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 March 31, 1998
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 .
----- -----
40,109,758 shares of common stock, $.01 par value, issued and outstanding at
May 14, 1998.
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LOUIS DREYFUS NATURAL GAS CORP.
Table of Contents
PART I. FINANCIAL INFORMATION Page
CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Consolidated Balance Sheets:
December 31, 1997 and March 31, 1998 . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations:
Three months ended March 31, 1997 and 1998. . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows:
Three months ended March 31, 1997 and 1998. . . . . . . . . . . . . . 6
Condensed Notes to Consolidated Financial Statements. . . . . . . . . . 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . 12
PART II. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . 23
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LOUIS DREYFUS NATURAL GAS CORP.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
A S S E T S
December 31, March 31,
1997 1998
----------- -----------
(unaudited)
CURRENT ASSETS
Cash and cash equivalents. . . . . . . . . . . . . $ 5,538 $ 5,543
Receivables:
Oil and gas sales . . . . . . . . . . . . . . . . 46,192 37,705
Costs reimbursable by insurance . . . . . . . . . 22,406 21,349
Joint interest and other. . . . . . . . . . . 14,311 15,944
Deposits . . . . . . . . . . . . . . . . . . . . . 4,467 3,002
Inventory and other. . . . . . . . . . . . . . . . 9,883 7,665
----------- -----------
Total current assets. . . . . . . . . . . . . . . 102,797 91,208
----------- -----------
PROPERTY AND EQUIPMENT, at cost, based on
successful efforts accounting . . . . . . . . . . 1,404,784 1,458,794
Less accumulated depreciation, depletion
and amortization . . . . . . . . . . . . . . . . (305,769) (337,078)
----------- -----------
1,099,015 1,121,716
----------- -----------
OTHER ASSETS, net. . . . . . . . . . . . . . . . . 9,142 8,896
=========== ===========
$ 1,210,954 $ 1,221,820
=========== ===========
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LOUIS DREYFUS NATURAL GAS CORP.
CONSOLIDATED BALANCE SHEETS
(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, March 31,
1997 1998
----------- -----------
(unaudited)
CURRENT LIABILITIES
Accounts payable . . . . . . . . . . . . . . . . . $ 61,197 $ 43,230
Accrued liabilities. . . . . . . . . . . . . . . . 22,258 23,662
Revenues payable . . . . . . . . . . . . . . . . . 16,111 14,232
----------- -----------
Total current liabilities . . . . . . . . . . . . 99,566 81,124
----------- -----------
LONG-TERM DEBT . . . . . . . . . . . . . . . . . . 563,344 597,911
----------- -----------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred revenue . . . . . . . . . . . . . . . . . 17,387 16,951
Deferred gains from price-risk
management activities . . . . . . . . . . . . . . 23,453 23,231
Deferred income taxes. . . . . . . . . . . . . . . 21,896 20,369
Other. . . . . . . . . . . . . . . . . . . . . . . 16,104 14,850
----------- -----------
78,840 75,401
----------- -----------
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,
40,088,258 and 40,104,008 shares, respectively . . 401 401
Additional paid-in capital . . . . . . . . . . . . 418,751 418,974
Retained earnings. . . . . . . . . . . . . . . . . 50,052 48,009
----------- -----------
469,204 467,384
----------- -----------
$ 1,210,954 $ 1,221,820
=========== ============
See accompanying notes to consolidated financial statements.
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LOUIS DREYFUS NATURAL GAS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(in thousands, except per share data)
Three Months Ended
March 31,
------------------
1997 1998
-------- --------
REVENUES
Oil and gas sales . . . . . . . . . . . . . . . . . . . $ 51,766 $ 67,914
Other income. . . . . . . . . . . . . . . . . . . . . . 9,296 1,682
-------- --------
61,062 69,596
-------- --------
EXPENSES
Operating costs . . . . . . . . . . . . . . . . . . . . 11,290 17,021
General and administrative. . . . . . . . . . . . . . . 3,992 6,203
Exploration costs . . . . . . . . . . . . . . . . . . . 2,165 7,580
Depreciation, depletion and amortization. . . . . . . . 15,753 32,041
Interest. . . . . . . . . . . . . . . . . . . . . . . . 6,269 10,046
-------- --------
39,469 72,891
-------- --------
Income (loss) before income taxes . . . . . . . . . . . 21,593 (3,295)
Income taxes. . . . . . . . . . . . . . . . . . . . . . 7,558 (1,252)
-------- --------
NET INCOME (LOSS) . . . . . . . . . . . . . . . . . . . $ 14,035 $ (2,043)
======== ========
Net income (loss) per share - basic and diluted . . . . $ .50 $ (.05)
======== ========
Weighted average diluted common shares outstanding. . . 27,880 40,099
======== ========
See accompanying notes to consolidated financial statements.
