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, 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
August 7, 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 June 30, 1998. . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations:
Three months and six months ended June 30, 1997 and 1998 . . . . . . 5
Consolidated Statements of Cash Flows:
Six months ended June 30, 1997 and 1998. . . . . . . . . . . . . . . 6
Condensed Notes to Consolidated Financial Statements . . . . . . . . . 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . . 11
PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . 25
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LOUIS DREYFUS NATURAL GAS CORP.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
A S S E T S
December 31, June 30,
1997 1998
----------- -----------
(unaudited)
CURRENT ASSETS
Cash and cash equivalents. . . . . . . . . . . . . $ 5,538 $ 6,150
Receivables:
Oil and gas sales. . . . . . . . . . . . . . . . 46,192 33,835
Joint interest and other . . . . . . . . . . . . 14,311 15,002
Section 29 credit properties conveyed. . . . . . -- 12,676
Costs reimbursable by insurance. . . . . . . . . 22,406 7,200
Deposits . . . . . . . . . . . . . . . . . . . . . 4,467 3,003
Inventory and other. . . . . . . . . . . . . . . . 9,883 5,374
----------- -----------
Total current assets . . . . . . . . . . . . . . 102,797 83,240
----------- -----------
PROPERTY AND EQUIPMENT, at cost, based on
successful efforts accounting. . . . . . . . . . 1,404,784 1,520,701
Less accumulated depreciation, depletion
and amortization . . . . . . . . . . . . . . . . (305,769) (370,759)
----------- -----------
1,099,015 1,149,942
----------- -----------
OTHER ASSETS, net. . . . . . . . . . . . . . . . . 9,142 8,537
----------- -----------
$ 1,210,954 $ 1,241,719
=========== ===========
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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,
1997 1998
----------- -----------
(unaudited)
CURRENT LIABILITIES
Accounts payable . . . . . . . . . . . . . . . . . $ 61,197 $ 49,001
Accrued liabilities. . . . . . . . . . . . . . . . 22,258 16,643
Revenues payable . . . . . . . . . . . . . . . . . 16,111 13,976
----------- -----------
Total current liabilities. . . . . . . . . . . . 99,566 79,620
----------- -----------
LONG-TERM DEBT . . . . . . . . . . . . . . . . . . 563,344 586,979
----------- -----------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred revenue . . . . . . . . . . . . . . . . . 17,387 28,745
Deferred gains from price-risk
management activities. . . . . . . . . . . . . . 23,453 63,002
Deferred income taxes. . . . . . . . . . . . . . . 21,896 13,610
Other. . . . . . . . . . . . . . . . . . . . . . . 16,104 12,669
----------- -----------
78,840 118,026
----------- -----------
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 40,109,758 shares, respectively . 401 401
Additional paid-in capital . . . . . . . . . . . . 418,751 419,075
Retained earnings. . . . . . . . . . . . . . . . . 50,052 37,618
----------- -----------
469,204 457,094
----------- -----------
$ 1,210,954 $ 1,241,719
=========== ===========
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 Six Months Ended
June 30, June 30,
------------------ ------------------
1997 1998 1997 1998
-------- -------- -------- --------
REVENUES
Oil and gas sales. . . . . . . . . . $ 44,336 $ 69,481 $ 96,102 $137,395
Other income . . . . . . . . . . . . 604 870 9,900 2,552
-------- -------- -------- --------
44,940 70,351 106,002 139,947
-------- -------- -------- --------
EXPENSES
Operating costs. . . . . . . . . . . 10,575 17,044 21,865 34,065
General and administrative . . . . . 3,899 6,336 7,891 12,539
Exploration costs. . . . . . . . . . 1,249 9,360 3,414 16,940
Depreciation, depletion and
amortization . . . . . . . . . . . 16,498 34,250 32,251 66,291
Impairment . . . . . . . . . . . . . -- 9,864 -- 9,864
Interest . . . . . . . . . . . . . . 6,250 10,372 12,519 20,418
-------- -------- -------- --------
38,471 87,226 77,940 160,117
-------- -------- -------- --------
Income (loss) before income taxes. . 6,469 (16,875) 28,062 (20,170)
Income taxes . . . . . . . . . . . . 2,264 (6,484) 9,822 (7,736)
-------- -------- -------- --------
NET INCOME (LOSS). . . . . . . . . . $ 4,205 $(10,391) $ 18,240 $(12,434)
======== ======== ======== ========
Net income (loss) per share:
Basic. . . . . . . . . . . . . . . . $ .15 $ (.26) $ .66 $ (.31)
======== ======== ======== ========
Diluted. . . . . . . . . . . . . . . $ .15 $ (.26) $ .65 $ (.31)
======== ======== ======== ========
Weighted average number of common
shares outstanding:
Basic. . . . . . . . . . . . . . . . 27,802 40,110 27,801 40,104
======== ======== ======== ========
Diluted. . . . . . . . . . . . . . . 27,862 40,110 27,873 40,104
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
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LOUIS DREYFUS NATURAL GAS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in thousands)
Six Months Ended
June 30,
------------------
1997 1998
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 18,240 $(12,434)
Items not affecting cash flows:
Depreciation, depletion and amortization . . . . . . . . . . . . . . . . . 32,251 66,291
Impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 9,864
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . 9,064 (8,286)
Exploration costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,414 16,940
Gain on sale of property . . . . . . . . . . . . . . . . . . . . . . . . . (8,617) (74)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119 316
Net change in operating assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,859 26,442
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,636 1,464
Inventory and other. . . . . . . . . . . . . . . . . . . . . . . . . . . . (465) 4,509
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,584) (12,196)
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . (175) (5,615)
Revenues payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214 (2,135)
-------- --------
53,956 85,086
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Exploration and development expenditures. . . . . . . . . . . . . . . . . . (62,590) (138,333)
Acquisition of oil and gas properties . . . . . . . . . . . . . . . . . . . (7,497) (4,575)
Additions to other property and equipment . . . . . . . . . . . . . . . . . (1,034) (1,658)
Proceeds from sale of property and equipment. . . . . . . . . . . . . . . . 26,862 565
Change in other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . -- (241)
-------- --------
(44,259) (144,242)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank borrowings . . . . . . . . . . . . . . . . . . . . . . . 123,575 329,514
Repayments of bank borrowings . . . . . . . . . . . . . . . . . . . . . . .(131,575) (306,014)
Proceeds from stock options exercised . . . . . . . . . . . . . . . . . . . 17 324
Change in deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . . (804) (888)
Change in gains from price-risk management activities . . . . . . . . . . . (2,108) 39,549
Change in other long-term liabilities . . . . . . . . . . . . . . . . . . . (2,391) (2,717)
-------- --------
(13,286) 59,768
-------- --------
Change in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . (3,589) 612
Cash and cash equivalents, beginning of period. . . . . . . . . . . . . . . 7,749 5,538
-------- --------
Cash and cash equivalents, end of period. . . . . . . . . . . . . . . . . .$ 4,160 $ 6,150
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid, net of capitalized interest. . . . . . . . . . . . . . . . .$ 11,713 $ 17,904
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 462 250
-------- --------
$ 12,175 $ 18,154
======== ========
See accompanying notes to consolidated financial statements.
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LOUIS DREYFUS NATURAL GAS CORP.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
JUNE 30, 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 and
six-month periods ended June 30, 1998 are not necessarily indicative of the
results to be expected for the full year. Certain reclassifications have been
made to the prior year financial 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 restatement of
earnings per share information for the 1997 periods pursuant to SFAS 128 was
not material. Weighted average diluted common shares outstanding for the
three months and six months ended June 30, 1997 include 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.
Reclassification of financial statements for all prior periods is required for
comparative purposes. For the three months and six months ended June 30, 1997
and 1998, the effects of the provisions of SFAS 130 were immaterial.
NOTE 4 -- ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), which is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Earlier application is permitted only as of the
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LOUIS DREYFUS NATURAL GAS CORP.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
JUNE 30, 1998
beginning of any fiscal quarter that begins after issuance of the statement.
SFAS 133 establishes new accounting and reporting guidelines for derivative
instruments and for hedging activities. It requires that all derivative
instruments be recognized as assets or liabilities in the statement of
financial position, measured at fair value. The accounting for changes in the
fair value of a derivative depends on the intended use of the derivative and
the resulting designation. For derivatives designated as cash flow hedges,
changes in fair value are recognized in other comprehensive income until the
hedged item is recognized in earnings. Any change in fair value resulting
from ineffectiveness, as defined by SFAS 133, is recognized immediately in
earnings. The Company believes that substantially all derivatives in its
portfolio of contracts qualify as cash flow hedges. Changes in the fair value
of derivative instruments which are not hedges are recorded in earnings as the
changes occur.
SFAS 133 does not specifically address a number of issues that are unique to
the oil and gas industry. In addition, certain provisions are complex and
their application to the Company's set of circumstances must be inferred. The
Company believes that adoption of the standard will result in the
reclassification, net of deferred income tax effect, of the balance of
deferred gains from price-risk management activities to stockholders' equity.
