================================================================================
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 June 30, 2000
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 July 26, 2000, 166,888,642 shares of Common Stock, par value $0.10 per
share, were outstanding.
================================================================================
<PAGE>
Ocean Energy, Inc.
Index
Page
Number
Part I. Financial Information
Item 1. Unaudited Consolidated Financial Statements
Consolidated Statements of Operations for the Three Months and
Six Months Ended June 30, 2000 and 1999.................... 1
Consolidated Balance Sheets - June 30, 2000
and December 31, 1999...................................... 2
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2000 and 1999............................... 3
Consolidated Statements of Comprehensive Income for the Three
Months and Six Months Ended June 30, 2000 and 1999......... 4
Notes to Consolidated Financial Statements.................. 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 14
Item 3. Quantitative and Qualitative Disclosures about Market Risks. 22
Part II. Other Information............................................... 22
Signatures................................................................ 23
(i)
<PAGE>
Item. 1 Unaudited Consolidated Financial Statements
Ocean Energy, Inc.
Consolidated Statements Of Operations
(Amounts in Thousands, Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------- ---------------------------------
2000 1999 2000 1999
--------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Revenues......................................................$ 236,429 $ 196,206 $ 482,497 $ 301,900
Costs of Operations:
Operating expenses......................................... 57,890 65,446 114,710 110,606
Depreciation, depletion and amortization................... 72,952 89,509 153,032 148,117
Impairment of oil and gas properties....................... - - - 28,500
General and administrative................................. 5,950 8,507 15,072 13,083
--------------- --------------- --------------- ----------------
136,792 163,462 282,814 300,306
--------------- --------------- --------------- ----------------
Operating Profit.............................................. 99,637 32,744 199,683 1,594
Other (Income) Expense:
Interest expense........................................... 18,866 31,021 38,094 56,191
Merger and integration costs............................... - - 3,273 40,652
Interest income and other.................................. (93) 369 (832) (114)
--------------- --------------- --------------- ----------------
Income (Loss) Before Income Taxes............................. 80,864 1,354 159,148 (95,135)
Income Tax Expense (Benefit).................................. 35,371 (235) 70,677 (15,673)
--------------- --------------- --------------- ----------------
Income (Loss) from Continuing Operations...................... 45,493 1,589 88,471 (79,462)
Income from Discontinued Operations, Net of
Income Taxes............................................... - 547 - 547
--------------- --------------- --------------- ----------------
Net Income (Loss)............................................. 45,493 2,136 88,471 (78,915)
Preferred Stock Dividend...................................... 812 836 1,625 1,637
--------------- --------------- --------------- ----------------
Net Income (Loss) Available to Common Shareholders............$ 44,681 $ 1,300 $ 86,846 $ (80,552)
=============== =============== =============== ================
Earnings (Loss) Per Common Share:
Basic:
Income (Loss) from Continuing Operations................. $ 0.27 $ 0.01 $ 0.52 $ (0.60)
Income from Discontinued Operations...................... - - - -
--------------- --------------- --------------- ----------------
Net Income (Loss)........................................ $ 0.27 $ 0.01 $ 0.52 $ (0.60)
=============== =============== =============== ================
Diluted:
Income (Loss) from Continuing Operations................. $ 0.26 $ 0.01 $ 0.50 $ (0.60)
Income from Discontinued Operations...................... - - - -
--------------- --------------- --------------- ----------------
Net Income (Loss)........................................ $ 0.26 $ 0.01 $ 0.50 $ (0.60)
=============== =============== =============== ================
Weighted Average Number of Common Shares
Basic.................................................... 167,217 166,441 167,022 134,991
=============== =============== =============== ================
Diluted.................................................. 177,484 168,371 176,057 134,991
=============== =============== =============== ================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
1
<PAGE>
Ocean Energy, Inc.
Consolidated Balance Sheets
(Amounts in Thousands, Except Share Data)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------------- ------------------
Assets
<S> <C> <C>
Current Assets:
Cash and cash equivalents.................................................... $ 84,839 $ 64,889
Accounts receivable, net..................................................... 198,344 170,034
Inventories.................................................................. 29,566 28,723
Prepaid expenses and other................................................... 23,791 26,304
----------------- ------------------
Total Current Assets....................................................... 336,540 289,950
Property, Plant and Equipment, at cost, full cost method for oil and gas properties:
Evaluated oil and gas properties............................................. 3,884,763 3,706,288
Unevaluated oil and gas properties excluded from amortization................ 521,007 507,197
Other........................................................................ 142,831 84,410
----------------- ------------------
4,548,601 4,297,895
Accumulated Depreciation, Depletion and Amortization............................ (2,339,617) (2,094,885)
----------------- ------------------
2,208,984 2,203,010
Deferred Income Taxes........................................................... 177,518 233,406
Other Assets.................................................................... 54,000 56,777
----------------- ------------------
Total Assets.................................................................... $ 2,777,042 $ 2,783,143
================= ==================
Liabilities And Shareholders' Equity
Current Liabilities:
Accounts and notes payable................................................... $ 280,105 $ 275,629
Accrued interest payable..................................................... 38,787 41,119
Accrued liabilities.......................................................... 23,576 51,542
Current maturities of long-term debt......................................... 8,023 13,651
----------------- ------------------
Total Current Liabilities.................................................. 350,491 381,941
Long-Term Debt.................................................................. 1,257,268 1,333,410
Other Noncurrent Liabilities and Deferred Revenue............................... 138,683 120,097
Commitments and Contingencies...................................................
Shareholders' Equity:
Preferred stock, $1.00 par value; authorized 10,000,000 shares;
issued 50,000 shares....................................................... 50 50
Common stock, $.10 par value; authorized 230,000,000 shares; issued
168,638,285 and 166,979,981 shares, respectively........................... 16,864 16,699
Additional paid-in capital................................................... 1,499,559 1,484,688
Accumulated deficit.......................................................... (460,372) (547,216)
Less - treasury stock, at cost; 1,758,653 and 378,171 shares, respectively... (22,310) (3,114)
Less - Other................................................................. (3,191) (3,412)
----------------- ------------------
Total Shareholders' Equity................................................. 1,030,600 947,695
----------------- ------------------
Total Liabilities and Shareholders' Equity...................................... $ 2,777,042 $ 2,783,143
================= ==================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
2
<PAGE>
Ocean Energy, Inc.
