<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
(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, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
Commission file number: 1-8094
SEAGULL ENERGY CORPORATION
(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 1700, HOUSTON, TEXAS 77002-6714
(Address of principal executive offices) (Zip code)
(713) 951-4700
(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 6, 1998, 63,393,735 shares of Common Stock, par value $0.10 per
share, were outstanding.
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<PAGE> 2
This Amendment No. 1 relates only to Part I, Item 2 -- Management's Discussion
and Analysis of Financial Condition and Results of Operations and provides added
information regarding the Company's Year 2000 compliance efforts.
INDEX
<TABLE>
<CAPTION>
PAGE
PART I. FINANCIAL INFORMATION NUMBER
<S> <C>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................................... 10
SIGNATURES ................................................................................... 20
</TABLE>
i
<PAGE> 3
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to assist in an understanding of
the financial position and results of operations of Seagull Energy Corporation
("Seagull" or the "Company") for each of the periods indicated. The Company's
accompanying unaudited financial statements and the notes thereto and the
consolidated financial statements and notes included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997 contain detailed
information that should be referred to in conjunction with the following
discussion.
RESULTS OF OPERATIONS
CONSOLIDATED HIGHLIGHTS
(Amounts in Thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Oil and gas operations................................ $ 79,862 $ 108,543 $ 256,415 $ 338,953
Alaska transmission and distribution ................. 13,237 12,112 62,538 63,455
--------- --------- --------- ---------
$ 93,099 $ 120,655 $ 318,953 $ 402,408
========= ========= ========= =========
Operating Profit (Loss):
Oil and gas operations................................ $ (99,574) $ 18,603 $ (83,808) $ 77,363
Alaska transmission and distribution.................. 1,146 548 13,436 12,985
Corporate............................................. (10,389) (5,695) (18,669) (12,475)
--------- --------- --------- ---------
$(108,817) $ 13,456 $ (89,041) $ 77,873
========= ========= ========= =========
Net income (loss)....................................... $ (87,638) $ 3,202 $ (85,534) $ 23,077
Net cash provided by operating activities before
changes in operating assets and liabilities........... $ 21,683 $ 48,623 $ 106,524 $ 172,572
Net cash provided by operating activities............... $ 31,901 $ 49,939 $ 96,142 $ 175,933
</TABLE>
For both the three and nine months ended September 30, 1998, Seagull
experienced decreases in revenues, operating profit, net income and net cash
provided by operating activities versus the same periods in 1997. These
decreases can be primarily attributed to the following key items:
o A noncash impairment charge of $78 million in the third quarter of 1998
related to the impairment of the Company's oil and gas and pipeline assets;
o Substantial decreases in worldwide oil prices and moderate decreases in
domestic gas prices from the 1997 periods;
o Substantial increases in exploration charges for the quarter and nine
months of 1998 versus the equivalent 1997 periods;
10
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SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
o The absence of contributions from the Company's Canadian oil and gas
operations which were sold in October 1997;
o One-time compensation costs of approximately $6 million associated with the
retirement of Barry J. Galt and the appointment of James T. Hackett as the
Company's Chief Executive Officer; and
o A change in the Company's tax expense from approximately 53% of earnings
before taxes for the nine months ended September 30, 1997 to an approximate
27% benefit for the first nine months of 1998, reflecting primarily the tax
benefits of the impairment of long-lived assets and one-time compensation
matters.
