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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: 1-8094
OCEAN ENERGY, INC.
(Exact name of registrant as specified in its charter)
TEXAS 74-1764876
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1001 FANNIN, SUITE 1600, HOUSTON,TEXAS 77002-6714
(Address of principal executive offices) (Zip code)
(713) 265-6000
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year,
if changed since last report)
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 .
As of November 10, 1999, 166,872,955 shares of Common Stock, par value
$0.10 per share, were outstanding.
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<PAGE>
OCEAN ENERGY, INC.
INDEX
<TABLE>
PAGE
NUMBER
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Financial Statements
Consolidated Statements of Operations for the Three Months and
Nine Months Ended September 30, 1999 and 1998...................................... 1
Consolidated Balance Sheets - September 30, 1999
and December 31, 1998.............................................................. 2
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1999 and 1998.................................................. 3
Consolidated Statements of Comprehensive Income for the Three
Months and Nine Months Ended September 30, 1999 and 1998 .......................... 4
Notes to Consolidated Financial Statements......................................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................................... 16
Item 3. Quantitative and Qualitative Disclosures about Market Risks............................ 30
PART II. OTHER INFORMATION.......................................................................... 30
</TABLE>
ON MARCH 30, 1999, OCEAN ENERGY, INC., A DELAWARE CORPORATION, MERGED WITH
AND INTO SEAGULL ENERGY CORPORATION, A TEXAS CORPORATION, AND THE RESULTING
COMPANY WAS RENAMED OCEAN ENERGY, INC. THE MERGER WAS TREATED FOR ACCOUNTING
PURPOSES AS AN ACQUISITION OF SEAGULL BY OCEAN IN A PURCHASE BUSINESS
TRANSACTION. AS SUCH, THE FINANCIAL RESULTS PRESENTED HERE ARE PRIMARILY THOSE
OF OCEAN ENERGY, INC. ON A STAND-ALONE BASIS FOR THE FIRST QUARTER OF 1999 AND
OF THE COMBINED COMPANY FOR THE SECOND AND THIRD QUARTERS OF 1999, COMPARED TO
OCEAN'S RESULTS IN THE FIRST, SECOND AND THIRD QUARTERS OF 1998 ON A STAND-ALONE
BASIS.
(i)
<PAGE>
ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
OCEAN ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands, Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
1999 1998 1999 1998
--------------- -------------- --------------- -----------------
<S> <C> <C> <C> <C>
Oil and Gas Sales............................................. $ 214,393 $ 123,369 $ 516,293 $ 397,334
Costs of Operations:
Operating expenses......................................... 54,672 50,048 165,278 135,460
Depreciation, depletion and amortization................... 85,615 70,221 233,732 217,719
Loss on sale of canadian assets............................ - - 28,500 -
Write-down of oil and gas properties....................... - - - 218,392
General and administrative................................. 4,955 4,628 18,038 13,646
--------------- -------------- --------------- -----------------
145,242 124,897 445,548 585,217
--------------- -------------- --------------- -----------------
Operating Profit (Loss)....................................... 69,151 (1,528) 70,745 (187,883)
Other (Income) Expense:
Interest expense........................................... 30,410 18,621 86,601 40,562
Merger expense............................................. 3,176 - 43,828 39,000
Interest income and other.................................. (269) (1,286) (383) (2,094)
--------------- -------------- --------------- -----------------
Income (Loss) Before Income Taxes............................. 35,834 (18,863) (59,301) (265,351)
Income Tax Expense (Benefit).................................. 6,404 (4,446) (9,269) (87,955)
--------------- -------------- --------------- -----------------
Income (Loss) From Continuing Operations...................... 29,430 (14,417) (50,032) (177,396)
Loss From Discontinued Operations, Net of
Income Taxes............................................... (625) - (78) -
--------------- -------------- --------------- -----------------
Net Income (Loss)............................................. 28,805 (14,417) (50,110) (177,396)
Preferred Stock Dividend...................................... 819 - 2,456 -
--------------- -------------- --------------- -----------------
Net Income (Loss) Available to Common Shareholders............ $ 27,986 $ (14,417) $ (52,566) $ (177,396)
=============== ============== =============== =================
Basic Earnings (Loss) Per Common Share:
Income (Loss) From Continuing Operations................. $ 0.17 $ (0.14) $ (0.36) $ (1.76)
Discontinued Operations.................................. - - - -
--------------- -------------- --------------- -----------------
Net Income (Loss)........................................ $ 0.17 $ (0.14) $ (0.36) $ (1.76)
=============== ============== =============== =================
Diluted Earnings (Loss) Per Common Share:
Income (Loss) From Continuing Operations................. $ 0.16 $ (0.14) $ (0.36) $ (1.76)
Discontinued Operations.................................. - - - -
--------------- -------------- --------------- -----------------
Net Income (Loss)........................................ $ 0.16 $ (0.14) $ (0.36) $ (1.76)
=============== ============== =============== =================
Weighted Average Number of Common Shares
Outstanding:
Basic.................................................... 166,680 100,924 145,670 100,544
=============== ============== =============== =================
Diluted.................................................. 170,629 100,924 145,670 100,544
=============== ============== =============== =================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
1
<PAGE>
OCEAN ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except Share Data)
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31,
1999 1998
----------------- ------------------
(UNAUDITED)
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents.................................................... $ 53,877 $ 10,706
Accounts receivable, net..................................................... 147,007 111,829
Inventories.................................................................. 27,127 16,802
Prepaid expenses and other................................................... 23,805 14,444
----------------- ------------------
Total Current Assets....................................................... 251,816 153,781
Property, Plant and Equipment, at cost, full cost method for oil and gas properties:
Evaluated oil and gas properties............................................. 3,501,039 2,759,686
Unevaluated oil and gas properties excluded from amortization................ 560,731 488,689
Other........................................................................ 76,650 44,960
----------------- ------------------
4,138,420 3,293,335
Accumulated Depreciation, Depletion and Amortization............................ 1,973,788 1,711,696
----------------- ------------------
2,164,632 1,581,639
Deferred Income Taxes........................................................... 206,045 217,824
Noncurrent Assets of Discontinued Operations, Net............................... 222,112 -
Other Assets.................................................................... 61,716 53,716
----------------- ------------------
Total Assets.................................................................... $ 2,906,321 $ 2,006,960
================= ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts and notes payable................................................... $ 163,982 $ 184,828
Accrued interest payable..................................................... 34,024 36,206
Accrued liabilities.......................................................... 89,354 15,312
Current maturities of long-term debt......................................... 846 836
----------------- ------------------
Total Current Liabilities.................................................. 288,206 237,182
Long-term Debt.................................................................. 1,538,697 1,371,890
Other Noncurrent Liabilities.................................................... 140,949 20,945
Commitments and Contingencies................................................... - -
Shareholders' Equity:
Preferred stock, $1.00 and $0.01 par value, respectively; authorized
10,000,000 Shares; issued 50,000 shares.................................. 1 1
Common stock, $.10 And $.01 Par value, respectively; authorized 230,000,000 and
250,000,000 shares respectively; issued 166,859,714 and 101,753,646 shares,
respectively............................................................... 16,687 1,018
Additional paid-in capital................................................... 1,483,015 892,339
Accumulated deficit.......................................................... (552,680) (500,114)
Other ....................................................................... (8,554) (16,301)
----------------- ------------------
Total Shareholders' Equity................................................. 938,469 376,943
----------------- ------------------
Total Liabilities and Shareholders' Equity...................................... $ 2,906,321 $ 2,006,960
================= ==================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
2
<PAGE>
OCEAN ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------------
1999 1998
----------------- ------------------
OPERATING ACTIVITIES:
<S> <C> <C>
Net loss............................................................... $ (50,110) $ (177,396)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Loss from discontinued operations.................................... 78 -
Depreciation, depletion and amortization............................. 233,732 217,719
Loss on sale of canadian assets...................................... 28,500 -
Write-down of oil and gas properties................................. - 218,392
Deferred income taxes................................................ (24,702) (91,253)
Noncash merger expenses.............................................. 21,047 -
Other................................................................ 6,180 5,294
----------------- ------------------
214,725 172,756
Changes in operating assets and liabilities, net of acquisitions:
Decrease in accounts receivable.................................... 23,926 6,039
(Increase) decrease in inventories, prepaid expenses and other..... 22,695 (11,929)
Decrease in accounts and notes payable............................. (112,004) (24,408)
Increase in accrued expenses and other............................. 47,064 5,871
----------------- ------------------
Net Cash Provided by Continuing Operations........................... 196,406 148,329
Net Cash Provided by Discontinued Operations......................... 14,377 -
----------------- ------------------
Net Cash Provided by Operating Activities............................ 210,783 148,329
----------------- ------------------
INVESTING ACTIVITIES:
Capital expenditures of continuing operations.......................... (231,976) (669,798)
Capital expenditures of discontinued operations........................ (5,040) -
Acquisition costs, net of cash acquired................................ (5,623) -
Proceeds from sales of property, plant and equipment................... 390,512 1,097
----------------- ------------------
Net Cash Provided by (Used In) Investing Activities.................. 147,873 (668,701)
----------------- ------------------
FINANCING ACTIVITIES:
Proceeds from debt..................................................... 989,999 1,424,438
Principal payments on debt ............................................ (1,400,823) (893,356)
Proceeds from deferred revenue......................................... 100,000 -
Proceeds from sales of common stock.................................... 2,572 7,583
Deferred debt issue costs.............................................. (6,406) (15,433)
Dividends paid......................................................... (827) -
----------------- ------------------
Net Cash Provided by (Used In) Financing Activities.................. (315,485) 523,232
----------------- ------------------
Increase in Cash and Cash Equivalents.................................... 43,171 2,860
Cash and Cash Equivalents At Beginning of Period......................... 10,706 11,689
----------------- ------------------
Cash and Cash Equivalents At End of Period............................... $ 53,877 $ 14,549
================= ==================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
OCEAN ENERGY, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
1999 1998 1999 1998
----------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net income (loss).................................... $ 28,805 $(14,417) $ (50,110) $(177,396)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment........... - (1,282) 10,720 (1,866)
----------------- --------------- ---------------- ----------------
Comprehensive income (loss) ......................... $ 28,805 $(15,699) $ (39,390) $(179,262)
================= =============== ================ ================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
OCEAN ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. PRESENTATION OF FINANCIAL INFORMATION
The consolidated financial statements of Ocean Energy, Inc. ("OEI" or "the
Company"), a Texas corporation, included herein have been prepared, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). Although certain information normally included in financial
statements prepared in accordance with generally accepted accounting principles
has been condensed or omitted, management believes that the financial statements
reflect all normal recurring adjustments that are necessary for a fair
presentation.
Effective March 30, 1999, Ocean Energy, Inc. ("Old Ocean") was merged (the
"Merger") with and into Seagull Energy Corporation ("Seagull"). Seagull was
engaged primarily in exploration and development activities in the United
States, Egypt, Cote d'Ivoire, Indonesia and the Russian Republic of Tartarstan.
At the time of the Merger, Seagull amended its Articles of Incorporation to
change its name to Ocean Energy, Inc., and each outstanding share of Old Ocean
common stock was converted into one share of Seagull common stock. The
stockholders of Old Ocean received approximately 61.5% of the outstanding common
stock of the Company in the Merger, and the shareholders of Seagull received the
remaining 38.5%. Certain reclassifications have been made to the historical
results of the Company to conform the presentation used by the companies.
