<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 PERIOD REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 316456
------------------------
GULF CANADA RESOURCES LIMITED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
CANADA 98-0086499
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
ONE NORWEST CENTER
1700 LINCOLN STREET, SUITE 5000
DENVER, COLORADO 80203-4525
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
TELEPHONE (303) 813-3800
(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.
[X] Yes [ ] No
On May 10, 1998, there were 348,970,344 ordinary shares issued and
outstanding.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
GULF CANADA RESOURCES LIMITED
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I FINANCIAL INFORMATION:
Item Unaudited Consolidated Financial Statements
1. 2-12
Item Management's Discussion and Analysis of Financial Condition
2. and Results of Operations 13-15
PART II OTHER INFORMATION 16-19
</TABLE>
1
<PAGE> 3
PART 1 -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
AND RETAINED EARNINGS (DEFICIT)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1999 1998
(unaudited) --------- ---------
(millions of dollars,
except per share
amounts)
<S> <C> <C>
EARNINGS (LOSS)
REVENUES
Net oil and gas........................................... $ 228 $ 282
Net gain on asset disposals............................... 0 5
Other..................................................... 16 35
------ ------
244 322
------ ------
EXPENSES
Operating -- production................................... 93 106
-- other....................................... 6 24
Exploration............................................... 22 43
General and administrative................................ 13 21
Depreciation, depletion and amortization (note 1)......... 116 144
Finance charges, net...................................... 67 58
Income tax expense (recovery) (note 1).................... (26) (26)
Minority shareholders' interest........................... (1) (3)
290 367
------ ------
EARNINGS (LOSS) FOR THE PERIOD............................ $ (46) $ (45)
====== ======
RETAINED EARNINGS (DEFICIT)
BALANCE, BEGINNING OF PERIOD AS PREVIOUSLY REPORTED....... $ (412) $ 181
Retroactive restatement for new tax policy (note 1)....... (83) (97)
AS RESTATED............................................... (495) 84
Earnings (loss) for the period............................ (46) (45)
Dividends declared on preference shares................... (8) (7)
------ ------
BALANCE, END OF PERIOD.................................... $ (549) $ 32
====== ======
PER SHARE INFORMATION
(Unaudited)
CASH GENERATED FROM OPERATIONS............................ $ 0.19 $ 0.28
====== ======
BASIC EARNINGS (LOSS) (NOTE 1)............................ $(0.16) $(0.15)
====== ======
</TABLE>
Certain amounts for 1998 have been reclassified to conform with the
presentation adopted for 1999.
Cash generated from operations per share and earnings (loss) per share are
after deduction of senior preference share dividends. These per share amounts
were calculated based upon the following:
<TABLE>
<S> <C> <C>
Ordinary shares outstanding (millions):
Average during the quarter................................ 349 347
At March 31............................................... 349 349
</TABLE>
2
<PAGE> 4
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
1999 1998
-------- --------
(unaudited) (millions of dollars)
<S> <C> <C>
OPERATING ACTIVITIES
EARNINGS (LOSS) FOR THE PERIOD............................ $ (46) $ (45)
NON-CASH ITEMS INCLUDED IN EARNINGS (LOSS):
Depreciation, depletion and amortization............... 116 144
Net gain on asset disposals............................ 0 (5)
Amortization of deferred foreign exchange losses....... 11 5
Exploration expense.................................... 22 43
Future income taxes.................................... (29) (32)
Other.................................................. 1 (5)
CASH GENERATED FROM OPERATIONS............................ 75 105
Other long-term liabilities............................... (28) 1
Changes in non-cash working capital....................... (29) (68)
Other, net................................................ 0 (3)
----- -----
18 35
INVESTING ACTIVITIES
Proceeds on asset disposals............................... 73 75
Acquisitions.............................................. 0 (16)
Capital expenditures and exploration expenses............. (115) (265)
Changes in non-cash working capital....................... (63) 3
Other, net................................................ (10) (9)
----- -----
(115) (212)
DIVIDENDS
Regular dividends declared on preference shares........... (8) (7)
----- -----
(8) (7)
FINANCING ACTIVITIES
Short-term loans (repayments)............................. (47) 51
Proceeds from issue of long-term debt..................... 20 97
Long-term debt repayments................................. 0 (10)
Issue of equity........................................... 0 57
----- -----
(27) 195
INCREASE (DECREASE) IN CASH............................... (132) 11
CASH AT BEGINNING OF PERIOD............................... 349 188
----- -----
CASH AT END OF PERIOD(1).................................. $ 217 $ 199
===== =====
</TABLE>
- ---------------
(1) Comprises cash and short-term investments
3
<PAGE> 5
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
(unaudited) --------- ------------
(millions of dollars)
<S> <C> <C>
ASSETS
CURRENT
Cash and short-term investments........................... $ 217 $ 345
Cash restricted in use.................................... 11 4
Accounts receivable....................................... 248 268
Future income taxes (note 1).............................. 10 19
Other..................................................... 155 133
------ ------
641 769
INVESTMENTS, DEFERRED CHARGES AND OTHER ASSETS............ 300 325
PROPERTY, PLANT AND EQUIPMENT (NOTE 1).................... 5,048 5,222
------ ------
$5,989 $6,316
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Short-term loans.......................................... $ 0 $ 47
Accounts payable.......................................... 276 293
Current portion of long-term debt......................... 240 215
Current portion of other long-term liabilities............ 32 57
Other..................................................... 107 177
------ ------
655 789
LONG-TERM DEBT............................................ 2,289 2,331
OTHER LONG-TERM LIABILITIES............................... 329 336
FUTURE INCOME TAXES (NOTE 1).............................. 729 777
MINORITY INTEREST......................................... 177 178
------ ------
4,179 4,411
SHAREHOLDERS' EQUITY
Share capital
Senior preference shares............................... 577 577
Ordinary shares........................................ 1,719 1,719
Contributed surplus....................................... 35 35
Retained earnings (deficit) (note 1)...................... (549) (495)
Foreign currency translation adjustment................... 28 69
------ ------
1,810 1,905
------ ------
$5,989 $6,316
====== ======
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of this statement.