OIL AND GAS OPERATIONS
(Amounts in Thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Natural gas ............................... $ 54,970 $ 70,374 $ 173,287 $ 224,093
Oil and NGL ............................... 19,583 32,986 66,258 96,220
Pipeline and marketing .................... 5,309 5,183 16,870 18,640
--------- --------- --------- ---------
79,862 108,543 256,415 338,953
--------- --------- --------- ---------
Production operating expenses ............... 28,651 27,967 82,961 87,091
Pipeline and marketing expenses ............. 7,109 6,860 20,524 20,840
Exploration charges ......................... 22,032 15,217 40,328 31,516
Depreciation, depletion and amortization .... 43,817 39,896 118,583 122,143
Impairment of long-lived assets ............. 77,827 -- 77,827 --
--------- --------- --------- ---------
Operating profit .......................... $ (99,574) $ 18,603 $ (83,808) $ 77,363
========= ========= ========= =========
</TABLE>
The decline in commodity prices was the significant factor in the 26%
and 24% decreases in revenues for the Oil and Gas Operations ("O&G") segment to
$80 million and $256 million for the three and nine months ended September 30,
1998, respectively. Domestic natural gas prices realized by the Company
decreased 9% from $2.28 per Mcf in the first nine months of 1997 to $2.07 per
Mcf for the same period in 1998. This price decrease and a 5% decrease in
domestic gas production combined to create a $26 million decrease in domestic
natural gas revenues. Worldwide oil prices realized by the Company showed a
decrease of 33%, from $17.40 per Bbl in 1997's first nine months to $11.62 per
Bbl in 1998. While declining oil prices were the primary factor for the decrease
in oil revenues, this was partially offset by an increase in oil and NGL
production in the U.S. and Egypt as Seagull realized additional contributions
from several new domestic wells and three Egyptian concessions - Qarun, where
additional facilities became operational during mid-1997, East Beni Suef, where
production began in mid-1998, and West Abu Gharadig, which was purchased in late
1997. For the third quarter of 1998, the Company's oil and gas production was
essentially unchanged from the third quarter of 1997, excluding
11
<PAGE> 5
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Canadian production. However, worldwide oil and gas prices realized by the
Company during the third quarter of 1998 reflected the similar downward trends
expressed during the first nine months of 1998 versus the same period in 1997.
Seagull sold its Canadian oil and gas operations in October 1997. These
Canadian operations contributed approximately $8 million and $26 million in
revenues and $4 million and $8 million in operating profit for the three and
nine months ended September 30, 1997, respectively.
EXPLORATION AND PRODUCTION OPERATING DATA
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------------------- ----------------------------------------------
Net Daily Production Unit Price Net Daily Production Unit Price
1998 1997 1998 1997 1998 1997 1998 1997
------ ------ -------- -------- ------ ------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gas Sales(1):
Domestic .............. 293 299 $ 1.94 $ 2.19 289 304 $ 2.07 $ 2.28
Canada(2) ............. -- 49 -- 1.38 -- 49 -- 1.63
Cote d'Ivoire ......... 7 7 1.59 1.77 9 6 1.57 1.81
Indonesia ............. 8 8 1.97 3.58 9 11 2.32 3.54
Other ................. 1 -- 1.40 1.07 1 -- 1.36 1.02
------ ------ -------- -------- ------ ------- -------- --------
309 363 $ 1.94 $ 2.11 308 370 $ 2.06 $ 2.22
====== ====== ======== ======== ====== ====== ======== ========
Oil and NGL Sales(1):
Domestic .............. 5,151 5,292 $ 10.78 $ 16.52 5,094 4,689 $ 11.88 $ 18.03
Canada(2) ............. -- 932 -- 15.37 -- 889 -- 16.46
Egypt ................. 10,085 9,838 12.07 18.02 10,555 8,987 12.67 18.30
Cote d'Ivoire ......... 782 1,146 7.34 17.44 993 1,285 10.90 19.06
Tatarstan ............. 4,201 4,113 6.74 13.94 4,060 4,224 8.57 14.34
Indonesia ............. 115 94 12.84 22.01 172 166 16.09 20.99
Other ................. 9 9 7.33 15.49 8 15 10.78 17.18
------ ------ -------- -------- ------ ------ -------- --------
20,343 21,424 $ 10.46 $ 16.74 20,882 20,255 $ 11.62 $ 17.40
====== ====== ======== ======== ====== ====== ======== ========
</TABLE>
(1) Natural gas is stated in MMcf and $ per Mcf. Oil and NGLs are stated in Bbl
and $ per Bbl.
(2) All of the Company's Canadian oil and gas operations were sold in October
1997.
