UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
TRANSITION 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 November 6, 1998: 56,977,171
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,
1998 1997
------------- ------------
ASSETS
Current Assets:
Cash and short-term cash investments $ 20,071 $ 55,075
Accounts receivable-trade 150,040 162,667
Materials and supplies inventories 3,633 2,805
Other current assets 12,964 15,385
------------ ------------
Total Current Assets 186,708 235,932
------------ ------------
Property, Plant and Equipment 3,123,534 2,807,027
Less: accumulated depreciation,
depletion and amortization (1,430,506) (1,260,601)
------------ ------------
1,693,028 1,546,426
------------ ------------
Other Assets 78,317 70,424
------------ ------------
Total Assets $ 1,958,053 $ 1,852,782
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable-trade $ 190,198 $ 163,563
Other current liabilities 34,076 28,456
Income taxes-current 650 2,299
------------ ------------
Total Current Liabilities 224,924 194,318
------------ ------------
Deferred Income Taxes 145,499 144,083
------------ ------------
Other Deferred Credits and Noncurrent Liabilities 48,629 56,425
------------ ------------
Long-term Debt 730,099 644,967
------------ ------------
Shareholders' Equity:
Common stock 195,001 194,743
Capital in excess of par value 359,841 358,054
Retained earnings 269,478 275,610
------------ ------------
824,320 828,407
Less common stock in treasury
(at cost, 1,524,900 shares) (15,418) (15,418)
------------ ------------
Total Shareholders' Equity 808,902 812,989
------------ ------------
Total Liabilities and Shareholders' Equity $ 1,958,053 $ 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)
Nine Months Ended September 30,
-------------------------------
1998 1997
-------------- -----------
REVENUES:
Oil and gas sales and royalties $ 470,543 $ 555,981
Gathering, marketing and processing 219,188 228,315
Other income 18,119 9,175
-------------- -----------
707,850 793,471
-------------- -----------
COSTS AND EXPENSES:
Oil and gas exploration 82,317 57,463
Oil and gas operations 114,241 122,060
Gathering, marketing and processing 210,565 215,867
Depreciation, depletion and amortization 228,802 219,813
Selling, general and administrative 38,476 36,353
Interest 37,451 39,869
Interest capitalized (5,118) (3,872)
-------------- -----------
706,734 687,553
-------------- -----------
INCOME BEFORE TAXES 1,116 105,918
INCOME TAX PROVISION 413(1) 39,226(1)
-------------- -----------
NET INCOME $ 703 $ 66,692
-------------- -----------
-------------- -----------
BASIC EARNINGS PER SHARE $ .01(2) $ 1.17(2)
-------------- -----------
-------------- -----------
DILUTED EARNINGS PER SHARE $ .01(2) $ 1.16(2)
-------------- -----------
-------------- -----------
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
3
NOBLE AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
Three Months Ended September 30,
---------------------------------
1998 1997
------------------------------
REVENUES:
Oil and gas sales and royalties $ 142,322 $ 170,999
Gathering, marketing and processing 69,402 60,983
Other income 587 2,367
-------------- -----------
212,311 234,349
-------------- -----------
COSTS AND EXPENSES:
Oil and gas exploration 41,575 22,019
Oil and gas operations 38,504 37,578
Gathering, marketing and processing 66,072 57,773
Depreciation, depletion and amortization 83,590 70,785
Selling, general and administrative 12,626 11,500
Interest 12,999 12,402
Interest capitalized (2,006) (1,823)
-------------- -----------
253,360 210,234
-------------- -----------
INCOME (LOSS) BEFORE TAXES (41,049) 24,115
INCOME TAX PROVISION (BENEFIT) (15,899)(1) 8,938(1)
-------------- -----------
NET INCOME (LOSS) $ (25,150) $ 15,177
-------------- -----------
-------------- -----------
BASIC EARNINGS (LOSS) PER SHARE $ (.44)(2) $ .27(2)
-------------- -----------
-------------- -----------
DILUTED EARNINGS (LOSS) PER SHARE $ (.44)(2) $ .26(2)
-------------- -----------
-------------- -----------
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
4
NOBLE AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended September 30,
-------------------------------
1998 1997
----------- -----------
Cash Flows from Operating Activities:
Net income $ 703 $ 66,692
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization 228,802 219,813
Amortization of undeveloped lease costs, net 2,415 2,983
Increase (decrease) in other deferred credits (6,381) 27,515
(Increase) decrease in other assets and other noncash items, net 27,606 (2,495)
Changes in working capital, not including cash:
(Increase) decrease in accounts receivable 12,627 79,706
(Increase) decrease in other current assets and inventories 1,629 3,538
Increase (decrease) in accounts payable 26,635 (1,389)