4
<PAGE> 6
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(MILLIONS OF DOLLARS)
1. ACCOUNTING CHANGE
Effective January 1, 1999, Gulf adopted the new recommendations of the
Canadian Institute of Chartered Accountants with respect to accounting for
income taxes. Under the new recommendations, the liability method of tax
allocation is used, based on differences between financial reporting and tax
bases of assets and liabilities. Previously, the deferral method was used, based
on differences in the timing of reporting income and expenses in financial
statements and tax returns.
This change has been applied retroactively, and the 1998 financial
statements have been restated accordingly. The effect of this change on the
identifiable assets of each segment is to increase North America oil and gas,
Syncrude, Indonesia and other international by $310 million, $25 million, $131
million and $139 million, respectively, at March 31, 1999, and $315 million, $25
million, $133 million and $142 million, respectively, at December 31, 1998. The
effect of this change on the consolidated statements of earnings (loss) and
financial position was as follows:
<TABLE>
<CAPTION>
Increase (decrease)
----------------------------
Three months ended
March 31,
----------------------------
1999 1998
----------- --------------
(millions of dollars, except
per share amounts)
<S> <C> <C>
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
Depreciation, depletion and amortization.................... $ 7 $ 12
Income tax expense (recovery)............................... (24) (14)
Earnings (loss) for the period.............................. 17 2
Retained earnings (deficit), beginning of period............ (83) (97)
Retained earnings (deficit), end of period.................. (66) (95)
Earnings per share.......................................... 0.05 0.01
</TABLE>
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
<S> <C> <C>
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
Property, plant and equipment -- net........................ $605 $615
Future income taxes......................................... 671 698
Retained earnings (deficit)................................. (66) (83)
</TABLE>
5
<PAGE> 7
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SEGMENT INFORMATION
<TABLE>
<CAPTION>
North America International
--------------------------------------- -------------------------
Oil and Gas Syncrude Other Indonesia Other Total
----------- ----------- ----------- ----------- ----------- -----------
1999 1998 1999 1998 1999 1998 1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues..................... 124 164 34 31 6 26 47 29 33 67 244 317
Expenses..................... 126 175 27 29 3 20 46 36 35 57 237 317
--------------------------------------- -------------------------------------
(2) (11) 7 2 3 6
1 (7) (2) 10 7 0
--------------------------------------- -------------------------------------
--------------------------------------- -------------------------------------
Net gain on asset
disposals..................
0 (5)
General and administrative...
13 21
Finance charges, net.........
67 58
Income tax expense
(recovery).................
(26) (26)
Minority shareholders'
interest...................
(1) (3)
- ----------------------------------------------------------------------------------------------------------------
Earnings (loss) for the
period..................... (46) (45)
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
THE FOLLOWING NOTES 3 THROUGH 6 HAVE BEEN PREPARED IN ACCORDANCE WITH U.S.
QUARTERLY REPORTING REQUIREMENTS.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements reflect all
adjustments (consisting of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair statement of the results for the
interim periods presented. The interim financial information and notes thereto
should be read in conjunction with the Company's latest annual report to the
shareholders. The unaudited financial statements contained herein are prepared
in accordance with Canadian generally accepted accounting principles. The
results of operations for the three-month period ended March 31, 1999 are not
necessarily indicative of results to be expected for the entire year.
4. CONTINGENCIES AND OTHER MATTERS
As part of Gulf's upstream operations and as a result of certain
discontinued downstream operations, Gulf has ongoing site restoration and
remediation responsibilities. Site restoration costs within upstream operations
involve the surface clean-up and reclamation of wellsites and field production
facilities to ensure that they can be safely returned to appropriate alternative
land uses. In addition, over the long term, certain plant facilities will
require decommissioning which will involve dismantling of facilities as well as
the decontamination and reclamation of these lands. Total anticipated future
costs (including plugging and abandoning of wells), given Gulf's current
inventory of wells and facilities including Syncrude, is in the order of $602
million over the next twenty years. Gulf has accrued $159 million ($11 million
as current) for future upstream site restoration costs and continues to accrue
these costs on the basis described in the summary of significant accounting
policies.
