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UNITED STATES
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, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____to______
Commission file number: 0-7062
NOBLE AFFILIATES, INC.
(Exact name of registrant as specified in its charter)
Delaware 73-0785597
(State of incorporation) (I.R.S. employer identification number)
110 West Broadway
Ardmore, Oklahoma 73401
(Address of principal executive offices) (Zip Code)
(405) 223-4110
(Registrant's telephone number, 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.
Yes X No
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Number of shares of common stock outstanding as of November 8, 1996:
56,758,285
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NOBLE AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
(Dollars in thousands)
(Unaudited)
September 30, December 31,
1996 1995
------------ -----------
ASSETS
Current Assets:
Cash and short-term cash investments . . . . . . . . . . . $ 90,676 $ 12,429
Accounts receivable-trade . . . . . . . . . . . . . . . . . 115,502 79,478
Materials and supplies inventories . . . . . . . . . . . . 4,230 2,855
Other current assets . . . . . . . . . . . . . . . . . . . 18,347 22,750
------------ -----------
Total Current Assets . . . . . . . . . . . . . . . . . . . 228,755 117,512
------------ -----------
Property, Plant and Equipment . . . . . . . . . . . . . . . . 2,578,516 1,691,485
Less: accumulated depreciation,
depletion and amortization . . . . . . . . . . . (958,784) (847,540)
------------ -----------
1,619,732 843,945
------------ -----------
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . 68,476 27,719
------------ -----------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . $ 1,916,963 $ 989,176
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable-trade . . . . . . . . . . . . . . . . . . $ 137,343 $ 73,536
Other current liabilities . . . . . . . . . . . . . . . . . 33,115 20,206
Current portion long-term debt . . . . . . . . . . . . . . 50,000
Income taxes-current . . . . . . . . . . . . . . . . . . . 7,064 3,436
------------ -----------
Total Current Liabilities . . . . . . . . . . . . . . . . . 227,522 97,178
------------ -----------
Deferred Income Taxes . . . . . . . . . . . . . . . . . . . . 104,141 69,445
------------ -----------
Other Deferred Credits and Noncurrent Liabilities . . . . . . 41,051 33,650
------------ -----------
Long-term Debt . . . . . . . . . . . . . . . . . . . . . . . . 1,079,019 376, 992
------------ -----------
Shareholders' Equity:
Common stock . . . . . . . . . . . . . . . . . . . . . . . 173,266 172,407
Capital in excess of par value . . . . . . . . . . . . . . 148,716 145,059
Retained earnings . . . . . . . . . . . . . . . . . . . . . 158,666 109,863
------------ -----------
480,648 427,329
Less common stock in treasury
(at cost, 1,524,900 shares) . . . . . . . . . . . . . . . . (15,418) (15,418)
------------ -----------
Total Shareholders' Equity . . . . . . . . . . . . . . . . 465,230 411,911
------------ -----------
Total Liabilities and Shareholders' Equity . . . . . . . . $ 1,916,963 $ 989,176
============ ===========
See notes to consolidated condensed financial statements.
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NOBLE AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
Nine Months Ended September 30,
----------------------------------
1996 1995
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REVENUES:
Oil and gas sales and royalties . . . . . . . . . . . . . . . . $ 396,149 $ 234,150
Gathering, marketing and processing revenues . . . . . . . . . . 209,796 71,334
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . 5,282 3,790
---------- ---------
611,227 309,274
---------- ---------
COSTS AND EXPENSES:
Oil and gas operations . . . . . . . . . . . . . . . . . . . . . 83,595 61,775
Oil and gas exploration . . . . . . . . . . . . . . . . . . . . 38,797 19,701
Gathering, marketing and processing costs . . . . . . . . . . . 193,687 69,402
Depreciation, depletion and amortization . . . . . . . . . . . . 153,668 106,667
Selling, general and administrative . . . . . . . . . . . . . . 32,671 27,264
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . 23,459 16,279
Interest capitalized . . . . . . . . . . . . . . . . . . . . . . (1,343) (2,360)
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524,534 298,728
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INCOME BEFORE INCOME TAXES . . . . . . . . . . . . . . . . . . . . . 86,693 10,546
INCOME TAX PROVISION . . . . . . . . . . . . . . . . . . . . . . . . 31,849 (1) 4,020 (1)
---------- --------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 54,844 $ 6,526
========== ========
PRIMARY EARNINGS PER SHARE . . . . . . . . . . . . . . . . . . . . . $ 1.09 (2) $ .13 (2)
========== ========
FULLY DILUTED EARNINGS PER SHARE . . . . . . . . . . . . . . . . . . $ 1.04 (3) $ .13 (3)
========== ========
See notes to consolidated condensed financial statements.