Increase (decrease) in other current liabilities 3,969 (46,784)
----------- -----------
Net Cash Provided by Operating Activities 298,005 349,579
----------- -----------
Cash Flows From Investing Activities:
Capital expenditures (416,297) (205,462)
Proceeds from sale of property, plant and equipment 3,076 14,601
----------- -----------
Net Cash Used in Investing Activities (413,221) (190,861)
----------- -----------
Cash Flows From Financing Activities:
Exercise of stock options 2,045 2,561
Cash dividends (6,833) (6,824)
Repayment of bank debt (514,000)
Proceeds from issuance of senior debt 342,506
Proceeds from bank borrowings 85,000
----------- -----------
Net Cash Provided by (Used in) Financing Activities 80,212 (175,757)
----------- -----------
Increase (Decrease) in Cash and Short-term Cash Investments (35,004) (17,039)
----------- -----------
Cash and Short-term Cash Investments at Beginning of Period 55,075 94,768
----------- -----------
Cash and Short-term Cash Investments at End of Period $ 20,071 $ 77,729
----------- -----------
----------- -----------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest (net of amount capitalized) $ 27,423 $ 33,817
Income taxes $ 4,276 $ 18,415
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
5
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 September 30, 1998 and December 31, 1997, and the results of operations
for the three month and nine month periods ended September 30, 1998 and 1997,
and the cash flows for the nine month periods ended September 30, 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 (BENEFIT)
For the nine months ended September 30:
(In thousands)
------------------------------
1998 1997
------------------------------
Current $ (1,454) $ 21,245
Deferred 1,867 17,981
--------- ---------
$ 413 $ 39,226
--------- ---------
--------- ---------
For the three months ended September 30:
(In thousands)
------------------------------
1998 1997
------------------------------
Current $ (6,751) $ 8,956
Deferred (9,148) (18)
--------- ---------
$(15,899) $ 8,938
--------- ---------
--------- ---------
(2) BASIC EARNINGS PER SHARE AND DILUTED EARNINGS PER SHARE
The Financial Accounting Standards Board ("FASB") 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 (loss) per share of common stock
was computed using the weighted average number of shares of common stock
outstanding during each period. The diluted net earnings (loss) per share of
common stock includes the effect of outstanding stock options.
The following tables summarize the calculation of basic earnings per
share ("EPS") and diluted EPS for the nine months ending September 30:
1998 1997
---- ----
INCOME SHARES INCOME SHARES
(IN THOUSANDS, EXCEPT PER SHARE) (NUMERATOR) (DENOMINATOR) (NUMERATOR) (DENOMINATOR)
- --------------------------------------------------------------------------------------------------------------
Net income/shares $703 56,947 $66,692 56,863
- --------------------------------------------------------------------------------------------------------------
BASIC EPS $.01 $1.17
- --------------------------------------------------------------------------------------------------------------
Net income/shares $703 56,947 $66,692 56,863
EFFECT OF DILUTIVE SECURITIES
Stock options 427 628
Adjusted net income/shares $703 57,374 $66,692 57,491
- --------------------------------------------------------------------------------------------------------------
DILUTED EPS $.01 $1.16
- --------------------------------------------------------------------------------------------------------------
6
For the three months ending September 30:
1998 1997
---- ----
INCOME SHARES INCOME SHARES
(IN THOUSANDS, EXCEPT PER SHARE) (NUMERATOR) (DENOMINATOR) (NUMERATOR) (DENOMINATOR)
- -----------------------------------------------------------------------------------------------------------------
Net income (loss)/shares $(25,150) 56,970 $15,177 56,880
- -----------------------------------------------------------------------------------------------------------------
BASIC EPS $(.44) $.27
- -----------------------------------------------------------------------------------------------------------------
Net income (loss)/shares $(25,150) 56,970 $15,177 56,880
EFFECT OF DILUTIVE SECURITIES
Stock options 300 623
Adjusted net income (loss)/shares $(25,150) 57,270 $15,177 57,503
- -----------------------------------------------------------------------------------------------------------------
DILUTED EPS $(.44) $.26
- -----------------------------------------------------------------------------------------------------------------
(3) RECLASSIFICATION TO CONFORM TO CURRENT YEAR PRESENTATION
Certain reclassifications have been made to the 1997 consolidated
condensed financial statements to conform to the 1998 presentation.
