<PAGE>
===============================================================================
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 quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
Commission File Number 1-13515
FOREST OIL CORPORATION
(Exact name of registrant as specified in its charter)
New York 25-0484900
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1600 Broadway
Suite 2200
Denver, Colorado 80202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 812-1400
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Number of Shares
Outstanding
Title of Class of Common Stock July 31, 1998
- ------------------------------ ----------------
Common Stock, Par Value $.10 Per Share 43,564,623
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<PAGE>
PART I. FINANCIAL INFORMATION
FOREST OIL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---------- ------------
(In Thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 13,428 18,191
Accounts receivable 59,960 65,720
Other current assets 5,512 4,649
---------- --------
Total current assets 78,900 88,560
Net property and equipment, at cost 854,963 521,293
Goodwill and other intangible assets, net 24,613 26,243
Other assets 13,392 11,686
---------- --------
$ 971,868 647,782
---------- --------
---------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 60,573 59,719
Accrued interest 10,107 4,152
Other current liabilities 2,103 2,627
---------- --------
Total current liabilities 72,783 66,498
Long-term debt 488,195 254,760
Other liabilities 16,355 17,020
Deferred income taxes 34,564 34,767
Minority interest 12,452 12,910
Shareholders' equity:
Common stock 4,356 3,632
Capital surplus 574,090 488,908
Accumulated deficit (222,671) (223,460)
Accumulated other comprehensive loss (8,256) (7,253)
---------- --------
Total shareholders' equity 347,519 261,827
---------- --------
$ 971,868 647,782
---------- --------
---------- --------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-1-
<PAGE>
FOREST OIL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF PRODUCTION AND OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------- ----------------------
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
-------- -------- -------- --------
(In Thousands Except Production and Per Share Amounts)
<S> <C> <C> <C> <C>
PRODUCTION
Natural gas (mmcf) 14,297 11,218 27,962 23,033
-------- -------- -------- --------
-------- -------- -------- --------
Oil, condensate and natural gas
liquids (thousands of barrels) 1,026 802 2,001 1,491
-------- -------- -------- --------
-------- -------- -------- --------
STATEMENTS OF CONSOLIDATED OPERATIONS
Revenue:
Marketing and processing $ 33,839 44,747 68,842 98,209
Oil and gas sales:
Gas 28,900 19,654 56,507 45,700
Oil, condensate and natural gas liquids 12,434 13,254 25,320 26,809
-------- -------- -------- --------
Total oil and gas sales 41,334 32,908 81,827 72,509
-------- -------- -------- --------
Total revenue 75,173 77,655 150,669 170,718
Expenses:
Marketing and processing 32,096 42,998 65,264 93,906
Oil and gas production 9,362 9,026 18,204 18,671
General and administrative 4,922 5,081 9,177 8,547
Depreciation and depletion 23,862 18,319 47,195 36,756
-------- -------- -------- --------
Total operating expenses 70,242 75,424 139,840 157,880
-------- -------- -------- --------
Earnings from operations 4,931 2,231 10,829 12,838
Other income and expense:
Other income, net (6,656) (807) (6,654) (1,650)
Interest expense 9,755 5,259 18,261 10,033
Minority interest in earnings (loss) of subsidiary (48) 59 (128) 161
Translation loss on subordinated debt 4,186 - 3,162 -
-------- -------- -------- --------
Total other income and expense 7,237 4,511 14,641 8,544
-------- -------- -------- --------
Earnings (loss) before income taxes and extraordinary item (2,306) (2,280) (3,812) 4,294
Income tax expense (benefit):
Current 603 (92) 949 1,273
Deferred 1,495 1,008 646 1,695
-------- -------- -------- --------
2,098 916 1,595 2,968
-------- -------- -------- --------
Earnings (loss) before extraordinary item (4,404) (3,196) (5,407) 1,326
-------- -------- -------- --------
Extraordinary item - gain on extinguishment of debt 6,196 - 6,196 -
-------- -------- -------- --------
Net earnings (loss) $ 1,792 (3,196) 789 1,326
-------- -------- -------- --------
-------- -------- -------- --------
Earnings (loss) attributable to common stock $ 1,792 (3,196) 789 1,137
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average number of common shares outstanding 37,721 32,578 37,350 32,169
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
continued on next page
See accompanying notes to condensed consolidated financial statements.
-2-
<PAGE>
FOREST OIL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF PRODUCTION AND OPERATIONS
(UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------- ----------------------
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
-------- -------- -------- --------
(In Thousands Except Production and Per Share Amounts)
<S> <C> <C> <C> <C>
Basic earnings (loss) per common share:
Earnings (loss) attributable to common stock
before extraordinary item $ (.11) (.10) (.14) .04
Extraordinary item - gain on extinguishment of debt .16 - .16 -
-------- -------- -------- --------
Earnings (loss) attributable to common stock $ .05 (.10) .02 .04
-------- -------- -------- --------
-------- -------- -------- --------
Diluted earnings (loss) per common share:
Earnings (loss) attributable to common stock
before extraordinary item $ (.11) (.10) (.14) .03
Extraordinary item - gain on extinguishment of debt .16 - .16 -
-------- -------- -------- --------
Earnings (loss) attributable to common stock $ .05 (.10) .02 .03
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-3-
<PAGE>
FOREST OIL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
------------------------
June 30, June 30,
1998 1997
---------- ----------
(In Thousands)
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) before preferred dividend and extraordinary item $ (5,407) 1,326
Adjustments to reconcile net earnings (loss) to net cash provided by
operating activities:
Depreciation and depletion 47,195 36,756
Translation loss on subordinated debt 3,162 -
Amortization of deferred debt costs 420 349
Deferred income tax expense 646 1,695
Minority interest in earnings (loss) of subsidiary (128) 161
Other, net 360 (63)
Decrease in accounts receivable 9,593 6,871
(Increase) decrease in other current assets (5,513) 103
Increase (decrease) in accounts payable 1,370 (9,799)
Increase (decrease) in accrued interest and other
current liabilities 5,381 (8,532)
Settlement of volumetric production payment obligation - (6,832)
Amortization of deferred revenue - (1,524)
---------- ----------
Net cash provided by operating activities 57,079 20,511
Cash flows from investing activities:
Capital expenditures for property and equipment (389,422) (81,877)
Less stock issued for acquisition 81,784 -
---------- ----------
(307,638) (81,877)
Proceeds from sales of assets 4,411 8,096
Increase in other assets, net (1,554) (377)
---------- ----------
Net cash used by investing activities (304,781) (74,158)
Cash flows from financing activities:
Proceeds from bank borrowings 380,504 101,136
Repayments of bank borrowings (211,652) (46,464)
Repayments of production payment obligation (58) (1,716)
Issuance of 8 3/4% senior subordinated notes,
net of issuance costs 74,620 -
Proceeds from exercise of options - 1,589
Costs of preferred stock conversion - (800)
Payment of preferred stock dividends - (540)
Decrease in other liabilities, net (494) (2,517)
---------- ----------
Net cash provided by financing activities 242,920 50,688
Effect of exchange rate changes on cash 19 (52)
---------- ----------
Net decrease in cash and cash equivalents (4,763) (3,011)
Cash and cash equivalents at beginning of period 18,191 8,626
---------- ----------
Cash and cash equivalents at end of period $ 13,428 5,615
---------- ----------
---------- ----------
Cash paid during the period for:
Interest $ 12,051 9,406
---------- ----------
---------- ----------
Income taxes $ 1,312 4,288
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-4-
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
(1) BASIS OF PRESENTATION
The condensed consolidated financial statements included herein are
unaudited. In the opinion of management, all adjustments, consisting of normal
recurring accruals, have been made which are necessary for a fair presentation
of the financial position of the Company at June 30, 1998 and the results of
operations for the six month periods ended June 30, 1998 and 1997. Quarterly
results are not necessarily indicative of expected annual results because of the
impact of fluctuations in prices received for liquids (oil, condensate and
natural gas liquids) and natural gas and other factors. For a more complete
understanding of the Company's operations and financial position, reference is
made to the consolidated financial statements of the Company, and related notes
thereto, filed with the Company's annual report on Form 10-K for the year ended
December 31, 1997, previously filed with the Securities and Exchange Commission.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, Reporting Comprehensive Income
(Statement No. 130), effective for years beginning after December 15, 1997.