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LOUIS DREYFUS NATURAL GAS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in thousands)
Three Months Ended
March 31,
------------------
1997 1998
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,035 $ (2,043)
Items not affecting cash flows:
Depreciation, depletion and amortization . . . . . . . . . . . . . . . 15,753 32,041
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . 6,975 (1,527)
Exploration costs. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,165 7,580
Gain on sale of property . . . . . . . . . . . . . . . . . . . . . . . (8,572) (63)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 157
Net change in operating assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . 8,884 7,911
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,167 1,465
Inventory and other. . . . . . . . . . . . . . . . . . . . . . . . . . (558) 2,218
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . (13,526) (17,967)
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 1,444 1,404
Revenues payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,774 (1,879)
-------- --------
29,600 29,297
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Exploration and development expenditures. . . . . . . . . . . . . . . . (27,770) (58,622)
Acquisition of oil and gas properties . . . . . . . . . . . . . . . . . (6,996) (3,551)
Additions to other property and equipment . . . . . . . . . . . . . . . (171) (721)
Proceeds from sale of property and equipment. . . . . . . . . . . . . . 26,388 88
Change in other assets. . . . . . . . . . . . . . . . . . . . . . . . . (61) (173)
-------- --------
(8,610) (62,979)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank borrowings . . . . . . . . . . . . . . . . . . . . . 61,075 155,075
Repayments of bank borrowings . . . . . . . . . . . . . . . . . . . . . (75,575) (120,575)
Proceeds from stock options exercised . . . . . . . . . . . . . . . . . 10 223
Change in deferred revenue. . . . . . . . . . . . . . . . . . . . . . . (395) (436)
Change in gains from price-risk management activities . . . . . . . . . (921) (222)
Change in other long-term liabilities . . . . . . . . . . . . . . . . . (2,832) (378)
-------- --------
(18,638) 33,687
-------- --------
Change in cash and cash equivalents . . . . . . . . . . . . . . . . . . 2,352 5
Cash and cash equivalents, beginning of period. . . . . . . . . . . . . 7,749 5,538
-------- --------
Cash and cash equivalents, end of period. . . . . . . . . . . . . . . . $ 10,101 $ 5,543
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid, net of capitalized interest. . . . . . . . . . . . . . . $ 3,636 $ 4,393
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . -- --
-------- --------
$ 3,636 $ 4,393
======== =========
See accompanying notes to consolidated financial statements.
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LOUIS DREYFUS NATURAL GAS CORP.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
March 31, 1998
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 period
ended March 31, 1998 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, 1997 for an expanded discussion of the Company's financial
disclosures and accounting policies.
NOTE 2 -- EARNINGS PER SHARE
In December 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS 128"), which changes the method
used to compute earnings per share and requires the restatement of all prior
periods to conform with the new calculation method. The calculation of basic
earnings per share for the three months ended March 31, 1997 pursuant to SFAS
128 did not result in a revision to the amount previously reported. Weighted
average common shares outstanding used in the calculation of basic earnings
per share for the three months ended March 31, 1997 and 1998 (in thousands)
were 27,801 and 40,099, respectively. Weighted average diluted common shares
outstanding for the first quarter of 1997 includes the effect of dilutive
stock options. Reference is made to the Notes to Consolidated Financial
Statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997 for a description of potentially dilutive securities
of the Company.
NOTE 3 -- COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130") on January 1, 1998, which is
effective for fiscal years beginning after December 15, 1997. The provisions
of SFAS 130 require the Company to classify items of other comprehensive
income in the financial statements and display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of the statement of financial position.
Also, reclassification of financial statements for all prior periods is
required for comparative purposes. For the three-month periods ended March
31, 1997 and 1998, the provisions of SFAS 130 were immaterial.
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LOUIS DREYFUS NATURAL GAS CORP.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 1998
NOTE 4 -- ACQUISITION OF AMERICAN EXPLORATION COMPANY
In October 1997, the Company acquired 100% of the outstanding common stock
of American Exploration Company ("American"), a Houston-based, publicly-held
independent energy company with exploration and development activities
focused primarily in South Texas, the Texas State Waters, the Cotton Valley
Reef Trend in East Texas and the Smackover Trend in Arkansas (the "American
Acquisition"). The acquisition consideration paid consisted of approximately
11.3 million shares of LDNG Common Stock valued at $17.15 per share and $47.2
million of cash. In addition, LDNG assumed $116 million of American long-term
debt, $20 million liquidation value of American preferred stock, and warrants
and options valued at $10.3 million. The acquisition consisted of 217 Bcfe of
proved reserves, approximately 3,500 producing wells, 1.0 million gross acres
of developed leasehold, 2.0 million gross acres of undeveloped leasehold and
other assets and liabilities. The purchase method was used to account for
this acquisition.
NOTE 5 -- CONTINGENCIES
Litigation. On December 22, 1995, the United States District Court for the
Western District of Oklahoma entered a $10.8 million 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. In January 1996, Midcon delivered a $10.8 million
promissory note to the Company secured by first and second liens on assets of
Midcon, payable in full on or before December 15, 1996 in settlement of
disputes in connection with this litigation. On December 16, 1996, Midcon
filed for protection from its creditors under Chapter 11 of the United States
Bankruptcy Code in the United States Bankruptcy Court, Southern District of
Texas, Corpus Christi Division. On January 27, 1997, Midcon filed an action
in the bankruptcy court alleging that Midcon's action in connection with the
settlement constituted fraudulent transfers or avoidable preferences and
seeking a return of amounts paid under the note and also seeking a release of
the liens securing the payment obligation under the note. The complaint filed
in the action also alleged certain affirmative claims against the Company
including injury to reputation and loss of business opportunity. The
complaint also seeks subordination of the Company's claim. The court denied
the Company's motion to dismiss the complaint. The Company considers the
allegations in the complaint to be without merit and will vigorously defend
against this action. Collection of unpaid interest and principal on the
Midcon note is uncertain and no amounts have been recorded with respect
thereto in the accompanying financial statements as of March 31, 1998. The
Company will recognize income as any payments are received.