Income and costs related to the Company's commodity hedging activities
are recognized in oil and gas revenues when the commodities are produced. The
Company recorded costs of $0.6 million and $8 million for the nine months ended
September 30, 1998 and 1997, respectively, related to equity hedging activities,
including costs related to the monetary production payment hedges of
approximately $0.6 million and $2 million in 1998 and 1997, respectively. By the
end of the first quarter of 1997, the Company's equity hedging activities had
been substantially reduced, leaving primarily the commodity hedges of
approximately 11 MMcf per day through December 1998, which were required by the
monetary production payment (related to the 1995 sale of the Company's Section
29 tax credit-bearing
12
<PAGE> 6
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
properties). For the third quarter of 1998 and 1997, all of the Company's equity
hedging costs of $0.1 million and $0.6 million, respectively, related to the
monetary production payment hedges. The Company also recorded hedging costs
related to third-party marketing activities of $3.8 million and $0.8 million for
the nine months ended September 30, 1998 and 1997, respectively, and $2.3
million and $0.6 million for the third quarter of 1998 and 1997, respectively.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards 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 is effective for fiscal years beginning after June 15, 1999. The
Company has not yet determined the impact of this statement on its financial
condition or results of operations.
In comparison to 1997, exploration charges for 1998 were approximately
$7 million and $9 million higher for the third quarter and nine months,
respectively, primarily due to increases in dry hole expense and impairment of
leaseholds on certain of the Company's Egyptian concessions.
The decrease in depreciation, depletion and amortization ("DD&A")
expense to $119 million for the nine months ended September 30, 1998 from $122
million for the prior year is primarily due to the decrease in domestic gas
production and the sale of the Company's Canadian operations, partially offset
by increased oil production in Egypt and an increase in the DD&A expense per
equivalent unit of production related to the Company's Egyptian operations. The
DD&A expense per equivalent unit of production for oil and gas producing
activities increased to $5.95 per Boe from $5.41 per Boe for the first nine
months of 1998 and 1997, respectively. For the third quarter, DD&A expense
increased nearly $4 million from 1997's $40 million also due to the increase in
the DD&A expense per equivalent unit of production related to the Company's
Egyptian operations.
During the third quarter of 1998, the Company recorded a noncash
impairment charge of $74 million related to its oil and gas assets. The
impairments of the oil and gas assets were primarily a result of disappointing
well performance, much lower oil and natural gas prices and a lack of any
perceived significant near-term improvement in oil prices that has led to a
reduction in reserves at certain of Seagull's Egyptian concessions. During this
quarter, the Company also decided to liquidate nonstrategic pipeline assets
which resulted in an additional noncash impairment of $4 million.
Even if worldwide oil and gas prices improve materially in the
remainder of 1998, O&G operating results will be substantially lower in 1998
versus the prior year. As the O&G segment represents the majority of the
Company's operations, a substantial decrease in O&G operating results will have
a significant impact on the Company's total operating results.
13
<PAGE> 7
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ALASKA TRANSMISSION AND DISTRIBUTION
(Amounts in Thousand Except Operating Data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues ...................................... $13,237 $12,112 $62,538 $63,455
Cost of gas sold .............................. 5,021 4,557 27,127 28,523
------- ------- ------- -------
Gross margin ................................ 8,216 7,555 35,411 34,932
Operations and maintenance expense ............ 4,942 4,917 15,598 15,689
Depreciation, depletion and amortization ...... 2,128 2,090 6,377 6,258
------- ------- ------- -------
Operating profit ............................ $ 1,146 $ 548 $13,436 $12,985
======= ======= ======= =======
OPERATING DATA:
Degree days (*) ............................. 1,050 762 6,332 6,053
Sales and transport volumes (MMcf) .......... 7,280 7,543 29,544 31,362
Sales and transport margin per MMcf ......... $ 1.13 $ 1.00 $ 1.20 $ 1.11
</TABLE>
(*) A measure of weather severity calculated by subtracting the mean
temperature for each day from 65 degrees Fahrenheit. More degree days
equate to colder weather.
