UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
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Commission File No. 1-12905
EEX CORPORATION
(Exact name of Registrant as specified in its charter)
Texas
(State or other jurisdiction of incorporation or organization)
75-2421863
(I.R.S. Employer Identification No.)
2500 CityWest Blvd., Suite 1400, Houston, Texas 77042
(Address of principal executive office) (Zip Code)
(713) 243-3100
(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
twelve 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
Number of shares of Common Stock of Registrant outstanding as
of November 9, 1998: 127,150,427
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
[CAPTION]
EEX CORPORATION
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)
Three Months Ended Nine Months Ended
September 30 September 30
------------------- -----------------
1998 1997 1998 1997
-------------- --------------
(In thousands except per share amounts)
[S] [C] [C] [C] [C]
Revenues
Natural gas $ 22,913 $ 51,175 $100,770 $154,826
Oil and condensate 18,487 21,866 56,339 71,230
Natural gas liquids 422 2,177 1,467 4,968
Cogeneration operations 4,159 2,912 10,123 8,387
Other 342 100 698 883
-------- -------- -------- --------
Total 46,323 78,230 169,397 240,294
-------- -------- -------- --------
Costs and Expenses
Production and operating 11,941 12,267 35,495 37,317
Exploration 11,345 25,192 37,600 65,213
Depreciation and amortization 21,771 38,604 77,415 112,353
Impairment of producing oil
and gas properties 210,202 210,202
Loss (gain) on sales of property,
plant & equipment (3,000) (8,003) 1,266 (8,003)
Cogeneration operations 2,879 2,584 7,679 7,742
General, administrative and other 6,240 31,939 19,057 48,593
Taxes, other than income 2,245 4,670 9,636 13,624
-------- -------- -------- --------
Total 53,421 317,455 188,148 487,041
-------- -------- -------- --------
Operating (Loss) (7,098) (239,225) (18,751) (246,747)
Other Income (Expense) - Net 73 (79) 59 (150)
Interest Income 12 383 374 469
Interest and Other Financing Costs (4,138) (8,804) (14,162) (25,502)
--------- --------- -------- --------
(Loss) Before Income Taxes (11,151) (247,725) (32,480) (271,930)
Income Tax (Benefit) (5,699) (66,190) (4,127) (74,665)
Minority Interest (73) (6,532) (73)
-------- -------- -------- --------
Net (Loss) $ (5,452)$(181,608) $(34,885)$(197,338)
======== ========= ======== =========
Basic and Diluted Net
(Loss) Per Share $ (0.04) $ (1.43) $ (0.28)$ (1.56)
======= ========= ======== ==========
Weighted Average Shares
Outstanding 126,616 126,641 126,633 126,641
======= ========= ======== ==========
See accompanying Notes.
[CAPTION]
EEX CORPORATION
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
Nine Months Ended
September 30
-------------------
1998 1997
-------- --------
(In thousands)
[S] [C] [C]
OPERATING ACTIVITIES
Net (loss) $ (34,885) $(197,338)
Impairment of producing oil and gas properties 210,202
Impairment of undeveloped leasehold 40,866
Dry hole cost 17,445 7,409
Depreciation and amortization 77,415 112,353
Deferred income tax (benefit) (8,678) (69,534)
Loss (gain) on sales of property,
plant and equipment 1,266 (8,003)
Other 4,279 14,071
Changes in current operating assets and liabilities
Accounts receivable 17,299 17,068
Other current assets (3,685) (2,477)
Accounts payable (70,319) 17,915
Other current liabilities (4,691) 355
--------- ---------
Net cash flows from (used in)
operating activities (4,554) 142,887
--------- ---------
INVESTING ACTIVITIES
Additions to property, plant and equipment (118,133) (128,522)
Proceeds from disposition of property,
plant and equipment 236,148 61,240
Changes in property, plant and
equipment accruals 9,485 (3,386)
--------- ---------
Net cash flows from (used in)
investing activities 127,500 (70,668)
--------- ---------
FINANCING ACTIVITIES
Borrowings under bank revolving credit agreement 160,000 60,000
Repayment of borrowings under bank
revolving credit agreement (155,000) (140,000)
Borrowings under short term financing agreement 167,764 130,900
Repayments under short term financing agreement (172,764) (127,900)
Redemption of minority interest in preferred
securities of subsidiary (100,000)
Repayment of Company-Obligated mandatorily
redeemable preferred securities of subsidiary (150,000)
Issuance of minority interests in preferred
securities of subsidiaries 150,000
Change in temporary advances with
affiliated companies 13,328
Change in advances under leasing arrangements (5,457)
Payments of capital lease obligations (8,040) (2,899)
Issuance of common stock 2
--------- ---------
Net cash flows used in financing activities (108,040) (72,026)
--------- ---------
Net Increase in Cash and Cash Equivalents 14,906 193
Cash and Cash Equivalents at Beginning of Period 3,790 1,358
--------- ---------
Cash and Cash Equivalents at End of Period $ 18,696 $ 1,551
========= =========
See accompanying Notes.
