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 September 30, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-9971
BURLINGTON RESOURCES INC.
(Exact name of registrant as specified in its charter)
Delaware 91-1413284
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5051 Westheimer, Suite 1400, Houston, Texas 77056
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (713) 624-9500
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
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding
Common Stock, par value $.01 per share,
as of September 30, 1999 177,564,685
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
BURLINGTON RESOURCES INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THIRD QUARTER NINE MONTHS
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
(In Millions, Except per Share Amounts)
<S> <C> <C> <C> <C>
Revenues................................... $ 437 $ 390 $ 1,162 $ 1,234
----- ----- ------- -------
Costs and Expenses
Production Taxes........................... 30 25 71 73
Production and Processing.................. 92 94 275 283
Depreciation, Depletion and Amortization... 133 130 387 390
Exploration Costs.......................... 39 71 128 187
Administrative............................. 35 29 102 97
----- ----- ------- ------
Total Costs and Expenses................... 329 349 963 1,030
----- ----- ------- ------
Operating Income ......................... 108 41 199 204
Interest Expense ......................... 40 39 123 111
Other Expense (Income) - Net ............. 1 (8) 1 (13)
----- ----- ------- ------
Income Before Income Taxes ............... 67 10 75 106
Income Tax Expense (Benefit) ............. 25 (5) 28 20
----- ----- ------- ------
Net Income ............................... $ 42 $ 15 $ 47 $ 86
===== ====== ======= =======
Basic Earnings per Common Share........... $ .24 $ .08 $ .27 $ .48
===== ====== ======= =======
Diluted Earnings per Common Share ........ $ .23 $ .08 $ .26 $ .48
===== ====== ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
2
<PAGE>
BURLINGTON RESOURCES INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(In Millions, Except Share Data)
<S> <C> <C>
ASSETS
Current Assets
Cash and Cash Equivalents ........................................$ -- $ --
Accounts Receivable .............................................. 410 402
Inventories ...................................................... 31 33
Other Current Assets ............................................. 26 21
----- ------
467 456
----- ------
Oil & Gas Properties (Successful Efforts Method) ................... 9,679 9,348
Other Properties ................................................... 857 828
------ ------
10,536 10,176
Accumulated Depreciation, Depletion and Amortization .............. 5,216 4,818
------ ------
Properties - Net ............................................... 5,320 5,358
------ ------
Other Assets ....................................................... 119 103
------ ------
Total Assets .................................................$ 5,906 $ 5,917
====== ======
LIABILITIES
Current Liabilities
Accounts Payable .................................................$ 285 $ 374
Taxes Payable .................................................... 83 53
Accrued Interest ................................................. 39 26
Dividends Payable ................................................ 24 24
Other Current Liabilities ........................................ 17 17
------ ------
448 494
------ ------
Long-term Debt ..................................................... 1,979 1,938
------ ------
Deferred Income Taxes .............................................. 220 199
------ ------
Deferred Revenue ................................................... 29 40
------ ------
Other Liabilities and Deferred Credits ............................. 222 217
------ ------
Put Options on Common Stock ........................................ -- 11
------ ------
Commitments and Contingent Liabilities
STOCKHOLDERS' EQUITY
Preferred Stock, Par Value $.01 Per Share
(Authorized 75,000,000 Shares; No Shares Issued) ................ -- --
Common Stock, Par Value $.01 Per Share
(Authorized 325,000,000 Shares; Issued 202,795,635 Shares) ...... 2 2
Paid-in Capital .................................................... 2,992 2,984
Retained Earnings .................................................. 1,013 1,039
------ ------
4,007 4,025
Cost of Treasury Stock
(25,230,950 and 25,420,562 Shares for 1999 and 1998, respectively) 999 1,007
------ ------
Stockholders' Equity ............................................... 3,008 3,018
------ ------
Total Liabilities and Stockholders' Equity ...................$ 5,906 $ 5,917
====== ======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
BURLINGTON RESOURCES INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
-----------
1999 1998
---- ----
(In Millions)
<S> <C> <C>
Cash Flows From Operating Activities
Net Income.......................................... $ 47 $ 86
Adjustments to Reconcile Net Income to Net Cash
Provided By Operating Activities
Depreciation, Depletion and Amortization .......... 399 401
Deferred Income Taxes ............................. 21 (3)
Exploration Costs ................................. 128 187
Working Capital Changes
Accounts Receivable ............................... (8) 45
Inventories ....................................... 2 (2)
Other Current Assets .............................. (5) 1
Accounts Payable .................................. (89) (138)
Taxes Payable ..................................... 30 (1)
Accrued Interest .................................. 13 17
Other Current Liabilities ......................... -- 6
Other .............................................. 46 7
----- -----
Net Cash Provided By Operating Activities ........ 584 606
----- -----