In February 1995, a lawsuit was filed in the United States District Court in
Denver, Colorado, by KN Gas Supply Services, Inc. ("KNGSS"), requesting
declaratory judgment that KNGSS had the right to reduce the contract price for
gas produced from the Bowdoin Field, a property obtained in the American
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LOUIS DREYFUS NATURAL GAS CORP.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 1998
Acquisition, to market levels from October 1, 1993 forward. KNGSS alleges
that it has overpaid American and seeks a refund of approximately $7.7 million
for the period through September 1996. KNGSS has not updated its refund claim
through the present date. A motion for summary judgment was filed by American
in July 1996 and was argued before the court in February 1997. The Company
assumed responsibility for this lawsuit in connection with the American
Acquisition. In February 1998, the court ruled in favor of the Company's
motion. KNGSS subsequently filed an appeal which has not been heard.
Although the Company cannot predict the ultimate outcome of this proceeding,
it will continue to vigorously defend its interests in this case and does not
expect the outcome of the case to have a material adverse impact on its
financial position or results of operations.
American was a defendant in various other legal proceedings for which the
Company also assumed responsibility in the American Acquisition. The largest
of such legal claims was for an alleged underpayment of royalty of $3.2
million plus interest. In addition, American had received preliminary and
final royalty underpayment determinations from the Minerals Management Service
aggregating approximately $2.8 million plus interest in connection with
certain gas contract settlements made in prior years. The Company is a
defendant in additional pending legal proceedings 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 believe that the outcome of
these matters will have a material adverse effect on the Company.
Insurance Recovery. On April 1, 1997, a blowout and fire occurred during
the drilling of a horizontal development well at East Cameron Block 328
located in federal waters offshore Louisiana (later acquired by the Company in
the American Acquisition). The upper structure of the platform was severely
damaged, requiring its dismantlement. The Company completed the construction
of the new production deck and restored production from the platform in April
of 1998. The platform is currently producing 2,100 barrels and 7.7 MMcf per
day net to the Company's interest.
The Company carries various types of insurance relating to the blowout and
as of March 31, 1998, had recognized a liability of approximately $2.1 million
for certain estimated costs that may not be recoverable through insurance. At
this stage of the Company's insurance claim, it is not possible to quantify
what other amounts, if any, will not be recoverable from insurance or legally
responsible third parties. If the Company is unable to recover a significant
portion of its costs from insurance or other third parties, the additional
costs to be incurred could result in the recognition of an impairment charge.
The MMS, which has jurisdiction over operations in federal waters, is required
by regulation to investigate this type of incident and to make a public
report. To date, the MMS has not issued any report regarding the blowout.
As of March 31, 1998, costs incurred for the recovery effort at East Cameron
Block 328 totaled approximately $44.4 million, $23.1 million of which has been
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LOUIS DREYFUS NATURAL GAS CORP.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 1998
reimbursed by insurance companies. The balance of $21.3 million is reflected
as a receivable in the accompanying consolidated balance sheet.
Fixed-Price Contracts. Two fixed-price contracts which hedge an aggregate
93 Bcf of natural gas as of March 31, 1998 are with independent power
producers ("IPPs") which sell electrical power under firm fixed-price
contracts to Niagara Mohawk Corporation ("NIMO"), a New York state utility.
As of March 31, 1998, the net present value of the differential between the
fixed prices provided by these contracts and forward market prices, as
adjusted for estimated basis and discounted at 10%, was approximately $124
million. This premium in the fixed prices is not reflected in the Company's
financial statements until realized. For the years ended December 31, 1995,
1996 and 1997, these contracts contributed $9.6 million, $.9 million and $1.8
million, respectively, to natural gas sales. The ability of these IPPs to
perform their obligations to the Company is dependent on the continued
performance by NIMO of its power purchase obligations to the counterparties.
NIMO has taken aggressive regulatory, judicial and contractual actions in
recent years seeking to curtail power purchase obligations, including its
obligations to the IPPs that are counterparties to the Company's fixed-price
contracts described above, and has further stated that its future financial
prospects are dependent on its ability to resolve these obligations, along
with other matters.
In July 1997, NIMO entered into a Master Restructuring Agreement (the "MRA")
with 16 IPPs, including the Company's counterparties. Pursuant to the MRA,
the power purchase agreements between NIMO and the IPPs would be terminated,
restated or amended, in exchange for an aggregate of $3.6 billion in cash, $50
million in notes or cash, 46 million shares of NIMO common stock and certain
fixed-price swap contracts. The allocation of the consideration among the
IPPs has not been disclosed. The closing of the MRA is conditioned upon,
among other things, NIMO and the IPPs negotiating their individual restated
and amended contracts, the receipt of all regulatory approvals, the IPPs
entering into new third party arrangements which will enable each IPP to
restructure its projects on a reasonably satisfactory economic basis, NIMO
having completed all necessary financing arrangements and NIMO and the IPPs
having received all necessary approvals from their respective boards of
directors, shareholders and partners.
