UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarter Ended March 31, 1999 Commission File No. 1-5591
PENNZENERGY COMPANY
(Exact name of registrant as specified in its charter)
Delaware 74-1597290
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
Pennzoil Place, P.O. Box 4616
Houston, Texas 77210-4616
(Address of principal executive offices)
Registrant's telephone number, including area code: (713) 546-
6000
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 of each class of stock, as of
latest practicable date, April 30, 1999:
Common stock, par value $0.83-1/3 per share, 47,950,086
shares.
Preferred stock, par value $1.00 per share, 1,500,000
shares.
<PAGE>
<PAGE> 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
<TABLE>
PENNZENERGY COMPANY
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
<CAPTION>
Three Months Ended March 31
----------------------------
1999 1998
----------- -----------
(Expressed in thousands
except per share amounts)
<S> <C> <C>
REVENUES
Natural gas sales $ 69,428 $ 93,819
Crude oil, condensate and natural gas liquids sales 45,885 60,061
Investment and other income, net 11,163 18,484
----------- -----------
Total revenues 126,476 172,364
COSTS AND EXPENSES
Operating expense 46,643 52,723
General and administrative expense 8,972 8,848
Depreciation, depletion and amortization 68,141 55,597
Exploration expense 13,118 12,675
Taxes, other than income 6,901 7,962
Interest charges, net 30,560 39,187
----------- -----------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAX (47,859) (4,628)
Income tax benefit (19,114) (4,976)
----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS (28,745) 348
INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX - 9,311
----------- -----------
NET INCOME (LOSS) (28,745) 9,659
Preferred stock dividends 2,434 -
----------- -----------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ (31,179) $ 9,659
=========== ===========
BASIC AND DILUTED INCOME (LOSS) PER SHARE
Continuing operations $ (0.65) $ 0.01
Discontinued operations - 0.19
----------- -----------
TOTAL BASIC AND DILUTED INCOME (LOSS) PER SHARE $ (0.65) $ 0.20
=========== ===========
AVERAGE SHARES OUTSTANDING
Basic 47,888 47,593
=========== ===========
Diluted 47,888 48,402
=========== ===========
END OF PERIOD SHARES OUTSTANDING 47,925 47,654
=========== ===========
DIVIDENDS PER COMMON SHARE $ 0.0625 $ 0.25
=========== ===========
<FN>
<F1>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<PAGE> 3
PART I. FINANCIAL INFORMATION - continued
<TABLE>
PENNZENERGY COMPANY
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
<CAPTION>
Three Months Ended March 31
----------------------------
1999 1998
----------- -----------
(Expressed in thousands)
<S> <C> <C>
NET INCOME (LOSS) $ (28,745) $ 9,659
----------- -----------
Unrealized gains on marketable securities, net of tax 26,383 402
Foreign currency translation adjustment and other (119) (876)
----------- -----------
26,264 (474)
----------- -----------
COMPREHENSIVE INCOME (LOSS) $ (2,481) $ 9,185
=========== ===========
<FN>
<F1>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<PAGE> 4
PART I. FINANCIAL INFORMATION - continued
<TABLE>
PENNZENERGY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<CAPTION>
March 31, December 31,
1999 1998
------------- -------------
(Expressed in thousands)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 15,908 $ 20,439
Receivables 69,951 71,553
Crude oil and natural gas inventories 4,495 4,818
Materials and supplies 12,700 12,354
Deferred income tax 10,300 10,300
Other current assets 10,910 8,955
------------- -------------
Total current assets 124,264 128,419
Property, plant and equipment, net 1,640,894 1,658,734
Marketable securities and other investments 639,752 598,462
Other assets 26,238 31,471
------------- -------------
TOTAL ASSETS $ 2,431,148 $ 2,417,086
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities $ 100,207 $ 127,495
Interest accrued 35,940 26,093
Other current liabilities 25,417 24,889
------------- -------------
Total current liabilities 161,564 178,477
------------- -------------
Long-term debt
Exchangeable debentures 739,810 739,258
Other long-term debt 852,353 797,951
------------- -------------
Total long-term debt 1,592,163 1,537,209
------------- -------------
Deferred income tax 161,282 167,253
Other liabilities 90,475 99,362
------------- -------------
TOTAL LIABILITIES 2,005,484 1,982,301
------------- -------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST 40,852 43,696
SHAREHOLDERS' EQUITY 384,812 391,089
