<PAGE>
===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED 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 _____to_____
Commission file number: 0-7062
NOBLE AFFILIATES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 73-0785597
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
110 West Broadway
Ardmore, Oklahoma 73401
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(580) 223-4110
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Number of shares of common stock outstanding as of August 3, 1998:
56,965,792
===============================================================================
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NOBLE AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
(Dollars in thousands)
<TABLE>
(Unaudited)
June 30, December 31,
1998 1997
----------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and short-term cash investments........... $ 38,798 $ 55,075
Accounts receivable-trade...................... 148,930 162,667
Materials and supplies inventories............. 4,619 2,805
Other current assets........................... 6,024 15,385
----------- -----------
Total Current Assets.......................... 198,371 235,932
----------- -----------
Property, Plant and Equipment................... 3,083,722 2,807,027
Less: accumulated depreciation,
depletion and amortization............. (1,375,797) (1,260,601)
----------- -----------
1,707,925 1,546,426
----------- -----------
Other Assets.................................... 60,692 70,424
----------- -----------
Total Assets................................ $ 1,966,988 $ 1,852,782
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable-trade........................ $ 180,602 $ 163,563
Other current liabilities..................... 31,780 28,456
Income taxes-current.......................... 650 2,299
----------- -----------
Total Current Liabilities..................... 213,032 194,318
----------- -----------
Deferred Income Taxes........................... 154,792 144,083
----------- -----------
Other Deferred Credits and Noncurrent
Liabilities................................... 42,937 56,425
----------- -----------
Long-term Debt.................................. 720,055 644,967
----------- -----------
Shareholders' Equity:
Common stock.................................. 194,967 194,743
Capital in excess of par value................ 359,714 358,054
Retained earnings............................. 296,909 275,610
----------- -----------
851,590 828,407
Less common stock in treasury
(at cost, 1,524,900 shares).................. (15,418) (15,418)
----------- -----------
Total Shareholders' Equity................... 836,172 812,989
----------- -----------
Total Liabilities and Shareholders' Equity... $ 1,966,988 $ 1,852,782
----------- -----------
----------- -----------
</TABLE>
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
2
<PAGE>
NOBLE AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
<TABLE>
Six Months Ended June 30,
--------------------------
1998 1997
---------- ----------
<S> <C> <C>
REVENUES:
Oil and gas sales and royalties............. $ 328,221 $ 384,982
Gathering, marketing and processing......... 149,786 167,332
Other income................................ 17,532 6,808
---------- ----------
495,539 559,122
---------- ----------
COSTS AND EXPENSES:
Oil and gas exploration..................... 40,742 35,444
Oil and gas operations...................... 75,737 84,482
Gathering, marketing and processing......... 144,493 158,094
Depreciation, depletion and amortization.... 145,212 149,028
Selling, general and administrative......... 25,850 24,853
Interest.................................... 24,452 27,467
Interest capitalized........................ (3,112) (2,049)
---------- ----------
453,374 477,319
---------- ----------
INCOME BEFORE TAXES........................... 42,165 81,803
INCOME TAX PROVISION.......................... 16,312 (1) 30,288 (1)
---------- ----------
NET INCOME.................................... $ 25,853 $ 51,515
---------- ----------
---------- ----------
BASIC EARNINGS PER SHARE..................... $ .45 (2) $ .91 (2)
---------- ----------
---------- ----------
DILUTED EARNINGS PER SHARE................... $ .45 (2) $ .90 (2)
---------- ----------
---------- ----------
</TABLE>
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
3
<PAGE>
NOBLE AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
<TABLE>
Three Months Ended June 30,
---------------------------
1998 1997
---------- ----------
<S> <C> <C>
REVENUES:
Oil and gas sales and royalties............... $ 161,284 $ 165,660
Gathering, marketing and processing........... 70,188 67,222
Other income.................................. 15,929 3,785
---------- ----------
247,401 236,667
---------- ----------
COSTS AND EXPENSES:
Oil and gas exploration....................... 24,127 15,839
Oil and gas operations........................ 36,047 40,965
Gathering, marketing and processing........... 68,199 63,293
Depreciation, depletion and amortization...... 74,900 71,308
Selling, general and administrative........... 12,789 12,666
