UNITED STATES
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 September 30, 1998
--------------------------------------------
OR
[_] TRANSITION PERIOD REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to _________
COMMISSION FILE NUMBER 316456
GULF CANADA RESOURCES LIMITED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CANADA
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
98-0086499
(I.R.S. EMPLOYER IDENTIFICATION NO.)
ONE NORWEST CENTER
1700 LINCOLN STREET, SUITE 5000
DENVER, COLORADO 80203-4525
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
TELEPHONE (303) 813-3800
(REGISTRANT'S TELEPHONE CODE, INCLUDING AREA CODE)
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. [X] YES [_] NO
ON September 30, 1998, THERE WERE 348,935,744 ORDINARY SHARES ISSUED AND
OUTSTANDING.
1
GULF CANADA RESOURCES LIMITED
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION:
Item 1. Unaudited Consolidated
Financial Statements 3 - 11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12 - 17
PART II. OTHER INFORMATION 18 - 20
2
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
GULF CANADA RESOURCES LIMITED
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
Sept. 30, 1998 Dec. 31, 1997
- ---------------------------------------------------------------------------------
(millions of Canadian dollars) (UNAUDITED)
=================================================================================
ASSETS
CURRENT
Cash and short-term investments $ 131 $ 188
Accounts receivable 604 346
Other 161 121
- ---------------------------------------------------------------------------------
896 655
INVESTMENTS, DEFERRED CHARGES AND OTHER ASSETS 326 238
PROPERTY, PLANT AND EQUIPMENT 4,618 5,736
- ---------------------------------------------------------------------------------
$5,840 $6,629
=================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Short-term loans $ 33 $ 51
Accounts payable 294 420
Current portion of long-term debt 214 29
Current portion of other long-term liabilities 41 37
Other 117 129
- ---------------------------------------------------------------------------------
699 666
LONG-TERM DEBT 2,467 2,785
OTHER LONG-TERM LIABILITIES 254 201
DEFERRED INCOME TAXES 136 307
MINORITY INTEREST 179 220
- ---------------------------------------------------------------------------------
3,735 4,179
- ---------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Share capital
Senior preference shares 577 577
Ordinary shares 1,718 1,660
Contributed surplus 35 35
Retained earnings (Deficit) (278) 181
Foreign currency translation adjustment 53 (3)
- ---------------------------------------------------------------------------------
2,105 2,450
- ---------------------------------------------------------------------------------
$5,840 $6,629
=================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of this statement.
3
GULF CANADA RESOURCES LIMITED
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
AND RETAINED EARNINGS (DEFICIT)
(Unaudited)
Three months Nine months
ended September 30, ended September 30,
(millions of Canadian dollars) 1998 1997 1998 1997
=============================================================================================
EARNINGS (LOSS)
REVENUES
Net oil and natural gas $ 259 $ 327 $ 797 $ 875
Gain on sale of shares by subsidiary - 417 - 417
Other 24 12 98 47
- ---------------------------------------------------------------------------------------------
283 756 895 1,339
- ---------------------------------------------------------------------------------------------
EXPENSES
Operating - production 99 94 308 273
- other 16 4 71 8
Exploration 45 38 121 89
General and administrative 11 17 45 50
Depreciation, depletion and amortization 110 169 362 375
Net gain on asset disposals and provision
for future losses (Note 3) 154 130 134 82
Reduction in carrying value of assets (Note 6b) 212 - 212 -
Pension settlement and restructuring charges (Note 3) 4 54 7 59
Finance charges, net 67 57 187 160
Income tax expense (73) (9) (82) 39
Minority interest (4) - (10) -
- ---------------------------------------------------------------------------------------------
641 554 1,355 1,135
- ---------------------------------------------------------------------------------------------
EARNINGS (LOSS) FROM CONTINUING
OPERATIONS (358) 202 (460) 204
Discontinued operations 24 - 24 -
- ---------------------------------------------------------------------------------------------
Earnings (loss) for the period $ (334) $ 202 $ (436) $ 204
=============================================================================================
RETAINED EARNINGS (DEFICIT)
BALANCE, BEGINNING OF PERIOD $ 64 $ (9) $ 181 $ -
Earnings (loss) for the period (334) 202 (436) 204
Dividends declared on preference shares (8) (5) (23) (16)
- ---------------------------------------------------------------------------------------------
BALANCE, END OF PERIOD $ (278) $ 188 $ (278) $ 188
=============================================================================================
PER SHARE INFORMATION
EARNINGS (LOSS) (dollars per share)
Continuing operations $(1.05) $0.67 $(1.39) $0.68
Consolidated $(0.98) $0.67 $(1.32) $0.68
- ---------------------------------------------------------------------------------------------
Earnings (loss) per share are after deduction of senior preference share dividends (but do not include the special dividends for
payment of arrears which have been charged to contributed surplus.) This per share amount was calculated based upon the following:
Ordinary shares outstanding during the period (millions):
Average 348.9 293.2 348.2 275.5
The accompanying Notes to Consolidated Financial Statements are an integral part
of this statement.