Effective March 27, 1998, United Meridian Corporation ("UMC") was merged
into Old Ocean (the "UMC Merger"). As a result of the UMC Merger, each
outstanding share of UMC common stock was converted into 1.3 shares of Old Ocean
common stock with approximately 46 million shares issued to the shareholders of
UMC, representing approximately 46% of all of the issued and outstanding shares
of Old Ocean. Old Ocean's shareholders received 2.34 shares of Old Ocean shares
for each share outstanding immediately preceding the UMC Merger, representing
approximately 54% of all of the then issued and outstanding shares. The UMC
Merger was accounted for as a pooling of interests. Accordingly, the
consolidated financial statements for periods prior to the UMC Merger were
restated to conform accounting policies and combine the historical results of
Old Ocean and UMC. Merger costs of $39 million relating to the UMC Merger
consisted primarily of investment banking and other transaction fees, employee
severance and relocation costs as well as the write-off of deferred financing
costs.
The accompanying consolidated financial statements of the Company should be
read in conjunction with the consolidated financial statements and notes thereto
of Old Ocean and Seagull for the year ended December 31, 1998.
PROPERTY, PLANT AND EQUIPMENT - The Company capitalizes interest expense
and certain employee-related costs that are directly attributable to oil and gas
operations. For the three months ended September 30, 1999 and 1998, the Company
capitalized interest expense in the amount of $8 million and $7 million,
respectively, and certain employee-related costs in the amount of $11 million
and $8 million, respectively. For the nine months ended September 30, 1999 and
1998, the Company capitalized interest expense in the amount of $28 million and
$22 million, respectively, and certain employee-related costs in the amount of
$26 million and $19 million, respectively.
5
<PAGE>
OCEAN ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
EARNINGS PER SHARE - Options to purchase a weighted average of 19,517,000
and 12,141,000 shares of common stock for the nine months ended September 30,
1999 and 1998, respectively, and 13,280,000 for the three months ended September
30, 1998, at prices ranging from $2.11 to $36.54 per share were outstanding but
were not included in the computation of diluted loss per share because such
options would have an antidilutive effect on the computation of diluted loss per
share. These options expire at various dates from 1999 to 2009. The preferred
stock conversion was also excluded from the computation because of its
antidilutive effect. For the three months ended September 30, 1999, the amount
of diluted weighted average shares has been increased by 3,949,000 shares to
reflect the assumed effect of the exercise of stock options. For this same
period options to purchase 10,800,000 shares of common stock at $10.19 to $36.54
per share and expiring at various dates from 1999 to 2009 were outstanding but
were not included in the computation of diluted earnings per share because the
options' exercise prices were greater than the average market price of the
common shares.
TREASURY STOCK - The Company follows the average cost method of accounting
for treasury stock transactions.
DISCONTINUED OPERATIONS - The Company has operated in Alaska through a
division of the Company and a wholly-owned subsidiary (collectively referred to
herein as "ENSTAR"). ENSTAR is subject to regulation by the Regulatory
Commission of Alaska ("the RCA") which has jurisdiction over, among other
things, rates, accounting procedures and standards of service. In July 1999 the
Company committed to a plan to dispose of ENSTAR, and on November 1, 1999 the
Company completed the sale. See Note 2. Prior to the sale the results of
operations and net assets of ENSTAR have been reflected as discontinued
operations.
ACCOUNTING PRONOUNCEMENTS - In June 1998, the Financial Accounting
Standards Board ("FASB") issued STATEMENT OF FINANCIAL ACCOUNTING STANDARDS
("SFAS") NO. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES.
This statement establishes standards of accounting for and disclosures of
derivative instruments and hedging activities. This statement, as amended, is
effective for fiscal years beginning after June 15, 2000. The Company has not
yet determined the impact of this statement on the Company's financial condition
or results of operations.
NOTE 2. ACQUISITION AND DISPOSITION OF ASSETS
MERGER - On March 30, 1999, the shareholders approved the Merger. The
Merger has been accounted for as a purchase under generally accepted accounting
principles. Because Old Ocean stockholders own a majority of the outstanding
shares of common stock of the merged company, the accounting treatment of the
Merger reflects Old Ocean acquiring Seagull in a "reverse purchase." Under this
method of accounting, the merged company's historical results for periods prior
to the Merger are the same as Old Ocean's historical results. At the date of the
Merger, assets
6
<PAGE>
OCEAN ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
and liabilities of Old Ocean were recorded based upon their historical costs,
and the assets and liabilities of Seagull were recorded at their estimated fair
market values.
The following is a calculation of purchase price:
<TABLE>
<S> <C>
CALCULATION OF PURCHASE PRICE (IN THOUSANDS, EXCEPT PER SHARE DATA):
Shares of common stock issued.............................................. 64,630
Average of OEI stock price three days before and after the
Merger announcement...................................................... $ 9.09
----------------------
Fair value of stock issued.................................................. $ 587,484
Add: Capitalized Merger costs............................................... 64,054
----------------------
Purchase Price.............................................................. $ 651,538
======================
</TABLE>
Capitalized merger costs consisted primarily of severance costs of Seagull
($22 million), value of Seagull stock options maintained by OEI ($17 million),
investment banking fees ($10 million), and other transaction fees and
professional expenses ($15 million). In addition, merger costs of $44 million
were expensed through September 30, 1999. These costs consisted primarily of Old
Ocean's severance costs ($24 million), the write-off of certain costs relating
to Old Ocean's information technology system ($14 million) and compensation
expense related to the vesting of Old Ocean's restricted stock ($6 million). As
of September 30, 1999, substantially all of Old Ocean's severance costs have
been paid.
The allocation of purchase price to specific assets and liabilities is
based on certain estimates of fair values and costs which will be adjusted as
actual amounts are determined. Such adjustments are not expected to be material.
DISPOSITION OF CANADIAN SUBSIDIARY - On April 15, 1999, the Company
completed a sale of its Canadian oil and gas subsidiary, realizing net proceeds
of $63 million which were used to repay existing long-term debt. A loss of $28.5
million on the sale was provided for at March 31, 1999. The Canadian disposed
assets contributed revenue of $7 million and $13 million for the nine months
ended September 30, 1999 and 1998, respectively, and had operating profit of $2
million (excluding the provision for loss on the sale) and $3 million,
respectively.
DISPOSITION OF ENSTAR - On July 15, 1999, the Company signed a purchase and
sale agreement to sell ENSTAR. On November 1, 1999 the Company closed the sale,
receiving net proceeds of $285 million, a portion of which was used to repay
existing long-term debt. ENSTAR contributed revenue of $30 million for the nine
months ended September 30, 1999 and operating profit of $3 million. ENSTAR's net
loss was $78,000, net of income tax expense of $462,000, for the same period.
The net assets disposed of comprised net current assets of $0.4 million,
property, plant and equipment of $273 million, and other long-term assets of $6
million, before liabilities assumed of $57 million.
7
<PAGE>
OCEAN ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DISPOSITION OF GULF OF MEXICO AND ARKOMA ASSETS - DURING August 1999, the
Company divested its working interest in three shelf Gulf of Mexico fields for
proceeds of $66 million. During September 1999, the Company finalized the sale
of certain Arkoma Basin assets for cash proceeds of $231 million. Proceeds from
the sales were used to reduce outstanding indebtedness under the revolving
credit facility. On a proforma basis, the Gulf of Mexico and Arkoma assets
contributed revenue of $36 million and $53 million for the nine months ended
September 30, 1999 and 1998, respectively, and had operating profit of $15
million and $21 million, respectively.
UNAUDITED PRO FORMA INFORMATION - The following table presents the
unaudited pro forma results (in thousands, except per share data) of the Company
determined as follows:
- the Seagull-OEI Merger is assumed to have occurred as of January 1, 1998;
- certain costs that Seagull had expensed under the successful efforts method
of accounting are capitalized under the full cost method of accounting;
- depreciation, depletion and amortization expense of Seagull is calculated
in accordance with the full cost method of accounting applied to the
adjusted basis of the properties acquired using the purchase method of
accounting;
- a decrease in interest expense results from the revaluation of Seagull debt
under the purchase method of accounting, including the elimination of
amortization of historical debt issuance costs;
- the sales of the Canadian subsidiary, the Gulf of Mexico and Arkoma oil and
gas assets, and ENSTAR are assumed to have occurred as of January 1, 1998;
- the proceeds from the asset sales were used to pay down debt at January 1,
1998; and,
- the related income tax effects of these adjustments are recorded based on
the applicable statutory tax rate.
UNAUDITED PRO FORMA INFORMATION
<TABLE>
Nine Months Ended September 30,
--------------------------------------------
1999 1998
----------------------- ------------------
<S> <C> <C>
Revenues.......................................................... $ 530,188 $ 578,519
Net income (loss) available to common shareholders................ $ 17,910 $ (169,100)
Basic earnings (loss) per share................................... $ 0.11 $ (1.03)
Diluted earnings (loss) per share................................. $ 0.11 $ (1.03)
</TABLE>
8
<PAGE>
OCEAN ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------- ------ ----------------------
1999 1998
-------------------- ----------------------
(amounts in thousands)
Cash paid during the period for:
<S> <C> <C>
Interest.................................................. $ 84,429 $ 34,315
Income taxes.............................................. $ 11,607 $ 1,895
</TABLE>
As discussed in Note 2, the Merger was completed through the issuance of
common stock. Therefore, the Merger increased property, plant and equipment by
$1.3 billion, debt by $563 million, other liabilities by $207 million, and
equity by $595 million through a non-cash transaction that was not reflected in
the statement of cash flows. However, $1.8 million of the $5.6 million of
acquisition costs reflected in "investing activities" in the statement of cash
flows represents the cash expenses paid in connection with the Merger, less the
cash of Seagull on the date of the Merger.
NOTE 4. FINANCIAL INSTRUMENTS
From time to time, the Company has utilized and expects to continue to
utilize hedging transactions with respect to a portion of its oil and gas
production to achieve a more predictable cash flow, as well as to reduce its
exposure to price fluctuations. Oil and gas revenues have been (decreased)
increased by ($31) million and $17.5 million for the nine months ended September
30, 1999 and 1998, respectively, as a result of derivative contracts.
At September 30, 1999, collars were in place for portions of the Company's
oil production for the remainder of 1999 with floors of $12.00 and $15.00 and
ceilings of $15.00, $18.85 and $19.00 per barrel. Contracted volumes totaled
60,000 barrels of oil per day at September 30, 1999. The $15.00 ceiling
associated with one of the collars was offset in October with the purchase of
call options that have a strike price of $15.00.
Additional collars were in place at September 30, 1999, at contracted
volumes of 15,000 barrels of oil per day for the period January 1 through
December 31, 2000 with floors of $19.00 and $20.00 and ceilings of $21.90 and
$22.20, respectively. The Company also has in place an oil swap agreement for
5,000 barrels per day at $20.08 per barrel for the period January through
December 2000.
As of September 30, 1999 the Company had no natural gas hedges in place.
9
<PAGE>
OCEAN ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
While derivative financial instruments are intended to reduce the Company's
exposure to declines in the market price of natural gas and crude oil, these
derivative financial instruments will limit the Company's realized revenues if
NYMEX prices exceed the contracted ceiling price and limit losses if NYMEX
prices fall below the contracted floor price. As a result, gains and losses on
derivative financial instruments are generally offset by similar changes in the
realized price of natural gas and crude oil. Gains and losses from these
financial instruments are recognized in revenues during the periods to which the
derivative financial instruments relate.