Statement No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. The Company adopted Statement No. 130 effective
January 1, 1998 and, accordingly, has reported accumulated other
comprehensive loss as a separate line item in the shareholders' equity
section of its condensed consolidated balance sheets at June 30, 1998 and
December 31, 1997. The components of total comprehensive income (loss) for
the periods consist of net earnings, foreign currency translation and changes
in the unfunded pension liability and are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------- ----------------------
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
-------- ------- ------- ------
(In Thousands)
<S> <C> <C> <C> <C>
Net earnings (loss) $ 1,792 (3,196) 789 1,326
Other comprehensive
earnings (loss) (1,239) 313 (1,003) (1,769)
------- ------- ------- ------
Total comprehensive
earnings (loss) $ 553 (2,883) (214) (443)
------- ------ ------- -------
------- ------ ------- -------
</TABLE>
(2) ACQUISITIONS
On February 3, 1998 the Company purchased 13 oil and gas properties
located onshore Louisiana (the Louisiana Acquisition) for total consideration
of approximately $230,776,000. The consideration consisted of 1,000,000
shares of the Company's Common Stock and approximately $216,557,000 in cash,
funded primarily from the Company's bank credit facility and the issuance of
$75,000,000 principal amount of 8 3/4% subordinated notes (see Note 6).
Estimated proved reserves acquired in the Louisiana Acquisition were
approximately 186 BCFE.
-5-
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
(2) ACQUISITIONS, CONTINUED
On June 25 and 29, 1998, in two separate closings, the Company purchased
certain oil and gas properties from The Anschutz Corporation (Anschutz) (the
Anschutz Acquisition). Total consideration consisted of 5,950,000 shares of the
Company's Common Stock valued at $67,565,000. The value of the stock was
determined by reference to the quoted market price during the period two days
preceding and two days following the announcement of the agreement in principle,
less a discount to reflect the size of the block of shares to be issued and
estimated brokerage fees on ultimate disposition of the shares. The properties
include an interest in The Anschutz Ranch field which is located in Utah and
Wyoming, prospects and producing acreage in Canada, and interests in projects in
various other countries. There are approximately 80 BCFE of estimated proved
reserves associated with the Anschutz Acquisition.
(3) SUBSIDIARIES
SAXON PETROLEUM INC. On December 20, 1995 the Company purchased a 56%
economic (49% voting) interest in Saxon Petroleum Inc. (Saxon) for approximately
$22,000,000. Saxon is a Canadian exploration and production company with
headquarters in Calgary, Alberta and operations concentrated in western Alberta.
Since Forest had majority voting control over Saxon as a result of the voting
common shares owned and proxies held, it accounted for Saxon as a consolidated
subsidiary from the date of its acquisition. During 1997 Forest converted
preferred shares of Saxon into common shares and acquired additional common
shares of Saxon pursuant to an equity participation agreement. These
transactions increased Forest's ownership in Saxon to a 65% economic (49%
voting) interest.
On June 25, 1998 Forest announced that it agreed to acquire all of the
approximately 49.8 million outstanding common shares of Saxon not previously
owned by Forest in exchange for Forest Common Stock on the basis of one share
of Forest Common Stock for each 47 common shares of Saxon. The transaction
was approved by the minority shareholders of Saxon on August 7, 1998 and by
the Alberta Court of Queen's Bench on August 10, 1998. As a result of this
acquisition, common shares outstanding will increase by 1,081,256 shares and
the minority interest will be eliminated.
CANADIAN FOREST OIL LTD. On January 31, 1996 the Company acquired ATCOR
Resources Ltd. of Calgary, Alberta. The exploration and production business
of ATCOR was renamed Canadian Forest Oil Ltd. (Canadian Forest). As part of
the Canadian Forest acquisition, Forest also acquired ATCOR's natural gas
marketing business, which was renamed Producers Marketing Ltd. (ProMark).
Canadian Forest is the issuer of the Company's 8 3/4% Senior Subordinated
Notes (the 8 3/4% Notes) (See Note 6). The Company has not presented separate
financial statements and other disclosures concerning Canadian Forest because
management has determined that such information is not material to holders of
the 8 3/4% Notes; however, the following summarized consolidated financial
information is being provided for Canadian Forest as of June 30, 1998 and
December 31, 1997 and for the six months ended June 30, 1998 and 1997:
-6-
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
(3) SUBSIDIARIES, CONTINUED
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---------- -----------
(In Thousands)
<S> <C> <C>
CANADIAN FOREST OIL LTD.
Summarized Consolidated Balance Sheet Information:
ASSETS
Current assets $ 29,520 35,630
Note receivable from parent 75,060 -
Property and equipment, net 128,239 117,394
Goodwill and other intangible assets, net 24,613 26,243
Other assets 3,699 3,320
---------- -------
$ 261,131 182,587
---------- -------
---------- -------
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
Current liabilities $ 21,101 24,029
Credit facility 13,626 -
8 3/4% Senior Subordinated Notes 199,974 124,690
Other liabilities 350 396
Deferred income taxes 34,309 36,282
Shareholder's equity (deficit) (8,229) (2,810)
---------- -------
$ 261,131 182,587
---------- -------
---------- -------
Six Months Ended
-----------------------
June 30, June 30,
1998 1997
---------- ----------
(In Thousands)
<S> <C> <C>
Summarized Consolidated Statements of Operations:
Revenue $ 78,179 117,993
---------- -------
---------- -------
Earnings (loss) before income taxes $ (5,815) 3,875
---------- -------
---------- -------
Net earnings (loss) $ (5,529) 1,443
---------- -------
---------- -------
</TABLE>
(4) NET PROPERTY AND EQUIPMENT
Components of net property and equipment are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- -----------
(In Thousands)
<S> <C> <C>
Oil and gas properties $ 1,972,473 1,594,443
Buildings, transportation and
other equipment 11,665 11,157
----------- ----------
1,984,138 1,605,600
Less accumulated depreciation,
depletion and valuation allowance (1,129,175) (1,084,307)
----------- ----------
$ 854,963 521,293
----------- ----------
----------- ----------
</TABLE>
-7-
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
(5) GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets recorded in the acquisition of ProMark
consist of the following:
<TABLE>
June 30, December 31,
1998 1997
------- ------------
(In Thousands)
<S> <C> <C>
Goodwill $15,619 16,029
Gas marketing contracts 13,626 13,986
------- ------
29,245 30,015
Less accumulated amortization (4,632) (3,772)
------- ------
$24,613 26,243
------- ------
------- ------
</TABLE>
Goodwill is being amortized on a straight line basis over 20 years. The
amount attributed to the value of gas marketing contracts acquired is being
amortized on a straight line basis over the average life of such contracts of 12
years.