In addition, the fair value of its energy swaps, collars, futures contracts,
basis swaps and interest rate swaps will be recorded at fair value as assets
and liabilities. The net step-up in value will be reflected as a component of
stockholders' equity net of deferred income tax effect. The term "derivative"
is defined broadly in the new pronouncement and it is unclear at this time
whether the Company's long-term physical delivery contracts meet the
definition and are subject to the provisions of this statement. This issue is
one of many presented to an implementation task force created by the Financial
Accounting Standards Board for consideration.
There are other provisions which could have a material effect on the
Company's financial statements. One such provision precludes the
consideration of future cash flows of derivative instruments in asset
impairment determinations irrespective of any risk management intent for
entering into such instruments. At this time, the Company is not able to
predict the amount of impairment, if any, that may be recognized due to the
adoption of SFAS 133. Any resultant charge is expected to be more than offset
by the net step-up in value of the Company's fixed-price contracts. The
Company expects to adopt SFAS 133 by December 31, 1998.
NOTE 5 -- 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
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LOUIS DREYFUS NATURAL GAS CORP.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
JUNE 30, 1998
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 6 -- 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 June 30, 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
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
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LOUIS DREYFUS NATURAL GAS CORP.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
JUNE 30, 1998
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.
NOTE 7 -- FIXED-PRICE CONTRACTS
The Company had two fixed-price contracts with independent power producers
("IPPs") which sold electrical power under firm fixed-price contracts to
Niagara Mohawk Corporation ("NIMO"), a New York state utility ("NIMO
Contracts"). In July 1997, NIMO entered into a Master Restructuring Agreement
(the "MRA") with 16 IPPs, including the counterparties to the NIMO Contracts.
Subsequently, one of the counterparties withdrew from the MRA. The power
purchase agreement between NIMO and the other counterparty was terminated. In
connection therewith, the Company agreed to terminate its fixed-price contract
to the counterparty in exchange for $40.1 million, the receipt of which has
been recorded as a deferred gain from price-risk management activities in the
Company's balance sheet to be amortized over the remaining contract term (see
Note 4). The remaining NIMO Contract which hedges 57 Bcf of natural gas as of
June 30, 1998 remains in force. Accordingly, the Company plans to continue to
deliver natural gas pursuant to the terms of this contract which expires in
2007.
NOTE 8 -- SECTION 29 CREDIT TRANSACTION
Effective May 1, 1998, the Company entered into an agreement with a third
party to convey certain oil and gas properties which have production
qualifying for Section 29 tax credits. The agreement provides for the
conveyance of qualifying properties in two separate tranches, the first of
which was funded in July 1998 resulting in the receipt of $12.7 million. The
second tranche which pertains to a smaller number of properties is expected to
close later in 1998. As of June 30, 1998, the Company's balance sheet
reflects a receivable of $12.7 million and an increase to deferred revenue of
$12.4 million associated with the first tranche which will be recognized in
earnings as production occurs.
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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. 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. For 1998, the Company plans to spend in excess of
$200 million in oil and gas exploration and development activities in these
Core Areas. These plans include approximately $78 million targeted for
exploration projects.
The Company has a portfolio of fixed-price contracts comprised of long-term
physical delivery contracts, energy swaps, collars, futures contracts, basis
swaps and option agreements (collectively "Fixed-Price Contracts"). As of
June 30, 1998, the Company's Fixed-Price Contracts hedged 303 Bcfe of future
production, representing 25% of its estimated proved reserves, at escalating
fixed prices. These fixed prices are presently significantly higher than the
forward market prices for natural gas. Recent hedging activity has been for
shorter periods of time, generally less than 12 months, when market conditions
have been viewed as favorable.
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.
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LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
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.
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.