NOTE 5. DEBT
Long-term debt consisted of the following at September 30, 1999 and
December 31, 1998 (in thousands):
<TABLE>
SEPTEMBER 30, 1999 December 31, 1998
-------------------------- -----------------------
<S> <C> <C>
Credit Facility (average interest rate of 6.5%), Due 2004...... $ 240,000 $ -
Oei credit facility (average interest rate of 7.0%)............ - 357,000
Public notes of old ocean...................................... 1,009,376 1,009,274
Public notes assumed in the Merger:
7 7/8% senior notes, due 2003............................... 98,452 -
7 1/2% senior notes, due 2027............................... 124,948 -
8 5/8% senior subordinated notes, due 2005.................. 99,539 -
Other.......................................................... 24,428 6,452
-------------------------- -----------------------
1,596,743 1,372,726
Less: current maturities.................................... (846) (836)
Debt of discontinued operations to be assumed.................. (57,200) -
-------------------------- -----------------------
$ 1,538,697 $ 1,371,890
========================== =======================
</TABLE>
Concurrently with the closing of the Merger on March 30, 1999, the Company
entered into an $800 million credit facility (the "Credit Facility") which
replaced the existing credit facilities of both Old Ocean and Seagull. At
September 30, 1999, the Credit Facility consisted of a $500 million five-year
revolving facility and a renewable $300 million 364-day facility with a one-year
term loan option. The Credit Facility bears interest, at the Company's option,
at LIBOR or prime rates plus applicable margins ranging from zero to 1.7% or at
a competitive bid. Financing fees of approximately $6 million were incurred
related to the Credit Facility. As of September 30, 1999, borrowings outstanding
against the Credit Facility totaled $240 million and Letters of Credit totaled
$44 million, leaving $516 million of available credit. As of November 10, 1999,
the Company had repaid all outstanding balances under the Credit Facility with
the proceeds of the asset sales discussed in Note 2, and, under the terms of the
agreement, reduced the $300 million 364-day facility to zero. Currently no
amounts are outstanding under the $500 million revolving credit facility.
On November 9, 1999, the Company announced a tender offer to repurchase
$150 million of 10 3/8% senior subordinated Notes due 2005 and $160 million of 9
3/4% senior subordinated Notes due 2006. The Company intends to fund the
repurchase of these Notes with available cash balances and borrowings under the
existing Credit Facility. If all of the outstanding Notes are tendered, the
total cost of the repurchase would be approximately $340 million, excluding
accrued and unpaid interest, and the Company would record an after-tax
extraordinary loss of approximately $24 million during the fourth quarter. The
tender offer is subject to certain conditions as described in the Offer to
Purchase and will expire on December 8, 1999 unless extended by the Company
according to the terms of the Offer. While the Company believes the tender offer
wil be completed during the fourth quarter, there can be no assurance that any
of the Notes will be tendered.
In addition, in November the Company entered into a new $200 million
364-day facility with substantially the same terms as the Company's existing
Credit Facility. The availability of this facility is contingent on the
consummation of the tender offer. Currently no amounts are outstanding under
this new 364-day facility.
The Credit Facility contains certain covenants and restrictive provisions
including limitations on the incurrence of additional debt and payment of
dividends and the maintenance of certain financial ratios. Under the most
restrictive of these provisions, approximately $574 million was
10
<PAGE>
OCEAN ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
available for payment of cash dividends on common stock or to repurchase common
stock as of September 30, 1999.
As a result of the Merger, the liabilities of both Seagull and Old Ocean
became the liabilities of the Company. Accordingly, the financial statements of
the Company include an aggregate of approximately $563 million of outstanding
Seagull debt assumed at March 30, 1999. As discussed above, Seagull's existing
revolving credit facility was replaced by the Credit Facility. The remaining
Seagull debt was recorded at a discount as follows: the 7 1/2% Senior Notes at a
discount of $26 million, the 7 7/8% Senior Notes at a discount of $2 million,
and the 8 5/8% Senior Subordinated Notes at a discount of $1 million.
NOTE 6. OTHER NONCURRENT LIABILITIES
In 1999, the Company entered into a prepaid crude oil sales contract to
deliver approximately 5,600 barrels of crude oil per day beginning in February
2000 through May 2003. In exchange for the crude oil to be provided, the Company
received an advance payment of approximately $100 million in June 1999. The
Company has the option to satisfy contract delivery requirements with crude oil
purchased from third parties or from oil it produces. The obligation associated
with the future delivery of the crude oil has been recorded as deferred revenue,
included in other accrued and other noncurrent liabilities, and will be
amortized into revenue as scheduled deliveries of crude oil are made.
NOTE 7. SUPPLEMENTAL GUARANTOR INFORMATION
Ocean Energy, Inc., a Louisiana corporation and wholly-owned subsidiary of
the Company ("Ocean Louisiana"), has unconditionally guaranteed the full and
prompt performance of the Company's obligations under certain of the notes and
related indentures, including the payment of principal, premium (if any) and
interest. None of the referenced indentures place significant restrictions on a
wholly-owned subsidiary's ability to make distributions TO THE PARENT. IN ORDER
TO PROVIDE MEANINGFUL FINANCIAL DATA RELATING TO THE GUARANTOR (I.E., Ocean
Louisiana on an unconsolidated basis), the following condensed consolidating
financial information has been provided following the policies set forth below:
1) Investments in subsidiaries are accounted for by the Company on the cost
basis. Earnings or losses of subsidiaries are therefore not reflected in
the related investment accounts.
2) Certain reclassifications were made to conform all of the financial
information to the financial presentation on a consolidated basis. The
principal eliminating entries eliminate investments in subsidiaries and
intercompany balances.
11
<PAGE>
OCEAN ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Amounts in Thousands)
<TABLE>
<CAPTION>
Unconsolidated
--------------------------------------------------------------
Guarantor Non-Guarantor
1999 OEI Subsidiary Subsidiaries Consolidated OEI
- ---- ------------------ -------------------- ------------------- ------------------
<S> <C> <C> <C> <C>
Revenues........................... $ - $ 70,860 $ 143,533 $ 214,393
Costs of Operations:
Operating expenses.............. - 26,705 27,967 54,672
Depreciation, depletion and
amortization.................. 4,971 26,726 53,918 85,615
General and administrative...... 6,407 (1,452) - 4,955
------------------ -------------------- ------------------- ------------------
Operating Profit (Loss)............ (11,378) 18,881 61,648 69,151
Interest Expense................... 25,870 - 4,540 30,410
Merger Expense..................... - 3,176 - 3,176
Interest Income and Other.......... (1,624) (4,545) 5,900 (269)
------------------ -------------------- ------------------- ------------------
Income (Loss) Before Taxes......... (35,624) 20,250 51,208 35,834
Income Tax Provision (Benefit)..... (13,002) 7,391 12,015 6,404
------------------ -------------------- ------------------- ------------------
Income (Loss) from Continuing
Operations...................... (22,622) 12,859 39,193 29,430
Income from Discontinued
Operations, net of income taxes. - - (625) (625)
------------------ -------------------- ------------------- ------------------
Net Income (Loss).................. $ (22,622) $ 12,859 $ 38,568 $ 28,805
================== ==================== =================== ==================
1998
- ----
Revenues........................... $ - $ 70,476 $ 52,893 $ 123,369
Costs of Operations:
Operating expenses.............. - 30,798 19,250 50,048
Depreciation, depletion and
amortization.................. - 31,435 38,786 70,221
General and administrative...... - 4,452 176 4,628
------------------ -------------------- ------------------- ------------------
Operating Profit (Loss)............ - 3,791 (5,319) (1,528)
Interest Expense (Income).......... 13,897 10,736 (6,012) 18,621
Interest Income and Other.......... - (183) (1,103) (1,286)
------------------ -------------------- ------------------- ------------------
Income (Loss) Before Taxes......... (13,897) (6,762) 1,796 (18,863)
Income Tax Expense (Benefit)....... (2,091) (2,680) 325 (4,446)
------------------ -------------------- ------------------- ------------------
Net Income (Loss).................. $ (11,806) $ (4,082) $ 1,471 $ (14,417)
================== ==================== =================== ==================
</TABLE>
12
<PAGE>
OCEAN ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Amounts in Thousands)
<TABLE>
<CAPTION>
Unconsolidated
--------------------------------------------------------------
Guarantor Non-Guarantor
1999 OEI Subsidiary Subsidiaries Consolidated OEI
- ---- ------------------ -------------------- ------------------- ------------------
<S> <C> <C> <C> <C>
Revenues........................... $ - $ 185,210 $ 331,083 $ 516,293
Costs of Operations:
Operating expenses.............. - 77,395 87,883 165,278
Depreciation, depletion and
amortization.................. 6,032 84,056 143,644 233,732
Loss on sale of Canadian assets. - - 28,500 28,500
General and administrative...... 10,770 7,268 - 18,038
------------------ -------------------- ------------------- ------------------
Operating Profit (Loss)............ (16,802) 16,491 71,056 70,745
Interest Expense................... 70,841 13,126 2,634 86,601
Merger Expense..................... - 43,828 - 43,828
Interest Income and Other.......... (3,168) (2,783) 5,568 (383)
------------------ -------------------- ------------------- ------------------
Income (Loss) Before Taxes......... (84,475) (37,680) 62,854 (59,301)
Income Tax Provision (Benefit)..... (30,833) (13,753) 35,317 (9,269)
------------------ -------------------- ------------------- ------------------
Income (Loss) from
Continuing Operations........... (53,642) (23,927) 27,537 (50,032)
Loss from Discontinued
Operations, net of income taxes. - - (78) (78)
------------------ -------------------- ------------------- ------------------
Net Income (Loss).................. $ (53,642) $ (23,927) $ 27,459 $ (50,110)
================== ==================== =================== ==================
1998
- ----
Revenues........................... $ - $ 238,161 $ 159,173 $ 397,334
Costs of Operations:
Operating expenses.............. - 83,862 51,598 135,460
Depreciation, depletion and
amortization.................. - 112,569 105,150 217,719
Write-down of oil and gas
PROPERTIES.................. - 218,392 - 218,392
General and administrative...... 60 12,994 592 13,646
------------------ -------------------- ------------------- ------------------
Operating Profit (Loss)............ (60) (189,656) 1,833 (187,883)
Interest Expense (Income).......... 21,954 30,209 (11,601) 40,562
Merger Expense..................... - 39,000 - 39,000
Interest Income and Other.......... - 255 (2,349) (2,094)
------------------ -------------------- ------------------- ------------------
Income (Loss) Before Taxes......... (22,014) (259,120) 15,783 (265,351)
Income Tax Benefit................. (23,991) (60,432) (3,532) (87,955)
------------------ -------------------- ------------------- ------------------
Net Income (Loss).................. $ 1,977 $ (198,688) $ 19,315 $ (177,396)
================== ==================== =================== ==================
</TABLE>
13
<PAGE>
OCEAN ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEETS
AT SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(Amounts in Thousands)
<TABLE>
<CAPTION>
Unconsolidated
--------------------------------------------------
Guarantor Non-Guarantor Eliminating Consolidated
SEPTEMBER 30, 1999 OEI Subsidiary Subsidiaries Entries OEI
- ------------------ -------------- --------------- --------------- --------------- ---------------
ASSETS
<S> <C> <C> <C> <C> <C>
Current Assets................ $ 2,359 $ 54,701 $ 194,756 $ - $ 251,816
Intercompany Investments...... 2,665,044 (172,061) (41,168) (2,451,815) -
Property, Plant and Equipment,
Net........................ 21,820 582,902 1,559,910 - 2,164,632
Other Assets.................. 79,197 201,146 209,530 - 489,873
-------------- --------------- --------------- --------------- ---------------
Total Assets.................. $ 2,768,420 $ 666,688 $ 1,923,028 $(2,451,815) $ 2,906,321
============== =============== =============== =============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities........... $ 66,134 $ 109,668 $ 112,404 $ - $ 288,206
Long-Term Debt................ 1,530,604 - 8,093 - 1,538,697
Other Liabilities............. 98,250 11,390 31,309 - 140,949