(6) LONG-TERM DEBT
Components of long-term debt are as follows:
<TABLE>
June 30, December 31,
1998 1997
------- ------------
(In Thousands)
<S> <C> <C>
U.S. Credit Facility $239,700 85,550
Canadian Credit Facility 13,626 -
Saxon Credit Facility 26,219 25,840
Production payment obligation - 10,004
11 1/4% Senior Subordinated Notes 8,676 8,676
8 3/4% Senior Subordinated Notes 199,974 124,690
-------- -------
$488,195 254,760
-------- -------
-------- -------
</TABLE>
-8-
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
(6) LONG-TERM DEBT, CONTINUED
On September 29, 1997 Canadian Forest completed an offering of $125,000,000
of 8 3/4% Notes which were sold at 99.745% and which are guaranteed on a senior
subordinated basis by the Company. A portion of the proceeds was used to fund a
tender offer pursuant to which $90,233,000 aggregate principal amount of 11 1/4%
Senior Subordinated Notes was tendered by the holders. A portion of the
proceeds was used to repay the outstanding balance under the Canadian Credit
Facility and the remainder was used for working capital and to fund capital
expenditures. The remaining outstanding principal amount of 11 1/4% Notes is
callable on or after September 1, 1998 at 105.688% of the principal amount.
On February 2, 1998 Canadian Forest issued $75,000,000 principal amount
of 8 3/4% subordinated notes, the net proceeds of which were used to provide
funds for the Louisiana Acquisition. The notes issued in 1998 were
subsequently exchanged for notes of the same series of 8 3/4% Notes that were
issued in September 1997.
The Company is required to recognize foreign currency translation gains or
losses related to its 8 3/4% Notes because the debt is denominated in U.S.
dollars and the functional currency of Canadian Forest is the Canadian dollar.
As a result of the increase in the value of the Canadian dollar relative to the
U.S. dollar during the first six months of 1998, the Company reported a noncash
translation loss of approximately $3,162,000.
On June 5, 1998 the Company settled its remaining nonrecourse production
payment obligation for 271,214 shares of the Company's Common Stock. The
stock was valued at $3,750,000 based upon the weighted average trading price
for the 10 day trading period preceding the closing date. The obligation,
which originated in May 1992, had a remaining book value of approximately
$9,966,000. As a result of this settlement, the Company recorded an
extraordinary gain on extinguishment of debt of $6,196,000 (net of related
expenses) in the second quarter of 1998.
(7) EARNINGS (Loss) PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings per Share (Statement No.
128) effective for periods ending after December 15, 1997. Statement No. 128
changed the computation, presentation and disclosure requirements for earnings
per share for entities with publicly held common stock or potential common
stock. Under such requirements the Company is required to present both basic
earnings per share and diluted earnings per share. Basic earnings (loss) per
share is computed by dividing net earnings (loss) attributable to common stock
by the weighted average number of common shares outstanding during each period,
excluding treasury shares.
Diluted earnings (loss) per share is computed by adjusting the average
number of common shares outstanding for the dilutive effect, if any, of
convertible preferred stock, stock options and warrants. The effect of
potentially dilutive securities is based on earnings (loss) before extraordinary
items.
The Company adopted the provisions of Statement No. 128 as of December 31,
1997. As prescribed by Statement No. 128, the Company has restated prior
periods' earnings per share of common stock, including interim earnings per
share of common stock.
-9-
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
(7) EARNINGS (Loss) PER SHARE, CONTINUED
The following sets forth the calculation of basic and diluted earnings per
share:
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1998(1) 1997(2) 1998(1) 1997(3)
------- ------- ------- -------
(In Thousands Except Per Share Amounts)
<S> <C> <C> <C> <C>
Basic earnings (loss) per share:
Net earnings (loss) $1,792 (3,196) 789 1,326
Less: Preferred stock dividends - - - (189)
------ ------ ------ ------
Earnings (loss) available to common stockholders $1,792 (3,196) 789 1,137
------ ------ ------ ------
------ ------ ------ ------
Weighted average common shares outstanding 37,721 32,578 37,350 32,169
Basic earnings (loss) per share $.05 (.10) .02 .04
------ ------ ------ ------
------ ------ ------ ------
Diluted earnings (loss) per share:
Weighted average common shares outstanding 37,721 32,578 37,350 32,169
Add dilutive effects of:
$.75 Convertible preferred stock - - - 656
Employee options - - - 178
Anschutz warrants - - - 1,007
------ ------ ------ ------
Weighted average common shares outstanding
including the effects of dilutive securities 37,721 32,578 37,350 34,010
------ ------ ------ ------
------ ------ ------ ------
Diluted earnings (loss) per share $.05 (.10) .02 .03
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
(1) At June 30, 1998, options to purchase 1,915,000 shares of common stock at
prices ranging from $11.25 to $25.00 per share were outstanding, but were
not included in the computation of diluted loss per share because the
effect of the assumed exercise of these stock options as of the beginning
of the period was antidilutive. These options expire at various dates
through 2007.
(2) At June 30, 1997, options to purchase 1,468,000 shares of common stock at
prices ranging from $11.25 to $25.00 per share were outstanding, but were
not included in the computation of diluted earnings per share for the
quarter ended June 30, 1997 because the effect of the assumed exercise of
these stock options as of the beginning of the period was antidilutive.
These options expire at various dates through 2007.
(3) At June 30, 1997, options to purchase 148,000 shares of common stock at
prices ranging from $14.87 to $25.00 per share were outstanding, but were
not included in the computation of diluted earnings per share because the
exercise prices were greater than the average market price of the common
shares. These options expire at various dates from 2001 to 2007.
-10-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's Consolidated Financial Statements and Notes thereto.
FORWARD-LOOKING STATEMENTS
Certain of the statements set forth in this Form 10-Q, such as the
statements regarding planned capital expenditures and the availability of
capital resources to fund capital expenditures, are forward-looking and are
based upon the Company's current belief as to the outcome and timing of such
future events. There are numerous risks and uncertainties that can affect the
outcome and timing of such events, including many factors which are beyond the
control of the Company. Should one or more of these risks or uncertainties
occur, or should underlying assumptions prove incorrect, the Company's actual
results and plans for 1998 and beyond could differ materially from those
expressed in the forward-looking statements. For a description of risks
affecting the Company's business, see "Item 1 - Business - Forward-Looking
Statements and Risk Factors" in the Company's 1997 Annual Report on Form 10-K.
RESULTS OF OPERATIONS FOR THE SECOND QUARTER OF 1998
Net earnings for the second quarter of 1998 were $1,792,000 or $.05 per
basic and diluted common share compared to a net loss of $3,196,000 or $.10
per basic and diluted common share in the second quarter of 1997. The 1998
period included an extraordinary gain on the extinguishment of debt of
$6,196,000 as well as a noncash loss on foreign currency translation of
$4,186,000 related to subordinated debt issued by Canadian Forest. Exclusive
of the extraordinary gain and the loss on the foreign currency translation, the
Company's net loss would have been $218,000 for the second quarter of 1998.
Higher production, higher natural gas sales prices and $3,657,000 of net
income related to the settlement of a Canadian gas purchase contract were
more than offset by lower liquids sales prices and higher interest and
depletion expense.
The Company's marketing and processing revenue decreased by 24% to
$33,839,000 in the second quarter of 1998 from $44,747,000 in the second quarter
of 1997 and the related marketing and processing expense decreased by 25% to
$32,096,000 in the 1998 quarter from $42,998,000 in the previous year. The
gross margin reported for marketing and processing activities decreased
slightly to $1,743,000 in the second quarter of 1998 from $1,749,000 in the
second quarter of 1997.
The Company's oil and gas sales revenue increased by 26% to $41,334,000 in
the second quarter of 1998 from $32,908,000 in the second quarter of 1997.