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,431,148 $ 2,417,086
============= =============
<FN>
<F1>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<PAGE> 5
PART I. FINANCIAL INFORMATION - continued
<TABLE>
PENNZENERGY COMPANY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Three Months Ended March 31
---------------------------------
1999 1998
----------- -----------
(Expressed in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (28,745) $ 9,659
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation, depletion and amortization 68,141 55,597
Dry holes and impairments 836 5,033
Deferred income tax (19,125) (3,691)
Income from discontinued operations, net of tax - (9,311)
Other non-cash items (1,014) 1,919
Changes in operating assets and liabilities (11,619) (71,660)
----------- -----------
Net cash provided by (used in) operating activities 8,474 (12,454)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (51,858) (117,266)
(Purchases) sales of marketable securities and other
investments, net (65) 14,132
Proceeds from sales of assets 6,433 30,700
Other investing activities (11,182) (3,454)
----------- -----------
Net cash used in investing activities (56,672) (75,888)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of notes payable, net 54,310 102,197
Debt repayments - (343,000)
Proceeds from issuance of debt - 360,000
Dividends paid (7,861) (11,899)
Other financing activities (2,782) 3,003
----------- -----------
Net cash provided by financing activities 43,667 110,301
----------- -----------
NET CASH USED IN DISCONTINUED OPERATIONS - (16,515)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,531) 5,444
CASH AND CASH EQUIVALENTS, beginning of period 20,439 9,462
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 15,908 $ 14,906
=========== ===========
<FN>
<F1>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<PAGE> 6
PART I. FINANCIAL INFORMATION - continued
PENNZENERGY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) General -
The condensed consolidated financial statements included
herein have been prepared by PennzEnergy Company ("PennzEnergy")
without audit and should be read in conjunction with the
financial statements and the notes thereto included in
PennzEnergy's latest annual report. The foregoing financial
statements include only normal recurring accruals and all
adjustments which PennzEnergy considers necessary for a fair
presentation. Certain prior period items have been reclassified
in the condensed consolidated financial statements in order to
conform with the current year presentation.
(2) Discontinued Operations -
On December 30, 1998, PennzEnergy, formerly named Pennzoil
Company, distributed to its shareholders (the "Spin-off") 47.8
million shares of common stock of its wholly owned subsidiary
Pennzoil-Quaker State Company ("Pennzoil-Quaker State"),
representing all of the shares of Pennzoil-Quaker State owned by
PennzEnergy.
Accordingly, Pennzoil-Quaker State's results of operations
are shown net of tax as discontinued operations in PennzEnergy's
condensed consolidated statement of income prior to the Spin-off.
After-tax income from discontinued operations, taxes on income
from discontinued operations, and revenues related to
discontinued operations for the quarter ended March 31, 1998 were
$9.3 million, $7.3 million and $373.4 million, respectively.
(3) New Accounting Standards -
In March 1998, the American Institute of Certified Public
Accountants issued Statement of Position ("SOP") No. 98-1,
"Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." The adoption of SOP No. 98-1 on
January 1, 1999 did not have a material impact on PennzEnergy's
results of operations.
In June 1998, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument be
recorded in the balance sheet as either an asset or liability
measured at its fair value. Changes in fair value must be
recognized currently in earnings unless specific hedge accounting
criteria are met. Accounting for qualifying hedges allows
derivative gains and losses to offset related results on the
hedged item in the income statement, and requires a company to
formally document, designate, and assess the effectiveness of
transactions that receive hedge accounting. SFAS No. 133 is
currently expected to be effective for fiscal years beginning
after June 15, 1999 and early adoption is permitted. The effect
of adopting SFAS No. 133 has not been determined, but is not
expected to have a material impact on PennzEnergy's financial
position or results of operations.