Interest...................................... 12,922 13,183
Interest capitalized.......................... (1,562) (1,336)
---------- ----------
227,422 215,918
---------- ----------
INCOME BEFORE TAXES............................. 19,979 20,749
INCOME TAX PROVISION............................ 7,844 (1) 7,597(1)
---------- ----------
NET INCOME...................................... $ 12,135 $ 13,152
---------- ----------
---------- ----------
BASIC EARNINGS PER SHARE........................ $ .21 (2) $ .23(2)
---------- ----------
---------- ----------
DILUTED EARNINGS PER SHARE...................... $ .21 (2) $ .23(2)
---------- ----------
---------- ----------
</TABLE>
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
4
<PAGE>
NOBLE AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
Six Months Ended June 30,
-------------------------
1998 1997
---------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 25,853 $ 51,515
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization............................ 144,991 149,028
Amortization of undeveloped lease costs, net........................ 1,233 1,799
Increase (decrease) in other deferred credits....................... (2,780) 27,428
(Increase) decrease in other assets and other noncash items, net.... 15,661 814
Changes in working capital, not including cash:
(Increase) decrease in accounts receivable.......................... 13,737 65,319
(Increase) decrease in other current assets and inventories......... 7,570 3,846
Increase (decrease) in accounts payable............................. 17,039 6,255
Increase (decrease) in other current liabilities.................... 1,678 (56,356)
--------- ---------
Net Cash Provided by Operating Activities................................ 224,982 249,648
--------- ---------
Cash Flows From Investing Activities:
Capital expenditures.................................................. (315,702) (129,400)
Proceeds from sale of property, plant and equipment................... 2,114 10,575
--------- ---------
Net Cash Used in Investing Activities .................................. (313,588) (118,825)
--------- ---------
Cash Flows From Financing Activities:
Exercise of stock options............................................. 1,884 1,891
Cash dividends........................................................ (4,555) (4,549)
Repayment of bank debt................................................ (389,000)
Proceeds from issuance of senior debt................................. 245,127
Proceeds from bank borrowings......................................... 75,000
--------- ---------
Net Cash Provided by (Used in) Financing Activities .................... 72,329 (146,531)
--------- ---------
Increase (Decrease) in Cash and Short-term Cash Investments............. (16,277) (15,708)
--------- ---------
Cash and Short-term Cash Investments at Beginning of Period............. 55,075 94,768
--------- ---------
Cash and Short-term Cash Investments at End of Period................... $ 38,798 $ 79,060
--------- ---------
--------- ---------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest (net of amount capitalized).................................. $ 22,193 $ 28,156
Income taxes ......................................................... $ 4,276 $ 11,750
</TABLE>
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
5
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
In the opinion of Noble Affiliates, Inc. (the "Company"), the
accompanying unaudited consolidated condensed financial statements contain
all adjustments, consisting only of necessary and normal recurring
adjustments, necessary to present fairly the Company's financial position as
of June 30, 1998 and December 31, 1997, and the results of operations for the
three month and six month periods ended June 30, 1998 and 1997, respectively
and the cash flows for the six month periods ended June 30, 1998 and 1997.
These consolidated condensed financial statements should be read in
conjunction with the consolidated financial statements and the notes thereto
incorporated in the Company's annual report on Form 10-K for the year ended
December 31, 1997.
(1) INCOME TAX PROVISION
For the six months ended June 30:
<TABLE>
<CAPTION>
(In thousands)
------------------------------
1998 1997
------- -------
<S> <C> <C>
Current........................................................... $ 5,297 $12,289
Deferred.......................................................... 11,015 17,999
------- -------
$16,312 $30,288
------- -------
------- -------
</TABLE>
For the three months ended June 30:
<TABLE>
<CAPTION>
(In thousands)
------------------------------
1998 1997
------- -------
<S> <C> <C>
Current........................................................... $ 1,492 $ 3,032
Deferred.......................................................... 6,352 4,565
------- -------
$ 7,844 $ 7,597
------- -------
------- -------
</TABLE>
(2) BASIC EARNINGS PER SHARE AND DILUTED EARNINGS PER SHARE
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 128 "Earnings per Share" in
February 1997. The Company adopted the disclosure requirements of SFAS No.