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NOBLE AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
Three Months Ended September 30,
----------------------------------
1996 1995
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REVENUES:
Oil and gas sales and royalties . . . . . . . . . . . . . . . . $ 168,212 $ 79,859
Gathering, marketing and processing revenues . . . . . . . . . . 87,709 29,248
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . 1,311 1,183
---------- -----------
257,232 110,290
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COSTS AND EXPENSES:
Oil and gas operations . . . . . . . . . . . . . . . . . . . . . 34,237 21,042
Oil and gas exploration . . . . . . . . . . . . . . . . . . . . 18,342 8,306
Gathering, marketing and processing costs . . . . . . . . . . . 82,792 27,813
Depreciation, depletion and amortization . . . . . . . . . . . . 70,742 35,847
Selling, general and administrative . . . . . . . . . . . . . . 13,786 8,269
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . 12,783 5,485
Interest capitalized . . . . . . . . . . . . . . . . . . . . . . (466) (881)
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232,216 105,881
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INCOME BEFORE INCOME TAXES . . . . . . . . . . . . . . . . . . . . . 25,016 4,409
INCOME TAX PROVISION . . . . . . . . . . . . . . . . . . . . . . . . 9,710 (1) 1,680 (1)
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NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,306 $ 2,729
========== ===========
PRIMARY EARNINGS PER SHARE . . . . . . . . . . . . . . . . . . . . $ .31 (2) $ .05 (2)
========== ===========
FULLY DILUTED EARNINGS PER SHARE . . . . . . . . . . . . . . . . . $ .29 (3) $ .05 (3)
========== ===========
See notes to consolidated condensed financial statements.
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NOBLE AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended September 30,
---------------------------------
1996 1995
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Cash Flows from Operating Activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 54,844 $ 6,526
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization . . . . . . . . . . . 153,668 106,667
Amortization of undeveloped lease costs, net . . . . . . . . . 4,558 5,875
Change in deferred credits . . . . . . . . . . . . . . . . . . 39,552 6,791
Change in other assets and other noncash items, net . . . . . . (14,419) (312)
Changes in working capital, not including cash:
(Increase) decrease in accounts receivable . . . . . . . . . . 1,507 (4,789)
(Increase) decrease in other current assets and inventories . . 3,839 19,821
Increase (decrease) in accounts payable . . . . . . . . . . . . 31,471 32,841
Increase (decrease) in other current liabilities . . . . . . . 18,644 6,952
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Net Cash Provided by (Used in) Operating Activities . . . . . . . . 293,664 180,372
--------- ---------
Cash Flows From Investing Activities:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . (200,743) (205,083)
Acquisition of Energy Development Corporation . . . . . . . . . . (768,185)
Proceeds from sale of property, plant and equipment . . . . . . . 3,036 4,998
--------- ---------
Net Cash Provided by (Used in) Investing Activities . . . . . . . . (965,892) (200,085)
--------- ---------
Cash Flows From Financing Activities:
Proceeds from bank financing . . . . . . . . . . . . . . . . . . 800,000
Proceeds (repayment) from line of credit borrowing . . . . . . . (48,000) 25,000
Exercise of stock options . . . . . . . . . . . . . . . . . . . 4,516 851
Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . (6,041) (6,003)
--------- ---------
Net Cash Provided by (Used in) Financing Activities . . . . . . . . 750,475 19,848
--------- ---------
Increase (Decrease) in Cash and Short-term Cash Investments . . . . 78,247 135
--------- ---------
Cash and Short-term Cash Investments at Beginning of Period . . . . 12,429 22,192
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Cash and Short-term Cash Investments at End of Period . . . . . . . $ 90,676 $ 22,327
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Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest (net of amount capitalized) . . . . . . . . . . . . . . $ 11,314 $ 8,700
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,500
See notes to consolidated condensed financial statements.