Consolidated Statements Of Cash Flows
(Amounts in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------------
2000 1999
----------------- ------------------
<S> <C> <C>
Operating Activities:
Net income (loss)...................................................... $ 88,471 $ (78,915)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation, depletion and amortization............................. 153,032 148,117
Impairment of oil and gas properties................................. - 28,500
Deferred income taxes................................................ 56,003 (25,727)
Noncash merger and integration costs................................. - 21,047
Other................................................................ 3,453 6,659
Changes in operating assets and liabilities, net of acquisitions:
Decrease (increase) in accounts receivable......................... (28,310) 41,317
Decrease in inventories, prepaid expenses and other................ 148 16,718
Decrease in accounts and notes payable............................. (50,039) (94,117)
Amortization of deferred revenue................................... (12,395) -
Increase in accrued expenses and other............................. 2,614 41,795
----------------- ------------------
Net Cash Provided by Operating Activities............................ 212,977 105,394
----------------- ------------------
Investing Activities:
Capital expenditures................................................... (251,348) (144,082)
Capital expenditures of Discontinued Operations........................ - (2,171)
Acquisition costs, net of cash acquired................................ (309) (2,327)
Proceeds from sales of property, plant and equipment................... 92,655 109,442
----------------- ------------------
Net Cash Used In Investing Activities................................ (159,002) (39,138)
----------------- ------------------
Financing Activities:
Proceeds from debt..................................................... 672,583 823,189
Principal payments on debt ............................................ (698,540) (946,931)
Proceeds from deferred revenue......................................... - 100,000
Proceeds from sales of common stock.................................... 11,518 311
Purchase of treasury stock............................................. (19,173) -
Deferred debt issue costs.............................................. - (6,406)
Other.................................................................. (413) (759)
----------------- ------------------
Net Cash Used In Financing Activities................................ (34,025) (30,596)
----------------- ------------------
Increase In Cash and Cash Equivalents.................................... 19,950 35,660
Cash and Cash Equivalents at Beginning of Period......................... 64,889 10,706
----------------- ------------------
Cash and Cash Equivalents at End of Period............................... $ 84,839 $ 46,366
================= ==================
</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 June 30, Six Months Ended June 30,
--------------------------------- ---------------------------------
2000 1999 2000 1999
----------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net income (loss).................................... $ 45,493 $ 2,136 $ 88,471 $ (78,915)
Other comprehensive income, net of tax:
Foreign currency translation adjustment........... - 9,741 - 10,720
----------------- --------------- ---------------- ----------------
Comprehensive income (loss) ......................... $ 45,493 $ 11,877 $ 88,471 $ (68,195)
================= =============== ================ ================
</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. ("Ocean", "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
disclosures are adequate to make the information presented not misleading. The
financial statements reflect all normal recurring adjustments that, in the
opinion of management, are necessary for a fair presentation.
On March 30, 1999, Ocean Energy, Inc. ("Old Ocean") was merged with and
into Seagull Energy Corporation ("Seagull", the "Merger"). The resulting company
was renamed Ocean Energy, Inc. The Merger was treated for accounting purposes as
an acquisition of Seagull by Ocean with the assets and liabilities of Old Ocean
being recorded based upon their historical costs and the assets and liabilities
of Seagull being recorded at their estimated fair market values. As of December
31, 1999 a total purchase price of $642 million had been allocated to assets and
liabilities. The Merger, completed through the issuance of common stock,
increased property, plant and equipment by $1.3 billion, debt by $563 million,
other liabilities by $200 million, and equity by $595 million through a non-cash
transaction. The financial results presented here include those of Ocean Energy,
Inc. on a stand alone-basis for the first quarter of 1999 and of the combined
company thereafter.
The accompanying consolidated financial statements of the Company should be
read in conjunction with the consolidated financial statements and notes thereto
included in the Annual Report on Form 10-K for the year ended December 31, 1999.
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 June 30, 2000 and 1999, the Company
capitalized interest expense in the amount of $11 million and $13 million,
respectively, and certain employee-related costs in the amount of $11 million
and $10 million, respectively. For the six months ended June 30, 2000 and 1999,
the Company capitalized interest expense in the amount of $23 million and $20
million, respectively, and certain employee-related costs in the amount of $21
million and $15 million, respectively.
During the first six months of 1999, the Company recognized impairments in
the amount of $28.5 million, pre-tax, related primarily to the sale of the
Canadian subsidiary on April 15, 1999.
5
<PAGE>
Ocean Energy, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Earnings Per Share - The following table provides a reconciliation between
basic and diluted earnings (loss) per share (stated in thousands except per
share data):
<TABLE>
<CAPTION>
Net Income (Loss) Weighted Average Earnings (Loss)
Available to Common Common Shares Per Share
Shareholders Outstanding Amount
------------------------ ---------------------- ------------------
<S> <C> <C> <C>
Quarter Ended June 30, 2000:
Basic................................... $ 44,681 167,217 $ 0.27
Effect of dilutive securities:
Stock options...................... - 6,880
Convertible preferred stock........ 812 3,387
------------------------ ----------------------
Diluted................................. $ 45,493 177,484 $ 0.26
======================== ======================
Quarter Ended June 30, 1999:
Basic................................... $ 1,300 166,441 $ 0.01
Effect of dilutive securities:
Stock options...................... - 1,930
------------------------ ----------------------
Diluted................................. $ 1,300 168,371 $ 0.01
======================== ======================
Six Months Ended June 30, 2000:
Basic.................................. $ 86,846 167,022 $ 0.52
Effect of dilutive securities:
Stock options..................... - 5,648
Convertible preferred stock....... 1,625 3,387
------------------------ ----------------------
Diluted................................ $ 88,471 176,057 $ 0.50
======================== ======================
Six Months Ended June 30, 1999:
Basic.................................. $ (80,552) 134,991 $ (0.60)
Effect of dilutive securities.......... - -
------------------------ ----------------------
Diluted................................ $ (80,552) 134,991 $ (0.60)
======================== ======================
</TABLE>
Weighted average options to purchase 7,661,000 shares of common stock at
$12.19 to $36.54 per share and 6,890,000 shares of common stock at $14.88 to
$36.54 per share were outstanding during the first six months and during the
second quarter of 2000, respectively, 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. These options expire at
various dates through 2010. Weighted average options to purchase 17,597,000
shares of common stock for the six months ended June 30, 1999 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 for the six months ended June 30, 1999
because of its antidilutive effect. Weighted average options to purchase
8,658,000 shares of common stock at $9.23 to $36.54 per share were outstanding
during the second quarter of 1999 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. These options expire at
various dates through 2009.
