1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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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, 1997
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
Commission file number 1-10447
CABOT OIL & GAS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 04-3072771
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
15375 MEMORIAL DRIVE, HOUSTON, TEXAS 77079
(Address of principal executive offices including Zip Code)
(281) 589-4600
(Registrant's telephone number)
NO CHANGE
(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 and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
As of October 31, 1997, there were 24,644,261 shares of Class A Common
Stock, Par Value $.10 Per Share, outstanding.
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CABOT OIL & GAS CORPORATION
INDEX TO FINANCIAL STATEMENTS
Page
----
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statement of Operations for the Three and Nine Months
Ended September 30, 1997 and 1996................................................................ 3
Condensed Consolidated Balance Sheet at September 30, 1997 and December 31, 1996................... 4
Condensed Consolidated Statement of Cash Flows for the Three and Nine Months
Ended September 30, 1997 and 1996................................................................ 5
Notes to Condensed Consolidated Financial Statements............................................... 6
Independent Certified Public Accountants' Report on Review of
Interim Financial Information.................................................................... 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................................ 10
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K............................................................. 19
Signature .............................................................................................. 20
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CABOT OIL & GAS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(In Thousands, Except Per Share Amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ---------------------
1997 1996 1997 1996
--------- --------- --------- ---------
NET OPERATING REVENUES
Natural Gas Production...................................... $ 35,416 $ 29,656 $ 115,901 $ 94,521
Crude Oil & Condensate ..................................... 2,676 2,598 8,826 8,196
Brokered Natural Gas Margin ................................ 1,053 971 2,484 4,185
Other ...................................................... 1,628 2,272 5,761 7,139
--------- --------- --------- ---------
40,773 35,497 132,972 114,041
OPERATING EXPENSES
Direct Operations .......................................... 7,154 6,960 21,587 20,386
Exploration ................................................ 2,966 2,926 9,873 8,974
Depreciation, Depletion and Amortization ................... 10,647 10,448 31,259 30,462
Impairment of Unproved Properties .......................... 714 705 2,160 2,115
General and Administrative ................................. 5,011 3,975 13,867 12,033
Taxes Other Than Income .................................... 3,450 2,889 11,017 9,407
--------- --------- --------- ---------
29,942 27,903 89,763 83,377
Gain (Loss) on Sale of Assets ................................. (1) (17) 349 1,456
--------- --------- --------- ---------
INCOME FROM OPERATIONS ........................................ 10,830 7,577 43,558 32,120
Interest Expense .............................................. 4,614 3,241 13,533 12,869
--------- --------- --------- ---------
Income Before Income Taxes .................................... 6,216 4,336 30,025 19,251
Income Tax Expense ............................................ 2,536 (29) 11,914 5,993
--------- --------- --------- ---------
NET INCOME .................................................... 3,680 4,365 18,111 13,258
Dividend Requirement on Preferred Stock ....................... 1,391 1,391 4,175 4,174
--------- --------- --------- ---------
Net Income Applicable to Common Stockholders .................. $ 2,289 $ 2,974 $ 13,936 $ 9,084
========= ========= ========= =========
Earnings Per Share Applicable to Common ....................... $ 0.10 $ 0.13 $ 0.61 $ 0.40
========= ========= ========= =========
Average Common Shares Outstanding ............................. 22,909 22,808 22,878 22,800
========= ========= ========= =========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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CABOT OIL & GAS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
(In Thousands, Except Share Data)
SEPTEMBER 30, DECEMBER 31,
1997 1996
--------- ---------
ASSETS
Current Assets
Cash and Cash Equivalents ........................................... $ 1,795 $ 1,367
Accounts Receivable, Net ............................................ 36,881 67,810
Inventories ......................................................... 9,104 8,797
Other ............................................................... 2,346 1,663
--------- ---------
Total Current Assets .............................................. 50,126 79,637
