1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
--------- ---------
Commission File Number 1-12480
LOUIS DREYFUS NATURAL GAS CORP.
(Exact name of registrant as specified in its charter)
Oklahoma 73-1098614
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
14000 QUAIL SPRINGS PARKWAY, SUITE 600
OKLAHOMA CITY, OKLAHOMA 73134
(Address of principal executive office) (Zip code)
Registrant's telephone number, including area code: (405) 749-1300
NONE
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO .
----- -----
43,161,361 shares of common stock, $.01 par value, issued and outstanding at
August 7, 2000.
2
LOUIS DREYFUS NATURAL GAS CORP.
Table of Contents
PART I. FINANCIAL INFORMATION Page
Item 1 -- CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Consolidated Balance Sheets:
June 30, 2000 and December 31, 1999. . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations:
Three months and six months ended June 30, 2000 and 1999 . . . . . . . 5
Consolidated Statements of Cash Flows:
Six months ended June 30, 2000 and 1999. . . . . . . . . . . . . . . . 6
Condensed Notes to Consolidated Financial Statements . . . . . . . . . . 7
Item 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . . .12
Item 3 -- QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. . .26
PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . .30
3
LOUIS DREYFUS NATURAL GAS CORP.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
A S S E T S
Pro forma
June 30, June 30, December 31,
2000 2000 1999
----------- ----------- -----------
(Note 4) (unaudited)
(unaudited)
CURRENT ASSETS
Cash and cash equivalents. . . . . . . . . . . . . . . $ 4,856 $ 4,856 $ 9,660
Receivables:
Oil and gas sales . . . . . . . . . . . . . . . . . . 72,867 72,867 43,782
Joint interest and other, net . . . . . . . . . . . . 11,842 11,842 8,923
Fixed-price contracts and other derivatives. . . . . . 2,492 2,492 7,204
Prepaids and other . . . . . . . . . . . . . . . . . . 5,631 5,631 4,928
----------- ----------- -----------
Total current assets. . . . . . . . . . . . . . . . . 97,688 97,688 74,497
----------- ----------- -----------
PROPERTY AND EQUIPMENT, at cost, based on successful
efforts accounting. . . . . . . . . . . . . . . . . . 1,841,300 1,841,300 1,636,854
Less accumulated depreciation, depletion and
amortization . . . . . . . . . . . . . . . . . . . . (539,660) (539,660) (513,715)
----------- ----------- -----------
1,301,640 1,301,640 1,123,139
----------- ----------- -----------
OTHER ASSETS
Fixed-price contracts and other derivatives. . . . . . 15,093 15,093 24,493
Other, net . . . . . . . . . . . . . . . . . . . . . . 3,694 3,694 4,958
----------- ----------- -----------
18,787 18,787 29,451
----------- ----------- -----------
$ 1,418,115 $ 1,418,115 $ 1,227,087
=========== =========== ===========
4
LOUIS DREYFUS NATURAL GAS CORP.
CONSOLIDATED BALANCE SHEETS (continued)
(dollars in thousands)
L I A B I L I T I E S A N D S T O C K H O L D E R S ' E Q U I T Y
Pro forma
June 30, June 30, December 31,
2000 2000 1999
----------- ----------- -----------
(Note 4) (unaudited)
(unaudited)
CURRENT LIABILITIES
Accounts payable . . . . . . . . . . . . . . . . . . . $ 66,362 $ 66,362 $ 41,216
Accrued liabilities. . . . . . . . . . . . . . . . . . 10,780 10,780 12,413
Revenues payable . . . . . . . . . . . . . . . . . . . 19,122 19,122 14,413
Fixed-price contracts and other derivatives. . . . . . 66,007 66,007 4,673
----------- ----------- -----------
Total current liabilities . . . . . . . . . . . . . . 162,271 162,271 72,715
----------- ----------- -----------
LONG-TERM DEBT . . . . . . . . . . . . . . . . . . . . 610,814 681,686 555,222
----------- ----------- -----------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred revenue . . . . . . . . . . . . . . . . . . . 12,435 12,435 13,524
Fixed-price contracts and other
derivatives . . . . . . . . . . . . . . . . . . . . . 38,126 38,126 12,008
Deferred income taxes. . . . . . . . . . . . . . . . . 29,456 29,456 52,341
Other. . . . . . . . . . . . . . . . . . . . . . . . . 22,194 22,194 22,495
----------- ----------- -----------
102,211 102,211 100,368
----------- ----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock, par value $.01; 10 million shares
authorized; no shares outstanding . . . . . . . . . . -- -- --
Common stock, par value $.01; 100 million shares
authorized; issued and outstanding, 43,160,700,
40,760,700 and 40,230,880 shares, respectively. . . . 432 408 402
Additional paid-in capital . . . . . . . . . . . . . . 500,663 429,815 420,859
Retained earnings. . . . . . . . . . . . . . . . . . . 46,076 46,076 28,149
Accumulated other comprehensive income . . . . . . . . (4,341) (4,341) 49,981
Treasury stock at cost, 589, 589 and 32,139 shares,
respectively. . . . . . . . . . . . . . . . . . . . . (11) (11) (609)
----------- ----------- -----------
542,819 471,947 498,782
----------- ----------- -----------
$ 1,418,115 $ 1,418,115 $ 1,227,087
=========== =========== ===========
See accompanying notes to consolidated financial statements.
5
LOUIS DREYFUS NATURAL GAS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2000 1999 2000 1999
-------- -------- -------- --------
REVENUES
Oil and gas sales. . . . . . . . . . $ 99,121 $ 70,306 $186,484 $128,461
Change in derivative fair value. . . (11,945) (8,135) (20,108) (11,110)
Other income . . . . . . . . . . . . 828 251 2,082 2,194
-------- -------- -------- --------
88,004 62,422 168,458 119,545
-------- -------- -------- --------
EXPENSES
Operating costs. . . . . . . . . . . 19,457 15,860 36,611 31,453
General and administrative . . . . . 5,609 5,803 11,701 11,618
Exploration costs. . . . . . . . . . 4,028 2,213 7,271 6,152
Depreciation, depletion and
amortization. . . . . . . . . . . . 29,827 29,070 60,085 57,200
Impairment . . . . . . . . . . . . . 4,569 -- 4,569 --
Interest . . . . . . . . . . . . . . 9,882 10,233 19,308 20,247
-------- -------- -------- --------
73,372 63,179 139,545 126,670
-------- -------- -------- --------
Income (loss) before income taxes. . 14,632 (757) 28,913 (7,125)
Income tax provision (benefit) . . . 5,560 (303) 10,986 (2,850)
-------- -------- -------- --------
NET INCOME (LOSS). . . . . . . . . . $ 9,072 $ (454) $ 17,927 $ (4,275)
======== ======== ======== ========
Net income (loss) per share:
Basic. . . . . . . . . . . . . . . . $ .22 $ (.01) $ .44 $ (.11)
======== ======== ======== ========
Diluted. . . . . . . . . . . . . . . $ .22 $ (.01) $ .43 $ (.11)
======== ======== ======== ========
Weighted average number of common shares:
Basic. . . . . . . . . . . . . . . . 40,649 40,123 40,442 40,116
Diluted. . . . . . . . . . . . . . . 41,827 40,123 41,315 40,116
See accompanying notes to consolidated financial statements.