6
<PAGE>
Ocean Energy, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Treasury Stock - The Company follows the average cost method of accounting
for treasury stock transactions.
Discontinued Operations - During the first six months of 1999 the Company
operated in Alaska through a division of the Company and a wholly-owned
subsidiary (collectively referred to herein as "ENSTAR"). In July 1999 the
Company committed to a plan to dispose of ENSTAR, and on November 1, 1999 the
Company completed the sale. Prior to the sale the results of operations and net
assets of ENSTAR were 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,
and in June 2000, the FASB issued SFAS No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities, an amendment of FASB
Statement No. 133. These statements establish standards of accounting for and
disclosures of derivative instruments and hedging activities. These statements
are effective for fiscal years beginning after June 15, 2000. While the Company
has not yet completed its evaluation of the impact of these statements, the
Company does not believe the statements will have a significant impact on its
results of operations as it expects its current derivative activities would
continue to qualify under hedge accounting.
Note 2. Disposition of Assets
Disposition of East Bay - On March 31, 2000, the Company completed the sale
of its East Bay Complex receiving net proceeds of approximately $78 million. The
properties consisted of South Pass 24, South Pass 27 and South Pass 30 Fields,
located in the Mississippi Delta Region of the Gulf of Mexico. The East Bay
Complex contributed revenues of $23 and $25 million for the first quarter of
2000 and the first six months of 1999, respectively, and had operating profit
(loss) of $10 million and $(3) million, respectively. Proceeds from this sale
were used to repay amounts outstanding under the Company's existing credit
facilities.
Disposition of Canadian Subsidiary - On April 15, 1999, the Company
completed a sale of its Canadian oil and gas assets, realizing net proceeds of
$68 million which were used to repay existing long-term debt. The Canadian
assets disposed of contributed revenues of $7 million, and had operating loss
of $21 million (including impairment) for the six months ended June 30, 1999.
7
<PAGE>
Ocean Energy, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Note 3. Supplemental Disclosures of Cash Flow Information
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------- ------ ----------------------
2000 1999
-------------------- ----------------------
(amounts in thousands)
<S> <C> <C>
Cash paid during the period for:
Interest.................................................. $ 37,540 $ 57,584
Income taxes.............................................. $ 22,075 $ 6,244
</TABLE>
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 natural
gas production to achieve a more predictable cash flow as well as to reduce its
exposure to price fluctuations. These transactions generally are swaps or price
collars and are entered into with major financial institutions or commodities
trading institutions. Derivative financial instruments are intended to reduce
the Company's exposure to declines in the market price of natural gas and crude
oil. As a result, gains and losses on derivative financial instruments are
generally offset by similar changes in the realized prices of natural gas and
crude oil. Gains and losses from these financial instruments are recognized in
revenues for the periods to which the derivative financial instruments relate.
Oil and gas revenues have decreased by $52 million and $5 million for the six
months ended June 30, 2000 and 1999, respectively, as a result of the derivative
financial instruments and a prepaid crude oil sales contract.
As of June 30, 2000 and based on NYMEX oil and gas strip prices at that
date, the Company's derivative financial instruments were as follows:
<TABLE>
<CAPTION>
Crude Oil Natural Gas
------------------------------------ ------------------------------------
Daily Daily
Production Average Hedged Production Average Hedged
Period (Bbl) Price (Mcf) Price
------------------------------- --------------- ---------------- --------------- -----------------
<S> <C> <C> <C> <C>
Third Quarter, 2000............... 35,000 $ 22.80 115,000 $ 2.95
Fourth Quarter, 2000.............. 25,000 $ 21.93 115,000 $ 2.95
First Six Months, 2001............ 15,000 $ 21.53 - -
</TABLE>
Note 5. 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
8
<PAGE>
Ocean Energy, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
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) The Company accounts for investments in subsidiaries on the cost basis.
Earnings 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.