Shareholders' Equity.......... 1,073,432 545,630 1,771,222 (2,451,815) 938,469
-------------- --------------- --------------- --------------- ---------------
Total Liabilities and
Shareholders' Equity....... $ 2,768,420 $ 666,688 $ 1,923,028 $(2,451,815) $ 2,906,321
============== =============== =============== =============== ===============
DECEMBER 31, 1998
- -----------------
ASSETS
Current Assets................ $ - $ 49,680 $ 104,101 $ - $ 153,781
Intercompany Investments...... 1,645,933 174,608 (410,255) (1,410,286) -
Property, Plant and Equipment,
Net........................ - 674,598 907,041 - 1,581,639
Other Assets.................. 24,686 214,868 31,986 - 271,540
-------------- --------------- --------------- --------------- ---------------
Total Assets.................. $ 1,670,619 $ 1,113,754 $ 632,873 $(1,410,286) $ 2,006,960
============== =============== =============== =============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities........... $ 31,271 $ 187,878 $ 18,033 $ - $ 237,182
Long-Term Debt................ 1,009,274 357,000 5,616 - 1,371,890
Other Liabilities............. - 981 19,964 - 20,945
Shareholders' Equity.......... 630,074 567,895 589,260 (1,410,286) 376,943
-------------- --------------- --------------- --------------- ---------------
Total Liabilities and
Shareholders' Equity....... $ 1,670,619 $ 1,113,754 $ 632,873 $(1,410,286) $ 2,006,960
============== =============== =============== =============== ===============
</TABLE>
14
<PAGE>
OCEAN ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Amounts in Thousands)
<TABLE>
<CAPTION>
Unconsolidated
----------------------------------------------------------
Guarantor Non-Guarantor
1999 OEI Subsidiary Subsidiaries Consolidated OEI
- ---- ------------------ ----------------- ----------------- ------------------
Cash Flows from Operating
Activities:
<S> <C> <C> <C> <C>
Net Income (Loss)............... $ (53,642) $ (23,927) $ 27,459 $ (50,110)
Adjustments to reconcile net
loss to net cash from
operating activities.......... (22,153) 26,954 260,034 264,835
Changes in assets and liabilities 48,094 380,669 (447,082) (18,319)
------------------ ----------------- ----------------- ------------------
Net Cash Provided by (Used In)
Continuing Operations........... (27,701) 383,696 (159,589) 196,406
Net Cash Provided by Discontinued
Operations...................... - - 14,377 14,377
------------------ ----------------- ----------------- ------------------
Net Cash Provided By (Used In)
Operating Activities............ (27,701) 383,696 (145,212) 210,783
Cash Flows Provided by (Used In)
Investing Activities............ (17,704) (20,326) 185,903 147,873
Cash Flows Provided by (Used In)
Financing Activities............ 45,405 (363,370) 2,480 (315,485)
------------------ ----------------- ----------------- ------------------
Net Increase in Cash and Cash
Equivalents..................... - - 43,171 43,171
Cash and Cash Equivalents:
Beginning of Period............. - - 10,706 10,706
------------------ ----------------- ----------------- ------------------
End of Period................... $ - $ - $ 53,877 $ 53,877
================== ================= ================= ==================
1998
- ----
Cash Flows from Operating
Activities:
Net Income (Loss)............... $ 1,977 $ (198,688) $ 19,315 $ (177,396)
Adjustments to reconcile net
income (loss) to net cash from
operating activities.......... (22,749) 284,217 88,684 350,152
Changes in assets and liabilities 1,814 (51,133) 24,892 (24,427)
------------------ ----------------- ----------------- ------------------
Net Cash Provided By (Used In)
Operating Activities............ (18,958) 34,396 132,891 148,329
Cash Flows Used in Investing
Activities...................... - (374,357) (294,344) (668,701)
Cash Flows Provided By Financing
Activities...................... 18,956 341,607 162,669 523,232
------------------ ----------------- ----------------- ------------------
Net Increase (Decrease) in Cash and
Cash Equivalents................ (2) 1,646 1,216 2,860
Cash and Cash Equivalents:
Beginning of Period............. 2 2,653 9,034 11,689
------------------ ----------------- ----------------- ------------------
End of Period................... $ - $ 4,299 $ 10,250 $ 14,549
================== ================= ================= ==================
</TABLE>
15
<PAGE>
OCEAN ENERGY, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion is intended to assist in understanding the
Company's financial position, results of operations and cash flows for each of
the periods indicated.
As discussed in Note 1, on March 30, 1999, Ocean Energy, Inc., a Delaware
corporation, merged with and into Seagull Energy Corporation, a Texas
corporation, and the resulting company was renamed Ocean Energy, Inc. The merger
was treated for accounting purposes as an acquisition of Seagull by Ocean in a
purchase business transaction. As such, the financial results presented here are
primarily those of Ocean Energy, Inc. on a stand-alone basis for the first
quarter of 1999 and of the combined company for the second and third quarters of
1999, compared to Ocean's results in the first, second and third quarters of
1998 on a stand-alone basis.
The Company's accompanying unaudited consolidated financial statements and
the notes thereto and the consolidated financial statements and notes thereto
included in the Annual Reports on Form 10-K for the year ended December 31, 1998
of Old Ocean and Seagull contain detailed information that should be referred to
in conjunction with the following discussion.
RESULTS OF OPERATIONS
(Amounts in Thousands)
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- -------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- -------------
OIL AND GAS OPERATIONS:
Revenues:
<S> <C> <C> <C> <C>
Natural gas............................ $ 101,908 $ 51,599 $ 236,914 $ 167,533
Oil and ngls........................... 112,485 71,770 279,379 229,801
-------------- -------------- -------------- -------------
214,393 123,369 516,293 397,334
-------------- -------------- -------------- -------------
Operating expenses....................... 54,672 50,048 165,278 135,460
Depreciation, depletion and amortization. 83,323 69,229 227,623 214,739
Loss on sale of canadian assets.......... - - 28,500 -
Write-down of oil and gas properties..... - - - 218,392
-------------- -------------- -------------- -------------
Operating profit (loss)................. 76,398 4,092 94,892 (171,257)
CORPORATE................................... (7,247) (5,620) (24,147) (16,626)
-------------- -------------- -------------- -------------
Total operating profit (loss)............ $ 69,151 $ (1,528) $ 70,745 $(187,883)
============== ============== ============== =============
</TABLE>
The Company's $71 million improvement in operating profit for the three
month period ending September 30, 1999 compared to the same period in 1998 is
primarily due to the recovery of world crude oil and natural gas prices
experienced during the third quarter of 1999 as well as to increases in oil and
gas production and to significant declines in operating expense incurred per
unit of production. The Company's $259 million improvement in operating profit
for the nine month period ending September 30, 1999 compared to the same period
in 1998 is due to the absence of the $218 million write-down of oil and gas
properties that was recorded in the second quarter of 1998 and to the
improvement in realized gas prices. Other factors affecting the Company's 1999
operations included the Merger and the loss on the sale of Canadian assets.
16
<PAGE>
OCEAN ENERGY, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
REVENUES - Natural gas revenues increased $69 million, or 41%, to $237
million for the nine months ended September 30, 1999, from $168 million for the
nine months ended September 30, 1998. Gas revenues increased $50 million, or
96%, to $102 million for the third quarter of 1999 as compared to $52 million
for the third quarter of 1998. These increases are primarily due to production
from properties acquired in the Merger and to higher average gas prices realized
during the period. The average realized price for natural gas increased 4% to
$2.00 per Mcf in the first nine months of 1999 as compared to $1.92 in the first
nine months of 1998 and increased 31% to $2.34 for the third quarter of 1999
compared to $1.78 for the third quarter of 1998. Daily natural gas production
for the first nine months of 1999 was 431 MMcf, an increase of 35% over 1998
volumes due also to the acquisition of producing properties in the Merger. Daily
natural gas production increased 50% over 1998 volumes for the third quarter of
1999 to 470 MMcf.
Oil revenues increased $49 million, or 21%, to $279 million for the nine
months ended September 30, 1999, from $230 million for the nine months ended
September 30, 1998. For the third quarter of 1999, oil revenues increased $40
million, or 56%, to $112 million for 1999 compared to $72 million for the third
quarter of 1998. These increases are the result of production from properties
acquired in the Merger, and to an increase in the average realized price for oil
during the nine months ended September 30, 1999. The average realized price for
oil increased 21% to $15.47 for the first nine months of 1999 compared to $12.78
for the same period in 1998. In addition, the average realized price for oil
increased 64% to $19.58 for the third quarter of 1999 compared to $11.93 for the
third quarter of 1998. Daily oil production increased to 73,965 Bbl in the first
nine months of 1999 as compared to 60,968 Bbl for the same period in 1998. For
the third quarter of 1999, daily oil production increased to 77,674 Bbl as
compared to 59,894 Bbl for the third quarter of 1998. The production increase
was also due to the acquisition of producing properties in the Merger.
For the nine months ended September 30, 1999 and 1998, oil and gas revenues
have been (decreased) increased by $(31) million and $17.5 million,
respectively, as a result of derivative contracts. Weighted average oil and
natural gas prices including hedging were $13.84 and $2.01, respectively, for
the nine months ended September 30, 1999, and $13.81 and $1.92, respectively,
for the nine months ended September 30, 1998.
17
<PAGE>
OCEAN ENERGY, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
EXPLORATION AND PRODUCTION OPERATING DATA
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- ----------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Net Daily Natural Gas Production (MMcf):
Domestic (1).............................. 427.5 267.8 382.0 273.0
Canada (2)................................ - 24.9 14.0 25.7
Cote d'ivoire (1)......................... 33.9 20.7 29.8 20.2
Egypt (1)................................. 0.9 - 0.7 -
Indonesia (1)............................. 7.6 - 4.4 -
--------------- --------------- --------------- ----------------
Total..................................... 469.9 313.4 430.9 318.9
=============== =============== =============== ================
Average Natural Gas Prices ($ per Mcf) :
Domestic (1).............................. $ 2.38 $ 1.84 $ 2.03 $ 2.00
Canada (2)................................ $ - $ 1.23 $ 1.54 $ 1.27
Cote d'Ivoire (1)......................... $ 1.77 $ 1.64 $ 1.73 $ 1.67
Egypt (1)................................. $ 3.94 $ - $ 3.32 $ -
Indonesia (1)............................. $ 2.26 $ - $ 2.14 $ -
Weighted average.......................... $ 2.34 $ 1.78 $ 2.00 $ 1.92
Average Natural Gas Prices Including Hedging
Activities ($ PER MCF).................... $ 2.36 $ 1.79 $ 2.01 $ 1.92
Net Daily Oil and NGL Production (Bbl):
Domestic (1).............................. 36,522 36,942 38,340 40,419
Canada (2)................................ - 1,326 469 1,243
Cote d'Ivoire (1)......................... 5,046 3,487 4,839 2,613
Equatorial Guinea......................... 20,774 18,139 19,902 16,693
Egypt (1)................................. 10,729 - 7,447 -
Russia (1)................................ 4,492 - 2,896 -
Indonesia (1)............................. 111 - 72 -
--------------- --------------- --------------- ----------------
Total..................................... 77,674 59,894 73,965 60,968
=============== =============== =============== ================
Average Oil and NGL Prices ($ per Bbl) :
Domestic (1).............................. $ 18.99 $ 12.07 $ 15.07 $ 12.93
Canada (2)................................ $ - $ 12.08 $ 11.27 $ 12.05
Cote d'ivoire (1)......................... $ 20.24 $ 11.52 $ 16.56 $ 13.33
Equatorial Guinea......................... $ 21.69 $ 11.70 $ 16.11 $ 12.38
Egypt (1)................................. $ 20.06 $ - $ 17.70 $ -
Russia (1)................................ $ 12.82 $ - $ 9.54 $ -
Indonesia (1)............................. $ 16.87 $ - $ 14.88 $ -
Weighted average.......................... $ 19.58 $ 11.93 $ 15.47 $ 12.78
Average Oil and NGL Prices Including Hedging
Activities ($ per Bbl).................... $ 15.74 $ 13.02 $ 13.84 $ 13.81
</TABLE>
(1) The Company's Egyptian, Russian and Indonesian operations, and a portion of
its domestic and Cote d'Ivoirian operations were acquired as a result of
the merger on March 31, 1999.
(2) The Company's Canadian operations were sold on April 15, 1999.