In connection with the MRA, the Company agreed to terminate one of the
fixed-price contracts which supplies 4 Bcf of natural gas annually to one of
the IPPs. The gas price provided in the contract is currently $2.89 per MMBtu
and escalates to $6.64 per MMBtu by the end of the contract's term in 2006.
The termination agreement is subject to the IPP's participation in the closing
of the MRA with NIMO. The terms of the termination agreement are subject to a
confidentiality agreement but the termination will result in the monetization
of the contract and will not have a material adverse effect on the operating
results of the Company.
NIMO announced that as of May 7, the date by which each of the IPPs had to
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LOUIS DREYFUS NATURAL GAS CORP.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 1998
either satisfy or waive third-party conditions, only one of the IPPs had
withdrawn from the MRA and announced that the closing date of the MRA is June
30, subject to certain conditions, including the successful financing of the
MRA and NIMO common stockholder approval of the issuance of common stock to
the IPPs. The Company sells 6 Bcf of natural gas annually to the IPP which
withdrew from the MRA. Accordingly, the Company will continue to deliver
natural gas pursuant to the terms of the gas supply contract which expires in
2007.
At this time, the Company cannot predict whether the conditions precedent to
the closing of the MRA will ultimately be satisfied. Any proceeds received by
the Company in consideration for termination of a fixed-price contract would
be used to repay indebtedness outstanding under the bank credit facility and
would be reflected under current accounting rules in the Company's balance
sheet as a deferred hedging gain to be amortized into oil and gas revenues
over the original life of the underlying contract. Cancellation of a contract
would subject a greater portion of the Company's gas production to market
prices, which in a low gas price environment could adversely affect the
carrying value of the Company's oil and gas properties and could otherwise
have an adverse effect on the Company if the consideration received for
cancellation was less than the contract fair value.
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LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
General. The Company's 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. Over the five-year period
ended December 31, 1997, this strategy has resulted in a 220% increase in
proved reserves to 1.2 Tcfe. In addition, production levels have increased
194% to 84 Bcfe and cash flows from operating activities have increased 483%
to $129.8 million. Excluding a one-time impairment charge recognized in
connection with the American Acquisition, the Company also realized record
results of operations for 1997.
The majority of the Company's growth has come from proved reserve
acquisitions geographically concentrated in its core areas: the Sonora area
of West Texas; the Mid-Continent area of Oklahoma, Kansas and the Panhandle of
Texas; the Western area of West Texas and Southeast New Mexico; the Gulf Coast
area of South Texas; the Offshore area in the Gulf of Mexico; and the Arklatex
area of East Texas, Southwest Arkansas and Northern Louisiana (collectively
"Core Areas"), where the Company has significant expertise and where the
Company benefits from operational synergies. During this five-year period,
the Company made proved reserve acquisitions aggregating 853 Bcfe, purchased
for a total consideration of $729.3 million, or $.86 per Mcfe. Of particular
significance was the American Acquisition which was completed in October 1997.
See related discussion under Note 4 of the Condensed Notes to Consolidated
Financial Statements, "Merger with American Exploration Company", appearing
elsewhere in this document.
The Company's drilling program over this five-year period resulted in the
drilling of 1,159 gross (721 net wells), with an overall drilling success rate
of 94%, adding 362 Bcfe of reserves (including revisions of previous
estimates) to its proved reserve base. The year ended December 31, 1997
marked the fourth consecutive year that the Company replaced its production by
both its acquisition and drilling programs. Total finding and development
costs (total costs incurred to acquire, explore and develop oil and gas
properties divided by the increase in proved reserves through acquisitions of
proved properties, extensions and discoveries, and revisions of previous
estimates) over this five-year period averaged $1.03 per Mcfe. The Company
has increasingly emphasized exploration as an integral component of its
business strategy and in connection therewith, has incurred substantial
up-front costs, including significant acreage positions, seismic costs and
other geological and geophysical costs. During 1997, the Company invested
$128 million in connection with exploration activities, including $98 million
allocated to the unproved acreage position obtained in the American
Acquisition. This significant commitment has had the impact of increasing
finding costs in the near term, but is expected to result in future reserve
additions at more favorable rates.
The Company has a portfolio of fixed-price contracts comprised of long-term
physical delivery contracts, energy swaps, collars, futures contracts, basis
13
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
swaps and option agreements (collectively "Fixed-Price Contracts"). As of
March 31, 1998, the Company's Fixed-Price Contracts hedged 303 Bcfe of future
production at escalating fixed prices, representing 25% of its estimated
proved reserves. These fixed prices are presently significantly higher than
the forward market prices for natural gas. Over the past few years,
competition in Fixed-Price Contracts has increased, opportunities for
attractive Fixed-Price Contracts have diminished and spot prices for natural
gas are higher than nearby forward market prices. In response to these
changes, a progressively smaller share of the Company's production and reserve
growth has been hedged due to a reluctance to sell into the prevailing forward
market where prices trend down or are essentially flat over the next several
years. More recent hedging activity has been for shorter periods of time,
generally less than 12 months, when market conditions have been viewed as
favorable. The Company may decide to hedge a greater or smaller share of
production in the future depending upon market conditions, capital investment
considerations and other factors. See "Fixed-Price Contracts".
