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, 1996
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 .
----- -----
27,800,000 shares of common stock, $.01 par value, issued and outstanding at
August 6, 1996.
2
LOUIS DREYFUS NATURAL GAS CORP.
Table of Contents
PART I. FINANCIAL INFORMATION Page
CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Consolidated Balance Sheets:
December 31, 1995 and June 30, 1996. . . . . . . . . . . . . . . . . 3
Consolidated Statements of Income:
Three months and six months ended June 30, 1995 and 1996 . . . . . . 5
Consolidated Statements of Cash Flows:
Six months ended June 30, 1995 and 1996. . . . . . . . . . . . . . . 6
Condensed Notes to Consolidated Financial Statements . . . . . . . . . 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . . 9
PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . 26
3
LOUIS DREYFUS NATURAL GAS CORP.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
A S S E T S
December 31, June 30,
1995 1996
----------- -----------
(unaudited)
CURRENT ASSETS
Cash and cash equivalents. . . . . . . . . . . . . $ 1,584 $ 10,640
Receivables:
Oil and gas sales . . . . . . . . . . . . . . . . 23,443 26,355
Joint interest and other, net . . . . . . . . . . 5,300 3,639
Deposits . . . . . . . . . . . . . . . . . . . . . 3,900 3,935
Inventory and other. . . . . . . . . . . . . . . . 3,095 3,636
----------- -----------
Total current assets . . . . . . . . . . . . . . . 37,322 48,205
----------- -----------
PROPERTY AND EQUIPMENT, at cost, based on
successful efforts accounting . . . . . . . . . . 778,348 854,126
Less accumulated depreciation, depletion,
amortization and impairment . . . . . . . . . . . (188,495) (218,382)
----------- -----------
589,853 635,744
----------- -----------
OTHER ASSETS, net. . . . . . . . . . . . . . . . . 7,762 7,072
----------- -----------
$ 634,937 $ 691,021
=========== ===========
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
December 31, June 30,
1995 1996
----------- -----------
(unaudited)
CURRENT LIABILITIES
Accounts payable . . . . . . . . . . . . . . . . . $ 21,458 $ 20,431
Accrued liabilities. . . . . . . . . . . . . . . . 7,912 8,781
Revenues payable . . . . . . . . . . . . . . . . . 4,687 5,400
----------- -----------
Total current liabilities . . . . . . . . . . . . 34,057 34,612
BANK DEBT. . . . . . . . . . . . . . . . . . . . . 216,000 239,100
SUBORDINATED DEBT. . . . . . . . . . . . . . . . . 98,760 98,833
DEFERRED REVENUE . . . . . . . . . . . . . . . . . 20,557 19,826
DEFERRED HEDGING GAINS . . . . . . . . . . . . . . 5,070 28,856
OTHER LONG-TERM LIABILITIES. . . . . . . . . . . . 4,285 4,180
DEFERRED INCOME TAXES. . . . . . . . . . . . . . . 13,627 16,247
----------- -----------
392,356 441,654
STOCKHOLDERS' EQUITY
Preferred stock, par value $.01; 10 million
shares authorized; no shares outstanding. . . . . -- --
Common stock, par value $.01; 100 million
shares authorized; 27,800,000 shares
issued and outstanding. . . . . . . . . . . . . . 278 278
Additional paid-in capital . . . . . . . . . . . . 197,291 197,291
Retained earnings. . . . . . . . . . . . . . . . . 45,012 51,798
----------- -----------
242,581 249,367
----------- -----------
$ 634,937 $ 691,021
=========== ===========
See accompanying notes to consolidated financial statements.
5
LOUIS DREYFUS NATURAL GAS CORP.
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
(in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1995 1996 1995 1996
-------- -------- -------- --------
REVENUES
Oil and gas sales. . . . . . . . . . . $ 37,704 $ 44,455 $ 76,064 $ 83,639
Interest and other . . . . . . . . . . 469 1,361 1,519 2,027
-------- -------- -------- --------
38,173 45,816 77,583 85,666
-------- -------- -------- --------
EXPENSES
Operating costs. . . . . . . . . . . . 7,703 11,104 15,978 21,544
General and administrative . . . . . . 3,978 4,118 8,254 8,371
Exploration costs. . . . . . . . . . . -- 242 -- 242
Depreciation, depletion, amortization
and impairment. . . . . . . . . . . . 13,235 16,661 26,648 31,724
Interest . . . . . . . . . . . . . . . 4,701 6,925 9,484 13,657
-------- -------- -------- --------
29,617 39,050 60,364 75,538
-------- -------- -------- --------
Income before income taxes. . . . . . . 8,556 6,766 17,219 10,128
Income taxes . . . . . . . . . . . . . 2,824 2,232 5,683 3,342
-------- -------- -------- --------
NET INCOME . . . . . . . . . . . . . . $ 5,732 $ 4,534 $ 11,536 $ 6,786
======== ======== ======== ========
Net income per share . . . . . . . . . $ .21 $ .16 $ .41 $ .24
======== ======== ======== ========
Weighted average common shares
outstanding . . . . . . . . . . . . . 27,800 27,800 27,800 27,800
======== ======== ======== ========
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,
---------------------
1995 1996
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,536 $ 6,786
Items not affecting cash flows:
Depreciation, depletion, amortization
and impairment. . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,255 31,724
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . 4,822 2,620
Exploration costs . . . . . . . . . . . . . . . . . . . . . . . . . . -- 242
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 238 302
-------- --------
43,851 41,674
Net change in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . (1,155) (1,251)
Deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221 (35)
Inventory and other . . . . . . . . . . . . . . . . . . . . . . . . . 348 (541)
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . (6,272) (1,027)
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . (1,771) 869
Revenues payable. . . . . . . . . . . . . . . . . . . . . . . . . . . (52) 713
Deferred Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . -- (4,310)
-------- --------
35,170 36,092
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property and equipment. . . . . . . . . . . . . . . . (33,263) (77,579)
Proceeds from sale of property and equipment . . . . . . . . . . . . . 11,607 291
-------- --------
(21,656) (77,288)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term bank borrowings. . . . . . . . . . . . . . . . 62,800 150,805
Repayments of long-term bank borrowings. . . . . . . . . . . . . . . . (75,197) (127,705)
Change in deferred hedging gains . . . . . . . . . . . . . . . . . . . -- 28,096
Change in deferred revenue . . . . . . . . . . . . . . . . . . . . . . (658) (731)
Change in other long-term liabilities. . . . . . . . . . . . . . . . . (198) (213)
-------- --------
(13,253) 50,252
-------- --------
Change in cash and cash equivalents. . . . . . . . . . . . . . . . . . 261 9,056
Cash and cash equivalents, beginning of period . . . . . . . . . . . . 2,980 1,584
-------- --------
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . $ 3,241 $ 10,640
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,601 $ 12,395
Income taxes paid. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,700 668
-------- --------
$ 11,301 $ 13,063
======== ========
See accompanying notes to consolidated financial statements.
7
LOUIS DREYFUS NATURAL GAS CORP.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
June 30, 1996
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
only normal and recurring adjustments, 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, 1996 are not necessarily indicative of the
results to be expected for the full year. Certain reclassifications have been
made to the prior year statements to conform with the current year
presentation. Reference is made to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995 for an expanded discussion of the
Company's financial disclosures and accounting policies.
NOTE 2 -- DEFERRED HEDGING GAINS
In June 1996, the Company and an unaffiliated counterparty to one of its
fixed-price contracts amended the terms of a fixed-price natural gas contract
to monetize the premium in the fixed prices provided by the contract.