(4) Debt -
PennzEnergy has two series of exchangeable debentures. Each
4.90% Debenture and 4.95% Debenture is exchangeable into 9.3283
shares of Chevron Corporation ("Chevron") common stock, matures
on August 15, 2008 and is not callable until August 15, 2000. The
4.90% Debentures and the 4.95% Debentures are exchangeable at the
option of the holders at any time prior to maturity, unless
previously redeemed, for shares of Chevron common stock. In lieu
of delivering Chevron common stock, PennzEnergy may, at its
option, pay to any holder an amount in cash equal to the market
value of the underlying Chevron common stock to satisfy the
<PAGE>
<PAGE> 7
PART I. FINANCIAL INFORMATION - continued
exchange request. Changes in the fair value of the 4.90%
Debentures and the 4.95% Debentures associated with fluctuations
in the price of Chevron common stock will be recorded in income
if and when the market value of the underlying Chevron common
stock exceeds $107.20 per share.
PennzEnergy's $200 million of 9.625% Debentures due November
1999 and $54.3 million borrowed under variable-rate credit
arrangements are classified as long-term debt based upon
availability of committed long-term credit facilities to
refinance such amounts and PennzEnergy's intent to maintain such
commitments in excess of one year.
(5) Earnings Per Share -
Earnings per share computations to reconcile basic and
diluted income (loss) from continuing operations consist of the
following:
<TABLE>
Three Months Ended
March 31
----------------------------
1999 1998
----------- -----------
(Expressed in thousands
except per share amounts)
<S> <C> <C>
Income (loss) from continuing operations $ (28,745) $ 348
Less: Preferred stock dividend 2,434 -
----------- -----------
Income (loss) from continuing operations available
to common shareholders $ (31,179) $ 348
=========== ===========
Basic weighted average shares outstanding 47,888 47,593
Effect of dilutive securities <F1>:
Options - 661
Awards - 148
----------- -----------
Diluted weighted average shares outstanding 47,888 48,402
=========== ===========
Income (loss) per share from continuing operations:
Basic $ (0.65) $ 0.01
=========== ===========
Diluted $ (0.65) $ 0.01
=========== ===========
<FN>
<F1> A weighted average number of options to purchase 4,649,718 shares
of common stock and awards of 123,996 shares of common stock were
outstanding for the three months ended March 31, 1999 but were not
included in the computation of diluted loss per share because these
options and awards would result in an antidilutive per share
amount. A weighted average number of options to purchase 2,948,091
shares of common stock were outstanding for the three months
ended March 31, 1998 but were not included in the computation of
diluted income per share because the options' exercise prices
were greater than the average market price of the common shares.
</FN>
</TABLE>
(6) Related Party Transactions -
As a result of the Spin-off, PennzEnergy and Pennzoil-Quaker
State have an arrangement to share certain corporate administrative
services for a period of up to one year after the date of the
Spin-off. Fees are paid based upon actual costs of providing these
services.
<PAGE>
<PAGE> 8
PART I. FINANCIAL INFORMATION - continued
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
PennzEnergy reported a net loss of $28.8 million for the
quarter ended March 31, 1999, compared to net income of $9.7
million for the quarter ended March 31, 1998. After preferred
dividends of $2.4 million, basic earnings per share for the first
quarter of 1999 was a loss of $.65 per share. Basic earnings per
share for the first quarter of 1998 was $.20 per share and
included $9.3 million, or $.19 per share, of income from
discontinued operations. Reference is made to Note 2 of Notes to
Condensed Consolidated Financial Statements.
Excluding discontinued operations, the decrease in first
quarter 1999 pretax income from the first quarter of the prior
year is primarily due to lower realized prices, higher
depreciation, depletion and amortization ("DD&A") rates and lower
natural gas production volumes.
Compared to the first quarter of 1998, first quarter 1999
realized natural gas prices decreased 40 cents per thousand cubic
feet ("Mcf"), from $2.07 to $1.67, and realized liquids prices
were down $2.91 per barrel, from $12.44 to $9.53.
Natural gas production for the first quarter of 1999
averaged 460 million cubic feet ("MMcf") per day compared to 500
MMcf per day in the first quarter of 1998. The decrease is
primarily due to production declines offshore at West Cameron
580. Liquids production for the first quarter of 1999 averaged
53,500 barrels per day, approximately 150 barrels per day lower
than 1998. On a barrel of oil equivalent ("boe") basis,
production declined from 136,900 boe per day in the first quarter
of 1998 to 130,200 boe per day in 1999.