4
GULF CANADA RESOURCES LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Nine months
ended September 30, ended September 30,
1998 1997 1998 1997
(millions of Canadian dollars)
- --------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
EARNINGS (LOSS) FOR THE PERIOD
FROM CONTINUING OPERATIONS $(358) $ 202 $ (460) $ 204
NON-CASH ITEMS INCLUDED IN EARNINGS (LOSS):
Depreciation, depletion and amortization 110 169 362 375
Net gain on asset disposals and provision
for future losses 154 130 134 82
Gain on sale of shares by subsidiary - (417) - (417)
Amortization of deferred foreign exchange losses 17 4 34 10
Reduction in carrying value of assets 212 - 212 -
Pension settlement and restructuring charges - 53 - 53
Exploration expense 45 38 121 89
Deferred income taxes (78) (18) (101) 9
Other (6) (6) (16) (4)
- --------------------------------------------------------------------------------------------------------------------
CASH GENERATED FROM OPERATIONS 96 155 286 401
Other long-term liabilities (2) (3) (8) (10)
Changes in non-cash working capital (89) (20) (117) 35
Other, net - (7) (2) (6)
- -------------------------------------------------------------------------------------------------------------------
5 125 159 420
- -------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds on asset disposals 407 656 992 729
Acquisitions (9) (811) (64) (1,877)
Capital expenditures and exploration expenses (211) (289) (672) (840)
Changes in non-cash working capital (337) (493) (343) (508)
Other, net 43 (12) 33 60
- -------------------------------------------------------------------------------------------------------------------
(107) (949) (54) (2,436)
- -------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Short-term loans 17 (859) (10) (68)
Proceeds from issue of long-term debt 43 1075 189 1,504
Long-term debt repayments - (66) (377) (326)
Issue of equity 1 704 59 944
Regular dividends declared on preference shares (8) (5) (23) (16)
Special dividends declared on preference shares - (3) - (10)
Other - (2) - (1)
- -------------------------------------------------------------------------------------------------------------------
53 844 (162) 2,027
- -------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (49) 20 (57) 11
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 180 44 188 53
- -------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 131 $ 64 $ 131 $ 64
- -------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are in integral part
of this statement.
5
GULF CANADA RESOURCES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements reflect all
adjustments (consisting of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair statement of the results for
the interim periods presented. The interim financial information and notes
thereto should be read in conjunction with the Company's latest annual
report to the shareholders. The unaudited financial statements contained
herein are prepared in accordance with Canadian generally accepted
accounting principles. The results of operations for the three-month and
nine-month periods ended September 30, 1998 are not necessarily indicative
of results to be expected for the entire year.
2. GAIN ON SALE OF SHARES BY SUBSIDIARY
On September 29, 1997, Gulf completed a public offering of 28 percent of
the shares of Gulf Indonesia Resources Limited (Gulf Indonesia), the
Indonesian arm of its oil and gas exploration and development activities.
The Company sold 24,150,000 shares of Gulf Indonesia at US$19.50 per share
for cash proceeds of $602 million, net of $44 million of costs. A gain of
$417 million ($384 million after tax) associated with this transaction was
recognized during the third quarter of 1997. Prior to the public offering,
Gulf Indonesia was a wholly-owned subsidiary of the Company.
3. UNUSUAL ITEMS
Net gain on asset disposals and provision for future losses
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------------------
1998 1997 1998 1997
------------------------------------------------
Net gain (loss) on asset
disposals (a) $ 171 $ (13) $ 191 $ 35
Provision for expected losses (325) (117) (325) (117)
on future asset disposals (b) -------- -------- -------- --------
$ (154) $ (130) $ (134) $ (82)
======== ======== ======== ========
(a) The 1998 net gain on disposals relates primarily to the $230 million gain
on the sale of 50 percent of the Company's Midstream assets. Other
property sales included the divestment of various international and Western
Canada conventional oil and natural gas properties. In 1997 the net gain
on asset disposals consisted of a gain on the sale of the remaining unit of
Gulf's northern drilling system and the sale of Western Canada oil and
natural gas assets.