Forward-Looking Statements. All statements in this document concerning the
Company other than purely historical information (collectively
"Forward-Looking Statements") reflect the current expectations of management
and are based on the Company's historical operating trends, its proved reserve
and Fixed-Price Contract positions and other information currently available
to management. Such Forward-Looking Statements include, among others,
statements regarding the Company's future drilling plans and objectives and
related exploration and development budgets and number and location of planned
wells, and statements regarding the quality of the Company's properties and
potential reserve and production levels. These statements assume, among other
things, that no significant changes will occur in the operating environment
for the Company's oil and gas properties and that there will be no material
acquisitions or divestitures except as disclosed herein. The Company cautions
that the Forward-Looking Statements 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 risks, counterparty risks, drilling risks,
reserves, operations or production risks. Certain of these risks are
described herein and in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997. Moreover, the Company may make material acquisitions
and modify its Fixed-Price Contract positions by entering into new contracts
or terminating existing contracts or entering 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 vary materially from the
Forward-Looking Statements and there is no assurance that the assumptions used
are necessarily the most likely. The Company disclaims any obligation or
undertaking to release publicly any updates regarding any changes in the
Company's expectations with regard to the subject matter of any
Forward-Looking Statements or any changes in events, conditions or
circumstances on which any Forward-Looking Statements are based.
14
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Certain Definitions. As used herein, the abbreviations listed below are
defined as follows:
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. Billion Btus.
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.
MMBtu. Million Btus.
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.
TBtu. Trillion Btus.
15
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
March 31,
--------------------
1997 1998
-------- --------
Oil and Gas Sales: (M$)
Wellhead oil sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,517 $ 11,485
Effect of Fixed-Price Contracts (1) . . . . . . . . . . . . . . . . . . . (109) 496
-------- --------
Total oil sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,408 $ 11,981
======== ========
Wellhead natural gas sales. . . . . . . . . . . . . . . . . . . . . . . . $ 46,596 $ 52,335
Effect of Fixed-Price Contracts (1) . . . . . . . . . . . . . . . . . . . (4,238) 3,598
-------- --------
Total natural gas sales . . . . . . . . . . . . . . . . . . . . . . . . . $ 42,358 $ 55,933
======== ========
PRODUCTION:
Oil production (MBbls). . . . . . . . . . . . . . . . . . . . . . . . . . 423 825
Natural gas production (MMcf) . . . . . . . . . . . . . . . . . . . . . . 15,476 24,954
Net equivalent production (MMcfe) . . . . . . . . . . . . . . . . . . . . 18,012 29,903
Oil production hedged by Fixed-Price Contracts (MBbls). . . . . . . . . . 180 79
Gas production hedged by Fixed-Price Contracts (BBtu) . . . . . . . . . . 8,809 11,330
AVERAGE SALES PRICE:
Oil (per Bbl):
Wellhead price. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22.52 $ 13.93
Effect of Fixed-Price Contracts (1) . . . . . . . . . . . . . . . . . . (.26) .60
-------- --------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22.26 $ 14.53
======== ========
Average fixed price received under Fixed-Price Contracts. . . . . . . . $ 22.32 $ 22.20
Net effective realization (2) . . . . . . . . . . . . . . . . . . . . . 99% 92%
Natural gas (per Mcf):
Wellhead price. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3.01 $ 2.10
Effect of Fixed-Price Contracts (1) . . . . . . . . . . . . . . . . . . (.27) .14
-------- --------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.74 $ 2.24
======== ========
Average fixed price received under Fixed-Price Contracts. . . . . . . . $ 2.50 $ 2.62
Net effective realization (2) . . . . . . . . . . . . . . . . . . . . . 102% 92%
Equivalent price (per Mcfe) . . . . . . . . . . . . . . . . . . . . . . . $ 2.87 $ 2.27
EXPENSES: (per Mcfe)
Operating costs:
Lease operating . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .47 $ .45
Production taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . .16 .12
General and administrative. . . . . . . . . . . . . . . . . . . . . . . . .22 .21
Depreciation, depletion and amortization - oil and gas. . . . . . . . . . .81 1.03
(1) - Represents the hedging results from the Company's Fixed-Price Contracts. See
"Fixed-Price Contracts."
(2) - Represents the net effective 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."
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 MARCH 31, 1998 COMPARED TO THREE
MONTHS ENDED MARCH 31, 1997
Net Income (Loss) and Cash Flows from Operating Activities. For the quarter
ended March 31, 1998, the Company realized a net loss of $2.0 million, or
$0.05 per share, on total revenue of $69.6 million. This compares with net
income of $14.0 million, or $.50 per share, on total revenue of $61.1 million
for the first quarter of 1997. Cash flows from operating activities (before
working capital changes) for the first quarter of 1998 were $36.1 million
compared to $30.4 million reported for the first quarter of 1997, an increase
of 19%. The decrease in first quarter 1998 earnings was primarily the result
of lower oil and gas prices, a higher depletion rate per Mcfe and higher
geological and geophysical expenditures made during the first quarter of 1998.
In addition, net income for the first quarter of 1997 included a $5.5 million
after-tax gain on the sale of a West Texas waterflood property. The increase
in cash flows provided by operating activities (before working capital
changes) was primarily driven by significant production growth as described
below. Cash flows provided by operating activities after consideration of the
net change in working capital decreased to $29.3 million from the $29.6
million reported for the first quarter of 1997, primarily due to a decrease in
accounts payable.