Operating costs, including corporate overheads, averaged
$5.34 per boe during the first quarter of 1999 compared to $5.64
per boe in the first quarter of 1998. Total operating and
general and administrative expenses were $6.0 million lower in
the first quarter of 1999 than in the first quarter of 1998. The
reduction was primarily due to lower offshore workover and
platform repair expenses. In addition, taxes, other than income,
were approximately $1.1 million lower during the quarter compared
to the first quarter of the prior year primarily due to lower oil
and gas prices.
In the first quarter of 1999, PennzEnergy announced a
workforce reduction program. The program will continue until
June 4, 1999 and, when complete, will result in the severance of
106 employees. PennzEnergy is also reducing its total contractor
workforce by approximately 200 before the end of the year. A
$3.5 million reserve is now in place to cover costs associated
with the program. The workforce reduction program is expected to
reduce future costs and expenses by approximately $18 million on
an annual basis.
DD&A rates increased from $4.51 per boe in the first quarter
of 1998 to $5.82 per boe during the first quarter of 1999. This
increase was primarily due to negative oil and gas proved reserve
revisions at year-end 1998.
Capital expenditures for the first quarter of 1999 were $52
million, $65 million below the first quarter of 1998. The
decrease in capital spending during 1999 was primarily a result
of lower domestic offshore and international spending in response
to lower commodity prices.
Onshore domestically, PennzEnergy is currently focused on
accelerating exploration and development of its assets in south
Louisiana, south Texas and the Raton Basin while working to
preserve capital and reduce overall risk. At the same time
PennzEnergy is emphasizing low-cost, low-risk production and
reserves enhancement on its developed properties.
<PAGE>
<PAGE> 9
PART I. FINANCIAL INFORMATION - continued
PennzEnergy participated in two successful exploration wells
at Redfish Point and Patterson in south Louisiana in the first
quarter of 1999, with a 50% working interest in each well. These
wells extended the productive limits of two separate fields and
production began in second quarter 1999. A third exploratory
well, at Tiger Pass in Plaquemines Parish on the Mississippi
Delta, resulted in a dry hole, with a partner paying 100% of the
drilling costs. Seismic acquisition is underway at PennzEnergy's
15,000-acre Quarantine Bay Field area. During 1999, 185 square
miles of 3-D seismic data will be added to the current south
Louisiana database (574 square miles) through trades and
purchases.
In south Texas, at Jennings Ranch, a Wilcox test resulted in
a dry hole in the first quarter of 1999 with a promoted partner
bearing most of the expense. In the central Texas Wilcox Trend, 3-
D seismic is currently being shot and will be delivered later
this year covering PennzEnergy's 23,000 acre Ray Ranch area in
Bee, Goliad and Karnes counties.
In the Carthage-Bethany area of northeast Texas, PennzEnergy
is currently operating a three-rig drilling program. PennzEnergy
spudded 11 development wells during the first quarter of 1999 and
another 34 are scheduled for the remainder of the year. All of
the wells drilled in this area during the first quarter of 1999
have been successful.
On March 22, 1999, PennzEnergy announced a joint venture with
Sonat Exploration, Inc. ("Sonat") to develop the mineral
interests underlying the Vermejo Park Ranch in northeast New
Mexico and southern Colorado. PennzEnergy will initially hold a
25% working interest in the joint venture but will increase its
working interest to 50% as the project progresses. PennzEnergy
will also retain a 25% royalty interest. Sonat will bear all
pipeline-related capital expenditures and will pay up to $10
million to PennzEnergy in progress bonuses. The joint venture
will initially be operated by Sonat with PennzEnergy taking over
operations as its working interest increases. PennzEnergy and
Sonat expect to drill a minimum of 35 wells in 1999, 80 wells in
2000 and 150 wells per year thereafter, until the project is
complete. The coal bed methane reserve potential on
PennzEnergy's acreage is estimated to be at least one trillion
cubic feet of recoverable gas reserves.
Offshore domestically, PennzEnergy is working to lower
overall capital costs and operating expenses. PennzEnergy also
plans to remain active in offshore lease sales and acquiring
seismic data in order to build an inventory of prospects for the
future.