Production volumes for natural gas and liquids (consisting of oil, condensate
and natural gas liquids) in the second quarter of 1998 increased 27% and 28%,
respectively, from the comparable 1997 period. The increases in production are
primarily due to discoveries in the Gulf of Mexico being brought onto production
and production attributable to properties purchased in the Louisiana
Acquisition. The average sales price received for natural gas in the second
quarter of 1998 increased 15% compared to the average sales price received in
the corresponding 1997 period. The average sales price received by the Company
for its liquids production during the second quarter of 1998 decreased 27%
compared to the average sales price received during the comparable 1997 period.
Oil and gas production expense of $9,362,000 in the second quarter of 1998
increased 4% from $9,026,000 in the comparable period of 1997. On an MCFE basis
(MCFE means thousands of cubic feet of natural gas equivalents, using conversion
ratio of one barrel of oil to six MCF of natural gas), production expense
decreased approximately 18% in the second quarter of 1998 to $.46 per MCFE from
$.56 MCFE in the second quarter of 1997. The decrease in the per-unit rate is
due primarily to lower per-unit costs related to the properties acquired in the
Louisiana Acquisition as well as fixed costs of offshore production operations
being spread over a larger production base.
-11-
<PAGE>
The following tables set forth production volumes, average sales prices and
production expenses during the periods as follows:
<TABLE>
Three Months Ended June 30, 1998
--------------------------------------------------------------
Offshore Onshore
Gulf of Gulf Total Total
Mexico Coast Western U.S. Canada Company
-------- ------- ------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
NATURAL GAS
Production (MMCF) 5,972 3,566 1,352 10,890 3,407 14,297
Sales price received (per MCF) $ 2.24 2.29 2.22 2.26 1.24 2.01
Effects of energy swaps (per MCF)(1) (.02) .08 - .01 (.01) .01
------ ----- ----- ------ ----- ------
Average sales price (per MCF) $ 2.22 2.37 2.22 2.27 1.23 2.02
LIQUIDS
Oil and condensate:
Production (MBBLS) 225 227 50 502 346 848
Sales price received (per BBL) $11.88 13.12 13.30 12.59 11.28 12.06
Effects of energy swaps (per BBL)(1) 1.15 - - .51 1.66 .98
------ ----- ----- ------ ----- ------
Average sales price (per BBL) $13.03 13.12 13.30 13.10 12.94 13.04
Natural gas liquids:
Production (MBBLS) - 33 53 86 92 178
Average sales price (per BBL) $ - 8.73 7.06 7.70 7.80 7.75
Total liquids production (MBBLS) 225 260 103 588 438 1,026
Average liquids sales price (per BBL) $13.03 12.57 10.09 12.31 11.86 12.12
TOTAL PRODUCTION:
Production volumes (MMCFE) 7,322 5,126 1,970 14,418 6,035 20,453
Average sales price (per MCFE) $ 2.22 2.29 2.05 2.22 1.55 2.02
Operating expense (per MCFE) .42 .49 .52 .46 .46 .46
------ ----- ----- ------ ----- ------
Netback (per MCFE) $ 1.80 1.80 1.53 1.76 1.09 1.56
------ ----- ----- ------ ----- ------
------ ----- ----- ------ ----- ------
</TABLE>
(1) Energy swaps were entered into to hedge the price of spot market volumes
against price fluctuations. Hedged natural gas volumes were 7,430 MMCF in
the three months ended June 30, 1998. Hedged oil and condensate volumes
were 136,000 barrels in the three months ended June 30, 1998. The
aggregate net gain under energy swap agreements was $939,000 for the period
and was accounted for as an increase to oil and gas sales.
-12-
<PAGE>
<TABLE>
Three Months Ended June 30, 1997
--------------------------------------------------------------
Offshore Onshore
Gulf of Gulf Total Total
Mexico Coast Western U.S. Canada Company
-------- ------- ------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
NATURAL GAS
Production (MMCF) 5,592 1,283 717 7,592 3,626 11,218
Sales price received (per MCF) $ 2.07 1.87 1.85 2.01 1.20 1.75
Effects of energy swaps (per MCF)(1) - - - - .01 -
------ ----- ----- ----- ----- ------
Average sales price (per MCF) $ 2.07 1.87 1.85 2.01 1.21 1.75
LIQUIDS
Oil and condensate:
Production (MBBLS) 200 24 25 249 412 661
Sales price received (per BBL) $17.12 20.00 18.24 17.51 17.96 17.80
Effects of energy swaps (per BBL)(1) .05 - - .04 .02 .02
------ ----- ----- ----- ----- ------
Average sales price (per BBL) $17.17 20.00 18.24 17.55 17.98 17.82
Natural gas liquids:
Production (MBBLS) - 38 2 40 101 141
Average sales price (per BBL) $ - 7.11 12.00 7.38 11.71 10.48
Total liquids production (MBBLS) 200 62 27 289 513 802
Average liquids sales price (per BBL) $17.17 12.10 17.78 16.14 16.74 16.53
TOTAL PRODUCTION
Production volumes (MMCFE) 6,792 1,655 879 9,326 6,704 16,030
Average sales price (per MCFE) $ 2.21 1.90 2.05 2.14 1.94 2.05
Operating expense (per MCFE) .48 .57 .95 .54 .60 .56
------ ----- ----- ----- ----- ------
Netback (per MCFE) $ 1.73 1.33 1.10 1.60 1.34 1.49
------ ----- ----- ----- ----- ------
------ ----- ----- ----- ----- ------
</TABLE>
(1) Energy swaps were entered into to hedge the price of spot market volumes
against price fluctuations. Hedged natural gas volumes were 3,110 MMCF in
the three months ended June 30, 1997. Hedged oil and condensate volumes
were 233,000 barrels in the three months ended June 30, 1997. The
aggregate gain under energy swap agreements was $60,000 for the period and
was accounted for as an increase to oil and gas sales.
-13-
<PAGE>
General and administrative expense decreased slightly to $4,922,000 in
the second quarter of 1998 compared to $5,081,000 in the comparable period of
1997. Total overhead costs (capitalized and expensed general and
administrative costs) of $7,023,000 in the second quarter of 1998 increased
slightly compared to $6,962,000 in the comparable period of 1997.
Depreciation and depletion expense increased 30% to $23,862,000 in the
second quarter of 1998 from $18,319,000 in the second quarter of 1997 due to
increased production and a higher per-unit rate. On a per-unit basis,
depletion expense was approximately $1.13 per MCFE in the second quarter of
1998 compared to $1.09 per MCFE in the corresponding 1997 period. The
increase in per-unit depletion expense results primarily from higher
development costs in the U.S. due to increased costs for services.
Other income was $6,656,000 in the second quarter of 1998 and was
$807,000 in the second quarter of 1997. The 1998 period includes $6,603,000
of income related to settlement of a Canadian gas contract.
Interest expense increased 85% to $9,755,000 in the second quarter of
1998 compared to $5,259,000 in the corresponding 1997 period, due primarily
to increased bank credit facility balances and interest on the 8 3/4% Notes,
offset partially by decreased interest on the aggregate outstanding principal
amount of 11 1/4% Notes.
Foreign currency translation loss of $4,186,000 in the second quarter of
1998 relates to translation of the 8 3/4% Notes issued by Canadian Forest,
and is attributable to the decrease in the value of the Canadian dollar
relative to the U.S. dollar during the period. The Company is required to
recognize the noncash foreign currency translation gains or losses related to
the 8 3/4% Notes because the debt is denominated in U.S. dollars and the
functional currency of Canadian Forest is the Canadian dollar.