[CAPTION]
EEX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(September 30, 1998 Unaudited)
September 30 December 31
1998 1997
------------ ---------
(In thousands)
[S] [C] [C]
ASSETS
Current Assets
Cash and cash equivalents $ 18,696 $ 3,790
Accounts receivable - trade 40,626 57,925
Other 15,230 11,545
---------- ----------
Total current assets 74,552 73,260
---------- ----------
Property, Plant and Equipment (at cost)
Oil and gas properties
(successful efforts method) 1,247,225 1,882,097
Other 19,875 19,581
---------- ----------
Total 1,267,100 1,901,678
Less accumulated depreciation
and amortization 772,254 1,192,691
---------- ----------
Net property, plant and equipment 494,846 708,987
---------- ----------
Deferred Income Tax Benefit 28,916 20,238
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Other Assets 4,631 5,304
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Total $ 602,945 $ 807,789
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable - trade $ 47,782 $ 108,616
Short term borrowings 5,000
Current portion of capital lease obligations 10,813 8,418
Other 5,340 10,031
---------- ----------
Total current liabilities 63,935 132,065
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Bank Revolving Credit Agreement 30,000 25,000
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Capital Lease Obligations 222,882 233,317
---------- ----------
Other Liabilities 45,851 42,744
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Minority Interest in Preferred
Securities of Subsidiary 100,000
---------- ----------
Common Shareholders' Equity
Common stock (400,000 shares authorized;
127,150 and 127,059 shares outstanding) 1,272 1,271
Paid in capital 569,289 570,493
Accumulated deficit (328,657) (293,772)
Unamortized restricted stock compensation (1,236) (2,877)
Treasury stock (391) (452)
---------- ----------
Common shareholders' equity 240,277 274,663
---------- ----------
Total $ 602,945 $ 807,789
========== ==========
See accompanying Notes.
EEX CORPORATION
Notes to Condensed Consolidated Financial Statements
1. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) necessary for a fair
presentation of the financial position, results of operations
and cash flows for the interim periods included herein have
been made. Certain items in prior periods have been
reclassified to be consistent with the current presentation.
2. Basic net income (loss) per share is based on the weighted
average number of common shares outstanding during the period.
Diluted net income (loss) per common share, where applicable,
is based on the weighted average number of common shares and
all dilutive potential common shares outstanding during the
period.
3. In the second quarter of 1998, EEX redeemed at par value,
all of the outstanding preferred securities of a subsidiary.
4. The Company maintains a valuation allowance to reduce the
calculated deferred tax asset to net realizable value in
accordance with Statement of Financial Accounting Standards No.
109 (SFAS 109). In the third quarter of 1998, EEX increased the
deferred tax asset by $8.7 million based upon several factors,
one of which is the taxable income from producing properties in
Indonesia which will be sheltered by past foreign net operating
losses. The realization of the remaining deferred tax asset is
based on expected future earnings and tax planning strategies
which include planned sales of non-core assets with fair market
values in excess of book and tax cost bases, utilization of
excess capacity of the Cooper floating production facility and
pipeline, acceleration of income from shallow water Gulf of
Mexico producing properties received as part of a property swap
completed during the third quarter of 1998, the favorable
impact from restructuring measures over the last year, the
curtailment of the onshore exploration program and reduction of
dry hole exposure in the Company's Gulf of Mexico exploration
program. Although the Company has incurred net taxable losses
for book purposes in recent years, management believes it is
more likely than not that the Company will generate taxable
income sufficient to realize a portion of the tax benefits
associated with assets which have a tax basis in excess of net
cost recorded under the successful efforts method of accounting
used for financial reporting purposes. Such assets are
primarily represented by seismic costs capitalized for tax
purposes but expensed under successful efforts accounting,
assets impaired under the provisions of SFAS 121 for which no
tax deduction is immediately available and past operating
losses of controlled foreign corporations. While management
believes that future earnings will be significantly enhanced as
a result of its strategic plan, due to the uncertainty of
future income estimates the additional anticipated earnings
benefit from further realization of the additional tax basis
has not been fully recognized at this time and is included in
the valuation allowance of $65 million at September 30, 1998
for the Company's deferred tax asset.