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
In the opinion of the Company, the accompanying unaudited consolidated
condensed financial statements contain all adjustments, consisting only of
necessary and normal recurring adjustments, necessary to present fairly the
Company's financial position as of September 30, 1996 and December 31, 1995,
results of operations for the three month and nine month periods ended
September 30, 1996 and 1995 and cash flows for the nine month periods ended
September 30, 1996 and 1995. These consolidated condensed financial statements
should be read in conjunction with the financial statements and the notes
thereto incorporated in the Company's annual report on Form 10-K for the year
ended December 31, 1995.
(1) INCOME TAX PROVISION
For the nine months ended September 30:
(In thousands)
--------------------------------
1996 1995
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Current . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,597 $ (1,551)
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . 16,252 5,571
-------- ---------
$ 31,849 $ 4,020
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For the three months ended September 30:
(In thousands)
--------------------------------
1996 1995
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Current . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 865 $ 381
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . 8,845 1,299
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$ 9,710 $ 1,680
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(2) NET INCOME PER SHARE
The primary earnings per share of common stock was computed using the
weighted average number of shares of common stock outstanding during the period
as follows:
(In thousands)
--------------------------------
1996 1995
-------- --------
For the nine months ended September 30 . . . . . . . . . . . . . . 50,356 50,032
For the three months ended September 30 . . . . . . . . . . . . . . 50,432 50,047
(3) FULLY DILUTED EARNINGS PER SHARE
The fully diluted earnings per share of common stock was computed using
the "if converted method", assuming the Company's convertible debt was
converted into additional outstanding shares of common stock at the beginning
of the period. Using the "if converted method" the weighted average number of
shares of common stock outstanding was 57,146,000 and 57,221,000 for the nine
months and three months, respectively, ended September 30, 1996. The increase
in income related to the assumed reduction in after tax interest expense was
$4,692,000 for the nine months ended September 30, 1996 and $1,564,000 for the
three months ended September 30, 1996. The Company's convertible debt was
antidilutive in 1995 thus, there was no effect on fully diluted earnings per
share.
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(4) MINERALS MANAGEMENT SERVICE CLAIMS
Over the past several years, the Company's wholly owned subsidiaries,
Samedan Oil Corporation ("Samedan") and Energy Development Corporation ("EDC"),
have settled various claims which they had against parties who had contracted
to purchase gas at fixed prices which were greater than market, or who had
take-or-pay contracts with Samedan or EDC in which such obligations to take or
pay for quantities of gas were not fulfilled. It is the Company's policy, which
is consistent with general industry practice, that such payments do not
represent payment for gas produced and, therefore, are not subject to royalty
payments. The federal government, with respect to leases on both onshore and
offshore federal lands, certain other governmental bodies, and some private
landowners have begun to assert claims in recent years against oil and gas
companies for royalties on some or all of such settlement amounts.
The Company recently participated in a joint effort with the Independent
Petroleum Association of America wherein Samedan was a party to a test case
involving such a claim made with respect to a lease on Indian lands. In the
U.S. District Court for the District of Columbia, Samedan and other plaintiffs
challenged the determination by the U.S. Minerals Management Service ("MMS")
that royalties were payable to the government on certain proceeds received by
Samedan (and the other plaintiffs) with respect to a contract settlement. The
district court ruled in favor of the MMS, and a judgment in the amount of
$20,000 was awarded against Samedan. Samedan appealed this judgment and the
court of appeals recently reversed the district court ruling and ruled in favor
of Samedan. The MMS has petitioned for a rehearing. The Company intends to
continue to follow its current policies in regard to these matters unless and
until the issues have been settled by controlling precedent.
Although the amount in controversy applicable to Samedan in the above
described lawsuit is not material, the decision in such case, if the court of
appeals' decision is not upheld, could have a negative impact with respect to
other take-or-pay or contract settlements entered into by Samedan and EDC.