Properties and Equipment, Net (Successful Efforts Method) .............. 510,169 480,511
Other Assets ........................................................... 918 1,193
--------- ---------
$ 561,213 $ 561,341
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current Portion of Long-Term Debt ................................... $ 16,000 $ --
Accounts Payable .................................................... 47,247 56,338
Accrued Liabilities ................................................. 16,718 16,279
--------- ---------
Total Current Liabilities ......................................... 79,965 72,617
Long-Term Debt ......................................................... 217,000 248,000
Deferred Income Taxes .................................................. 80,610 69,427
Other Liabilities ...................................................... 9,261 10,593
Stockholders' Equity
Preferred Stock:
Authorized--5,000,000 Shares of $.10 Par Value
Issued and Outstanding - $3.125 Cumulative Convertible
Preferred; $50 Stated Value; 692,439 Shares in 1997 and 1996 - 6%
Convertible Redeemable Preferred; $50 Stated Value;
1,134,000 Shares in 1997 and 1996 ............................... 183 183
Common Stock:
Authorized--40,000,000 Shares of $.10 Par Value
Issued and Outstanding-- 22,956,538 Shares and
22,847,345 Shares in 1997 and 1996, Respectively ................ 2,294 2,284
Additional Paid-in Capital .......................................... 245,759 243,283
Accumulated Deficit ................................................. (73,859) (85,046)
--------- ---------
Total Stockholders' Equity ........................................ 174,377 160,704
--------- ---------
$ 561,213 $ 561,341
========= =========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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CABOT OIL & GAS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(In Thousands)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1997 1996 1997 1996
-------- -------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income ..................................... $ 3,680 $ 4,365 $ 18,111 $ 13,258
Adjustment to Reconcile Net Income To Cash
Provided by Operating Activities:
Depletion, Depreciation and Amortization .... 10,647 10,448 31,259 30,462
Impairment of Undeveloped Leasehold ......... 714 705 2,160 2,115
Deferred Income Taxes ....................... 3,000 1,497 11,183 7,052
(Gain) Loss on Sale of Assets ............... 1 17 (349) (1,456)
Exploration Expense ......................... 2,966 2,926 9,873 8,974
Other, Net .................................. 399 73 683 168
Changes in Assets and Liabilities:
Accounts Receivable ......................... (2,675) 1,004 30,929 6,976
Inventories ................................. (3,420) (5,388) (307) (4,692)
Other Current Assets ........................ (144) 165 (684) (71)
Other Assets ................................ (105) (5) 275 (10)
Accounts Payable and Accrued Liabilities .... 12,054 230 (9,029) (11,503)
Other Liabilities ........................... 123 495 (658) 1,462
-------- -------- -------- --------
Net Cash Provided by Operating Activities ... 27,240 16,532 93,446 52,735
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital Expenditures ........................... (32,018) (14,654) (63,823) (38,569)
Proceeds from Sale of Assets ................... 468 340 1,251 4,749
Exploration Expense ............................ (2,966) (2,926) (9,873) (8,974)
-------- -------- -------- --------
Net Cash Used by Investing Activities .......... (34,516) (17,240) (72,445) (42,794)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of Common Stock ........................... 936 145 1,347 373
Increase in Debt ............................... 16,000 2,000 17,000 2,000
Decrease in Debt ............................... (6,000) (1,000) (32,000) (7,000)
Dividends Paid ................................. (2,308) (2,304) (6,920) (6,910)
-------- -------- -------- --------
Net Cash Provided (Used) by Financing Activities 8,628 (1,159) (20,573) (11,537)
-------- -------- -------- --------
Net Increase (Decrease) in Cash & Cash Equivalents 1,352 (1,867) 428 (1,596)
Cash and Cash Equivalents, Beginning of Period .... 443 3,300 1,367 3,029
-------- -------- -------- --------
Cash and Cash Equivalents, End of Period .......... $ 1,795 $ 1,433 $ 1,795 $ 1,433
======== ======== ======== ========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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CABOT OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. FINANCIAL STATEMENT PRESENTATION
During interim periods, Cabot Oil & Gas Corporation (the Company) follows
the accounting policies set forth in its Annual Report to Stockholders and its
Report on Form 10-K filed with the Securities and Exchange Commission. Users of
financial information produced for interim periods are encouraged to refer to
the footnotes contained in the Annual Report to Stockholders when reviewing
interim financial results.
In the opinion of management, the accompanying interim financial statements
contain all material adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation.