Production. The Company produced 29.9 Bcfe for the first quarter of 1998
compared to 18.0 Bcfe for the prior-year first quarter, an increase of 66%.
Gas production increased to 25.0 Bcf compared to 15.5 Bcf for the first
quarter of 1997, an increase of 61%. Oil production for the first quarter of
1998 increased 95% to 825 MBbls compared to 423 MBbls for the prior-year first
quarter. These increases are primarily attributable to the American
Acquisition and the results of the Company's exploration and development
drilling activities.
Oil and Gas Prices. On a natural gas equivalent basis, the Company received
an average price of $2.27 per Mcfe for the quarter ended March 31, 1998, a
decrease of 21% from the $2.87 received for the first quarter of 1997. The
Company's gas production yielded an average price of $2.24 per Mcf, a decrease
of 18% compared to $2.74 per Mcf for the prior-year first quarter. The
Company's average gas price for the 1998 first quarter was enhanced $.14 per
Mcf as a result of the Company's hedging activities. The average gas price
for the first quarter of 1997 was reduced $.27 as a result of the Fixed-Price
Contracts in effect for that period. The average oil price for the first
quarter of 1998 was $14.53 per Bbl compared to $22.26 per Bbl for the
prior-year first quarter. The 1998 first quarter average oil price was
enhanced $.60 per Bbl as a result of the Company's hedging activities.
Fixed-Price contracts in effect during the first quarter of 1997 decreased the
average oil price by $.26 per Bbl.
The combination of higher gas production and lower gas prices increased gas
sales to $55.9 million for the first quarter of 1998 compared to $42.4 million
for the first quarter of 1997. The net effect of higher oil production and
lower oil prices increased oil sales to $12.0 million compared to $9.4 million
17
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
reported for the prior-year quarter. The aggregate impact of the Company's
oil and gas hedging activities was to increase oil and gas sales by $4.1
million for the quarter ended March 31, 1998 and to decrease oil and gas sales
by $4.3 million for the quarter ended March 31, 1997. See "Fixed-Price
Contracts."
Other Income. Other income for the first quarter of 1998 was $1.7 million
compared to $9.3 million for the first quarter of 1997. The 1997 amount
included a net gain of $8.5 million realized upon the sale of a non-core West
Texas waterflood property.
Operating Costs. Operating costs for the first quarter of 1998 were
comprised of $13.4 million of lease operating expenses and $3.6 million of
production taxes. This compares to $8.4 million of lease operating expenses
and $2.9 million of production taxes for the first quarter of 1997. These
increases are principally attributable to producing properties acquired and
wells drilled during the previous twelve months. Lease operating expenses on
a natural gas equivalent unit of production basis improved to $.45 per Mcfe
compared to $.47 for the three months ended March 31, 1997.
General and Administrative Expense. General and administrative expense
("G&A") for the first quarter of 1998 was $6.2 million, an increase of 55%
from the prior-year first quarter amount of $4.0 million. This increase is
primarily attributable to increases in personnel and related costs as a result
of the American Acquisition. On a natural gas equivalent unit of production
basis, G&A decreased 5% to $.21 per Mcfe for the 1998 first quarter compared
to $.22 for the first quarter of 1997.
Exploration Costs. Exploration costs, comprised of geological and
geophysical costs, exploratory dry holes and leasehold impairment costs, were
$7.6 million for the quarter ended March 31, 1998, compared to $2.2 million
for the first quarter of 1997. The 1998 amount consists of $4.1 million of
seismic acquisition and other geological and geophysical costs and $3.5
million of dry hole costs. The 1997 amount consists of $.7 million of seismic
acquisition costs, $1.0 million of dry hole costs and $.5 million of leasehold
costs.
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization ("DD&A") for the first quarter of 1998 was $32.0 million compared
to $15.8 million for the prior-year first quarter. This increase in DD&A is
attributable to higher production levels and an increase in the oil and gas
DD&A rate. The oil and gas DD&A rate per equivalent unit of production was
$1.03 for the 1998 first quarter compared to $.81 for the first quarter of
1997. This increase was due primarily to the American Acquisition purchase
price allocated to proved reserves using the purchase method of accounting.
Interest Expense. Interest expense for the first quarter of 1998 was $10.0
million compared to $6.3 million for the first quarter of 1997. This increase
is primarily attributable to a higher level of outstanding indebtedness for
18
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
the 1998 first quarter as a result of the American Acquisition. On a natural
gas equivalent unit of production basis, interest costs improved to $.34 per
Mcfe compared to $.35 per Mcfe for the first quarter of 1997. The net impact
of interest rate swaps in effect for the first quarter of 1998 and 1997 was
not material. See "Capital Resources and Liquidity -- Credit Facility."
Income Taxes. For the first quarter of 1998, the Company recorded a tax
benefit of $1.3 million on a pre-tax loss of $3.3 million, an effective rate
of 38%. This compares to an income tax provision of $7.6 million provided on
pre-tax income of $21.6 million, an effective rate of 35%, for the first
quarter of 1997. The effective rate for the first quarter of 1997 was lower
than the statutory rate primarily due to the availability of Section 29
credits.