There can be no assurance that the court of appeals' ruling will be upheld. The
Company is unable at this time to estimate the possible amount of the loss, if
any, associated with this contingency.
(5) EDC ACQUISITION
On July 31, 1996, Samedan acquired all the outstanding common stock of
EDC for $768 million. In connection with the acquisition, the Company entered
into a $800 million bank credit facility. Borrowings of $800 under that
agreement were used to fund the purchase of EDC and repay $48 million of
outstanding indebtedness under the Company's then existing bank credit
agreement.
The acquisition has been accounted for using the purchase method of
accounting, and, accordingly, the purchase price has been allocated to EDC's
assets and liabilities based on fair values at the date of the acquisition.
The operating results of EDC have been included in the Consolidated
Condensed Statement of Operations from the date of the acquisition. The
following pro forma information has been prepared assuming the acquisition had
taken place at the beginning of the respective periods. The pro forma
information includes adjustments for interest expense that would have been
incurred to finance the acquisition, additional depreciation, depletion and
amortization based on the fair value of EDC's property, plant and equipment and
expected savings from the termination of certain EDC employees and facilities
consolidation.
Nine Months
Ended September 30,
(In thousands)
---------------------------
1996 1995
-------- --------
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . $827,358 $537,981
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 45,046 $(24,582)
Primary earnings per share . . . . . . . . . . . . . . . . . $ .90 $ (.51)
Fully diluted earnings per share . . . . . . . . . . . . . . . $ .84 $ (.51)
The pro forma data presented above are based on several assumptions and
should not be viewed as indicative of the operations of the Company in future
periods.
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(6) SUBSEQUENT EVENT
On October 17, 1996, the Company called for redemption on November 1,
1996, all of the $230,000,000 principal amount of the Company's 4 1/4%
Convertible Subordinated Notes Due 2003 (the "Convertible Notes"). Prior to the
close of business on November 1, 1996, the holders of $229,962,000 aggregate
principal amount of the Convertible Notes converted such Convertible Notes into
an aggregate of 6,274,474 shares of the Company's common stock. The Company
redeemed the remaining $38,000 of the Convertible Notes using the proceeds from
the sale of 1,036 shares of its common stock to a standby underwriter engaged
in connection with the redemption of the Convertible Notes.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This report on Form 10-Q includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. All statements other
than statements of historical facts included in this Form 10-Q, including,
without limitation, statements contained in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" regarding the
Company's estimates of oil and gas reserves and the future net cash flows
attributable thereto, anticipated capital expenditures, business strategy,
plans and objectives of management of the Company for future operations and
industry conditions, are forward-looking statements. Although the Company
believes that their expectations reflected in such forward-looking statements
are reasonable, it can give no assurance that such expectations will prove to
have been correct. Important factors that could cause actual results to differ
materially from the Company's expectations ("Cautionary Statements") include
without limitation future production levels, future prices and demand for oil
and gas, results of future exploration and development activities, future
operating and development costs, the effect of existing and future laws and
governmental regulations (including those pertaining to the environment) and
the political and economic climate of the United States and the foreign
countries in which the Company operates from time to time, as discussed in this
Form 10-Q and the other documents of the Company filed with the Securities and
Exchange Commission (the "Commission"). All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by the Cautionary Statements.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities increased to $293.7 million in
the nine months ended September 30, 1996 from $180.4 million in the same period
of 1995. Cash and short-term cash investments increased from $12.4 million at
December 31, 1995 to $90.7 million at September 30, 1996.
On July 31, 1996, the Company purchased (the "EDC Acquisition") all of
the outstanding common stock of Energy Development Corporation ("EDC"). The
Company expended $768 million for the EDC Acquisition which was not included in
the original 1996 capital budget. The Company expects to fund internally its
remaining 1996 capital budget. The Company's $240 million 1996 capital budget
includes approximately $58 million for potential acquisitions of producing
properties.