The extraordinary gain on extinguishment of debt in the second quarter
of 1998 resulted from settlement of the Company's remaining nonrecourse
production payment obligation in exchange for 271,214 shares of the Company's
Common Stock valued at $3,750,000. The obligation had a remaining book value
of approximately $9,966,000. As a result of this settlement, the Company
recorded an extraordinary gain on extinguishment of debt of $6,196,000 (net
of related expenses).
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998
Net earnings for the first six months of 1998 were $789,000 or $.02 per
basic and diluted common share compared to net earnings of $1,326,000 or $.04
per basic common share and $.03 per diluted common share in the first six
months of 1997. The 1998 period included an extraordinary gain on
extinguishment of debt of $6,196,000 as well as a noncash loss on foreign
currency translation of $3,162,000 related to subordinated debt issued by
Canadian Forest. Exclusive of the extraordinary gain and the loss on foreign
currency translation, the Company's net loss for the first six months of 1998
would have been $2,245,000. Higher production, higher natural gas sales
prices and $3,657,000 of net income related to the settlement of a Canadian
gas purchase contract were more than offset by lower liquids sales prices and
higher interest and depletion expense.
The Company's marketing and processing revenue decreased 30% to
$68,842,000 in the first six months of 1998 from $98,209,000 in the first six
months of 1997. The related marketing and processing expense decreased by
31% to $65,264,000 in the 1998 period from $93,906,000 in the previous year.
The gross margin reported for marketing and processing activities of
$3,578,000 in the first six months of 1998 was lower than the gross margin of
$4,303,000 in the first six months of 1997. The decrease in the gross margin
was due to lower liquids prices realized at the Company's Canadian gas
processing facility.
The Company's oil and gas sales revenue increased by 13% to $81,827,000
in the first six months of 1998 compared to $72,509,000 in the first six
months of 1997. Production volumes for natural gas and liquids in the first
six months of 1998 increased 21% and 34%, respectively, from the comparable
1997 period. The increases in production are due primarily to discoveries in
the Gulf of Mexico being brought onto production and production attributable
to properties purchased in the Louisiana Acquisition. The average sales
price received for natural gas in the first six months of 1998 increased 2%
compared to the average sales price received in the corresponding 1997
period. The average sales price received for liquids during the first six
months of 1998 decreased 30% compared to the average sales price received
during the comparable 1997 period.
-14-
<PAGE>
Oil and gas production expense of $18,204,000 in the first six months of
1998 decreased 3% from $18,671,000 in the comparable period of 1997. The
1998 period includes additional production expense related to the properties
acquired in the Louisiana Acquisition, while the 1997 period included higher
transportation costs in Canada. On an MCFE basis, production expense
decreased approximately 21% in the first six months of 1998 to $.46 per MCFE
from $.58 per MCFE in the first six months of 1996. The decrease in the
per-unit rate is due primarily to lower per-unit costs related to the properties
acquired in the Louisiana Acquisition as well as fixed costs of offshore
production operations being spread over a larger production base.
The following tables set forth production volumes, average sales prices
and production expenses during the periods as follows:
<TABLE>
<CAPTION>
Six Months Ended June 30, 1998
---------------------------------------------------------------------------------
Offshore Onshore
Gulf of Gulf Total Total
Mexico Coast Western U.S. Canada Company
-------- ------- ------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
NATURAL GAS
Production (MMCF) 12,182 6,252 2,274 20,708 7,254 27,962
Sales price received (per MCF) $ 2.24 2.25 2.15 2.23 1.24 1.97
Effects of energy swaps (per MCF) (1) .08 .06 - .07 - .05
------- ----- ----- ------ ----- ------
Average sales price (per MCF) $ 2.32 2.31 2.15 2.30 1.24 2.02
LIQUIDS
Oil and condensate:
Production (MBBLS) 469 374 78 921 731 1,652
Sales price received (per BBL) $ 12.40 13.56 13.63 12.98 12.46 12.74
Effects of energy swaps (per BBL)(1) .99 - - .50 1.37 .89
------- ----- ----- ------ ----- ------
Average sales price (per BBL) $ 13.39 13.56 13.63 13.48 13.83 13.63
Natural gas liquids:
Production (MBBLS) - 72 56 128 221 349
Average sales price (per BBL) $ - 8.08 7.09 7.65 8.24 8.02
Total liquids production (MBBLS) 469 446 134 1,049 952 2,001
Average liquids sales price (per BBL) $ 13.39 12.68 10.90 12.77 12.53 12.65
TOTAL PRODUCTION:
Production volumes (MMCFE) 14,996 8,928 3,078 27,002 12,966 39,968
Average sales price (per MCFE) $ 2.30 2.25 2.06 2.26 1.61 2.05
Operating expense (per MCFE) .41 .49 .61 .46 .44 .46
------- ----- ----- ------ ----- ------
Netback (per MCFE) $ 1.89 1.76 1.45 1.80 1.17 1.59
------- ----- ----- ------ ----- ------
------- ----- ----- ------ ----- ------
</TABLE>
(1) Energy swaps were entered into to hedge the price of spot market volumes
against price fluctuations. Hedged natural gas volumes were 11,799 MMCF in
the six months ended June 30, 1998. Hedged oil and condensate volumes were
316,000 barrels in the six months ended June 30, 1998. The aggregate net
gain under energy swap agreements was $2,851,000 for the period and was
accounted for as an increase to oil and gas sales.
-15-
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 1997
---------------------------------------------------------------------------------
Offshore Onshore
Gulf of Gulf Total Total
Mexico Coast Western U.S. Canada Company
-------- ------- ------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
NATURAL GAS
Production (MMCF) 12,195 2,561 1,334 16,090 6,943 23,033
Sales price received (per MCF) $ 2.44 2.11 2.19 2.37 1.54 2.12
Effects of energy swaps (per MCF) (1) (.25) - - (.19) (.01) (.14)
------- ----- ----- ------ ----- ------
Average sales price (per MCF) $ 2.19 2.11 2.19 2.18 1.53 1.98
LIQUIDS
Oil and condensate:
Production (MBBLS) 398 46 54 498 748 1,246
Sales price received (per BBL) $ 19.03 21.52 20.41 19.41 19.32 19.35
Effects of energy swaps (per BBL)(1) (.76) - - (.61) (.35) (.45)
------- ----- ----- ------ ----- ------
Average sales price (per BBL) $ 18.27 21.52 20.41 18.80 18.97 18.90
Natural gas liquids:
Production (MBBLS) - 49 4 53 192 245
Average sales price (per BBL) $ - 8.51 14.00 9.00 14.46 13.28
Total liquids production (MBBLS) 398 95 58 551 940 1,491
Average liquids sales price (per BBL) $ 18.28 14.81 19.97 17.86 18.05 17.98
TOTAL PRODUCTION
Production volumes (MMCFE) 14,583 3,131 1,682 19,396 12,583 31,979
Average sales price (per MCFE) $ 2.33 2.18 2.43 2.32 2.20 2.26
Operating expense (per MCFE) .47 .67 1.03 .55 .64 .58
------- ----- ----- ------ ----- ------
Netback (per MCFE) $ 1.86 1.51 1.40 1.77 1.56 1.68
------- ----- ----- ------ ----- ------
------- ----- ----- ------ ----- ------
</TABLE>
(1) Energy swaps were entered into to hedge the price of spot market volumes
against price fluctuations. Hedged natural gas volumes were 5,919 MMCF in
the six months ended June 30, 1997. Hedged oil and condensate volumes were
437,000 barrels in the three months ended June 30, 1997. The aggregate net
loss under energy swap agreements was $3,741,000 for the period and was
accounted for as a reduction to oil and gas sales.
