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 MARCH 31, 1999
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 May 3, 1999: 56,981,212
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,
1999 1998
---------- -----------
ASSETS
Current Assets:
Cash and short-term cash investments.............................. $ 56,976 $ 19,100
Accounts receivable-trade......................................... 81,948 106,513
Materials and supplies inventories................................ 2,201 3,006
Other current assets.............................................. 52,209 59,670
---------- ----------
Total Current Assets.............................................. 193,334 188,289
---------- ----------
Property, Plant and Equipment, at cost............................... 2,918,553 2,915,917
Less: accumulated depreciation,
depletion and amortization................................. (1,545,608) (1,486,250)
---------- ----------
1,372,945 1,429,667
---------- ----------
Investment in unconsolidated subsidiary.............................. 33,512 25,061
Other Assets......................................................... 47,161 43,063
---------- ----------
Total Assets...................................................... $1,646,952 $1,686,080
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable-trade............................................ $ 84,990 $ 108,538
Other current liabilities......................................... 33,460 28,815
Income taxes-current.............................................. 650 1,813
---------- ----------
Total Current Liabilities......................................... 119,100 139,166
---------- ----------
Deferred Income Taxes................................................ 101,525 106,823
---------- ----------
Other Deferred Credits and Noncurrent Liabilities.................... 50,240 52,868
---------- ----------
Long-term Debt....................................................... 745,187 745,143
---------- ----------
Shareholders' Equity:
Common stock...................................................... 195,018 195,018
Capital in excess of par value.................................... 360,008 360,008
Retained earnings................................................. 91,292 102,472
---------- ----------
646,318 657,498
Less common stock in treasury
(at cost, 1,524,900 shares)....................................... (15,418) (15,418)
---------- ----------
Total Shareholders' Equity........................................ 630,900 642,080
---------- ----------
Total Liabilities and Shareholders' Equity........................ $1,646,952 $1,686,080
========== ==========
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,
-----------------------------------------
1999 1998
--------- ----------
REVENUES:
Oil and gas sales and royalties.................................... $ 112,233 $ 166,937
Gathering, marketing and processing................................ 63,633 79,598
Other income....................................................... 2,046 1,603
---------- ----------
177,912 248,138
---------- ----------
COSTS AND EXPENSES:
Oil and gas exploration............................................ 10,240 16,615
Oil and gas operations............................................. 31,352 39,690
Gathering, marketing and processing................................ 58,503 76,294
Depreciation, depletion and amortization........................... 66,549 70,312
Selling, general and administrative................................ 11,391 13,061
Interest........................................................... 13,035 11,530
Interest capitalized............................................... (1,123) (1,550)
---------- ----------
189,947 225,952
---------- ----------
INCOME (LOSS) BEFORE TAXES............................................. (12,035) 22,186
INCOME TAX PROVISION (BENEFIT)......................................... (3,134) (1) 8,468 (1)
---------- ----------
NET INCOME (LOSS)...................................................... $ (8,901) $ 13,718
========== ==========
BASIC EARNINGS (LOSS) PER SHARE........................................ $ (.16) (2) $ .24 (2)
========== ==========
DILUTED EARNINGS (LOSS) PER SHARE...................................... $ (.16) (2) $ .24 (2)
========== ==========
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,
----------------------------------------
1999 1998
------------ ----------
Cash Flows from Operating Activities:
Net income (loss)..................................................... $ (8,901) $ 13,718
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation, depletion and amortization............................ 66,549 70,312
Amortization of undeveloped lease costs, net........................ 1,178 596
Increase (decrease) in deferred credits............................ (7,925) 4,288
(Increase) decrease in other assets and other noncash items, net... (2,579) 12,065
Changes in working capital, not including cash:
(Increase) decrease in accounts receivable.......................... 24,565 25,274
(Increase) decrease in other current assets and inventories......... 8,323 9,385
Increase (decrease) in accounts payable............................. (23,548) 1,174
Increase (decrease) in other current liabilities.................... 3,481 7,336
---------- ----------
Net Cash Provided by Operating Activities 61,143 144,148
---------- ----------
Cash Flows From Investing Activities:
Capital expenditures.................................................. (12,763) (201,128)
Investment in unconsolidated subsidiary............................... (8,451)
Proceeds from sale of property, plant and equipment................... 226 1,622
---------- ----------
Net Cash Used in Investing Activities ................................... (20,988) (199,506)
---------- ----------
Cash Flows From Financing Activities:
Exercise of stock options............................................. 1,481
Cash dividends........................................................ (2,279) (2,277)
Proceeds from bank borrowings......................................... 50,000
---------- ----------
Net Cash Provided by (Used in) Financing Activities...................... (2,279) 49,204
---------- ----------
Increase (Decrease) in Cash and Short-term Cash Investments.............. 37,876 (6,154)
---------- ----------
Cash and Short-term Cash Investments at Beginning of Period.............. 19,100 55,075
---------- ----------
Cash and Short-term Cash Investments at End of Period.................... $ 56,976 $ 48,921
========== ==========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest (net of amount capitalized).................................. $ 6,116 $ 6,472
Income taxes.......................................................... $ 0 $ 0
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, 1999 and the results of operations and the cash flows for the
three month periods ended March 31, 1999 and 1998. These consolidated
condensed financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 1998.