Cash Flows From Investing Activities
Additions to Properties ............................ (470) (818)
Short-term Investments ............................. -- 83
Other .............................................. (81) (27)
------ ------
Net Cash Used In Investing Activities ............ (551) (762)
------ ------
Cash Flows From Financing Activities
Proceeds from Long-term Debt ....................... 450 80
Reduction in Long-term Debt ........................ (409) --
Dividends Paid ..................................... (73) (73)
Common Stock Purchases ............................. (9) (15)
Other .............................................. 8 12
------ ------
Net Cash Provided By (Used In) Financing Activities (33) 4
------ ------
Decrease in Cash and Cash Equivalents ................ -- (152)
Cash and Cash Equivalents
Beginning of Year .................................... -- 152
------ ------
End of Period ........................................ $ -- $ --
===== =====
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
BURLINGTON RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The 1998 Annual Report of Burlington Resources Inc. (the "Company")
includes certain definitions and a summary of significant accounting policies
and should be read in conjunction with this Quarterly Report on Form 10-Q
("Quarterly Report"). The financial statements for the periods presented herein
are unaudited, condensed and do not contain all information required by
generally accepted accounting principles to be included in a full set of
financial statements. In the opinion of management, all material adjustments
necessary to present fairly the results of operations have been included. All
such adjustments are of a normal, recurring nature. The results of operations
for any interim period are not necessarily indicative of the results of
operations for the entire year. The consolidated financial statements include
certain reclassifications that were made to conform to current presentation.
Basic earnings per common share ("EPS") is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period. The weighted average number of common shares
outstanding for computing basic EPS was 178 million for the third quarter of
1999 and 177 million for the third quarter of 1998 and the first nine months of
1999 and 1998. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. The weighted average number of common shares outstanding for
computing diluted EPS, including dilutive stock options, was 178 million for the
third quarter and the first nine months of 1999 and 1998. For the third quarter
of 1999 and 1998 and the first nine months of 1999 and 1998, approximately 4
million shares attributable to the exercise of outstanding options were excluded
from the calculation of diluted EPS because the effect was antidilutive. No
adjustments were made to reported net income in the computation of EPS. EPS
discussions within this document are in reference to basic EPS.
2. PROPOSED BUSINESS COMBINATION
On August 16, 1999, the Company and Poco Petroleums Ltd. ("Poco"), a
Canadian company, entered into a definitive agreement to combine the businesses
of the two companies. The transaction is subject to approval by the shareholders
of the Company and Poco and other customary conditions.
Under the proposed transaction, Poco shareholders will exchange each of
their Poco shares for .25 of an exchangeable share of Burlington Resources
Canada Inc., a Canadian subsidiary of the Company. Each exchangeable share will
have economic and voting rights equivalent to one share of the Company's common
stock and may be exchanged for one share of the Company common stock at any
time. The transaction, including approximately $750 million of Poco debt, is
valued at approximately $2.5 billion based on the Company's closing stock price
of $45.3125 on August 16, 1999 and is expected to be accounted for as a pooling
of interests. The transaction is expected to close in November 1999.
5
<PAGE>
3. COMMITMENTS AND CONTINGENT LIABILITIES
The Company is involved in several proceedings challenging the payment of
royalties for its crude oil and natural gas production.
On November 20, 1997, the Company and numerous other defendants entered
into a settlement agreement in a lawsuit styled as The McMahon Foundation, et
al. v. Amerada Hess Corporation, et al. This lawsuit is a proposed class action
consisting of both working interest owners and royalty owners against numerous
defendants, all of which are oil companies and/or purchasers of oil from oil
companies, including Burlington Resources Oil & Gas Company, formerly known as
Meridian Oil Inc. ("BROG") and The Louisiana Land and Exploration Company
("LL&E"). The plaintiffs allege that the defendants conspired to fix, depress,
stabilize and maintain at artificially low levels the prices paid for oil by,
among other things, setting their posted prices at arbitrary levels below
competitive market prices. Cases involving similar allegations have been filed
in federal courts in other states. On January 14, 1998, the United States
Judicial Panel on Multidistrict Litigation issued an order consolidating these
cases and transferring the McMahon case to the United States District Court for
the Southern District of Texas in Corpus Christi (In Re Lease Oil Antitrust
Litigation, MDL No. 1206). The Company and other defendants have entered into a
Settlement Agreement which received preliminary approval by the Court on October
28, 1998. Following an evidentiary hearing, the Court issued a final order dated
September 10, 1999 finding that class certification was appropriate and that the
Settlement Agreement was fair, adequate and reasonable. The Court further
ordered the dismissal of all claims against the Company and other designated
defendants. Several appeals have been filed and are pending.