5. The In June 1998, the Financial Accounting Standards Board
issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", which is effective for fiscal years
beginning after June 15, 1999, with earlier adoption
encouraged. This Statement requires companies to record
derivatives on the balance sheet as assets and liabilities,
measured at fair value. Gains or losses resulting from changes
in the values of those derivatives would be accounted for
depending on the use of the derivative and whether it qualifies
for hedge accounting. EEX has not yet determined what the
effect of SFAS No. 133 will be on results of operations and
financial position. EEX will adopt this accounting standard as
required by January 1, 2000.
6. Early in 1998, EEX entered into two forward purchase
facilities to repurchase shares of its common stock. During the
third quarter of 1998, EEX initiated several transactions under
these facilities. These facilities allow for settlement, at
EEX's option, by physical delivery of the shares to EEX in
exchange for cash or on a net basis in either shares of EEX
common stock or in cash. For a net basis settlement, to the
extent that the market price of EEX's common stock on a
settlement date is higher (lower) than the forward purchase
price, the net differential is received (paid) by EEX. As of
September 30, 1998, transactions under these facilities covered
approximately $5.5 million or 986,900 shares of EEX's stock
with an average forward purchase price of $5.57 per share. If
the agreements were settled on a net basis on the September 30,
1998 market price of EEX's common stock ($4.88 per share), EEX
would be obligated to pay approximately $.7 million in cash or
deliver approximately 141,648 shares.
7. EEX was named a defendant in two lawsuits filed on August
3, 1998, in Federal Court for the Northern and Southern
Districts of Texas. The suits are on behalf of certain EEX
shareholders and have been consolidated in the Northern
District of Texas (Dallas)and a consolidated amended complaint
will be filed. The plaintiffs allege misrepresentations
occurred prior to August 4, 1997, concerning the value of the
Company's assets and reserves. In addition to EEX, defendants
include Enserch Corporation, Texas Utilities Company, Degolyer
& MacNaughton and certain present and former officers and
directors of EEX. No assessment of the claims can be made at
this time. EEX intends to vigorously defend the consolidated
action.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Certain statements in this report, including statements of EEX
Corporation's ("EEX" or the "Company") and management's
expectations, intentions, plans and beliefs, are "forward-
looking statements," within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended, that are subject
to certain events, risks and uncertainties that may be outside
EEX's control. See "Forward Looking Statements- Uncertainties
and Risks" below.
RESULTS OF OPERATIONS
EEX reported a third quarter 1998 net loss of $5.5 million
($.04 per share), versus a net loss of $182 million ($1.43 per
share) for the same period in 1997. Results for the three
months ended September 30, 1998 included non-recurring gains
on asset sales ($3 million). Results for the nine months ended
September 30, 1998 included non-recurring amounts for losses
on asset sales ($1.3 million) and costs associated with the
disposition of properties in East Texas included in
depreciation and amortization ($6.7 million). Results for the
quarter and nine months ended September 30, 1997 included non-
recurring amounts for gains on asset sales ($8 million);
impairment of producing oil and gas properties ($210 million);
and an unusual charge, included in general, administrative and
other expenses, for reorganization and restructuring ($24
million for the quarter and $26 million for nine months).
In the following comparisons of results of operations, 1998
and 1997 results have been adjusted to exclude the non-
recurring items described above.
QUARTERS ENDED SEPTEMBER 30, 1998 AND 1997 - Revenues for the
third quarter of 1998 were $46 million, a 41% decrease from
1997 primarily due to decreased production resulting from
sales of non-core properties and third quarter 1998 weather-
related production shutdowns in the Gulf of Mexico. Natural
gas revenues decreased $28 million (55%) resulting from lower
third quarter 1998 production ($25 million), and prices ($2.9
million). The average natural gas sales price per thousand
cubic feet ("Mcf") was $2.06 in 1998 compared with $2.32 in
1997. Natural gas production for 1998 was 11.1 billion cubic
feet ("Bcf"), down from 22 Bcf in 1997. Oil revenues decreased
$3.4 million (15%), reflecting a 30% decrease in the average
sales price per barrel to $12.58, which was mostly offset by a
20% increase in production primarily due to the Mudi field in
Indonesia. Crude oil production was 1,470 thousand barrels
("Mbbls") in 1998 compared to 1,223 MBbls in 1997. EEX net
production from the Mudi field for the third quarter of 1998
was 666 Mbbls, down slightly from 722 Mbbls in the second
quarter of 1998 due to market constraints and operational
factors.