(4) 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. The
Company had no natural gas or crude oil hedging contracts related to its
production in the third quarter of 1998. During the third quarter of 1997,
the Company had natural gas hedging contracts that hedged approximately 21
percent of its average daily production. The net effect of these hedges was a
$.06 per MCF reduction in the average natural gas price for the third
quarter. The Company also had various crude oil hedging contracts that hedged
approximately 20 percent of its average daily production in the third quarter
of 1997. The net effect of these hedges was a $.03 per BBL decrease in the
average crude oil price for the third quarter of 1997. For the nine months
ended September 30, 1997, the net effect of natural gas hedging was an $.11
per MCF reduction in the average natural gas price. For the same period, the
net effect of crude oil hedging was a $.21 per BBL reduction in the average
crude oil price.
In addition to the hedging arrangements pertaining to the Company's
production as described above, Noble Gas Marketing ("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. During the third quarter of 1998,
NGM had hedging transactions with broker-dealers that represented
approximately 725,000 MMBTU's of gas per day. Hedges for October 1998 through
October 2000, which range from 19,000 MMBTU's to 1,165,000 MMBTU's of gas per
day for future physical transactions, were not closed at September 30, 1998.
During the third quarter of 1997, NGM had hedging transactions with
broker-dealers that represented approximately 394,000 MMBTU's of gas per day.
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.
The FASB issued SFAS No. 133 "Accounting for Derivative Instruments
and Hedging Activities" in June 1998. The Statement establishes accounting
and reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in
the balance sheet as either an asset or liability measured at its fair value.
The Statement requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria
are met wherein gains and losses are
7
reflected in stockholder equity until the hedged item is recognized. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and
requires that a company formally document, designate and assess the
effectiveness of transactions that receive hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15,
1999. A company may also implement the Statement as of the beginning of any
fiscal quarter after the Statement's issuance (that is, fiscal quarters
beginning June 16, 1998 and thereafter). SFAS No. 133 cannot be applied
retroactively. SFAS No. 133 must be applied to (a) derivative instruments and
(b) certain derivative instruments embedded in hybrid contracts that were
issued, acquired, or substantively modified after December 31, 1997 (and, at
the Company's election, before January 1, 1998).
The Company has not yet quantified the impact of adopting SFAS No. 133
and has not determined the timing of adoption of SFAS No. 133.
(5) 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 "MMS Lawsuit").
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. Based
upon the MMS Injunction, the Company in June 1998 recorded $13.7 million as
other income which represented the amount of the reserve that the Company had
established pending the outcome of the MMS Lawsuit.
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.
(6) METHANOL PLANT
Through the recently formed Atlantic Methanol Production Company
("AMPCO"), Samedan is participating, with a 45 percent expense interest and a
five percent carried interest for the Equatorial Guinea Government, in a
joint venture with CMS Energy Corporation to construct a methanol plant on
Bioko Island in Equatorial Guinea. The plant will use the gas from Samedan's
31 percent owned Alba field as feedstock. The plant is being designed to
utilize approximately 115 MMCF of gas per day. The gas will be priced at
approximately $.25 per MMBTU.
On January 29, 1998, AMPCO awarded a contract to Raytheon Engineers and
Constructors to build the methanol plant. The plant is estimated to cost
$317,000,000 and is being designed to produce 2,500 metric tons of methanol
per day, which equates to approximately 20,000 BBLS per day. The construction
contract stipulates that the first commercial production of methanol should
be achieved by January 2001. Current marketing plans are to enter into
long-term contracts with methanol users in the United States and Europe.
The Company is currently funding construction of the methanol plant with
cash flow from current operations. The Company is currently evaluating
alternative methods for funding the balance of the construction project.
8
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 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 $297.7 million in
the nine months ended September 30, 1998 from $349.6 million in the same
period of 1997. Cash and short-term cash investments decreased from $55.1
million at December 31, 1997 to $20.1 million at September 30, 1998. Such
decreases in cash are primarily the result of declining oil prices.
The Company has expended approximately $416.3 million of its $451.0
million 1998 capital budget through September 30, 1998. The Company's 1998
capital budget includes approximately $48.4 million for potential
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.
