reduced the capitalized costs to be depleted and
partially offset the increase in the depletion rate per barrel of oil
equivalent.
30
NUEVO ENERGY COMPANY
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
East: Depreciation, depletion and amortization of $4.3 million for the six
months ended June 30, 1999 reflects a 34% decrease from $6.5 million in the same
period in 1998, due primarily to decreased production volumes as a result of the
sale of the East Texas natural gas properties in January 1999.
West: Depreciation, depletion and amortization of $37.3 million for the six
months ended June 30, 1999 reflects a 1% increase from $36.8 million in the same
period in 1998, due primarily to an increased average depletion rate per barrel
of oil equivalent offset by decreased production volumes.
International: Depreciation, depletion and amortization of $3.9 million for the
six months ended June 30, 1999 reflects a 56% increase from $2.5 million in the
same period in 1998, due primarily to an increased average depletion rate per
barrel of oil equivalent as well as increased production volumes.
General and Administrative Expenses:
General and administrative expenses were $7.2 million and $8.5 million in the
six months ended June 30, 1999 and 1998, respectively. The 16% decrease is due
primarily to a reduction in bonus accruals, engineering costs and third-party
consulting studies.
Interest Expense:
Interest expense of $16.4 million incurred in the six months ended June 30, 1999
reflects an increase of 14% as compared to interest expense of $14.4 million in
the six months ended June 30, 1998. The increase is primarily attributable to
the Company's issuance of $100.0 million of 8 7/8% Senior Subordinated Notes due
2008 in June 1998, which was used to repay lower-interest bank debt.
Other Expense:
In March 1999, the Company discovered that a non-officer employee had
fraudulently authorized and diverted for personal use Company funds totaling
$5.9 million, $4.3 million in 1998 and the remainder in the first quarter of
1999, that were intended for international exploration. Accordingly, the
Company has reclassified the amounts lost in 1998 and 1999 from exploration
costs to other expense. Based on its review of the facts, management is
confident that only one employee was involved in the matter and that all
misappropriated funds have been identified. The Board engaged a Certified Fraud
Examiner to conduct an in-depth review of the fraudulent transactions to
determine the scope of the fraud, the possibility of recovery of amounts lost
from insurance, from the terminated employee and/or from third parties, and to
make recommendations regarding what, if any, new internal control procedures
should be implemented.
Net Income (Loss)
Net income of $15.8 million, $0.80 per common share-basic and $0.79 per common
share-diluted, was generated for the six months ended June 30, 1999, as
compared to a net loss of $14.2 million, ($0.72) per common share-basic and
diluted, in the same period in 1998.
31
NUEVO ENERGY COMPANY
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risk, including adverse changes in commodity
prices and interest rates.
Commodity Price Risk - The Company produces and sells crude oil, natural gas and
natural gas liquids. As a result, the Company's operating results can be
significantly affected by fluctuations in commodity prices caused by changing
market forces. The Company periodically seeks to reduce its exposure to price
volatility by hedging its production through swaps, options and other commodity
derivative instruments. The Company uses hedge accounting for these
instruments, and settlements of gains or losses on these contracts are reported
as a component of oil and gas revenues and operating cash flows in the period
realized. These agreements expose the Company to counterparty credit risk to
the extent that the counterparty is unable to meet its settlement commitments to
the Company. At June 30, 1999, the fair value of commodity derivative
instruments outstanding was a loss of $16.5 million. A 10% increase in the
underlying commodity price would increase this loss by $10.3 million.
Changes in prices for California crude oil production, especially sour heavy oil
production, do not always follow changes in the prices of oil futures prices on
the NYMEX or other established futures markets. The difference the Company
receives for its California production and the NYMEX prices or prices on other
established futures markets is referred to as basis differential. The
volatility of the basis differential makes it difficult to effectively hedge
California production.
For the second half of 1999, the Company is party to crude oil swaps on an
average of 31,500 barrels of oil ("Bbls") per day, or 65% of its estimated crude
oil production, at an average NYMEX price of $16.35 per Bbl. For calendar year
2000, the Company has entered into crude oil swaps on 16,500 Bbls per day, or
30% of its estimated crude oil production, at an average NYMEX price of $17.94
per Bbl. In addition, for calendar year 2000, the Company has hedged an
additional 30% of its estimated crude oil production through the purchase of put
options on 16,500 Bbls per day at a NYMEX price of $16.00 per Bbl, and the sale
of call options on 16,500 Bbls per day at an average NYMEX price of $21.21 per
Bbl. There was no net cost to the Company for these options.