13
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,
------------------ ------------------
1997 1998 1997 1998
-------- -------- -------- --------
OIL AND GAS SALES: (M$)
Wellhead oil sales . . . . . . . . . . . . $ 8,008 $ 11,541 $ 17,525 $ 23,026
Effect of Fixed-Price Contracts (1). . . . 431 -- 322 496
-------- -------- -------- --------
Total oil sales. . . . . . . . . . . . . . $ 8,439 $ 11,541 $ 17,847 $ 23,522
======== ======== ======== ========
Wellhead natural gas sales . . . . . . . . $ 32,912 $ 54,211 $ 79,508 $106,546
Effect of Fixed-Price Contracts (1). . . . 2,985 3,729 (1,253) 7,327
-------- -------- -------- --------
Total natural gas sales. . . . . . . . . . $ 35,897 $ 57,940 $ 78,255 $113,873
======== ======== ======== ========
PRODUCTION:
Oil production (MBbls) . . . . . . . . . . 414 913 837 1,738
Natural gas production (MMcf). . . . . . . 16,129 24,989 31,605 49,943
Net equivalent production (MMcfe). . . . . 18,613 30,468 36,625 60,371
Oil production hedged by Fixed-Price
Contracts (MBbls). . . . . . . . . . . . 182 -- 362 79
Gas production hedged by Fixed-Price
Contracts (BBtu) . . . . . . . . . . . . 8,760 11,557 17,568 22,886
AVERAGE SALES PRICE:
Oil (per Bbl):
Wellhead price . . . . . . . . . . . . . $ 19.34 $ 12.64 $ 20.95 $ 13.25
Effect of Fixed-Price Contracts (1). . . 1.04 -- .38 .28
-------- -------- -------- --------
Total. . . . . . . . . . . . . . . . . . $ 20.38 $ 12.64 $ 21.33 $ 13.53
======== ======== ======== ========
Average fixed price received under
Fixed-Price Contracts . . . . . . . . . $ 22.32 $ n/a $ 22.32 $ 22.20
Net effective realization (2). . . . . . 97% n/a 98% 92%
Natural gas (per Mcf):
Wellhead price . . . . . . . . . . . . . $ 2.04 $ 2.17 $ 2.52 $ 2.13
Effect of Fixed-Price Contracts (1). . . .19 .15 (.04) .15
-------- -------- -------- --------
Total. . . . . . . . . . . . . . . . . . $ 2.23 $ 2.32 $ 2.48 $ 2.28
======== ======== ======== ========
Average fixed price received under
Fixed-Price Contracts . . . . . . . . . $ 2.46 $ 2.60 $ 2.48 $ 2.61
Net effective cash realization (2). . . 97% 96% 99% 94%
Equivalent price (per Mcfe). . . . . . . . $ 2.38 $ 2.28 $ 2.62 $ 2.28
14
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,
------------------ ------------------
1997 1998 1997 1998
-------- -------- -------- --------
EXPENSES: (per Mcfe)
Operating costs:
Lease operating. . . . . . . . . . . . . $ .45 $ .45 $ .46 $ .45
Production taxes . . . . . . . . . . . . $ .12 $ .11 $ .14 $ .11
General and administrative . . . . . . . . $ .21 $ .21 $ .22 $ .21
Depreciation, depletion and
amortization - oil & gas. . . . . . . . . $ .82 $ 1.08 $ .82 $ 1.05
<FN>
(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."
RESULTS OF OPERATIONS -- THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE
MONTHS ENDED JUNE 30, 1997
Net Income (Loss) and Cash Flows from Operating Activities. For the quarter
ended June 30, 1998, the Company realized a net loss of $10.4 million, or $.26
per share, on total revenue of $70.4 million. This compares to net income
of $4.2 million, or $.15 per share, on total revenue of $44.9 million for the
second quarter of 1997. Cash flows from operating activities (before working
capital changes) for the second quarter of 1998 grew significantly, increasing
52% to $36.5 million compared to $24.1 million for the second quarter of 1997.
The increase in operating cash flows for 1998 was primarily driven by
significant production growth attributable to the acquisition of American
Exploration Company in the fourth quarter of 1997 ("American Acquisition") and
the results of the Company's drilling program. Results of operations for the
quarter ended June 30, 1998 were adversely affected by the recognition of a
$9.9 million ($6.1 million after-tax) impairment charge, increased exploration
costs, higher oil and gas depletion and lower oil prices. Cash flows provided
by operating activities after consideration of the net change in working
capital increased to $55.8 million from the $24.4 million reported for the
second quarter of 1997, primarily due to the increase in production previously
discussed and a decrease in accounts receivable.
Production. The Company produced 30.5 Bcfe for the second quarter of 1998
compared to 18.6 Bcfe for the prior year second quarter, an increase of 64%.
Gas production increased to 25.0 Bcf compared to 16.1 Bcf for the second
quarter of 1997, an increase of 55%. Oil production for the second quarter of
1998 increased 121% to 913 MBbls compared to 414 MBbls for the prior-year
second quarter. These increases in production are primarily attributable to
the American Acquisition and the results of the Company's oil and gas drilling
15
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
program.
Oil and Gas Prices. On a natural gas equivalent basis, the Company received
an average price of $2.28 per Mcfe for the quarter ended June 30, 1998, a
decrease of 4% from the $2.38 per Mcfe received for the second quarter of
1997. The Company's gas production yielded an average price of $2.32 per Mcf,
an increase of 4% compared to $2.23 per Mcf for the prior-year second quarter.