Through the recently formed Atlantic Methanol Production Company
("AMPCO"), Samedan is participating, with a 45 percent expense interest and a
five percent carried interest for the Equatorial Guinea Government, in a
joint venture with CMS Energy Corporation to construct a methanol plant on
Bioko Island in Equatorial Guinea. The plant will use the gas from Samedan's
31 percent owned Alba field as feedstock. The plant is being designed to
utilize approximately 115 MMCF of gas per day. The gas will be priced at
approximately $.25 per MMBTU.
On January 29, 1998, AMPCO awarded a contract to Raytheon Engineers and
Constructors to build the methanol plant. The plant is estimated to cost
$317,000,000 and is being designed to produce 2,500 metric tons of methanol
per day, which equates to approximately 20,000 BBLS per day. The construction
contract stipulates that the first commercial production of methanol should
be achieved by January 2001. Current marketing plans are to enter into
long-term contracts with methanol users in the United States and Europe.
The Company is currently funding construction of the methanol plant with
cash flow from current operations. The Company is currently evaluating
alternative methods for funding the balance of the construction project.
The Company's current ratio (current assets divided by current
liabilities) was .83 at September 30, 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 $18.3
million at September 30, 1998 and $18.5 million at December 31, 1997.
Estimated gas imbalance liabilities were $21.5 million at September 30, 1998
and $21.6 million 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
9
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 1998, the Company recorded a net loss of $25.2
million, or ($.44) per share, compared to net income of $15.2 million, or
$.27 per share, in the third quarter of 1997. During the first nine months of
1998, the Company recorded net income of $.7 million, or $.01 per share,
compared to net income of $66.7 million, or $1.17 per share, in the first
nine months of 1997.
Gas sales for the Company, excluding third party sales by Noble Gas
Marketing ("NGM"), a wholly owned subsidiary of the Company, decreased seven
percent and five percent, respectively, for the three months and nine months
ended September 30, 1998, as compared with the same periods in 1997. The
decrease in sales for the third quarter is primarily due to hurricane-related
shut-ins which decreased the Company's production of gas by approximately 37
million cubic feet per day. For the nine months ended September 30, 1998, gas
sales decreased primarily due to a five percent decrease in the average gas
price received as compared with the same period 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
and 34 percent, respectively, for the three months and nine months ended
September 30, 1998, as compared with the same periods in 1997. The primary
reasons for the decreased sales were due to hurricane related shut-ins which
decreased the Company's production of oil by approximately 1,550 barrels per
day and a 34 percent decrease in the average oil price received for the three
months ended September 30, 1998 as compared to the same period in 1997. For
the nine months ended September 30, 1998, oil sales decreased primarily due
to a 33 percent decrease in the average oil price received as compared to the
same period of 1997.
NGM markets most of 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.
For the third quarter of 1998, revenues and expenses from combined NGM
and NTI sales totaled $69.4 million and $66.1 million, respectively, for a
gross margin of $3.3 million. In comparison, combined NGM and NTI sales and
expenses of $61.0 million and $57.8 million, respectively, resulted in a
gross margin of $3.2 million for the third quarter of 1997. For the nine
months ended September 30, 1998, combined NGM and NTI revenues and expenses
from sales totaled $219.2 million and $210.6 million, respectively, for a
gross margin of $8.6 million. In comparison, combined NGM and NTI sales and
expenses of $228.3 million and $215.9 million, respectively, resulted in a
gross margin of $12.4 million for the same period in 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 third quarter of 1998. During the third quarter of
1997, the Company had natural gas hedging contracts that hedged approximately
21 percent of its average daily production. The net effect of these hedges
was a $.06 per MCF reduction in the average natural gas price for the third
quarter. The Company also had various crude oil hedging contracts that hedged
approximately 20 percent of its average daily production in the third quarter
of 1997. The net effect of these hedges was a $.03 per BBL decrease in the
average crude oil price for the third quarter. For the nine months ended
September 30, 1997, the net effect of natural gas hedging was an $.11 per MCF
reduction in the average natural gas price. For the same period, the net
effect of crude oil hedging was a $.21 per BBL reduction in the average crude
oil price.
10
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 third quarter of 1998, NGM had
hedging transactions with broker-dealers that represented approximately
725,000 MMBTU's of gas per day. During the third quarter of 1997, NGM had
hedging transactions with broker-dealers that represented approximately
394,000 MMBTU's of gas per day. Hedges for October 1998 through October 2000,
which range from 19,000 MMBTU's to 1,165,000 MMBTU's of gas per day for
future physical transactions, were not closed at September 30, 1998.