Costs and expenses from recurring operations were $56 million
in 1998, compared to $91 million in 1997, a 38% decrease.
Operating expenses (production and operating, general and
administrative and taxes other than income) were $20 million
in 1998, 17% lower than 1997, resulting from asset sales and
the favorable impact from restructuring measures implemented
over the last year. Production and operating costs for 1998
included $3.3 million for oil production from the Mudi field.
Exploration expenses for 1998 decreased 55% from 1997 due to
curtailment of the onshore exploration program, change in
focus to offshore and international areas and impact of the
offshore exploration joint venture with Enterprise Oil Plc.
Exploration expense for the third quarter of 1998 includes
$7.1 million for dry holes in both offshore and international
drilling activities. Depreciation and amortization was $22
million in 1998, $17 million lower than 1997 due to lower
production volumes and the impairment to producing oil and gas
properties recognized in 1997.
Total interest and other financing costs, including minority
interest, were $4.1 million in 1998, a $4.7 million reduction
from 1997, due to the reduction in debt and redemption of the
minority interest with proceeds of asset sales.
NINE MONTHS ENDED JUNE 30, 1998 AND 1997 - Revenues for 1998
were $169 million, a 29% decrease from 1997 due to lower
production resulting from sales of non-core properties and a
13% reduction in the sales price per barrel of oil equivalent
to $13.63. Natural gas revenues decreased $54 million (35%),
resulting primarily from lower production ($48 million).
The average natural gas sales price per Mcf was $2.28 in 1998
compared with $2.41 in 1997. Natural gas production for 1998
was 44.3 Bcf, down from 64.2 Bcf in 1997. Oil revenues
decreased $15 million (21%), reflecting a 30% decrease in the
average sales price per barrel to $13.68, which was partially
offset by a 13% increase in production primarily from the Mudi
field. Crude oil production for 1998 was 4,119 Mbbls compared
to 3,652 Mbbls in 1997. Production from the Mudi field was
1,476 Mbbls.
Costs and expenses from recurring operations were $180 million
in 1998, compared to $258 million in 1997. Operating expenses
(as defined above) were $64 million in 1998, 12% lower than
1997 for the reasons listed above. Production and operating
costs for 1998 included $7 millon for oil production from the
Mudi field. Exploration expenses for 1998 decreased 42% from
1997 due to reasons described above. Exploration expense for
1998 includes $17 million for dry holes. Depreciation and
amortization was $71 million in 1998, $42 million lower than
1997 due to lower production volumes and the impairment to
producing oil and gas properties recognized in 1997.
In the second quarter of 1998, EEX completed the sale of East
Texas producing oil and gas properties to Cross Timbers Oil
Company for $235 million. These properties represented
approximately 220 billion cubic feet of gas equivalent. As a
part of the sale, EEX retained a volumetric production payment
to satisfy an obligation existing under agreements with Encogen
One Partners, Ltd. The effective date of the sale was January
1, 1998.
Results of operations for the nine months ended September 30,
1998 include the following revenues, costs and expenses and
sales volumes attributable to the East Texas properties:
Revenues Millions Sales Volume
Natural gas $17.3 8.2 Bcf
Oil, condensate and liquids 1.5 103 MBbls
Costs and Expenses
Production 1.6
Depreciation and amortization 15.2
Taxes, other than income 1.6
Total interest and other financing costs, including minority
interest, were $21 million, $4.9 million reduced from 1997,
resulting from a lower overall debt level in 1998 and
redemption of the minority interest in the second quarter of
1998.
