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UNITED STATES
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 MARCH 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____to_____
Commission file number: 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)
(580) 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
--- ---
Number of shares of common stock outstanding as of April 29, 1998: 56,952,769
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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)
March 31, December 31,
1998 1997
---------- ----------
ASSETS
Current Assets:
Cash and short-term cash investments $ 48,921 $ 55,075
Accounts receivable-trade 137,393 162,667
Materials and supplies inventories 3,624 2,805
Other current assets 5,204 15,385
---------- ----------
Total Current Assets 195,142 235,932
---------- ----------
Property, Plant and Equipment, at cost 2,990,658 2,807,027
Less: accumulated depreciation,
depletion and amortization (1,316,245) (1,260,601)
---------- ----------
1,674,413 1,546,426
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Other Assets 58,991 70,424
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Total Assets $1,928,546 $1,852,782
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable-trade $ 164,737 $ 163,563
Other current liabilities 35,517 28,456
Current installments of long-term debt
Income taxes-current 2,573 2,299
---------- ----------
Total Current Liabilities 202,827 194,318
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Deferred Income Taxes 148,432 144,083
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Other Deferred Credits and Noncurrent
Liabilities 56,364 56,425
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Long-term Debt 695,011 644,967
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Shareholders' Equity:
Common stock 194,917 194,743
Capital in excess of par value 359,361 358,054
Retained earnings 287,052 275,610
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841,330 828,407
Less common stock in treasury
(at cost, 1,524,900 shares) (15,418) (15,418)
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Total Shareholders' Equity 825,912 812,989
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Total Liabilities and Shareholders'
Equity $1,928,546 $1,852,782
---------- ----------
---------- ----------
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
2
NOBLE AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
Three Months Ended March 31,
----------------------------
1998 1997
--------- ---------
REVENUES:
Oil and gas sales and royalties $166,937 $219,322
Gathering, marketing and processing 79,598 100,110
Other income 1,603 3,023
-------- --------
248,138 322,455
-------- --------
COSTS AND EXPENSES:
Oil and gas exploration 16,615 19,605
Oil and gas operations 39,690 43,517
Gathering, marketing and processing 76,294 94,801
Depreciation, depletion and amortization 70,312 77,720
Selling, general and administrative 13,061 12,187
Interest 11,530 14,284
Interest capitalized (1,550) (713)
-------- --------
225,952 261,401
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INCOME BEFORE TAXES 22,186 61,054
INCOME TAX PROVISION 8,468(1) 22,691(1)
NET INCOME $13,718 $ 38,363
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BASIC EARNINGS PER SHARE $ .24(2) $ .67(2)
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DILUTED EARNINGS PER SHARE $ .24(2) $ .67(2)
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SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
3
NOBLE AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Three Months Ended March 31,
----------------------------
1998 1997
------ ------
Cash Flows from Operating Activities:
Net income $ 13,718 $ 38,363
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization 70,312 77,720
Amortization of undeveloped lease costs, net 596 1,087
Increase in deferred credits 4,288 18,169
Decrease in other assets and other noncash items, net 12,065 4,746
Changes in working capital, not including cash:
(Increase) decrease in accounts receivable 25,274 64,588
(Increase) decrease in other current assets and
inventories 9,385 3,934
Increase (decrease) in accounts payable 1,174 (35,053)
Increase (decrease) in other current liabilities 7,336 584
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Net Cash Provided by Operating Activities 144,148 174,138
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Cash Flows From Investing Activities:
Capital expenditures (201,128) (69,361)
Proceeds from sale of property, plant and equipment 1,622 271
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Net Cash Used in Investing Activities (199,506) (69,090)
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Cash Flows From Financing Activities:
Exercise of stock options 1,481 1,506
Cash dividends (2,277) (2,274)
Proceeds from bank borrowings 50,000
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Net Cash Provided by (Used in) Financing Activities 49,204 (768)
--------- --------
Increase (Decrease) in Cash and Short-term Cash
Investments (6,154) 104,280
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Cash and Short-term Cash Investments at Beginning
of Period 55,075 94,768
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Cash and Short-term Cash Investments at End of Period $ 48,921 $199,048
--------- --------
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Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest (net of amount capitalized) $ 6,472 $ 14,806
Income taxes $ 4,750
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
4
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
In the opinion of Noble Affiliates, Inc. (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 March 31, 1998 and December 31, 1997, and the results of operations and
the cash flows for the three month periods ended March 31, 1998 and 1997.
These consolidated condensed financial statements should be read in
conjunction with the consolidated financial statements and the notes thereto
incorporated in the Company's annual report on Form 10-K for the year ended
December 31, 1997.