The Company is also involved in several governmental proceedings relating
to the payment of royalties. Various administrative proceedings are pending
before the Minerals Management Service ("MMS") of the United States Department
of the Interior with respect to the proper valuation of oil and gas produced on
federal and Indian lands for purposes of paying royalties on production sold by
BROG to its affiliate, Burlington Resources Trading Inc. ("BRTI"), or gathered
by its affiliate, Burlington Resources Gathering Inc. In general, these
proceedings stem from regular MMS audits of the Company's royalty payments over
various periods of time and involve the interpretation of the relevant federal
regulations.
In late February 1998, the Company and numerous other oil and gas companies
received a complaint filed in the United States District Court for the Eastern
District of Texas in Lufkin in a lawsuit styled as United States of America ex
rel J. Benjamin Johnson, Jr., et al v. Shell Oil Company, et al. alleging
violations of the civil False Claims Act. The United States has intervened in
this lawsuit as to some of the defendants, including the Company, and has filed
a separate complaint. This suit alleges that the Company underpaid royalties for
crude oil produced on federal and Indian lands through the use of below-market
posted prices in the sale of oil from BROG to BRTI. The suit alleges that
royalties paid by BROG based on these posted prices were lower than the
royalties allegedly required to be paid under federal regulations, and that the
forms filed by BROG with the MMS reporting the royalties paid were false,
thereby violating the civil False Claims Act. The Company and others have also
received document subpoenas and other inquiries from the Department of Justice
relating to the payment of royalties to the federal government for natural gas
production. These requests and inquiries have been made in the context of one or
more other False Claims Act cases brought by individuals which remain under seal
and are now being investigated by the Civil Division of the Department of
Justice. The Company has responded and continues to respond to these requests
and inquiries, but the Company does not know what action, if any, the Department
of Justice will take with regard to these other cases. If the government chooses
not to intervene and pursue these cases, the individuals who initially brought
these cases are free to pursue them in return for a share, if any, of any final
settlement or judgment. In addition, the Company has been advised that it is a
target of a criminal investigation by the United States Attorney for the
District of Wyoming into the alleged underpayment of oil and gas royalties. The
United States Attorney for the District of Wyoming has also inquired into
6
<PAGE>
certain historical oil and gas accounting and financial reporting practices of
the Company. The Company has responded to numerous grand jury document subpoenas
in connection with the investigation and is otherwise cooperating with the
investigation. Management cannot predict when the investigation will be
completed or its ultimate outcome.
Based on the Company's present understanding of the various governmental
proceedings described in the preceding two paragraphs, the Company believes that
it has substantial defenses to these claims and intends to vigorously assert
such defenses. However, in the event that the Company is found to have violated
the civil False Claims Act or is indicted or convicted on criminal charges, the
Company could be subjected to a variety of sanctions, including treble damages,
substantial monetary fines, civil and/or criminal penalties and a temporary
suspension from entering into future federal mineral leases and other federal
contracts for a defined period of time. While the ultimate outcome and impact on
the Company cannot be predicted with certainty, management believes that the
resolution of these proceedings will not have a material adverse effect on the
consolidated financial position of the Company, although results of operations
and cash flow could be significantly impacted in the reporting periods in which
such matters are resolved.
In addition to the foregoing, the Company and its subsidiaries are named
defendants in numerous other lawsuits and named parties in numerous governmental
and other proceedings arising in the ordinary course of business. While the
outcome of these other lawsuits and proceedings cannot be predicted with
certainty, management believes these matters, other than the above-described
proceedings, will not have a material adverse effect on the consolidated
financial position, results of operations or cash flows of the Company.
4. COMMODITY HEDGING ACTIVITIES
The Company hedges its oil and gas production utilizing options and swaps.