2. PROPERTIES AND EQUIPMENT
Properties and equipment are comprised of the following:
SEPTEMBER 30, DECEMBER 31,
1997 1996
----------- -----------
(in thousands)
Unproved oil and gas properties .................... $ 17,395 $ 15,746
Proved oil and gas properties ...................... 864,281 811,726
Gathering and pipeline systems ..................... 154,193 150,910
Land, building and improvements .................... 5,276 5,221
Other .............................................. 16,901 16,028
----------- -----------
1,058,046 999,631
Accumulated depreciation, depletion and amortization (547,877) (519,120)
----------- -----------
$ 510,169 $ 480,511
=========== ===========
3. ADDITIONAL BALANCE SHEET INFORMATION
Certain balance sheet amounts are comprised of the following:
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- -----------
(in thousands)
Accounts Receivable
Trade accounts ................ $ 31,329 $ 63,458
Other accounts ................ 6,181 5,021
-------- --------
37,510 68,479
Allowance for doubtful accounts (629) (669)
-------- --------
$ 36,881 $ 67,810
======== ========
Accounts Payable
Trade accounts ................ $ 9,618 $ 12,277
Natural gas purchases ......... 11,640 20,726
Royalty and other owners ...... 9,698 13,469
Capital costs ................. 10,156 5,409
Dividends payable ............. 1,391 1,391
Taxes other than income ....... 1,005 1,170
Other accounts ................ 3,739 1,896
-------- --------
$ 47,247 $ 56,338
======== ========
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CABOT OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
3. ADDITIONAL BALANCE SHEET INFORMATION, CONTINUED
SEPTEMBER 30, DECEMBER 31,
1997 1996
------- -------
(in thousands)
Accrued Liabilities
Employee benefits ......................... $ 3,741 $ 4,432
Taxes other than income ................... 8,535 8,407
Interest payable .......................... 3,750 2,188
Other accrued ............................. 692 1,252
------- -------
$16,718 $16,279
======= =======
Other Liabilities
Post-retirement benefits other than pension $ 1,179 $ 1,853
Accrued pension cost ...................... 3,784 4,022
Taxes other than income and other ......... 4,298 4,718
------- -------
$ 9,261 $10,593
======= =======
4. LONG-TERM DEBT
At September 30, 1997, the Company had borrowed $153 million against an
available revolving credit line of $235 million. The available credit line is
subject to adjustment from time-to-time on the basis of the projected present
value (as determined by a petroleum engineer's report incorporating certain
assumptions provided by the lender) of estimated future net cash flows from
proved oil and gas reserves and other assets. The revolving term under this
credit facility presently ends in June 1999 and is subject to renewal.
5. ACCOUNTING FOR LONG-LIVED ASSETS
The Company adopted SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" in 1995. If the
Company determines that an impairment event has occurred, through either adverse
changes or a periodic review, the impairment is made on an economic unit basis.
The Company performs a review of all fields each year to determine if an
impairment event has occurred.
6. CONVERSION OF $3.125 PREFERRED STOCK
On October 13, 1997 the Company converted 692,439 outstanding shares of
$3.125 Convertible Preferred Stock into approximately 1,649,000 common shares.
The preferred stock became convertible at the Company's option when the
Company's common shares closed at or above the $21.00 conversion price of the
preferred stock for twenty consecutive trading days. The future impact of the
conversion on the Company is a $2.2 million annual increase in net income
available to common shareholders as a result of eliminating the preferred
dividend.
The Company issued the $3.125 Convertible Preferred Stock in 1993 to
acquire certain properties in the Anadarko area of the west region. After this
conversion, the Company will have one remaining issue of outstanding preferred
stock which is related to its 1994 acquisition of Washington Energy Resources
Company.
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7. PURCHASE AND SALE TRANSACTIONS
Subsequent to the end of the third quarter, the Company completed two
notable asset transactions. Properties in northwest Pennsylvania were sold to
Lomak Petroleum Incorporated for $92.5 million. The Company later purchased $44
million in oil and gas producing properties from Equitable Energy Resources.
These two transactions will be recorded in a like-kind exchange transaction
along with any other potential acquisitions that may qualify. Management
anticipates that any net gain or loss related to properties that do not qualify
for like-kind exchange treatment will not be significant to the consolidated
financial results of the Company. See Overview section on page 10 for further
discussion.
8. PRIVATE PLACEMENT OF SENIOR NOTES
Since the close of the quarter, the Company has taken steps to replace a
portion of its existing borrowings on its revolving credit facility. The Company
expects to execute a definitive note agreement in November 1997 for the $100
million private placement of 7.19%, twelve year Senior Notes. The Company's
existing $80 million, 10.18% private placement amortizes over five years
commencing with a principal payment of $16 million in the second quarter of
1998.