-16-
<PAGE>
General and administrative expense was $9,177,000 in the first six months
of 1998 compared to $8,547,000 in the comparable period of 1997. Total overhead
costs (capitalized and expensed general and administrative costs) were
$13,187,000 in the first six months of 1998 compared to $12,612,000 in the
comparable period of 1997. The increase in total overhead costs is attributable
primarily to higher employee related costs in the 1998 period as a result of
increased headcount and nonrecurring expenses incurred by Saxon as a result of
its decision to investigate strategic alternatives, offset partially by lower
insurance costs due to receipt of a premium refund.
The following table summarizes the total overhead costs incurred during the
periods:
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1998 1997 1998 1997
------ ----- ------ ------
(In Thousands)
<S> <C> <C> <C> <C>
Overhead costs capitalized $2,101 1,881 4,010 4,065
General and administrative costs
expensed (1) 4,922 5,081 9,177 8,547
------ ----- ------ ------
Total overhead costs $7,023 6,962 13,187 12,612
------ ----- ------ ------
------ ----- ------ ------
</TABLE>
(1) Includes $694,000 and $751,000 related to marketing and processing
operations for the three month periods ended June 30, 1998 and 1997,
respectively, and $1,441,000 and $1,462,000 for the six month periods ended
June 30, 1998 and 1997, respectively.
Depreciation and depletion expense increased 28% to $47,195,000 in the
first six months of 1998 from $36,756,000 in the first six months of 1997 due to
increased production and a higher per-unit rate. On a per-unit basis, depletion
expense was approximately $1.14 per MCFE in the first six months of 1998
compared to $1.09 per MCFE in the corresponding 1997 period. The increase in
per-unit depletion results primarily from higher development costs in the U.S.
due to increased costs for services. At June 30, 1998 the Company had
undeveloped properties with a cost basis of approximately $94,260,000 which were
excluded from depletion, compared to approximately $64,000,000 at June 30, 1997.
The increase is attributable primarily to undeveloped acreage acquired in the
Louisiana Acquisition.
The Company was not required to record a writedown of the carrying value of
its United States or Canadian oil and gas properties in the first half of 1998
or 1997. Writedowns of the full cost pools in the United States and Canada may
be required, however, if prices decline, undeveloped property values decrease,
estimated proved reserve volumes are revised downward or costs incurred in
exploration, development, or acquisition activities in the respective full cost
pools exceed the discounted future net cash flows from the additional reserves,
if any, attributable to each of the cost pools.
Other income was $6,654,000 in the first six months of 1998 and was
$1,650,000 in the first six months of 1997. The 1998 period includes $6,603,000
of income related to settlement of a Canadian gas purchase contract.
Interest expense increased 82% to $18,261,000 in the first six months of
1998 compared to $10,033,000 in the corresponding 1997 period, due primarily to
increased bank credit facility balances and interest on the 8 3/4% Notes, offset
partially by decreased interest on the aggregate outstanding principal amount of
11 1/4% Notes.
Foreign currency translation loss of $3,162,000 in the first six months
of 1998 relates to translation of the 8 3/4% Notes issued by Canadian Forest
and is attributable to the decrease in the value of the Canadian dollar
relative to the U.S. dollar during the period. The Company is required to
recognize the noncash foreign currency translation gains or losses related to
the 8 3/4% Notes because the debt is denominated in U.S. dollars and the
functional currency of Canadian Forest is the Canadian dollar.
-17-
<PAGE>
The extraordinary gain on extinguishment of debt in the first six months
of 1998 resulted from settlement of the Company's remaining nonrecourse
production payment obligation in exchange for 271,214 shares of the Company's
Common valued at $3,750,000. The obligation had a remaining book value of
approximately $9,966,000. As a result of this settlement, the Company
recorded an extraordinary gain on extinguishment of debt of $6,196,000 (net
of related expenses).
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically addressed its long-term liquidity needs
through the issuance of debt and equity securities, when market conditions
permit, and through the use of bank credit facilities and cash provided by
operating activities.
In 1998, the Company has completed several transactions that affected
its financial position.
On February 2, 1998 Canadian Forest issued $75,000,000 principal amount of
8 3/4% subordinated notes, the net proceeds of which were used to provide funds
for the Louisiana Acquisition described below. The notes issued in 1998 were
subsequently exchanged for notes of the same series of 8 3/4% Notes that were
issued in September 1997.
On February 3, 1998 the Company purchased 13 oil and gas properties located
onshore Louisiana for total consideration of approximately $230,776,000. The
consideration consisted of 1,000,000 shares of the Company's Common Stock and
approximately $216,557,000 in cash, funded primarily from the Company's bank
credit facility and the issuance of $75,000,000 principal amount of 8 3/4%
Notes. Estimated proved reserves acquired in the Louisiana Acquisition were
approximately 186 BCFE.
On June 5, 1998 the Company settled its only remaining nonrecourse
production payment obligation in exchange for 271,214 shares of the Company's
Common Stock. The stock was valued at $3,750,000 based upon the weighted
average trading price for the 10 day trading period preceding the closing
date. The obligation, which originated in May 1992, had a remaining book
value of approximately $9,966,000. As a result of this settlement, the
Company recorded an extraordinary gain on extinguishment of debt of $6,196,000
(net of related expenses) in the second quarter of 1998.
-18-
<PAGE>
On June 25 and 29, 1998, in two separate closings, the Company purchased
certain oil and gas properties from Anschutz. Total consideration consisted of
5,950,000 shares of the Company's Common Stock valued at $67,565,000. The value
of the stock was determined by reference to the quoted market price during the
period two days preceding and two days following the announcement of the
agreement in principle, less a discount to reflect the size of the block of
shares to be issued and estimated brokerage fees on ultimate disposition of the
shares. The properties include an interest in The Anschutz Ranch Field which is
located in Utah and Wyoming, prospects and producing acreage in Canada, and
interests in projects in various other countries. There are approximately 80
BCFE of estimated proved reserves associated with the Anschutz Acquisition.
Many of the factors which may affect the Company's future operating
performance and long-term liquidity are beyond the Company's control including,
but not limited to, oil and natural gas prices, governmental actions and taxes,
the availability and attractiveness of properties for acquisition, the adequacy
and attractiveness of financing and operational results. The Company continues
to examine alternative sources of long-term capital, including bank borrowings,
the issuance of debt instruments, the sale of common stock, preferred stock or
other equity securities of the Company, the issuance of net profits interests,
sales of non-strategic assets, prospects and technical information, or joint
venture financing. Availability of these sources of capital and, therefore, the
Company's ability to execute its operating strategy will depend upon a number of
factors, some of which are beyond the control of the Company. In addition, the
prices the Company receives for its future oil and natural gas production and
the level of the Company's production will significantly impact future operating
cash flows. No prediction can be made as to the prices the Company will receive
for its future oil and gas production. At August 1, 1998 the Company had 4
offshore Gulf of Mexico wells whose combined production represents approximately
17% of the Company's consolidated daily deliverability. The Company's
production, revenue and cash flow could be adversely affected if production from
these properties decreases to a significant degree.
BANK CREDIT FACILITIES. At December 31, 1997 the Company and its
subsidiaries, Canadian Forest and ProMark, had a $250,000,000 global credit
facility (the Global Credit Facility) which provided for a global borrowing base
of $130,000,000 through a syndicate of banks led by The Chase Manhattan Bank and
The Chase Manhattan Bank of Canada. The borrowing base is subject to
semi-annual redeterminations. Under the Global Credit Facility, the Company
can allocate the global borrowing base between the United States and Canada,
subject to specified limitations. Funds borrowed under the Global Credit
Facility can be used for general corporate purposes. Under the terms of the
Global Credit Facility, the Company, Canadian Forest and ProMark are subject
to certain covenants and financial tests, including restrictions or
requirements with respect to working capital, cash flow, additional debt,
liens, asset sales, investments, mergers, cash dividends and reporting
responsibilities.