The Company's average gas price for the 1998 second quarter was enhanced $.15
per Mcf as a result of the Company's hedging activities. The average gas
price for the second quarter of 1997 increased $.19 per Mcf as a result of the
Fixed-Price Contracts in effect for that period. The average oil price for
the second quarter of 1998 was $12.64 per Bbl a decrease of 38% from the
$20.38 per Bbl received for the prior-year second quarter. No fixed-price oil
contracts were in effect during the second quarter of 1998. Fixed-Price
Contracts in effect during the second quarter of 1997 increased the average
oil price by $1.04 per Bbl.
The combination of higher gas production and higher gas prices increased gas
sales to $57.9 million for the second quarter of 1998 compared to $35.9
million for the second quarter of 1997. The net effect of higher oil
production and lower oil prices increased oil sales to $11.5 million compared
to $8.4 million 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 $3.7 million for the quarter ended June 30, 1998 and to increase oil and
gas sales by $3.4 million for the quarter ended June 30, 1997. See
"Fixed-Price Contracts."
Operating Costs. Operating costs for the second quarter of 1998 were
comprised of $13.8 million of lease operating expenses and $3.2 million of
production taxes. This compares to $8.5 million of lease operating expenses
and $2.1 million of production taxes for the second quarter of 1997. These
increases are principally attributable to producing properties acquired in the
American Acquisition and wells drilled during the previous twelve months.
Lease operating expenses on a natural gas equivalent unit of production basis
remained constant at $.45 per Mcfe for the three months ended June 30, 1998
and 1997.
General and Administrative Expense. General and administrative expense
("G&A") for the second quarter of 1998 was $6.3 million, an increase of 63%
from the prior-year second quarter amount of $3.9 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 remained constant at $.21 per Mcfe for the 1998 and 1997 second
quarters.
Exploration Costs. Exploration costs, comprised of geological and
geophysical costs, exploratory dry holes and leasehold impairment costs, were
$9.4 million for the quarter ended June 30, 1998, compared to $1.2 million for
the second quarter of 1997. The 1998 amount consists of $5.0 million of dry
16
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
hole costs, $2.4 million of seismic acquisition and other geological and
geophysical costs and $2.0 million of leasehold costs. The 1997 amount
consists of $1.1 million of seismic acquisition costs and $.1 million of
leasehold costs.
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization ("DD&A") for the second quarter of 1998 was $34.3 million
compared to $16.5 million for the prior-year second 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 $1.08 for the 1998 second quarter compared to $.82 for the
second quarter of 1997. This increase was due primarily to the American
Acquisition purchase price allocated to proved reserves using the purchase
method of accounting.
Impairment. For the quarter ended June 30, 1998, the Company recorded an
impairment charge of $9.9 million in connection with an impairment review
conducted in response to the significant decline in oil prices. This review
identified one field which had a net book value in excess of estimated future
net revenues for the field, which resulted in the impairment charge. There
was no impairment charge recorded for the second quarter of 1997.
Interest Expense. Interest expense for the second quarter of 1998 was $10.4
million compared to $6.3 million for the second quarter of 1997. This
increase is primarily attributable to a higher level of outstanding
indebtedness for the 1998 second quarter as a result of the American
Acquisition. On a natural gas equivalent unit of production basis, interest
costs remained constant at $.34 per Mcfe for the second quarter of 1998
compared to the prior-year second quarter. The net impact of interest rate
swaps in effect for the second quarter of 1998 and 1997 was not material.
Income Taxes. For the second quarter of 1998, the Company recorded a tax
benefit of $6.5 million on a pre-tax loss of $16.9 million, an effective rate
of 38%. This compares to an income tax provision of $2.3 million provided on
pre-tax income of $6.5 million, an effective rate of 35%, for the second
quarter of 1997. The effective rate for the second quarter of 1997 was lower
than the statutory rate primarily due to the availability of Section 29
credits.
RESULTS OF OPERATIONS -- SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS
ENDED JUNE 30, 1997
Net Income (Loss) and Cash Flows from Operating Activities. The Company
realized a net loss of $12.4 million, or $.31 per share, on total revenue of
$139.9 million for the six months ended June 30, 1998. This compares with net
income of $18.2 million, or $.66 per share, on total revenue of $106.0 million
for the six months ended June 30, 1997. Cash flows from operating activities
(before working capital changes) for the first six months of 1998 were notably
higher at $72.6 million, compared to $54.5 million for the first six months of
1997, an increase of 33%. The decrease in 1998 earnings was primarily the
17
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
result of the recognition of a $9.9 million ($6.1 million after-tax)
impairment charge, increased exploration costs, higher DD&A and lower oil and
gas prices. 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 increased
to $85.1 million from the $54.0 million reported for the second quarter of
1997, primarily due to the increase in production previously discussed and a
decrease in accounts receivable.