HEDGING ACTIVITIES
A portion of the risk associated with fluctuations in the
price of natural gas and oil is managed through the use of
hedging techniques such as oil and gas swaps, collars and
futures agreements. EEX fixed the price on third quarter 1998
production volumes of 7.3 Bcf of natural gas (64% of
production) at an average price of $2.19 per Mcf and 262 MBbls
of oil (40% of production) at an average price of $18.53 per
Bbl. For the first nine months of 1998, EEX fixed the price
on 25 Bcf of natural gas (56% of production) at an average
price of $2.36 per Mcf and 1,269 MBbls of oil (63% of
production) at an average price of $17.81 per Bbl. In total
oil and gas price hedging activities increased third quarter
1998 revenues by $1.2 million, compared to a decrease of $.8
million for the third quarter of 1997. For the first nine
months of 1998 and 1997, oil and gas hedging activities
increased revenues by $7 million and $.8 million,
respectively. At September 30, 1998, EEX had outstanding
swaps, collars and futures agreements that were entered into
as hedges extending through December 31, 1999, to exchange
payments on 13.2 Bcf of natural gas and 230 MBbls of oil. At
September 30, 1998, there were $.8 million of net unrealized
and unrecognized hedging gains based on the difference between
the strike price and the New York Mercantile Exchange futures
price for the applicable trading month. In addition, there
were $.1 million of realized losses on hedging activities
which were deferred and will be applied as a decrease in
revenues in the fourth quarter of 1998 in the applicable month
of physical sale of production.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows and Capital Expenditures
For the first nine months of 1998, EEX generated sufficient
cash flows from asset sales to fund its capital requirements,
reduce financings by $8 million, redeem all of the $100
million of preferred securities of a subsidiary and provide
funds required by operations. Operating activities for the
first nine months of 1998 required cash flows of $4.6 million,
compared to $143 million of cash flows provided from
operations in 1997. The requirement in 1998 was a result of
changes in current operating assets and liabilities.
The Company intends to continue to make substantial capital
expenditures in the fourth quarter of 1998 and in 1999 for the
exploration and development of its properties, primarily in
the Gulf of Mexico. At present, EEX plans to finance these
capital expenditures through internally generated cash flows,
the sale of additional non-core assets, borrowings under
existing credit facilities, alliances with contractors to
assume early capital expenditure requirements and/or offerings
in public or private equity or debt markets. Borrowings under
EEX's credit facilities may also be used to supplement
temporary cash flow needs. In September 1998, EEX filed a
Form S-3 registration statement to register an aggregate of
$300 million of debt securities, preferred stock, warrants and
common stock. The registration statement became effective on
October 13, 1998. EEX plans to offer debt or equity
securities registered under the Form S-3 when market
conditions are favorable. EEX does not anticipate paying cash
dividends on its common stock in the foreseeable future.
Capital Structure
EEX has scheduled a special meeting of shareholders for
December 8, 1998 to vote on a one-for-three reverse split of
the Company's outstanding common stock, presently 127 million
shares, and to reduce the Company's authorized common stock
from 400 million shares to 150 million shares. The reverse
split, if approved by shareholders, will not have a material
effect on financial position, results of operations or cash
flows.
In the second quarter of 1998, EEX redeemed, at par value, all
the outstanding preferred securities of a subsidiary. The
dividend rate on these preferred securities was based on LIBOR
plus a spread of 4% for the quarter ended March 31, 1998, 5%
for the quarter ended June 30, 1998 and was to increase by 1%
quarterly through December 31, 1998. At September 30, 1998,
debt represented 53% of total capitalization, as defined in
loan agreements and includes both capital and operating
leases, compared to 50% at December 31, 1997.
YEAR 2000 ISSUE
EEX initiated its Year 2000 Readiness Program in 1998 by
engaging a consultant to perform a preliminary analysis of the
Company's asset inventory and provide strategic guidelines to
ensure EEX's operations are not interrupted by the potential
failure of computer programs to recognize and interpret date
codes correctly in the Year 2000 ("Year 2000 Issue"). A
project team comprised of managers from various departments
reviewed the consultant's conclusions and developed an
organizational approach for the investigation of the Year 2000
Issue.
This approach entails assessment, implementation, certification
and contingency planning phases. Generally, EEX's strategy
involves the identification of operations and inventory that
may be affected by the Year 2000 Issue, the assessment of
readiness and the risk associated with those items that may
fail to perform, and the implementation of corrective measures
and contingency plans. To date, EEX has identified software,
hardware and other memory-capable pieces of equipment that may
be affected by the Year 2000 Issue, and is researching
manufacturer/vendor representations regarding their Year 2000
functionality. Concurrently, EEX is conducting a poll of its
business partners and service providers regarding their Year
2000 readiness. After the results of this poll are known,
contingency plans, which will include actions such as
identifying alternates for those entities that cannot provide
satisfactory levels of assurance, will be formulated. It is
anticipated these contingency plans will be in place by the
third quarter of 1999.