The Global Credit Facility is secured by a lien on, and a security interest
in, a portion of the Company's U.S. proved oil and gas properties, related
assets, pledges of accounts receivable, and a pledge of 66% of the capital stock
of Canadian Forest. The Global Credit Facility is also indirectly secured by
substantially all of the assets of Canadian Forest.
On February 3, 1998, the Company amended the Global Credit Facility. The
primary purpose of the amendment was to increase the credit facility to
$300,000,000 and the borrowing base to $260,000,000 in order to finance the
Louisiana Acquisition. On June 29, 1998, the borrowing base was increased to
$300,000,000 after redetermination by the lenders. Under the amended Global
Credit Facility, the maximum credit facility allocations in the United States
and Canada are $275,000,000 and $25,000,000, respectively. The global borrowing
base is currently allocated $275,000,000 to the United States and $25,000,000 to
Canada.
At July 31, 1998, the outstanding borrowings under the Global Credit
Facility were $256,850,000. The Company has used the Global Credit Facility
for Letters of Credit in the amount of $233,000 in the United States and
$4,705,000 CDN in Canada.
In addition to the credit facilities described above, Saxon has a credit
facility with a borrowing base of $38,700,000 CDN. The borrowing base is
reduced by $600,000 CDN per quarter. The loan is subject to annual review and
has demand features; however, repayments are not required provided that
borrowings are not in excess of the borrowing base and Saxon complies with
other existing covenants. At July 31, 1998 the outstanding balance under
this facility was $37,941,000 CDN.
-19-
<PAGE>
WORKING CAPITAL. The Company had a working capital surplus of
approximately $6,117,000 at June 30, 1998 compared to approximately
$22,062,000 at December 31, 1997. The decrease in the surplus is due
primarily to cash used in the first six months of 1998 to fund capital
expenditures in the United States and Canada, higher interest due to the
issuance of the 8 3/4% Notes, and additional net drawdowns on the Company's
long-term bank credit facilities in 1998 to fund capital expenditures.
In the U.S., the Company periodically reports working capital deficits at
the end of a period. Such working capital deficits are principally the result
of accounts payable for capitalized exploration and development costs.
Settlement of these payables is funded by cash flow from the Company's
operations or, if necessary, by drawdowns on the Company's long-term bank credit
facilities. For cash management purposes, drawdowns on the credit facilities
are not made until the due dates of the payables.
CASH FLOW. Historically, one of the Company's primary sources of
capital has been net cash provided by operating activities. Net cash
provided by operating activities increased to $57,079,000 in the first six
months of 1998 compared to $20,511,000 in the first six months of 1997. The
1998 period included higher production volumes, proceeds related to
settlement of a Canadian gas purchase contract, higher interest due to the
issuance of the 8 3/4% Notes and additional drawdowns on the Company's
long-term bank credit facilities. The 1997 period included payment related
to settlement of volumetric production payments, cash used to reduce
current liabilities related to capital expenditures and gas marketing
activity at the end of 1996. The Company used $304,781,000 for investing
activities in the first six months of 1998 compared to $74,158,000 in the
first six months of 1997. The increased use in the 1998 period is due
primarily to the Louisiana Acquisition. Cash provided by financing
activities in the first six months of 1998 was $242,920,000 compared to
$50,688,000 in 1997. The 1998 period included approximately $75,000,000 of
proceeds from the issuance of the 8 3/4% Notes as well as net drawdowns on
the credit facilities of approximately $169,000,000.
CAPITAL EXPENDITURES. The Company's expenditures for property acquisition,
exploration and development for the first six months of 1998 and 1997 were as
follows:
<TABLE>
Six Months Ended
------------------------
June 30, June 30,
1998 1997
-------- ------
(In Thousands)
<S> <C> <C>
Property acquisition costs:
Proved properties $276,165 3,048
Undeveloped properties 43,933 3,087
-------- ------
320,098 6,135
Exploration costs:
Direct costs 34,419 44,181
Overhead capitalized 1,814 1,776
-------- ------
36,233 45,957
Development costs:
Direct costs 30,201 28,266
Overhead capitalized 2,196 2,289
-------- ------
32,397 30,555
-------- ------
$388,728 82,647
-------- ------
-------- ------
</TABLE>
The Company's budgeted 1998 expenditures for exploration and development
(exclusive of property acquisition costs) are approximately $130,000,000. The
Company intends to meet its 1998 capital expenditure financing requirements
using cash flows generated by operations, sales of non-strategic assets and
borrowings under
-20-
<PAGE>
existing lines of credit. There can be no assurance, however, that the
Company will have access to sufficient capital to meet its capital
requirements. The planned levels of capital expenditures could be reduced if
the Company experiences lower than anticipated net cash provided by
operations or other liquidity needs or could be increased if the Company
experiences increased cash flow or accesses additional sources of capital.
In addition, while the Company intends to continue a strategy of
acquiring reserves that meet its investment criteria, no assurance can be
given that the Company can locate or finance any property acquisitions.
INVESTMENT IN SAXON PETROLEUM INC. On June 25, 1998 Forest announced
that it agreed to acquire all of the approximately 49.8 million outstanding
common shares of Saxon not then owned by Forest in exchange for Forest Common
Stock on the basis of one share of Forest Common Stock for each 47 common
shares of Saxon. The transaction was approved by the minority shareholders
of Saxon on August 7, 1998 and by the Alberta Court of Queen's Bench on
August 10, 1998. As a result of this acquisition, common shares outstanding
will increase by 1,081,256 shares and the minority interest will be
eliminated.
LONG-TERM SALES CONTRACTS. A significant portion of Canadian Forest's
natural gas production is sold through the ProMark Netback Pool. At June 30,
1998 the ProMark Netback Pool had entered into fixed price contracts to sell
approximately 13.6 BCF of natural gas in 1998 at an average price of $1.83
CDN per MCF and approximately 5.4 BCF of natural gas in 1999 at an average
price of approximately $2.16 CDN per MCF. Canadian Forest, as one of the
producers in the ProMark Netback Pool, is obligated to deliver a portion of
this gas. In 1997 Canadian Forest supplied 27% of the gas for the Netback
Pool.
HEDGING PROGRAM. In addition to the volumes of natural gas and oil sold
under long-term sales contracts, the Company also uses energy swaps and other
financial agreements to hedge against the effects of fluctuations in the
sales prices for oil and natural gas produced. In a typical swap agreement,
the Company receives the difference between a fixed price per unit of
production and a price based on an agreed upon third-party index if the index
price is lower. If the index price is higher, the Company pays the
difference. The Company's current swaps are settled on a monthly basis. At
June 30, 1998 the Company had natural gas swaps for an aggregate of
approximately 50 BBTU (billion British Thermal Units) per day of natural gas
during the remainder of 1998 at fixed prices ranging from $1.18 per MMBTU
(million British Thermal Units) on an Alberta Energy Company "C" (AECO "C",
U.S. $) basis to $2.35 per MMBTU on a New York Mercantile Exchange (NYMEX)
basis and an aggregate of approximately 17 BBTU per day of natural gas during
1999 at fixed prices ranging from $1.59 per MMBTU (AECO "C", U.S. $ basis) to
$2.36 per MMBTU (NYMEX basis). The weighted average hedged price for natural
gas under such agreements is $2.15 and $2.02 per MMBTU in 1998 and 1999,
respectively. At June 30, 1998 the Company had oil swaps for an aggregate of
418 barrels per day of oil during the remainder of 1998 at fixed prices
ranging from $20.52 to $20.62 per barrel (NYMEX basis). The weighted average
hedged price for oil under such agreements is $20.55 per barrel.