6
LOUIS DREYFUS NATURAL GAS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in thousands)
Six Months Ended
June 30,
------------------
2000 1999
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,927 $ (4,275)
Items not affecting cash flows:
Depreciation, depletion and amortization. . . . . . . . . . . . . . . . . 60,085 57,200
Impairment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,569 --
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 10,408 (2,990)
Exploration costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,271 6,152
Change in derivative fair value . . . . . . . . . . . . . . . . . . . . . 20,108 11,110
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (365) (111)
Net change in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . (31,504) 4,261
Prepaids and other. . . . . . . . . . . . . . . . . . . . . . . . . . . . (703) 2,289
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,146 (13,515)
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,262) 128
Revenues payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,709 169
-------- --------
116,389 60,418
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Exploration and development expenditures . . . . . . . . . . . . . . . . . (125,828) (59,457)
Acquisition of proved oil and gas properties . . . . . . . . . . . . . . . (131,891) (30,409)
Additions to other property and equipment. . . . . . . . . . . . . . . . . (1,581) (976)
Proceeds from sale of property and equipment . . . . . . . . . . . . . . . 10,857 7,034
Change in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . 470 (143)
-------- --------
(247,973) (83,951)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank borrowings. . . . . . . . . . . . . . . . . . . . . . . 277,350 240,369
Repayments of bank borrowings. . . . . . . . . . . . . . . . . . . . . . . (144,350) (207,569)
Repayments of subordinated notes . . . . . . . . . . . . . . . . . . . . . (6,549) --
Proceeds from stock option exercises and other . . . . . . . . . . . . . . 8,804 415
Change in deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . (1,089) (980)
Change in gains from price-risk management activities. . . . . . . . . . . (6,340) (2,249)
Change in other long-term liabilities. . . . . . . . . . . . . . . . . . . (1,046) (1,009)
-------- --------
126,780 28,977
-------- --------
Change in cash and cash equivalents. . . . . . . . . . . . . . . . . . . . (4,804) 5,444
Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . 9,660 2,539
-------- --------
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . $ 4,856 $ 7,983
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid, net of capitalized interest . . . . . . . . . . . . . . . . $ 17,895 $ 19,479
Income taxes paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,163 285
-------- --------
$ 19,058 $ 19,764
======== ========
See accompanying notes to consolidated financial statements.
7
LOUIS DREYFUS NATURAL GAS CORP.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
JUNE 30, 2000
NOTE 1 -- ACCOUNTING PRINCIPLES AND BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q as prescribed by the
Securities and Exchange Commission. All material adjustments, consisting of
normal and recurring adjustments and a $4.6 million impairment charge
discussed below, which, in the opinion of Management, were necessary for a
fair presentation of the results for the interim periods have been reflected.
The results of operations for the three-month and six-month periods ended June
30, 2000 are not necessarily indicative of the results to be expected for the
full year. Reference is made to the Company's Annual Report on Form 10-K for
the year ended December 31, 1999 for an expanded discussion of the Company's
financial disclosures and accounting policies.
In the second quarter of 2000, an impairment charge of $4.6 million was
recorded due to downward reserve revisions for two single-well offshore fields
drilled in 1998. Management is unaware of any other fields which may be
impaired because of performance or other reasons. However, future impairments
may be recognized as a result of numerous factors, all of which are beyond the
Company's ability to control or predict.
NOTE 2 -- HEDGING
The Company reduces its exposure to unfavorable changes in oil and natural
gas prices by utilizing fixed-price physical delivery contracts, energy swaps,
collars, futures contracts, basis swaps and options (collectively "Fixed-Price
Contracts"). The Company also enters into interest rate swap contracts to
reduce its exposure to adverse interest rate fluctuations. In October 1998,
the Company adopted Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133")
which establishes new accounting and reporting guidelines for derivative
instruments and hedging activities. Substantially all of the Company's
Fixed-Price Contracts (other than three costless natural gas collars which
mature in September 2000) and interest rate swaps are designated as cash flow
hedges. Change in derivative fair value in the statements of operations for
the three-month and the six-month periods ended June 30, 2000 and 1999 is
comprised of the following:
8
LOUIS DREYFUS NATURAL GAS CORP.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
JUNE 30, 2000
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2000 1999 2000 1999
-------- -------- -------- --------
CHANGE IN DERIVATIVE FAIR VALUE
Change in fair value for derivatives
not qualifying as hedges . . . . . . $ (9,308) $ (8,779) $(16,235) $ (6,631)
Amortization of derivative fair value
gains and losses recognized in
earnings prior to actual cash
settlements. . . . . . . . . . . . . (2,070) (332) (4,346) (5,745)
The ineffective portion of
derivatives qualifying as hedges . . (567) 976 473 1,266
-------- -------- -------- --------
$(11,945) $ (8,135) $(20,108) $(11,110)
======== ======== ======== ========
Change in derivative fair value in the statement of operations for the six
months ended June 30, 2000 includes $14.0 million of net losses which will
fully reverse in the third quarter of 2000. Despite certain Fixed-Price
Contracts failing the effectiveness guidelines of SFAS 133 from time to time,
Fixed-Price Contracts continue to be highly effective in achieving the risk
management objectives for which they were intended.
The change in carrying value of Fixed-Price Contracts and interest rate
swaps in the Company's balance sheet since December 31, 1999 resulted from a
significant increase in market prices for natural gas and crude oil and an
increase in interest rates. The majority of this change in fair value was
reflected in accumulated other comprehensive income, net of deferred tax
effects. Derivative liabilities reflected as current in the June 30, 2000
balance sheet represent the estimated fair value of Fixed-Price Contract
settlements scheduled to occur over the subsequent twelve-month period based
on market prices for oil and gas as of the balance sheet date. Because
present accounting rules do not provide for the accrual of the future cash
flow transaction the contracts were designed to hedge, an apparent working
capital deficit is created which does not, in Management's opinion, accurately
depict the Company's true working capital position or its liquidity. These
settlement amounts are not due and payable until the monthly period that the
related underlying hedged transaction occurs.
The estimated fair values of Fixed-Price Contracts as of June 30, 2000 and
December 31, 1999 are provided below. The associated carrying values of these
contracts are equal to the estimated fair values for each period presented.
9
LOUIS DREYFUS NATURAL GAS CORP.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
JUNE 30, 2000
June 30, December 31,
2000 1999
----------- -----------
(in thousands)
Derivative assets:
Fixed-price natural gas swaps . . . . . . . . . $ 7,032 $ 16,433
Fixed-price natural gas collars . . . . . . . . 1,070 1,323
Fixed-price natural gas delivery contracts. . . 3,876 7,921
Fixed-price crude oil swaps . . . . . . . . . . -- 360
Interest rate swaps . . . . . . . . . . . . . . 5,607 5,660
Derivative liabilities:
Fixed-price natural gas swaps . . . . . . . . . (30,607) (4,329)
Fixed-price crude oil swaps . . . . . . . . . . (305) --
Fixed-price natural gas collars . . . . . . . . (14,856) --
Fixed-price natural gas delivery contracts. . . (57,079) (9,081)
Natural gas basis swaps . . . . . . . . . . . . (1,286) (3,271)
----------- -----------
Total . . . . . . . . . . . . . . . . . . . . . $ (86,548) $ 15,016
=========== ===========
The fair value of Fixed-Price Contracts as of June 30, 2000 and December 31,
1999 was estimated based on market prices of natural gas and crude oil for the
periods covered by the contracts. The net differential between the prices in
each contract and market prices for future periods, as adjusted for estimated
basis, has been applied to the volumes stipulated in each contract to arrive
at an estimated future value. This estimated future value was discounted on a
contract-by-contract basis at rates commensurate with the Company's estimation
of contract performance risk and counterparty credit risk. The terms and
conditions of the Company's fixed-price physical delivery contracts and
certain financial swaps are uniquely tailored to the Company's circumstances.
In addition, the determination of market prices for natural gas beyond a five
year horizon is subject to significant judgment and estimation. As a result,
the Fixed-Price Contract fair value does not necessarily represent the value a
third party would pay to assume the Company's contract positions.
NOTE 3 -- ACQUISITION OF PROPERTIES FROM COSTILLA ENERGY, INC.
On June 15, 2000, the Company acquired substantially all of the oil and gas
properties of Costilla Energy, Inc. for approximately $126 million in cash,
net of estimated purchase price adjustments. The acquired properties are
comprised of 135 Bcfe of net proved reserves included in 1,011 gross (607 net)
producing wells. The Costilla properties are primarily located within the
Company's three core operating areas. A substantial portion of the total
identified value is contained within fields in which the Company has a
significant ownership position, the largest being the SW Speaks field in
10
LOUIS DREYFUS NATURAL GAS CORP.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
JUNE 30, 2000
Lavaca County, Texas. The purchase price for the Costilla acquisition has
been funded through availability under the Company's revolving bank credit
facility. See Note 4 -- Common Stock Offering and Pro Forma Balance Sheet.
The acquisition has been accounted for using the purchase method of
accounting.