(1) INCOME TAX PROVISION (BENEFIT)
For the three months ended March 31:
(In thousands)
-----------------------------------
1999 1998
--------- ---------
Current............................................................... $ (7,469) $ 3,804
Deferred.............................................................. 4,335 4,664
-------- ---------
$ (3,134) $ 8,468
========= =========
(2) BASIC EARNINGS PER SHARE AND DILUTED EARNINGS PER SHARE
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:
1999 1998
------------------------- -------------------------
INCOME SHARES INCOME SHARES
(IN THOUSANDS, EXCEPT PER SHARE) (NUMERATOR) (DENOMINATOR) (NUMERATOR) (DENOMINATOR)
- ---------------------------------------------------------------------------------------------------------------------
Net income (loss)/shares $(8,901) 56,981 $13,718 56,912
- ---------------------------------------------------------------------------------------------------------------------
BASIC EPS $(.16) $.24
- ---------------------------------------------------------------------------------------------------------------------
Net income (loss)/shares $(8,901) 56,981 $13,718 56,912
EFFECT OF DILUTIVE SECURITIES
Stock options (1) 480
Adjusted net income (loss)/shares $(8,901) 56,981 $13,718 57,392
- ---------------------------------------------------------------------------------------------------------------------
DILUTED EPS $(.16) $.24
- ---------------------------------------------------------------------------------------------------------------------
(1) The effect of dilutive securities on first quarter 1999 diluted EPS is
antidilutive as a result of the net operating loss; therefore, the
basic EPS and diluted EPS are the same. The effect of dilutive
securities on first quarter 1998 diluted EPS is less than one cent;
therefore, the basic EPS and diluted EPS, as reported, are the same.
5
(3) 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.
(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 first quarter of 1999 and 1998.
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.
During the first quarter of 1999, NGM had hedging transactions with
broker-dealers that represented approximately 728,000 MMBTU's of gas per day.
Hedges for April 1999 through October 2000, which range from 25,000 MMBTU's
to 637,000 MMBTU's of gas per day for future physical transactions, were not
closed at March 31, 1999. During the first quarter of 1998, NGM had hedging
transactions with broker-dealers that represented approximately 783,000
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.
In December 1998 the Emerging Issues Task Force ("EITF") released their
consensus on EITF 98-10 "Accounting for Energy Trading and Risk Management
Activities". This statement requires that contracts for the purchase and sale
of energy commodities which are entered into for the purpose of speculating
on market movements or otherwise generating gains from market price
differences be recorded at their market value, as of the balance sheet date,
with any corresponding gains or losses recorded as income from operations.
The effect of adopting this statement was not material.
6
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standard ("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 reflected in stockholders
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 and 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 is preparing to adopt this statement as of January 1, 2000.
The Company estimates there will be no material financial impact as a result
of adopting SFAS No. 133.
(5) 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 sold by Samedan to
AMPCO 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 turnkey plant construction cost
is $313.5 million 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 its share of the construction costs
related to the methanol plant with cash flow from current operations and is
evaluating alternative methods for funding the balance of its obligation
related to the construction project.
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 anticipated capital expenditures, projected timing of planned
projects or activities, 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.
7
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities decreased to $61.1 million in
the three months ended March 31, 1999 from $144.1 million in the same period
of 1998. Cash and short-term investments increased from $19.1 million at
December 31, 1998 to $57.0 million at March 31, 1999.
The Company has expended approximately $21.2 million of its $234.3
million 1999 capital budget through March 31, 1999. The Company expects to
fund its remaining 1999 capital budget from cash flows from operations. 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 turnkey plant construction cost
is $313.5 million 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 its share of the construction costs
related to the methanol plant with cash flow from current operations and is
evaluating alternative methods for funding the balance of its obligation
related to the construction project.