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Independent Certified Public Accountants' Report on Review of Interim Financial
Information
To the Board of Directors and Shareholders
Cabot Oil & Gas Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of
Cabot Oil & Gas Corporation as of September 30, 1997, and the related condensed
consolidated statements of operations and cash flows for the three-month and
nine-month periods ended September 30, 1997 and 1996. These financial statements
are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying consolidated financial statements for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year then ended (not presented herein); and, in our report dated
March 7, 1997, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31, 1996, is
fairly stated in all material respects, in relation to the consolidated
financial statements from which it has been derived.
Coopers & Lybrand L.L.P.
Houston, Texas
November 7, 1997
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following review of operations for the first nine months of 1997 and
1996 should be read in conjunction with the Condensed Consolidated Financial
Statements of the Company and the Notes thereto included elsewhere in this Form
10-Q and with the Consolidated Financial Statements, Notes and Management's
Discussion and Analysis included in the Company's Form 10-K for the year ended
December 31, 1996.
OVERVIEW
For the first nine months of 1997, a substantial improvement in gas
prices, coupled with a 10% increase in production to 50.6 Bcfe, were primarily
responsible for record earnings. Operating cash flows were also up
significantly, increasing $40.7 million over the same period in 1996. Cash flows
from operations funded $73.7 million of capital and exploration expenditures as
well as allowing a $15 million reduction in outstanding debt.
The Company drilled 120.8 net wells with a success rate of 90% compared to
115.7 net wells and an 85% success rate in the first nine months of 1996. For
the entire year of 1997 the Company plans to drill 161 net wells and spend $93
million in capital and exploration expenditures compared to 154 net wells and
$73 million of capital and exploration expenditures in 1996.
Natural gas production was 47.8 Bcf, up 4.5 Bcf compared to the first nine
months of 1996. The production increase was due primarily to the full year
benefit of the new production brought on by the expanded 1996 drilling program
of 154 net wells compared to only 55 net wells drilled in 1995.
On October 1, 1997, the Company sold proved reserves and acreage located
primarily in Northwest Pennsylvania (the Meadville properties) for $92.5 million
to Lomak Petroleum Incorporated. The Meadville properties included 912 wells
producing approximately 15 Mmcfe net per day primarily from the Medina
formation. A portion of these assets were replaced, in a like-kind exchange
transaction, for $44 million in oil and gas producing properties located in the
Green River Basin of Wyoming purchased from Equitable Resources Energy Company
(the Equitable properties) on October 3, 1997. The purchased properties include
approximately 74 Bcfe of reserves, interests in 65 wells with estimated daily
net production of 10 Mmcfe and nearly 70 potential drilling locations. This
acquisition increases the Company's presence in the Rocky Mountain area by 46%.
The remaining cash from the sale of the Meadville properties will be held in
escrow to fund acquisitions identified in the fourth quarter, or to reduce the
level of borrowings on the revolving line of credit.
Natural gas production sales prices in the third quarter increased $0.04
per Mcf, or 2%, to $2.12 per Mcf compared to the 1996 third quarter, while
natural gas sales prices in the nine month period increased $0.24 per Mcf, or
11%, to $2.42 per Mcf over the comparable period of 1996. The volatility of gas
prices has been prevalent in recent years with wide price swings in the
day-to-day trading on the Nymex futures market. Although gas prices in most
regions of the U.S. were up sharply in January of 1997, prices dropped markedly
in February and March of 1997, demonstrating significant price volatility in the
first quarter of 1997. During the second quarter of 1997, gas prices rebounded
in May and June with prices in most regions reaching levels comparable or
favorable to May and June prices of 1996. As the third quarter began, prices
fell below 1996 levels. However, by September, prices rebounded well above
September 1996 levels. Given this recent history of price fluctuations, there is
considerable uncertainty about gas prices for the future periods.
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The Company remains focused on its strategies to grow through the drill
bit, from synergistic acquisitions and from exploitation of its marketing
abilities. Management believes that these strategies are appropriate in the
current industry environment, enabling the Company to add shareholder value over
the long term.
The preceding paragraphs, discussing the Company's strategic objectives
and goals, contain forward-looking information. See Forward-Looking Information
on page 18.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings per Share ("SFAS
128") and Statement of Financial Accounting Standards No. 129, Disclosure of
Information about Capital Structure ("SFAS 129"). The Company expects to adapt
these statements effective December 31, 1997. SFAS 128 simplifies the
computation of earnings per share for companies with a complex capital structure
by replacing primary and fully diluted presentations with the new basic and
diluted disclosures. It is not expected to significantly impact the Company's
disclosure which reflects a simple capital structure. SFAS 129 establishes
standards for disclosing information about an entity's capital structure. The
Company has not determined the impact of these pronouncements on its financial
statements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS
130") and Statement of Financial Accounting Standards No. 131, Disclosure about
Segments of an Enterprise and Related Information ("SFAS 131"). The Company
expects to adapt these statements effective the year ended December 31, 1998.