In connection with the EDC Acquisition, the Company entered into a new
$800 million bank credit facility pursuant to a credit agreement (the "Credit
Agreement") dated as of July 31, 1996. Borrowings of $800 million under the
Credit Agreement were used to fund the purchase price for EDC and, together
with funds on hand, to repay $48 million of outstanding indebtedness under the
Company's then existing bank credit agreement, which was cancelled in
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connection with the repayment thereunder. The Credit Agreement generally
permits the Company to repay at its option, in whole or in part and without
premium or penalty, the indebtedness under the Credit Agreement. The Company
therefore has the ability to consider the refinancing of part or all of the
indebtedness outstanding under the Credit Agreement from time to time in the
public or private financial markets on such terms as it considers satisfactory.
As of September 30, 1996 the Company had debt of $100,000,000 of 7 1/4%
Notes Due 2023, $230,000,000 of 4 1/4% Convertible Subordinated Notes Due 2003
(the "Convertible Notes") and $800,000,000 under the Credit Agreement, which
provides for a $400 million term loan which has scheduled $50 million
prepayments on each of June 30, 1997, December 31, 1997 and June 30, 1998 and
maturity of July 31, 2001, and a $400 million revolving credit facility with
maturity of July 31, 2001.
Certain covenants in the Credit Agreement require that as significant
non-core assets are sold, the proceeds be used to pay down the debt. On October
18, 1996, the Company entered into an agreement to sell certain properties in
Colorado for approximately $8.5 million which will be applied to the debt.
On October 17, 1996, the Company called for redemption on November 1,
1996, all of the $230,000,000 principal amount of Convertible Notes. Prior to
the close of business on November 1, 1996, the holders of $229,962,000
aggregate principal amount of the Convertible Notes converted such Convertible
Notes into an aggregate of 6,274,474 shares of the Company's common stock. The
Company redeemed the remaining $38,000 of the Convertible Notes using the
proceeds from the sale of 1,036 shares of its common stock to a standby
underwriter engaged in connection with the redemption of the Convertible Notes.
The Company's current ratio (current assets divided by current
liabilities) was 1.01 for September 30, 1996 compared to 1.21 at December 31,
1995.
The Company follows an entitlements method of accounting for its gas
imbalances. The Company's estimated gas imbalance receivables were $21.6
million at September 30, 1996 and $12.3 million at December 31, 1995.
Estimated gas imbalance liabilities were $20.2 million at September 30, 1996
and $11.4 million at December 31, 1995. Included in the amounts at September
30, 1996 are EDC receivables of $12.4 million and liabilities of $4.5 million.
These imbalances are valued at the amount which is expected to be received or
paid to settle the imbalances. The settlement of the imbalances can occur
either over the life or at the end of the life of a well, on a volume basis or
by cash settlement. The Company does not expect that a significant portion of
the settlements will occur in any one year. Thus, the Company believes the
settlement of gas imbalances will not have a material impact on its liquidity.
RESULTS OF OPERATIONS
For the third quarter of 1996, the Company recorded net income of $15.3
million, or primary earnings per share of 31 cents, compared to net income of
$2.7 million, or primary earnings per share of 5 cents in the third quarter of
1995. During the first nine months of 1996, the Company recorded net income of
$54.8 million, or primary earnings per share of $1.09, compared to net income
of $6.5 million, or primary earnings per share of 13 cents in the first nine
months of 1995. The increase resulted primarily from increased oil and gas
production, as well as increased prices. Approximately $1.6 million and $4.7
million, respectively, after tax interest expense was added to income to
calculate fully diluted earnings per share of 29 cents and $1.04, respectively,
for the three months and nine months ended September 30, 1996.
Sales of the Company's natural gas marketing subsidiary, Noble Gas
Marketing, Inc. ("NGM"), began in June 1994 and sales of the Company's oil
trading subsidiary, Noble Trading, Inc. ("NTI"), began in May 1995. Sales
between all Company subsidiaries are eliminated and third party sales and
expenses are recorded as gathering, marketing and processing revenues and
costs. For the third quarter of 1996, third party sales and expenses totaled
$87.7 million and $82.8 million, respectively, for a gross margin of $4.9
million. Third party sales and expenses of $209.8 million and $193.7 million,
respectively, resulted in a gross margin of $16.1 million for the first nine
months of 1996. For the third quarter of 1995, third party sales and expenses
totaled $29.2 million and $27.8 million, respectively, for a gross margin of
$1.4 million. Third party sales, expenses, and gross margin for the first nine
months
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of 1995 were $71.3 million, $69.4 million and $1.9 million, respectively. The
increased margins in the 1996 third quarter and first nine months resulted from
the Company's capacity and ability to make delivered sales and meet the greater
demand for gas.