(b) The provision for expected losses on future asset disposals is the
reduction to estimated realizable values in the carrying amounts of assets,
which the Company expects to divest. The 1998 provision for future losses
includes write-offs and one-time items of $199 million primarily relating
to the planned sales of Western Canada conventional properties. Also, in
1997, Gulf entered into a transaction to lock in an underlying Treasury
bond rate in connection with a planned issuance of debt securities. As a
result of a decision not to proceed with the transaction as planned, the
Company is taking a provision of $40 million against this position. The
1997 provision consists of write-downs of an undeveloped coal property of
$67 million, North American oil and natural gas assets of $47 million and
other assets of $3 million.
6
Pension settlement and restructuring charges
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------
1998 1997 1998 1997
-------------------------------------
Pension settlement (a) $ - $ 53 $ - $ 53
Restructuring charges (b) 4 1 7 6
-------- ----- -------- -----
$ 4 $ 54 $ 7 $ 59
======== ===== ======== =====
7
(a) Pension settlement
Deferred pension costs were written off to reflect the Company's
decision to commence a program to annuitize the obligations of the
defined benefit pension plan.
(b) Restructuring charges pertain to costs related to organizational
changes.
4. DISCONTINUED OPERATIONS
The discontinued operations gain of $24 million relates to the sale of an
undeveloped tract of land in Reno, Nevada that was part of a subsidiary's
former downstream operations.
5. RECLASSIFICATIONS
Certain amounts for 1997 have been reclassified to conform with the
presentation adopted for 1998.
6. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES ("U.S. GAAP") AND ADDITIONAL DISCLOSURES REQUIRED BY U.S. GAAP
8
If U.S. GAAP had been followed, the earnings (loss) and earnings (loss) per
ordinary share would have been as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1998 1997 1998 1997
--------------------- ---------------------
(MILLIONS OF DOLLARS) (MILLIONS OF DOLLARS)
EARNINGS (LOSS) FOR THE PERIOD, as reported $ (334) $ 202 $ (436) $ 204
Adjustments:
Interest rate swap (c) (2) (3) (7) (7)
New asset values (a)(i) (310) (68) (360) (88)
Asset impairment (b) (123) - (123) -
Foreign exchange (d) (73) (3) (102) (7)
Involuntary employee termination (f) 15 - 8 -
Income tax recovery 359 74 461 64
------ ----- ------ -----
EARNINGS (LOSS), as adjusted (468) 202 (559) 166
Cumulative dividends on senior preference shares (8) (5) (23) (16)
------ ----- ------ -----
EARNINGS (LOSS) TO ORDINARY SHAREHOLDERS $ (476) $ 197 $ (582) $ 150
====== ===== ====== =====
PER ORDINARY SHARE, as adjusted (DOLLARS) (DOLLARS)
- Earnings (Loss) $(1.36) $0.67 $(1.67) $0.54
If U.S. GAAP were followed, amounts on the Consolidated Statements of
Financial Position would be increased (decreased) as follows:
SEPTEMBER 30, DECEMBER 31,
1998 1997
--------------------- ---------------------
(MILLIONS OF DOLLARS) (MILLIONS OF DOLLARS)
ASSETS
Accounts receivable (c) $ 9 $ 2
Current deferred income taxes (a) (ii) 12 6
Investments, deferred charges and other assets (c)(d) (41) 61
Property, plant and equipment (a) (i) (b) 830 1,313
----- ------
$ 810 $1,382
===== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current portion of other long-term liabilities (c) $ (12) $ (12)
Other current liabilities (a)(i)(c) 11 (1)
Long-term debt (c) 200 200
Other long-term liabilities (c) (e) (f) (g) 38 39
Deferred income taxes (a) (i) (ii) (b) (c) (d) (e) (g) 914 1,374
Share capital, ordinary shares (a) (i) (89) (89)
Deficit (252) (129)
----- ------
$ 810 $1,382
===== ======
9
The financial statements have been prepared in accordance with
accounting principles generally accepted in Canada which, in the case of
Gulf, conform in all material respects with those in the United States
except that:
(a) The financial statements would reflect the following effects of adopting
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS 109).
(i) SFAS 109 requires a restatement, to pre-tax amounts, of the new asset
values reflected in the accounts in connection with the change of
control in 1986 of Gulf Canada Limited and the acquisition of new
subsidiaries. This restatement, along with differences between the tax
bases and recorded amounts of other asset transfers, would result in
property, plant and equipment (PP&E) and deferred income taxes both
being $830 million higher than under Canadian generally accepted
accounting principles ("Canadian GAAP") at September 30, 1998
(December 31, 1997 -$1,313 million). These differences are amortized
to earnings over the lives of the related assets or adjusted as assets
are sold or otherwise disposed. The application of previous accounting
standards at the time of the change in control results in ordinary
share capital being lower by $89 million.