There have been no other significant subsequent developments relating to
the downstream potential liabilities since year-end, and as such the estimated
costs and associated accrual have not changed materially since year-end.
Gulf is involved in various litigation, regulatory and other environmental
matters in the ordinary course of business. In management's opinion, an adverse
resolution of these matters would not have a material impact on operations or
financial position.
5. RECLASSIFICATIONS
Certain amounts for 1998 have been reclassified to conform with the
presentation adopted for 1999.
6
<PAGE> 8
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES ("U.S. GAAP") AND ADDITIONAL DISCLOSURES REQUIRED BY U.S. GAAP
If U.S. GAAP had been followed, the earnings (loss) and loss per ordinary
share would have been as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
----------------------
1999 1998
--------- ---------
(MILLIONS OF DOLLARS)
<S> <C> <C>
LOSS FROM CONTINUING OPERATIONS, as reported................ $ (46) $ (45)
Adjustments:
New asset values(a1)...................................... 0 (46)
Interest rate swap(b)..................................... (24) (2)
Foreign exchange(c)....................................... 45 20
Termination benefits(d)................................... (10) (7)
Asset impairments(e)...................................... 6 0
Income tax (expense) recovery(f).......................... (52) 31
------ ------
LOSS FROM CONTINUING OPERATIONS, as adjusted................ (81) (49)
Cumulative effect of accounting change(g)................... (80) 0
------ ------
LOSS FOR THE PERIOD, as adjusted............................ (161) (49)
Cumulative dividends on senior preference shares............ (8) (7)
------ ------
LOSS TO ORDINARY SHAREHOLDERS............................... $ (169) $ (56)
====== ======
PER ORDINARY SHARE, as adjusted (DOLLARS)
- -- Loss from continuing operations before cumulative effect
of accounting change..................................... $(0.25) $(0.16)
- -- Cumulative effect of accounting change................... (0.23) 0
- -- Loss for the period...................................... (0.48) (0.16)
(MILLIONS OF DOLLARS)
COMPREHENSIVE INCOME (LOSS)(j).............................. $ (41) $ 13
PRO FORMA LOSS REFLECTING ACCOUNTING CHANGE(g).............. (47)
</TABLE>
The Consolidated Statements of Cash Flows presented under Canadian GAAP
comply with International Accounting Standard 7.
7
<PAGE> 9
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
If U.S. GAAP were followed, amounts on the Consolidated Statements of
Financial Position would be increased (decreased) as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
(MILLIONS OF DOLLARS)
<S> <C> <C>
ASSETS
Accounts receivable(b)...................................... $ 9 $ 15
Current deferred income taxes(a2)........................... 0 9
Investments, deferred charges and other assets(b)(c)........ 39 (4)
Property, plant and equipment(a1)(e)........................ (117) 336
----- ----
$ (69) $356
===== ====
LIABILITIES AND SHAREHOLDERS' EQUITY
Current portion of other long-term liabilities(b)........... $ 0 $(24)
Other current liabilities(a2)(b)(d)......................... 1 2
Long-term debt(b)........................................... 200 200
Other long-term liabilities(h)(i)........................... 66 66
Deferred income taxes....................................... (93) 317
Share capital, ordinary shares(a1).......................... 0 (89)
Deficit..................................................... (218) (91)
Foreign currency translation adjustment(j).................. (28) (69)
Accumulated other comprehensive income(j)(k)................ 3 44
----- ----
$ (69) $356
===== ====
</TABLE>
The financial statements have been prepared in accordance with accounting
principles generally accepted in Canada which, in the case of Gulf, conform in
all material respects with those in the United States except that:
(a) Prior to January 1, 1999 the financial statements would reflect the
following effects of adopting Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS 109). Effective
January 1, 1999 such differences have been eliminated (see note "g"
below).
1. Gulf's initial application of SFAS 109 required a restatement, to
pre-tax amounts, of the new asset values reflected in the accounts
in connection with the change of control in 1986 of Gulf Canada
Limited and the acquisition of new subsidiaries. This restatement,
along with differences between the tax bases and recorded amounts of
other asset transfers, resulted in property, plant and equipment
(PP&E) and deferred income taxes both being $458 million higher than
under Canadian generally accepted accounting principles ("Canadian
GAAP") at December 31, 1998. These differences are amortized to
earnings over the lives of the related assets. The application of
previous accounting standards at the time of the change in control
resulted in ordinary share capital being lower by $89 million at
December 31, 1998.
2. Measurement and presentation of deferred income taxes according to
SFAS 109 would result in recording current and non-current deferred
tax assets and liabilities, for a net decrease in the deferred tax
liability of $5 million at December 31, 1998.