128 during 1997 and restated all previously presented financial statements in
conformity with SFAS No. 128. Basic earnings per share of common stock was
computed using the weighted average number of shares of common stock
outstanding during each period. The diluted net income per share of common
stock includes the effect of outstanding stock options.
The following tables summarize the calculation of basic earnings per
share ("EPS") and diluted EPS for the quarter ending June 30:
<TABLE>
<CAPTION>
1998 1997
-------------------------- ---------------------------
INCOME SHARES INCOME SHARES
(IN THOUSANDS, EXCEPT PER SHARE) (NUMERATOR) (DENOMINATOR) (NUMERATOR) (DENOMINATOR)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income/shares $12,135 56,958 $13,152 56,869
- -------------------------------------------------------------------------------------------------------------------
BASIC EPS $.21 $.23
- -------------------------------------------------------------------------------------------------------------------
Net income/shares $12,135 56,958 $13,152 56,869
Effect of Dilutive Securities
Stock options 613 519
Adjusted net income/shares $12,135 57,571 $13,152 57,388
- -------------------------------------------------------------------------------------------------------------------
DILUTED EPS $.21 $.23
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
For the six months ending June 30:
<TABLE>
<CAPTION>
1998 1997
-------------------------- ---------------------------
INCOME SHARES INCOME SHARES
(IN THOUSANDS, EXCEPT PER SHARE) (NUMERATOR) (DENOMINATOR) (NUMERATOR) (DENOMINATOR)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income/shares $25,853 56,936 $51,515 56,855
- -------------------------------------------------------------------------------------------------------------------
BASIC EPS $.45 $.91
- -------------------------------------------------------------------------------------------------------------------
Net income/shares $25,853 56,936 $51,515 56,855
Effect of Dilutive Securities
- -----------------------------
Stock options 520 601
Adjusted net income/shares $25,853 57,456 $51,515 57,456
- -------------------------------------------------------------------------------------------------------------------
DILUTED EPS $.45 $.90
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(3) RESTATEMENT TO CONFORM TO CURRENT YEAR PRESENTATION
Certain reclassifications have been made to the 1997 consolidated
financial statements to conform to the 1998 presentation.
(4) TRADING AND HEDGING ACTIVITIES
The Company, through its subsidiaries, from time to time, uses various
hedging arrangements in connection with anticipated crude oil and natural gas
sales of its production to minimize the impact of product price fluctuations.
Such arrangements include fixed price hedges, costless collars, swaps,
options and other contractual arrangements.
Hedging gains and losses, as applicable, related to the Company's oil
and gas production are recorded in oil and gas sales and royalties. The
Company had no natural gas or crude oil hedging contracts related to its
production in the second quarter of 1998.
In addition to the hedging arrangements pertaining to the Company's
production as described above, Noble Gas Marketing ("NGM"), a wholly owned
subsidiary of the Company, employs various hedging arrangements in connection
with its purchases and sales of third party production to lock in profits or
limit exposure to gas price risk. Most of the purchases made by NGM are on an
index basis; however, purchasers in the markets in which NGM sells often
require fixed or NYMEX related pricing. NGM may use a hedge to convert the
fixed or NYMEX sale to an index basis thereby determining the margin and
minimizing the risk of price volatility. During the second quarter of 1998,
NGM had hedging transactions with broker-dealers that represented
approximately 653,000 MMBTU's of gas per day. Hedges for July 1998 through
October 2000, which range from 20,000 MMBTU's to 726,000 MMBTU's of gas per
day for future physical transactions, were not closed at June 30, 1998.
During the second quarter of 1997, NGM had hedging transactions with
broker-dealers that represented approximately 454,182 MMBTU's of gas per day.
NGM records hedging gains or losses relating to fixed term sales as
gathering, marketing and processing revenues in the periods in which the
related contract is completed.
The FASB issued SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities" in June 1998. The Statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in
the balance sheet as either an asset or liability measured at its fair value.
The Statement requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges allows a derivative's gains
and losses to offset related results on the hedged item in the income
statement, and requires that a company formally document, designate and
assess the effectiveness of transactions that receive hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15,
1999. A company may also implement the Statement as of the beginning of any
fiscal quarter after the Statement's issuance (that is, fiscal quarters
beginning
7
<PAGE>
June 16, 1998 and thereafter). SFAS No. 133 cannot be applied retroactively.