In connection with the acquisition, the Company entered into two costless
collars to hedge a portion of the future production from the properties. The
first collar hedges 20 MMcf per day for 2001 at a floor price of $3.13 per
MMBtu and a ceiling price of $4.25 per MMBtu. The second collar hedges 20
MMcf per day in 2002 at a floor price of $2.84 per MMBtu and a ceiling price
of $3.94 per MMBtu.
NOTE 4 -- COMMON STOCK OFFERING AND PRO FORMA BALANCE SHEET
On June 28, 2000, the Company sold 2.4 million shares of its common stock at
$31.00 per share ($29.53 per share net of underwriting discount) in a public
offering. Proceeds from the offering of $70.9 million received in July 2000
were applied to reduce a majority of the indebtedness incurred in connection
with the acquisition of properties from Costilla Energy, Inc. In addition, an
indirect wholly-owned subsidiary of S.A. Louis Dreyfus et Cie sold 1.6 million
shares of the Company's common stock in the offering. Subsequent to the
offering, S.A. Louis Dreyfus et Cie through its subsidiaries owned 19.2
million common shares, or approximately 44% of the total issued and
outstanding common shares of the Company.
The pro forma balance sheet as of June 30, 2000 gives effect to the common
stock offering as if it had closed on June 30, 2000. Long-term debt has been
reduced by $70.9 million and common stock and paid-in capital reflect an
increase of $24,000 and $70.8 million, respectively, giving effect to the
issuance of the shares and the application of the related net proceeds to
long-term debt.
NOTE 5 -- LITIGATION
The Company is one of numerous defendants in several lawsuits
originally filed in 1995, subsequently consolidated with related litigation,
and now pending in the 93rd Judicial District Court in Hildago County, Texas.
The lawsuit alleges that the plaintiffs, a group of local landowners and
businesses, have suffered damages including, but not limited to, property
damage and lost profits of approximately $60 million as the result of
hydrocarbon contamination of the groundwater within the city of McAllen,
Texas. The lawsuit alleges that gas wells and related pipeline facilities
operated by the Company, and other facilities operated by other defendants,
caused contamination. In August 1999, the plaintiff's experts produced
reports that suggested the Company might be considered a significant
contributor to the contamination. The Company's investigation into this
matter has not found any leaks or discharges from its facilities. In
11
LOUIS DREYFUS NATURAL GAS CORP.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
JUNE 30, 2000
addition, the Company's investigation has revealed the alleged contamination
to be unrelated to the Company's production of natural gas from its
facilities. Trial is not anticipated to commence until the second half of
2001 as the plaintiffs have indicated that they are seeking class action
status. The Company will vigorously defend its interests in this case.
Results of litigation are inherently unpredictable; however, the Company does
not presently expect the ultimate outcome of the case to have a material
adverse impact on its financial position or results of operations.
The Company was a defendant in various other legal proceedings as of June
30, 2000, which are routine and incidental to its business. While the
ultimate results of all these proceedings and determinations cannot be
predicted with certainty, the Company will vigorously defend its interests and
does not presently believe that the outcome of these matters will have a
material adverse effect on the Company.
NOTE 6 -- COMPREHENSIVE LOSS
Components of comprehensive loss for the three-month and the six-month
periods ended June 30, 2000 and 1999, are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2000 1999 2000 1999
-------- -------- -------- --------
Net income (loss) . . . . . . . . . . $ 9,072 $ (454) $ 17,927 $ (4,275)
Other comprehensive loss, net of tax:
Reclassification adjustments -
contract settlements. . . . . . . . 8,628 (747) 10,841 (5,030)
Change in fixed-price contract
and other derivative fair value . . (37,453) (12,451) (65,163) (26,931)
-------- -------- -------- --------
Comprehensive loss . . . . . . . . . .$(19,753) $(13,652) $(36,395) $(36,236)
======== ======== ======== ========
12
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
General. Our business strategy is to generate strong and consistent growth
in reserves, production, operating cash flows and earnings through a balanced
program of exploration and development drilling and strategic acquisitions of
oil and gas properties. Our drilling, acquisition and operating activities
are geographically concentrated in three core areas: the Permian Region of
West Texas, Southeast New Mexico and the San Juan Basin; the Mid-Continent
Region of Oklahoma, Kansas and the Panhandle of Texas; and the Gulf Coast
Region, which includes South Texas, Offshore Gulf of Mexico, East Texas,
Southwest Arkansas and Northern Louisiana (collectively our "Core Areas"). We
have significant expertise and we benefit from operational synergies due to
the concentration of our properties within these areas. Our capital
expenditure plans for 2000 include the investment of approximately $210
million in drilling activities in these Core Areas. See "-- Commitments and
Capital Expenditures."
We reduce exposure to unfavorable changes in oil and gas prices by utilizing
long-term physical delivery contracts, energy swaps, collars, futures
contracts, basis swaps and option agreements (collectively "Fixed-Price
Contracts"). As of June 30, 2000, our Fixed-Price Contracts hedged 175 Bcfe
of future production, representing 12% of our estimated total proved reserves
at December 31, 1999, at escalating fixed prices. Approximately 27 Bcfe is
hedged for the remainder of fiscal 2000. See "Quantitative and Qualitative
Disclosures About Market Risk."
Forward-Looking Statements. All statements made in this document other than
purely historical information are "forward-looking statements" within the
meaning of the federal securities laws. These statements reflect our current
expectations and are based on our historical operating trends, proved reserve
and Fixed-Price Contract positions and other currently available information.
Forward-looking statements include statements regarding our future drilling
plans and objectives and related exploration and development budgets and
number and location of planned wells and statements regarding the quality of
our properties and potential reserve and production levels. These statements
may be preceded by or followed by or otherwise include the words "believes",
"expects", "anticipates", "intends", "plans", "estimates", "projects", or
similar expressions or statements that certain events "will" or "may" occur.
These statements assume that no significant changes will occur in the
operating environment for our oil and gas properties and that there
will be no material acquisitions or divestitures except as otherwise
described.
The forward-looking statements are subject to all the risks and
uncertainties incident to the acquisition, exploration, development and
marketing of oil and natural gas reserves, including the risks described in
this document and in our Annual Report filed on Form 10-K for the year ended
13
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
December 31, 1999. These risks include, but are not limited to,
commodity price, counterparty, environmental, drilling, reserves, operations
and production rates. We may also make material acquisitions or divestitures,
modify our Fixed-Price Contract positions or enter into financing
transactions. None of these events can be predicted with certainty and are
not taken into consideration in the forward-looking statements.
Statements concerning Fixed-Price Contract, interest rate swap and other
financial instrument fair values and their estimated contribution to our
future results of operations are based upon market information as of a
specific date. This market information is often a function of significant
judgment and estimation. Further, market prices for oil and gas and market
interest rates are subject to significant volatility.
For all of these reasons, our actual results may vary materially from the
forward-looking statements and there is no assurance that the assumptions we
have used are necessarily the most likely. We will not update any
forward-looking statements to reflect events or circumstances occurring after
the date the statement is made.
Certain Definitions. As used herein, the abbreviations listed below are
defined as follows:
Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein
in reference to oil or other liquid hydrocarbons.
Bcf. Billion cubic feet.
Bcfe. Billion cubic feet of natural gas equivalent, determined using the
ratio of one Bbl of oil or condensate to six Mcf of natural gas.
BBtu. Billion Btus.
Btu. British thermal unit, which is the heat required to raise the
temperature of a one-pound mass of water from 58.5 to 59.5 degrees
Fahrenheit.
EBITDAX. EBITDAX is defined in this document as income (loss) before interest
expense, income taxes, depreciation, depletion and amortization,
impairment, exploration costs and change in derivative fair value.
We believe that EBITDAX is a financial measure commonly used in the
oil and gas industry as an indicator of a company's ability to
service and incur debt. However, EBITDAX should not be considered in
isolation or as a substitute for net income, cash flows provided by
operating activities or other data prepared in accordance with
generally accepted accounting principles, or as a measure of a
company's profitability or liquidity. EBITDAX measures as presented
may not be comparable to other similarly titled measures of other
companies.
MBbls. Thousand barrels.
Mcf. Thousand cubic feet.
Mcfe. Thousand cubic feet of natural gas equivalent, determined using the
ratio of one Bbl of oil or condensate to six Mcf of natural gas.
14
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
MMBbls. Million barrels.
MMBtu. Million Btus.
MMcf. Volume of one million cubic feet.