Production. The Company produced 60.4 Bcfe for the first six months of 1998
compared to 36.6 Bcfe for the comparable prior-year period, an increase of
65%. Gas production increased to 49.9 Bcf compared to 31.6 Bcf for the first
half of 1997, an increase of 58%. Oil production for the first six months of
1998 increased 108% to 1,738 MBbls compared to 837 MBbls for the first six
months of 1997. 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 $2.28 per Mcfe for the first six months of 1998, a
decrease of 13% from the $2.62 per Mcfe received for the first six months of
1997. The Company's gas production yielded an average price of $2.28 per Mcf,
a decrease of 8% compared to $2.48 per Mcf for the prior-year period. The
Company's average gas price for the first six months of 1998 was enhanced $.15
per Mcf as a result of the Company's hedging activities. The average gas
price for the first six months of 1997 decreased $.04 per Mcf as a result of
the Fixed-Price Contracts in effect for that period. The average oil price
for the first half of 1998 was $13.53 per Bbl compared to $21.33 per Bbl for
the first half of 1997, a decline of 37%. The average oil price for the
current year six-month period was enhanced $.28 per Bbl as a result of the
Company's hedging activities. Fixed-Price Contracts in effect during the
prior-year six-month period increased the average oil price by $.38 per Bbl.
The combination of higher gas production and lower gas prices increased gas
sales to $113.9 million for the first six months of 1998 compared to $78.3
million for the first six months of 1997. The net effect of higher oil
production and lower oil prices increased oil sales to $23.5 million compared
to $17.8 million reported for the prior-year period. The aggregate impact of
the Company's oil and gas hedging activities was to increase oil and gas sales
by $7.8 million for the six months ended June 30, 1998 and to decrease oil and
gas sales by $.9 million for the six months ended June 30, 1997. See
"Fixed-Price Contracts."
Other Income. Other income for the first six months of 1998 was $2.6
million compared to $9.9 million for the first six months of 1997. The 1997
higher at $72.6 million, compared to $54.5 million for the first six months of
1997, an increase of 33%. The decrease in 1998 earnings was primarily the
18
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
higher at $72.6 million, compared to $54.5 million for the first six months of
1997, an increase of 33%. The decrease in 1998 earnings was primarily the
Operating Costs. Operating costs for the first six months of 1998 were
comprised of $27.2 million of lease operating expenses and $6.9 million of
production taxes. This compares to $16.9 million of lease operating expenses
and $5.0 million of production taxes for the first six months of 1997. These
increases are principally attributable to producing properties acquired in the
American Acquisition and wells drilled during the previous twelve months.
Lease operating expenses on a natural gas equivalent unit of production basis
improved slightly to $.45 per Mcfe compared to $.46 per Mcfe for the six
months ended June 30, 1997.
General and Administrative Expense. G&A for the first six months of 1998
was $12.5 million compared to $7.9 million for the comparable prior-year
period. 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 to $.21 per Mcfe for the
first six months of 1998 compared to $.22 per Mcfe for the first six months of
1997.
Exploration Costs. Exploration costs, comprised of geological and
geophysical costs, exploratory dry holes and leasehold impairment costs, were
$16.9 million for the six months ended June 30, 1998, compared to $3.4 million
for the six months ended June 30, 1997. The 1998 amount consists of $8.4
million of dry hole costs, $6.2 million of seismic acquisition and other
geological and geophysical costs and $2.3 million of leasehold costs. The
1997 amount consists of $2.0 million of seismic acquisition and other
geological and geophysical costs, $.8 million of dry hole costs and $.6
million of leasehold costs.
Depreciation, Depletion and Amortization. DD&A for the first half of 1998
was $66.3 million compared to $32.3 million for the first half of 1997. 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 $1.05 for the first six months of 1998 compared to $.82 for
the first six months of 1997. This increase was due primarily to the American
Acquisition purchase price allocated to proved reserves using the purchase
method of accounting.
Impairment. For the six months ended June 30, 1998, the Company recorded an
impairment charge of $9.9 million in connection with an impairment review
conducted in response to the significant decline in oil prices. This review
identified one field which had a net book value in excess of estimated future
net revenues for the field, which resulted in the impairment charge. There
was no impairment charge recorded for the first six months of 1997.
Interest Expense. Interest expense for the six months ended June 30, 1998
was $20.4 million compared to $12.5 million for the six months ended June 30,
19
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
1997. This increase is primarily attributable to a higher level of
outstanding indebtedness for the first six months of 1998 as a result of the
American Acquisition. On a natural gas equivalent unit of production basis,
interest costs remained constant at $.34 per Mcfe for the first six months of
1998 and 1997. The net impact of interest rate swaps in effect for the first
six months of 1998 and 1997 was immaterial.