Pursuant to the amendment, the Company received a non-refundable payment in
the amount of $25.0 million. As consideration for this payment, the weighted
average fixed price over the remaining 17 years of the contract provided by
the underlying contract was reduced from $3.20 per MMBtu to $2.37 per MMBtu
approximating the forward market prices for natural gas at the time. The
payment has been reflected in the accompanying balance sheet as deferred
hedging gains and will be amortized into earnings over the life of the
underlying contract. In connection with the amendment, the Oil and Gas
Reserves Loan Value (the borrowing base) provided by the Company's $300
million revolving bank credit facility was reset to be $315 million.
NOTE 3 -- BANK CREDIT FACILITY
In July 1996, certain provisions of the Company's $300 million bank credit
facility were amended to reduce the pricing and to extend the maturity. The
LIBOR interest rate margin which previously ranged from .50% to 1% per annum
(.75% at June 30, 1996) based on the relationship of outstanding indebtedness
to the discounted present value of the Company's oil and gas reserves and
Fixed-Price Contracts was lowered to a range of .25% to .55% per annum (.30%
at July 31, 1996). Additionally, the Commitment fee of .1875% per annum was
eliminated and the facility fee was amended to .20% of the outstanding
Commitment. As of July 31, 1996, the effective interest rate for borrowings
under the credit facility (before the effect of interest rate swaps and the
facility fee) was 5.8%. The date at which the Commitment Amount (as defined
by the credit facility agreement) begins reducing at the rate of $18.75
million per quarter was extended from December 31, 1997 to October 31, 1999.
The loan matures on July 31, 2003.
8
LOUIS DREYFUS NATURAL GAS CORP.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
June 30, 1996
NOTE 4 -- LITIGATION
On December 22, 1995, the United States District Court for the Western
District of Oklahoma entered a judgment in favor of the Company against Midcon
Offshore, Inc. ("Midcon") in connection with non-performance by Midcon under
an agreement to purchase a certain offshore oil and gas property. The amount
of the judgment owed by Midcon as of December 31, 1995 was $10.8 million. In
January 1996, the Company and Midcon settled remaining disputes in connection
with this litigation and Midcon delivered a promissory note to the Company,
secured by first and second liens on all assets of Midcon, in the amount of
$10.8 million, payable in full on or before December 15, 1996. In July 1996,
Midcon made a $1.0 million installment payment on the note which has been
recorded as other income for the quarter ended June 30, 1996. Collectibility
of the balance of this note is uncertain. Accordingly, no amounts have been
recorded with respect to the balance of the note in the accompanying financial
statements as of June 30, 1996. The Company will recognize income as future
payments are received.
9
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
General. Formed in 1979, Louis Dreyfus Natural Gas Corp. (the "Company")
was acquired by S.A. Louis Dreyfus et Cie on July 18, 1990 for the purpose of
engaging in oil and gas acquisition, development, production and marketing
activities in North America. Since that date, the Company's oil and gas
reserves and production have grown significantly as the result of numerous
proved reserve acquisitions and an active drilling program. In November 1993,
the Company completed an initial public offering of 7.8 million shares of
common stock. As of June 30, 1996, S.A. Louis Dreyfus et Cie's ownership in
the Company was approximately 74%.
The Company has a portfolio of fixed-price contracts, which include both
long-term physical delivery contracts, energy swaps and, from time to time,
option agreements (collectively, "Fixed-Price Contracts") which reduce the
risk associated with fluctuations in natural gas and oil prices. For the
six-month periods ended June 30, 1995 and 1996, Fixed-Price Contracts hedged
95% and 50%, respectively, of the Company's natural gas production not
otherwise subject to fixed prices and 92% and 70%, respectively, of the
Company's oil production for such periods. Moreover, as of June 30, 1996, the
Company's Fixed-Price Contracts hedge 359 Bcf of natural gas and 476 MBbls of
oil to be produced in future periods. See "Fixed-Price Contracts."
Forward-Looking Statements. Forward-looking statements for 1996 and for
later periods are made in various places in this discussion, which include all
statements other than purely historical information. Such statements
represent the estimates of Management based on the Company's historical
operating trends, its proved reserves as of December 31, 1995, its Fixed-Price
Contract position as of June 30, 1996 and other information available to
Management. See "Estimates for Fiscal Year 1996" for a discussion of the
risks, uncertainties and other important factors which could cause actual
results to differ materially from those projected in such statements.
Certain Definitions. As used herein, the abbreviations listed below are
defined as follows.
CERTAIN DEFINITIONS
Bbl. 42 U.S. gallons, the basic unit for measuring crude oil and natural
gas condensate.
Bcf. Volume of one billion cubic feet.
Bcfe. Bcf equivalent, determined using the ratio of one Bbl of oil or
condensate to six Mcf of natural gas.
BBtu. One billion Btus.
10
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
CERTAIN DEFINITIONS (continued)
Btu. British thermal unit, which is the quantity of heat required to raise
the temperature of a one-pound mass of water from 58.5 to 59.5
degrees Fahrenheit.
MBbls. Volume of one thousand barrels.
Mcf. Volume of one thousand cubic feet, the basic unit for measuring
natural gas.
Mcfe. Mcf equivalent, determined using the ratio of one Bbl of oil or
condensate to six Mcf of natural gas.
MMBbls. Volume of one million barrels.
MMcf. Volume of one million cubic feet.
MMcfe. MMcf equivalent, determined using the ratio of one Bbl of oil or
condensate to six Mcf of natural gas.
11
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Selected Operating Data. The following table provides certain operating
data relating to the Company's operations.
SELECTED OPERATING DATA Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1995 1996 1995 1996
-------- -------- -------- --------
OIL AND GAS SALES: (M$)
Wellhead oil sales . . . . . . . . . . $ 7,248 $ 9,694 $ 14,476 $ 17,991
Effect of Fixed-Price Contracts. . . . (104) (907) 404 (1,105)
-------- -------- -------- --------
Total oil sales. . . . . . . . . . . . $ 7,144 $ 8,787 $ 14,880 $ 16,886
======== ======== ======== ========
Wellhead natural gas sales:
Sales under Sonora Gas Contract. . . $ 12,156 $ -- $ 23,108 $ --
Other sales. . . . . . . . . . . . . 12,161 35,316 24,159 65,008
-------- -------- -------- --------
Total. . . . . . . . . . . . . . . . 24,317 35,316 47,267 65,008
Effect of Fixed-Price Contracts (1). . 6,243 352 13,917 1,745
-------- -------- -------- --------
Total natural gas sales. . . . . . . . $ 30,560 $ 35,668 $ 61,184 $ 66,753
======== ======== ======== ========
PRODUCTION:
Oil production (MBbls) . . . . . . . . 404 466 831 915
Natural gas production (MMcf):
Sold under Sonora Gas Contract . . . 3,076 -- 5,902 --
Other production . . . . . . . . . . 8,111 16,389 16,451 30,969
-------- -------- -------- --------
Total. . . . . . . . . . . . . . . . . 11,187 16,389 22,353 30,969
======== ======== ======== ========
Net equivalent production (MMcfe). . . 13,612 19,187 27,339 36,460
/TABLE
12
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
SELECTED OPERATING DATA, CONTINUED Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1995 1996 1995 1996
-------- -------- -------- --------
AVERAGE SALES PRICE:
Oil (per Bbl):
Wellhead price . . . . . . . . . . . $ 17.93 $ 20.79 $ 17.42 $ 19.66
Effect of Fixed-Price Contracts. . . (.25) (1.95) .49 (1.21)
-------- -------- -------- --------
Total. . . . . . . . . . . . . . . . $ 17.68 $ 18.84 $ 17.91 $ 18.45
======== ======== ======== ========
Average fixed price received under
Fixed-Price Contracts. . . . . . . . $ 18.99 $ 19.26 $ 19.31 $ 19.24
Net effective cash realization (2) . 93% 95% 93% 95%
Natural gas (per Mcf):
Sales under Sonora Gas Contract. . . $ 3.95 $ -- $ 3.92 $ --
Other wellhead sales . . . . . . . . 1.50 2.16 1.47 2.10
-------- -------- -------- --------
Average price. . . . . . . . . . . . 2.17 2.16 2.11 2.10
Effect of Fixed-Price Contracts (1). .56 .02 .63 .06
-------- -------- -------- --------
Total. . . . . . . . . . . . . . . . $ 2.73 $ 2.18 $ 2.74 $ 2.16
======== ======== ======== ========
Average fixed price received under
Fixed-Price Contracts. . . . . . . . $ 2.48 $ 2.37 $ 2.51 $ 2.34
Net effective cash realization (2) . 93% 93% 96% 94%
Equivalent price (per Mcfe). . . . . . $ 2.77 $ 2.32 $ 2.78 $ 2.29
EXPENSES: (per Mcfe)
Operating costs. . . . . . . . . . . . $ .57 $ .58 $ .58 $ .59
General and administrative . . . . . . $ .29 $ .21 $ .30 $ .23
Depreciation, depletion, amortization
& impairment - oil & gas . . . . . . . $ .91 $ .82 $ .91 $ .82
<FN>
(1)- Net of basis results and amortization of deferred hedging gains and
losses. See "Fixed-Price Contracts -- Market Risk."