Certain selected oil and gas operating statistics follow:
For the three months For the nine months
ended September 30, ended September 30,
-------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
Oil revenues (in thousands) ................ $ 37,704 $ 57,854 $122,869 $186,843
Average daily oil production - BBLS........... 37,382 38,232 37,866 38,751
Average oil price per BBL ................ $ 11.21 $ 16.91 $ 12.19 $ 18.11
Gas revenue (in thousands) ................ $ 102,009 $109,155 $337,550 $355,583
Average daily gas production - MCFS.......... 534,433 537,050 568,414 571,754
Average gas price per MCF ................ $ 2.11 $ 2.26 $ 2.22 $ 2.33
BBLS - BARRELS
MCFS - THOUSAND CUBIC FEET
Oil and gas exploration expense increased $19.6 million and $24.9
million, respectively, for the three months and nine months ended September
30, 1998, as compared to the same periods in 1997. These increases are
primarily attributable to increases of $10.0 million and $12.8 million,
respectively, in abandoned assets, and increases of $17.0 million and $10.4
million, respectively, in dry hole expense, compared with the same periods of
1997. Seismic expense decreased $6.3 million in the third quarter of 1998,
compared to the same period in 1997.
Oil and gas operations expense increased $.9 million and decreased $7.8
million, respectively, for the three months and nine months ended September
30, 1998 compared to the same periods in 1997. The year to date decrease is
due primarily to decreased lease operations expenses of $6.4 million for the
nine months ended September 30, 1998 compared to the same period in 1997.
Depreciation, depletion and amortization (DD&A) expense increased 18
percent and 4 percent, respectively, for the three months and nine months
ended September 30, 1998 compared to the same periods in 1997. The unit rate
of DD&A per barrel of oil equivalent (BOE), converting gas to oil on the basis
of 6 MCF per barrel, was $6.32 for the first nine months of 1998, as compared
to $6.01 for the same period of 1997. The increase in the unit rate per BOE is
due to production from recently completed high volume properties in the Gulf
of Mexico. The Company has recorded, through charges to DD&A, a reserve for
estimated future liabilities related to dismantlement and reclamation costs
for offshore facilities. Approximately $5.2 million and $17.0 million,
respectively, was charged to DD&A for the three months and nine months ended
September 30, 1998 compared to $3.3 million and $10.2 million, respectively,
for the three months and nine months ended September 30, 1997 for these
estimated future liabilities. This reserve is based on the best estimates of
Company engineers of such costs to be incurred in future years.
Interest expense increased $.6 million and decreased $2.4 million,
respectively, for the three months and nine months ended September 30, 1998,
as compared to the same periods in 1997. The year to date decrease resulted
from the 1997 repayment of debt associated with the Company's purchase of
Energy Development Corporation in 1996.
Interest capitalized increased $.2 million and $1.2 million,
respectively, for the three months and nine months ended September 30, 1998,
as compared to the same periods in 1997. This increase resulted from
construction projects for various properties located in the Gulf of Mexico.
11
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 "MMS Lawsuit").
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. Based
upon the MMS Injunction, the Company in June 1998 recorded $13.7 million as
other income which represented the amount of the reserve that the Company had
established pending the outcome of the MMS Lawsuit.
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.
The Company is currently funding construction of its methanol plant in
Equatorial Guinea with cash flow from current operations. The Company is
currently evaluating alternative methods for funding the balance of the
construction project. See "--Liquidity and Capital Resources."
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 working to resolve the potential impact of the year 2000
on the ability of the Company's computerized information systems to
accurately process information that may be date-sensitive. Any of the
Company's programs that recognize a date using "00" as the year 1900 rather
than the year 2000 could result in errors or system failures. The Company
utilizes a number of computer programs across its entire operation. The
Company has not completed its assessment, but currently believes that costs
of addressing this issue will not have a material adverse impact on the
Company's financial position. However, if the Company and third parties upon
which it relies are unable to address this issue in a timely manner, it could
result in a material financial risk to the Company. In order to assure that
this does not occur, the Company plans to devote all resources required to
resolve any significant year 2000 issues in a timely manner.
12
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) The Company did not file any reports on Form 8-K during the three
months ended September 30, 1998.
13
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, 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 12, 1998 /s/ WM. D. DICKSON
--------------------- ---------------------------------
WM. D. DICKSON
Senior Vice President-Finance and Treasurer
(Principal Financial Officer
and Authorized Signatory)
14
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
Number Exhibit Page
- --------- -------------------------- ---------------
27.1 Financial Data Schedule