PennzEnergy is developing the Garden Banks 161 discovery as
a two-well subsea facility. PennzEnergy currently holds a 35%
working interest and is operator of the block. Production is
expected by the end of the year at a rate of net 5,000 boe per
day. A third party will fund part of PennzEnergy's share of
the development expenses. The Minerals Management Service's
decision on a royalty relief application is pending.
During the first quarter, PennzEnergy drilled an exploration
well funded 100% by a third party at High Island 156 (50% working
interest). The well encountered the geologic column expected,
but no commercial hydrocarbons were present in the objective
sands.
PennzEnergy executed a production development agreement with
Halliburton Energy Services in the first quarter of 1999 to drill
one well and perform five recompletions on Ship Shoal 198.
PennzEnergy will be carried on all activities and Halliburton
will bear the expenses of the development and recover its costs
through production. The program, which commenced at the
beginning of the second quarter, is expected to result in an
increase in production of a net 10.5 MMcf per day by year-end.
PennzEnergy was high bidder on five blocks in Central Gulf
of Mexico Lease Sale 172 in March 1999 and expects to be awarded
the leases during the second quarter of 1999. PennzEnergy bid
$1.4 million for the five blocks located on the shelf and the
flex trend in less than 1,000' water depths. PennzEnergy expects
to be active in the Western Gulf of Mexico Lease Sale in August
1999.
<PAGE>
<PAGE> 10
PART I. FINANCIAL INFORMATION - continued
Operations are continuing on the Shell-operated Garden Banks
127/128 Enchilada/Chimichanga field. The A-9 well has been
completed and is currently testing 14 MMcf per day and 730
barrels of condensate per day. A fifth well, the A-8, is
currently drilling. PennzEnergy has a 20% working interest in
this subsalt field in 670 feet of water. Total gross production
from the field is currently 80 MMcf per day and 3,500 barrels of
liquids per day.
PennzEnergy has implemented several initiatives designed to
reduce operating and overhead expenses offshore, including the
consolidation of its Lafayette, Louisiana office to Houston and
realignment of the offshore division along functional lines.
Internationally, on March 10, PennzEnergy signed a
participation agreement with Petroleo Brasileiro, SA (Petrobras),
the national oil company of Brazil, providing for joint
exploration of Block BSeal 4 in the Sergipe-Alagoas Basin
offshore Brazil. PennzEnergy has a 30% working interest in the
block and will serve as operator. Approval from the Brazilian
government naming PennzEnergy as operator is expected in May.
PennzEnergy expects to begin a 380 square kilometer 3-D seismic
acquisition program in 1999 to be able to drill a commitment
exploratory well in 2000.
In the North July field in Egypt, PennzEnergy (100% working
interest) is completing a plan of development to submit to the
Egyptian General Petroleum Corporation ("EGPC") by early June.
Negotiations are ongoing with BP/Amoco to route this production
through their facilities on the "July 10" platform. On the West
Beni Suef concession, PennzEnergy is continuing its seismic
acquisition program with the first exploratory well planned for
early 2000.
Offshore Qatar, PennzEnergy (75% working interest) has
completed the acquisition of 200 square kilometers of 3-D seismic
on the Block 8 concession. The seismic data will be interpreted
this year and a commitment exploratory well is planned for 2000.
PennzEnergy initiated its drilling program in Lake
Maracaibo, Venezuela in March 1999. It currently has a 54%
working interest in block B2X-68/79 and a 45% working interest in
block B2X-70/80. The program calls for the drilling of seven
infill development wells, some of which will be deepened to test
exploration targets. At the end of the first quarter, net
production in Venezuela averaged 3,100 barrels of oil per day.
In April 1999, the Azerbaijan International Operating
Company ("AIOC"), in which PennzEnergy has a 4.8% carried
interest, delivered its first oil shipment from the Azeri-Chirag-
Gunashli (ACG) joint development area via the new western route
pipeline through Azerbaijan and Georgia to the Black Sea. Daily
oil production at ACG averaged 92,000 barrels for the first
quarter of 1999 and is expected to average approximately 97,000
barrels per day for the rest of 1999. Production is currently
limited by the gas handling facilities on the Chirag-1 platform.
During the first quarter, PennzEnergy received $3.6 million in
net additional payments for reimbursement of past costs
associated with a gas utilization project for the Gunashli Field.
These proceeds were recorded as a gain on sale. An additional
net $1.3 million has been received in the second quarter of 1999.