(b) A special purpose entity has $200 million 11 per cent public debentures
issued and outstanding which mature on October 31, 2000, and assets
consisting of a $200 million oil indexed debenture maturing on October
31, 2000 and an interest rate swap. These are not included in Gulf's
statement of financial position, but under U.S. GAAP would have been
included in long-term debt and investments and other assets,
respectively. Earnings include amortization of a provision for losses
on
8
<PAGE> 10
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
a related swap agreement of $24 million for the three months ended
March 31, 1999 and $2 million for the three months ended March 31,
1998.
(c) Unrealized gains or losses arising on translation of long-term
liabilities repayable in foreign funds would be included in earnings in
the period in which they arise under U.S. GAAP. The balances of such
deferred losses were $161 million at March 31, 1999 and $206 million at
December 31, 1998.
(d) Under U.S. GAAP a liability for non-contractual involuntary employee
termination benefits is not incurred until the terms of the termination
are communicated to the affected individual employees. Under Canadian
GAAP, the liability was recorded when the Company made the termination
decision. As such, under U.S. GAAP, the liability recorded prior to
employees being notified is reversed and recognized in the year of
notification.
(e) U.S. GAAP requires that impaired assets be written down to fair value,
rather than undiscounted future cash flows from use. Accordingly, Gulf
would have recognized an additional write-down of $123 million in 1998,
and $6 million lower depreciation, depletion and amortization expense
in the three months ended March 31, 1999.
(f) The income tax provision for U.S. GAAP in the three months ended March
31, 1999 includes an increase of $43 million in the valuation allowance
against deferred tax assets.
(g) Effective January 1, 1999 Gulf adopted Canadian standards for
accounting for income taxes substantially identical to those of SFAS
109. The method and assumptions used to apply the new standards in the
Canadian GAAP financial statements, however, differ in some respects
from those applied previously under SFAS 109. The U.S. GAAP financial
statements reflect application of these standards consistent with the
Canadian GAAP financial statements, and as permitted by SFAS 109,
prospectively from January 1, 1999. The cumulative effect of this
change on retained earnings is included in the loss for the three
months ended March 31, 1999. The effect of this change in the current
period is to increase the loss from continuing operations by $1
million.
(h) Under U.S. GAAP, the costs of providing all forms of post-retirement
benefits to employees would be recognized during the active service
lives of the employees rather than expensed as incurred. The
accumulated post-retirement benefit obligation at March 31, 1999 and at
December 31, 1998 is estimated to be $43 million using a discount rate
of 6 per cent. There is no material difference between the net periodic
service cost under U.S. GAAP and the pay-as-you-go amount under
Canadian GAAP for the three-month periods ended March 31, 1999 and
1998.
(i) Under U.S. GAAP, as at March 31, 1999 and December 31, 1998, an
additional minimum pension liability of $23 million must be accrued for
the deficit between the market value of the Company's pension plan
assets and its accumulated benefit obligations.
(j) For U.S. GAAP the foreign currency translation adjustment arising upon
consolidation of self-sustaining foreign subsidiaries is included in
other comprehensive income.
(k) Under U.S. GAAP an unrealized holding loss on equity securities of $19
million recognized in 1998 would be reported in other comprehensive
income rather than earnings.
9
<PAGE> 11
SUPPLEMENTARY INFORMATION
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
VOLUMES SOLD FROM RETAINED PROPERTIES(1) (gross/net)
Crude oil and natural gas liquids (thousands of barrels per
day)
North America
Conventional light crude oil........................... 26.5/22.8 29.8/24.7
Conventional heavy crude oil........................... 15.0/13.7 18.8/17.2
Syncrude oil........................................... 20.0/20.0 16.1/16.1
Other natural gas liquids.............................. 12.8/ 9.3 15.8/12.2
----------- -----------
74.3/65.8 80.5/70.2
----------- -----------
International
Indonesia.............................................. 22.0/18.4 21.1/17.5
Netherlands............................................ 4.6/ 4.6 0.3/ 0.3
Australia.............................................. 4.1/ 4.1 1.7/ 1.6
----------- -----------
30.7/27.1 23.1/19.4
----------- -----------
Total liquids............................................... 105.0/92.9 103.6/89.6
=========== ===========
</TABLE>
<TABLE>
Natural gas (millions of cubic feet per day)
<S> <C> <C>
North America............................................. 309/ 254 311/245
Indonesia................................................. 140/ 134 0/ 0
Netherlands............................................... 63/ 63 71/70
Australia................................................. 18/ 15 7/ 7
----------- -----------
Total natural gas........................................... 530/ 466 389/322
=========== ===========
Total (thousands of boe/day)(2)............................. 172.7/153.6 147.7/126.9
=========== ===========
VOLUMES SOLD FROM DIVESTED PROPERTIES(1)(2) (gross/net)
(thousands of boe/day)
North America conventional................................ 5.4/ 4.5 18.8/15.2
United Kingdom............................................ 0.0/ 0.0 19.7/18.8
Other international....................................... 0.0/ 0.0 4.6/ 3.2
----------- -----------
Total (thousands of boe/day)(2)(3).......................... 5.4/ 4.5 43.1/37.2
=========== ===========
TOTAL VOLUMES SOLD (thousands of boe/day)................... 178.1/158.1 190.8/164.1
- ---------------