MMcfe. Million cubic feet of natural gas equivalent, determined using the
ratio of one Bbl of oil or condensate to six Mcf of natural gas.
TBtu. One Trillion Btus.
Selected Operating Data. The following table provides certain operating
data relating to our results of operations.
15
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2000 1999 2000 1999
-------- -------- -------- --------
OIL AND GAS SALES: (M$)
Wellhead oil sales . . . . . . . . . . . . . . . . . $ 18,947 $ 11,800 $ 37,890 $ 20,028
Effect of Fixed-Price Contract settlements (1) . . . (2,616) -- (5,280) --
-------- -------- -------- --------
Total oil sales. . . . . . . . . . . . . . . . . . . $ 16,331 $ 11,800 $ 32,610 $ 20,028
======== ======== ======== ========
Wellhead natural gas sales . . . . . . . . . . . . . $ 96,775 $ 55,801 $166,294 $ 98,317
Effect of Fixed-Price Contract settlements (1) . . . (13,985) 2,705 (12,420) 10,116
-------- -------- -------- --------
Total natural gas sales. . . . . . . . . . . . . . . $ 82,790 $ 58,506 $153,874 $108,433
======== ======== ======== ========
PRODUCTION:
Oil production (MBbls) . . . . . . . . . . . . . . . 690 760 1,389 1,502
Natural gas production (MMcf). . . . . . . . . . . . 28,373 26,625 55,961 52,093
Net equivalent production (MMcfe). . . . . . . . . . 32,513 31,183 64,295 61,105
Percent of oil production hedged by Fixed-Price
Contracts (%) . . . . . . . . . . . . . . . . . . . 73% -- 72% --
Percent of gas production hedged by Fixed-Price
Contracts (%) . . . . . . . . . . . . . . . . . . . 68% 72% 49% 54%
AVERAGE SALES PRICE:
Oil price (per Bbl):
Wellhead price . . . . . . . . . . . . . . . . . . $ 27.46 $ 15.53 $ 27.28 $ 13.33
Effect of Fixed-Price Contract settlements (1) . . (3.79) -- (3.80) --
-------- -------- -------- --------
Total. . . . . . . . . . . . . . . . . . . . . . . $ 23.67 $ 15.53 $ 23.48 $ 13.33
======== ======== ======== ========
Natural gas price (per Mcf):
Wellhead price . . . . . . . . . . . . . . . . . . $ 3.41 $ 2.10 $ 2.97 $ 1.89
Effect of Fixed-Price Contract settlements (1) . . (.49) .10 (.22) .19
-------- -------- -------- --------
Total. . . . . . . . . . . . . . . . . . . . . . . $ 2.92 $ 2.20 $ 2.75 $ 2.08
======== ======== ======== ========
Average sales price (per Mcfe). . . . . . . . . . . $ 3.05 $ 2.25 $ 2.90 $ 2.10
OPERATING AND OVERHEAD COSTS: (per Mcfe)
Lease operating expenses . . . . . . . . . . . . . . $ .40 $ .40 $ .40 $ .41
Production taxes . . . . . . . . . . . . . . . . . . .20 .11 .17 .10
General and administrative . . . . . . . . . . . . . .17 .19 .18 .19
-------- -------- -------- --------
Total. . . . . . . . . . . . . . . . . . . . . . . . $ .77 $ .70 $ .75 $ .70
======== ======== ======== ========
Cash operating margin (per Mcfe) (2) . . . . . . . . $ 2.28 $ 1.55 $ 2.15 $ 1.40
Depreciation, depletion and amortization -
oil and gas (per Mcfe). . . . . . . . . . . . . . . $ .88 $ .89 $ .90 $ .89
<FN>
(1) - Represents the realized hedging results from our Fixed-Price Contracts. See
"Quantitative and Qualitative Disclosures About Market Risk - Fixed-Price Contracts."
These amounts do not include any change in derivative fair value included in results of
operations for the respective period.
(2) - Cash operating margin is defined as oil and gas sales less lease operating expenses,
production taxes and general and administrative costs.
16
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS -- THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO
THREE MONTHS ENDED JUNE 30, 1999
Net Income (Loss) and Cash Flows from Operating Activities. For the quarter
ended June 30, 2000, we realized net income of $9.1 million, or $.22 per
share, on total revenue of $88.0 million. This compares to a net loss of $.5
million, or $.01 per share, on total revenue of $62.4 million for the second
quarter of 1999. Earnings results for the second quarter of 2000 were
bolstered by higher natural gas production and sharply higher prices, but were
negatively impacted by an $11.9 million non-cash loss related to SFAS 133
derivative accounting rules. Net income excluding the non-cash impact of SFAS
133 derivative accounting was $16.5 million, or $.39 per share, for the second
quarter of 2000 and $4.4 million or $.11 per share, for the second quarter of
1999. The third quarter of 2000 will reflect the reversal of $14.0 million of
previously recorded unrealized losses in change in derivative fair value in
the statement of operations as the underlying contracts settle. Also
affecting earnings results for the second quarter of 2000 was a $4.6 million
nonrecurring, noncash impairment charge ($2.8 million after tax, or $.07 per
share) relating to downward reserve revisions for two small single-well
offshore fields.
Cash flows from operating activities (before working capital changes) for
the second quarter of 2000 grew 69% to a record $64.9 million compared to
$38.5 million for the second quarter of 1999. EBITDAX for the quarter ended
June 30, 2000 improved 53% to $74.9 million, also a record. This compares to
EBITDAX of $48.9 million for the prior year quarter. The increases in
operating cash flows and EBITDAX for the current year quarter were also
principally the result of higher oil and gas prices and higher gas production.
Cash flows provided by operating activities after consideration of the net
change in working capital increased to $64.6 million from the $27.5 million
reported for the second quarter of 1999.
Production. We produced 32.5 Bcfe for the second quarter of 2000 compared
to 31.2 Bcfe for the prior year second quarter, an increase of 4%. Gas
production increased to 28.4 Bcf compared to 26.6 Bcf for the second quarter
of 1999, an increase of 7%. Oil production for the second quarter of 2000
decreased 9% to 690 MBbls compared to 760 Mbbls for the prior-year second
quarter.
Oil and Gas Prices. On a natural gas equivalent basis, we received an
average price of $3.05 per Mcfe for the quarter ended June 30, 2000, an
increase of 36% from the $2.25 per Mcfe received for the second quarter of
1999. Our gas production yielded an average price of $2.92 per Mcf, an
increase of 33% compared to $2.20 per Mcf for the prior-year second quarter.
Our average gas price for the 2000 second quarter was reduced $.49 per Mcf as
a result of our price risk management activities. The average gas price for
the second quarter of 1999 increased $.10 per Mcf as a result of the
Fixed-Price Contracts in effect for that period. The average oil price for
the second quarter of 2000 was $23.67 per Bbl, an increase of 52% from the
17
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
$15.53 per Bbl received for the prior-year second quarter. The average oil
price for the second quarter of 2000 was reduced $3.79 per Bbl as a result of
our hedging activities. No fixed-price oil contracts were in effect during
the second quarter of 1999.
The combination of higher gas production and higher gas prices increased gas
sales to $82.8 million for the second quarter of 2000 compared to $58.5
million for the second quarter of 1999. The net effect of higher oil prices
and lower oil production increased oil sales to $16.3 million compared to
$11.8 million reported for the prior-year quarter. The impact of Fixed-Price
Contract settlements for each period was to decrease oil and gas sales by
$16.6 million for the quarter ended June 30, 2000 and to increase gas sales by
$2.7 million for the quarter ended June 30, 1999. See "Quantitative and
Qualitative Disclosures About Market Risk."
Change in Derivative Fair Value. Change in derivative fair value for the
second quarter of 2000 was a net loss of $11.9 million, which included a $9.3
million loss associated with certain derivatives not qualifying as hedges, $.5
million of net losses relating to the ineffective portion of derivatives which
qualified as hedges, and a $2.1 million loss relating to the reversal of
contract fair value gains and losses recognized in earnings prior to actual
cash settlement. Change in derivative fair value for the second quarter of
1999 was a net loss of $8.1 million, which included $8.8 million of losses
associated with certain derivatives not qualifying as hedges, $1.0 million of
net gains relating to the ineffective portion of derivatives which qualified
as hedges, and $.3 million of losses relating to the reversal of contract fair
value gains and losses recognized in earnings prior to actual cash settlement.