9
<PAGE>
Ocean Energy, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Supplemental Condensed Consolidating Statements of Operations
For the Three Months Ended June 30, 2000 and 1999
(Amounts in Thousands)
<TABLE>
<CAPTION>
Unconsolidated
--------------------------------------------------------------
Guarantor Non-Guarantor
2000 OEI Subsidiary Subsidiaries Consolidated OEI
------------------ -------------------- ------------------- ------------------
<S> <C> <C> <C> <C>
Revenues........................... $ - $ 66,563 $ 169,866 $ 236,429
Costs of Operations:
Operating expenses.............. - 15,860 42,030 57,890
Depreciation, depletion and
amortization.................. 1,582 13,579 57,791 72,952
General and administrative...... 5,950 - - 5,950
-------------------- ------------------- ------------------ ------------------
Operating Profit (Loss) ........... (7,532) 37,124 70,045 99,637
Interest Expense................... 18,644 - 222 18,866
Interest Income and Other.......... (550) 13 444 (93)
------------------ -------------------- ------------------- ------------------
Income (Loss) Before Taxes......... (25,626) 37,111 69,379 80,864
Income Tax Provision (Benefit) .... (9,354) 13,545 31,180 35,371
------------------ -------------------- ------------------- ------------------
Net Income (Loss).................. $ (16,272) $ 23,566 $ 38,199 $ 45,493
================== ==================== =================== ==================
1999
Revenues........................... $ - $ 65,550 $ 130,656 $ 196,206
Costs of Operations:
Operating expenses.............. - 26,467 38,979 65,446
Depreciation, depletion and
amortization.................. 1,061 27,002 61,446 89,509
General and administrative...... 4,363 4,144 - 8,507
------------------ -------------------- ------------------- ------------------
Operating Profit (Loss)............ (5,424) 7,937 30,231 32,744
Interest Expense................... 30,487 649 (115) 31,021
Interest Income and Other.......... (1,543) 5,249 (3,337) 369
------------------ -------------------- ------------------- ------------------
Income (Loss) Before Taxes......... (34,368) 2,039 33,683 1,354
Income Tax Provision (Benefit)..... 9,885 (30,185) 20,065 (235)
------------------ -------------------- ------------------- ------------------
Income (Loss) from Continuing
Operations...................... (44,253) 32,224 13,618 1,589
Income from Discontinued
Operations, net of income taxes. - - 547 547
------------------ -------------------- ------------------- ------------------
Net Income (Loss).................. $ (44,253) $ 32,224 $ 14,165 $ 2,136
================== ==================== =================== ==================
</TABLE>
10
<PAGE>
Ocean Energy, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Supplemental Condensed Consolidating Statements of Operations
For the Six Months Ended June 30, 2000 and 1999
(Amounts in Thousands)
<TABLE>
<CAPTION>
Unconsolidated
--------------------------------------------------------------
Guarantor Non-Guarantor
2000 OEI Subsidiary Subsidiaries Consolidated OEI
------------------ -------------------- ------------------- ------------------
<S> <C> <C> <C> <C>
Revenues........................... $ - $ 158,985 $ 323,512 $ 482,497
Costs of Operations:
Operating expenses.............. - 35,613 79,097 114,710
Depreciation, depletion and
amortization.................. 3,165 36,051 113,816 153,032
General and administrative...... 15,072 - - 15,072
------------------ -------------------- ------------------- ------------------
Operating Profit (Loss)............ (18,237) 87,321 130,599 199,683
Interest Expense................... 37,629 - 465 38,094
Merger and integration costs....... 3,273 - - 3,273
Interest Income and Other.......... (102) 27 (757) (832)
------------------ -------------------- ------------------- ------------------
Income (Loss) Before Taxes......... (59,037) 87,294 130,891 159,148
Income Tax Provision (Benefit) .... (21,549) 31,862 60,364 70,677
------------------ -------------------- ------------------- ------------------
Net Income (Loss).................. $ (37,488) $ $ 55,432 $ 70,527 $ 88,471
================== ==================== =================== ==================
1999
Revenues........................... $ - $ 114,350 $ 187,550 $ 301,900
Costs of Operations:
Operating expenses.............. - 50,936 59,670 110,606
Depreciation, depletion and
amorization................... 1,061 57,330 89,726 148,117
Impairment of oil and gas
properties.................... - - 28,500 28,500
General and administrative...... 4,363 8,474 246 13,083
------------------ -------------------- ------------------- ------------------
Operating Profit (Loss)............ (5,424) (2,390) 9,408 1,594
Interest Expense................... 44,971 13,126 (1,906) 56,191
Merger and integration costs....... - 40,652 - 40,652
Interest Income and Other.......... (1,544) 1,762 (332) (114)
------------------ -------------------- ------------------- ------------------
Income (Loss) Before Taxes......... (48,851) (57,930) 11,646 (95,135)
Income Tax Provision (Benefit)..... (17,831) (21,144) 23,302 (15,673)
------------------ -------------------- ------------------- ------------------
Loss from Continuing Operations.... (31,020) (36,786) (11,656) (79,462)
Income from Discontinued
Operations, net of income taxes. - - 547 547
----------------------------------------- ------------------- ------------------
Net Loss........................... $ (31,020) $ (36,786) $ (11,109) $ (78,915)
========================================= =================== ==================
</TABLE>
11
<PAGE>
Ocean Energy, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Supplemental Condensed Consolidating Balance Sheets
At June 30, 2000 and December 31, 1999
(Amounts in Thousands)
<TABLE>
<CAPTION>
Unconsolidated
--------------------------------------------------
Guarantor Non-Guarantor Eliminating Consolidated
June 30, 2000 OEI Subsidiary Subsidiaries Entries OEI
-------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Assets
Current Assets................ $ 28,667 $ 68,744 $ 239,129 $ - $ 336,540
Intercompany Investments...... 2,472,465 (75,273) (75,118) (2,322,074) -
Property, Plant and Equipment,
Net........................ 21,330 539,659 1,647,995 - 2,208,984
Other Assets.................. 30,902 187,393 13,223 - 231,518
-------------- --------------- --------------- --------------- ---------------
Total Assets.................. $ 2,553,364 $ 720,523 $ 1,825,229 $(2,322,074) $ 2,777,042
============== =============== =============== =============== ===============
Liabilities and Shareholders' Equity
Current Liabilities........... $ 193,720 $ 106,583 $ 50,188 $ - $ 350,491