As of September 30, 1999, the Company had a deferred loss related to its oil and
gas hedges of approximately $57 million for production in years 1999 through
2002.
5. SEGMENT AND GEOGRAPHIC INFORMATION
The Company's reportable segments are North America and International. Both
segments are engaged principally in the exploration, development, production and
marketing of oil and gas. The North America segment is responsible for the
Company's operations in the U.S. and Canada and the International segment is
responsible for all operations outside that geographical region. There are no
significant intersegment sales or transfers.
The following tables present information about reported segment operations.
<TABLE>
<CAPTION>
Third Quarter
-------------------------------------------------------------------
1999 1998
------------------------------ ---------------------------------
North North
America International Total America International Total
------- ------------- ----- ------- ------------- -----
(In Millions)
<S> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 401 $ 36 $ 437 $ 359 $ 31 $ 390
Operating income (loss).............. 149 (1) 148 82 (9) 73
Additions to oil and gas properties.. $ 124 $ 25 $ 149 $ 232 $ 40 $ 272
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Nine Months
----------------------------------------------------------------
1999 1998
----------------------------- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
North North
America International Total America International Total
------- ------------- ----- ------- ------------- -----
(In Millions)
Revenues............................. $1,061 $ 101 $1,162 $1,118 $ 116 $1,234
Operating income (loss).............. 345 (33) 312 317 (7) 310
Additions to oil and gas properties.. $ 321 $ 126 $ 447 $ 690 $ 97 $ 787
</TABLE>
The following is a reconciliation of segment operating income to
consolidated income before income taxes.
<TABLE>
<CAPTION>
Third Quarter Nine Months
------------- -----------
1999 1998 1999 1998
---- ---- ---- ----
(In Millions)
<S> <C> <C> <C> <C>
Total operating income for reportable segments.... $148 $ 73 $312 $ 310
Corporate expenses................................ 40 32 113 106
Interest expense.................................. 40 39 123 111
Other expense (income) - net...................... 1 (8) 1 (13)
---- ----- ---- ------
Consolidated income before income taxes........... $ 67 $ 10 $ 75 $ 106
===== ==== ==== ======
</TABLE>
The following is a reconciliation of segment additions to oil and gas
properties to consolidated amounts.
<TABLE>
<CAPTION>
Third Quarter Nine Months
------------- -----------
1999 1998 1999 1998
---- ---- ---- ----
(In Millions)
<S> <C> <C> <C> <C>
Total additions to oil and gas properties for reportable segments.. $ 149 $ 272 $ 447 $ 787
Administrative expenditures........................................ 9 9 23 31
----- ----- ----- -----
Consolidated additions to properties .............................. $ 158 $ 281 $ 470 $ 818
===== ===== ===== =====
</TABLE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Financial Condition and Liquidity
The total long-term debt to capital ratio at September 30, 1999 and
December 31, 1998 was 40 percent and 39 percent, respectively.
The Company's credit facilities are comprised of a $600 million revolving
credit agreement that expires in February 2003 and a $400 million revolving
credit agreement that expires in February 2000. The $400 million revolving
credit agreement is renewable annually by mutual consent. As of September 30,
1999, there were no borrowings outstanding under the credit facilities. The
Company also has the capacity to issue $1 billion of securities under a shelf
registration statement filed with the Securities and Exchange Commission. In
March 1999, the Company issued $450 million of 7 3/8 percent fixed-rate debt. In
May and August 1999, the Company repaid $300 million and $150 million of
fixed-rate debt, respectively. At September 30, 1999, the Company had
outstanding commercial paper borrowings of $232 million at an average interest
rate of 6 percent.
8
<PAGE>
Net cash provided by operating activities for the first nine months of 1999
was $584 million compared to $606 million in 1998. The decrease is primarily due
to lower operating income partially offset by higher working capital and other
changes.
The Company and its subsidiaries are named defendants in numerous lawsuits
and named parties in numerous governmental and other proceedings arising in the
ordinary course of business. While the outcome of lawsuits and other proceedings
cannot be predicted with certainty, management believes these matters will not
have a material adverse effect on the consolidated financial position of the
Company, although results of operations and cash flows could be significantly
impacted in the reporting periods in which such matters are resolved.
The Company has certain other commitments and uncertainties related to its
normal operations. Management believes that there are no other commitments,
uncertainties or contingent liabilities that will have a material adverse effect
on the consolidated financial position, results of operations or cash flows of
the Company.