In general, the equipment situated on EEX-operated offshore
production facilities may be less likely to present Year 2000-
related obstacles since the average age of those facilities is
three years. Responsibility for Year 2000 readiness with
respect to drilling operations is addressed and delineated
during drilling contract negotiations. The majority of EEX's
hardware and software is covered by maintenance agreements that
ensure the issuance of Year 2000-compliant updates or the
provision of necessary modifications at no additional cost to
EEX.
EEX is currently focused on implementing corrective measures
for those inventory items that have been identified as non-
compliant. For example, system upgrades and compliance testing
for EEX's financial application system are expected to be
complete in the first quarter of 1999. Additionally, certain
production facility components will be replaced with Year 2000-
functional substitutes prior to the third quarter of 1999. To
date, EEX has spent $.1 million on Year 2000 corrective
measures. Year 2000 costs to EEX cannot be accurately
estimated at this time because EEX has not completed its
assessment of inventory and operations. No assurances can be
given that business interruptions arising from the Year 2000
Issue will not occur.
RECENT EVENTS
Trade for Shallow Water Properties in the Gulf of Mexico
In the third quarter of 1998 EEX completed the previously
announced exchange of substantially all of its Permian Basin
properties in West Texas and Eastern New Mexico for shallow
water properties located off the coast of Texas and Louisiana.
In the trade, which was effective January 1, 1998, EEX received
interests in 24 producing blocks and 30 exploratory blocks and
$9 million in cash.
Llano Development Plan
EEX is planning a phased development approach to exploit the
potentially sizeable reserves encountered at Llano. Presently,
there are no proved reserves at Llano. The phased approach
begins with an appraisal well to be drilled during the fourth
quarter and an early development option that could bring first
production on line as early as late 2000. In addition to
development drilling at Llano, additional exploration drilling
is planned on other prospects in the area over the next several
years. Information provided from early production at Llano and
any additional exploration success will be used to properly
size the eventual production facilities.
Early in the fourth quarter of 1998, the Ocean Voyager semi-
submersible drilling rig returned to Garden Banks Block 386 and
will begin drilling the first Llano appraisal well. Drilling at
the Llano #2 well on Block 386 is expected to continue through
the first quarter of 1999. The Llano #2 is the first of at
least two wells which will be required to evaluate the
potential size of the reservoir.
Early production options may include utilization of the
existing facility currently located on Garden Banks Block 388.
The Cooper field on Block 388 is producing through a Floating
Production System ("FPS") and sub-sea pipelines that flow to a
shallow water facility on Eugene Island Block 315. With Cooper
field production rapidly declining, EEX is considering
relocating the FPS from Cooper to the Llano area in order to
accelerate first production by connecting the appraisal wells
to the existing infrastructure.
Deepwater Exploration Program
In addition to development activities at Llano, EEX continues
to pursue an exploration drilling program and to participate in
offshore lease sales in the deepwater of the Gulf of Mexico.
In the most recent offshore lease sale (Western Gulf of Mexico
Sale # 171), EEX, along with partners, were the high bidders on
four out of five blocks bid upon. Assuming all these bids are
awarded, EEX will have an interest in 97 blocks in the
deepwater Gulf of Mexico.
Drilling operations at the Sheba Prospect on Green Canyon Block
341 in the deepwater of the Gulf of Mexico have been completed.
While encountering several sand intervals in drilling to
approximately 25,000 feet, there were no commercial
accumulations of hydrocarbons. The well has been plugged and
the semi-submersible drilling rig will be used to drill the
first appraisal well at the Company's Llano discovery.
EEX currently has deepwater wells drilling on two prospects:
Elvis and Gamera. The Elvis prospect on Mississippi Canyon
block 580 is drilling below 17,000 feet, above the objective
horizons, which are as deep as 20,000 feet. The Elvis well is
expected to reach total depth in November.
The recently spud Gamera prospect is located in the ultra-deep
waters of Atwater Valley in the Gulf. The initial objective of
this well is the Lower Pliocene sand around 16,000 feet. The
well is anticipated to reach total depth during the first
quarter of 1999.
Gulf of Mexico Shelf Activities
The shelf drilling program thus far in 1998 has resulted in
five successes and three dry holes. EEX is currently drilling
two additional shelf wells which are expected to complete
before the end of the year. A recently drilled well at
Vermilion 37 was temporarily abandoned pending further
evaluation. The successful wells will contribute to additional
gas production at an estimated rate, net to EEX, of some 35
million cubic feet per day. The largest contributors to this
rate will come from South Timbalier Block 217 and West Cameron
Block 204, which are expected to begin producing in the fourth
quarter. EEX plans to use available surplus facilities to
accelerate the time from discovery to first production. An
existing platform on Brazos Block 455 was salvaged and
reinstalled in approximately 50 feet of water at West Cameron
204 and production commenced in early November.