(2)- Represents the net effective cash price realized for the Company's
hedged production (after consideration for basis results and
amortization of deferred hedging gains and losses) as a percentage of
the fixed prices in the Company's Fixed-Price Contracts. See "Fixed
Price-Contracts -- Market Risk."
/TABLE
13
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, 1996 COMPARED TO THREE
MONTHS ENDED JUNE 30, 1995.
Net Income and Cash Flows from Operating Activities. For the quarter ended
June 30, 1996, the Company realized net income of $4.5 million, or $.16 per
share, on total revenue of $45.8 million. This compares with net income of
$5.7 million, or $.21 per share, on total revenue of $38.2 million for the
second quarter of 1995. Cash flows from operating activities (before working
capital changes) for the second quarter of 1996 increased 8% to $23.5 million
from the $21.7 million reported for the second quarter of 1995. The decline
in second quarter 1996 earnings was principally the result of lower average
natural gas prices caused by the expiration in December 1995 of a wellhead
contract for certain production in the Sonora area with Lone Star Gas Company
("Sonora Gas Contract"). This contract paid $3.95 per Mcf for approximately
27% of the Company's total gas production in the second quarter of 1995,
representing $5.5 million of premium over second quarter 1996 wellhead prices.
The increase in operating cash flows for the second quarter of 1996 was
principally attributable to the significant increase in production realized
for the quarter.
Production. The Company produced 19.2 Bcfe for the second quarter of 1996
compared to 13.6 Bcfe for the prior year second quarter, an increase of 41%.
Natural gas production increased to 16.4 Bcf, up 46% over the 11.2 Bcf
produced in the second quarter of 1995. Oil production for the second quarter
of 1996 increased 15% to 466 MBbls compared to 404 MBbls for the second
quarter of 1995. The increase in oil and gas production was primarily the
result of acquisitions closed during the previous twelve months and the
results of the Company's drilling program. Over this period, the Company
expended $142 million and $87 million in connection with its acquisition and
drilling programs, respectively.
Oil and Gas Prices. On a natural gas equivalent basis, the Company received
an average price of $2.32 per Mcfe for the quarter ended June 30, 1996, a
decrease of 16% from the $2.77 per Mcfe received for the second quarter of
1995. The Company's gas production yielded an average price of $2.18 per Mcf,
a decrease of 20% from the $2.73 per Mcf for the prior year second quarter,
due primarily to the expiration of the Sonora Gas Contract. The average gas
price for the second quarter of 1996 was enhanced $.02 per Mcf as a result of
the Company's hedging activities. The average gas price for the second
quarter of 1995 was enhanced $.56 per Mcf as a result of Fixed-Price Contracts
in effect for that period. The average oil price received for the second
quarter of 1996 was $18.84 per Bbl, an increase of 7% compared to $17.68 per
Bbl for the prior-year second quarter. The 1996 second quarter average oil
price decreased $1.95 per Bbl as a result of the Company's hedging activities.
Fixed-Price Contracts hedging the Company's crude oil production during the
second quarter of 1995 decreased the average price by $.25 per Bbl.
The combination of higher gas production and lower average gas prices
increased gas sales to $35.7 million for the second quarter of 1996 compared
to $30.6 million for the second quarter of 1995, an increase of 17%. The
14
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
combined effect of higher oil production and higher average oil prices was to
increase oil sales by 23% to $8.8 million from the $7.1 million reported for
the second quarter of 1995. See additional discussion under "Fixed-Price
Contracts."
Other Income. Other income for the second quarter of 1996 was $1.4 million
compared to $469,000 for the second quarter of 1995. The 1996 second quarter
amount is higher primarily due to the recognition of a $1.0 million
installment payment received from Midcon Offshore, Inc. in connection with a
$10.8 million judgment in the Company's favor. Collectibility of the balance
of the judgment ($9.8 million) is uncertain. Accordingly, no amounts have
been recorded with respect to the balance of the judgment in the accompanying
financial statements as of June 30, 1996. The Company will recognize income
as future payments are received.
Operating Costs. Operating costs, which include direct lease operating
expenses and production taxes, increased to $11.1 million for the second
quarter of 1996 compared to $7.7 million for second quarter of 1995. This
increase is principally attributable to producing properties acquired and
wells drilled during the previous twelve months. On an equivalent unit of
production basis, total operating costs remained relatively constant at $.58
per Mcfe for the second quarter of 1996 compared to $.57 per Mcfe for the
prior-year second quarter.
General and Administrative Expense. General and administrative expense
("G&A") for the second quarter of 1996 was $4.1 million compared to $4.0
million for the prior-year second quarter. On an equivalent unit of
production basis, G&A decreased to $.21 per Mcfe for the 1996 second quarter
compared to $.29 per Mcfe for the second quarter of 1995, a decrease of 28%.
This decrease is primarily attributable to the significant growth achieved in
oil and gas production without corresponding increases in personnel and
associated costs.
Exploration Costs. Exploration costs, primarily comprised of geological and
geophysical costs, were $242,000 for the quarter ended June 30, 1996. Through
the first six months of 1996, the Company had drilled five exploratory wells,
all of which were successfully completed.
Depreciation, Depletion, Amortization and Impairment. Depreciation,
depletion, amortization and impairment ("DD&A") for the second quarter of 1996
was $16.7 million compared to $13.2 million for the prior-year second quarter.
This increase in DD&A is attributable to the increase in production volumes
previously discussed. The oil and gas DD&A rate per equivalent unit of
production (including leasehold impairment) was $.82 per Mcfe for the second
quarter of 1996 compared to $.91 per Mcfe for the second quarter of 1995.
This decrease in rate is due principally to favorable finding cost results
attributable to the Company's acquisition and drilling programs during the
twelve-month period and to a SFAS 121 impairment charge taken in the fourth
quarter of 1995.