Despite certain contracts failing the effectiveness guidelines of SFAS 133
from time to time, our Fixed-Price Contracts continue to be highly effective
in achieving the risk management objectives for which they were intended.
Other Income. Other income for the second quarters of 2000 and 1999 was $.8
million and $.3 million, respectively.
Operating Costs. Operating costs for the second quarter of 2000 were
comprised of $13.1 million of lease operating expenses and $6.4 million of
production taxes. This compares to $12.3 million of lease operating expenses
and $3.5 million of production taxes for the second quarter of 1999. The
increase in production taxes is primarily the result of higher oil and gas
prices in the second quarter of 2000. Lease operating expenses on a natural
gas equivalent unit of production basis remained constant at $.40 per Mcfe for
the three months ended June 30, 2000 and 1999.
General and Administrative Expense. General and administrative expense
("G&A") for the second quarter of 2000 was $5.6 million, a decrease of 3% from
the prior-year second quarter amount of $5.8 million. This decrease is
primarily attributable to increased overhead recoveries for the current
period. On a natural gas equivalent unit of production basis, G&A decreased
18
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
to $.17 per Mcfe for the 2000 second quarter compared to $.19 per Mcfe for the
1999 second quarter.
Exploration Costs. Exploration costs, comprised of geological and
geophysical costs, exploratory dry holes and leasehold impairment costs, were
$4.0 million for the quarter ended June 30, 2000, compared to $2.2 million for
the second quarter of 1999. The 2000 amount consists of $1.0 million of dry
hole costs, $2.5 million of seismic acquisition and other geological and
geophysical costs and $.5 million of leasehold costs. The 1999 amount
consists of $.6 million of dry hole costs, $.5 million of seismic acquisition
costs and other geological and geophysical costs and $1.1 million of leasehold
costs.
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization ("DD&A") for the second quarter of 2000 was $29.8 million
compared to $29.1 million for the prior-year second quarter. This slight
increase in DD&A is attributable to an increase in production. The oil and
gas DD&A rate per equivalent unit of production was $.88 for the 2000 second
quarter compared to $.89 for the second quarter of 1999.
Impairment. For the quarter ended June 30, 2000, an impairment charge of
$4.6 million was recorded due to downward reserve revisions for two
single-well offshore fields drilled in 1998. There was no impairment charge
recorded for the second quarter of 1999. We are unaware of any other fields
which may be impaired because of performance or other reasons. However,
future impairments may be recognized as a result of numerous factors, all of
which are beyond our ability to control or predict.
Interest Expense. Interest expense for the second quarter of 2000 was $9.9
million compared to $10.2 million for the second quarter of 1999. The net
impact of interest rate swaps in effect for each period was to decrease
interest expense by $.4 million in the second quarter of 2000 and to increase
interest expense by $.1 million for the prior year second quarter. See
"Capital Resources and Liquidity Credit Facility."
Income Taxes. For the second quarter of 2000, a tax provision of $5.6
million was recorded on pretax income of $14.6 million, an effective rate of
38%. This compares to a tax benefit of $.3 million on a pretax loss of $.8
million, an effective rate of 40%, for the second quarter of 1999. The
effective rate for the second quarter of 1999 was higher than the statutory
rate primarily due to the effect of permanent differences created by
differences in the book and tax bases of acquired assets.
RESULTS OF OPERATIONS -- SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO
SIX MONTHS ENDED JUNE 30, 1999
Net Income (Loss) and Cash Flows from Operating Activities. We realized net
income of $17.9 million, or $.43 per dilutive share, on total revenue of
$168.5 million for the six months ended June 30, 2000. This compares with a
19
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
net loss of $4.3 million, or $.11 per share, on total revenue of $119.5
million for the six months ended June 30, 1999. Earnings results for the
first six months of 2000 were negatively impacted by a $20.1 million non-cash
loss related to SFAS 133 derivative accounting, $14.0 million of which will
reverse as a gain in the third quarter of 2000 as the corresponding cash
settlements occur. Net income excluding the non-cash impact of SFAS 133
derivative accounting was $30.4 million, or $.74 per share, for the first six
months of 2000, and $2.4 million, or $.06 per share, for the six months ended
June 30, 1999. Cash flows from operating activities (before working capital
changes) for the first six months of 2000 were $120.0 million, compared to
$67.1 million for the first six months of 1999, an increase of 79%. The
increase in operating cash flows for the current year six-month period was
primarily the result of higher oil and gas prices and higher gas production in
relation to the first six months of 1999. Cash flows provided by operating
activities after consideration of the net change in working capital increased
to $116.4 million from the $60.4 million reported for the second quarter of
1999, primarily for the same reasons. EBITDAX for the first six months of
2000 was $140.3 million, compared to $87.6 million for the comparable period
of 1999, an increase of 60%.
Production. Total production for the first six months of 2000 was 64.3 Bcfe
compared to 61.1 Bcfe for the comparable prior-year period, an increase of 5%.
Gas production increased to 56.0 Bcf compared to 52.1 Bcf for the first half
of 1999, an increase of 7%. Oil production for the first six months of 2000
decreased 8% to 1.4 MMBbls compared to 1.5 MMBbls for the first six months of
1999.
Oil and Gas Prices. On a natural gas equivalent basis, we received an
average price of $2.90 per Mcfe for the first six months of 2000, an increase
of 38% from the $2.10 per Mcfe received for the first six months of 1999. Gas
production yielded an average price of $2.75 per Mcf, an increase of 32%
compared to $2.08 per Mcf for the prior-year six-month period. The average
gas price for the first six months of 2000 was reduced $.22 per Mcf as a
result of Fixed-Price Contracts. The average gas price for the first six
months of 1999 was enhanced $.19 per Mcf as a result of the Fixed-Price
Contracts in effect for that period. The average oil price for the first half
of 2000 was $23.48 per Bbl compared to $13.33 per Bbl for the first half of
1999, an increase of 76%. Fixed-Price Contracts in effect during the first
six months of 2000 decreased the average oil price by $3.80 per Bbl. No
fixed-price oil contracts were in effect during the first six months of 1999.
The combined effect of higher gas production and higher gas prices increased
gas sales to $153.9 million for the first six months of 2000 compared to
$108.4 million for the first six months of 1999. The net effect of lower oil
production and higher oil prices increased oil sales to $32.6 million compared
to $20.0 million reported for the prior-year six-month period. The impact of
Fixed-Price Contract settlements for each period was to decrease oil and gas
sales by $17.7 million for the six months ended June 30, 2000 and to increase
20
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
oil and gas sales by $10.1 million for the six months ended June 30, 1999.
See "Quantitative and Qualitative Disclosures About Market Risk."
Change in Derivative Fair Value. Change in derivative fair value for the
six months ended June 30, 2000 was a net loss of $20.1 million which was
comprised of a $16.2 million loss associated with certain derivatives not
qualifying as hedges, $.5 million of net gains relating to the ineffective
portion of derivatives which qualified as hedges, and $4.4 million of losses
relating to the reversal of contract fair value gains and losses recognized in
earnings prior to actual cash settlement. Change in derivative fair value for
the six months ended June 30, 1999 was a net loss of $11.1 million which
included a $6.7 million loss associated with certain derivatives not
qualifying as hedges, $1.3 million of net gains relating to the ineffective
portion of derivatives which qualified as hedges, and $5.7 million of losses
relating to the reversal of contract fair value gains and losses recognized in
earnings prior to actual cash settlement. Despite certain Fixed-Price
Contracts failing the effectiveness guidelines of SFAS 133 from time to time,
our Fixed-Price Contracts continue to be highly effective in achieving the
risk management objectives for which they were intended.
Other Income. Other income for the first six months of 2000 and 1999 was
$2.1 million and $2.2 million, respectively.
Operating Costs. Operating costs for the first six months of 2000 were
comprised of $25.8 million of lease operating expenses and $10.8 million of
production taxes. This compares to $25.3 million of lease operating expenses
and $6.1 million of production taxes for the first six months of 1999. The
increase in production taxes is principally attributable to higher oil and gas
prices. Lease operating expenses on a natural gas equivalent unit of
production basis improved to $.40 per Mcfe compared to $.41 per Mcfe for the
six months ended June 30, 1999.