Gas sales, excluding third party sales by NGM, increased 165 percent and
99 percent, respectively, for the three months and nine months ended September
30, 1996. The increase in sales is primarily due to a 30 percent and 25 percent
increase, respectively, in the average gas price and a 103 percent and 57
percent increase respectively, in average daily production for the three months
and nine months ended September 30, 1996 compared to the same periods in 1995.
Oil sales increased 59 percent and 38 percent, respectively, for the
three months and nine months ended September 30, 1996 compared with the same
periods in 1995. The increase in sales is primarily due to a 13 percent and 8
percent increase, respectively, in the average oil price and a 41 percent and
28 percent increase, respectively, in average daily production for the three
months and nine months ended September 30, 1996 compared to the same periods in
1995.
The increases in gas and oil production resulted principally from the EDC
Acquisition and production from new wells.
The Company, from time to time, uses various hedging arrangements in
connection with anticipated crude oil and natural gas sales of its production
to minimize the impact of product price fluctuations. Such arrangements include
fixed price hedges, costless collars and other contractual arrangements. During
the third quarter of 1996 the Company had natural gas hedging contracts to
hedge 46 percent of its natural gas production and 43 percent of its crude oil
production, respectively. Natural gas hedges were in the range of $1.60 to
$2.03 per MMBTU and crude oil hedges were in the range of $16.50 to $23.06 per
barrel. The net effect of these third quarter 1996 hedges was a $.19 per MMBTU
reduction in the average natural gas price and $2.13 per barrel reduction in
the average crude oil price for the quarter. As of September 30, 1996, the
Company was a party to crude oil hedging contracts to hedge approximately 91
percent of its estimated 1996 fourth quarter crude oil production and
approximately 25 percent of its estimated 1997 annual crude oil production at
an average price per bbl of $19.31 and $20.98, respectively. The Company was
also a party as of such date to natural gas hedging contracts to hedge
approximately 43 percent of its estimated 1996 fourth quarter natural gas
production and approximately 27 percent of its estimated 1997 annual natural
gas production at an average price per MMBTU of $1.90 and $1.96, respectively.
In addition to the hedging arrangements pertaining to the Company's
production as described above, NGM employs various hedging arrangements in
connection with its purchases and sales of third party production to lock in
profits or limit exposure to oil and gas price risk. Most of the purchases
made by NGM are on an index basis; however, purchasers in the markets in which
NGM sells may often require fixed or NYMEX related pricing. NGM may use a hedge
to convert the fixed or NYMEX sale to an index basis thereby determining the
margin and minimizing the risk of price volatility. During the third quarter of
1996, NGM had hedging transactions with broker-dealers that represented
approximately 303,000 MMBTU of gas per day at prices ranging from $1.66 to
$2.67 per MMBTU resulting in a combined margin (financial hedge net of physical
transaction) of $.025 per MMBTU. Hedges for October 1996 for approximately
429,000 MMBTU of gas per day secured a combined margin (financial hedge net of
physical transaction) of one-half cent per MMBTU. NGM has in place hedges
ranging from approximately 1,300 to 67,000 MMBTU of gas per day for November
1996 to March 1998 for future physical transactions for which a margin has yet
to be determined. Once the index price is established, the margin for November
1996 to March 1998 can be determined. Based on past history, the margin should
not have a significant impact on the financial results of NGM's operations.
Although these hedging arrangements expose the Company to credit
risks, the Company monitors the creditworthiness of its counterparties, which
generally are major institutions, and believes that losses from nonperformance
are unlikely to occur.