15
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Interest Expense. Interest expense for the second quarter of 1996 was $6.9
million compared to $4.7 million for the second quarter of 1995. This
increase is primarily attributable to a higher level of outstanding
indebtedness for the 1996 second quarter as a result of acquisitions funded
with availability under the Company's $300 million bank credit facility. The
net impact of interest rate swaps in effect for the second quarter of 1996 was
to increase interest expense by $320,000. The net impact of interest rate
swaps in effect during the second quarter of 1995 was to decrease interest
expense by $122,000. See "Capital Resources and Liquidity -- Credit
Facility."
Income Taxes. For the second quarter of 1996, the Company recorded an
income tax provision of $2.2 million on pretax income of $6.8 million, an
effective rate of 33%. This compares to an income tax provision of $2.8
million on pretax income of $8.6 million, an effective rate of 33%, for the
second quarter of 1995. The effective rate for both quarters was lower than
the statutory rate primarily due to the availability of Section 29 credits.
RESULTS OF OPERATIONS -- SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS
ENDED JUNE 30, 1995.
Net Income and Cash Flows from Operating Activities. The Company realized
net income of $6.8 million, or $.24 per share, on total revenue of $85.7
million for the six months ended June 30, 1996. This compares with net income
of $11.5 million, or $.41 per share, on total revenue of $77.6 million for the
first six months of 1995. Cash flows from operating activities (before
working capital changes) for the first six months of 1996 decreased 5% to
$41.7 million from the $43.9 million reported for the first six months of
1995. The decrease in earnings and cash flows was primarily the result of the
expiration of the Sonora Gas Contract.
Production. The Company produced 36.5 Bcfe for the first six months of 1996
compared to 27.3 Bcfe for the comparable prior-year period. This increase in
overall production is principally attributable to producing property
acquisitions made during the previous twelve months and to the results of the
Company's drilling program. Natural gas production for the six months ended
June 30, 1996 was 31.0 Bcf, a 39% increase over the 22.4 Bcf produced in the
first half of 1995. Oil production for the first six months of 1996 increased
10% to 915 MBbls compared to 831 MBbls for the first six months of 1995.
Oil and Gas Prices. On a natural gas equivalent basis, the Company received
an average price of $2.29 per Mcfe for the first six months of 1996, a
decrease of 18% compared to $2.78 per Mcfe for the first six months of 1995.
The average gas price for the first six months of 1996 was $2.16 per Mcf, a
decrease of 21% compared to $2.74 per Mcf for the six months ended June 30,
1995. These declines were primarily the result of the expiration of the
Sonora Gas Contract. The Company's average gas price for the first six months
of 1996 was enhanced $.06 per Mcf as a result of the Company's hedging
activities. The average gas price for the first six months of 1995 was
enhanced $.63 per Mcf as a result of Fixed-Price Contracts in effect for that
16
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
period. The average oil price for the first six months of 1996 was $18.45 per
Bbl compared to $17.91 per Bbl for the first six months of 1995. The average
oil price for the current year six-month period decreased $1.21 per Bbl as a
result of Fixed-Price Contracts in effect for the period. The effect of
Fixed-Price Contracts hedging the Company's crude oil production during the
first six months of 1995 was to increase the average price by $.49 per Bbl.
The combination of higher gas production and lower average gas prices
increased gas sales to $66.8 million for the first six months of 1996, an
increase of 9% from the $61.2 million reported for the first six months of
1995. The combined effect of higher oil production and higher average oil
prices was to increase oil sales by 13% to $16.9 million compared to $14.9
million for the prior-year six-month period.
Other Income. Other income for the first six months of 1996 was $2.0
million compared to $1.5 million for the first six months of 1995. This
increase is primarily due to the recognition of a $1.0 million installment
payment received from Midcon Offshore, Inc. in connection with a $10.8 million
judgment in the Company's favor. Collectibility of the balance of the
judgment ($9.8 million) is uncertain. Accordingly, no amounts have been
recorded with respect to the balance of the judgment in the accompanying
financial statements as of June 30, 1996. The Company will recognize income
as future payments are received.
Operating Costs. Operating costs, which include direct lease operating
expenses and production taxes, increased to $21.5 million for the first six
months of 1996 compared to $16.0 million for the first six months of 1995.
This increase is principally attributable to producing properties acquired
and wells drilled during the previous twelve months. On a natural gas
equivalent basis, total operating costs remained relatively constant at $.59
per Mcfe for the first six months of 1996 compared to $.58 per Mcfe for the
comparable prior-year period.
General and Administrative Expense. G&A for the first six months of 1996
was $8.4 million compared to $8.3 million for the comparable prior-year
period. On a natural gas equivalent basis, G&A decreased to $.23 per Mcfe for
the first six months of 1996 compared to $.30 per Mcfe for the first six
months of 1995, a decrease of 23%. This decrease is primarily attributable to
the significant growth achieved in oil and gas production without
corresponding increases in personnel and related costs.
Exploration Costs. Exploration costs, primarily comprised of geological and
geophysical costs, were $242,000 for the six months ended June 30, 1996.
Through the first six months of 1996, the Company had drilled five exploratory
wells, all of which were successfully completed.
Depreciation, Depletion, Amortization and Impairment. DD&A for the first
six months of 1996 was $31.7 million compared to $26.6 million for the first
six months of 1995. This increase in DD&A is attributable to the increase in
17
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
production volumes previously discussed. The oil and gas DD&A rate per
equivalent unit of production (including leasehold impairment) was $.82 per
Mcfe for the first six months of 1996 and $.91 per Mcfe for the first six
months of 1995. This decrease in rate is due principally to favorable finding
cost results attributable to the Company's acquisition and drilling programs
during the previous twelve-month period and to a SFAS 121 impairment charge
taken in the fourth quarter of 1995.
Interest Expense. For the six months ended June 30, 1996, interest expense
was $13.7 million compared to $9.5 million for the first six months of 1995.
This increase is primarily attributable to a higher level of outstanding
indebtedness for the first six months of 1996 as a result of acquisitions
funded with availability under the Company's $300 million bank credit
facility. The net impact of interest rate swaps in effect during the first
six months of 1996 was to increase interest expense by $532,000. Interest
rate swaps in effect for the first six months of 1995 decreased interest costs
by $288,000. See "Capital Resources and Liquidity -- Credit Facility."
Income Taxes. For the first six months of 1996, the Company recorded a tax
provision of $3.3 million on pretax income of $10.1 million, an effective rate
of 33%. This compares to a tax provision of $5.7 million provided on pretax
income of $17.2 million for the first six months of 1995, an effective rate of
33%. The effective rate for both periods was lower than the statutory rate
primarily due to the availability of Section 29 credits.
CAPITAL RESOURCES AND LIQUIDITY
General. For the six-month period ended June 30, 1996, the Company funded
its investing activities primarily through cash provided by operating
activities, bank borrowings and other financing activities. The Company's
income (excluding gains and losses on sales and retirements of assets and
non-cash charges and writedowns) before deduction for interest, income taxes,
and DD&A ("EBITDA") increased from $54.2 million for the first six months of
1995 to $55.7 million for the first six months of 1996. This increase in
EBITDA has occurred primarily as a result of the increase in the Company's oil
and gas sales between the two periods. The Company's $300 million bank credit
facility and the indenture agreement for the 9-1/4% Senior Subordinated Notes
due 2004 include certain covenants based in part on EBITDA. However, EBITDA
should not be considered an alternative to net income as an indicator of
Company operating performance or an alternative to cash flows as a measure of
liquidity.