General and Administrative Expense. G&A for the first six months of 2000
was $11.7 million, comparable to the $11.6 million reported for the first six
months of 1999. On a natural gas equivalent unit of production basis, G&A
decreased to $.18 per Mcfe for the first six months of 2000 compared to $.19
per Mcfe for the first six months of 1999.
Exploration Costs. Exploration costs, comprised of geological and
geophysical costs, exploratory dry holes and leasehold impairment costs, were
$7.3 million for the six months ended June 30, 2000, compared to $6.2 million
for the six months ended June 30, 1999. The 2000 amount consists of $1.1
million of dry hole costs, $3.4 million of seismic acquisition and other
geological and geophysical costs and $2.8 million of leasehold costs. The
1999 amount consists of $1.1 million of dry hole costs, $1.3 million of
seismic acquisition and other geological and geophysical costs and $3.8
million of leasehold costs.
21
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Depreciation, Depletion and Amortization. DD&A for the first half of 2000
was $60.1 million compared to $57.2 million for the first half of 1999. This
increase in DD&A is attributable to an increase in the oil and gas DD&A rate
and higher production. The oil and gas DD&A rate per equivalent unit of
production was $.90 for the first six months of 2000 compared to $.89 for the
first six months of 1999. This increase was primarily the result of an
increase in production from certain higher cost properties.
Impairment. For the six month period ended June 30, 2000, an impairment
charge of $4.6 million was recorded due to downward reserve revisions for two
single-well offshore fields drilled in 1998. There was no impairment charge
recorded for the first six months of 1999. We are unaware of any other fields
which may be impaired because of performance or other reasons. However,
future impairments may be recognized as a result of numerous factors, all of
which are beyond our ability to control or predict.
Interest Expense. Interest expense for the six months ended June 30, 2000
was $19.3 million compared to $20.2 million for the six months ended June 30,
1999. The net impact of interest rate swaps in effect for the first six
months of 2000 and 1999 was to decrease interest expense by $.8 million and
increase interest expense by $.2 million, respectively. See "Capital
Resources and Liquidity Credit Facility."
Income Taxes. For the first half of 2000, a tax provision of $11.0 million
was recorded on pretax income of $28.9 million, an effective rate of 38%.
This compares to a tax benefit of $2.9 million provided on a pretax loss of
$7.1 million, an effective rate of 40%, for the first half of 1999. The
effective rate for the first six months of 1999 was higher than the statutory
rate primarily due to the effect of permanent differences created by
differences in the book and tax bases of acquired assets.
CAPITAL RESOURCES AND LIQUIDITY
Cash Flows. Our business of acquiring, exploring and developing oil and gas
properties is capital intensive. Our ability to grow our reserve base is
contingent, in part, upon the ability to generate cash flows from operating
activities and to access outside sources of capital to fund our investing
activities. For the six months ended June 30, 2000 and 1999, we expended
$257.7 million and $89.9 million, respectively, in oil and gas property
acquisition, exploration and development activities, representing
substantially all of the cash flow we invested during each six-month period.
See "Commitments and Capital Expenditures." Cash flows from operating
activities before changes in working capital for the six months ended June 30,
2000 and 1999 were $120.0 million and $67.1 million, representing 47% and 75%,
respectively, of the oil and gas property investments made for each period.
Substantially all of the cash flows from operating activities are generated
from oil and gas sales which are highly dependent upon oil and gas prices.
Significant decreases in the market prices of oil and gas could result in
reduction of cash flows from operating activities, which in turn could impact
22
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
the amount of capital investment.
Cash flows from financing activities for the first six months of 2000
reflected a net source of cash of $126.8 million compared to a $29.0 million
source of cash for the first six months of 1999. This increase is related to
borrowings made during the period to temporarily fund the acquisition of
properties from Costilla Energy, Inc., discussed below. Historically, we have
relied upon availability under various revolving bank credit facilities and
proceeds from the issuance of senior and subordinated notes to fund our
investing activities.
Credit Facility. We have a revolving credit facility (the "Credit
Facility") with a syndicate of banks which provides up to $450 million in
borrowings (the "Commitment"). Letters of credit are limited to $75 million
of this availability. The Credit Facility allows us to draw on the full $450
million credit line without restrictions tied to periodic revaluations of our
oil and gas reserves provided we continue to maintain an investment grade
credit rating from either Standard & Poor's Ratings Service or Moody's
Investors Service. A borrowing base can be required only upon the vote by a
majority in interest of the lenders after the loss of an investment grade
credit rating. No principal payments are required under the Credit Facility
prior to termination on October 14, 2002. We have relied upon the Credit
Facility to provide funds for acquisitions and drilling activities, and to
provide letters of credit to meet margin requirements under Fixed-Price
Contracts. As of June 30, 2000, there was $385.6 million of principal and
$41.8 million of letters of credit outstanding under the Credit Facility. See
" -- Common Stock Offering."
We have the option of borrowing at a LIBOR-based interest rate or the Base
Rate (approximating the prime rate). The LIBOR interest rate margin and the
facility fee payable under the Credit Facility are subject to a sliding scale
based on our senior debt credit rating. At June 30, 2000, the applicable
interest rate was LIBOR plus 30 basis points. The Credit Facility also
requires the payment of a facility fee equal to 15 basis points of the
Commitment. The average interest rate for borrowings under the Credit
Facility was 6.9% as of June 30, 2000. Including the effect of interest rate
swaps which hedge a portion of the interest rate exposure attributable to this
facility, the effective interest rate was 6.4%. See the Notes to Consolidated
Financial Statements included in our Annual Report on Form 10-K for the year
ended December 31, 1999 for an expanded discussion of our interest rate swaps.
The Credit Facility contains various affirmative and restrictive covenants
which, among other things, limit total indebtedness to $700 million ($625
million of senior indebtedness) and require us to meet certain financial
tests. Borrowings under the Credit Facility are unsecured.
Other Lines of Credit. We have certain other uncommitted lines of credit
which aggregated $30.1 million as of June 30, 2000. These short-term lines of
credit are unsecured and primarily used to meet margin requirements under
23
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Fixed-Price Contracts and for working capital purposes. As of June 30, 2000,
there was $3.0 million of indebtedness and $.1 million of letters of credit
outstanding under these credit lines. Repayment of indebtedness thereunder is
expected to be made through Credit Facility availability.
6 7/8% Senior Notes due 2007. In December 1997, we issued $200 million
principal amount, $198.8 million net of discount, of 6 7/8% Senior Notes due
2007. Interest is payable semi-annually on June 1 and December 1. The
associated indenture agreement contains restrictive covenants which place
limitations on the amount of liens and our ability to enter into sale and
leaseback transactions.
9 1/4% Subordinated Notes due 2004. In June 1994, we issued $100 million
principal amount, $98.5 million net of discount, of 9 1/4% Senior Subordinated
Notes due 2004 (the "Subordinated Notes"). Interest is payable semi-annually
on June 15 and December 15. The associated indenture agreement contains
certain restrictive covenants which limit, among other things, the prepayment
of the Subordinated Notes, the incurrence of additional indebtedness, the
payment of dividends and the disposition of assets. In the second quarter of
2000, we repurchased $6.3 million face value of the Subordinated Notes in the
open market, leaving $93.7 million principal amount outstanding at June 30,
2000.
Common Stock Offering. On June 28, 2000, we sold 2.4 million shares of our
common stock at $31.00 per share ($29.53 per share net of underwriting
discount) in a public offering. Proceeds from the offering of $70.9 million
received in July 2000 were applied to reduce a majority of the indebtedness
incurred in connection with the acquisition of properties from Costilla
Energy, Inc. described below. In addition, an indirect wholly-owned
subsidiary of S.A. Louis Dreyfus et Cie sold 1.6 million shares of our common
stock in the offering. Subsequent to the offering, S.A. Louis Dreyfus et Cie
through its subsidiaries owned 19.2 million of our common shares, or
approximately 44% of the total issued and outstanding common shares.
We believe that the borrowing capacity available under the Credit Facility,
combined with our internally generated operating cash flows, will be adequate
to finance the capital expenditure program planned for the balance of 2000,
and to meet margin requirements under Fixed-Price Contracts. See "Commitments
and Capital Expenditures" and "Quantitative and Qualitative Disclosures About
Market Risk."