SFAS No. 133 must be applied to (a) derivative instruments and (b) certain
derivative instruments embedded in hybrid contracts that were issued,
acquired, or substantively modified after December 31, 1997 (and, at the
Company's election, before January 1, 1998).
The Company has not yet quantified the impact of adopting SFAS No. 133
and has not determined the timing or method of adoption of SFAS No. 133.
(5) MINERALS MANAGEMENT SERVICE CLAIMS
Samedan Oil Corporation ("Samedan"), a wholly owned subsidiary of the
Company, has from time to time settled various claims against parties which
failed to fulfill their contractual obligation to Samedan to purchase gas at
fixed prices greater than market or pursuant to take-or-pay provisions. The
Company's policy, which is consistent with general industry practice, is that
amounts received in such settlements ("settlement payments") do not represent
payment for gas produced and, therefore, are not subject to royalty payments.
Property owners, including governmental authorities and private parties, have
in recent years asserted claims against Samedan and other oil and gas
companies for royalties on settlement payments.
Samedan participated, in a joint effort with other energy companies and
the Independent Petroleum Association of America ("IPAA"), in a test case
which challenged the determination by the U.S. Minerals Management Service
("MMS") that royalties were payable to the government on certain settlement
payments received by Samedan and the other plaintiffs (the "MMS Lawsuit").
The District Court for the District of Columbia (the "D.C. District Court")
entered a judgment against Samedan in the amount of $20,000. In 1996, the
Court of Appeals for the District of Columbia Circuit reversed the judgment
against Samedan. In subsequent proceedings in the D.C. District Court
consistent with the appellate court decision, on July 25, 1997, the court
enjoined the MMS from taking action to collect from Samedan royalties on
non-recoupable settlement payments (the "MMS Injunction"). The MMS had until
April 14, 1998 to appeal the MMS Injunction and elected not to do so. Based
upon the MMS Injunction, the Company in June 1998 recorded $13.7 million as
other income which represented the amount of the reserve that the Company had
established pending the outcome of the MMS Lawsuit.
Samedan may be the subject of future legal actions by property owners
claiming royalties on other settlement payments received by Samedan. There
can be no assurance that Samedan will prevail in any such action. The Company
is unable to estimate the possible amount of loss, if any, associated with
this contingency.
(6) METHANOL PLANT
Through the recently formed Atlantic Methanol Production Company
("AMPC"), Samedan is participating, with a 50 percent expense interest, in a
joint venture with CMS Energy Corporation to construct a methanol plant on
Bioko Island in Equatorial Guinea. The plant will use the gas from Samedan's
31 percent owned Alba field as feedstock. The plant is being designed to
utilize approximately 115 MMCF of gas per day. The gas will be priced at
approximately $.25 per MMBTU.
On January 29, 1998, AMPC awarded a contract to Raytheon Engineers and
Constructors to build the methanol plant. The plant is estimated to cost
$317,000,000 and is being designed to produce 2,500 metric tons of methanol
per day, which equates to approximately 20,000 BBLS per day. The construction
contract stipulates that the first commercial production of methanol should
be achieved by January 2001. Current marketing plans are to enter into
long-term contracts with methanol users in the United States and Europe.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This report on Form 10-Q includes "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. All
statements other than statements of historical fact included in this Form
10-Q, including, without limitation,
8
<PAGE>
statements contained under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" regarding the Company's financial
position, business strategy, plans and objectives of management of the
Company for future operations and industry conditions, are forward-looking
statements. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, it can give no assurance that
such expectations will prove to have been correct. Important factors that
could cause actual results to differ materially from the Company's
expectations ("Cautionary Statements") include without limitation future
production levels, future prices and demand for oil and gas, results of
future exploration and development activities, future operating and
development costs, the effect of existing and future laws and governmental
regulations (including those pertaining to the environment) and the political
and economic climate of the United States and the foreign countries in which
the Company operates from time to time, as discussed in this quarterly report
on Form 10-Q and the other documents of the Company filed with the Securities
and Exchange Commission (the "Commission"). All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on
its behalf are expressly qualified in their entirety by the Cautionary
Statements.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities decreased to $225.0 million in
the six months ended June 30, 1998 from $249.6 million in the same period of
1997. Cash and short-term cash investments decreased from $55.1 million at
December 31, 1997 to $38.8 million at June 30, 1998. Such decreases in cash
are primarily the result of declining oil prices.