18
<PAGE>
OCEAN ENERGY, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OPERATING EXPENSES - Total operating expenses increased $30 million, or
22%, to $165 million for the nine months ended September 30, 1999 from $135
million for the comparable 1998 period. Operating expenses for the third quarter
of 1999 increased $5 million, or 10%, to $55 million for the third quarter of
1999 compared to $50 million for the third quarter of 1998. These increases
primarily result from the acquisition of additional producing properties in the
Merger, as well as from fluctuations in normal operating expenses, including
operating expenses associated with increased production from new facilities and
timing of workovers. Operating expenses decreased 5% to $4.15 per BOE for the
nine months ended September 30, 1999, compared to $4.35 per BOE in the
comparable 1998 period. Operating expenses decreased 21% to $3.81 per BOE for
the third quarter of 1999 compared to $4.85 per BOE for the third quarter of
1998.
DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE - Depreciation, depletion
and amortization (DD&A) expense related to oil and gas operations increased 6%
to $228 million for the nine months ended September 30, 1999 compared to $215
million for the same period in 1998. DD&A expense was $83 million for the third
quarter of 1999 compared to $69 million for the third quarter of 1998. For both
the third quarter and nine months of 1999 versus 1998, additional DD&A expense
related to properties acquired in the Merger was offset by the effects of the
non-cash impairments of oil and gas properties recognized by the Company in
1998. DD&A for oil and gas operations per BOE decreased $1.17, or 17%, to $5.72
per BOE for the nine months ended September 30, 1999, from $6.89 per BOE for the
comparable 1998 period. This variance is primarily attributable to the effect of
the non-cash impairments of oil and gas properties recognized by the Company in
1998.
LOSS ON SALE OF CANADIAN SUBSIDIARY - On April 15, 1999, the Company
completed a sale of its Canadian oil and gas subsidiary, realizing net proceeds
of $63 million which were used to repay existing long-term debt. A loss of $28.5
million on the sale was recorded during the first quarter of 1999.
WRITE-DOWN OF OIL AND GAS PROPERTIES - At June 30, 1998, the Company
recognized a non-cash impairment of oil and gas properties in the amount of
$218.4 million pursuant to the ceiling limitation required by the full cost
method of accounting for oil and gas properties. The write-down was primarily
the result of the precipitous decline in world crude oil prices experienced
during the second quarter of 1998.
GENERAL AND ADMINISTRATIVE EXPENSES - General and administrative expense
increased $4 million or 29% to $18 million for the nine months ended September
30, 1999 compared to $14 million for the same period in 1998. General and
administrative expense remained constant at $5 million for the third quarters of
both 1999 and 1998. As a result of the Merger, the combined Company expects to
realize a decline in proforma general and administrative expense as cost savings
related to personnel reduction, office consolidations and reduced combined
expenses for professional fees and other expense items are realized.
19
<PAGE>
OCEAN ENERGY, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OTHER
INTEREST EXPENSE - Interest increased $46 million to $87 million for the
nine months ended September 30, 1999 from $41 million in the comparable 1998
period. Interest expense for the third quarter of 1999 increased $11 million to
$30 million from $19 million for 1998. This increase is primarily the result of
an increase in debt levels in 1999 resulting from the higher capital spending
program in place throughout 1998. Interest expense for the remainder of 1999
will continue to be higher than 1998 levels due to the inclusion of the
outstanding debt of Seagull of approximately $563 million in the Company's
financial statements. However, the use of proceeds from the various asset sales
discussed in Note 2 to repay existing long-term debt will serve to reduce
interest expense for the remainder of 1999.
MERGER EXPENSE - Merger expenses of $44 million associated with the Merger
between Old Ocean and Seagull have been recorded for the nine months ended
September 30, 1999. Merger expenses of $39 million associated with the March
1998 merger between Old Ocean and UMC were recorded in the first quarter of
1998.
INCOME TAX BENEFIT - An income tax benefit of $9 million was recognized for
the nine months ended September 30, 1999, compared to a benefit of $88 million
for the nine months ended September 30, 1998. The effective tax rate change from
33% for the nine months ended September 30, 1998 to 16% for 1999 is primarily
the result of three factors: (i) significant improvement in operating results;
(ii) changes in the nature of deferred tax assets and liabilities due to the
Merger and subsequent asset sales; and (iii) the relative magnitude of
international operating results and international taxes to the Company's total
results. The Company currently believes that it is more likely than not that the
net deferred tax asset will be realized.
UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL AND OPERATING DATA
The following table sets forth summary unaudited pro forma condensed
combined financial and operating data which are presented to give effect to the
Merger and to the sales of ENSTAR and of the Canadian, Gulf of Mexico and Arkoma
assets as if they had occurred as of January 1, 1998. The information does not
purport to be indicative of actual results, if the Merger had been in effect for
the periods indicated, or of future results.
The information was prepared based on the following assumptions:
- - The Seagull-OEI Merger is assumed to have occurred as of January 1, 1998;
- - certain costs that Seagull had expensed under the successful efforts method
of accounting are capitalized under the full cost method of accounting;
20
<PAGE>
OCEAN ENERGY, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- - depreciation, depletion and amortization expense of Seagull is calculated
in accordance with the full cost method of accounting applied to the
adjusted basis of the properties acquired using the purchase method of
accounting;
- - a decrease in interest expense results from the revaluation of Seagull debt
under the purchase method of accounting, including the elimination of
amortization of historical debt issuance costs;
- - the sales of the Canadian subsidiary, the Gulf of Mexico and Arkoma oil and
gas assets, and ENSTAR are assumed to have occurred as of January 1, 1998;
- - the proceeds from the asset sales were used to pay down debt at January 1,
1998; and,
- - the related income tax effects of these adjustments are recorded based on
the applicable statutory tax rate.
21
<PAGE>
OCEAN ENERGY, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
UNAUDITED PRO FORMA INFORMATION
(Amounts in Thousands, Except Per Unit Data)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------------------
1999 1998
------------------- -------------------
<S> <C> <C>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME:
Oil and Gas Sales...................................................... $ 530,188 $ 578,519
Cost of Operations:
Operating expenses.................................................. 175,888 211,570
Depreciation, depletion and amortization............................ 247,925 290,930
Write-down of oil and gas properties................................ - 222,590
General and administrative.......................................... 22,329 29,430
------------------- -------------------
446,142 754,520
------------------- -------------------
Operating Profit (Loss)................................................ 84,046 (176,001)
Other (Income) Expense:
Interest expense.................................................... 67,458 32,289
Merger expense (1).................................................. - 39,000
Interest income and other........................................... (5,196) (4,339)
------------------- -------------------
Income (Loss) Before Income Taxes and Extraordinary Item............... 21,784 (242,951)
Income Tax Expense (Benefit)........................................... 1,418 (74,882)
------------------- -------------------
Net Income (Loss) Before Extraordinary Item............................ 20,366 (168,069)
Extraordinary Item (Loss On Repurchase of Debt)........................ - (1,031)
------------------- -------------------
Net Income (Loss)...................................................... 20,366 (169,100)
Preferred Stock Dividend............................................... 2,456 -
------------------- -------------------
Net Income (Loss) Available to Common Shareholders..................... $ 17,910 $ (169,100)
=================== ===================
Income (Loss) Per Common Share:
Basic............................................................... $ 0.11 $ (1.03)
=================== ===================
Diluted............................................................. $ 0.11 $ (1.03)
=================== ===================
Weighted Average Number of Common Shares Outstanding:
Basic............................................................... 166,503 163,616
=================== ===================
Diluted............................................................. 170,452 163,616
=================== ===================
CAPITAL EXPENDITURES:
Oil and Gas Operations.............................................. $ 244,844 $ 794,613
Corporate........................................................... 12,783 14,458
------------------- -------------------
Total (2)........................................................... $ 257,627 $ 809,071
=================== ===================
</TABLE>
(1) Excludes approximately $44 million of merger expenses recorded in 1999.
During 1998, the Company recorded $39 million in merger expenses related to
the UMC Merger, which was accounted for as a pooling transaction.
(2) Includes capitalized interest of $29 million and $27 million and
capitalized employee-related costs of $27 million and $25 million,
respectively.
22
<PAGE>
OCEAN ENERGY, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
UNAUDITED PRO FORMA PRODUCTION OPERATING DATA
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------------------
1999 1998
------------------- -------------------
<S> <C> <C>
OPERATIONS DATA:
Net daily natural gas production (MMcf):
Domestic.......................................................... 405.5 488.5
Cote d'Ivoire..................................................... 33.1 29.1
Other international............................................... 7.8 9.9
------------------- -------------------
Total....................................................... 446.4 527.5
=================== ===================
Average natural gas prices ($ per Mcf) (1):
Domestic.......................................................... $ 2.00 $ 2.03
Cote d'Ivoire..................................................... $ 1.71 $ 1.64
Other international............................................... $ 2.29 $ 2.23
Weighted average.................................................. $ 1.98 $ 2.01
Net daily oil and NGL production (Bbl):
Domestic.......................................................... 37,477 42,664
Egypt............................................................. 10,787 10,555
Cote D'ivoire..................................................... 5,164 3,609
Russia............................................................ 4,277 4,060
Equatorial Guinea................................................. 19,902 16,692
Other international............................................... 90 180
------------------- -------------------
Total.......................................................... 77,697 77,760
=================== ===================
Average oil and NGL prices ($ per Bbl) (1):
Domestic.......................................................... $ 15.77 $ 12.79
Egypt............................................................. $ 15.60 $ 12.67
Cote d'Ivoire..................................................... $ 16.18 $ 12.65
Russia............................................................ $ 8.60 $ 8.57
Equatorial Guinea................................................. $ 16.10 $ 12.38
Other international............................................... $ 14.76 $ 15.84
Weighted average.............................................. $ 15.46 $ 12.46
Net daily production (MBOE):........................................ 152.1 165.7
Average costs ($ per BOE):
Operating expenses.................................................. $ 4.24 $ 4.68
General and administrative.......................................... .54 .65
Interest expense.................................................... 1.62 .71
------------------- -------------------
Cash costs.................................................... 6.40 6.04
Depletion, depreciation and amortizaton............................. 5.97 6.43
------------------- -------------------
All-in costs................................................. $ 12.37 $ 12.47
=================== ===================
</TABLE>
(1) Prices exclude the effects of hedging activities. Weighted average prices
including hedging were $13.90 and $13.08 for oil and $1.99 and $2.01 for
gas for 1999 and 1998, respectively.
23
<PAGE>
OCEAN ENERGY, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY - Concurrently with the closing of the Merger on March 30, 1999,
the Company entered into an $800 million credit facility (the "Credit Facility")
which replaced the existing credit facilities of both Old Ocean and Seagull. At
September 30, 1999, the Credit Facility consisted of a $500 million five-year
revolving facility and a renewable $300 million 364-day facility with a one-year
term loan option. The Credit Facility bears interest, at the Company's option,
at LIBOR or prime rates plus applicable margins ranging from zero to 1.7% or at
a competitive bid. Financing fees of approximately $6 million were incurred
related to the Credit Facility. As of September 30, 1999, borrowings outstanding
against the Credit Facility totaled $240 million and Letters of Credit totaled
$44 million, leaving $516 million of available credit. As of November 10, 1999,
the Company had repaid all outstanding balances under the Credit Facility with
the proceeds of the asset sales discussed in Note 2, and, under the terms of the
agreement, reduced the $300 million 364-day facility to zero. Currently no
amounts are outstanding under the $500 million revolving credit facility.
On November 9, 1999, the Company announced a tender offer to repurchase
$150 million of 10 3/8% senior subordinated Notes due 2005 and $160 million of 9
3/4% senior subordinated Notes due 2006. The Company intends to fund the
repurchase of these Notes with available cash balances and borrowings under the
existing Credit Facility. If all of the outstanding Notes are tendered, the
total cost of the repurchase would be approximately $340 million, excluding
accrued and unpaid interest, and the Company would record an after-tax
extraordinary loss of approximately $24 million during the fourth quarter. The
tender offer is subject to certain conditions as described in the Offer to
Purchase and will expire on December 8, 1999 unless extended by the Company
according to the terms of the Offer. While the Company believes the tender offer
wil be completed during the fourth quarter, there can be no assurance that any
of the Notes will be tendered.