SFAS 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. It requires (a) classification of items
of other comprehensive income by their nature in a financial statement and (b)
display of the accumulated balance of other comprehensive income separate from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position. The Company has not determined the impact of
this pronouncement on its financial statements.
SFAS 131 establishes standards for reporting information about operating
segments in annual financial statements and requires selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company has not determined the impact
of this pronouncement on its financial statements.
FINANCIAL CONDITION
CAPITAL RESOURCES AND LIQUIDITY
The Company's capital resources consist primarily of cash flows from its
oil and gas properties and asset-based borrowing supported by its oil and gas
reserves. The Company's level of earnings and cash flows depend on many factors,
including the price of oil and natural gas and its ability to control and reduce
costs. Demand for oil and gas has historically been subject to seasonal
influences characterized by peak demand and higher prices in the winter heating
season. Natural gas demand and consequently prices were up significantly in
January 1997, but trended down in February and March due to milder than normal
winter weather. Second quarter gas prices strengthened compared to March prices
and were comparable to the second quarter price levels of 1996. Prices dipped
slightly in July and August, but by September had risen above 1996 levels.
Cooler than normal weather in the north and warmer than normal weather in the
south, combined with nuclear outages and ongoing pipeline maintenance have
continued to increase demand and restrict supply.
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The primary source of cash for the Company during the first nine months of
1997 was from funds generated from operations. Primary uses of cash were funds
used in operations, exploration and development expenditures, repayment of debt
and the payment of dividends.
The Company had a net cash inflow of $0.4 million in the first nine months
of 1997. Net cash inflow from operating and financing activities totaled $72.9
million in the current year, funding the $73.7 million of capital and
exploration expenditures.
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------
1997 1996
-------- -------
(in millions)
Cash Flows Provided by Operating Activities....... $ 93.4 $ 52.7
======== =======
Cash flows from operating activities in the 1997 first nine months were
higher by $40.7 million compared to the corresponding period of 1996 primarily
due to higher natural gas production and prices, as well as favorable changes in
working capital.
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------
1997 1996
-------- -------
(in millions)
Cash Flows Used by Investing Activities........... $ 72.4 $ 42.8
======== =======
Cash flows used by investing activities in the first nine months of 1997
and 1996 were substantially attributable to capital and exploration expenditures
of $73.7 million and $47.5 million, respectively. Proceeds from the sale of
certain oil and gas properties in the first nine months of 1997 and 1996 were
$1.3 million and $4.7 million, respectively.
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------
1997 1996
-------- -------
(in millions)
Cash Flows Used by Financing Activities........... $ 20.6 $ 11.5
======== =======
Cash flows used by financing activities were primarily debt reductions
under the Company's revolving credit facility and dividend payments. During the
third quarter of 1997, borrowings against the revolving credit facility
increased $10 million primarily to support the drilling program. For the nine
month period, this line of debt has been reduced by $15 million primarily as a
result of strong operating cash flows.
The Company has a revolving credit facility of $235 million, which is
subject to adjustment on the basis of the projected present value of estimated
future net cash flows from proved oil and gas reserves and other assets. The
revolving term of the credit facility runs to June 1999. Management believes
that the Company has the ability to finance, if necessary, its capital
requirements, including acquisitions.
Subsequent to the end of the third quarter, the Company received a
commitment from six insurance companies for a $100 million private placement of
Senior Notes with a twelve year final maturity and a coupon rate of 7.19%.
Proceeds from the Senior Notes will be used to pay down debt on the Company's
revolving credit facility. Closing of the transaction is scheduled for November
1997 after the satisfactory completion of a definitive Note Purchase Agreement.
The Company's existing $80 million, 10.18% private placement amortizes over five
years commencing in 1998. Also in October, the Company completed the conversion
of the $3.125 preferred stock into approximately 1,649,000 shares of common
stock, eliminating $2.2 million in annual preferred stock dividends.
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The Company's 1997 debt service is projected to be approximately $18.2
million. No principal payments are due in 1997. A $16 million principal payment
is due in the second quarter of 1998 on the Company's twelve year 10.18% notes.