The Company has expended approximately $315.7 million of its $451.0
million 1998 capital budget through June 30, 1998. The Company's 1998 capital
budget includes approximately $48.4 million for potential acquisitions of
producing properties. The Company continues to evaluate possible strategic
acquisitions and believes it is positioned to access external sources of
funding should it be necessary or desirable in connection with an acquisition.
The Company's current ratio (current assets divided by current
liabilities) was .93 at June 30, 1998 compared with 1.21 at December 31, 1997.
The Company follows an entitlements method of accounting for its gas
imbalances. The Company's estimated gas imbalance receivables were $18.5
million at June 30, 1998 and December 31, 1997. Estimated gas imbalance
liabilities were $20.9 million at June 30, 1998 and $21.6 million at December
31, 1997. These imbalances are valued at the amount which is expected to be
received or paid to settle the imbalances. The settlement of the imbalances
can occur either over the life or at the end of the life of a well, on a
volume basis or by cash settlement. The Company does not expect that a
significant portion of the settlements will occur in any one year. Thus, the
Company believes the settlement of gas imbalances will not have a material
impact on its liquidity.
RESULTS OF OPERATIONS
For the second quarter of 1998, the Company recorded net income of $12.1
million, or $.21 per share, compared to net income of $13.2 million, or $.23
per share, in the second quarter of 1997. During the first six months of
1998, the Company recorded net income of $25.9 million, or $.45 per share,
compared to net income of $51.5 million, or $.91 per share, in the first six
months of 1997.
Gas sales for the Company, excluding third party sales by Noble Gas
Marketing ("NGM"), a wholly owned subsidiary of the Company, increased 16
percent for the three months and decreased four percent for the six months
ended June 30, 1998. The increase in sales for the second quarter is
primarily due to a 14 percent increase in the average gas price and a one
percent increase in average daily production, compared to the same quarter in
1997. For the six months ended June 30, 1998, gas sales decreased four
percent primarily due to a four percent decrease in the average gas price,
compared with the six months ended June 30, 1997.
Oil sales for the Company, excluding third party sales by Noble Trading,
Inc. ("NTI"), a wholly owned subsidiary of the Company, decreased 33 percent
and 34 percent, respectively, for the three months and six months ended June
30, 1998, as compared with the same periods in 1997. The primary reasons for
the decreased sales were due to a 31 percent and 32 percent decrease,
respectively, in average oil price for the three months and six months ended
June 30, 1998, as compared to the same periods in 1997. The average daily
production decreased two percent for the three months and six months ended
June 30, 1998, as compared with the same periods in 1997.
9
<PAGE>
NGM markets most of the Company's natural gas as well as certain third
party gas. NGM sells gas directly to end-users, gas marketers, industrial
users, interstate and intrastate pipelines, and local distribution companies.
NTI markets a portion of the Company's oil as well as certain third party
oil. The Company records all NGM's and NTI's sales as gathering, marketing
and processing revenues and expenses. All intercompany sales and expenses
have been eliminated.
For the second quarter of 1998, revenues and expenses from combined NGM
and NTI third party sales totaled $70.2 million and $68.2 million,
respectively, for a gross margin of $2.0 million. In comparison, combined NGM
and NTI third party sales and expenses of $67.2 million and $63.3 million,
respectively, resulted in a gross margin of $3.9 million for the second
quarter of 1997. For the six months ended June 30, 1998, combined NGM and NTI
revenues and expenses from third party sales totaled $149.8 million and
$144.5 million, respectively, for a gross margin of $5.3 million. In
comparison, combined NGM and NTI third party sales and expenses of $167.3
million and $158.1 million, respectively, resulted in a gross margin of $9.2
million for the same period in 1997.
The Company, from time to time, uses various hedging arrangements in
connection with anticipated crude oil and natural gas sales of its own
production and third party production purchased and sold by NGM to minimize
the impact of product price fluctuations. Such arrangements include fixed
price hedges, costless collars and other contractual arrangements. Although
these hedging arrangements expose the Company to credit risk, the Company
monitors the creditworthiness of its counterparties, which generally are
major institutions, and believes that losses from nonperformance are unlikely
to occur.