Subsequent to June 30, 1998 the Company entered into a swap that hedges
4,741 MMBTU of Canadian natural gas per day from April 1999 through October
1999 at a fixed price of $1.62 per MMBTU (AECO "C" basis).
YEAR 2000 ISSUES. In 1996, the Company commenced a year 2000 date
conversion project. The year 2000 issue results from computer programs being
written using two digits (rather than four) to define the applicable year. As
a result, certain of the Company's programs that have time-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000.
This calculation could result in system failure or miscalculations. The
Company's project addresses the effects the year 2000 will have on its
software applications and analyzes upgrades and purchases that may be
required. The estimated cost of hardware and software upgrades and purchases
that may be required and the time required for implementation have not yet
been determined.
Management believes that a failure to complete its year 2000 compliance,
or a failure by parties with whom the Company has material relationships to
complete year 2000 compliance, could have a material adverse effect on the
Company's financial condition and results of operations. The Company
believes that it can provide the resources necessary to ensure year 2000
compliance prior to the year 2000. The Company also believes that a
sufficient number of suppliers exist if the Company's current suppliers are
delayed in their efforts to achieve year 2000 compliance.
RECENT ACCOUNTING PRONOUNCEMENTS. In June 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 131, Disclosures About Segments of an Enterprise and Related Information
(Statement No. 131), effective for years beginning after December 15, 1997.
Statement No. 131 establishes standards for reporting information about
operating segments and the methods by which such segments were determined.
The Company has not yet adopted Statement No. 131.
In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits (Statement No. 132),
effective for years beginning after December 15, 1997. Statement No. 132
revises employers' disclosures about pension and other postretirement benefit
plans. It does not change the measurement of recognition of those plans.
The Company will comply with the reporting and display requirements of this
statement when required.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (Statement No. 133), effective for fiscal
quarters of fiscal years beginning after June 15, 1999. Statement No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. The Company has not determined the impact Statement
No. 133 will have on its financial statements and believes that such
determination will not be meaningful until closer to the date of initial
adoption.
-21-
<PAGE>
PART II. OTHER INFORMATION
ITEM 2c. RECENT SALE OF UNREGISTERED SECURITIES
On February 3, 1998, the Company purchased oil and gas properties for
1,000,000 shares of Common Stock and cash. This transaction was exempt from
registration under the Securities Act of 1933 (the 33 Act) pursuant to
Section 4(2) of the 33 Act.
On June 5, 1998, the Company settled a production payment obligation for
271,214 shares of Common Stock. This transaction was exempt from
registration under the the 33 Act pursuant to Section 4(2) of the 33 Act.
On June 25 and 29, 1998 the Company purchased certain oil and gas
properties from Anschutz in exchange for an aggregate of 5,950,000 shares of
Common Stock. This transaction was exempt from registration under the the 33
Act pursuant to Section 4(2) of the 33 Act.
On August 10, 1998, the Company acquired the shares of Saxon not owned
by the Company for 1,081,256 shares of Common Stock. The transaction was
approved by the Alberta Court of Queen's Bench and was exempt from registration
under the 33 Act pursuant to Section 3(a)(10) of the 33 Act.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting held on June 25, 1998, the shareholders
of the Company (a) elected two (2) Class IV directors; (b) approved the
Anschutz Transaction; and (c) ratified the appointment of KPMG Peat Marwick
as independent auditors for the Company in 1998.
With respect to the election of the Class IV directors, votes for and
withheld with respect to each director are as follows:
<TABLE>
<S> <C>
Craig D. Slater
For 34,832,292 votes
Withheld 535,901 votes
Cortlandt S. Dietler
For 35,179,814 votes
Withheld 188,379 votes
</TABLE>
In all such cases, there were no broker non-votes.
The terms of the following directors continued after the meeting:
Philip F. Anschutz, Robert S. Boswell, William L. Britton, William L. Dorn,
Jordan L. Haines, James H. Lee, J. J. Simmons, III, Drake S. Tempest, and
Michael B. Yanney.
19,729,469 votes were cast in favor of the Anschutz Transaction.
1,266,224 votes were cast against the transaction and 48,021 votes abstained.
There were 14,324,479 broker non-votes.
With respect to the ratification of the appointment of KPMG Peat Marwick
as independent auditors for the Company for 1998, 35,337,044 votes were cast
in favor of such ratification, 13,216 votes were cast against such
ratification, 17,933 votes abstained from voting and there were no broker
non-votes.
Under New York law and the Company's By-laws, abstentions and broker
non-votes have no effect on the outcome of the vote on any of the matters
considered at the Annual Meeting. A broker non-vote occurs if a broker or
other nominee does not have discretionary authority and has not received
instructions with respect to a particular item.
-22-
<PAGE>
ITEM 5. OTHER INFORMATION
Because of a recent SEC change to Rule 14a-4(c)(1), the Company's
management will have discretionary authority with respect to proxies
submitted to the 1999 Annual Meeting of Shareholders on any matter which the
Company does not receive notice of by April 21, 1999. This rule change does
not affect the deadline set forth in Rule 14a-8 for including a shareholder
proposal in the Board of Directors' solicitation of proxies, and a
shareholder proposal must be received by Daniel L. McNamara, Secretary, at
1600 Broadway, Suite 2200, Denver, CO 80202, no later than February 4, 1999
in order to be included in the Board of Director's solicitation of proxies.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<S> <C>
* Exhibit 27 Financial Data Schedule.
</TABLE>
* Filed with this report.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed by Forest during the second
quarter of 1998:
<TABLE>
Date of Report Item Reported Financial Statements Filed
-------------- ------------- --------------------------
<S> <C> <C>
April 8, 1998 Item 5, 7 None.
June 25, 1998 Item 2, 7 (a) Audited Statement of Oil and
Gas Revenue and Direct Lease
Operating Expenses of the Anschutz
Ranch Field for each of the years
in the three year period ended
December 31, 1997.
(b) Condensed pro forma combined
financial statements of Forest Oil
Corporation at March 31, 1998 and
for the three months then ended,
and for the year ended December 31,
1997.
</TABLE>
-23-
<PAGE>
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.
FOREST OIL CORPORATION
(Registrant)
Date: August 14, 1998 /s/ Daniel L. McNamara
------------------------------------
Daniel L. McNamara
Corporate Counsel and Secretary
(Signed on behalf of the registrant)
/s/ David H. Keyte
------------------------------------
David H. Keyte
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)
-24-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
condensed consolidated balance sheets and condensed consolidated statements of
income and notes to condensed consolidated financial statements on pages 1
through 7 of the Company's Form 10-Q for the six month period ending June 30,
1998, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1997
<CASH> 13,428
<SECURITIES> 0
<RECEIVABLES> 59,960
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 78,900
<PP&E> 1,984,138
<DEPRECIATION> 1,129,175
<TOTAL-ASSETS> 971,868
<CURRENT-LIABILITIES> 72,783
<BONDS> 488,195
0
0
<COMMON> 4,356
<OTHER-SE> 343,163
<TOTAL-LIABILITY-AND-EQUITY> 971,868
<SALES> 150,669
<TOTAL-REVENUES> 150,669
<CGS> 83,468
<TOTAL-COSTS> 92,645
<OTHER-EXPENSES> 43,575
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,261
<INCOME-PRETAX> (3,812)
<INCOME-TAX> 1,595
<INCOME-CONTINUING> (5,407)
<DISCONTINUED> 0
<EXTRAORDINARY> 6,196
<CHANGES> 0
<NET-INCOME> 789
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