Capitalization information on the Company is as follows:
SEPTEMBER 30, DECEMBER 31,
1997 1996
-------- --------
(in millions)
Long-Term Debt (1) ..... $ 233.0 $ 248.0
Stockholders' Equity (2)
Common Stock ....... 83.1 69.4
Preferred Stock .... 91.3 91.3
-------- --------
Total .............. 174.4 160.7
-------- --------
Total Capitalization ... $ 407.4 $ 408.7
======== ========
Debt to Capitalization.. 57.2% 60.7%
- ------
(1) Includes $16 million in current portion of long-term debt at September 30,
1997.
(2) The conversion of the $3.125 preferred stock in the fourth quarter will
reduce the preferred stock balance by $34.6 million and increase the balance in
common stock by the same amount. There is no effect on the total Stockholders'
Equity balance due to this conversion.
CAPITAL AND EXPLORATION EXPENDITURES
The following table presents major components of capital and exploration
expenditures:
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1997 1996
------- -------
(in millions)
Capital Expenditures
Drilling and Facilities ....... $ 50.0 $ 30.7
Leasehold Acquisitions ........ 3.3 2.2
Pipeline and Gathering ........ 3.4 2.9
Other ......................... 1.5 0.4
------- -------
58.2 36.2
------- -------
Proved Property Acquisitions... 5.6 2.3
Exploration Expenses ..................... 9.9 9.0
------- -------
Total ......................... $ 73.7 $ 47.5
======= =======
Total capital and exploration expenditures in the first nine months of 1997
increased $26.2 million compared to the same period of 1996, primarily due to
the overall increased capital spending program planned for 1997.
The Company generally funds most of its capital and exploration activities,
excluding oil and gas property acquisitions, with cash generated from
operations, and budgets such capital expenditures based upon projected cash
flows, exclusive of acquisitions.
The Company has $92.6 million of capital and exploration expenditures
planned for 1997, an increase of 27% compared to 1996. The Company expects to
drill 161 net wells in 1997 compared with 154 net wells drilled in 1996.
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During the first nine months of 1997, the Company paid dividends of $2.7
million on the Common Stock and $4.2 million in aggregate on the $3.125
convertible preferred stock and 6% convertible redeemable preferred stock. A
regular dividend of $0.04 per share of Common Stock was declared for the quarter
ending September 30, 1997, to be paid November 28, 1997 to shareholders of
record as of November 14, 1997.
CONCLUSION
The Company's financial results depend upon many factors. Two important
factors are the price of natural gas, and the Company's ability to market gas on
economically attractive terms. While the natural gas prices rose sharply in
January and trended down in February and March of 1997, the average produced
natural gas sales price received in the first quarter of 1997 was up 32% over
the first quarter in 1996. Second quarter prices were comparable to the second
quarter price levels of 1996, while third quarter prices have risen above 1996
levels. Gas prices for the first nine months of 1997 were up 11%, or 24 cents
per Mcf, over the comparable period in 1996. The volatility of natural gas
prices in recent years remains prevalent in 1997 with wide price swings in
day-to-day trading on the Nymex futures market. Given this continued price
volatility, management cannot predict with certainty what pricing levels will be
for the remainder of 1997. Because future cash flows are subject to such
variables, there can be no assurance that the Company's operations will provide
cash sufficient to fully fund its capital expenditures if prices should return
to the depressed levels of 1995.
While the Company's 1997 plans include a significant increase in capital
spending, potentially negative changes in industry conditions might require the
Company to adjust its 1997 spending plan to ensure the availability of capital,
including, among other things, reductions in capital expenditures or common
stock dividends.
The Company believes its capital resources, supplemented, if necessary,
with external financing, are adequate to meet its capital requirements.
The preceding paragraph contains forward-looking information. See the
Forward-Looking Information section on page 18.
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RESULTS OF OPERATIONS
For the purpose of reviewing the Company's results of operations, "Net
Income" is defined as net income available to common shareholders.