(1) "Gross" sales include royalties; "net" sales are after
royalties. Volumes exclude:
-- inventory drawdown/(build-up)....................... (3.7) 0.9
(2) North American gas converted @ 10:1, International @ 6:1
(3) Crude oil and natural gas liquids (thousands of barrels
per day).................................................. 3.7/ 3.0 31.6/27.4
Natural gas (millions of cubic feet per day)........... 17/ 15 100/83
</TABLE>
10
<PAGE> 12
SUPPLEMENTARY INFORMATION
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1999 1998
--------- ---------
(Unaudited)
(millions of dollars)
<S> <C> <C>
GROSS AVERAGE PRICES
Crude oil and natural gas liquids (dollars per barrel)
North America
-- Conventional light crude oil........................ 17.43 19.57
-- Conventional heavy crude oil........................ 13.48 6.00
-- Syncrude oil........................................ 19.03 21.41
-- Other natural gas liquids........................... 11.27 17.97
International
-- Indonesia........................................... 17.52 19.13
--United Kingdom....................................... -- 18.37
--Other international.................................. 14.58 12.94
Average
-- unhedged............................................ 16.22 17.29
-- hedged.............................................. 15.61 18.55
Natural gas (dollars per thousand cubic feet)
North America
-- unhedged............................................ 2.16 1.94
-- hedged.............................................. 2.19 1.94
Indonesia................................................. 1.54 --
Other international....................................... 2.60 3.36
Average
-- hedged.............................................. 2.09 2.23
------ ------
AVERAGE EXCHANGE RATES (Cdn$1).............................. $0.662 $0.699
------ ------
NET OIL AND GAS REVENUE
Crude oil and natural gas liquids
North America
-- Conventional light crude oil........................ $ 41 $ 81
-- Conventional heavy crude oil........................ 18 11
-- Syncrude oil........................................ 34 31
-- Condensate.......................................... 7 14
-- Other natural gas liquids........................... 7 15
Indonesia................................................. 35 36
United Kingdom............................................ 0 34
Other international....................................... 11 4
------ ------
153 226
------ ------
Natural gas
North America............................................. 65 68
</TABLE>
11
<PAGE> 13
SUPPLEMENTARY INFORMATION -- (CONTINUED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1999 1998
--------- ---------
(Unaudited)
(millions of dollars)
<S> <C> <C>
Indonesia................................................. 19 0
Netherlands............................................... 15 25
Other international....................................... 4 5
------ ------
103 98
------ ------
Sulphur..................................................... (1) 1
------ ------
255 325
Less: Royalties
North America
-- Conventional........................................ (21) (34)
-- Syncrude............................................ 0 0
Indonesia................................................. (7) (7)
Other international....................................... 1 (2)
------ ------
NET OIL AND GAS REVENUE..................................... $ 228 $ 282
====== ======
</TABLE>
12
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
This document includes "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934 ("Exchange Act"). All
statements other than statements of historical facts included in this document,
including those regarding the timing of projects, successful conclusion of
current negotiations, proposed drilling programs and the results thereof,
commodity price expectations and expected results of cost cutting initiatives.
Although Gulf believes that the assumptions upon which such forward-looking
statements are based are reasonable, it can give no assurances that such
assumptions will prove to have been correct. Important factors that could cause
actual results to differ materially from Gulf's expectations. All subsequent
written and oral forward-looking statements attributable to Gulf or persons
acting on its behalf are expressly qualified by the cautionary statements.
CASH GENERATED FROM OPERATIONS AND EARNINGS
CASH GENERATED
Gulf's cash generated from continuing operations for the three months ended
March 31, 1999 was $75 million, representing a $30 million decline over the same
period last year. Approximately $10 million of the decline is explained by a tax
adjustment recognized in 1998.
Cost reductions of $34 million substantially reduced the impact of a $54
million decline in net oil and gas revenue.
Net oil and gas revenues
Net oil and natural gas revenues for the three months ended March 31, 1999
of $228 million represents a decrease of $54 million or 19 per cent from
revenues of $282 million for the first three months of 1998. Lower revenues were
largely due to a seven per cent decline in sales volumes and a 16 per cent
decline in liquids prices.
First quarter sales volumes averaged 178,100 boe/d, down approximately
12,700 boe/d or seven per cent from sales of 190,800 boe/d during the same
period in 1998. The decrease is largely attributable to asset sales that raised
$1.2 billion in 1998 and a further $73 million cash in the first quarter of
1999. Properties divested between January 1, 1998 and March 31, 1999 produced an
average of 5,400 boe/d in the first quarter of 1999 and were 37,700 boe/d below
1998 levels.
Sales from properties retained in Gulf's portfolio as of March 31, 1999
averaged 172,700 boe/d during the quarter, up 25,000 boe/d or 17 per cent from
147,700 boe/d a year earlier. This increase is due to the fourth quarter
start-up of the Corridor Gas Project, higher volumes from Syncrude and other
additions. Gulf also added 3,700 boe/d to inventories during the first quarter,
which are not reflected in sales volumes.