(1) INCOME TAX PROVISION
For the three months ended March 31:
(In thousands)
--------------------
1998 1997
------- --------
Current $ 3,804 $ 9,257
Deferred 4,664 13,434
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$ 8,468 $ 22,691
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(2) BASIC EARNINGS PER SHARE AND DILUTED EARNINGS PER SHARE
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 128 "Earnings per Share" in February 1997.
The Company adopted the disclosure requirements of SFAS No. 128 during 1997
and restated all previously presented financial statements in conformity with
SFAS No. 128. Basic earnings per share of common stock was computed using the
weighted average number of shares of common stock outstanding during each
period. The diluted net income per share of common stock includes the effect
of outstanding stock options.
The following table summarizes the calculation of basic earnings per
share ("EPS") and diluted EPS for the quarter ending March 31:
1998 1997
------------------------------- ------------------------------
INCOME SHARES INCOME SHARES
(IN THOUSANDS, EXCEPT PER SHARE) (NUMERATOR) (DENOMINATOR) (NUMERATOR) (DENOMINATOR)
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Net income/shares $13,718 56,912 $38,363 56,841
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BASIC EPS $.24 $.67
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Net income/shares $13,718 56,912 $38,363 56,841
Effect of Dilutive Securities
Stock options 480 582
Adjusted net income/shares $13,718 57,392 $38,363 57,423
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DILUTED EPS $.24 $.67
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(3) RESTATEMENT TO CONFORM TO CURRENT YEAR PRESENTATION
Certain reclassifications have been made to the 1997 consolidated financial
statements to conform to the 1998 presentation.
5
(4) MINERALS MANAGEMENT SERVICE CLAIMS
Samedan Oil Corporation ("Samedan"), a wholly owned subsidiary of the
Company, has from time to time settled various claims against parties which
failed to fulfill their contractual obligation to Samedan to purchase gas at
fixed prices greater than market or pursuant to take-or-pay provisions. The
Company's policy, which is consistent with general industry practice, is that
amounts received in such settlements ("settlement payments") do not represent
payment for gas produced and, therefore, are not subject to royalty payments.
Property owners, including governmental authorities and private parties, have
in recent years asserted claims against Samedan and other oil and gas
companies for royalties on settlement payments.
Samedan participated, in a joint effort with other energy companies and
the Independent Petroleum Association of America ("IPAA"), in a test case
which challenged the determination by the U.S. Minerals Management Service
("MMS") that royalties were payable to the government on certain settlement
payments received by Samedan (and the other plaintiffs). The District Court
for the District of Columbia (the "D.C. District Court") entered a judgment
against Samedan in the amount of $20,000. In 1996, the Court of Appeals for
the District of Columbia Circuit reversed the judgment against Samedan. In
subsequent proceedings in the D.C. District Court consistent with the
appellate court decision, on July 25, 1997, the court enjoined the MMS from
taking action to collect from Samedan royalties on non-recoupable settlement
payments (the "MMS Injunction"). The MMS had until April 14, 1998 to appeal
the MMS Injunction and elected not to do so. The Company is reviewing the
impact of that decision.
Samedan may be the subject of future legal actions by property owners
claiming royalties on other settlement payments received by Samedan. There
can be no assurance that Samedan will prevail in any such action. The Company
is unable to estimate the possible amount of loss, if any, associated with
this contingency.
(5) TRADING AND HEDGING ACTIVITIES
The Company, through its subsidiaries, 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, swaps,
options and other contractual arrangements.
Hedging gains and losses, as applicable, related to the Company's oil
and gas production are recorded in oil and gas sales and royalties.
In addition to the hedging arrangements pertaining to the Company's
production as described above, Noble Gas Marketing, Inc. ("NGM"), a wholly
owned subsidiary of the Company, employs various hedging arrangements in
connection with its purchases and sales of third party production to lock in
profits or limit exposure to gas price risk.
Most of the purchases made by NGM are on an index basis; however,
purchasers in the markets in which NGM sells 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.
NGM records hedging gains or losses relating to fixed term sales as
gathering, marketing and processing revenues in the periods in which the
related contract is completed.
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 fact included in this Form
10-Q, including, without limitation, statements contained under "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
regarding the Company's financial position, 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 the 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
6
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 quarterly report on 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 decreased to $144.1 million
in the three months ended March 31, 1998 from $174.1 million in the same period
of 1997. Cash and short-term cash investments decreased from $55.1 million at
December 31, 1997 to $48.9 million at March 31, 1998.