In addition, in November the Company entered into a new $200 million
364-day facility with substantially the same terms as the Company's existing
Credit Facility. The availability of this facility is contingent on the
consummation of the tender offer. Currently no amounts are outstanding under
this new 364-day facility.
The Company's debt to total capitalization ratio has decreased to 62% at
September 30, 1999, from 78% at December 31, 1998. During the first nine months
of 1999, the Company has used proceeds from asset sales to pay down amounts
outstanding under the Credit Facility. Subsequent to September 30, 1999, the
Company used the proceeds from the sale of ENSTAR to make additional repayments
of existing long-term debt. Assuming the sale of ENSTAR had closed on September
30, 1999 and the proceeds used to repay existing long-term debt, the pro forma
debt to total capitalization ratio would have been reduced to 58% at such date.
The ability of the Company to satisfy its obligations and fund planned
capital expenditures will be dependent upon its future performance. Such future
performance is subject to many conditions that are beyond the Company's control,
particularly oil and gas prices, and the Company's ability to obtain additional
debt and equity financing, if necessary. The Company currently expects that its
cash flow from operations and availability under the Credit Facility will be
adequate to execute its 1999 business plan. However, no assurance can be given
that the Company will not experience liquidity problems from time to time or on
a long-term basis. If the Company's cash flow from operations and availability
under the Credit Facility are not sufficient to satisfy its cash requirements,
there can be no assurance that additional debt or equity financing will be
available to meet its requirements.
EFFECTS OF LEVERAGE - The Company has outstanding indebtedness of
approximately $1.5 billion as of September 30, 1999. The Company's level of
indebtedness has several important effects on its future operations, including
(i) a substantial portion of the Company's cash flow from operations must be
dedicated to the payment of interest on its indebtedness and will not be
available for other purposes, (ii) the covenants contained in the various
indentures require the Company to meet certain financial tests, and contain
other restrictions that limit the Company's ability to borrow additional funds
or to dispose of assets and may affect the Company's flexibility in planning
for, and reacting to, changes in its business, including possible acquisition
activities and (iii) the Company's ability to obtain additional financing in the
future for working capital,
24
<PAGE>
OCEAN ENERGY, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
expenditures, acquisitions, general corporate or other purposes may be impaired.
None of the indentures place significant restrictions on a wholly-owned
subsidiary's ability to make distributions to the parent company.
The Company believes it is currently in compliance with all covenants
contained in the respective indentures.
CAPITAL EXPENDITURES
(Amounts in Thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ----------------------------------
1999 1998 1999 1998
-------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Oil and Gas Operations:
Leasehold acquisitions.............. $ 4,336 $ 40,441 $ 16,907 $ 75,906
Exploration costs................... 34,375 134,856 84,220 281,950
Development costs................... 42,913 63,032 119,126 302,461
-------------- -------------- --------------- --------------
81,624 238,329 220,253 660,317
Corporate............................. 6,270 3,848 11,723 9,481
-------------- -------------- --------------- --------------
Total continuing operations........... 87,894 242,177 231,976 669,798
Discontinued operations............... 2,869 - 5,040 -
-------------- -------------- --------------- --------------
$ 90,763 $ 242,177 $ 237,016 $ 669,798
============== ============== =============== ==============
</TABLE>
The Company's capital expenditure budget for 1999 is expected to be
approximately $350 million (excluding proved property acquisitions). Actual
capital spending may vary from the capital expenditure budget. The Company will
evaluate its level of capital spending throughout the year based upon drilling
results, commodity prices, cash flows from operations and property acquisitions.
The Company makes, and will continue to make, substantial capital
expenditures for the acquisition, exploration, development, production and
abandonment of its oil and natural gas reserves. The Company has historically
funded its expenditures from cash flows from operating activities, bank
borrowings, sales of equity and debt securities, sales of non-strategic oil and
natural gas properties, sales of partial interests in exploration concessions
and project finance borrowings. The Company intends to finance 1999 capital
expenditures primarily with funds provided by operations.
ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement establishes standards of
accounting for and disclosures of derivative instruments and hedging activities.
This statement, as amended, is effective for fiscal years beginning after June
15, 2000. The Company has not yet determined the impact of this statement on the
Company's financial condition or results of operations.
25
<PAGE>
OCEAN ENERGY, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ENVIRONMENTAL
Compliance with applicable environmental and safety regulations by the
Company has not required any significant capital expenditures or materially
affected its business or earnings. The Company believes it is in substantial
compliance with environmental and safety regulations and foresees no material
expenditures in the future; however, the Company is unable to predict the impact
that compliance with future regulations may have on its capital expenditures,
earnings and competitive position.
YEAR 2000
Historically, most computer systems (including microprocessors embedded
into field equipment and other machinery) utilized software that recognized a
calendar year by its last two digits. Beginning in the year 2000, these systems
will require modification to distinguish twenty-first century dates from
twentieth century dates ("Year 2000 issues").
Accordingly, the Company has initiated a comprehensive plan to address the
Year 2000 issues associated with its operations and business (the "Year 2000
plan"). The Company's Board of Directors has been briefed about the Year 2000
problem generally and as it may affect the Company. The Board has created a
committee consisting of senior executives and a representative from the Board to
oversee the adoption and implementation of the Year 2000 plan covering all of
the Company's business units. The plan has been developed with an aim towards
taking reasonable steps to prevent the Company's mission-critical functions from
being impaired due to the Year 2000 problem.
The plan includes several phases - (i) assessment of all of the Company's
systems and technology; (ii) implementation and testing of modifications to or
replacements of existing systems and technology, both financial and operational;
(iii) communication with key business partners regarding Year 2000 issues; and
(iv) contingency planning.
In planning and developing the project, the Company has considered both its
information technology ("IT") and its non-IT systems. The term "computer
equipment and software" includes systems that are commonly thought of as IT
systems, including accounting, data processing, telephone systems, scanning
equipment, and other miscellaneous systems. Non-IT systems include alarm
systems, fax machines, monitors for field operations, and other miscellaneous
systems. Both IT and non-IT systems may contain embedded technology, which
complicates the Company's Year 2000 identification, assessment, remediation, and
testing efforts. In those cases where the Company has identified equipment and
software that was not Year 2000 ready, the Company has replaced or upgraded such
items so they will calculate dates correctly in the new century. Furthermore, as
new equipment and software are purchased in the ordinary course of business, the
Company ensures that such purchases are Year 2000 ready.
26
<PAGE>
OCEAN ENERGY, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
During 1997, the Company utilized both internal and external resources to
test, reprogram or replace many of its IT systems, primarily financial and
operational software, for necessary modifications identified in its assessment
of Year 2000 issues. Work on the Company's Year 2000 plan related to these IT is
essentially complete. During September 1998, the Company began utilizing
internal and external resources to evaluate its vulnerability to Year 2000
issues related to its non-IT systems, primarily field operational systems and
equipment. With this evaluation now complete, the Company has found no
significant Year 2000 issues related to its non-IT systems.
The Company has employed outside engineering firms to inventory and
evaluate embedded chips in control, metering and monitoring devices on the
Company's producing properties. Such devices are extensively used in offshore
operations. While some remedial work has been required, it was not extensive and
is essentially complete.
The Company has also initiated formal communications with all of its key
business partners to determine the extent to which the Company is vulnerable to
those third parties' potential failure to remediate their own Year 2000 issues.
Key business partners were identified in four categories of companies including:
(a) major vendors and contractors (including banks and other financial service
companies); (b) major customers; (c) utility companies; and (d) third party
operators of major oil and gas properties. Questionnaires were sent to the
Company's key business partners to confirm their Year 2000 activities and
follow-up letters, telephone calls, and meetings were used, as appropriate, to
obtain additional information.
During the fourth quarter of 1998, the Company began developing contingency
plans for its financial and operational systems. The Company's contingency plans
were designed to minimize the disruptions or other adverse effects resulting
from Year 2000 incompatibilities regarding these systems, and to facilitate the
early identification and remediation of Year 2000 problems that first manifest
themselves after January 1, 2000.
The failure to correct a material Year 2000 issue could result in an
interruption in, or a failure of, certain normal business activities, resulting
in a material, adverse affect on the Company's results of operations, liquidity
and financial position. The Company's remediation efforts are expected to reduce
significantly the Company's level of uncertainty about Year 2000 compliance and
the possibility of interruptions of normal operations. However, there can be no
guarantee that other companies' systems, on which the Company's systems rely,
will be timely converted, or that a failure to convert by another company, or a
conversion that is incompatible with the Company's systems, would not have a
material adverse effect on the Company. Disruptions to the oil and gas
transportation networks controlled by third-party carriers could result in
reduced production volumes delivered to market.
In addition, risks associated with foreign operations may increase with the
uncertainty of Year 2000 compliance by foreign governments and their supporting
infrastructures. The Company's Year 2000 task force members have been asked to
investigate the compliance activities of certain
27
<PAGE>
OCEAN ENERGY, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
third parties and foreign governments to determine the risks to the Company.
This investigation is essentially complete.
In a recent Securities and Exchange Commission release regarding Year 2000
disclosures, the Securities and Exchange Commission stated that public companies
must disclose the most reasonably likely worst case Year 2000 scenario. Analysis
of the most reasonably likely worst case Year 2000 scenarios the Company may
face leads to contemplation of the following possibilities which, though
unlikely in some or many cases, must be included in any consideration of worst
cases: widespread failure of electrical, gas, and similar supplies by utilities
serving the Company domestically and internationally; widespread disruption of
the services of communications common carriers domestically and internationally;
similar disruption to means and modes of transportation for the Company and its
employees, contractors, suppliers, and customers; significant disruption to the
Company's ability to gain access to, and remain working in, office buildings and
other facilities; the failure of substantial numbers of the Company's
mission-critical information (computer) hardware and software systems, including
both internal business systems and systems (such as those with embedded chips)
controlling operational facilities such as onshore and offshore oil and gas
rigs, oil and gas pipelines and gas plants domestically and internationally, the
effects of which would have a cumulative material adverse impact on the Company.
Among other things, the Company could face substantial claims by customers or
loss of revenues due to service interruptions, inability to fulfill contractual
obligations, inability to account for certain revenues or obligations or to bill
customers accurately and on a timely basis, and increased expenses associated
with litigation, stabilization of operations following mission-critical
failures, and the execution of contingency plans. The Company could also
experience an inability by customers, traders, and others to pay, on a timely
basis or at all, obligations owed to the Company. Under these circumstances, the
adverse effect on the Company, and the diminution of the Company's revenues,
would be material, although not quantifiable at this time. Further in this
scenario, the cumulative effect of these failures could have a substantial
adverse effect on the economy, domestically and internationally. The adverse
effect on the Company, and the diminution of the Company's revenues, from a
domestic or global recession or depression is also likely to be material,
although not quantifiable at this time.
The total costs for the Year 2000 compliance review, evaluation, assessment
and remediation efforts are not expected to be in excess of $1.0 million.
Approximately $570,000 of costs had been incurred as of September 30, 1999.
DEFINED TERMS
Natural gas is stated herein in billion cubic feet ("Bcf"), million cubic
feet ("MMcf") or thousand cubic feet ("Mcf"). Oil, condensate and natural gas
liquids ("NGL") are stated in barrels ("Bbl") or thousand barrels ("MBbl").
MMcfe and Mcfe represent the equivalent of one million and one thousand cubic
feet of natural gas, respectively. Oil, condensate and NGL are converted to gas
at a ratio of one barrel of liquids per six Mcf of gas, based on relative energy
content.