(ii) Measurement and presentation of deferred income taxes according to
SFAS 109 would result in recording current and non-current deferred
tax assets and liabilities, for a net increase in the deferred tax
liability of $85 million at September 30, 1998 (December 31, 1997
- a net increase of $94 million).
(b) During the third quarter of 1998 the Company recorded a provision of $212
million for the impairment of certain Western Canada oil and natural gas
assets based on the difference between undiscounted cash flow and the
carrying amount of the assets. Under U.S. GAAP an additional provision of
$123 million was recorded to reflect the impairment as if it had been
calculated based on discounted cash flow.
(c) A special purpose entity has $200 million 11 per cent public debentures
issued and outstanding which mature on October 31, 2000, and assets
consisting of a $200 million oil indexed debenture maturing on October 31,
2000 and an interest rate swap. These are not included in Gulf's statement
of financial position, but under U.S. GAAP would have been included in
long-term debt and investments and other assets, respectively. Earnings
include amortization of a provision for losses on a related swap agreement
of $7 million ($4 million after tax) for the nine months ended September
30, 1998 and $7 million ($4 million after tax) for the nine months ended
September 30, 1997.
(d) Unrealized gains or losses arising on translation of long-term liabilities
repayable in foreign funds would be included in earnings in the period in
which they arise under U.S. GAAP. The balances of such deferred losses were
$241 million at September 30, 1998 and $139 million at December 31, 1997.
(e) Under U.S. GAAP, the costs of providing all forms of post-retirement
benefits to employees would be recognized during the active service lives
of the employees rather than expensed as incurred. The accumulated post-
retirement benefit obligation at September 30, 1998 is estimated to be $44
million ($25 million after tax) using a discount rate of 7.5 per cent.
There is no material difference between the net period service cost under
U.S. GAAP and the pay-as-you-go amount under Canadian GAAP for the three-
month and nine-month periods ended September 30, 1998 and 1997.
(f) Under U.S. GAAP a liability for non-contractual involuntary employee
termination benefits is not incurred until the terms of the termination are
communicated to the affected individual employees. Under Canadian GAAP, the
liability is recorded when the Company made the termination decision. As
such, under U.S. GAAP, the liability recorded prior to employees being
notified is reversed and recognized in the period of notification.
(g) Under U.S. GAAP, as at September 30, 1998 and December 31, 1997, an
additional minimum pension liability of $8 million ($4 million after tax)
must be accrued for the deficit between the market value of the Company's
pension plan assets and its accumulated benefit obligations.
10
CONDENSED STATEMENT OF COMPREHENSIVE INCOME
The Company has adopted SFAS 130, "Reporting Comprehensive Income" which
established standards for reporting and display of certain components of changes
in equity that arise from non-owner sources.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------------------------
1998 1997 1998 1997
----------------------------------------------------
(MILLIONS OF DOLLARS) (MILLIONS OF DOLLARS)
Net Income (Loss) $(468) $ 202 $(559) $ 166
Foreign currency translation,
adjustments, net of tax 26 (1) 30 (3)
----- ----- ----- -----
Comprehensive Income (Loss) $(442) $ 201 $(529) $ 163
===== ===== ===== =====
CHANGES IN U. S. ACCOUNTING STANDARDS
In June 1998, Financial Accounting Standard (FAS) 133, Accounting for Derivative
Instruments and Hedging Activities, was issued. Adoption of this standard is
required in the first quarter of 2000. FAS 133 requires that all derivatives
be recognized as either assets or liabilities and measured as fair value. If
certain conditions are met, a derivative may be specifically designated as a
hedge of risk exposure. Gulf is currently reviewing the expected impact of FAS
133, which will depend on the derivatives outstanding when it is adopted and is
not expected to be significant.
11
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
FORWARD LOOKING STATEMENTS
This document includes "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934 ("Exchange Act"). All
statements other than statements of historical facts included in this
document, including without limitation, statements under "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
regarding Gulf's financial position, estimated quantities and net present
values of reserves, business strategy, plans and objectives of management of
Gulf for future operations and covenant compliance, are forward-looking
statements. Although Gulf believes that the assumptions upon which such
forward-looking statements are based are reasonable, it can give no assurances
that such assumptions will prove to have been correct. Important factors that
could cause actual results to differ materially from Gulf's expectations
("Cautionary Statements") are disclosed below and elsewhere in this document.
All subsequent written and oral forward-looking statements attributable to
Gulf or persons acting on its behalf are expressly qualified by the Cautionary
Statements.