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Certain selected oil and gas operating statistics for the Company's
production of oil and gas follow:
For the three months For the nine months
ended September 30, ended September 30,
------------------------ ------------------------
1996 1995 1996 1995
----------- ----------- ---------- ------------
Oil revenues (in thousands) . . . . . . . $ 64,169 $ 40,398 $ 156,704 $ 113,231
Average daily oil production - BBLS . . . 38,366 27,296 32,268 25,305
Average oil price per BBL (1) . . . . . . $ 18.59 $ 16.43 $ 18.18 $ 16.77
Gas revenue (in thousands) . . . . . . . . $ 99,613 $ 37,599 $ 229,536 $ 115,426
Average daily gas production - MCFS . . . 546,269 269,095 422,325 268,155
Average gas price per MCF (2) . . . . . . $ 2.03 $ 1.56 $ 2.03 $ 1.62
BBLS - barrels
MCF - thousand cubic feet
(1) Includes the effect of hedging transactions. The amounts shown reflect a
decrease of $2.13 and an increase of $.48 per barrel, respectively, for
the three months ended September 30, 1996 and 1995. For the nine months
ended September 30, 1996 and 1995, the amounts shown reflect a decrease of
$1.14 and an increase of $.47 per barrel, respectively.
(2) Includes the effect of hedging transactions. The amounts shown reflect a
decrease of $.16 per MCF, for the three months ended September 30, 1996. For
the nine months ended September 30, 1996, the amount shown reflects a
decrease of $.29 per MCF. The Company had no natural gas hedging
transactions for the first nine months of 1995.
Oil and gas exploration expense increased $10 million and $19.1 million,
respectively, for the three months and nine months ended September 30, 1996
compared to the same periods in 1995. The increase is primarily attributable
to a $12.3 million and $22.1 million increase, respectively, in dry hole
expense, partially offset by a $.9 million and $1.3 million decrease,
respectively, in undeveloped lease amortization during the three months and
nine months ended September 30, 1996.
Oil and gas operations expense increased $13.2 million and $21.8 million,
respectively, for the three months and nine months ended September 30, 1996,
compared to the same periods in 1995. On a barrel of oil equivalent (BOE)
basis (converting gas to oil on the basis of 6 MCF per barrel), operations
expense decreased $.29 per BOE for the three months and $.26 per BOE for the
nine months ended September 30, 1996 as compared to the same periods of 1995.
The increase in the third quarter of 1996 is due primarily to the EDC
Acquisition and to an increase in expenses relating to a number of offshore
properties and platforms in the Gulf of Mexico.
Gathering, marketing and processing costs increased $55 million and
$124.3 million, respectively, for the three months and nine months ended
September 30, 1996, compared to the same periods in 1995. The increased costs
for the three and nine months ended September 30, 1996, reflect increased
volumes and higher acquisition costs for both natural gas and crude oil for NGM
and NTI, respectively.
Depreciation, depletion and amortization (DD&A) expense increased 97
percent and 44 percent, respectively, for the three months and nine months
ended September 30, 1996, compared to the same periods in 1995. The unit rate
of DD&A per equivalent barrel, converting gas to oil on the basis of 6 MCF per
barrel, was $5.46 for the first nine months of 1996 compared to $5.58 for the
same period of 1995. The increase in DD&A expense for the three months ended
September 30, 1996 reflects the effects of the EDC Acquisition and a unit rate
of DD&A per equivalent barrel for EDC volumes of $7.43. The increase in the
nine months DD&A expense for 1996 reflects higher oil and gas production
volumes coupled with the higher DD&A rate for EDC volumes. The lower unit rate
for the nine months ended September 30, 1996 compared to the same period in
1995 is primarily due to the $59.5 million writedown of certain long lived
assets as prescribed by Statement of Financial Accounting Standards No. 121
which the Company adopted in 1995. The Company has recorded, through charges to
DD&A, a reserve for future liabilities related to dismantlement and reclamation
costs for offshore facilities. Approximately $3.5 million and $8.4 million,
respectively, was charged to DD&A for the three months and nine months ended
September 30, 1996 for these estimated future liabilities. This reserve is
based on the best estimates of Company engineers of such future costs.
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Selling, general and administrative (SG&A) expense increased 67 percent
and 20 percent, respectively, for the three months and nine months ended
September 30, 1996, compared to the same periods in 1995. The increase in SG&A
in the third quarter of 1996 is due primarily to the EDC Acquisition.