SELECTED FINANCIAL AND OPERATING DATA
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1997 1996 1997 1996
------ ------ ------- --------
(in millions, except where noted)
Net Operating Revenues................................... $ 40.8 $ 35.5 $ 133.0 $ 114.0
Operating Expenses....................................... 29.9 27.9 89.8 83.4
Operating Income......................................... 10.8 7.6 43.6 32.1
Interest Expense......................................... 4.6 3.2 13.5 12.9
Net Income............................................... 2.3 3.0 13.9 9.1
Earnings Per Share....................................... 0.10 0.13 0.61 0.40
Natural Gas Production (Bcf)
Appalachia.......................................... 6.5 6.6 19.9 19.8
West................................................ 10.2 7.6 27.9 23.5
------ ------ ------- --------
Total Company....................................... 16.7 14.2 47.8 43.3
Natural Gas Production Sales Prices ($/Mcf)
Appalachia.......................................... 2.57 2.31 2.88 2.61
West................................................ 1.90 1.89 2.13 1.83
Total Company....................................... 2.12 2.08 2.42 2.18
Crude/Condensate
Volume (Mbbl)....................................... 139 124 434 403
Price $/Bbl......................................... 19.57 20.92 20.45 20.32
Brokered Natural Gas Margin
Volume (Bcf)........................................ 9.2 8.5 24.8 25.2
Margin $/Mcf........................................ 0.11 0.11 0.10 0.16
THIRD QUARTERS OF 1997 AND 1996 COMPARED
Net Income and Revenues The Company reported net income in the third
quarter of 1997 of $2.3 million, or $0.10 per share. During the corresponding
quarter of 1996, the Company reported net income of $3.0 million, or $0.13 per
share which included a one-time tax refund of $2.6 million. Excluding this
non-recurring item, net income for the third quarter of 1996 was $0.4 million,
or $0.02 per share. Operating income and operating revenues increased $3.3
million and $5.3 million, respectively. Natural gas made up 87%, or $35.4
million, of net operating revenue. The increase in net operating revenues was
driven primarily by a 18% increase in natural gas production as discussed below.
Net income and operating income were similarly impacted by the increase in
natural gas production.
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16
Natural gas production volume in the Appalachian Region was virtually
unchanged at 6.5 Bcf. Natural gas production volume in the Western Region was up
2.6 Bcf to 10.2 Bcf due primarily to new production brought on by drilling since
1995.
The average Appalachian natural gas production sales price increased $0.26
per Mcf, or 11%, to $2.57, increasing net operating revenues by $1.7 million on
6.5 Bcf of production. In the Western Region, the average natural gas production
sales price increased slightly to $1.90 per Mcf, increasing net operating
revenues by $0.1 million on 10.2 Bcf of production. The overall weighted average
natural gas production sales price increased $0.04 per Mcf, or 2%, to $2.12.
Crude oil and condensate sales volumes were up 15 Mbbl, or 12%, to 139
Mbbl while crude oil prices decreased $1.35 per Bbl, or 6%, to $19.57,
increasing net operating revenues by approximately $0.1 million.
The brokered natural gas margin increased $0.1 million to $1.1 million due
to an increase in volume of 0.7 Bcf, or 8%, to 9.2 Bcf. The net margin remained
flat at $0.11 per Mcf. During the first half of 1997, the Company experienced
less favorable than normal market conditions. However, the third quarter has
seen improving volumes and a slightly better price.
Other net operating revenues decreased $0.6 million to $1.6 million due
primarily to $0.7 million in non-recurring miscellaneous revenues in the third
quarter of 1996 related to the settlement of a claim.
Operating Costs and Expenses Total costs and expenses from recurring
operations increased $2.0 million, or 7%, due primarily to the following:
o Direct costs of operations increased $0.2 million primarily due to
costs associated with the consolidation of two regional offices.
o Depreciation, depletion, amortization and impairment expense was up
slightly from 1996. However, expense per Mcf equivalent decreased for
the third quarter compared to the same period in 1996 due to the higher
base of reserve levels created by the success of the 1997 drilling
program.
o Taxes other than income increased $0.6 million, or 19%, due to the
increase in natural gas production revenues.
o General and administrative expenses increased $1.0 million, or 26%, due
to $0.4 million of increased non-cash stock compensation expense, $0.1
million related to office relocation expenses and a favorable fringe
benefit adjustment that lowered 1996 third quarter expenses by $0.3
million.
Interest expense increased $1.4 million primarily due to $1.3 million in
interest received in the third quarter of 1996 on a one-time tax refund.
Income tax expense increased $2.6 million due to the one-time tax refund
received in the third quarter of 1996 for percentage depletion claimed for
certain periods prior to 1990.
NINE MONTHS OF 1997 AND 1996 COMPARED
Net Income and Revenues The Company reported net income in the first
nine months of 1997 of $13.9 million, or $0.61 per share. During the
corresponding period of 1996, the Company reported net income of $9.1 million,
or $0.40 per share, including a $2.6 million one-time tax refund. Operating
income and operating revenues increased $11.4 million and $18.9 million,
respectively. Natural gas made up 87%, or $115.9 million, of operating revenue.