Credit Facility. The Company has a revolving credit facility with a
syndicate of banks (the "Credit Facility"), as most recently amended July 31,
1996 to reduce the pricing and extend the maturity, which provides for
borrowings and letters of credit up to the lesser of the Commitment or the Oil
and Gas Reserves Loan Value as defined by the agreement. The maximum amount
of letters of credit available for issuance thereunder is further limited to
$75 million. The Oil and Gas Reserves Loan Value is based on a periodic
valuation of the Company's oil and gas reserves and Fixed-Price Contracts,
18
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
subject to certain adjustments, and was most recently reset to be $315 million
in June 1996. The Commitment is $300 million and reduces at the rate of
$18.75 million per quarter commencing October 31, 1999 through July 31, 2003.
Prior to the July 31, 1996 amendment, the Commitment began reducing in
December 1997. The Company has relied upon the Credit Facility to provide
funds for acquisitions and to provide letters of credit to meet the Company's
margin requirements under Fixed-Price Contracts. See "Fixed-Price Contracts
- -- Margining." As of June 30, 1996, the Company had $226.0 million of
principal and $3.4 million of letters of credit outstanding under the Credit
Facility.
The Company has the option of either borrowing at a LIBOR-based interest
rate or the Base Rate (approximating the prime rate). The agreement also
provides for a competitive bid option for borrowings under the facility. The
LIBOR interest rate margin under the facility is subject to a sliding scale
based on the relationship of outstanding indebtedness to the discounted
present value of the Company's oil and gas reserves and Fixed-Price Contracts.
The LIBOR interest rate margin beginning July 31, 1996 varies from .25% to
.55% per annum (compared to .50% to 1% before the July 31, 1996 amendment).
At July 31, 1996, the applicable interest rate was LIBOR plus .30%. The
amended Credit Facility also requires the payment of a facility fee equal to
.20% of the Commitment beginning July 31, 1996, compared to a commitment fee
ranging from .125% to .25% per annum plus a facility fee of .125% prior to the
amendment.
The Credit Facility contains various affirmative and restrictive covenants.
These covenants, among other things, limit additional indebtedness, the extent
to which volumes under Fixed-Price Contracts can exceed proved reserves in any
year and in the aggregate, the sale of assets and the payment of dividends,
and require the Company to meet certain financial tests. Borrowings under the
Credit Facility are unsecured.
The Company has entered into interest rate swaps to hedge the interest rate
exposure associated with the Credit Facility. As of June 30, 1996, the
Company had fixed the interest rate on average notional amounts of $126
million for the balance of 1996, and $153 million, $99 million and $33 million
for the years ending December 31, 1997, 1998 and 1999, respectively. Under
the interest rate swaps, the Company receives the LIBOR three-month rate (5.6%
at June 30, 1996) and pays an average rate of 6.1% for the balance of 1996,
and 6.1%, 6.3% and 6.5% for the years ending December 31, 1997, 1998 and 1999,
respectively. The notional amounts are less than the maximum amount
anticipated to be available under the Credit Facility in such years. As of
June 30, 1996, the effective interest rate for borrowings under the Credit
Facility, including the effect of interest rate swaps, was 6.8%. On June 28,
1996, the Company entered into an additional interest rate swap under which
the Company pays the LIBOR three-month rate and receives 7.1% on a notional
amount of $25 million. This interest rate swap is in effect through June 28,
2004.
19
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Subordinated Notes. In June 1994, the Company completed the sale of $100
million of 9-1/4% Senior Subordinated Notes due 2004 (the "Notes") in a public
offering. The Notes were sold at 98.534% of face value to yield 9.48% to
maturity. Interest is payable semi-annually on June 15 and December 15.
Proceeds from the offering were used to retire outstanding indebtedness under
the Credit Facility and for general working capital purposes. The associated
indenture agreement contains certain restrictive covenants which limit, among
other things, the prepayment of the Notes, the incurrence of additional
indebtedness, the payment of dividends and the disposition of assets.
Other. The Company has certain other unsecured lines of credit available to
it which aggregated $53 million as of June 30, 1996. Such short-term lines of
credit are primarily used to meet letter of credit obligations under
Fixed-Price Contracts and for working capital purposes. At June 30, 1996, the
Company has $13.1 million of indebtedness and $17.9 million of letters of
credit outstanding under such credit lines. Repayment of indebtedness
thereunder is expected to be made through Credit Facility availability.
The Company believes that the borrowing capacity currently available under
the Credit Facility, combined with the Company's internal cash flows, will be
adequate to finance the capital expenditure program planned for the balance of
1996 and to meet the Company's obligations under its Fixed-Price Contracts.
See "Commitments and Capital Expenditures" and "Fixed-Price Contracts --
Margining." At June 30, 1996, the Company had working capital of $13.6
million and a current ratio of 1.4 to 1. Total long-term debt outstanding at
June 30, 1996 was $337.9 million. The Company's long-term debt as a
percentage of its total capitalization was 58%.
COMMITMENTS AND CAPITAL EXPENDITURES
The Company's primary business strategy is to increase production and
reserves through acquisition, development and exploration activities. For the
six months ended June 30, 1996, the Company expended $76.2 million in
connection with this strategy, including $6.8 million for exploration
projects, funded principally through internally generated cash flows, bank
borrowings and other investing activities. For the balance of 1996, the
Company currently plans to spend approximately $43 million in connection with
its drilling program, the vast majority of which is development drilling,
focused principally in its core operating areas of Sonora, the Mid-Continent,
the Permian Region and the Gulf Coast. Such planned expenditure levels
include approximately $8 million of additional exploration drilling and other
exploration costs. Actual levels of drilling, development and exploration
expenditures may vary due to many factors, including drilling results, new
drilling opportunities, oil and natural gas prices and acquisition
opportunities. As of August 6, 1996, the Company had drilled 152 wells, 143
of which were successfully completed as producers, and an additional 36 wells
were in progress.
On April 4, 1996, the Company purchased certain producing oil and gas
properties and associated leasehold acreage from Coastal Oil and Gas Company
20
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
for $30.5 million. The properties, which are located primarily in Oklahoma,
consist of approximately 60 Bcfe of proved reserves attributable to
approximately 800 wells. The Company continues to actively search for
attractive proved reserve acquisitions but is not able to predict the timing
or amount of any capital expenditure which may be employed in acquisitions.
Additionally, from time to time the Company may identify non-strategic oil and
gas assets for divestiture. The Company is not currently obligated to make
any material acquisitions or divestitures.
FIXED-PRICE CONTRACTS
Description of Contracts. Oil and gas prices are subject to significant and
often volatile fluctuation. Historically, the Company has entered into
Fixed-Price Contracts to reduce exposure to unfavorable changes in such
prices. The Company's Fixed-Price Contracts are comprised of energy swaps for
both crude oil and natural gas, and physical delivery contracts for natural
gas. These contracts allow the Company to predict with greater certainty the
effective oil and gas prices to be received for its hedged production and
benefit the Company when market prices are less than the fixed prices provided
in its Fixed-Price Contracts. However, for its hedged production, the Company
will not benefit from market prices that are higher than the fixed prices in
such contracts. During the first six months of 1996, Fixed-Price Contracts
hedged 50% of the Company's gas production and 70% of its oil production.
Moreover, as of June 30, 1996, Fixed-Price Contracts are in place to hedge
approximately 60% of the Company's estimated future production from proved gas
reserves through the year 2000 and 476 MBbls of oil for the balance of 1996.
Under its energy swap sales contracts, the Company receives a fixed price
for the respective commodity and pays a floating market price (generally a
NYMEX-based or regional spot market index), as defined in each contract, to
the counterparty. For its physical delivery contracts, the Company purchases
gas in the spot market at floating market prices and delivers such gas to the
contract counterparty for a fixed price. Under its energy swap purchase
contracts, the Company pays a fixed price for the commodity and receives a
floating market price.