Income Taxes. For the first half of 1998, the Company recorded a tax
benefit of $7.7 million on a pre-tax loss of $20.2 million, an effective rate
of 38%. This compares to an income tax provision of $9.8 million provided on
pre-tax income of $28.1 million, an effective rate of 35%, for the first half
of 1997. The effective rate for the first six months 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 six months ended June 30, 1997 and
1998, the Company expended $70.1 million and $142.9 million, respectively, in
oil and gas property acquisition, exploration and development activities,
representing substantially all of the cash flow invested by the Company during
the six-month periods. See "Commitments and Capital Expenditures." Cash
flows from operating activities before changes in working capital for the six
months ended June 30, 1997 and 1998 were $54.5 million and $72.6 million,
representing 78% and 51%, respectively, of the oil and gas property
investments made for each period. A disproportionately higher share of the
Company's 1998 capital expenditure program has been incurred in the first six
months of 1998. Substantially all of the cash flows from operating activities
are generated from oil and gas sales which are highly dependent upon oil and
gas prices. Significant decreases in the market prices of oil and gas could
result in 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 waterflood property. The proceeds were used
initially to reduce outstanding indebtedness. As a result, cash flows from
financing activities for the first six months of 1997 reflected a net
application of cash of $13.3 million, compared to a $59.8 million source of
cash for the first six months of 1998. Included in the amount for 1998 is
$40.1 million of proceeds received in connection with the termination of a
Fixed-Price Contract. See Note 7 of the Condensed Notes to Consolidated
Financial Statements appearing elsewhere herein. 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.
20
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
The Company's EBITDAX increased from $76.2 million for the first six months
of 1997 to $93.3 million for the first six months 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. The Company believes that
EBITDAX is a financial measure commonly used in the oil and gas industry as an
indicator of a company's ability to service and incur debt. However, EBITDAX
should not be considered in isolation or as a substitute for net income, cash
flows provided by operating activities or other data prepared in accordance
with generally accepted accounting principles, or as a measure of a company's
profitability or liquidity. EBITDAX measures as presented may not be
comparable to other similarly titled measures of other companies.
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 drilling activities and to provide letters of
credit to meet margin requirements under Fixed-Price Contracts. As of June
30, 1998, the Company had $279.0 million of principal and $12.5 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 June 30,
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 June 30, 1998, the effective interest rate for
borrowings under the Credit Facility was 6.3%, 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.
21
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
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
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 Lines of Credit. The Company has certain other uncommitted lines of
credit available to it which aggregated $45.1 million as of June 30, 1998.
Such short-term lines of credit are unsecured and primarily used to meet
margin requirements under Fixed-Price Contracts and for working capital
purposes. As of June 30, 1998, the Company had $15.1 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." At
June 30, 1998, the Company had working capital of $3.6 million and a current
ratio of 1.0 to 1. Total long-term debt outstanding at June 30, 1998 was
$587.0 million. The Company's long-term debt as a percentage of its total
capitalization was 56%. This ratio is expected to decrease upon the adoption
of SFAS 133. See Note 4 of the Condensed Notes to Consolidated Financial
Statements appearing elsewhere herein.
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 six months ended June 30, 1998, the Company expended $143
million in connection with this strategy, including $88 million for
development activities, $50 million for exploration activities which includes
$13 million of unproved property costs expected to benefit future periods, and
$5 million for proved property acquisitions. This expenditure level resulted
in the drilling of 185 development wells and 20 exploratory wells. Of these
wells, 167 development wells and ten exploratory wells were successfully
completed as producers, for a completion success rate of 90% and 50%,
respectively (an overall success rate of 86%). For the balance of 1998, the
Company currently plans to spend approximately $85 million in connection with
its drilling program focused principally in its Core Areas. Such planned
22
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
expenditure levels include approximately $28 million of additional exploration
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.
During the first half of 1998, the Company drilled 11 Lower Wilcox wells in
its Yoakum Gorge project, eight of which have been completed with three wells
undergoing completion. Four additional wells are presently drilling and up to
six more wells are expected to be drilled during 1998. In its Texas State
Waters project, the Company drilled three wells resulting in two discoveries.
These discoveries are expected to come on line in September 1998. Two
additional offshore tests drilled subsequent to June 30, 1998 were
unsuccessful. One additional well in the Texas State Waters is presently
planned for 1998. In the Cotton Valley Reef Trend, the Company is a 39%
working interest owner in a Cotton Valley test operated by Tom Brown, Inc.,
which is presently drilling. In the Pitchfork Ranch area, the Company has
completed the second phase of its seismic acquisition over an additional 50
square mile area of the ranch. Drilling is anticipated in the fourth quarter
of 1998.