Capital Expenditures
Capital expenditures for the first nine months of 1999 totaled $470 million
compared to $818 million in 1998. Capital expenditures are currently projected
to be approximately $750 million for all of 1999 and are expected to be
primarily for the development and exploration of oil and gas properties and
plant and pipeline expenditures. Capital expenditures will be funded from
internal cash flows, supplemented, if needed, by external financing.
Commodity Pricing
The Company uses a sensitivity analysis technique to evaluate the
hypothetical effect that changes in the market value of crude oil and natural
gas may have on the fair value of the Company's derivative instruments. At
September 30, 1999, the potential change in fair value of commodity derivative
instruments assuming a 10 percent adverse movement in the underlying commodities
(which is an increase in oil and gas prices) would result in a 131% increase in
the net deferred loss.
For purposes of calculating the hypothetical change in fair value, the
relevant variables are the type of commodity (crude oil or natural gas), the
commodity futures prices, the volatility of commodity prices and the basis and
quality differentials. The hypothetical change in fair value is calculated by
multiplying the difference between the hypothetical price (adjusted for any
basis or quality differentials) and the contractual price by the contractual
volumes.
Dividends
On October 13, 1999, the Board of Directors declared a quarterly common
stock dividend of $.1375 per share, payable January 3, 2000.
Results of Operations - Third Quarter 1999 Compared to Third Quarter 1998
The Company reported net income of $42 million or $.24 per share for the
third quarter of 1999 compared to $15 million or $.08 per share in 1998.
Operating income for the third quarter of 1999 was $108 million compared to $41
million in 1998.
9
<PAGE>
Revenues were $437 million for the third quarter of 1999 compared to $390
million for the third quarter of 1998. Natural gas sales prices increased 15
percent to $2.18 per MCF and gas sales volumes decreased 4 percent to 1,561 MMCF
per day which increased revenues $42 million and decreased revenues $12 million,
respectively. Average oil sales prices increased 39 percent to $17.54 per barrel
and oil sales volumes decreased 16 percent to 69.2 MBbls per day which increased
revenues $31 million and decreased revenues $15 million, respectively. Gas and
oil sales volumes decreased primarily due to reduced capital spending on the
Gulf of Mexico shelf coupled with steep production declines in the area.
Costs and expenses were $329 million for the third quarter of 1999 compared
to $349 million in 1998. The decrease was primarily due to a $32 million
decrease in exploration costs, a $2 million decrease in production and
processing expenses partially offset by a $6 million increase in administrative
expenses, a $5 million increase in production taxes and a $3 million increase in
depreciation, depletion and amortization.
Other expense (income) - net was an expense of $1 million for the third
quarter of 1999 compared to income of $8 million in 1998, primarily due to lower
interest income in 1999.
The effective income tax rate was an expense of 38 percent for the third
quarter of 1999 compared to a benefit of 59 percent in 1998. The effective tax
rate increased primarily as a result of higher pretax income and lower benefits
from nonconventional fuel tax credits.
Results of Operations - Nine Months 1999 Compared to Nine Months 1998
The Company reported net income of $47 million or $.27 per share for the
first nine months of 1999 compared to $86 million or $.48 per share in 1998.
Operating income for the first nine months of 1999 was $199 million compared to
$204 million in 1998.
Revenues were $1,162 million for the first nine months of 1999 compared to
$1,234 million in 1998. Natural gas sales prices increased 2 percent to $1.99
per MCF and gas sales volumes decreased 6 percent to 1,543 MMCF per day which
increased revenues $17 million and decreased revenues $55 million, respectively.
Average oil sales prices increased 5 percent to $14.40 per barrel and oil sales
volumes decreased 16 percent to 71.2 MBbls per day which increased revenues $12
million and decreased revenues $50 million, respectively. Gas and oil sales
volumes decreased primarily due to reduced capital spending on the Gulf of
Mexico shelf coupled with steep production declines in the area.
Costs and expenses were $963 million for the first nine months of 1999
compared to $1,030 million in 1998. The decrease was primarily due to a $59
million decrease in exploration costs, an $8 million decrease in production and
processing expenses, a $3 million decrease in depreciation, depletion and
amortization and a $2 million decrease in production taxes partially offset by a
$5 million increase in administrative expenses.
Interest expense was $123 million for the first nine months of 1999
compared to $111 million in 1998. The increase was due to higher outstanding
fixed-rate debt and higher outstanding commercial paper borrowings during the
first nine months of 1999.