21
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
The following table summarizes the volumes, fixed prices and future amounts
to be received (or paid) under the Company's Fixed-Price Contracts as of June
30, 1996. Such amounts do not reflect the future floating price payments (in
the case of energy swaps) or the future cost of supplying gas (in the case of
physical delivery contracts) pursuant to these contracts.
FIXED-PRICE CONTRACTS (1)
Six
Months
Ending Years Ending December 31, Balance
December -------------------------------------- through
31, 1996 1997 1998 1999 2000 2017 Total
-------- -------- -------- -------- -------- -------- ----------
NATURAL GAS SWAPS
Sales Contracts
Contract volumes
(BBtu) (2) . . . . . . . . -- 4,247 13,833 15,832 9,843 37,360 81,115
Weighted average
fixed price per MMBtu. . . $ -- $ 2.19 $ 2.33 $ 2.44 $ 2.46 $ 2.96 $ 2.65
Future receipts (M$) . . . $ -- $ 9,285 $ 32,259 $ 38,644 $ 24,192 $110,572 $ 214,952
Purchase Contracts
Contract volumes (BBtu). . -- (1,825) (9,125) (10,950) -- -- (21,900)
Weighted average
fixed price per MMBtu. . . $ -- $ 2.01 $ 2.09 $ 2.18 $ -- $ -- $ 2.13
Future payments (M$) . . . $ -- $ (3,668) $(19,108) $(23,880) $ -- $ -- $ (46,656)
NATURAL GAS PHYSICAL
DELIVERY CONTRACTS
Contract volumes (BBtu). . 14,851 32,510 36,059 28,203 26,750 161,391 299,764
Weighted average fixed
price per MMBtu. . . . . . $ 2.42 $ 2.48 $ 2.62 $ 2.82 $ 3.02 $ 3.97 $ 3.38
Future receipts (M$) . . . $ 35,862 $ 80,716 $ 94,564 $ 79,576 $ 80,892 $640,840 $1,012,450
CRUDE OIL SWAPS
Contract volumes (MBbls) . 476 -- -- -- -- -- 476
Weighted average fixed
price per Bbl. . . . . . . $ 19.45 $ -- $ -- $ -- $ -- $ -- $ 19.45
Future receipts (M$) . . . $ 9,256 $ -- $ -- $ -- $ -- $ -- $ 9,256
<FN>
(1)- The Company expects the prices to be realized for its hedged production will be less than
the prices shown due to location, quality and other factors which create a differential
between wellhead prices and the floating prices under its Fixed-Price Contracts. See
"Fixed-Price Contracts -- Market Risk."
(2)- Includes 20,000 BBtu attributable to a natural gas swap entered into with an affiliate in
April 1996. See "Significant New Contracts."
Accounting. The differential between the fixed price and the floating price
for each contract settlement period multiplied by the associated contract
volumes is the contract profit or loss. The realized contract profit or loss
is included in oil and gas sales in the period for which the underlying
commodity was hedged. All of the Company's Fixed-Price Contracts have been
22
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
executed in connection with its natural gas and crude oil hedging program and
not for trading purposes. Consequently, no amounts are reflected in the
Company's balance sheet or income statement related to changes in market value
of the contracts. If a Fixed-Price Contract is liquidated, sold or monetized
prior to maturity, the gain or loss is deferred and amortized into oil and
gas sales over the original life of the contract.
In June 1996, the Company and an unaffiliated counterparty to one of its
fixed-price contracts amended the terms of a fixed-price natural gas contract
to monetize the premium in the fixed prices provided by the contract.
Pursuant to the amendment, the Company received a non-refundable payment in
the amount of $25.0 million. As consideration for this payment, the weighted
average fixed price over the remaining 17 years of the contract was reduced
from $3.20 per MMBtu to $2.37 per MMBtu, approximating the forward market
prices for natural gas at the time. The payment has been reflected in the
Company's balance sheet as a deferred hedging gain and will be amortized
into earnings over the life of the underlying contract. As of June 30, 1996,
the balance of deferred hedging gains was $28.9 million; the amount of
deferred hedging losses was not material.
Credit Risk. The terms of the Company's Fixed-Price Contracts generally
provide for monthly settlements and energy swap contracts provide for the
netting of payments. The counterparties to the contracts are comprised of
independent power producers, pipeline marketing affiliates, financial
institutions, a municipality and S.A. Louis Dreyfus et Cie, among others. In
some cases, the Company requires letters of credit or corporate guarantees to
secure the performance obligations of the contract counterparty. Should a
counterparty to a contract default or cancel a contract, there can be no
assurance that the Company would be able to enter into a new contract with a
third party on terms comparable to the original contract. The loss of a
contract would subject a greater portion of the Company's oil and gas
production to market prices and could adversely affect the carrying value of
the Company's oil and gas properties and the amount of borrowing capacity
available under the Credit Facility. See "Capital Resources and Liquidity."
Two Fixed-Price Contracts which hedge an aggregate 111 Bcf of natural gas as
of June 30, 1996 are with independent power producers who sell electrical
power under firm fixed-price contracts to Niagara Mohawk Corporation ("NIMO"),
a New York state utility. As of June 30, 1996, the fixed prices provided by
these contracts were "in the money" in relation to quoted forward market
prices for natural gas by approximately $136 million (discounted at 10%).
This premium in the fixed prices is not reflected in the Company's financial
statements until realized. The ability of these independent power producers
to perform their obligations to the Company is largely dependent on the
continued performance by NIMO of its power purchase obligations. NIMO in
recent years has initiated judicial and regulatory proceedings designed to
curtail power purchase obligations under its contracts with non-regulated
power generators. As of June 30, 1996, NIMO had not been successful in these
proceedings. In April 1996, the Federal Energy Regulatory Commission issued
23
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Order No. 888 which, among other things, affirmed the ability of public
utilities to recover stranded investment costs when open-access transmission
rules become effective. The implications of Order No. 888 are far reaching
and its ultimate impact to NIMO is unknown; however, the order is anticipated
to allow NIMO to recover costs, such as power purchase obligations with
non-regulated power generators which have become "stranded" as the result of
customers having access to electricity from other generators through NIMO's
transmission system. On August 1, 1996, NIMO announced that it has offered to
terminate 44 independent power contracts, including those to the Company's
counterparties, in exchange for a combination of cash and debt securities from
a newly restructured NIMO. The terms of the offer have not been made public.
At this time, the likelihood of NIMO's proposal being accepted cannot be
predicted, nor can any potential impact on future counterparty performance if
the proposal is accepted. The Company has not experienced non-performance by
any counterparty.
Market Risk. The Company's Fixed-Price Contracts hedge 359 Bcf of proved
natural gas reserves, substantially all of which are proved developed
reserves, and 476 MBbls of oil at fixed prices. If the Company's proved
reserves are produced at rates less than anticipated, the volumes specified
under the Fixed-Price Contracts may exceed production volumes. In such case,
the Company would be required to satisfy its contractual commitments at market
prices in effect for each settlement period, which may be above the contract
price, without a corresponding offset in wellhead revenue for such volumes.
The Company expects future production volumes to be equal to or greater than
the volumes provided for in its contracts.