FINANCIAL REVIEW
The following discussion and analysis has been prepared based upon the
financial results of operations as presented in this document, which were
prepared in accordance with Canadian generally accepted accounting principles.
Refer to Note 4 for differences between Canadian and U.S. generally accepted
accounting principles. All dollar amounts set forth herein are in Canadian
dollars, except where otherwise indicated.
Gulf follows the successful efforts method of accounting for oil and gas
exploration and development costs. The initial acquisition costs of oil and
gas properties and the costs of drilling and equipping successful exploratory
wells are capitalized. The costs of unsuccessful exploration wells are charged
to earnings. All other exploration costs are charged to earnings as incurred.
All development costs, including the costs of liquid injectants used in
enhanced oil recovery projects, are capitalized. Maintenance and repairs are
charged to earnings; renewals and betterments, which extend the economic life
of the assets, are capitalized. Capitalized costs of proved oil and gas
properties are amortized using the unit-of-production method based on
estimated proved oil and gas reserves. Depreciation of plant and equipment is
based on estimated remaining useful lives of the assets using either the
straight-line method or the unit-of-production method based on estimated
proved oil and gas reserves. Individually insignificant unproved properties
are amortized on a group basis at rates determined after considering past
experience and lease terms. As changes in circumstances warrant, the net
carrying values of proved properties, plant and equipment are assessed to
ensure that they do not exceed future cash flows from use. Capitalized costs
of significant unproved properties are also assessed regularly to determine
whether an impairment in value has occurred.
Gulf's revenues, cash flow, profitability and future rate of growth are
substantially dependent upon prevailing prices for oil and gas. Prices for oil
and gas are subject to wide fluctuations in response to relatively minor
changes in supply of and demand for oil and gas, market uncertainty and a
variety of additional factors that are beyond the control of Gulf.
CASH GENERATED FROM OPERATIONS AND EARNINGS (LOSS)
Gulf's net oil and natural gas revenues for the nine months ended September 30,
1998 were $797 million, down $78 million or nine per cent from revenues of $875
million for the first nine months of 1997. The third quarter 1998 revenues of
$259 million were $68 million lower than the same period in 1997. The lower
revenues continue to reflect the impact of significantly lower liquids prices.
Revenue was further affected by lower sales volumes as a result of asset
divestitures. Price declines were partially offset by Gulf's hedging program
that generated revenues of $46 million during the first nine months of 1998,
($21 million in the third quarter), and higher natural gas prices.
The average realized liquids price (including hedging) for the first nine months
of 1998 of $18.38 per barrel declined 26 per cent from $24.80 per barrel
realized during the same period in 1997. The Company's average realized liquids
price (including hedging) in the third quarter was $19.04 per barrel, down $4.84
per barrel over the same period in 1997. Natural gas prices
12
continued to strengthen as the Company realized an average hedged price of $2.13
per mcf for the first nine months of 1998 and $2.04 per mcf for the third
quarter compared to $1.96 per mcf and $1.91 per mcf, during the same periods in
1997.
Daily production volumes were 176,900 boe/d for the first nine months and
161,700 boe/d for the third quarter, an increase of 7,000 boe/d and a decrease
of 28,500 boe/d over the same periods in 1997. The difference in production is
primarily due to asset sales and acquisitions in Western Canada during the
second half of 1997 and the United Kingdom assets sold in the second quarter
1998.
Cash generated from continuing operations for the nine months ended September
30, 1998 was $286 million, $115 million lower than the same period last year.
Cash generated in the third quarter was $96 million, compared with $155 million
in the same period of 1997. Lower third quarter revenues were partially offset
by lower cash interest expense, attributable to debt repayments, and lower
general and administrative (G&A) expenses. On a segmented basis for the first
nine months of 1998, North American conventional oil and gas operations
generated cash of $264 million versus $350 million for the same period last
year. The heavy oil division and thermal pilot projects utilized $9 million of
cash. Gulf's interest in the Syncrude Project generated $33 million, down from
$55 million for the same period in 1997, and in Indonesia, cash generation of
$57 million was a decrease of $37 million from the same period in 1997. In the
North Sea, cash generated during the first nine months of 1998 included $38
million from the United Kingdom (which was sold in the second quarter of 1998)
and $53 million from the Netherlands, versus $81 million and $43 million in
1997, respectively. Cash generation from Australia was $21 million, an increase
of $1 million from 1997 with the benefit of additional volumes from the second
quarter 1998 Jabiru-Challis acquisition.
Gulf's loss from continuing operations during the nine-month period was $460
million, compared with earnings of $204 million during the first nine months of
1997. The third quarter ended in a loss from continuing operations of $358
million of which $60 million is due to a loss from operating results and $298
million to one-time adjustments discussed below. The discontinued operations
gain of $24 million relates to the sale of an undeveloped tract of land in Reno,
Nevada that was part of Gulf's former downstream operations.