Interest Rate Risk - The Company may enter into financial instruments such as
interest rate swaps to manage the impact of changes in interest rates. For
1999, the Company has entered into a swap agreement, with a notional amount of
$16.4 million, which hedges the price at which the Company may repurchase a
portion of its fixed rate debt and effectively converts such debt to a floating
rate exposure for a period of one year. This agreement is not held for trading
purposes. As the swap provider is a major financial institution, the Company
does not anticipate non-performance by the provider. Termination of this swap
would not be material.
The Company's exposure to changes in interest rates primarily results from its
short-term and long-term debt with both fixed and floating interest rates. The
following table presents principal amounts (stated in thousands) and the related
average interest rates by year of maturity for the Company's debt obligations at
June 30, 1999:
Fair
Value
1999 2000 2001 2002 2003 Thereafter Total Liability
------ ------ ------ ------ ------ ---------- ----- ---------
Long-term debt,
including current
maturities:
Variable rate $2,051 -- -- -- $120,000 -- $122,051 $122,051
Average interest rate 5.2% -- -- -- 5.4% -- 5.4%
Fixed rate -- -- -- -- -- $260,000 $260,000 $258,602
Average interest rate -- -- -- -- -- 9.3% 9.3%
32
NUEVO ENERGY COMPANY
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
See Note 7 to the Notes to Condensed Consolidated Financial Statements.
ITEM 2. Changes in Securities
None.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of the stockholders of the Company, held on May 12, 1999,
and the adjournment thereof held on May 26, 1999, the following matters were
voted on with the following results:
(1) Robert L. Gerry III was elected as a Class III director with a total of
17,757,024 shares voting in favor and 97,360 shares withheld authority.
David Ross III was elected as a Class III director with a total of
17,757,430 shares voting in favor and 96,954 shares withheld authority.
David H. Batchelder was elected as a Class III director with a total of
17,757,535 shares voting in favor and 96,849 shares withheld authority.
(2) The Stockholders approved a proposal to amend the Certificate of
Incorporation and Bylaws providing for a declassification of the Board of
Directors, with a total of 15,984,701 shares voting in favor, 224,482
shares withheld authority and a total of 31,502 shares abstaining.
(3) The Stockholders approved a proposal to amend the Certificate of
Incorporation and Bylaws to remove the business combination provisions,
with a total of 15,929,896 shares voting in favor, 177,463 shares withheld
authority and a total of 43,326 shares abstaining.
(4) The Stockholders approved a proposal to amend the Certificate of
Incorporation to grant the directors the right to amend the bylaws, with a
total of 13,980,468 shares voting in favor, 1,402,116 shares withheld
authority and a total of 132,456 shares abstaining.
(5) The Stockholders approved a proposal to approve the 1998 Non-Executive
Employee Stock Purchase Plan, with a total of 12,454,502 shares voting in
favor, 3,025,768 shares withheld authority and a total of 34,773 shares
abstaining.
(6) The Stockholders approved a proposal to approve the 1999 Stock Incentive
Plan, with a total of 7,552,485 shares voting in favor, 6,533,203 shares
withheld authority and a total of 1,436,208 shares abstaining.
(7) The Stockholders approved a proposal to ratify the selection of KPMG Peat
Marwick LLP as the Company's independent auditors for the year ending
December 31, 1999, with a total of 17,816,691 shares voting in favor, a
total of 15,467 shares voting against and a total of 22,226 shares
abstaining.
ITEM 5. Other Information
None.
33
ITEM 6. Exhibits and Reports on Form 8-K
3. Exhibits
(3) Articles of Incorporation and bylaws.
3.1 Certificate of Incorporation of Nuevo Energy Company.
3.2 Certificate of Amendment to the Certificate of Incorporation of Nuevo
Energy Company.
3.3 Bylaws of Nuevo Energy Company.
3.4 Amendment to Section 3.1 of the Bylaws of Nuevo Energy Company.
(4) Instruments defining the rights of security holders, including indentures.