The differential between the floating price paid under each swap contract,
or the cost of gas to supply physical delivery contracts, and the price
received at the wellhead for the Company's production is termed "basis" and is
the result of differences in location, quality, contract terms, timing and
other factors. The effective price realizations which result from the
Company's Fixed-Price Contracts are affected by movements in basis. For its
gas production in 1994 and 1995, the Company realized approximately 11% and 3%
less than the prices specified in its natural gas fixed-price contracts due to
basis, respectively. For its oil production hedged by Fixed-Price Contracts
in 1994 and 1995, the Company realized approximately 8% and 7% less than the
prices specified in such contracts, respectively. For the six months ended
June 30, 1996, the Company received approximately 6% and 5% less than the
prices specified in its natural gas contracts and crude oil contracts,
respectively. Such results do not include the $4.3 million basis charge
recognized in the fourth quarter of 1995, discussed below. Basis results for
the first six months of 1996 are not necessarily indicative of the results to
be expected for the full year. Basis movements can result from a number of
variables, including temporary regional market aberrations, changes in the
Company's portfolio of Fixed-Price Contracts and the composition of the
Company's producing property base. Basis movements are generally considerably
less than the price movements affecting the underlying commodity, but their
effect can be significant. A 1% change in price realization for hedged
24
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
natural gas production for the remaining six months of 1996 would represent a
$359,000 change in gas sales. A 1% change in price realization for hedged oil
production for the remaining six months of 1996 would represent a $93,000
change in oil sales. The Company actively manages its exposure to basis
movements and from time to time will enter into contracts designed to reduce
such exposure.
In the first quarter of 1996, the Company experienced an unprecedented
widening of basis for certain of its Fixed-Price Contracts. These particular
contracts have floating indices tied to the NYMEX natural gas contract or
involve the purchase of gas in the spot market priced at or near the Henry Hub
delivery point in Louisiana. The Henry Hub price has historically had high
correlation to the market prices received by the Company for its gas
production, making such contracts effective natural gas price hedges. This
effectiveness, however, was lost for the first quarter 1996 settlement
periods. As a result, the Company recognized a $4.3 million charge in the
fourth quarter of 1995 (when the anomaly was identified) to reflect the
estimated basis loss incurred. To reduce exposure to Henry Hub basis
volatility, the Company monetized a 20-Bcf contract with S.A. Louis Dreyfus et
Cie in January 1996, receiving $1.6 million in proceeds. These proceeds are
being amortized into oil and gas sales over the original 19-month contract
term which commenced January 1996. The Company has also entered into several
basis swaps with third parties which are designed to substantially eliminate
the Company's exposure to Henry Hub basis volatility over the next five years.
Margining. The Company is required to post margin in the form of bank
letters of credit under certain of its Fixed-Price Contracts. In some cases,
the amount of such margin is fixed; in others, the amount changes as the
market value of the respective contract changes, or if certain financial tests
are not met. During 1994 and 1995, the maximum aggregate amount of margin
posted by the Company was $41.0 million and $23.4 million, respectively. If
natural gas prices were to rise, or if the Company fails to meet the financial
tests contained in certain of its Fixed-Price Contracts, margin requirements
could increase significantly. The Company believes that it will be able to
meet such requirements through the Credit Facility and such other credit lines
that it has or may obtain in the future. If the Company is unable to meet its
margin requirements, a contract could be terminated and the Company could be
required to pay damages to the counterparty which generally approximate the
cost to the counterparty of replacing the contract. At June 30, 1996, the
Company had issued margin in the form of letters of credit and treasury bills
totaling $20.4 million and $3.9 million, respectively.
Significant New Contracts. The Company entered into two long-term,
Fixed-Price Contracts to hedge a portion of the production acquired from
Coastal Oil and Gas Company. The first contract is a ten-year, 20-Bcf natural
gas swap with Duke/Louis Dreyfus L.L.C., an affiliate, which commences June
1997. The fixed prices in this contract range from $2.05 to $2.51 per MMBtu.
The second contract, which was entered into with an unrelated third party, is
a five-year, 9-Bcf natural gas swap that provides an average fixed price of
25
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
$2.10 per MMBtu. This contract also commences June 1997.
ESTIMATES FOR FISCAL YEAR 1996
General. The fiscal year 1996 estimates provided under this caption and
other statements in this document other than purely historical information
(collectively "Forward-Looking Statements") are based on the Company's
historical operating trends, its proved reserves as of December 31, 1995, its
Fixed-Price Contract position as of June 30, 1996 and other information
available to Management. These statements assume that market conditions for
the Company's oil and gas production are comparable to those experienced in
1995 as modified for changes in oil and gas prices through July 1996. These
statements also assume that no significant changes occur in the operating
environment for the Company's oil and gas properties. And finally, the
Forward-Looking Statements assume no material changes in the composition of
the Company's property base as the result of material acquisitions or
divestitures except as disclosed herein. The COMPANY CAUTIONS THAT THE
FORWARD-LOOKING STATEMENTS PROVIDED HEREIN ARE SUBJECT TO ALL THE RISKS AND
UNCERTAINTIES INCIDENT TO THE ACQUISITION, DEVELOPMENT AND MARKETING OF, AND
EXPLORATION FOR, OIL AND GAS RESERVES. THESE RISKS INCLUDE, BUT ARE NOT
LIMITED TO, COMMODITY PRICE RISK, ENVIRONMENTAL RISK, DRILLING RISK, RESERVE,
OPERATIONS AND PRODUCTION RISK, AND COUNTERPARTY RISK. CERTAIN OF THESE RISKS
ARE DESCRIBED ELSEWHERE HEREIN. MOREOVER, THE COMPANY MAY MAKE MATERIAL
ACQUISITIONS OR DIVESTITURES, MODIFY ITS FIXED-PRICE CONTRACT POSITION BY
ENTERING INTO NEW CONTRACTS OR TERMINATING EXISTING CONTRACTS, OR ENTER INTO
FINANCING TRANSACTIONS. NONE OF THESE CAN BE PREDICTED WITH CERTAINTY AND,
ACCORDINGLY, ARE NOT TAKEN INTO CONSIDERATION IN THE FORWARD-LOOKING
STATEMENTS MADE HEREIN. FOR ALL OF THE FOREGOING REASONS, ACTUAL RESULTS MAY
DIFFER MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS AND THERE IS NO
ASSURANCE THAT THE ASSUMPTIONS USED ARE NECESSARILY THE MOST LIKELY.
Reference is made to "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Estimates for Fiscal Year 1996"
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1995 and in the Company's Form 10-Q for the quarter ended March
31, 1996. Subject to the uncertainties identified in the preceding paragraph,
no material modifications to previously disclosed estimates are deemed
necessary.
26
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 1996 Annual Meeting of Shareholders was held on May 21, 1996. The
following matters were submitted to a vote of the Company's shareholders:
1. The election of eight 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 26,592,867 votes for; 122,871 votes withheld; 0
votes abstaining
Simon B. Rich, Jr. 26,704,267 votes for; 11,471 votes withheld; 0
votes abstaining
Mark E. Monroe 26,704,267 votes for; 11,471 votes withheld; 0
votes abstaining
Richard E. Bross 26,704,267 votes for; 11,471 votes withheld; 0
votes abstaining
Daniel R. Finn, Jr. 26,704,267 votes for; 11,471 votes withheld; 0
votes abstaining
John J. Hogan, Jr. 26,704,267 votes for; 11,471 votes withheld; 0
votes abstaining
James R. Paul 26,704,467 votes for; 11,271 votes withheld; 0
votes abstaining
James T. Rodgers, III 26,704,467 votes for; 11,271 votes withheld; 0
votes abstaining
2. Ratification of the selection of Ernst & Young as independent auditors of
the Company for the year ending December 31, 1996. The results of the
shareholder vote included 26,709,098 votes for; 6,190 votes against; and 450
votes abstaining.