Other
PennzEnergy's investment and other income, net for the
quarter ended March 31, 1999 includes dividend income of $4.3
million from its investment in Chevron common stock compared to
$10.9 million for the quarter ended March 31, 1998. In 1998,
PennzEnergy sold or exchanged approximately 10.7 million shares
of Chevron common stock in conjunction with an exchange offer for
its exchangeable debentures.
Net interest expense for the first quarter of 1999 totaled
$30.6 million compared to $39.2 million during the first quarter
of 1998. The decrease in interest expense was primarily due to
the reduction of debt associated with the early extinguishment of
6.5% and 4.75% exchangeable debentures and the spin-off of
Pennzoil-Quaker State in 1998.
<PAGE>
<PAGE> 11
PART I. FINANCIAL INFORMATION - continued
Capital Resources and Liquidity
Cash Flow. As of March 31, 1999, PennzEnergy had cash and
cash equivalents of $15.9 million. During the three months ended
March 31, 1999, cash and cash equivalents decreased $4.5 million.
PennzEnergy's cash flow from operations before changes in
operating assets and liabilities and cash exploration expense
totaled $32.4 million for the three months ended March 31, 1999,
compared to $66.8 million for the three months ended March 31,
1998.
Debt Instruments and Repayments. Borrowings under
PennzEnergy's variable-rate credit arrangements totaled $54.3
million as of March 31, 1999, which has been classified as long-
term debt along with $200 million of 9.625% Debentures due
November 1999 based upon the availability of committed long-term
credit facilities to refinance such amounts and PennzEnergy's
intent to maintain such commitments in excess of one year.
PennzEnergy had no outstanding borrowings under its $500 million
committed revolving credit facility at March 31, 1999.
Derivative Instruments. During April 1999, PennzEnergy
entered into swaps to hedge 18,000 barrels of crude oil per day
for May and June 1999 at an average of $17.26 per barrel and
$17.15 per barrel, respectively. In addition, PennzEnergy
entered into swaps to hedge approximately 165 MMcf of natural gas
per day for May and June 1999 at an average of $2.21 per Mcf and
$2.25 per Mcf, respectively. PennzEnergy also entered into
collar transactions for 19 MMcf per day of natural gas for May
and June 1999. The collar transactions fixed a minimum natural
gas price of $2.16 per Mcf for the two month period and a maximum
price of $2.30 per Mcf and $2.38 per Mcf for May and June 1999,
respectively. PennzEnergy did not hedge any of its crude oil or
natural gas production in the first quarter of 1999.
Year 2000
PennzEnergy has completed a review of its key computer
systems and has identified a number of systems that would be
affected by the year 2000 compliance issue. PennzEnergy is
undertaking or has completed conversions or upgrades of these non-
compliant financial, operating, human resources, payroll and
seismic data systems. The only conversions and upgrades
remaining are for seismic data systems and a billing system for a
retail gas operation, which are targeted for completion by the
end of August 1999 or sooner, after compliant upgrades are
received from the vendors. Upgrades and standardization to
network, infrastructure, desktop and communications systems to
make these assets compliant are in progress. This effort is
scheduled for completion in the second quarter of 1999 following
the release of compliant updates from the vendors. International
as well as domestic sites were included in these assessments.
The assessment of specialized hardware and software unique to an
international location was completed by the end of the first
quarter of 1999. The only system replacements that have been
accelerated to remedy non-compliance are some of the PennzEnergy
voicemail systems and security systems. No major information
technology ("IT") projects have been deferred due to year 2000
compliance issues. Contingency planning has started for the IT
systems during the first quarter of 1999 and includes backup,
standby and storage service solutions to reduce the impact of
critical service providers. The validation phase that consists
of testing mission-critical and significant systems will be
completed by June 1999.