Long-Term Debt................ 1,248,399 - 8,869 - 1,257,268
Other Liabilities............. 115,526 11,390 11,767 - 138,683
Shareholders' Equity.......... 995,719 602,550 1,754,405 (2,322,074) 1,030,600
-------------- --------------- --------------- --------------- ---------------
Total Liabilities and
Shareholders' Equity....... $ 2,553,364 $ 720,523 $ 1,825,229 $(2,322,074) $ 2,777,042
============== =============== =============== =============== ===============
December 31, 1999
Assets
Current Assets................ $ 3,266 $ 60,340 $ 226,344 $ - $ 289,950
Intercompany Investments...... 2,498,760 (167,761) (8,925) (2,322,074) -
Property, Plant and Equipment,
Net....................... 22,630 586,164 1,594,216 - 2,203,010
Other Assets.................. 72,943 187,393 29,847 - 290,183
-------------- --------------- --------------- --------------- ---------------
Total Assets.................. $ 2,597,599 $ 666,136 $ 1,841,482 $(2,322,074) $ 2,783,143
============== =============== =============== =============== ===============
Liabilities and Shareholders' Equity
Current Liabilities........... $ 131,041 $ 107,628 $ 143,272 $ - $ 381,941
Long-Term Debt................ 1,324,811 - 8,599 - 1,333,410
Other Liabilities............. 102,976 11,390 5,731 - 120,097
Shareholders' Equity.......... 1,038,771 547,118 1,683,880 (2,322,074) 947,695
-------------- --------------- --------------- --------------- ---------------
Total Liabilities and
Shareholders' Equity....... $ 2,597,599 $ 666,136 $ 1,841,482 $(2,322,074) $ 2,783,143
============== =============== =============== =============== ===============
</TABLE>
12
<PAGE>
Ocean Energy, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Supplemental Condensed Consolidating Statements of Cash Flows
For the Six Months Ended June 30, 2000 and 1999
(Amounts in Thousands)
<TABLE>
<CAPTION>
Unconsolidated
----------------------------------------------------------
Guarantor Non-Guarantor
2000 OEI Subsidiary Subsidiaries Consolidated OEI
------------------ ----------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Cash Flows from Operating
Activities:
Net Income (Loss)............... $ (37,488) $ 55,432 $ 70,527 $ 88,471
Adjustments to reconcile net
income (loss) to net cash from
operating activitives......... 62,621 36,051 113,816 212,488
Changes in assets and liabilities (6,564) (9,448) (71,970) (87,982)
------------------ ----------------- ----------------- ------------------
Net Cash Provided by Operating
Activities...................... 18,569 82,035 112,373 212,977
Cash Flows Provided by (Used in)
Investing Activities............ 1,865 10,453 (171,320) (159,002)
Cash Flows Provided by (Used In)
Financing Activities............ (8,000) (92,488) 66,463 (34,025)
------------------ ----------------- ----------------- ------------------
Net Increase in Cash and Cash
Equivalents..................... 12,434 - 7,516 19,950
Cash and Cash Equivalents:
Beginning of Period............. 1,552 - 63,337 64,889
------------------ ----------------- ----------------- ------------------
End of Period................... $ 13,986 $ - $ 70,853 $ 84,839
================== ================= ================= ==================
1999
Cash Flows from Operating
Activities:
Net Loss........................ $ (31,020) $ (36,786) $ (11,109) $ (78,915)
Adjustments to reconcile net
loss to net cash from operating
activities................... (15,446) 36,031 158,011 178,596
Changes in assets and liabilities (273,931) 374,464 (94,820) 5,713
------------------ ----------------- ----------------- ------------------
Net Cash Provided by (Used in)
Operating Activities............ (320,397) 373,709 52,082 105,394
Cash Flows Used in Investing
Activities...................... (2,057) (10,339) (26,742) (39,138)
Cash Flows Provided by (Used in)
Financing Activities............ 330,680 (363,370) 2,094 (30,596)
------------------ ----------------- ----------------- ------------------
Net Increase in Cash and Cash
Equivalents..................... 8,226 - 27,434 35,660
Cash and Cash Equivalents:
Beginning of Period............. - - 10,706 10,706
------------------ ----------------- ----------------- ------------------
End of Period................... $ 8,226 $ - $ 38,140 $ 46,366
================== ================= ================= ==================
</TABLE>
13
<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.
On March 30, 1999, Ocean Energy, Inc. ("Old Ocean") merged with and into
Seagull Energy Corporation ("Seagull", "the Merger"). In conjunction with the
Merger, Seagull amended its Articles of Incorporation to change its name to
Ocean Energy, Inc. The merger was treated for accounting purposes as an
acquisition of Seagull by Ocean. As such, the financial results presented here
include those of Ocean Energy, Inc. on a stand-alone basis for the first quarter
of 1999 and of the combined company thereafter.
The Company's accompanying unaudited consolidated financial statements and
the notes thereto and the consolidated financial statements and notes thereto
included in the Annual Report on Form 10-K for the year ended December 31, 1999
contain detailed information that should be referred to in conjunction with the
following discussion.
Results Of Operations
(Amounts in Thousands)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------- -------------------------------
2000 1999 2000 1999
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Oil and gas operations:
Revenues:
Natural gas............................ $ 106,602 $ 87,982 $ 199,987 $ 135,006
Oil and NGL............................ 129,827 108,224 282,510 166,894
-------------- -------------- -------------- -------------
236,429 196,206 482,497 301,900
-------------- -------------- -------------- -------------
Operating expenses....................... 57,890 65,446 114,710 110,606
Depreciation, depletion and amortization. 71,369 87,129 149,867 144,300
Impairment of oil and gas properties..... - - - 28,500
-------------- -------------- -------------- -------------
Operating profit ....................... 107,170 43,631 217,920 18,494
Corporate................................... (7,533) (10,887) (18,237) (16,900)
-------------- -------------- -------------- -------------
Total operating profit .................. $ 99,637 $ 32,744 $ 199,683 $ 1,594
============== ============== ============== =============
</TABLE>
With the Merger, the Company gained new operations in Egypt, Russia and
Indonesia and expanded its operations in the U.S. and Cote d'Ivoire. In
addition, the Company sold more than $700 million of non-core assets during 1999
and $92 million in the first half of 2000 as part of its debt reduction program.