The average price of WTI crude oil fell 18 per cent from US$15.95 in 1998
to US$13.06 in 1999. The average hedged liquids price received during the first
three months of 1999 of $15.61 per barrel was 16 per cent below the price
received in 1998. Gulf's realized price did not decrease as much as WTI due
largely to sharply reduced heavy oil differentials and a weaker Canadian dollar.
Corporate wide natural gas price declined from $2.23 per mcf to $2.09 per mcf as
increases in North American prices were more than offset by lower priced volumes
from Indonesia.
Cash expenses
Improved production operating expenses contributed $13 million to the
overall cost reduction with the average cost per boe declining six per cent from
$6.17 in the first quarter of 1998 to $5.80 per boe in the first quarter 1999.
The primary reasons for the lower unit operating costs were the addition of
relatively low cost gas volumes in Indonesia, significantly reduced heavy oil
operating costs and reduced Syncrude maintenance.
13
<PAGE> 15
In addition, Western Canada conventional costs were relatively flat in spite of
increased gas processing costs related to the 1998 sale of 50 per cent of the
Company's midstream assets.
Cash general and administrative expenses of $14 million or $0.87 per boe
were $7 million or $0.35 per boe better than the first quarter of 1998 due to
benefits from the Company's restructuring program such as the sale of its
aircraft, improved building lease arrangements and other cost reduction
initiatives. Note that 1998 included severance and other one-time items of
approximately $2 million.
Other revenue net of other operating expenses of $10 million was
approximately $1 million below 1998.
Cash finance charges of $52 million were $2 million lower than the
comparable period in 1998. The impact of lower outstanding net debt during the
1999 period is only partially reflected in the year over year comparison as a
weaker Canadian dollar increased interest expense in 1999. In addition $5
million of Corridor project interest was capitalized in the 1998 period.
Excluding the one time income tax adjustment referred to above, cash income
taxes declined from $16 million in 1998 to $3 million in 1999.
EARNINGS
The $46 million loss after tax in 1999 compares to a $45 million loss last
year.
Non-cash expenses
Finance charges in the first quarter of 1999 included $11 million for the
amortization of deferred translation losses compared to $5 million for the
comparable period in 1998. The increase in 1999 relates primarily to a weaker
Canadian dollar during the first quarter of 1999 as compared to the first
quarter of 1998.
Exploration expenses of $22 million in 1999 were $21 million lower than
1998 as a result of lower exploration spending during 1999.
Depreciation, depletion and amortization expense was $116 million or $7.24
per boe in the first quarter of 1999 compared to $144 million or $8.39 per boe
during the comparable 1998 period. The 1999 period includes a $7 million expense
($12 million in 1998) related to the Company adopting new recommendations of the
Canadian Institute of Chartered Accountants (CICA) with respect to accounting
for income taxes. The primary reasons for the decline in costs per boe are the
sale of relatively high cost United Kingdom properties and the addition of
relatively low cost natural gas volumes in Indonesia.
The deferred tax recovery was $29 million during the first quarter of 1999
as compared to a recovery of $32 million during the first quarter of 1998. The
1999 period includes a $7 million recovery ($12 million in 1998) related to the
Company adopting new recommendations of the CICA with respect to accounting for
income taxes.
NET CASH FLOW AND FINANCIAL POSITION
During the quarter, Gulf generated cash from operations of $75 million and
received $73 million from asset sales for total cash inflows before financing
activities of $148 million.
Capital and exploration expenditures were $115 million. Additionally, Gulf
spent $24 million to settle an obligation under a swap arrangement, $44 million
to meet interest obligations, $8 million for dividends on preferred shares and
an additional $62 million primarily to settle outstanding payables in Indonesia.
Total expenditures before financing activities were $253 million.
Gulf's expenditures exceeded cash inflows before financing by $105 million;
however, net debt only increased by $57 million due to the positive impact of a
stronger Canadian dollar as at March 31, 1999 as compared to December 31, 1998.
14
<PAGE> 16
At quarter end, the Company had a cash balance of $228 million and a
current portion of long-term debt of $240 million of which $215 million will be
paid in 1999. In addition, the Company has negotiated an additional asset sale
that is expected to generate proceeds of approximately $50 million in the second
quarter.
The Company is currently allocating $300 million for capital expenditures
this year. Expenditures were weighted toward the first quarter when spending
totaled $115 million. If the year brings a sustained turnaround in oil prices
above a US$12.00 per barrel WTI scenario, additional cash may be applied to
further reduce outstanding debt or accelerate capital projects planned for 2000.
As at April 30, 1999 Gulf has put on oil price hedges that lock-in an
average WTI price of US$15.87 on 13,100 barrels per day for the remaining three
quarters of the year.