<PAGE>
<PAGE> 12
PART I. FINANCIAL INFORMATION - continued
PennzEnergy has completed a comprehensive inventory and is
currently assessing and renovating systems and devices with
embedded chips in the exploration, production and non-production
facilities. The exploration and production facilities consist of
offshore platforms, onshore installations, gas plants, regional
pipelines and a natural gas retail distribution operation. These
facilities, which include the processing, storage, and movement
of oil and natural gas, have the greatest inherent risk since
embedded chip systems control and monitor these processes. At
this time, several of PennzEnergy's onshore exploration and
production facilities have non-compliant metering and control
equipment. These deficiencies are being addressed by upgrading
or replacing the non-compliant portion of mission-critical
equipment. This effort is targeted for completion by the end of
June 1999. Non mission-critical production equipment that may
have non-compliant components is being replaced with compliant
components during normal maintenance and repair outages that
occur through 1999. If for any reason, these systems do not
receive maintenance prior to the millennium or are still found to
be non-compliant after the millennium, they will be operated in a
manual mode until further renovation and testing is completed.
In addition, all currently compliant control systems that have
potential for environmental, safety, or business interruption
impact will be tested during scheduled maintenance. The majority
of this type of production equipment is used to monitor and
control production only. Nevertheless, operation of these
systems would still be reduced or discontinued if a component is
found to be non-compliant in order to prevent safety and
environmental problems. Contingency planning is also underway to
provide alternatives in the event these systems are partially or
completely inoperable. Spare components are being tested to
ensure compliant systems remain compliant through the maintenance
process.
PennzEnergy is contacting key suppliers, banks, customers
and other unaffiliated companies that have business relationships
with PennzEnergy to assess their year 2000 compliance programs.
PennzEnergy could be adversely affected by the failure of these
unaffiliated companies to adequately address the year 2000 issue.
This assessment includes activities such as face-to-face
meetings, reviews of year 2000 readiness and co-operative
testing. Contingency planning will be included in this
assessment to identify arrangements to mitigate the impact of
disruptions from outside sources. This process is targeted for
completion by the end of June 1999. In addition, PennzEnergy has
implemented internal procedures to respond cooperatively to
inquiries from regulatory agencies and other businesses about its
year 2000 program.
As with most companies, PennzEnergy anticipates more issues
arising from international business partners, especially in the
banking, utility, shipping and governmental segments. PennzEnergy
is currently reviewing all banking relationships in international
locations. In addition, PennzEnergy is actively involved in a
joint industry effort through the American Petroleum Institute to
collectively address the readiness of their common business
partners such as utilities and governmental agencies, and to
share approaches to solving the specific problems of each
international location.
If these steps are not completed successfully in a timely
manner, PennzEnergy's operations and financial performance could
be adversely affected through disruptions in operations. Costs
associated with such disruptions currently cannot be estimated.
Both incremental historical and estimated future costs
related to the year 2000 issue are not expected to be material to
the financial results of PennzEnergy for several reasons. Most
of the renovation is being accomplished with upgrades to existing
software that is under maintenance contracts. The implementation
of the major IT systems was not accelerated to remedy year 2000
problems. Independent quality assurance services and tools are
being used to assure the reliability of the assessment and costs.
These services will be supplemented with PennzEnergy resources.
Costs for all year 2000 activities are estimated to be less than
$8 million. This estimate does not include PennzEnergy's
potential share of year 2000 costs that may be incurred by
partnerships and joint ventures in which the company participates
but is not the operator.
<PAGE>
<PAGE> 13
PART I. FINANCIAL INFORMATION - continued
PennzEnergy has a June 30, 1999 target readiness date for
all major phases of its year 2000 preparations. PennzEnergy's
existing emergency response plan will be re-evaluated in the
fourth quarter of 1999, using the latest information available
for infrastructure services such as utilities. Adjustments to
this plan will be made based on this information. Readers are
cautioned that forward-looking statements contained in this year
2000 update should be read in conjunction with the company's
disclosures under the heading: "Forward-Looking Statements --
Safe Harbor Provisions."
Forward-Looking Statements - Safe Harbor Provisions
This quarterly report on Form 10-Q of PennzEnergy for the
quarter ended March 31, 1999 contains certain 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, which are intended to be
covered by the safe harbors created thereby. To the extent that
such statements are not recitations of historical fact, such
statements constitute forward-looking statements which, by
definition, involve risks and uncertainties. Where, in any
forward-looking statements, PennzEnergy expresses an expectation
or belief as to future results or events, such expectation or
belief is expressed in good faith and believed to have a
reasonable basis, but there can be no assurance that the
statement of expectation or belief will result or be achieved or
accomplished.