4.1 Specimen Stock Certificate (incorporated by reference to Exhibit 4.1 to
Registration Statement on Form S-4 (No. 33-33873) filed under the
Securities Act of 1933).
4.2 Indenture dated April 1, 1996 among Nuevo Energy Company as Issuer,
various Subsidiaries as the Guarantors, and State Street Bank and Trust
Company as the Trustee - 9 1/2% Senior Subordinated Notes due 2006.
(Incorporated by reference from Form S-3 (No. 333-1504).
4.3 Form of Amended and Restated Declaration of Trust dated December 23, 1996,
among the Company, as sponsor, Wilmington Trust Company, as Institutional
Trustee and Delaware Trustee, and Michael D. Watford, Robert L. Gerry, III
and Robert M. King, as Regular Trustees. (Incorporated by reference from
Exhibit 4.1 to Form 8-K filed on December 23, 1996).
4.4 Form of Subordinated Indenture dated as of November 25, 1996, between the
Company and Wilmington Trust Company, as Indenture Trustee. (Incorporated
by reference from Exhibit 4.2 to Form 8-K filed on December 23, 1996).
4.5 Form of First Supplemental Indenture dated December 23, 1996, between the
Company and Wilmington Trust Company, as Indenture Trustee. (Incorporated
by reference from Exhibit 4.3 to Form 8-K filed on December 23, 1996).
4.6 Form of Preferred Securities Guarantee Agreement dated as of December 23,
1996, between the Company and Wilmington Trust Company, as Guarantee
Trustee. (Incorporated by reference from Exhibit 4.4 to Form 8-K filed on
December 23, 1996).
4.7 Form of Certificate representing TECONS. (Incorporated by reference from
Exhibit 4.5 to Form 8-K filed December 23, 1996).
4.8 Shareholder Rights Plan, dated March 5, 1997, between Nuevo Energy Company
and American Stock Transfer & Trust Company, as Rights Agent (incorporated
by reference to Exhibit 1 to the Company's Form 8-A filed on April 1,
1997).
4.9 Release and Termination of Subsidiary Guarantees with respect to the
9 1/2% Senior Subordinated Notes due 2006. (Incorporated by reference to
Exhibit 4.11 to Form 10-K for the year ended December 31, 1997.)
4.10 Indenture dated June 8, 1998 among Nuevo Energy Company as Issuer, various
Subsidiaries as the Guarantors, and State Street Bank and Trust Company as
the Trustee - 8 7/8% Senior Subordinated Notes due 2008. (Incorporated by
reference from Exhibit 4.1 to Registration Statement on Form S-4
(No. 333-60655) filed on August 5, 1998.
(10) Material Contracts
10.1 Second Restated Credit Agreement dated June 30, 1999 between Nuevo Energy
Company (Borrower) and Bank of America N.A., formerly NationsBank, N.A.
(Administrative Agent), Morgan Guaranty Trust Company of New York
(Documentation Agent), Banc of America Securities LLC (Lead Arranger and
Sole Book Manager) and certain lenders.
27. Financial Data Schedule
Reports on Form 8-K.
1. Report filed on Form 8-K on July 23, 1999, regarding the offer to
exchange a new issuance of $260.0 million of 9 1/2% senior
subordinated notes due June 1, 2008, for its outstanding $160.0
million of 9 1/2% senior subordinated notes due 2006 and $100.0
million of 8 7/8% senior subordinated notes due 2008 reporting Item 7.
Financial Statements and Exhibits.
2. Report filed on Form 8-K on August 2, 1999, regarding the amended
offer to exchange a new issuance of $260.0 million of 9 1/2% senior
subordinated notes due June 1, 2008, for its outstanding $160.0
million of 9 1/2% senior subordinated notes due 2006 and $100.0
million of 8 7/8% senior subordinated notes due 2008 reporting Item 7.
Financial Statements and Exhibits.
34
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 16, 1999 By:/s/ Douglas L. Foshee
Douglas L. Foshee
Chairman, President and Chief Executive
Officer
Date: August 16, 1999 By:/s/ Robert M. King
Robert M. King
Senior Vice President and Chief Financial
Officer
35