YEAR 2000
The Company is devoting significant resources throughout its business
operations to the Year 2000 issue. The Company's goal is business continuity and
sustained operations beyond December 31, 1999, without significant disruption or
material financial impact resulting from the Year 2000 issue. During 1999, the
Company will continue to address its critical information technology and
non-information technology internal systems along with expanding its efforts to
understand its exposure to external Year 2000 risks from its key business
partners, third-party vendors and customers, and where possible, to develop
contingency plans to address any failures on their part to become Y2K ready. At
this time, the Company believes that the most likely "worst case" scenario
involves potential disruptions worldwide in areas where the Company relies on
third party providers of power, telecommunications and transportation. As well,
the Company's operations in Indonesia may be adversely affected by failures of
third party vendors, refiners and customers to take adequate steps to address
the Y2K problem. In recognition of the potential impacts in Indonesia, the
Company has taken steps to identify alternate providers of goods and services,
along with selecting alternative markets to address concerns with refining and
customers. While such failures could affect the operations of the Company and
its subsidiaries, either directly or indirectly, in a significant manner, the
Company cannot at present estimate either the likelihood or the potential cost
of such failures. The Company is, however, currently developing contingency
plans to mitigate any material impact on the Company's business.
The Company has incurred to date costs of approximately $4.3 million,
related to its Y2K project. The estimated additional costs to complete the
project are currently expected to be $5.4 million. A significant portion of
these costs have been or will be incurred for the replacement of non-compliant
equipment, with some of these costs being shared by the Company's partners. All
of the Company's costs for the Y2K project are being paid out of operating
expenses.
The Company may revise the timing and focus of its efforts to address the
Year 2000 problem from time to time as new issues are identified. The
description of the Company's efforts involves estimates and projections derived
using numerous assumptions of future events including continued access to key
resources. The Company cannot guarantee that these estimates will be achieved,
and actual results could differ materially from the plans, as it is impossible
to predict the cost and availability of materials and resources as the year 2000
approaches.
A more complete statement can be obtained from Gulf's website www.gulf.ca
15
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
The following exhibits are filed with this Form 10-Q and they are
identified by the number indicated.
<TABLE>
<CAPTION>
EXHIBIT
- -------
<S> <C> <C>
3.1 -- Articles of Incorporation of Gulf Canada Resources Limited
(incorporated by reference to Exhibit 3.1 of the Company's
10-Q filed for quarter ended June 30, 1997, filed August 14,
1997)
3.2 -- Bylaws of Gulf Canada Resources Limited (incorporated by
reference to Exhibit 3.2 of the Company's 10-Q for quarter
ended June 30, 1997, filed August 14, 1997)
4.1 -- Indenture dated July 1, 1989 between the Company and Chase
Manhattan Bank pertaining to the Company's 9% debentures due
1999 (incorporated by reference to the Company's
Registration Statement on Form F-10, Registration No.
33-30138)
4.2 -- Indenture dated January 27, 1994 between the Company and The
Bank of New York pertaining to the Company's 9.25% Senior
Subordinated Debentures due 2004 (incorporated by reference
to the Company's Registration Statement on Form F-10,
Registration No. 33-73252)
4.3 -- Indenture dated July 5, 1995 between the Company and The
Bank of New York pertaining to the Company's 9.625% Senior
Subordinated Debentures due 2005 (incorporated by reference
to Exhibit 7.1 to the Company's Registration Statement on
Form F-10, Registration No. 33-93452)
4.4 -- Indenture dated August 7, 1997 between the Company and The
Bank of New York pertaining to the Company's 8.35% Senior
Notes payable 2006 (incorporated by reference to Exhibit 7.1
to the Company's Registration Statement on Form F-10,
Registration No. 333-5332)
4.5 -- Indenture dated March 21, 1997 between the Company and The
Bank of New York pertaining to the Company's 8.25% Senior
Notes payable 2017 (incorporated by reference to Exhibit 7.1
to the Company's Registration Statement on Form F-10,
Registration No. 333-6608)
4.6 -- Incentive Stock Plan 1994 (incorporated by reference to
Exhibit 10.3 to the Company's Form 10-Q for the quarter
ended June 30, 1997, filed August 14, 1997)
4.7 -- Form of Indenture (incorporated by reference to Exhibit 7.1
to the Company's Registration Statement on Form F-10,
Registration No. 333-7802)
</TABLE>
16
<PAGE> 18
<TABLE>
<CAPTION>
EXHIBIT
- -------
<S> <C> <C>
4.8 -- First Supplemental Indenture dated November 16, 1998 between
the Company and the Bank of New York pertaining to the
Company's 8 3/8% Senior Notes payable 2005 (incorporated by
reference to Exhibit 7.2 to the Company's Current Report on
Form 8-K).
10.1 -- Loan Agreement dated July 18, 1997 with a syndicate of banks
(incorporated by reference to Exhibit 10.2 to the Company's
report on Form 10-Q for the quarter ended June 30, 1997,
filed August 14, 1997)
10.2 -- Employment Agreement, dated February 1996 with Mr.