The Company has expended approximately $201.1 million of its $451.2
million 1998 capital budget through March 31, 1998. The Company expects to fund
its remaining 1998 capital budget from cash flows from operations. The Company's
1998 capital budget includes approximately $48.4 million for acquisitions of
producing properties. The Company continues to evaluate possible strategic
acquisitions and believes it is positioned to access external sources of funding
should it be necessary or desirable in connection with an acquisition.
The Company's current ratio (current assets divided by current
liabilities) was .96 at March 31, 1998 compared with 1.21 at December 31, 1997.
The Company follows an entitlements method of accounting for its gas
imbalances. The Company's estimated gas imbalance receivables were $19.0
million at March 31, 1998 and $18.5 million at December 31, 1997. Estimated
gas imbalance liabilities were $21.6 million at March 31, 1998 and at
December 31, 1997. 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.
The Company purchased oil and gas properties from New England Energy
Incorporated, a wholly owned subsidiary of New England Electric System, for
$50 million, effective as of January 1, 1998. The Company estimates net
proved reserves of the properties to be 1 million barrels of oil/condensate
and 50.2 billion cubic feet of gas as of the effective date.
RESULTS OF OPERATIONS
For the first quarter of 1998, the Company recorded net income of $13.7
million, or $.24 per share, compared with net income of $38.4 million, or
$.67 per share, in the first quarter of 1997. The decrease resulted primarily
from substantially lower product prices.
Gas sales for the Company, excluding third party sales by Noble Gas
Marketing, Inc. ("NGM"), a wholly owned subsidiary of the Company, decreased
19 percent for the three months ended March 31, 1998 compared with the same
period in 1997. The primary reasons for the decreased sales were a decrease
in average gas price of 17 percent, coupled with an average daily production
decrease of two percent in the 1998 first quarter, compared with the first
quarter of 1997.
Oil sales for the Company, excluding third party sales by Noble Trading,
Inc. ("NTI"), a wholly owned subsidiary of the Company, decreased 35 percent
for the three months ended March 31, 1998, compared with the same period in
1997. The decrease in sales was primarily due to an average oil price
decrease of 33 percent, and an average daily production decrease of three
percent in the first quarter of 1998, compared with the first quarter of 1997.
NGM markets the Company's natural gas as well as certain third party
gas. NGM sells gas directly to end-users, gas marketers, industrial users,
interstate and intrastate pipelines, and local distribution companies. NTI
markets a portion of the Company's oil as well as certain third party oil.
The Company records all of NGM's and NTI's sales as gathering, marketing and
processing revenues and expenses. All intercompany sales and expenses have
been eliminated.
7
For the first quarter of 1998, revenues and expenses from combined NGM
and NTI third party sales totaled $79.6 million and $76.3 million,
respectively, for a gross margin of $3.3 million. In comparison, combined NGM
and NTI third party sales and expenses of $100.1 million and $94.8 million,
respectively, resulted in a gross margin of $5.3 million for the first
quarter of 1997.
The Company, from time to time, uses various hedging arrangements in
connection with anticipated crude oil and natural gas sales of its own
production and third party production purchased and sold by NGM to minimize
the impact of product price fluctuations. Such arrangements include fixed
price hedges, costless collars and other contractual arrangements. Although
these hedging arrangements expose the Company to credit risk, the Company
monitors the creditworthiness of its counterparties, which generally are
major institutions, and believes that losses from nonperformance are unlikely
to occur.
The Company had no natural gas or crude oil hedging contracts related to
its production in the first quarter of 1998.
NGM employs various hedging arrangements in connection with its
purchases and sales of third party production to lock in profits or limit
exposure to gas price risk. Most of the purchases made by NGM are on an index
basis; however, purchasers in the markets in which NGM sells 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 first quarter of 1998, NGM had
hedging transactions with broker-dealers that represented approximately
783,000 MMBTU's of gas per day. Hedges for April 1998 through March 2000,
which range from 20,000 MMBTU's to 686,000 MMBTU's of gas per day for future
physical transactions, were not closed at March 31, 1998. During the first
quarter of 1997, NGM had hedging transactions with broker-dealers that
represented approximately 679,000 MMBTU's of gas per day.
Certain selected oil and gas operating statistics follow:
For the three months
ended March 31,
--------------------------
1998 1997
--------- ---------
Oil revenue (in thousands) $ 45,055 $ 69,297
Average daily oil production - BBLS 38,540 39,604
Average oil price per BBL $ 13.37 $ 19.93
Gas revenues (in thousands) $ 117,476 $ 144,635
Average daily gas production - MCFS 599,082 612,185
Average gas price per MCF $ 2.24 $ 2.69
BBLS - barrels
MCF - thousand cubic feet
Oil and gas exploration expense decreased $3.0 million to $16.6 million
for the three months ended March 31, 1998, as compared with the same period
of 1997. This decrease is primarily attributable to a $7.7 million decrease
in dry hole expense offset by a $5.5 million increase in seismic expense, as
compared to the same period of 1997.