The following are factors that could cause actual results or
events to differ materially from those anticipated, and include
but are not limited to: general economic, financial and business
conditions; commodity prices for natural gas and crude oil; the
effect of weather on natural gas demand and consumption;
competition for international drilling rights; the costs of
exploration and development of petroleum reserves; exploration
risks; political risks impacting exploration and development;
unanticipated environmental liabilities; changes in and
compliance with governmental regulations; changes in tax laws;
and the cost and effects of legal proceedings.
<PAGE>
<PAGE> 14
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
12 Computation of Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends for the three
months ended March 31, 1999 and 1998.
27 Financial Data Schedule
(b) Reports -
No reports on Form 8-K were filed during the quarter for
which this report was filed.
<PAGE>
<PAGE> 15
SIGNATURE
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.
PENNZENERGY COMPANY
Registrant
S/N Malcolm R. Rae
Malcolm R. Rae
Controller
May 13, 1999
<TABLE>
EXHIBIT 12
PENNZENERGY COMPANY
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED
CHARGES AND PREFERRED STOCK DIVIDENDS
<CAPTION>
Three months ended March 31,
----------------------------------
1999 1998
------------- -------------
(Expressed in thousands)
<S> <C> <C>
Loss from continuing operations before income from
equity investees $ (29,343) $ (553)
Distributions of income from equity investees 598 901
Income tax provision (benefit) (19,114) (4,976)
Amortization of capitalized interest 2,341 2,098
Interest charges 32,361 40,724
------------- -------------
Income before income tax provision and interest charges $ (13,157) $ 38,194
============= =============
Fixed charges $ 36,958 $ 42,500
============= =============
Amount by which fixed charges exceed earnings $ 50,115 $ 4,306
============= =============
<CAPTION>
DETAIL OF INTEREST AND FIXED CHARGES
Three months ended March 31,
----------------------------------
1999 1998
------------- -------------
(Expressed in thousands)
<S> <C> <C>
Interest charges per consolidated statement of income
which includes amortization of debt discount, expense and premium $ 31,231 $ 40,963
Preferred stock dividends (grossed up to pre-tax, based on 38% tax rate) 3,926 -
Add: portion of rental expense representative of interest factor <F1> 1,801 1,537
------------- -------------
Total fixed charges $ 36,958 $ 42,500
Less: preferred stock dividends 3,926 -
Less: interest capitalized per consolidated statement of income 671 1,776
------------- -------------
Total interest charges $ 32,361 $ 40,724
============= =============
<FN>
<F1> Interest factor based on management's estimates and approximates one-third of rental expense.
</FN>
</TABLE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarter Ended March 31, 1999 Commission File No. 1-5591
PENNZENERGY COMPANY
(Exact name of registrant as specified in its charter)
Delaware 74-1597290
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Pennzoil Place, P.O. Box 4616
Houston, Texas 77210-4616
(Address of principal executive offices)
EXHIBIT
<PAGE>
PENNZOIL COMPANY AND SUBSIDIARIES
INDEX TO EXHIBITS
Exhibit No.
- -----------
12 Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends for the three months ended
March 31, 1999 and 1998.
27 Financial Data Schedule
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 15,908
<SECURITIES> 0
<RECEIVABLES> 81,113
<ALLOWANCES> 11,162
<INVENTORY> 4,495
<CURRENT-ASSETS> 124,264
<PP&E> 4,782,040
<DEPRECIATION> 3,141,146
<TOTAL-ASSETS> 2,431,148
<CURRENT-LIABILITIES> 161,564
<BONDS> 1,592,163
<COMMON> 43,507
0
1,500
<OTHER-SE> 339,805
<TOTAL-LIABILITY-AND-EQUITY> 2,431,148
<SALES> 115,313
<TOTAL-REVENUES> 126,476
<CGS> 46,643
<TOTAL-COSTS> 59,761
<OTHER-EXPENSES> 75,042
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,560
<INCOME-PRETAX> (47,859)
<INCOME-TAX> (19,114)
<INCOME-CONTINUING> (28,745)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (28,745)
<EPS-PRIMARY> (0.65)<F1>
<EPS-DILUTED> (0.65)
<FN>
<F1> Reflects basic earnings per share.
</FN>
</TABLE>