Auchinleck (incorporated by reference to the Company's Form
10-K for the fiscal year ended 1997, filed March 30, 1998)
10.3 -- Employment Agreement, dated January 1995 with Mr. Glick
(incorporated by reference to the Company's Form 10-K for
the fiscal year ended 1997, filed March 30, 1998)
10.4 -- Employment Agreement, dated February 1996 with Mr. Feuchuk
(incorporated by reference to the Company's Form 10-K for
the fiscal year ended 1997, filed March 30, 1998)
10.5 -- Amending Agreement dated February 19, 1998 to the Employee
Agreement dated February 1996 with Mr. Auchinleck
(incorporated by reference to Exhibit 10.5 to the Company's
Form 10-K/A for the fiscal year ended 1998 filed April 15,
1999.)
10.6 -- Amending Agreement dated February 19, 1998 to the Employment
Agreement dated January 1995 with Mr. Glick (incorporated by
reference to Exhibit 10.6 to the Company's Form 10-K/A for
the fiscal year ended 1998 filed April 15, 1999.)
10.7 -- Amending Agreement dated February 19, 1998 to the Employment
Agreement dated February 1996 with Mr. Feuchuk (incorporated
by reference to Exhibit 10.7 to the Company's Form 10-K/A
for the fiscal year ended 1998 filed April 15, 1999.)
10.8 -- Employment Agreement, dated June, 1998 with Mr. Sykes
(incorporated by reference to Exhibit 10.8 to the Company's
Form 10-K/A for the fiscal year ended 1998 filed April 15,
1999.)
10.9 -- Employment Agreement, dated September 1997 with Mr. Hrap
(incorporated by reference to Exhibit 10.9 to the Company's
Form 10-K/A for the fiscal year ended 1998 filed April 15,
1999.)
10.10 -- Amending Agreement dated February 19, 1998 to the Employment
Agreement dated September 1997 with Mr. Hrap (incorporated
by reference to Exhibit 10.10 to the Company's Form 10-K/A
for the fiscal year ended 1998 filed April 15, 1999.)
10.11 -- Employment Agreement, dated September 1997 with Mr. Manner
(incorporated by reference to Exhibit 10.11 to the Company's
Form 10-K/A for the fiscal year ended 1998 filed April 15,
1999.)
10.12 -- Amending Agreement dated February 19, 1998 to the Employment
Agreement dated September 1997 with Mr. Manner (incorporated
by reference to Exhibit 10.12 to the Company's Form 10-K/A
for the fiscal year ended 1998 filed April 15, 1999.)
10.13 -- Employment Agreement, dated September 1997 with Ms. Walker
(incorporated by reference to Exhibit 10.13 to the Company's
Form 10-K/A for the fiscal year ended 1998 filed April 15,
1999.)
10.14 -- Amending Agreement dated February 19, 1998 to the Employment
Agreement dated September 1997 with Ms. Walker (incorporated
by reference to Exhibit 10.14 to the Company's Form 10-K/A
for the fiscal year ended 1998 filed April 15, 1999.)
</TABLE>
17
<PAGE> 19
<TABLE>
<CAPTION>
EXHIBIT
- -------
<S> <C> <C>
10.15 -- Loan Agreement dated September 18, 1998 with a syndicate of
banks (incorporated by reference to Exhibit 10.15 to the
Company's Form 10-K/A for the fiscal year ended 1998 filed
April 15, 1999.)
27 -- Financial Data Schedule (see attached)
</TABLE>
b. Reports on Form 8-K.
None.
18
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GULF CANADA RESOURCES LIMITED
By: /s/ RICHARD H. AUCHINLECK
------------------------------------
Richard H. Auchinleck
Chief Executive Officer
(duly authorized officer)
By: /s/ DENNIS FEUCHUK
------------------------------------
Dennis Feuchuk
Vice President & Controller
Chief Accounting Officer
(duly authorized officer)
Date: May 11, 1999
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from consolidated
statement of financial position and consolidated statement of earnings and
retained earnings and is qualified in its entirety by reference to such 10-Q.
</LEGEND>
<MULTIPLIER> 1,000,000
<CURRENCY> CANADIAN DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> .6617<F1>
<CASH> 42
<SECURITIES> 185
<RECEIVABLES> 248
<ALLOWANCES> 3
<INVENTORY> 116
<CURRENT-ASSETS> 641
<PP&E> 7,960
<DEPRECIATION> 2,912
<TOTAL-ASSETS> 5,989
<CURRENT-LIABILITIES> 655
<BONDS> 2,289
0
577
<COMMON> 1,719
<OTHER-SE> (486)
<TOTAL-LIABILITY-AND-EQUITY> 5,989
<SALES> 228
<TOTAL-REVENUES> 244
<CGS> 0
<TOTAL-COSTS> 99
<OTHER-EXPENSES> 138
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 67
<INCOME-PRETAX> (72)
<INCOME-TAX> (26)
<INCOME-CONTINUING> (46)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (46)
<EPS-PRIMARY> (0.16)
<EPS-DILUTED> (0.16)
<FN>
<F1>See "Summary of Significant Accounting Policies - Foreign Currency Translation"
Period end rate $0.6628
Average exchange rate during the period $0.6617.
</FN>
</TABLE>