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 June 30, 1998,
Fixed-Price Contracts hedged 46% of the Company's natural gas production and
none of its oil production. As of June 30, 1998, Fixed-Price Contracts are in
place to hedge 299 Bcf of the Company's estimated future production from
proved gas reserves and 690 MBbls of its future oil production.
Subsequent to December 31, 1997, the Company entered into nine natural gas
fixed-price collars which hedge an aggregate of 20.3 TBtu of natural gas, 8.4
TBtu for 1998 and 11.9 TBtu for 1999, and one crude oil fixed-price collar
23
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
which hedges 230 MBbls of oil for the fourth quarter of 1998. The natural gas
collars contain floor prices ranging from $2.10 per MMBtu to $2.68 per MMBtu
and ceiling prices ranging from $2.41 per MMBtu to $3.08 per MMBtu. The
weighted average ceiling and floor prices for 1998 are $2.73 per MMBtu and
$2.40 per MMBtu, respectively. The weighted average ceiling and floor prices
for 1999 are $2.84 per MMBtu and $2.45 per MMBtu, respectively. The oil
collar contains a floor price of $16.55 per Bbl and a ceiling price $18.10 per
Bbl. The Company also entered into an oil swap which hedges 230 MBbls in the
fourth quarter of 1998 at an average fixed-price of $16.52 per Bbl. 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.
During the second quarter, the Company received $40.1 million in connection
with the early termination of a gas contract. See Note 7 of the Condensed
Notes to Consolidated Financial Statements appearing elsewhere herein for a
further discussion. Also see Note 4 of the Condensed Notes to Consolidated
Financial Statements for a discussion of the new financial accounting
standard, which upon adoption, will change the accounting for the Company's
hedging activities.
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" and other information
provided elsewhere in this document and in the Company's Form 10-Q for the
quarter ended March 31, 1998, no material modifications to previously
disclosed estimates are deemed necessary.
YEAR 2000 COMPLIANCE
The Company continues to address the business issues surrounding the ability
of computer software and hardware and other business systems to appropriately
consider periods and dates after December 31, 1999, both in its offices and
field locations. The Company has formed a task force which reports to senior
management to identify, address and monitor its internal year 2000 issues.
Many of the software applications utilized by the Company are presently year
2000 compliant and substantially all of the computer hardware used by the
Company is year 2000 compatible. The remaining material software 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
task force also has the mandate to identify material exposures to year 2000
non-compliance by third parties and to monitor the progress of third parties
as deemed appropriate, to the extent information can be obtained. These
exposures include the ability of the Company's purchasers, transporters,
outside operators and other customers to buy, take delivery, transport and pay
for natural gas and crude oil produced. Other risks relate to continued
24
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
performance of suppliers, vendors and service companies that the Company
relies upon to conduct its operations, as well as the financial institutions
utilized in connection with the Company's borrowing and cash management
activities. No assurance can be given that all material issues will be
identified, or that all material third parties will be compliant by the year
2000. At this time, the Company does not expect a material interruption in
its business as a result of year 2000 issues.
25
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 1998 Annual Meeting of Shareholders was held on May 19, 1998. The
following were submitted to a vote of the Company's shareholders:
1. The election of ten 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 35,381,594 votes for; 31,383 votes withheld; 0
votes abstaining
Simon B. Rich, Jr. 35,382,407 votes for; 30,570 votes withheld; 0
votes abstaining
Mark Andrews 35,381,088 votes for; 31,889 votes withheld; 0
votes abstaining
Mark E. Monroe 35,382,153 votes for; 30,824 votes withheld; 0
votes abstaining
Richard E. Bross 35,380,407 votes for; 32,570 votes withheld; 0
votes abstaining
Daniel R. Finn, Jr. 35,382,282 votes for; 30,695 votes withheld; 0
votes abstaining
Peter G. Gerry 35,380,407 votes for; 32,570 votes withheld; 0
votes abstaining
John H. Moore 35,381,237 votes for; 31,740 votes withheld; 0
votes abstaining
James R. Paul 33,824,801 votes for; 1,588,176 votes withheld; 0
votes abstaining
Ernest F. Steiner 35,381,966 votes for; 31,011 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, 1998. The results of
the shareholder vote included 35,399,106 votes for; 9,824 votes against;
and 4,047 votes abstaining.
Item 5 -- None
Item 6 -- Exhibits and Reports on Form 8-K
(a) Exhibits:
27.1 -- Financial Data Schedule
(b) Reports on Form 8-K:
None
26
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 13, 1998 /s/ Jeffrey A. Bonney
-----------------------------------
Jeffrey A. Bonney
Executive Vice President and Chief Financial
Officer