In the third quarter 1998, the Company incurred a net loss on asset disposals
and net provision for future losses of $154 million before tax. This includes a
gain on the sale of 50 per cent of Gulf Midstream Services sold during the
quarter of $230 million before tax ($167 million after tax). The gain is more
than offset by net losses on other asset disposals and a net provision for
future losses relating to Western Canada and miscellaneous international
properties of $344 million ($293 million after-tax given a minimal tax base for
these properties). In addition, a provision of $40 million ($23 million after
tax) was taken for a forward interest rate contract that Gulf entered into in
1997 to lock in an underlying treasury bond rate in connection with a planned
issuance of debt securities. The provision is the result of a decision not to
proceed with the entire transaction as planned.
Additional one-time items in the third quarter include a $212 million before tax
($149 million after tax) reduction in the carrying value of assets based on
lower oil price assumptions. Heavy oil assets acquired in the purchase of
Stampeder Exploration account for substantially all of this amount.
Earnings for the nine months of 1997 included the $417 million gain ($384
million after tax) from the IPO of Gulf's Indonesia operations, which was offset
by $220 million of third quarter write-offs and one-time items.
Exploration expense increased by $32 million to $121 million for the first nine
months of 1998 and increased by $7 million to $45 million for the third quarter.
The changes are due mainly to dry hole costs in Indonesia associated with
increased exploration activity throughout this year.
Production operating costs for the nine months of 1998 rose to $308 million from
$273 million during the same period last year. On a per unit basis, operating
costs rose from $5.89 per boe to $6.36 per boe. Higher cost production from the
August 1997 acquisition of Stampeder and the sale of lower cost United Kingdom
production accounted for the majority of the increase. The 1998 third quarter
operating costs of $99 million are comparable to those incurred during the same
period in 1997.
G&A expenses of $45 million, or $0.93 per boe, for the first nine months of 1998
represents a decrease of $5 million or 11 cents per boe from the first nine
months of 1997. Third quarter 1998 G&A costs of $11 million decreased $6
million largely as the result of eliminating expenses related to the U.K.
operations.
13
Year-to-date restructuring and pension charges of $7 million, including $4
million in the third quarter, reflect 1998 organizational changes. A charge of
$59 million in the first nine months of 1997 related mainly to a third quarter
decision to annuitize Gulf's pension plan and the related deferred pension
charges of $53 million.
Depreciation, depletion and amortization (DD&A) charges decreased from $375
million in the first nine months of 1997 to $362 million in the same period in
1998. On a per unit basis DD&A decreased from $8.10 per boe to $7.50 per boe.
The reduced charge is due to lower volumes in Western Canada and to lower
volumes from the United Kingdom that had a high rate per boe. The $59 million
decrease in DD&A for the third quarter of 1998 from $169 million to $110 million
is largely due to the same factors.
Finance charges for the first nine months of 1998 were $187 million, up $27
million from the first nine months of 1997. Additional amortization of deferred
foreign exchange on U.S. dollar denominated debt accounted for $24 million of
the net increase. On a quarterly basis, net finance charges increased to $67
million in 1998 versus $57 million in 1997. Lower cash interest expense related
to lower debt levels was offset by a $13 million increase from the amortization
of deferred foreign exchange on U.S. dollar denominated debt.