Operating profit of the Alaska transmission and distribution segment
for the third quarter of 1998 increased from the 1997 period primarily as a
result of cooler temperatures, increased customer count and increased gross
margin due to a change in the mix of customers. This segment's business is
seasonal with approximately 65%-70% of its sales made in the first and fourth
quarters of each year.
OTHER
During the third quarter of 1998, Seagull recorded approximately $6
million in compensation expenses, related to the retirement of Barry J. Galt and
the appointment of James T. Hackett as the Company's Chief Executive Officer,
included in general and administrative ("G&A") expense. Additional compensation
costs related to Mr. Galt's retirement of approximately $1 million will be
recorded in G&A expense throughout the remainder of 1998 and the first half of
1999.
14
<PAGE> 8
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
CAPITAL EXPENDITURES AND ACQUISITIONS
(Amounts in Thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Capital expenditures:
Exploration and production:
Leasehold ............................... $ 13,988 $ 3,634 $ 18,412 $ 17,893
Exploration ............................. 27,361 28,456 59,695 73,089
Development ............................. 34,805 30,359 101,715 101,109
-------- -------- -------- --------
76,154 62,449 179,822 192,091
Pipeline and marketing .................... 85 162 1,302 207
-------- -------- -------- --------
Oil and gas operations .................. 76,239 62,611 181,124 192,298
Alaska transmission and distribution ...... 2,974 3,081 6,978 6,532
Corporate ................................. 1,261 2,524 4,977 6,734
-------- -------- -------- --------
$ 80,474 $ 68,216 $193,079 $205,564
======== ======== ======== ========
Acquisitions ................................. $ 673 $ 6,600 $128,142 $ 7,421
======== ======== ======== ========
</TABLE>
Seagull's capital expenditure program is designed to fulfill the
Company's goals of growing its reserve base and production capacity. Capital
expenditures, excluding acquisitions, decreased by $12 million for the first
nine months of 1998 versus 1997 due to the sale of the Company's Canadian
operations, which had expenditures of $13 million in the first nine months of
1997, and a decline in domestic capital expenditures, partially offset by
increased expenditures related to the Company's Egyptian operations.
The Company has a revolving credit facility (the "Credit Facility")
with a maximum commitment of $500 million. At September 30, 1998, there was $205
million borrowed under the Credit Facility and $277 million of the unused
commitment was immediately available. The Credit Facility contains certain
covenants and restrictive provisions, including limitations on the incurrence of
additional debt or liens, the declaration or payment of dividends and the
repurchase or redemption of capital stock and the maintenance of certain
financial ratios. Under the most restrictive of these provisions, approximately
$143 million was available for payment of cash dividends on common stock or to
repurchase common stock as of September 30, 1998.
During the third quarter of 1998, the Company repurchased in
open-market transactions approximately $50 million in aggregate principal amount
of its 8 5/8% Senior Subordinated Notes due 2005. These purchases were funded
using borrowings under the Credit Facility. In connection with this repurchase,
the Company recorded an extraordinary loss of $1 million, or $0.02 per basic and
diluted
15
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SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
share. At current interest rates under the Credit Facility, the Company expects
to save approximately $1.6 million in annual interest expense by refinancing the
$50 million of Senior Subordinated Notes under the Credit Facility.
On June 1, 1998, the Company completed the purchase of the stock of BRG
Petroleum, Inc. and its related partnership interests for $103 million in cash,
excluding cash acquired of $2 million and noncash deferred tax liabilities of
$25 million. The Company funded this acquisition through its existing credit
facility.
The assets acquired include proved oil and gas reserves of 102 billion
cubic feet of natural gas equivalents ("Bcfe"). BRG operated approximately 70
percent of 600 currently producing oil and gas wells in approximately 140
fields. Daily production from the properties net to the combined BRG interests
averaged approximately 18 million cubic feet of gas and 400 barrels of oil and
natural gas liquids in 1997. The most significant of these assets are
concentrated in East Texas, primarily in Freestone, Upshur, Rusk and Nacogdoches
counties.
Management believes the Company's internally generated funds and bank
borrowing capabilities will be sufficient to finance current and forecasted
operations, including capital expenditures.