The Company's expanded operations, offset by property sales, combined with the
continued escalation of world crude oil and natural gas prices which began
during the second quarter of 1999 and has continued into 2000, resulted in a
$181 million increase in revenues during the first six months of 2000 and a $40
million increase for the current quarter. During the first six months of 1999,
the Company recorded impairments of oil and gas properties in the amount of
$28.5 million related primarily to the sale of the Canadian subsidiary on April
15, 1999. These factors combined to improve total operating profit by $198
million for the first six months of 2000 and by $67 million for the second
quarter of 2000 compared to the same periods of 1999. For the first quarter of
1999, prior to the Merger, Seagull on a stand-alone basis
14
<PAGE>
Ocean Energy, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results Of Operations
recorded revenues of $57 million from its oil and gas operations and had
production of 19,456 barrels of oil per day and 277 MMcf of gas per day.
Revenues - Natural gas revenues increased $65 million, or 48%, to $200
million for the six months ended June 30, 2000, from $135 million for the six
months ended June 30, 1999. Gas revenues increased $19 million, or 22%, to $107
million for the second quarter of 2000 as compared to $88 million for the second
quarter of 1999. These increases are primarily due to higher average gas prices
realized during the period, offset by the effects of property sales as discussed
below. The average realized price for natural gas increased 52% to $2.75 per Mcf
in the first six months of 2000 as compared to $1.81 in the first six months of
1999 and increased 61% to $3.06 for the second quarter of 2000 compared to $1.90
for the second quarter of 1999. Daily natural gas production for the first six
months of 2000 was 399.6 MMcf as compared to 411.0 MMcf per day for the first
six months of 1999. Daily production decreased 25% from 1999 volumes for the
second quarter of 2000 to 382.4 MMcf due primarily to property sales.
Oil revenues reached $283 million for the six months ended June 30, 2000,
an increase of $116 million, or 69%, over revenues of $167 million for the six
months ended June 30, 1999. For the second quarter of 2000, oil revenues
increased $22 million, or 20%, to $130 million for 2000 compared to $108 million
for the second quarter of 1999. These increases are the result of an increase in
the average realized oil price during the period, offset by the effects of
property sales as discussed below. The average realized price for oil increased
77% to $22.59 for the first six months of 2000 compared to $12.79 for the same
period in 1999. The average realized oil price increased to $22.14 for the
second quarter of 2000 compared to $15.03 for the second quarter of 1999. Daily
oil production decreased slightly, to 68,703 Bbl for the first six months of
2000 as compared to 72,078 Bbl for the same period in 1999. For the second
quarter of 2000, daily oil production decreased 19%, to 64,429 Bbl as compared
to 79,145 Bbl for the second quarter of 1999 primarily due to property sales.
During 1999 and the first quarter of 2000, the Company sold various
non-core oil and gas assets as part of its debt reduction program as follows:
<TABLE>
<CAPTION>
Net Daily Production
Six Months Ending June 30, 1999
------------------------------------------
Oil and NGL's Gas
Asset Date of Sale (Bbl) (MMcf)
---------------------------------------------- ---------------- ------------------- -------------------
<S> <C> <C> <C>
Canadian subsidiary........................ April 1999 708 21
Arkoma Basin assets (acquired primarily
in Merger)............................... August 1999 - 59
Gulf of Mexico assets...................... August 1999 2,517 6
East Bay assets............................ March 2000 8,685 19
------------------- -------------------
Total reduction in daily production
associated with property sales.......... 11,910 105
=================== ===================
</TABLE>
Oil and gas revenues have been decreased by $52 million and $5 million for
the six months ended June 30, 2000 and 1999, respectively, and have been
decreased by $32 million for the three months ended June 30, 2000, as a result
of derivative contracts and a prepaid crude oil sales
15
<PAGE>
Ocean Energy, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results Of Operations
contract. There was no increase or decrease in oil and gas revenues as a result
of derivative contracts during the second quarter of 1999.
Operating Data
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ------------------------------
2000 1999 2000 1999
------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Net Daily Natural Gas Production (MMcf):
Domestic............................................. 344.2 465.0 359.2 358.9
Cote d'Ivoire........................................ 28.8 32.1 30.7 27.8
Other International.................................. 9.4 12.9 9.7 24.3
------------- -------------- -------------- ---------------
Total................................................ 382.4 510.0 399.6 411.0
============= ============== ============== ===============
Average Natural Gas Prices ($ per Mcf) (1):
Domestic............................................. $ 3.36 $ 1.92 $ 2.88 $ 1.82
Cote d'Ivoire........................................ $ 2.47 $ 1.63 $ 2.23 $ 1.71
Other International.................................. $ 3.44 $ 1.81 $ 3.45 $ 1.61
Weighted Average..................................... $ 3.30 $ 1.90 $ 2.84 $ 1.80
Average Natural Gas Prices including Hedging Activities and
Prepaid Crude Oil Sales Contract ($ per Mcf)......... $ 3.06 $ 1.90 $ 2.75 $ 1.81
Net Daily Oil and NGL Production (Bbl):
Domestic............................................. 25,220 38,722 29,016 39,263
Equatorial Guinea.................................... 21,484 19,516 21,390 19,458
Cote d'Ivoire........................................ 4,011 4,975 4,286 4,734
Egypt ............................................... 9,022 11,495 9,231 5,779
Other International.................................. 4,692 4,437 4,780 2,844
------------- -------------- -------------- ---------------
Total................................................ 64,429 79,145 68,703 72,078
============= ============== ============== ===============
Average Oil and NGL Prices ($ per Bbl) (1):
Domestic............................................. $ 26.81 $ 15.44 $ 27.39 $ 13.22
Equatorial Guinea.................................... $ 27.27 $ 14.84 $ 26.81 $ 13.07
Cote d'Ivoire........................................ $ 24.07 $ 18.75 $ 23.91 $ 14.57
Egypt................................................ $ 27.20 $ 15.48 $ 26.67 $ 15.48
Other International.................................. $ 16.49 $ 6.38 $ 17.46 $ 7.41
Weighted Average..................................... $ 26.09 $ 15.00 $ 26.20 $ 13.22
Average Oil and NGL Prices including Hedging Activities and
Prepaid Crude Oil Sales Contract ($ per Bbl)........... $ 22.14 $ 15.03 $ 22.59 $ 12.79
</TABLE>
(1) All price information excludes the results of hedging activities, unless
otherwise stated.