14
[Volume and price information for the Company's 1998 and 1997 third quarter
and first nine months oil and gas production is summarized in the following
table:]
SUPPLEMENTARY INFORMATION
(Unaudited)
Three months Nine months
ended September 30, ended September 30,
- ----------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
======================================================================================================================
VOLUMES SOLD /(1)/ (gross/net)
Crude oil and natural gas liquids (thousands of barrels per
day)
North America
- Conventional light crude oil 35.5 / 30.2 43.4 / 36.1 36.5 / 31.0 41.0 / 33.6
- Conventional heavy crude oil 13.8 / 12.2 5.3 / 4.7 16.9 / 15.2 1.8 / 1.6
- Synthetic crude oil 17.8 / 17.8 20.9 / 17.9 18.3 / 18.3 17.8 / 16.6
- Condensate 5.8 / 4.0 6.4 / 4.9 6.0 / 4.2 5.8 / 4.1
- Other natural gas liquids 9.8 / 7.7 10.5 / 8.5 10.4 / 8.2 10.2 / 8.4
- ----------------------------------------------------------------------------------------------------------------------
82.7 / 71.9 86.5 / 72.1 88.1 / 76.9 76.6 / 64.3
- ----------------------------------------------------------------------------------------------------------------------
International
- Indonesia 20.8 / 17.1 24.3 / 19.0 20.5 / 16.9 22.6 / 16.8
- United Kingdom - / - 20.1 / 19.2 9.6 / 9.1 16.1 / 15.3
- Other 11.0 / 9.5 2.1 / 1.8 6.1 / 5.5 1.6 / 1.5
- ----------------------------------------------------------------------------------------------------------------------
31.8 / 26.6 46.5 / 40.0 36.2 / 31.5 40.3 / 33.6
- ----------------------------------------------------------------------------------------------------------------------
Total liquids 114.5 / 98.5 133.0 /112.1 124.3 /108.4 116.9 / 97.9
- ----------------------------------------------------------------------------------------------------------------------
Natural gas (millions of cubic feet per day)
- North America 365 / 318 419 /374 378 /314 399 /338
- Netherlands 42 / 41 57 / 57 63 / 62 55 / 54
- Other international 22 / 20 35 / 32 26 / 24 24 / 21
- ----------------------------------------------------------------------------------------------------------------------
Total natural gas 429 / 379 511 /463 467 /400 478 /413
======================================================================================================================
Total barrels of oil equivalent
per day/(2)/ 161.7/140.5 190.2/164.3 176.9/154.1 169.9/144.2
======================================================================================================================
(1) "Gross" sales include royalties; "net" sales are after royalties. Volumes
exclude:
- NGL re-injection requirements (3.9) (4.6) (3.5) (4.4)
- inventory drawdown/(build-up) (0.2) 1.6 (0.5) (0.2)
(2) North America gas converted @ 10:1, Netherlands and other international
@ 6:1
15
GROSS AVERAGE PRICES
Crude oil and natural gas liquids (dollars per barrel)
North America
- Conventional light crude oil 18.55 24.66 18.70 26.30
- Conventional heavy crude oil 12.60 15.54 8.60 15.54
- Synthetic crude oil 20.59 26.97 20.77 28.01
- Condensate 18.12 26.39 21.28 28.18
- Other natural gas liquids 9.67 15.65 11.48 18.73
International
- Indonesia 18.64 25.40 18.71 26.41
- United Kingdom 0.00 22.65 17.96 23.12
- Other international 18.74 27.58 19.12 28.46
Average - unhedged 17.32 23.92 17.12 25.44
- hedged 19.04 23.88 18.38 24.80
Natural gas (dollars per thousand cubic feet)
North America - unhedged 1.86 1.43 1.90 1.75
- hedged 1.96 1.65 1.93 1.72
International 2.51 3.06 2.96 3.17
Average - unhedged 1.96 1.72 2.10 1.98
- hedged 2.04 1.91 2.13 1.96
- -----------------------------------------------------------------------------------------------------
AVERAGE EXCHANGE RATES (Cdn$1) US$ 0.66 US$ 0.72 US$ 0.68 US$ 0.73
- -----------------------------------------------------------------------------------------------------
NET CASH FLOW AND FINANCIAL POSITION
Capital expenditures and exploration expenses were $672 million for the nine
months, representing a 20 per cent decrease over 1997 expenditures of $840
million due to reductions in capital spending made as a result of lower oil
prices. North America conventional light and heavy oil operations accounted for
the majority of the reductions, decreasing by $171 million to $300 million.
Additionally, Gulf spent $31 million on Syncrude, $15 million on thermal pilot
projects, $222 million in Indonesia and $104 million on other international
projects. In Indonesia, at September 30, 1998 the Company had drawn US$240
million on the Corridor Project Facility, including US$28 million during the
third quarter.
The Company received $992 million in proceeds from asset sales and sales of
interests in subsidiary companies during the nine months compared with $729
million in 1997. The 1998 proceeds relate mainly to the sale of 50 per cent of
Gulf's Midstream Services, sale of the U.K. operations, as well as various North
America properties. The 1997 proceeds are principally attributable to net
proceeds from the initial public offering of 28 per cent of Gulf Indonesia
Resources.
Total equity issued for the nine months of 1998 was $59 million compared with
$944 million for the same period in 1997. The August 1997 Stampeder purchase
accounted for $700 million of the prior year issue.
During the first nine months, Gulf paid down $377 million of long-term debt with
the proceeds of asset sales and drew $189 million from committed long-term
facilities, the majority of which was related to the Corridor Gas Project
facility. This compares to $326 million and $1,504 million, respectively,
during the same period in 1997. At September 30, 1998, short-term debt was $33
million, a reduction of $18 million from the December 1997 year-end balance.