International Activities
EEX has a 50% interest in production at the Mudi Field in the
Tuban Block of Indonesia and is continuing to evaluate
additional prospects located within the block. In Turkey, the
Company pursued two areas of interest and, after an
unsuccessful exploratory well at the Salt Lake prospect, has
relinquished its exploration contracts in Turkey.
NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued
SFAS No. 133,"Accounting for Derivative Instruments and
Hedging Activities", which is effective for fiscal years
beginning after June 15, 1999, with earlier adoption encouraged.
This Statement requires companies to record derivatives on the
balance sheet as assets and liabilities, measured at fair
value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use
of the derivative and whether it qualifies for hedge
accounting. EEX has not yet determined what the effect of SFAS
No. 133 will be on results of operations and financial
position. EEX will adopt this accounting standard as required
by January 1, 2000.
Forward Looking Statements -Uncertainties and Risks
Certain statements in this report, including statements of
EEX's and management's expectations, intentions, plans and
beliefs, are "forward-looking statements," within the meaning
of Section 21E of the Securities Exchange Act of 1934, as
amended, that are subject to certain events, risks and
uncertainties that may be outside EEX's control. These forward-
looking statements include statements of management's plans and
objectives for EEX's future operations and statements of future
economic performance; information regarding drilling schedules,
expected or planned production, future production levels of
international and domestic fields, EEX's capital budget and
future capital requirements, EEX's meeting its future capital
needs, the level of future expenditures for environmental costs
and the outcome of regulatory and litigation matters; and the
assumptions described in this report underlying such forward-
looking statements. Actual results and developments could
differ materially from those expressed in or implied by such
statements due to a number of factors, including, without
limitation, those described in the context of such forward-
looking statements and the risk factors set forth below and
described from time to time in EEX's other documents and
reports filed with the Securities and Exchange Commission.
Exploration Risk. Exploration for oil and gas in the
deepwater Gulf of Mexico and unexplored frontier areas have
inherent and historically high risk. As described in this
report, EEX is focusing on exploration opportunities in
offshore and international areas which will increase associated
risk. Future reserve increases and production will be
dependent on EEX's success in these exploration efforts and no
assurances can be given of such success.
Operational Risks and Hazards. EEX's operations are
subject to the risks and uncertainties associated with finding,
acquiring and developing oil and gas properties, and producing,
transporting and selling oil and gas. Operations may be
materially curtailed, delayed or canceled as a result of
numerous factors, such as accidents, weather conditions,
compliance with governmental requirements and shortages or
delays in the delivery of equipment. Drilling may involve
unprofitable efforts, not only with respect to dry wells, but
also with respect to wells that are productive but do not
produce sufficient net revenues to return a profit after
drilling, operating and other costs. Various field operating
hazards such as fires, explosions, blow-outs, equipment
failures, abnormally pressured formations and environmental
accidents may adversely affect production from successful
wells. EEX's ability to sell its oil and gas production is
dependent on the availability and capacity of gathering
systems, pipelines and other forms of transportation.
Offshore Risks. EEX's offshore Gulf of Mexico oil and gas
reserves include properties located in water depths of 20 to in
excess of 7,000 feet where operations are by their nature more
difficult than drilling operations conducted on land in
established producing areas. Deepwater drilling and operations
require the application of more advanced technologies that
involve a higher risk of mechanical failure and can result in
significantly higher drilling and operating costs.
Furthermore, offshore operations require a significant amount
of time between the time of discovery and the time the gas or
oil is actually marketed, increasing the market risk involved
with such operations.
Volatility of Oil and Gas Markets. EEX's operations are
highly dependent upon the prices of, and demand for, oil and
gas. These prices have been, and are likely to continue to be,
volatile. Prices are subject to fluctuations in response to a
variety of factors that are beyond the control of EEX, such as
worldwide economic and political conditions as they affect
actions of OPEC and Middle East and other producing countries,
and the price and availability of alternative fuels. EEX's
hedging activities with respect to some of its projected oil
and gas production, which are designed to protect against price
declines, may prevent EEX from realizing the benefits of price
increases above the levels of the hedges and protect it from
incurring the detriments of price decreases below the level of
hedges. Because the majority of EEX's reserve base is natural
gas on an energy equivalent basis, it is more sensitive to
fluctuations in the price of natural gas.