Operating Expenses - Total operating expenses remained relatively flat at
$115 million for the six months ended June 30, 2000 compared to $111 million for
the comparable 1999 period. Operating expenses per BOE were $4.66 per BOE for
the first six months of 2000 compared to $4.35 per BOE for the comparable 1999
period. For the second quarter of 2000 total operating expenses decreased $7
million, or 11%, to $58 million compared to $65 million for the second quarter
of 1999, while operating expenses per BOE were $4.97 per BOE for the second
quarter of
16
<PAGE>
Ocean Energy, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results Of Operations
2000 compared to $4.38 per BOE for the second quarter of 1999.The increase in
operating expenses per BOE is attributable to increases in production taxes and
workover expenses.
Depreciation, Depletion and Amortization Expense - Total depreciation,
depletion and amortization (DD&A) expense for oil and gas operations increased
$6 million to $150 million for the six months ended June 30, 2000 from $144
million for the same period in 1999. DD&A expense for oil and gas operations
decreased $16 million to $71 million for the second quarter of 2000 compared to
$87 million for the second quarter of 1999 primarily due to decreased production
during the second quarter of 2000. DD&A expense per BOE related to oil and gas
operations rose 7% to $6.09 per BOE for the six months ended June 30, 2000, from
$5.67 per BOE for the comparable period in 1999. DD&A per BOE was $6.12 per BOE
for the second quarter of 2000 as compared to $5.83 per BOE for the second
quarter of 1999. The higher DD&A expense per BOE for both the first six months
and the first quarter of 2000 is primarily attributable to the effects of the
Merger and the geographic mix of production.
General and Administrative Expenses - General and administrative expenses
totaled $15 million for the six months ended June 30, 2000. This amount includes
approximately $3 million in expense relating to compensation plans that are tied
directly to the market price of the Company's common stock. General and
administrative expenses totaled $13 million for the comparable 1999 period.
General and administrative expense for the second quarter of 2000 decreased 33%,
or $3 million, to $6 million, as compared to $9 million for the second quarter
of 1999 as the Company has been able to realize cost savings related to
personnel reduction, office consolidations and reduced combined expenses for
professional fees and other expense items as a result of the Merger.
Other
Interest Expense - Interest expense decreased $18 million, or 32%, to $38
million for the six months ended June 30, 2000 from $56 million in the
comparable 1999 period. Interest expense for the second quarter of 2000
decreased $12 million to $19 million from $31 million for 1999. These decreases
are the result of the Company's debt reduction program undertaken subsequent to
the Merger in 1999 and to the increase in the amount of interest capitalized
during the first six months of 2000 ($23 million in 2000 as opposed to $20
million in 1999) due to the increase in the level of capital expenditures.
Merger and Integration Costs - Merger and integration costs of $3 million
relating primarily to severance costs were recorded in the first six months of
2000. Costs of $41 million were recorded in the first six months of 1999 and
consisted primarily of Old Ocean's severance costs ($21 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).
17
<PAGE>
Ocean Energy, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results Of Operations
Income Tax Expense (Benefit) - Income tax expense of $71 million was
recognized for the six months ended June 30, 2000 compared to an income tax
benefit of $16 million for the six months ended June 30, 1999. This change 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 significance of
international operating results and taxes to the Company's total results.
Liquidity And Capital Resources
Liquidity - As a result of the Merger, the Company had nearly $2 billion in
long-term debt as of March 31, 1999. One of management's goals has been the
reduction of these high debt levels. Using proceeds primarily from asset sales,
excess cash flows attributable to higher commodity prices and disciplined
capital spending, long-term debt has been reduced to less than $1.3 billion at
June 30, 2000.
Concurrent with the closing of the Merger on March 30, 1999, the Company
entered credit facilities (the "Credit Facilities") which combined the existing
credit facilities of both Old Ocean and Seagull. As of June 30, 2000, the Credit
Facilities consist of a $500 million five-year revolving facility and a
renewable $200 million 364-day facility. The Credit Facilities bear 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. As of June 30, 2000, borrowings
outstanding against the Credit Facilities totaled $225 million and Letters of
Credit totaled $45 million, leaving $430 million of available credit.
The Company's debt to total capitalization ratio has decreased to 55% at
June 30, 2000, from 58% at December 31, 1999, and 66% at June 30, 1999.
Effects of Leverage - The Company has outstanding indebtedness of
approximately $1.3 billion as of June 30, 2000. 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, expenditures, acquisitions, general corporate or
other purposes may be impaired.
18
<PAGE>
Ocean Energy, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results Of Operations
Capital Expenditures
(Amounts in Thousands)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------- -----------------------------------
2000 1999 2000 1999
-------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Oil and Gas Operations:
Leasehold acquisitions............... $ 13,574 $ 8,672 $ 28,998 $ 12,571
Exploration costs................... 35,218 40,854 83,975 49,845
Development costs................... 75,291 40,194 132,264 76,213
-------------- -------------- --------------- ---------------
124,083 89,720 245,237 138,629
Corporate............................. 3,781 2,636 6,111 5,453
-------------- -------------- --------------- ---------------
Total Continuing Operations........... 127,864 92,356 251,348 144,082
Discontinued Operations............ - 2,171 - 2,171
-------------- -------------- --------------- ---------------
Total Capital Expenditures............ $ 127,864 $ 94,527 $ 251,348 $146,253
============== ============== =============== ===============
</TABLE>
During the first six months of 2000 the Company drilled 90 development
wells, 77 of which were successful, and 32 exploratory wells, 17 of which were
successful, for an overall success rate of 77% on total wells drilled.
During the second quarter, the Company's Board of Directors approved a $50
million increase to the Company's capital expenditure budget for 2000 to
approximately $550 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 2000 capital
expenditures primarily with funds provided by operations.