The current portion of long-term debt of $214 million includes the 9 per cent
US$125 million debentures due in August 1999 and US$15 million relating to the
Corridor Project Facility. Long-term debt of $2,467 million includes US$975
million of public debt due between 2004 and 2017, the Corridor Project loan of
US$240 million and $687 million largely in bank debt. As at September 30, 1998,
the Company's cash balance was $131 million. In addition the Company has a $290
million receivable relating to the sale of 50 per cent of Gulf Midstream
Services. Further, the purchaser of Gulf's Midstream assets has agreed to
provide Gulf Midstream with a three year, $100 million advance. It is
anticipated that this amount will be advanced to Gulf and, at the Company's
option, can be repaid in cash or an additional interest in the Midstream assets.
As at September 30, 1998 the Canadian dollar equivalent of Gulf's U.S.
dollardenominated debt was impacted by $162 million from the December 31, 1997
balance as a result of the decline in value of the Canadian dollar from the
year-end rate of C$1.43 to C$1.53 per U.S. dollar.
YEAR 2000
The inventory and investigation phases of the program Y2K are complete and
remediation efforts underway. The Company is on track to achieve its goal of
becoming Y2K ready by year-end 1998.
16
The Company is also developing contingency plans to further address and mitigate
its most critical Y2K issues. Since the Company's business is constantly
evolving, processes have been implemented to capture and address any new Y2K
issues that may arise. It is anticipated that remediation costs will not exceed
$10 million, of which approximately 40 per cent has been spent to date.
17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5: OTHER INFORMATION
None.
18
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
The following exhibits are filed with this Form 10-Q and they are identified by
the number indicated.
Exhibit
- -------
(2) Plan of acquisition, reorganization, arrangement, liquidation or
succession*
(3) Articles of Incorporation and By-laws
3.1 Articles of Incorporation of the Registrant (incorporated by reference
to Exhibit 3.1 of the Company's 10-Q filed for quarter ended June 30, 1997,
filed August 14, 1997)
3.2 By-laws of the Registrant (incorporated by reference to Exhibit 3.1 of
the Company's 10-Q filed for quarter ended June 30, 1997, filed August 14,
1997)
(4) Instruments defining rights of security holders, including indentures
4.1 Indenture between the Registrant and Chase Manhattan Bank dated July 1,
1989 pertaining to the Registrant's 9% Debentures due 1999 (incorporated
herein by reference to the Registrant's Registration Statement on Form F-
10, Reg. No. 33- 30138)
4.2 Indenture between the Registrant and The Bank of New York dated January
27, 1994 pertaining to the Registrant's 9-1/4% Senior Subordinated
Debentures due 2004 (incorporated herein by reference to the Registrant's
Registration Statement on Form F-10, Reg. No. 33- 73252)
4.3 Indenture between the Registrant and The Bank of New York dated July 5,
1995 pertaining to the Registrant's 9-5/8% Senior Subordinated Debentures
due 2005 (incorporated herein by reference to the Registrant's Registration
Statement on Form F-10, Reg. No. 33-93452)
4.4 Indenture between the Registrant and The Bank of New York dated August
7, 1996 pertaining to the Registrant's 8.35% Senior Notes due 2006
(incorporated herein by reference to the Registrant's Registration
Statement on Form F-10, Reg. No. 333-5332)
4.5 Indenture between the Registrant and The Bank of New York dated March
21, 1997 pertaining to the Registrant's 8-1/4% Senior Notes due 2017
(incorporated herein by reference to the Registrant's Registration
Statement on Form F-10, Reg. No. 333-6608)
4.6 Incentive Stock Plan 1994 (incorporated by reference to Exhibit 10.3 to
the Company's Form 10-Q for the quarter ended June 30, 1997, filed August
14, 1997)
(10) Material Contracts
10.1 Loan Agreement dated July 18, 1997 with a syndicate of banks
(incorporated by reference to Exhibit 10.2 to the Company's Form 10-Q for
the quarter ended June 30, 1997, filed August 14, 1997)
10.2 Shareholder Rights Plan dated as of February 19, 1998 between the
Registrant and Montreal Trust Company of Canada (incorporated herein by
reference to Exhibit 1 to the Registrant's Form 8-A filed in March 11,
1998)
(27) Financial Data Schedule
_________________________________
*Inapplicable to this filing
b. Reports on Form 8-K.
None.
19
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.
GULF CANADA RESOURCES LIMITED
DATE: NOVEMBER 9, 1998 BY: /s/ CRAIG GLICK
CRAIG GLICK
EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER
AND SECRETARY (DULY AUTHORIZED OFFICER AND
PRINCIPLE FINANCIAL OFFICER)
Attachments available through Edgar
20