The Company had no natural gas or crude oil hedging contracts related to
its production in the second quarter of 1998.
NGM employs various hedging arrangements in connection with its
purchases and sales of third party production to lock in profits or limit
exposure to gas price risk. Most of the purchases made by NGM are on an index
basis; however, purchasers in the markets in which NGM sells often require
fixed or NYMEX related pricing. NGM may use a hedge to convert the fixed or
NYMEX sale to an index basis thereby determining the margin and minimizing
the risk of price volatility. During the second quarter of 1998, NGM had
hedging transactions with broker-dealers that represented approximately
653,000 MMBTU's of gas per day. Hedges for July 1998 through October 2000,
which range from 20,000 MMBTU's to 726,000 MMBTU's of gas per day for future
physical transactions, were not closed at June 30, 1998. During the second
quarter of 1997, NGM had hedging transactions with broker-dealers that
represented approximately 454,182 MMBTU's of gas per day.
Certain selected oil and gas operating statistics follow:
<TABLE>
<CAPTION>
For the three months For the six months
ended June 30, ended June 30,
---------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Oil revenues (in thousands) $ 40,110 $ 59,692 $ 85,165 $128,989
Average daily oil production - BBLS 37,690 38,434 38,113 39,015
Average oil price per BBL $ 11.98 $ 17.46 $ 12.68 $ 18.71
Gas revenue (in thousands) $118,065 $101,793 $235,541 $246,428
Average daily gas production - MCFS 572,436 566,852 585,685 589,393
Average gas price per MCF $ 2.31 $ 2.03 $ 2.27 $ 2.37
BBLS - BARRELS
MCFS - THOUSAND CUBIC FEET
</TABLE>
Oil and gas exploration expense increased $8.3 million and $5.3 million,
respectively, for the three months and six months ended June 30, 1998, as
compared to the same periods in 1997. These increases are primarily
attributable to increases of $5.1 million and $2.8 million, respectively, in
abandoned assets, compared with the same periods in 1997.
10
<PAGE>
Oil and gas operations expense decreased $4.9 million and $8.7 million,
respectively, for the three months and six months ended June 30, 1998
compared to the same periods in 1997. These decreases are due primarily to
decreased lease operations expenses of $3.6 million and $5.9 million,
respectively, for the three months and six months ended June 30, 1998
compared to the same periods in 1997.
Depreciation, depletion and amortization (DD&A) expense increased five
percent and decreased three percent, respectively, for the three months and
six months ended June 30, 1998 compared to the same periods in 1997. The unit
rate of DD&A per barrel of oil equivalent (BOE), converting gas to oil on the
basis of 6 MCF per barrel, was $5.91 for the first six months of 1998, as
compared to $6.00 for the same period of 1997. The decrease in the unit rate
per BOE is due to 1997 year-end reserve revisions on certain properties as a
result of lower production performance, which revisions were recognized last
year and thus lowered the depreciable basis beginning in 1998. The Company
has recorded, through charges to DD&A, a reserve for estimated future
liabilities related to dismantlement and reclamation costs for offshore
facilities. Approximately $5.6 million and $11.6 million, respectively, was
charged to DD&A for the three months and six months ended June 30, 1998 for
these estimated future liabilities. This reserve is based on the best
estimates of Company engineers of such costs to be incurred in future years.
Interest expense decreased $.3 million and $3.0 million for the three
months and six months ended June 30, 1998, as compared to the same periods in
1997. This decrease resulted from the decreased debt associated with the EDC
Acquisition.
Interest capitalized increased $.2 million and $1.1 million,
respectively, for the three months and six months ended June 30, 1998, as
compared to the same periods in 1997. This increase resulted from
construction projects for various properties located in the Gulf of Mexico.
FUTURE TRENDS
Samedan Oil Corporation ("Samedan"), a wholly owned subsidiary of the
Company, has from time to time settled various claims against parties which
failed to fulfill their contractual obligation to Samedan to purchase gas at
fixed prices greater than market or pursuant to take-or-pay provisions. The
Company's policy, which is consistent with general industry practice, is that
amounts received in such settlements ("settlement payments") do not represent
payment for gas produced and, therefore, are not subject to royalty payments.