CAPITAL RESOURCES AND LIQUIDITY
Cash Flows. The Company's business of acquiring, exploring and developing
oil and gas properties is capital intensive. The Company's ability to grow
its reserve base is contingent, in part, upon its ability to generate cash
flows from operating activities and to access outside sources of capital to
fund its investing activities. For the quarters ended March 31, 1997 and
1998, the Company expended $34.8 million and $61.1 million, respectively, in
oil and gas property acquisition, exploration and development activities,
representing substantially all of the cash flows invested by the Company
during the three-month periods. See "Commitments and Capital Expenditures."
Cash flows from operating activities before changes in working capital for the
quarters ended March 31, 1997 and 1998 were $30.4 million and $36.1 million,
representing 87% and 59%, respectively, of the oil and gas property
investments made for each quarter. 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 or gas could result in lower cash flows from operating activities,
which could, in turn, impact the amount of capital invested by the Company.
See "Fixed-Price Contracts."
The Company received net proceeds of $26.2 million in connection with the
January 1997 sale of a non-core West Texas waterflood property. The proceeds
were applied initially to outstanding indebtedness. As a result, cash flows
from financing activities for the first quarter of 1997 reflected a net
application of cash of $18.6 million, compared to a $33.7 source of cash for
the first quarter of 1998. Historically, the Company has relied upon
availability under various revolving bank credit facilities and proceeds from
the issuance of senior and subordinated notes to fund its investing
activities.
The Company's EBITDAX increased from $45.8 million in the first quarter of
1997 to $46.4 million in the first quarter of 1998. EBITDAX is defined herein
as income (loss) before interest, income taxes, DD&A, impairments and
exploration costs. Increases in EBITDAX have occurred primarily as a result
of increases in the Company's oil and gas sales. LNDG believes that EBITDAX
19
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
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.
Credit Facility. In October 1997, in connection with the American
Acquisition, the Company replaced its $300 million borrowing base credit
facility with a new $550 million revolving credit facility (the "Credit
Facility"). Upon the issuance of senior notes in December 1997, the Company
reduced the aggregate commitment under the Credit Facility to $450 million
(the "Commitment"). The Credit Facility allows the Company to draw on the
full $450 million credit line without restrictions tied to periodic
revaluations of its oil and gas reserves provided the Company continues 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. Letters of credit are limited to
$75 million of such availability. No principal payments are required under
the Credit Facility prior to termination on October 14, 2002. The Company has
relied upon the Credit Facility and the predecessor bank facility to provide
funds for acquisitions and to provide letters of credit to meet the Company's
margin requirements under Fixed-Price Contracts. As of March 31, 1998, the
Company had $300.0 million of principal and $5.0 million of letters of credit
outstanding under the Credit Facility.
The Company has 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 the Company's senior debt credit rating. At March 31,
1998, 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. At March 31, 1998, the effective interest rate for
borrowings under the Credit Facility was 6.2%, including the effect of
interest rate swaps. See the Notes to Consolidated Financial Statements
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997 for an expanded discussion of the Company's 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 the Company to meet certain
financial tests. Borrowings under the Credit Facility are unsecured.
6 7/8% Senior Notes due 2007. In December 1997, the Company 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 the Company's ability to enter into
20
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
sale and leaseback transactions.
9 1/4% Subordinated Notes due 2004. In June 1994, the Company 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.
Other. The Company has certain other unsecured lines of credit available
to it which aggregated $42.8 million as of March 31, 1998. Such short-term
lines of credit are primarily used to meet margining requirements under
Fixed-Price Contracts and for working capital purposes. As of March 31, 1998,
the Company had $15.3 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 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 1998, and
to meet the Company's margin requirements under its Fixed-Price Contracts.
See "Commitments and Capital Expenditures" and "Fixed-Price Contracts --
Margining." At March 31, 1998, the Company had working capital of $10.1
million and a current ratio of 1.1 to 1. Total long-term debt outstanding at
March 31, 1998 was $597.9 million. The Company's long-term debt as a
percentage of its total capitalization was 56%.
COMMITMENTS AND CAPITAL EXPENDITURES
The Company's primary business strategy is to increase oil and gas
production and reserves through acquisition, development and exploration
activities. For the quarter ended March 31, 1998, the Company expended $61.1
million in connection with this strategy, including $42.7 million for
development activities, $15.9 million for exploration activities, the majority
of which was leasehold and seismic costs, and $2.5 million for proved reserve
acquisitions. This expenditure level resulted in the drilling of 86
development wells and 14 exploratory wells. Of these wells, 76 development
wells and 9 exploratory wells were successfully completed as producers, for a
completion success rate of 88% and 64%, respectively (an overall success rate
of 85%). For the balance of 1998, the Company currently plans to spend
approximately $141 million in connection with its drilling program focused
principally in its Core Areas. Such planned expenditure levels include
approximately $62 million of additional exploratory drilling, leasehold and
seismic costs. Actual levels of development and exploration expenditures may
vary due to many factors, including drilling results, new drilling
opportunities, oil and natural gas prices and acquisition opportunities. For
the year, the Company plans to drill approximately 400 wells, including 340
development wells and 60 exploratory wells.