28
<PAGE>
OCEAN ENERGY, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
MMBOE, MBOE and BOE represent one million barrels, one thousand barrels and one
barrel of oil equivalent, respectively, with six Mcf of gas converted to one
barrel of liquid.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
This document includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, Section 21E of the Securities
Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995.
All statements other than statements of historical fact included in this
document, including, without limitation, statements regarding the financial
position, business strategy, production and reserve growth and other plans and
objectives for the future operations of the Company are forward-looking
statements.
Although the Company believes that such forward-looking statements are
based on reasonable assumptions, it can give no assurance that its expectations
will in fact occur. Important factors could cause actual results to differ
materially from those in the forward-looking statements. Forward-looking
statements are subject to risks and uncertainties and include information
concerning cost savings from the Merger, integration of the businesses of Old
Ocean and Seagull, general economic conditions and possible or assumed future
results of operations of the Company, estimates of oil and gas production and
reserves, drilling plans, future cash flows, anticipated capital expenditures,
the Company's realization of its deferred tax assets, the level of future
expenditures for environmental costs, and management's strategies, plans and
objectives as set forth herein.
When used in this document, the words "believes," "expects," "anticipates,"
"intends" or similar expressions are intended to identify such forward-looking
statements. The following important factors, in addition to those discussed
elsewhere in this document could affect the future results of the energy
industry in general and could cause those results to differ materially from
those expressed in such forward-looking statements:
- - Risks incident to the drilling and operation of oil and gas wells;
- - Future production and development costs;
- - The effect of existing and future laws and regulatory actions;
- - The political and economic climate in the foreign jurisdictions in which
the Company conducts oil and gas operations;
- - The effect of changes in commodity prices, hedging activities and
conditions in the capital markets; and
- - Competition from others in the energy industry.
29
<PAGE>
OCEAN ENERGY, INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
The Company has entered into various derivative financial instruments for
its oil and gas production for the years 1999-2000. See Note 4 to the Company's
financial statements for a discussion of hedging activities during the third
quarter of 1999. It is estimated based upon quoted prices at September 30, 1999,
the potential effect of the derivative contracts during the fourth quarter of
1999 is an approximate $17 million net decrease in revenues and is an
approximate $3 million net decrease in revenues during the year 2000. Assuming a
10% increase in oil and gas prices, the potential loss from the derivatives
contracts would be increased $6 million for the fourth quarter of 1999 and $12
million for the year 2000. Assuming a 10% decrease in oil and gas prices, this
potential effect of the derivatives contracts would be reduced by $6 million for
the fourth quarter of 1999 and would result in an increase in revenues of $3
million for the year 2000.
In 1999, the Company entered into a prepaid crude oil sales contract to
deliver approximately 5,600 barrels of crude oil per day beginning in February
2000 through May 2003. In exchange for the crude oil to be provided, the Company
received an advance payment of approximately $100 million in June 1999. The
Company has the option to satisfy contract delivery requirements with crude oil
purchased from third parties or from oil it produces. The obligation associated
with the future delivery of the crude oil has been recorded as deferred revenue
and will be amortized into revenue as scheduled deliveries of crude oil are
made. The obligation is included in other accrued and other noncurrent
liabilities and deferred revenue on the consolidated balance sheet.
The Company also evaluated the potential effect that reasonably possible
near term changes in interest rates may have on the Company's Credit Facility.
The Credit Facility represents approximately 15% of the Company's total debt as
of September 30, 1999 and is the only floating rate debt. Based upon an
analysis, utilizing the actual interest rates in effect and balances outstanding
as of September 30, 1999 and assuming a 10% increase or decrease in interest
rates, the potential effect on annual interest expense is approximately $2
million. As of November 10, 1999, there were no amounts outstanding under the
Credit Facility.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
30
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
*#10.1 Agreement between Ocean Energy, Inc., (the "Company") a Texas
corporation formerly known as Seagull Energy Corporation, and
John D. Schiller ("Executive") dated September 27, 1999.
* 27.1 Financial Data Schedule.
* Filed herewith.
# Identifies management contracts and compensatory plans or arrangements.
(b) Reports on form 8-K: On November 8, 1999, the Company filed a Current
Report on Form 8-K dated September 16, 1999 containing the Press Release of
the Company, dated November 2, 1999, in which the Company announced the
sale of ENSTAR Natural Gas Company and the Alaska Pipeline Company; the
Press Release of the Company dated October 20, 1999, containing the
Company's financial results for the quarter ended September 30, 1999; and
the Press Release of the Company dated September 16, 1999 in which the
Company reported the sale of certain Arkoma Basin assets. The items
reported in such Current Report were Item 5 (Other Events) and Item 7
(Financial Statements and Exhibits).
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.
OCEAN ENERGY, INC.
By: /S/ William L. Transier
William L. Transier
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: November 12, 1999
By: /S/Gordon L. Mcconnell
Gordon L. McConnell
Vice President and Controller
(Principal Accounting Officer)
Date: November 12, 1999
31
<PAGE>
OCEAN ENERGY, INC.
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
*#10.1 Schiller Severance Agreement.
*27.1 Financial Data Schedule.
* Filed herewith.
# Identifies management contracts and compensatory plans or arrangements.
32
SEVERANCE AGREEMENT
AGREEMENT BETWEEN OCEAN ENERGY, INC., A TEXAS CORPORATION (THE "COMPANY")
formerly known as Seagull Energy Corporation, and JOHN D. SCHILLER
("EXECUTIVE"),
W I T N E S S E T H :
WHEREAS, the Company desires to retain certain key employee personnel
and, accordingly, the Board of Directors of the COMPANY (THE "BOARD") has
approved the Company entering into a severance agreement with Executive in order
to encourage his continued service to the Company; and
WHEREAS, Executive is prepared to commit such services in return for
specific arrangements with respect to severance compensation and other benefits;
NOW, THEREFORE, in consideration of the foregoing and for other good
and valuable consideration, the Company and Executive agree as follows:
1
<PAGE>
1. DEFINITIONS.
(A) "AVERAGE BONUS" shall mean the average of the bonus
payments, if any, received by Executive for the two immediately preceding fiscal
years of the Company; provided, however, that for purposes of computing such
Average Bonus, Executive shall be deemed to have received a bonus payment equal
to 45% of Executive's annual salary at the time he commenced employment with the
Company for each of the 1997 and 1998 fiscal years of the Company and any bonus
payments actually received by Executive for such fiscal years shall be
disregarded.
(B) "CHANGE IN DUTIES" shall mean the occurrence, within two
years after the date upon which a Change of Control occurs, of any one or more
of the following:
(i) A significant reduction in the duties of
Executive from those applicable to him immediately prior to the date on
which a Change of Control occurs;
(ii) A reduction in Executive's annual salary or
bonus opportunity under any applicable bonus or incentive compensation
plan from that provided to him immediately prior to the date on which a
Change of Control occurs;
(iii) Receipt of employee benefits (including but not
limited to medical, dental, life insurance, accidental death and
dismemberment, and long-term disability plans) and perquisites by
Executive that are materially inconsistent with the employee benefits
and perquisites provided by the Company to executives with comparable
duties; or
(iv) A change in the location of Executive's
principal place of employment by the Company by more than 50 miles from
the location where he was principally employed immediately prior to the
date on which a Change of Control occurs;
provided, however, that with respect to the merger of Ocean Energy, Inc., a
Delaware corporation, with and into the Company, which was consummated on March
30, 1999 (the "OEI Merger"), this Paragraph 1(b) shall be applied with reference
to Executive's duties, annual salary or bonus opportunity, employee benefits,
and location of principal place of employment by the Company as of the effective
date of this Agreement rather than prior to the OEI Merger.
(C) "CHANGE OF CONTROL" means the occurrence of one of the
following events:
(i) The Company (A) shall not be the surviving entity
in any merger, consolidation or other reorganization (or survives only
as a subsidiary of an entity other than a previously wholly-owned
subsidiary of the Company) or (B) is to be dissolved and liquidated,
and as a result of or in connection with such transaction, the persons
who were directors of the Company before such transaction shall cease
to constitute a majority of the Board;
2
<PAGE>
(II) ANY PERSON OR ENTITY, INCLUDING A "GROUP" as
contemplated by Section 13(d)(3) of the Securities Exchange Act of
1934, as amended, acquires or gains ownership or control (including,
without limitation, power to vote) of 20% or more of the outstanding
shares of the Company's voting stock (based upon voting power), and as
a result of or in connection with such transaction, the persons who
were directors of the Company before such transaction shall cease to
constitute a majority of the Board; or
(iii) The Company sells all or substantially all of
the assets of the Company to any other person or entity (other than a
wholly-owned subsidiary of the Company) in a transaction that requires
shareholder approval pursuant to the Texas Business Corporation Act;
provided, however, that the OEI Merger shall constitute a "Change of Control"
for purposes of this Agreement.
(D) "CODE" shall mean the Internal Revenue Code of 1986, as
amended.
(E) "COMPENSATION" shall mean the greater of:
(i) Executive's annual salary plus his Average Bonus
immediately prior to the date on which a Change of Control occurs, or
(ii) Executive's annual salary plus his Average Bonus
at the time of his Involuntary Termination.
(F) "INVOLUNTARY TERMINATION" shall mean any termination of
Executive's employment with the Company which:
(i) does not result from a resignation by Executive
(other than a resignation pursuant to clause (ii) of this subparagraph
(f) or a resignation at the request of the Company); or
(ii) results from a resignation by Executive on or
before the date which is sixty days after the date upon which Executive
receives notice of a Change in Duties;
PROVIDED, HOWEVER, THE TERM "INVOLUNTARY TERMINATION" shall not include a
Termination for Cause, a termination of Executive's employment occurring as a
result of or in connection with the sale or other divestiture by the Company of
a division, subsidiary, or other business segment (including, without
limitation, a divestiture by sale of shares of stock or of assets) if Executive
is offered continued employment on terms that would not constitute a Change in
Duties by the acquiror of such business segment immediately upon such sale or
divestiture, or any termination as a result of death, disability under
circumstances entitling him to benefits under the Company's long-term disability
plan, or Retirement.
3
<PAGE>
(G) "RETIREMENT" shall mean Executive's voluntary resignation
on or after the date he reaches age sixty-five (other than a resignation within
sixty days after the date Executive receives notice of a Change in Duties or a
resignation at the request of the Company).
(H) "SEVERANCE AMOUNT" shall mean an amount equal to 2.99
times Executive's Compensation.
(I) "TERMINATION FOR CAUSE" shall mean termination of
Executive's employment by the Company (or its subsidiaries) by reason of
Executive's gross negligence, gross neglect or willful misconduct in the
performance of his duties or Executive's final conviction of a felony or of a
misdemeanor involving moral turpitude, excluding misdemeanor convictions
relating to the operation of a motor vehicle.
(J) "WELFARE BENEFIT COVERAGES" shall mean the medical,
dental, life insurance and accidental death and dismemberment coverages provided
by the Company to its active employees.
2. SERVICES. Executive agrees that he will render services to the
Company (as well as any subsidiary thereof or successor thereto) during the
period of his employment to the best of his ability and in a prudent and
businesslike manner and that he will devote substantially the same time, efforts
and dedication to his duties as heretofore devoted.
3. SEVERANCE BENEFITS. If Executive's employment by the Company or any
subsidiary thereof or successor thereto shall be subject to an Involuntary
Termination which occurs within two years after the date upon which a Change of
Control occurs, then Executive shall be entitled to receive, as additional
compensation for services rendered to the Company (including its subsidiaries),
the following severance benefits:
(a) A lump sum cash payment in an amount equal to Executive's
Severance Amount.