The Company's current ratio (current assets divided by current
liabilities) was 1.62 at March 31, 1999 compared with .96 at December 31,
1998.
The Company follows the entitlements method of accounting for its gas
imbalances. The Company's estimated gas imbalance receivables were $19.0
million at March 31, 1999 and $19.1 million at December 31, 1998. Estimated
gas imbalance liabilities were $14.9 million at March 31, 1999 and $14.8 at
December 31, 1998. These imbalances are valued at the amount which is
expected to be received or paid to settle the imbalances. The settlement of
the imbalances can occur either over the life or at the end of the life of a
well, on a volume basis or by cash settlement. The Company does not expect
that a significant portion of the settlements will occur in any one year.
Thus, the Company believes the settlement of gas imbalances will not have a
material impact on its liquidity.
RESULTS OF OPERATIONS
For the first quarter of 1999, the Company recorded a net loss of $8.9
million, or $.16 per share, compared with net income of $13.7 million, or
$.24 per share, in the first quarter of 1998. The decrease resulted primarily
from substantially lower product prices coupled with lower production volumes.
Gas sales for the Company, excluding third party sales by Noble Gas
Marketing, Inc. ("NGM"), a wholly owned subsidiary of the Company, decreased
33 percent for the three months ended March 31, 1999 compared with the same
period in 1998. The primary reasons for the decreased sales were a decrease
in average gas price of 21 percent, coupled with an average daily production
decrease of 13 percent, in the 1999 first quarter compared with the first
quarter of 1998.
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, 1999, compared with the same period in
1998. The decrease in sales was primarily due to an average oil price
decrease of 26 percent, and an average daily production decrease of 13
percent, in the first quarter of 1999 compared with the first quarter of 1998.
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.
8
For the first quarter of 1999, revenues and expenses from combined NGM
and NTI third party sales totaled $63.6 million and $58.5 million,
respectively, for a gross margin of $5.1 million. In comparison, for the
first quarter of 1998 combined NGM and NTI third party sales and expenses of
$79.6 million and $76.3 million, respectively, resulted in a gross margin of
$3.3 million.
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 1999 or 1998.
In December 1998 the Emerging Issues Task Force ("EITF") released their
consensus on EITF 98-10 "Accounting for Energy Trading and Risk Management
Activities". This statement requires that contracts for the purchase and sale
of energy commodities which are entered into for the purpose of speculating
on market movements or otherwise generating gains from market price
differences be recorded at their market value, as of the balance sheet date,
with any corresponding gains or losses recorded as income from operations.
The effect of adopting this statement was not material.
The Company is exposed to market risk in the normal course of its
business operations. Management believes that the Company is well positioned
with its mix of oil and gas reserves to take advantage of future price
increases that may occur. However, the uncertainty of oil and gas prices
continues to impact the domestic oil and gas industry. Due to the volatility
of oil and gas prices, the Company, from time to time, has used derivative
hedging and may do so in the future as a means of controlling its exposure to
price changes. During the first quarter of 1999, the Company had no oil or
gas hedging transactions for its production. NGM, from time to time, employs
hedging arrangements in connection with its purchases and sales of
production. While most of NGM's purchases are made for an index-based price,
NGM's customers often require prices that are either fixed or related to
NYMEX. In order to establish a fixed margin and mitigate the risk of price
volatility, NGM may convert a fixed or NYMEX sale to an index-based sales
price (such as by purchasing an index-based futures contract obligating NGM
for delivery of production). Due to the size of such transactions and certain
restraints imposed by contract and by Company guidelines, as of March 31,
1999 the Company had no material market risk exposure from NGM's hedging
activity. During the first quarter of 1999, NGM had hedging transactions with
broker-dealers that represented approximately 728,000 MMBTU's of gas per day.
Hedges for April 1999 through October 2000, which range from 25,000 MMBTU's
to 637,000 MMBTU's of gas per day for future physical transactions, were not
closed at March 31, 1999. During the first quarter of 1998, NGM had hedging
transactions with broker-dealers that represented approximately 783,000
MMBTU's of gas per day.
Certain selected oil and gas operating statistics follow:
For the three months
ended March 31,
--------------------------
1999 1998
------------ -------------
Oil revenue (in thousands)................................................. $ 29,070 $ 45,055
Average daily oil production - BBLS....................................... 33,408 38,540
Average oil price per BBL.................................................. $ 9.93 $ 13.37
Gas revenues (in thousands)................................................ $ 79,274 $ 117,476
Average daily gas production - MCFS........................................ 520,506 599,082
Average gas price per MCF.................................................. $ 1.76 $ 2.24
BBLS - BARRELS
MCF - THOUSAND CUBIC FEET
Oil and gas exploration expense decreased $6.4 million to $10.2 million
for the three months ended March 31, 1999, as compared with the same period
of 1998. This decrease is attributable to a $6.4 million decrease in seismic
expense, as compared to the same period of 1998.