21
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
The Company continues to actively search for attractive proved reserve
acquisitions but is not able to predict the timing or amount of capital
expenditure which may be employed in acquisitions during 1998 and is not
currently obligated to make any material acquisitions.
FIXED-PRICE CONTRACTS
Description of Contracts. The Company has entered into Fixed-Price
Contracts to reduce its exposure to unfavorable changes in oil and gas prices
which are subject to significant and often volatile fluctuation. The
Company's Fixed-Price Contracts are comprised of long-term physical delivery
contracts, energy swaps, collars, futures contracts, basis swaps and option
agreements. 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, the Company will not
benefit from market prices that are higher than the fixed prices in such
contracts for its hedged production. For the years ended December 31, 1995,
1996 and 1997, Fixed-Price Contracts hedged 84%, 51%, and 60% of the Company's
natural gas production not otherwise subject to fixed prices and 86%, 67% and
33% of its oil production, respectively. For the quarter ended March 31,
1998, Fixed-Price Contracts hedged 45% of the Company's natural gas production
and 10% of its oil production. As of March 31, 1998, Fixed-Price Contracts
are in place to hedge 303 Bcf of the Company's estimated future production
from proved gas reserves and none of its future oil production. See Note 5 of
the Condensed Notes to Consolidated Financial Statements, "Contingencies --
Fixed-Price Contracts," appearing elsewhere in this document.
Subsequent to December 31, 1997, the Company entered into five additional
fixed-price collars of 1.2 TBtu each which hedge an aggregate of 6.1 TBtu of
natural gas from June through September 1998. The collars contain floor
prices ranging from $2.10 MMBtu to $2.68 MMBtu and ceiling prices ranging from
$2.41 MMBtu to $2.99 MMBtu. For an expanded discussion of the Company's
Fixed-Price Contracts, see the Notes to Consolidated Financial Statements
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
OUTLOOK FOR FISCAL 1998
Reference is made to "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Outlook for Fiscal Year 1998" included
in the Company's Annual Report on Form 10-K for the year ended December 31,
1997 for an expanded discussion of 1998 estimates. Subject to the
uncertainties identified in "Forward-Looking Statements," no material
modifications to previously disclosed estimates are deemed necessary.
YEAR 2000 COMPLIANCE
The Company has been addressing the computer issues surrounding the ability
to appropriately account for periods and dates after December 31, 1999, both
in its offices and field locations. Many of the software applications
22
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
utilized by the Company are presently year 2000 compliant and the remaining
applications used internally are expected to be compliant by year end 1998.
The estimated cost of such compliance in the aggregate is not expected to be
material. The Company has additionally formed a task force to identify
situations where the Company may be exposed to year 2000 compliance by third
parties and to monitor the progress, to the extent information can be
obtained, of third parties as deemed appropriate. No assurance can be given,
however, that all material issues will have been identified, or that all third
parties will be compliant by the year 2000.
23
LOUIS DREYFUS NATURAL GAS CORP.
PART II. OTHER INFORMATION
Item 1 -- None
Item 2 -- Recent Sales of Unregistered Securities
In April 1998, the Company transferred a total of 55,000 shares
of its common stock to the trustee of a rabbi trust created by the
Company for the benefit of four senior executive officers of the
Company in exchange for an agreement on the part of such officers to
terminate their participation in another executive compensation plan
maintained by an affiliate of the Company. The shares were
transferred on the basis that no "sale" of the shares were involved
or, alternatively, in reliance on the private placement exemption
from registration under Section 4 (2) of the Securities Act of 1933.
Item 3 -- None
Item 4 -- None
Item 5 -- None
Item 6 -- Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 -- Form of Change in Control Agreements between Registrant and
Messrs. Mark E. Monroe, Jeffrey A. Bonney, Richard E. Bross,
Ronnie K. Irani and Kevin R. White.
10.2 -- Louis Dreyfus Natural Gas Corp. Deferred Stock Trust Agreement
dated April 14, 1998.
10.3 -- Deferred Stock Award Agreement dated March 31, 1998 between
Registrant and Mark E. Monroe.
10.4 -- Deferred Stock Award Agreement dated March 31, 1998 between
Registrant and Richard E. Bross.
10.5 -- Deferred Stock Award Agreement dated March 31, 1998 between
Registrant and Ronnie K. Irani.
10.6 -- Deferred Stock Award Agreement dated March 31, 1998 between
Registrant and Kevin R. White.
27.1 -- Financial Data Schedule
(b) Reports on Form 8-K:
A Form 8-K dated February 3, 1998 disclosing under Item 7 the financial
results of the Company for the three months and the year ended December
31, 1997.
A Form 8-K dated February 6, 1998 disclosing under Item 5 the following
information:
(1) The financial results of American Exploration Company for the three
months and nine months ended September 30, 1996 and 1997 and the
financial position of American Exploration Company as of December 31,
1996 and September 30, 1997.
24
LOUIS DREYFUS NATURAL GAS CORP.
PART II. OTHER INFORMATION (continued)
(2) Pro forma financial results of the Company for the nine months ended
September 30, 1997 and the pro forma financial position of the
Company as of September 30, 1997, giving effect to the acquisition of
American Exploration Company.
25
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: May 14, 1998 /s/ Jeffrey A. Bonney
---------------------------------------
Jeffrey A. Bonney
Executive Vice President and
Chief Financial Officer