Property owners, including governmental authorities and private parties, have
in recent years asserted claims against Samedan and other oil and gas
companies for royalties on settlement payments.
Samedan participated, in a joint effort with other energy companies and
the Independent Petroleum Association of America ("IPAA"), in a test case
which challenged the determination by the U.S. Minerals Management Service
("MMS") that royalties were payable to the government on certain settlement
payments received by Samedan and the other plaintiffs (the "MMS Lawsuit").
The District Court for the District of Columbia (the "D.C. District Court")
entered a judgment against Samedan in the amount of $20,000. In 1996, the
Court of Appeals for the District of Columbia Circuit reversed the judgment
against Samedan. In subsequent proceedings in the D.C. District Court
consistent with the appellate court decision, on July 25, 1997, the court
enjoined the MMS from taking action to collect from Samedan royalties on
non-recoupable settlement payments (the "MMS Injunction"). The MMS had until
April 14, 1998 to appeal the MMS Injunction and elected not to do so. Based
upon the MMS Injunction, the Company in June 1998 recorded $13.7 million as
other income which represented the amount of the reserve that the Company had
established pending the outcome of the MMS Lawsuit.
Samedan may be the subject of future legal actions by property owners
claiming royalties on other settlement payments received by Samedan. There
can be no assurance that Samedan will prevail in any such action. The Company
is unable to estimate the possible amount of loss, if any, associated with
this contingency.
Management believes the Company is well positioned with its balanced
reserves of oil and gas to take advantage of future price increases that may
occur. However, the uncertainty of oil and gas prices continues to affect the
domestic oil and gas industry. Due to the volatility of oil and gas prices,
the Company, from time to time, uses hedging and plans to do so in the future
as a means of controlling its exposure to price changes. The Company cannot
predict the extent to which its revenues will be affected by inflation,
government regulation or changing prices.
11
<PAGE>
The Company is working to resolve the potential impact of the year 2000
on the ability of the Company's computerized information systems to
accurately process information that may be date-sensitive. Any of the
Company's programs that recognize a date using "00" as the year 1900 rather
than the year 2000 could result in errors or system failures. The Company
utilizes a number of computer programs across its entire operation. The
Company has not completed its assessment, but currently believes that costs
of addressing this issue will not have a material adverse impact on the
Company's financial position. However, if the Company and third parties upon
which it relies are unable to address this issue in a timely manner, it could
result in a material financial risk to the Company. In order to assure that
this does not occur, the Company plans to devote all resources required to
resolve any significant year 2000 issues in a timely manner.
12
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The information required by this Item 6 (a) is set forth in the Index to
Exhibits accompanying this quarterly report and is incorporated herein by
reference.
(b) The Company did not file any reports on Form 8-K during the three months
ended June 30, 1998.
13
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
NOBLE AFFILIATES, INC.
(Registrant)
Date August 13, 1998 /s/ WM. D. DICKSON
----------------------- -------------------------------------------
WM. D. DICKSON
Senior Vice President-Finance and Treasurer
(Principal Financial Officer
and Authorized Signatory)
14
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Exhibit Page
- ------- ------------------------------- -----------------
<S> <C> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 38,798
<SECURITIES> 0
<RECEIVABLES> 148,930
<ALLOWANCES> 0
<INVENTORY> 4,619
<CURRENT-ASSETS> 198,371
<PP&E> 3,083,722
<DEPRECIATION> 1,375,797
<TOTAL-ASSETS> 1,966,988
<CURRENT-LIABILITIES> 202,827
<BONDS> 720,055
0
0
<COMMON> 194,967
<OTHER-SE> 618,246
<TOTAL-LIABILITY-AND-EQUITY> 1,966,988
<SALES> 328,221
<TOTAL-REVENUES> 495,539
<CGS> 0
<TOTAL-COSTS> 428,922
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,452
<INCOME-PRETAX> 42,165
<INCOME-TAX> 16,312
<INCOME-CONTINUING> 25,853
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,853
<EPS-PRIMARY> .45
<EPS-DILUTED> .45
</TABLE>