The increase in net operating revenue was driven primarily by a 11% increase in
the average natural gas price, and by a 10% increase in natural gas production
as discussed
-16-
17
below. Net income and operating income were similarly impacted by the increase
in natural gas production and prices.
Natural gas production volume in the Appalachian Region was up slightly at
19.9 Bcf. Natural gas production volume in the Western region was up 4.4 Bcf, or
19%, to 27.9 Bcf due primarily to new production brought on by drilling in 1996
and early 1997.
The average Appalachian natural gas production sales price increased $0.27
per Mcf, or 10%, to $2.88, increasing net operating revenues by $5.4 million on
19.9 Bcf of production. In the Western Region, the average natural gas
production sales price increased $0.30 per Mcf, or 16%, to $2.13, increasing net
operating revenues by $8.4 million on 27.9 Bcf of production. The overall
weighted average natural gas production sales price increased $0.24 per Mcf, or
11%, to $2.42.
Crude oil and condensate sales volumes were up 31 Mbbl, or 8%, to 434 Mbbl
while crude prices increased $0.13 per Bbl, or 1%, to $20.45, increasing net
operating revenues by approximately $0.1 million.
The brokered natural gas margin decreased $1.7 million to $2.5 million
primarily due to a softening of $0.06 per Mcf in the net margin to $0.10 per
Mcf. Brokered gas market conditions in 1996, particularly in the first quarter,
were exceptionally good. While market conditions in the first half of 1997 were
less favorable than normal, prices in the third quarter have returned to the
1996 level.
Other net operating revenues decreased $1.4 million to $5.8 million due
primarily to net miscellaneous revenues in 1996 related to a contract
settlement.
Operating Costs and Expenses Total costs and expenses from operations
increased $6.4 million, or 8%, due primarily to the following:
o Direct Operations expense increased $1.2 million, or 6%, due the timing
of workovers and lease maintenance performed later in 1996 than in
1997, and costs associated with the consolidation of two regional
offices.
o Exploration expense increased $0.9 million, or 10%, due to the dry hole
expenses related to the expanded exploration activity in the drilling
program for 1997.
o Depreciation, depletion, amortization and impairment expense increased
$0.8 million, or 3%, due to the increase in equivalent production.
o Taxes other than income increased $1.6 million, or 17%, due primarily
to the increase in natural gas production revenues.
o General and administrative expenses increased $1.8 million, or 15%,
primarily due to $0.5 million associated with the timing of the
incentive compensation expenses which were accrued in the later part of
1996, $0.7 million of increased non-cash stock compensation expense,
$0.3 million related to a favorable fringe benefit adjustment in 1996
and $0.1 million for accrued office relocation expense.
Interest expense increased $0.7 million due to last year's results
reflecting the benefit of $1.3 million of interest received on the one-time tax
refund in the third quarter of 1996. Decreases in bank debt in 1997 partially
offset the overall increase.
Excluding the one-time tax refund of $1.8 million received in 1996, income
tax expense was up $4.1 million due to the increase in earnings before income
tax.
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FORWARD-LOOKING INFORMATION
The statements regarding future financial performance and results and the
other statements which are not historical facts contained in this report are
forward-looking statements. The words "expect," "project," "estimate,"
"predict" and similar expressions are also intended to identify
forwarding-looking statements. Such statements involve risks and uncertainties,
including, but not limited to, market factors, market prices (including
regional basis differentials) of natural gas and oil, results of future
drilling and marketing activity, future production and costs and other factors
detailed herein and in the Company's other Securities and Exchange Commission
filings. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual outcomes may vary
materially from those indicated.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
15.1 -- Awareness letter of independent accountants.
27 -- Article 5. Financial Data Schedule for Third Quarter
1997 Form 10-Q
(b) Reports on Form 8-K
None
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SIGNATURE
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.
CABOT OIL & GAS CORPORATION
(Registrant)
By: /s/ Edgar J. Milan
--------------------------------------------
November 10, 1997 Edgar J. Milan, Chief Financial Officer
(Principal Financial Officer and Officer Duly
Authorized to Sign on Behalf of the Registrant)
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INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
15.1 --Awareness letter of independent accountants.
27 --Article 5. Financial Data Schedule for Third Quarter
1997 Form 10-Q