Update of Year 2000 Estimates
On February 23, 2000, the Company filed a Current Report on Form 8-K
containing the Company's current estimates of its operating statistics for the
year ended December 31, 2000. The Company has revised its estimates of operating
statistics for the year ended December 31, 2000 based on operating performance
for the first half of 2000 and revised estimates for the second half of 2000.
Annual production estimates have been reduced by approximately 5% due primarily
to production delays in the Gulf of Mexico and Equatorial Guinea. The revised
mid-points of annual production estimates ranges are 25 MMBbls of crude oil
production and 156 Bcf of natural gas production for the year 2000. Operating
costs per BOE have been increased by approximately 10% to $4.40 per BOE,
primarily due to increased production taxes attributable to
19
<PAGE>
Ocean Energy, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results Of Operations
higher commodity prices and increased workover expenses. The increase in
workover expenses is complementary to the Company's $50 million increase in
planned capital expenditures for 2000 in order to take advantage of new
opportunities caused by higher commodity prices.
The Company cautions that the revised 2000 estimates set forth above are
given as of the date hereof only based on currently available information, and
that the Company is not undertaking any obligations to update these estimates as
conditions change or other information becomes available.
Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, and in June 2000, the FASB issued SFAS No.
138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities, an amendment of FASB Statement No. 133. These statements establish
standards of accounting for and disclosures of derivative instruments and
hedging activities. These statements are effective for fiscal years beginning
after June 15, 2000. While the Company has not yet completed its evaluation of
the impact of these statements, the Company does not believe the statements will
have a significant impact on its results of operations as it expects that its
current derivative activities would continue to qualify under hedge accounting.
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 capital expenditures,
earnings and competitive position.
Defined Terms
Natural gas is stated herein in thousand cubic feet ("Mcf"), million cubic
feet ("MMcf") or billion cubic feet ("Bcf"). Oil, condensate and natural gas
liquids ("NGL") are stated in barrels ("Bbl"), thousand barrels ("MBbl") or
million barrels ("MMBbl"). 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 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
20
<PAGE>
Ocean Energy, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results Of Operations
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 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.
21
<PAGE>
Ocean Energy, Inc.
Item 3. Quantitative and Qualitative Disclosures About Market Risks.
To mitigate a portion of its exposure to fluctuations in commodity prices,
the Company has entered into various derivative financial instruments for its
oil and natural gas production for the remainder of 2000 and for 2001. See Note
4 to the Company's Consolidated Financial Statements for a discussion of hedging
activities during the first six months of 2000. To calculate the potential
effect of the derivative financial instruments on revenues, the Company applies
the average NYMEX oil and gas strip prices for the remainder of 2000 and for
2001 to the quantity of the Company's oil and gas production hedged as of June
30, 2000. Using this calculation, the estimated potential effect of the
derivative financial instruments is an approximate $76 million net decrease in
revenues for the remainder of the year 2000 and an approximate $13 million net
decrease for 2001. Assuming a 10% decrease in oil and gas prices, the potential
effect of the derivative financial instruments would be an approximate $44
million decrease in revenues for the remainder of 2000 and an approximate $6
million decrease for 2001. Assuming a 10% increase in oil and gas prices, the
potential effect of the derivative financial instruments would be an
approximate $102 million decrease in revenues for the remainder of 2000 and an
approximate $20 million decrease for 2001.
The Company also evaluated the potential effect that reasonably possible
near term changes in interest rates may have on the Company's Credit Facilities.
Debt outstanding under the Credit Facilities represents approximately 18% of the
Company's total debt as of June 30, 2000 and is the only floating rate debt.
Based upon the balances outstanding as of June 30, 2000 and assuming no changes
in the amount of debt outstanding, the potential effect on annual interest
expense of a 10% increase or decrease in interest rates is approximately $2
million.
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Shareholders of the Company held on May 10, 2000,
the shareholders elected certain directors to serve until the 2003 Annual
Meeting of Shareholders and ratified the appointment of KPMG LLP as independent
auditors of the Company for the fiscal year ended December 31, 2000.
Votes cast were as follows:
<TABLE>
<CAPTION>
Broker
For Against Non-Votes Abstained
--------------- --------------- --------------- -------------
<S> <C> <C> <C> <C>
Election as a Director of the Company of:
J. Evans Attwell....................... 133,474,303 - - 1,309,344
Barry J. Galt.......................... 133,014,688 - - 1,768,959
Elvis L. Mason......................... 133,072,707 - - 1,710,940
David K. Newbigging.................... 133,815,287 - - 968,360
Dee S. Osborne......................... 133,895,146 - - 888,501
Ratification of Selection of KPMG LLP
as Independent Auditors For 2000....... 134,477,189 148,461 - 157,997
</TABLE>
22
<PAGE>
Ocean Energy, Inc.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
<S> <C>
4.1 Amendment No. 4 to the Amended and Restated Rights Agreement, dated as of May 19, 2000, by and
between the Company and Fleet National Bank (f/k/a BankBoston, N.A.) incorporated by reference to
the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on May
22, 2000.
* 27.1 Financial Data Schedule.
</TABLE>
* Filed herewith.
(b) Reports on Form 8-K:
On May 22, 2000, the Company filed a Current Report on Form 8-K dated May
19, 2000 with respect to the Amendment and Restatement of the Company's Rights
Agreement. 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: August 1, 2000
By: /s/Gordon L. McConnell
Gordon L. McConnell
Vice President and Controller
(Principal Accounting Officer)
Date: August 1, 2000
23
<PAGE>
Ocean Energy, Inc.
Exhibit Index
<TABLE>
<CAPTION>
<S> <C>
4.1 Amendment No. 4 to the Amended and Restated Rights Agreement, dated as of May 19, 2000, by and
between the Company and Fleet National Bank (f/k/a BankBoston, N.A.) incorporated by reference to
the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on May
22, 2000.
* 27.1 Financial Data Schedule.
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* Filed herewith.