9
Depreciation, depletion and amortization (DD&A) expense decreased five
percent for the three months ended March 31, 1999 compared with the same
period in 1998. 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 $6.15 for the
first three months of 1999 compared with $5.65 for the same period of 1998.
The increase in the unit rate per BOE is due to additional drilling and
completion costs recorded to certain high unit rate properties during 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 decreased to $1.1 million for the first quarter of
1999 from $1.5 million for the first quarter of 1998. This decrease resulted
from a reduction in expenditures related to drilling, completion and
construction activity, which decreased during the first quarter of 1999 due
to low product prices, as compared to the same period of 1998.
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 its share of the construction costs
related to the methanol plant in Equatorial Guinea with cash flow from
current operations and is evaluating alternative methods for funding the
balance of its obligations related to 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.
YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Computer
equipment and software and devices with embedded technology that are
time-sensitive may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in a system failure or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities.
The Company has undertaken various initiatives intended to ensure that
its computer equipment and software will function properly with respect to
dates in the year 2000 and thereafter. For this purpose, the term "computer
10
equipment and software" includes systems that are commonly thought of as
information technology ("IT") systems, including accounting, data processing,
telephone/PBX systems, and other miscellaneous systems, as well as systems
that are not commonly thought of as IT systems, such as field operations
equipment, alarm systems, sprinkler systems, fax machines, or other
miscellaneous systems. Both IT and non-IT systems may contain imbedded
technology, which complicates the Company's Year 2000 identification,
assessment, remediation, and testing efforts. In addition, in the ordinary
course of replacing computer equipment and software, the Company attempts to
obtain replacements that it believes are Year 2000 compliant. Utilizing
internal resources to identify and assess needed Year 2000 remediation, the
Company currently anticipates that its Year 2000 identification, assessment,
remediation, and testing efforts, which began in January 1998, will be
completed by September 30, 1999, and that such efforts will be completed
prior to any currently anticipated impact on its computer equipment and
software. The Company estimates that as of March 31, 1999, it had completed
approximately 80% of the initiatives that it believes will be necessary to
fully address potential Year 2000 issues relating to its computer equipment
and software. The projects comprising the remaining 20% of the initiatives
are in process and expected to be completed by September 30, 1999.
Percent
Year 2000 Initiative Time Frame Complete
- ---------------------------------------------------------------------------------------------------------------------
Identification and assessment of IT systems March 31, 1999 100%
(Company and subsidiaries)
Identification and assessment of critical non-IT systems June 30, 1999 50%
(Company and subsidiaries)
Remediation and testing of IT and non-IT systems of December 31, 1998 100%
subsidiaries other than Samedan and subsidiaries
Remediation and testing of IT and non-IT systems of June 30, 1999 90%
Samedan and subsidiaries
Remediation and testing of Company's central IT June 30, 1999 90%
and non-IT systems
Replacement and testing of third party software June 30, 1999 75%
Identification and assessment of field equipment used in
oil and gas producing operations June 30, 1999 25%
Remediation and testing of field equipment September 30, 1999 0%
The Company plans to mail letters in May 1999 to its significant vendors
and service providers and has verbally communicated with many strategic
customers to determine the extent to which interfaces with such entities are
vulnerable to Year 2000 issues and whether the products and services
purchased from or by such entities are Year 2000 compliant.
The Company is funding its Year 2000 efforts primarily with internal
resources and does not anticipate making any expenditures in connection
therewith except for the purchase of third party software that it otherwise
would not have purchased or would have purchased at a later date. Although
the Company does not separately track its internal costs related to Year 2000
efforts, which include compensation of employees working on Year 2000
projects, it believes that such costs will not exceed $75,000, of which
approximately $65,000 had been incurred as of March 31, 1999. The Company
estimates that these internal and external costs will represent less than
five percent of total IT-related costs for 1998 and 1999 and that none of the
Company's IT initiatives that are not related to the Year 2000 issue will be
materially delayed or impacted by Year 2000 efforts.