At June 30, 2000, we had negative working capital of $64.6 million and a
current ratio of .6 to 1. This working capital deficit is the result of
recording the fair value of Fixed-Price Contract settlements scheduled to
occur over the subsequent twelve-month period based on market prices for oil
and gas as of the balance sheet date. Because present accounting rules do
not, provide for the accrual of the future cash flow transactions the
contracts were designed to hedge, an apparent working capital deficit is
24
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
created which does not, in our opinion, accurately depict our true working
capital position or liquidity. These settlement amounts are not due and
payable until the monthly period that the related underlying hedged
transaction occurs. Short-term liquidity has actually improved as a result of
the increase in oil and gas prices. Excluding the current portion of
Fixed-Price Contracts from current assets and liabilities, working capital was
a negative $1.1 million and the current ratio was 1.0 to 1. Total long-term
debt outstanding at June 30, 2000 was $681.7 million. Long-term debt as a
percentage of total capitalization was 59%. Giving pro forma effect to the
common stock offering previously discussed as if it had closed on June 30,
2000, total long-term debt was $610.8 million and long-term debt as a
percentage of total capitalization was 53%.
COMMITMENTS AND CAPITAL EXPENDITURES
Our primary business strategy is to generate strong and consistent growth in
reserves, production, operating cash flows and earnings through a balanced
program of exploration and development drilling and strategic acquisitions of
oil and gas properties. For the six months ended June 30, 2000, we invested
$102.4 million in development activities and $23.4 million on exploration
activities. This expenditure level resulted in the drilling of 190
development wells and five exploratory wells. Of these wells, 180 development
wells and four exploratory wells were successfully completed as producers, for
a completion success rate of 95% and 80%, respectively (an overall success
rate of 94%). In addition, we invested $131.9 million in proved oil and gas
property acquisitions during the first six months of 2000. The more
significant transaction involved the acquisition of proved and unproved oil
and gas properties from Costilla Energy, Inc. in June 2000. The Costilla
properties consisted of 135 Bcfe of net proved reserves contained within 1,011
gross (607 net) producing wells. The acquired properties are primarily
located within our Core Areas. The $126 million purchase price, net of
estimated purchase price adjustments, has been funded initially through
availability under the revolving bank credit facility. See "Capital Resources
and Liquidity -- Common Stock Offering." The acquisition has been accounted
for using the purchase method of accounting. For the balance of 2000, we
currently plan to invest an additional $88 million in connection with our
drilling program focused principally in our Core Areas. Actual levels of
drilling and acquisition expenditures may vary due to many factors, including
drilling results, new drilling opportunities, oil and natural gas prices and
acquisition opportunities.
We continue to actively search for additional attractive oil and gas
property acquisitions, but are not able to predict the timing or amount of
additional capital expenditures which may ultimately be employed in
acquisitions during 2000.
OUTLOOK FOR FISCAL 2000
Reference is made to "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Outlook for Fiscal Year 2000" included
25
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
in our Annual Report on Form 10-K for the year ended December 31, 1999 for an
expanded discussion of estimates. Subject to the uncertainties identified in
"Forward-Looking Statements" and the closing of the Costilla acquisition and
the common stock offering as described herein, no material modifications to
previously disclosed estimates are deemed necessary.
26
LOUIS DREYFUS NATURAL GAS CORP.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
GENERAL
Our results of operations and operating cash flows are impacted by changes
in market prices for oil and gas and changes in market interest rates. To
mitigate a portion of our exposure to adverse market changes, we entered into
Fixed-Price Contracts and interest rate swaps. Each Fixed-Price Contract and
interest rate swap has been entered into as a hedge of oil and gas price risk
or interest rate risk and not for trading purposes. Information regarding our
market exposures, Fixed-Price Contracts, interest rate swaps and certain other
financial instruments is provided below. All information is presented in U.S.
Dollars.
FIXED-PRICE CONTRACTS
Description of Contracts. Our Fixed-Price Contracts are comprised of
long-term physical delivery contracts, energy swaps, collars, futures
contracts and basis swaps. These contracts allow us to predict with greater
certainty the effective oil and gas prices to be received for our hedged
production and benefit us when market prices are less than the fixed prices
provided in the Fixed-Price Contracts. However, we will not benefit from
market prices that are higher than the fixed prices in these contracts for our
hedged production. For the years ended December 31, 1999, 1998 and 1997,
Fixed-Price Contracts hedged 55%, 50% and 60%, respectively, of our gas
production and 19%, 16% and 33%, respectively, of our oil production. For the
six months ended June 30, 2000, Fixed-Price Contracts hedged 49% of our
natural gas production and 72% of our oil production. As of June 30, 2000,
Fixed-Price Contracts are in place to hedge 175 Bcfe of our estimated future
gas and oil production; 27 Bcfe are hedged for the remainder of fiscal 2000.
Reference is made to our Annual Report on Form 10-K for the year ended
December 31, 1999 for a more detailed discussion of the Fixed-Price Contracts.
The following table summarizes the estimated volumes, fixed prices,
fixed-price sales and future net revenues attributable to the Fixed-Price
Contracts as of June 30, 2000. We expect the prices to be realized for our
hedged production to vary from the prices shown in the following table due to
basis, which is the differential between the floating price paid under each
energy swap contract, or the cost of gas to supply physical delivery contracts
and the price received at the wellhead for our production. Basis
differentials are caused by differences in location, quality, contract terms,
timing and other variables. Future net revenues for any period are determined
as the differential between the fixed prices provided by Fixed-Price Contracts
and forward market prices as of June 30, 2000, as adjusted for basis. Future
net revenues change with changes in market prices and basis.
27
LOUIS DREYFUS NATURAL GAS CORP.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (continued)
FIXED-PRICE CONTRACTS
Six
Months
Ending
December Years Ending December 31, Balance
31, -------------------------------------- through
2000 2001 2002 2003 2004 2017 Total
-------- -------- -------- -------- -------- -------- ---------
(dollars in thousands, except price data)
NATURAL GAS SWAPS:
Contract volumes (BBtu) . . 9,299 7,840 6,697 5,650 5,650 12,133 47,269
Weighted-average fixed
price per MMBtu (1). . . $ 2.46 $ 2.46 $ 2.65 $ 2.92 $ 3.12 $ 3.36 $ 2.85
Future fixed-price sales . $ 22,864 $ 19,281 $ 17,766 $ 16,492 $ 17,608 $ 40,821 $ 134,832
Future net
revenues (losses) (2). . $(18,550) $ (9,526) $ (2,874) $ 121 $ 1,595 $ 6,558 $ (22,676)
NATURAL GAS PHYSICAL
DELIVERY CONTRACTS:
Contract volumes (BBtu). . 8,411 17,211 17,086 14,216 6,030 41,321 104,275
Weighted-average fixed
price per MMBtu (1). . . $ 2.30 $ 2.36 $ 2.43 $ 2.50 $ 2.45 $ 2.93 $ 2.62
Future fixed-price sales . $ 19,324 $ 40,628 $ 41,568 $ 35,477 $ 14,788 $121,209 $ 272,994
Future net
revenues (losses) (2). . $(17,308) $(21,006) $ (9,508) $ (4,455) $ (1,977)$ 201 $ (54,053)
NATURAL GAS COLLARS:
Contract volumes (BBtu):
Floor. . . . . . . . . . 4,140 7,300 7,300 -- -- -- 18,740
Ceiling. . . . . . . . . 8,280 7,300 7,300 -- -- -- 22,880
Weighted-average fixed
price per MMBtu (1):
Floor. . . . . . . . . . $ 2.48 $ 3.13 $ 2.84 $ -- $ -- $ -- $ 2.87
Ceiling. . . . . . . . . $ 2.80 $ 4.25 $ 3.94 $ -- $ -- $ -- $ 3.63
Future fixed-price sales
(at ceiling). . . . . . . $ 23,184 $ 31,025 $ 28,762 $ -- $ -- $ -- $ 82,971
Future net
revenues (losses) (2). . $(13,968) $ (628) $ 810 $ -- $ -- $ -- $ (13,786)
TOTAL NATURAL GAS
CONTRACTS (3):
Contract volumes (BBtu). . 25,990 32,351 31,083 19,866 11,680 53,454 174,424
Weighted-average fixed
price per MMBtu (1). . . $ 2.52 $ 2.81 $ 2.83 $ 2.62 $ 2.77 $ 3.03 $ 2.81
Future fixed-price sales . $ 65,372 $ 90,934 $ 88,096 $ 51,969 $ 32,396 $162,030 $ 490,797
Future net
revenues (losses) (2). . $(49,826) $(31,160) $(11,572) $ (4,334) $ (382)$ 6,759 $ (90,515)
CRUDE OIL SWAPS:
Contract volumes (MBbls) . 155 -- -- -- -- -- 155
Weighted-average fixed
price per Bbl (1) . . . . $ 30.52 $ -- $ -- $ -- $ -- $ -- $ 30.52
Future fixed-price sales . $ 4,731 $ -- $ -- $ -- $ -- $ -- $ 4,731
Future net
revenues (losses) (2). . $ (307) $ -- $ -- $ -- $ -- $ -- $ (307)
<FN>
(1) - We expect the prices to be realized for our hedged production to vary from the prices
shown due to basis.