Depreciation, depletion and amortization (DD&A) expense decreased 10
percent for the three months ended March 31, 1998 compared with the same
period in 1997. The unit rate of DD&A per barrel of oil equivalents (BOE),
converting gas to oil on the basis of 6 MCF per barrel, was $5.65 for the
first three months of 1998 compared with $6.10 for the same period of 1997.
The decrease in the unit rate per BOE is due to 1997 year-end reserve
revisions on certain properties as a result of lower production performance,
which revisions were recognized last year and thus lowered the depreciable
basis beginning in 1998. The Company has recorded, through charges to DD&A, a
reserve for future liabilities related to dismantlement and reclamation costs
for offshore facilities. This reserve is based on the best estimates of
Company engineers of such costs to be incurred in future years.
Interest capitalized rose to $1.5 million for the first quarter of 1998
from $.7 million for the first quarter of 1997. This increase resulted from
increased construction projects for various properties of the Company located
in the Gulf of Mexico.
8
FUTURE TRENDS
Samedan Oil Corporation ("Samedan"), a wholly owned subsidiary of the
Company, has from time to time settled various claims against parties which
failed to fulfill their contractual obligation to Samedan to purchase gas at
fixed prices greater than market or pursuant to take-or-pay provisions. The
Company's policy, which is consistent with general industry practice, is that
amounts received in such settlements ("settlement payments") do not represent
payment for gas produced and, therefore, are not subject to royalty payments.
Property owners, including governmental authorities and private parties, have
in recent years asserted claims against Samedan and other oil and gas
companies for royalties on settlement payments.
Samedan participated, in a joint effort with other energy companies and
the Independent Petroleum Association of America ("IPAA"), in a test case
which challenged the determination by the U.S. Minerals Management Service
("MMS") that royalties were payable to the government on certain settlement
payments received by Samedan (and the other plaintiffs). The District Court
for the District of Columbia (the "D.C. District Court") entered a judgment
against Samedan in the amount of $20,000. In 1996, the Court of Appeals for
the District of Columbia Circuit reversed the judgment against Samedan. In
subsequent proceedings in the D.C. District Court consistent with the
appellate court decision, on July 25, 1997, the court enjoined the MMS from
taking action to collect from Samedan royalties on non-recoupable settlement
payments (the "MMS Injunction"). The MMS had until April 14, 1998 to appeal
the MMS Injunction and elected not to do so. The Company is reviewing the
impact of that decision.
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.
The Company is currently in the process of updating its computer
software programs and operating systems so that these systems will properly
utilize dates beyond December 31, 1999. The Company does not expect the cost
to modify its information systems to be material to its financial condition
or results of operations. The Company does not anticipate any material
disruptions in its operations as a result of its 2000 compliance plan.
9
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of stockholders of the Company was held at 10:00
a.m., local time, on Tuesday, April 28, 1998 in Ardmore, Oklahoma.
(b) Proxies were solicited by the Board of Directors of the Company
pursuant to Regulation 14A under the Securities Exchange Act of 1934.
There was no solicitation in opposition to the Board of Directors'
nominees as listed in the proxy statement and all such nominees were
duly elected.
(c) Out of a total of 56,915,805 shares of common stock of the Company
outstanding and entitled to vote, 44,383,861 shares were present in
person or by proxy, representing approximately 78 percent.
Number of Shares
Number of Shares WITHHOLDING AUTHORITY
Voting FOR Election to Vote for Election
As Director As Director
------------------- ---------------------
Alan A. Baker ............................. 43,478,102 905,759
Michael A. Cawley ......................... 43,479,392 904,469
Edward F. Cox ............................. 43,480,294 903,567
James C. Day .............................. 43,480,078 903,783
Robert Kelley ............................. 43,462,344 921,517
Harold F. Kleinman ........................ 42,887,917 1,495,944
George J. McLeod .......................... 43,472,898 910,963
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 on Form 10-Q.
(b) The Company did not file any reports on Form 8-K during the three
months ended March 31, 1998.
10
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: May 12, 1998 By: /s/ WILLIAM D. DICKSON
---------------------------------
William D. Dickson,
Senior Vice President-Finance and
Treasurer
(Principal Financial Officer
and Authorized Signatory)
11
INDEX TO EXHIBITS
Exhibit
Number Exhibit
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27.1 Financial Data Schedule