Item 5 -- None
Item 6 -- Exhibits and Reports on Form 8-K
Exhibits:
10.1 -- Amendment to Loan Agreement dated as of July 31, 1996.
No reports on Form 8-K.
27
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 12, 1996 /s/ Jeffrey A. Bonney
-----------------------------------
Jeffrey A. Bonney
Vice President and Chief Accounting Officer
28
EXHIBIT 10.1
AMENDMENT TO LOAN AGREEMENT
This Amendment ("Amendment") is made and entered into to be effective the
31st day of July, 1996 among Louis Dreyfus Natural Gas Corp., an Oklahoma
corporation (the "Borrower"), the financial institutions (the "Banks") who are
parties to the Loan Agreement (as hereinafter defined), and Banque Paribas
(New York Branch), as administrative agent for the Banks under the Loan
Agreement (the "Administrative Agent") with reference to the following
circumstances:
A. The Borrower and the Banks entered into a Loan Agreement dated as of
October 6, 1994 providing for, among other things, a three year revolving
credit facility in the maximum amount of $300,000,000, followed by a four year
declining revolving credit facility with the final maturity of September 30,
2001 (the "Loan Agreement").
B. NBD Bank, N.A. has previously assigned its interest in the Loan
Agreement and the Loans and Loan Documents to The First National Bank of
Chicago and simultaneously with the effectiveness of this Amendment Midland
Bank, PLC New York Branch and The First National Bank of Boston are assigning
their respective interests in the Loan Agreement and the Loans and Loan
Documents to Christiana Bank OG Kreditkasse (which is increasing its
Commitment by $5,000,000 as a result thereof) and to Royal Bank of Canada and
The Bank of Nova Scotia (each of which are becoming Banks under the Loan
Agreement with a Commitment of $25,000,000 as a result thereof).
C. The Borrower and the Banks desire to amend the Loan Agreement to extend
the maturity and to reduce the interest rate and fees payable thereunder.
NOW, THEREFORE, the parties hereto agree as follows:
1. DEFINITIONS. All capitalized terms used but not otherwise defined
herein shall have the meanings provided in the Loan Agreement.
2. AMENDMENTS TO LOAN AGREEMENT. The Borrower, the Banks, the Co-Agents
and the LC Issuer hereby agree that the Loan Agreement shall be amended as
follows:
29
2.1 The table in the definition of "Applicable Margin" in Section 1.1 shall
be amended to read as follows:
Applicable
Margin will be
-------------------------------------
For Interest Beginning For Interest
"If the Percentage Relationship July 31, 1996 and Beginning
of Debt to PV10 is then the Ending July 30, 2001 July 31, 2001
- ------------------------------- ---------------------- --------------
Greater than 50 percent .55 percent .675 percent
Greater than 30 percent, .30 percent .425 percent
but not greater than 50 percent
30 percent or less .25 percent .375 percent"
2.2 The definition of "Commitment Reduction Amount" in Section 1.1
shall be amended by deleting "September 30, 1997" and inserting in lieu
thereof "July 31, 1999".
2.3 The definition of "Commitment Termination Date" in Section 1.1
shall be amended by deleting "September 30, 2001" and inserting "July 31,
2003" in lieu thereof.
2.4 The definition of "Quarterly Date" in Section 1.1 shall be amended
to read as follows:
" QUARTERLY DATE' shall mean each April 30, July 31, October 31 and
January 31 during the period commencing on October 30, 1996 and
ending on the Commitment Termination Date."
2.5 The definition of "Quarterly Reduction Date" in Section 1.1 shall
be amended to read as follows:
" QUARTERLY REDUCTION DATE' shall mean October 31, 1999 and each
January 31, April 30, July 31 and October 31 thereafter until the
Commitment Termination Date, or if any of those dates is not a
Business Day, then the Business Day immediately following this date."
2.6 The definition of "Report Date" in Section 1.1 shall be amended by
(a) deleting "60" wherever it appears and inserting "90" in lieu thereof; and
(b) deleting "1994" and "1995" and inserting "1996" in lieu thereof.
2.7 The definition of "Reserve Evaluation Report" shall be amended by
deleting "60" in clause (i) and inserting "90" in lieu thereof.
2.8 Section 3.4(a) shall be amended to read in its entirety as follows:
"(a) The Borrower will pay to the Administrative Agent for the
account of each Bank on each Quarterly Date for the quarter ending on
that Quarterly Date during the period commencing July 31, 1996 and
30
ending on the Commitment Termination Date an amount computed on the basis of a
year of 360 days and actual days elapsed, which shall be equal to 0.20% of the
average daily aggregate amount of the Commitments during that quarter."
2.9 Section 10.17 shall be amended to delete all references therein to
"2002" and insert "2004" in lieu thereof.
3. EFFECTIVENESS OF AMENDMENT. This Amendment shall become a binding
agreement of the parties when the Administrative Agent shall have received
executed counterparts of this Amendment from the Borrower and each Bank.
4. EFFECT ON EXISTING LOANS. The interest rate on any and all Eurodollar
Loans outstanding as of July 31, 1996 shall be automatically adjusted as of
such date to reflect the new Applicable Margin as provided herein.
5. STATUS OF LOAN DOCUMENTS. This Amendment shall be limited solely for
the purposes and to the extent expressly set forth herein and nothing herein
expressed or implied shall constitute an amendment, supplement, waiver or
other modification to or of any other term, provision or condition of the Loan
Agreement or any other Loan Documents. Except as expressly modified hereby,
the terms, provisions of the Loan Agreement and the other Loan Documents shall
continue in full force and effect and are hereby ratified and confirmed in all
respects.
6. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, all of which together taken together shall constitute one
agreement and any of the parties hereto may enter into this Amendment by
executing and delivering such a counterpart.
7. GOVERNING LAWS. This amendment shall be construed in accordance with
and be governed by the laws governing the Loan Agreement.
31
The parties have caused this Amendment to be duly executed as of the day and
year first above written.
LOUIS DREYFUS NATURAL GAS CORP.
By:
------------------------------
Name:
----------------------
Title:
----------------------
Date:
----------------------
BANQUE PARIBAS (NEW YORK BRANCH)
By:
------------------------------
Name:
----------------------
Title:
----------------------
Date:
----------------------
CITIBANK, N.A.
By:
------------------------------
Name:
----------------------
Title:
----------------------
Date:
----------------------
BANK OF MONTREAL
By:
------------------------------
Name:
----------------------
Title:
----------------------
Date:
----------------------
32
CHRISTIANIA BANK
OG KREDITKASSE
By:
------------------------------
Name:
----------------------
Title:
----------------------
Date:
----------------------
CIBC, INC.
By:
------------------------------
Name:
----------------------
Title:
----------------------
Date:
----------------------
ROYAL BANK OF CANADA
By:
------------------------------
Name:
----------------------
Title:
----------------------
Date:
----------------------
THE FIRST NATIONAL BANK OF CHICAGO
By:
------------------------------
Name:
----------------------
Title:
----------------------
Date:
----------------------
33
THE BANK OF NOVA SCOTIA
By:
------------------------------
Name:
----------------------
Title:
----------------------
Date:
----------------------
NATIONSBANK OF TEXAS, N.A.
By:
------------------------------
Name:
----------------------
Title:
----------------------
Date:
----------------------
ABN AMRO BANK N.V., Houston Agency
By: ABN AMRO NORTH AMERICAN, INC.
As Agent
By:
------------------------------
Name:
----------------------
Title:
----------------------
Date:
----------------------
THE CHASE MANHATTAN BANK, N.A.
By:
------------------------------
Name:
----------------------
Title:
----------------------
Date:
----------------------