(2) - Future net revenues as presented above are undiscounted and have not been adjusted for
contract performance risk or counterparty credit risk.
(3) - Does not include basis swaps with notional volumes by year, as follows: 2000 - 10.5 Tbtu;
2001 - 9.4 TBtu; and 2002 - 5.5 TBtu.
28
LOUIS DREYFUS NATURAL GAS CORP.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (continued)
The estimates of future net revenues (losses) from Fixed-Price Contracts are
computed based on the difference between the prices provided by the
Fixed-Price Contracts and forward market prices as of the specified date. The
market for natural gas beyond a five year horizon is illiquid and published
market quotations are not available. We have relied upon near-term market
quotations, longer-term over-the-counter market quotations and other market
information to determine future net revenue estimates. Forward market prices
for natural gas are dependent upon supply and demand factors in the forward
market and are subject to significant volatility. The future net revenue
estimates shown above are subject to change as forward market prices change.
The estimated fair values of our Fixed-Price Contracts as of June 30, 2000
and December 31, 1999 are provided below. The associated carrying values of
these contracts are equal to the estimated fair values for each period
presented.
June 30, December 31,
2000 1999
----------- -----------
(in thousands)
Derivative assets:
Fixed-price natural gas swaps . . . . . . . . . $ 7,032 $ 16,433
Fixed-price natural gas collars . . . . . . . . 1,070 1,323
Fixed-price natural gas delivery contracts. . . 3,876 7,921
Fixed-price crude oil swaps . . . . . . . . . . -- 360
Interest rate swaps . . . . . . . . . . . . . . 5,607 5,660
Derivative liabilities:
Fixed-price natural gas swaps . . . . . . . . . (30,607) (4,329)
Fixed-price crude oil swaps . . . . . . . . . . (305) --
Fixed-price natural gas collars . . . . . . . . (14,856) --
Fixed-price natural gas delivery contracts. . . (57,079) (9,081)
Natural gas basis swaps . . . . . . . . . . . . (1,286) (3,271)
----------- -----------
Total . . . . . . . . . . . . . . . . . . . . . $ (86,548) $ 15,016
=========== ===========
The fair value of Fixed-Price Contracts as of June 30, 2000 and December 31,
1999 was estimated based on market prices of natural gas and crude oil for the
periods covered by the contracts. The net differential between the prices in
each contract and market prices for future periods, as adjusted for estimated
basis, has been applied to the volumes stipulated in each contract to arrive
at an estimated future value. This estimated future value was discounted on a
contract-by-contract basis at rates commensurate with our estimation of
contract performance risk and counterparty credit risk. The terms and
conditions of fixed-price physical delivery contracts and certain financial
swaps are uniquely tailored to our circumstances. In addition, the
determination of market prices for natural gas beyond a five year horizon is
subject to significant judgment and estimation. As a result, the Fixed-Price
29
LOUIS DREYFUS NATURAL GAS CORP.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (continued)
Contract fair value does not necessarily represent the value a third party
would pay to assume our contract positions.
INTEREST RATE SENSITIVITY We have entered into interest rate swaps to hedge
the interest rate exposure associated with borrowings under the Credit
Facility. As of June 30, 2000, the interest rate has been hedged for average
notional amounts of $125 million for the balance of 2000, and $125 million and
$94 million for the years ending December 31, 2001 and 2002, respectively.
Under the interest rate swaps, we receive the LIBOR three-month rate (6.8% at
June 30, 2000) and pay an average rate of 5.0% for the balance of 2000 and all
of 2001 and 2002. The notional amounts are less than the maximum amount
anticipated to be outstanding under the Credit Facility in these years.
Reference is made to our Annual Report on Form 10-K for the year ended
December 31, 1999 for an expanded discussion of the interest rate swaps.
30
LOUIS DREYFUS NATURAL GAS CORP.
PART II. OTHER INFORMATION
ITEM 1 -- NONE
ITEM 2 -- NONE
ITEM 3 -- NONE
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 2000 Annual Meeting of Shareholders was held on May 16, 2000. The
following were submitted to a vote of shareholders:
1. The election of twelve directors for the ensuing year and until their
successors are duly elected and qualified. The results of the election
for each director are as follows:
Gerard Louis-Dreyfus 34,030,359 votes for; 3,051,050 votes withheld; 0
votes abstaining
Simon B. Rich, Jr. 36,830,285 votes for; 251,124 votes withheld; 0
votes abstaining
Mark Andrews 36,916,900 votes for; 164,509 votes withheld; 0
votes abstaining
Mark E. Monroe 36,830,941 votes for; 250,468 votes withheld; 0
votes abstaining
Richard E. Bross 36,843,241 votes for; 238,168 votes withheld; 0
votes abstaining
Daniel R. Finn, Jr. 33,600,861 votes for; 3,480,548 votes withheld; 0
votes abstaining
Peter G. Gerry 34,035,187 votes for; 3,046,222 votes withheld; 0
votes abstaining
John H. Moore 36,916,346 votes for; 165,063 votes withheld; 0
votes abstaining
James R. Paul 36,917,644 votes for; 163,765 votes withheld; 0
votes abstaining
Ernest F. Steiner 33,817,771 votes for; 3,263,638 votes withheld; 0
votes abstaining
Nancy K. Quinn 36,917,196 votes for; 164,213 votes withheld; 0
votes abstaining
E. William Barnett 36,904,598 votes for; 176,811 votes withheld; 0
votes abstaining
2. The approval of the Louis Dreyfus Natural Gas Corp. 2000 Employee Stock
Purchase Plan. The results of the shareholder vote included 36,686,998
votes for; 145,736 votes against; and 12,075 abstaining.
3. Ratification of the selection of Ernst & Young as independent auditors
for the year ending December 31, 2000. The results of the shareholder
vote included 36,836,944 votes for; 3,753 votes against; and 4,112 votes
abstaining.
31
LOUIS DREYFUS NATURAL GAS CORP.
PART II. OTHER INFORMATION (continued)
ITEM 5 -- NONE
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 -- Financial Data Schedule
(b) Reports on Form 8-K:
A Form 8-K dated June 15, 2000 disclosing under Item 2 the acquisition of
substantially all of the oil and gas properties of Costilla Energy, Inc.,
under Item 5 the planned underwritten public offering of common stock by
the Company and by its principal shareholder, and under Item 7 the Asset
Purchase Agreement by and between Costilla Energy, Inc. as seller and
Louis Dreyfus Natural Gas Corp. as buyer.
A Form 8-K dated June 28, 2000 disclosing under Item 5 the underwriting
agreement executed in connection with the underwritten public offering of
common stock consisting of 2,400,000 shares sold by the Company, and
1,600,000 shares sold by an indirect wholly owned subsidiary of its
principal shareholder, S.A. Louis Dreyfus et Cie.
32
LOUIS DREYFUS NATURAL GAS CORP.
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.
LOUIS DREYFUS NATURAL GAS CORP.
---------------------------------------
(Registrant)
Date: August 14, 2000 /s/ Jeffrey A. Bonney
---------------------------------------
Jeffrey A. Bonney
Executive Vice President and
Chief Financial Officer