The Company presently believes that the Year 2000 issue will not pose
significant operational problems for the Company. However, if all Year 2000
issues are not properly identified, or assessment, remediation, and testing
are not effected timely, there can be no assurance that the Year 2000 issue
will not materially adversely impact the Company's results of operations or
adversely affect the Company's relationships with customers, vendors, or
others. Additionally, there can be no assurance that the Year 2000 issues of
other entities will not have a material adverse impact on the Company's
systems or results of operations.
The costs of the Company's Year 2000 identification, assessment,
remediation, and testing efforts and the dates on which the Company believes
it will complete such efforts are based upon management's estimates, which
were derived using numerous assumptions regarding future events, including
the continued availability of certain resources, third-party remediation
plans and other factors. There can be no assurance that these estimates will
prove to be
11
accurate, and actual results could differ materially from those currently
anticipated. Specific factors that could cause such material differences
include, but are not limited to, the availability and cost of personnel
trained in Year 2000 issues, the ability to identify, assess, remediate, and
test all relevant computer codes and imbedded technology, and similar
uncertainties. In addition, variability of definitions of "compliance with
Year 2000" may lead to claims on the Company, the impact of which is not
currently estimable. No assurance can be given that the aggregate cost of
defending and resolving such claims, if any, will not materially adversely
affect the Company's results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company is exposed to market risk in the normal course of its
business operations. Management believes that the Company is well positioned
with its mix of oil and gas reserves to take advantage of future price
increases that may occur. However, the uncertainty of oil and gas prices
continues to impact the domestic oil and gas industry. Due to the volatility
of oil and gas prices, the Company, from time to time, has used derivative
hedging and may do so in the future as a means of controlling its exposure to
price changes. During the first quarter of 1999, the Company had no oil or
gas hedging transactions for its production. NGM, from time to time, employs
hedging arrangements in connection with its purchases and sales of
production. While most of NGM's purchases are made for an index-based price,
NGM's customers often require prices that are either fixed or related to
NYMEX. In order to establish a fixed margin and mitigate the risk of price
volatility, NGM may convert a fixed or NYMEX sale to an index-based sales
price (such as by purchasing an index-based futures contract obligating NGM
for delivery of production). Due to the size of such transactions and certain
restraints imposed by contract and by Company guidelines, as of March 31,
1999 the Company had no material market risk exposure from NGM's hedging
activity.
The Company has a $300 million credit agreement (see Note 3 - Debt, to
the Consolidated Financial Statements) which exposes the Company to the risk
of earnings or cash flow loss due to changes in market interest rates. At
March 31, 1999, there was $300 million outstanding under the credit facility
with a maturity date of December 24, 2002. The interest rate charged, which
is based upon a Eurodollar rate plus 22.5 basis points, was 5.2 percent at
March 31, 1999. All other Company long-term debt is fixed-rate and,
therefore, does not expose the Company to the risk of earnings or cash flow
loss due to changes in market interest rates.
The Company does not invest in foreign currency derivatives. The U.S.
dollar is considered the primary currency for each of the Company's
international operations. Transactions that are completed in a foreign
currency are translated into U.S. dollars and recorded in the financial
statements. Translation gains or losses were not material in any of the
periods presented and the Company does not believe it is currently exposed to
any material risk of loss on this basis. Such gains or losses are included in
other expense on the income statement. However, certain sales transactions
are concluded in foreign currencies and the Company therefore is exposed to
potential risk of loss based on fluctuation in exchange rates from time to
time.
12
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 27, 1999 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 56,981,008 shares of common stock of the Company
outstanding and entitled to vote, 50,959,628 shares were present in person
or by proxy, representing approximately 89 percent.
Number of Shares
WITHHOLDING
Number of Shares AUTHORITY
Voting FOR Election to Vote for Election
As Director As Director
----------------------------------- ---------------------------------
Alan A. Baker.............................. 50,534,717 424,911
Michael A. Cawley.......................... 50,548,001 411,627
Edward F. Cox.............................. 50,546,436 413,192
James C. Day............................... 50,547,626 412,002
Thomas E. Hassen........................... 50,548,137 411,491
Dale P. Jones.............................. 50,534,910 424,718
Robert Kelley.............................. 50,547,827 411,801
Harold F. Kleinman......................... 50,044,626 915,002
T. Don Stacy............................... 50,531,099 428,529
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, 1999.
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: May 12, 1999 By: /s/ WILLIAM D. DICKSON
-------------------------------------------
William D. Dickson,
Senior Vice President-Finance and Treasurer
(Principal Financial Officer
and Authorized Signatory)
14
INDEX TO EXHIBITS
Exhibit
Number Exhibit
- ------------------------- --------------------------------------------
27.1 Financial Data Schedule