In March 1998, Seagull announced it may include some of its less
strategic E&P properties located away from its various core assets in packages
of properties to be liquidated in the fourth quarter of 1998. During the third
quarter of 1998, the Company also decided to liquidate its nonstrategic pipeline
assets in late 1998 or early 1999. The Company also announced its intentions to
exit its third-party marketing business and to explore alternatives for
marketing its equity production, including outsourcing.
YEAR 2000 ISSUES
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"). Seagull's Board of Directors has been briefed about the Year 2000
problem generally and as it may affect Seagull. 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
Seagull's business units. The plan has been developed with an aim towards taking
reasonable steps to prevent Seagull'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, Seagull 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 IT technology
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 Seagull's Year 2000 identification, assessment,
remediation, and testing efforts. Based upon its identification and assessment
efforts to date, Seagull is in the process of replacing the computer equipment
and software it currently uses to become Year 2000 compliant. In addition, in
the ordinary course of replacing computer equipment and software, Seagull plans
to obtain replacements that are in compliance with Year 2000.
16
<PAGE> 10
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
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. As of the date of this filing, the Company estimates that
approximately 80% of its Year 2000 plan related to these IT systems has been
implemented and anticipates that the remainder of the plan, including any
necessary remedial action, will be completed by June 30, 1999. 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.
The Company is working with Stone & Webster to identify embedded chips
that may need to be replaced or avoided. Stone & Webster is an internationally
recognized engineering firm that has developed and maintains a database of
systems that are susceptible to Year 2000 problems. The database comparisons
that have been completed to date have not revealed any material problems. This
effort should be completed by the end of the first quarter of 1999. Areas that
will require contingency plans will be determined as part of these efforts
relative to embedded chips and
microcontrollers and as a result of our correspondence and meetings with key
business partners. This effort should be completed by the end of the second
quarter of 1999.
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 are being used,
as appropriate, to obtain additional information.
During the fourth quarter of 1998, the Company plans to develop
contingency plans for its financial and operational systems. Seagull's
contingency plans are being 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 third parties and
foreign governments to determine the risks to the Company. This investigation is
in progress.
17
<PAGE> 11
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
Seagull 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 Seagull domestically and internationally; widespread
disruption of the services of communications common carriers domestically and
internationally; similar disruption to means and modes of transportation for
Seagull and its employees, contractors, suppliers, and customers; significant
disruption to Seagull's ability to gain access to, and remain working in, office
buildings and other facilities; the failure of substantial numbers of Seagull'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 Seagull.
Among other things, Seagull 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. Seagull could also experience
an inability by customers, traders, and others to pay, on a timely basis or at
all, obligations owed to Seagull. Under these circumstances, the adverse effect
on Seagull, and the diminution of Seagull'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 Seagull, and the
diminution of Seagull'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
$1,000,000. Of this amount, approximately $300,000 had been incurred as of
September 30, 1998.
18
<PAGE> 12
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. 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
Item 2 of this document includes forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, as amended. Although Seagull believes that such
forward-looking statements are based upon reasonable assumptions, it can give no
assurance that its expectations will in fact occur. Important factors that could
cause actual results to differ materially from those in the forward-looking
statements include, but are not limited to, political developments in foreign
countries, federal and state regulatory developments, the timing and extent of
changes in commodity prices, the timing and extent of success in discovering,
developing and producing or acquiring oil and gas reserves, the availability of
skilled personnel, materials and equipment, operating hazards attendant to the
industry, and conditions of the capital and equity markets during the periods
covered by the forward-looking statements, as well as the other factors
discussed in Seagull's Annual Report on Form 10-K for the year ended December
31, 1997.
19
<PAGE> 13
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
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.
SEAGULL ENERGY CORPORATION
By: /s/ William L. Transier
------------------------------------------
William L. Transier, Executive Vice
President and Chief Financial
Officer (Principal Financial Officer)
Date: January 27, 1998
By: /s/ Gordon L. McConnell
------------------------------------------
Gordon L. McConnell, Vice President and
Controller (Principal Accounting Officer)
Date: January 27, 1998
20