Estimating Reserves and Future Net Cash Flows. Uncertainties
are inherent in estimating quantities and values of reserves
and in projecting rates of production, net revenues and the
timing of development expenditures. The reserve data represent
estimates only of the recovery of hydrocarbons from underground
accumulations and are often different from the quantities
ultimately recovered. Any downward adjustment in reserve
estimates could adversely affect EEX. Also, any substantial
decline due to long-term price changes in the projected net
revenues resulting from production of reserves could have a
material adverse effect on the Company's financial position and
results of operation.
Capital Funding. EEX's access to public or private equity or
debt markets may be limited by general conditions in or
volatility of the markets. No assurances can be given that the
Company will be able to secure funds in these markets, or that
such funds will be obtained on terms favorable to the Company.
Government Regulation. EEX's business is subject to certain
federal, state and local laws and regulations relating to the
drilling for the production of oil and gas, as well as
environmental and safety matters. See "Business -Government
Regulation "in EEX's Annual Report on Form 10-K.
International Operations. EEX's interests in countries
outside the United States are subject to the various risks
inherent in foreign operations. These risks may include,
among other things, currency restrictions and exchange rate
fluctuations, loss of revenue, property and equipment as a
result of expropriation, nationalization, war, insurrection
and other political risks, risks of increases in taxes and
governmental royalties, renegotiations of contracts with
governmental entities, changes in laws and policies governing
operations of foreign-based companies and other uncertainties
arising out of foreign government sovereignty over the
Company's international operations. The Company's
international operations may also be adversely affected by
laws and policies of the United States affecting foreign
trade, taxation and investment. In addition, in the event of
a dispute arising from foreign operations, the Company may be
subject to the exclusive jurisdiction of foreign courts or may
not be successful in subjecting foreign persons to the
jurisdiction of the courts of the United States.
[CAPTION]
EEX CORPORATION
SUMMARY OF SELECTED OPERATING DATA FOR OIL & GAS PRODUCING ACTIVITIES
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30 September 30
------------------- ----------------
1998 1997 1998 1997
------ ------ ------ ------
[S] [C] [C] [C] [C]
Sales Volumes
Natural gas (MMcf) 11,112 22,022 44,256 64,173
Oil and condensate (MBbls) 1,470 1,223 4,119 3,652
Natural gas liquids (MBbls) 39 179 141 365
Total volumes (MBoe) (a) 3,361 5,072 11,636 14,713
Average Sales Price
Natural gas (per Mcf) $ 2.06 $ 2.32 $ 2.28 $ 2.41
Oil and condensate (per Bbl) 12.58 17.88 13.68 19.50
Natural gas liquids (per Bbl) 10.82 12.16 10.40 13.61
Total product revenue (per MBoe) (a) 12.44 14.83 13.63 15.70
Cost and Expenses (per MBoe) (a) (b)
Production and operating (c) $ 3.55$ 2.42 $ 3.05 $ 2.54
Exploration 3.38 4.97 3.23 4.43
Depreciation and amortization 6.48 7.61 6.65 7.64
General, administration and other 1.86 1.52 1.64 1.51
Taxes, other than income .67 .92 .83 .93
Net Wells
Drilled 6.7 16 20.7 45
Productive 5.7 9 16.7 33
(a) Natural gas has been converted to barrel of oil equivalents
(Boe) on the basis of six Mcf equals 1.0 Boe.
(b) Excludes unusual and non-recurring expenses.
(c) Excludes related production, severance and ad valorem taxes.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EXHIBIT (27) - Financial Data Schedule
(b) Reports on Form 8-K
Current Report on Form 8-K dated September 24,
1998. (News release dated September 24, 1998: EEX
shareholders to vote on one-for-three reverse split
of EEX common stock.)
Current Report on Form 8-K dated September 10,
1998. (News release dated September 10, 1998:
Update on Llano development plans and deepwater
exploration program.)
Current Report on Form 8-K dated September 1, 1998.
(News release dated September 1, 1998: Successful
completion and testing of West Cameron Block 204
Well No. 1.)
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.
EEX CORPORATION
(Registrant)
Dated November 11, 1998 By /s/R. S. Langdon
-------------------------------------
R. S. Langdon
Executive Vice President,
Finance and Administration,
and Chief Financial Officer
The above officer of registrant has signed this
report as its duly authorized representative and
as its principal financial officer.