Interest expense increased $7.3 million and $7.2 million, respectively,
for the three months and nine months ended September 30, 1996 compared to the
same periods in 1995, primarily due to borrowing $800 million for the EDC
Acquisition. Interest capitalized decreased $.4 million and $1 million,
respectively, for the three months and nine months ended September 30, 1996
compared to the same periods in 1995. This decrease resulted from the
completion and discontinuation of capitalized interest on certain properties in
the Gulf of Mexico.
OTHER
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123 "Accounting for Stock-Based Compensation." The Company plans to adopt SFAS
No. 123 during 1996 by electing to disclose the additional information required
in the footnotes to its financial statements as opposed to recording stock
based compensation expense.
FUTURE TRENDS
Over the past several years, the Company's wholly owned subsidiaries,
Samedan and EDC, have settled various claims which they had against parties who
had contracted to purchase gas at fixed prices which were greater than market,
or who had take-or-pay contracts with Samedan or EDC in which such obligations
to take or pay for quantities of gas were not fulfilled. It is the Company's
policy, which is consistent with general industry practice, that such payments
do not represent payment for gas produced and, therefore, are not subject to
royalty payments. The federal government, with respect to leases on both
onshore and offshore federal lands, certain other governmental bodies, and some
private landowners have begun to assert claims in recent years against oil and
gas companies for royalties on some or all of such settlement amounts.
The Company recently participated in a joint effort with the Independent
Petroleum Association of America wherein Samedan was a party to a test case
involving such a claim made with respect to a lease on Indian lands. In the
U.S. District Court for the District of Columbia, Samedan and other plaintiffs
challenged the determination by the U.S. Minerals Management Service (MMS)
that royalties were payable to the government on certain proceeds received by
Samedan (and the other plaintiffs) with respect to a contract settlement. The
district court ruled in favor of the MMS, and a judgment in the amount of
$20,000 was awarded against Samedan. Samedan appealed this judgment and the
court of appeals recently reversed the district court ruling and ruled in favor
of Samedan. The MMS has petitioned for a rehearing. The Company intends to
continue to follow its current policies in regard to these matters unless and
until the issues have been settled by controlling precedent.
Although the amount in controversy applicable to Samedan in the above
described lawsuit is not material, the decision in such case, if the court of
appeals' decision is not upheld could have a negative impact with respect to
other take-or-pay or contract settlements entered into by Samedan and EDC.
There can be no assurance that the court of appeals' ruling will be upheld. The
Company is unable at this time to estimate the possible amount of the loss, if
any, associated with this contingency.
Management believes the Company is well positioned with its balanced
reserves of oil and gas to take advantage of future price increases that may
occur. However, the uncertainty of oil and gas prices continues to affect the
domestic oil and gas industry. Due to the volatility of oil and gas prices,
the Company, from time to time, uses hedging and plans to do so in the future
as a means of controlling its exposure to price changes. The Company cannot
predict the extent to which its revenues will be affected by inflation,
government regulation or changing prices.
Lease operating expense and selling, general and administrative expense
have increased significantly with the EDC Acquisition. These expenses will
remain higher than they were prior to the EDC Acquisition but will be less than
if both companies continued operating separately. As of November 1, 1996,
selling, general and administrative expense will be reduced by approximately $1
million per month with the termination of certain EDC employees.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The information required by this Item 6 (a) is set forth in the Index to
Exhibits accompanying this quarterly report and is incorporated herein by
reference.
(b) On August 13, 1996 the Company filed Form 8-K (Date of Event: July 31,
1996) reporting the EDC Acquisition. Pursuant to Items 7 (a) (4) and
7 (b) (2) of Form 8-K, the Company filed an amendment dated September
27, 1996, to such Form 8-K to include the financial statements and pro
forma financial information required by Item 7 of Form 8-K.
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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.
NOBLE AFFILIATES, INC.
---------------------------------------
(Registrant)
Date November 14, 1996 WM. D. DICKSON
-------------------------- ---------------------------------------
WM. D. DICKSON, Vice President-Finance
and Treasurer
(Principal Financial Officer
and Authorized Signatory)
14
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INDEX TO EXHIBITS
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBERED EXHIBIT PAGE
- -------- ------- ------------
27.1 - Financial Data Schedule