(b) Executive shall be entitled to continue the Welfare
Benefit Coverages for himself and, where applicable, his eligible dependents
following his Involuntary Termination for up to thirty-six months (the
"Continuation Period"), as long as Executive continues either to pay the
premiums paid by active employees of the Company for such coverages or to pay
the actual (nonsubsidized) cost of such coverages for which the Company does not
subsidize for active employees. Such benefit rights shall apply only to those
Welfare Benefit Coverages which the Company has in effect from time to time for
active employees, and the applicable payments shall adjust as premiums for
active employees of the Company or actual costs, whichever is applicable,
change. Welfare Benefit Coverage(s) shall immediately end upon Executive's
obtainment of new employment and eligibility for similar Welfare Benefit
Coverage(s) (with Executive being obligated hereunder to promptly report such
eligibility to the Company). Nothing herein shall be deemed to adversely affect
in any way the additional rights, after consideration of the Continuation
Period, of Executive and his eligible dependents to health care continuation
coverage as required pursuant to Part 6 of Title I of the Employee Retirement
Income Security Act of 1974, as amended. If, for any reason, Company is unable
to continue any of the Welfare Benefit Coverages during a period in which
Executive would otherwise be entitled to continue such Welfare Benefit
Coverage(s), Company shall pay Executive an amount equal to the economic value
of such Welfare Benefit Coverage(s).
4
<PAGE>
(c) Executive shall be entitled to receive out-placement
services in connection with obtaining new employment up to a maximum cost of
$6,000, or an equivalent cash payment, if Executive either has or is not seeking
new employment.
(d) The severance benefits payable under this Agreement shall
be paid to Executive on or before the tenth business day after the last day of
Executive's employment with the Company; provided, however, that such severance
benefits shall not be paid earlier than the day after expiration of the
revocation period for the release required by Paragraph 6(i). Any severance
benefits paid pursuant to this Paragraph will be deemed to be a severance
payment and not compensation for purposes of determining benefits under the
Company's qualified plans and shall be subject to any required tax withholding.
4. INTEREST ON LATE BENEFIT PAYMENTS. If any payment provided for in
Paragraph 3(a) or 3(b) hereof is not made when due, the Company shall pay to
Executive interest on the amount payable from the date that such payment should
have been made under such paragraph until such payment is made, which interest
shall be calculated at a rate equal to two percentage points over the prime or
base rate of interest announced by Chase Bank of Texas, N.A. (or any successor
thereto) at its principal office in Houston, Texas and shall change when and as
any such change in such prime or base rate shall be announced by such bank.
5. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. Notwithstanding anything
to the contrary in this Agreement, in the event that any payment or distribution
by the Company to or for the benefit of Executive, whether paid or payable or
distributed or distributable pursuant to the terms of this Agreement or
otherwise (a "Payment"), would be subject to the excise tax imposed by Section
4999 of the Code or any interest or penalties with respect to such excise tax
(such excise tax, together with any such interest or penalties, are hereinafter
collectively referred to as the "Excise Tax"), the Company shall pay to
Executive an additional payment (a "Gross-up Payment") in an amount such that
after payment by Executive of all taxes (including any interest or penalties
imposed with respect to such taxes), including any Excise Tax imposed on any
Gross-up Payment, Executive retains an amount of the Gross-up Payment equal to
the Excise Tax imposed upon the Payment. The Company and Executive shall make an
initial determination as to whether a Gross-up Payment is required and the
amount of any such Gross-up Payment. Executive shall notify the Company in
writing of any claim by the Internal Revenue Service which, if successful, would
require the Company to make a Gross-up Payment (or a Gross-up Payment in excess
of that, if any, initially determined by the Company and Executive) within ten
days of the receipt of such claim. The Company shall notify Executive in writing
at least ten days prior to the due date of any response required with respect to
such claim if it plans to contest the claim. If the Company decides to contest
such claim, Executive shall cooperate fully with the Company in such action;
provided, however, the Company shall bear and pay directly or indirectly all
costs and expenses (including additional interest and penalties) incurred in
connection with such action and shall indemnify and hold Executive harmless, on
an after-tax basis, for any Excise Tax or income tax, including interest and
penalties with respect thereto, imposed as a result of the Company's action. If,
as a result of the Company's action with respect to a claim, Executive receives
a refund of any amount paid by the Company with respect to such claim, Executive
shall promptly pay such refund to the Company. If the Company fails to timely
notify Executive whether it will contest such claim or the Company determines
not to contest such claim, then the Company shall immediately pay to Executive
the portion of such claim, if any, which it has not previously paid to
Executive.
5
<PAGE>
6. GENERAL.
(A) TERM. THE EFFECTIVE DATE OF THIS AGREEMENT IS JUNE 22,
1999. The initial term of this Agreement shall be the period beginning on said
effective date and ending on the three-year anniversary of said effective date.
Within sixty days following the expiration of the initial term of this Agreement
and within sixty days after each successive three-year period of time thereafter
that this Agreement is in effect, the Company shall have the right to review
this Agreement, and in its sole discretion either continue and extend this
Agreement, terminate this Agreement, and/or offer Executive a different
agreement. The Board (excluding any member of the Board who is covered by this
Agreement or by a similar agreement with the Company) will vote on whether to so
extend, terminate, and/or offer Executive a different agreement and will notify
Executive of such action before the end of said sixty-day time period mentioned
above. This Agreement shall remain in effect until so terminated and/or modified
by the Company. Failure of the Board to take any action within said sixty-day
time period shall be considered as an extension of this Agreement for an
additional three-year period of time. Notwithstanding anything to the contrary
contained in this "SUNSET PROVISION," it is agreed that if a Change of Control
occurs while this Agreement is in effect, then this Agreement shall not BE
SUBJECT TO TERMINATION OR MODIFICATION UNDER THIS "SUNSET PROVISION," and shall
remain in force for a period of two years after such Change of Control, and if
within said two years the contingency factors occur which would entitle
Executive to the benefits as provided herein, this Agreement shall remain in
effect in accordance with its terms. If, within such two years after a Change of
CONTROL, THE CONTINGENCY FACTORS THAT WOULD ENTITLE EXECUTIVE TO SAID BENEFITS
DO NOT OCCUR, THEREUPON THIS THREE-YEAR "SUNSET PROVISION" shall again be
applicable with the sixty-day time period for Board action to thereafter
commence at the expiration of said two years after such Change of Control and on
each three-year anniversary date thereafter.
(B) INDEMNIFICATION. If Executive shall obtain any money
judgment or otherwise prevail with respect to any litigation brought by
Executive or the Company to enforce or interpret any provision contained herein,
the Company, to the fullest extent permitted by applicable law, hereby
indemnifies Executive for his reasonable attorneys' fees and disbursements
incurred in such litigation and hereby agrees (i) to pay in full all such fees
and disbursements and (ii) to pay prejudgment interest on any money judgment
obtained by Executive from the earliest date that payment to him should have
been made under this Agreement until such judgment shall have been paid in full,
which interest shall be calculated at a rate equal to two percentage points over
the prime or base rate of interest announced by Chase Bank of Texas, N.A. (or
any successor thereto) at its principal office in Houston, Texas, and shall
change when and as any such change in such prime or base rate shall be announced
by such bank.
(C) PAYMENT OBLIGATIONS ABSOLUTE. The Company's obligation to
pay (or cause one of its subsidiaries to pay) Executive the amounts and to make
the arrangements provided herein shall be absolute and unconditional and shall
not be affected by any circumstances, including, without limitation, any
set-off, counterclaim, recoupment, defense or other right which the Company
(including its subsidiaries) may have against him or anyone else. All amounts
payable by the Company (including its subsidiaries hereunder) shall be paid
without notice or demand. Executive shall not be obligated to seek other
employment in mitigation of the amounts payable or arrangements made under any
provision of this Agreement, and, except as provided in Paragraph 3(b) hereof,
the obtaining of any such other employment shall in no event effect any
reduction of the Company's obligations to make (or cause to be made) the
payments and arrangements required to be made under this Agreement.
(D) SUCCESSORS. This Agreement shall be binding upon and inure
to the benefit of the Company and any successor of the Company, by merger or
otherwise. This Agreement shall also be binding upon and inure to the benefit of
Executive and his estate. If Executive shall die prior to full payment of
amounts due pursuant to this Agreement, such amounts shall be payable pursuant
to the terms of this Agreement to his estate.
6
<PAGE>
(E) SEVERABILITY. Any provision in this Agreement which is
prohibited or unenforceable in any jurisdiction by reason of applicable law
shall, as to such jurisdiction, be ineffective only to the extent of such
prohibition or unenforceability without invalidating or affecting the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
(F) NON-ALIENATION. Executive shall not have any right to
pledge, hypothecate, anticipate or assign this Agreement or the rights
hereunder, except by will or the laws of descent and distribution.
(G) NOTICES. Any notices or other communications provided for
in this Agreement shall be sufficient if in writing. In the case of Executive,
such notices or communications shall be effectively delivered if hand delivered
to Executive at his principal place of employment or if sent by registered or
certified mail to Executive at the last address he has filed with the Company.
In the case of the Company, such notices or communications shall be effectively
delivered if sent by registered or certified mail to the Company at its
principal executive offices.
(H) CONTROLLING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Texas. Further, Executive
agrees that any legal proceeding to enforce the provisions of this Agreement
shall be brought in Houston, Harris County, Texas, and hereby waives his right
to any pleas regarding subject matter or personal jurisdiction and venue.
(I) RELEASE. As a condition to the receipt of any benefit
under Paragraph 3 hereof, Executive shall first execute a release, in the form
established by the Company, releasing the Company, its affiliates, predecessors,
successors, shareholders, partners, officers, directors, employees and agents
from any and all claims and from any and all causes of action of any kind or
character, including but not limited to all claims or causes of action arising
out of Executive's employment with the Company or the termination of such
employment.
(J) FULL SETTLEMENT. If Executive is entitled to and receives
the benefits provided hereunder, performance of the obligations of the Company
hereunder will constitute full settlement of all claims that Executive might
otherwise assert against the Company on account of his termination of
employment.
(K) UNFUNDED OBLIGATION. The obligation to pay amounts under
this Agreement is an unfunded obligation of the Company (including its
subsidiaries), and no such obligation shall create a trust or be deemed to be
secured by any pledge or encumbrance on any property of the Company (including
its subsidiaries).
7
<PAGE>
(L) NOT A CONTRACT OF EMPLOYMENT. This Agreement shall not be
deemed to constitute a contract of employment, nor shall any provision hereof
affect (i) the right of the Company (or its subsidiaries) to discharge Executive
at will or (ii) the terms and conditions of any signed written agreement
hereafter executed by Company and Executive. This Agreement constitutes the
entire agreement of the parties with regard to the subject matter hereof, and
contains all the covenants, promises, representations, warranties and agreements
between the parties with respect to any termination of Executive's employment
with the Company. Without limiting the scope of the preceding sentence, all
prior understandings and agreements among the parties hereto relating to the
subject matter hereof are hereby null and void and of no further force and
effect. Further, without limiting the scope of this paragraph, this Agreement
supersedes and replaces any Severance Agreement, Employment Agreement or
Severance Protection Agreement between Company (or its predecessors) and
Executive (a "Prior Agreement") in its entirety and any such Prior Agreement
shall be null and void and of no further force and effect. Any modification of
this Agreement will be effective only if it is in writing and signed by the
party to be charged.
(M) NUMBER AND GENDER. Wherever appropriate herein, words used
in the singular shall include the plural and the plural shall include the
singular. The masculine gender where appearing herein shall be deemed to include
the feminine gender.
(N) COUNTERPARTS. This Agreement may be executed in one or
more counterparts, each of which shall be deemed to be an original, but all of
which together will constitute one and the same Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the 27 day of September, 1999.
"EXECUTIVE"
/s/ John D. Schiller
"COMPANY"
OCEAN ENERGY, INC.
By: /s/ Robert K. Reeves
Name: Robert K. Reeves
Title: Executive Vice President, General Counsel
and Secretary
VEHOU02:140045.1, modified
8
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