Other expense (income) - net was an expense of $1 million for the first
nine months of 1999 compared to income of $13 million in 1998, primarily due to
lower interest income in 1999.
Income tax expense for the first nine months of 1999 was $28 million, a
rate of 37 percent compared to $20 million and a rate of 19 percent in 1998. The
increased tax expense in 1999 is primarily a result of lower benefits from
nonconventional fuel tax credits.
10
<PAGE>
Other Matters
Proposed Business Combination
On August 16, 1999, the Company and Poco Petroleums Ltd. ("Poco"), a
Canadian company, entered into a definitive agreement to combine the businesses
of the two companies. The transaction is subject to approval by the shareholders
of the Company and Poco and other customary conditions.
Under the proposed transaction, Poco shareholders will exchange each of
their Poco shares for .25 of an exchangeable share of Burlington Resources
Canada Inc., a Canadian subsidiary of the Company. Each exchangeable share will
have economic and voting rights equivalent to one share of the Company's common
stock and may be exchanged for one share of the Company common stock at any
time. The transaction, including approximately $750 million of Poco debt, is
valued at approximately $2.5 billion based on the Company's closing stock price
of $45.3125 on August 16, 1999 and is expected to be accounted for as a pooling
of interests. The transaction is expected to close in November 1999.
Year 2000 Compliance
The year 2000 issue is the result of computer systems and other equipment
with embedded chips or processors using two digits instead of four to define a
specific year and potentially being unable to process accurately certain data
before, during or after the year 2000. This could result in system failures or
miscalculations, causing disruptions to various activities and operations.
The Company began a program during 1996 to assess computer software and
hardware (hereafter referred to as information technology), which included an
assessment of any year 2000 issues. Since 1996, significant portions of the
Company's information technology have been replaced with information technology
that is year 2000 compliant, and the Company has further developed a year 2000
readiness plan.
The Company's year 2000 readiness plan involves four phases: assessment,
remediation, testing and implementation. The Company has completed its
assessment of all material systems that could be affected by the year 2000
issue. The assessment confirmed that information technology exposures were not
material; however, assets used in producing, gathering and transporting
hydrocarbons (hereafter referred to as operating equipment) were determined to
be at risk of encountering year 2000 problems.
The Company has completed the remediation, testing and implementation
phases for all significant operating equipment. The Company's goal under its
year 2000 readiness plan is to ensure that all critical operating equipment,
systems and processes under its direct control remain operational. However,
because certain operating equipment, systems and processes may be linked with
systems outside of the Company's control, there can be no assurance that all
implementations will be successful.
The Company has no means of ensuring that its third-party vendors and
suppliers will be year 2000 compliant. The Company has contacted all third-party
vendors and suppliers of products and services that it considers material to its
operations in order to ascertain their level of year 2000 readiness. All of the
significant vendors and suppliers of the Company have responded that they
believe the year 2000 issue will not have a material adverse impact on their
ability to perform. However, if the Company's third party vendors and suppliers
are unable to perform because of year 2000 problems, such failures could result
in the inability to transport, deliver or market crude oil, natural gas or
natural gas liquids.
11
<PAGE>
Crude oil gathering, transportation and marketing by the Company are widely
dispersed across the United States, and it is unlikely that a year 2000 failure
by any single gatherer, transporter, or purchaser of crude oil would
significantly impact the Company. A significant portion of natural gas sales
originate in the San Juan Basin. Natural gas is gathered in the San Juan Basin
through three primary gathering systems operated by an affiliate and two other
companies. The gas is then sold through two primary pipelines. Approximately 70%
of natural gas sales by all producers in the San Juan Basin and 35% of the
Company's natural gas sales are transported to markets by a single pipeline
system. The Company, in conjunction with other major producers in the San Juan
Basin, has evaluated these entities' assessment, remediation, testing and
implementation on their systems for year 2000 readiness. The Company and other
major producers have had discussions with certain suppliers and vendors upon
which these gathering and transportation systems rely to perform their services
for the Company. The Company has also participated in the development of
contingency plans to deal with unforeseeable year 2000 failures. The Company is
continuing to develop contingency plans to address the reasonably foreseeable
issues in connection with a possible failure with respect to the gathering and
transportation of natural gas in the San Juan Basin. These plans include manual
back-up of computer controlled and embedded technology systems and
identification of alternative vendors and suppliers.
Although management believes it is unlikely, the most reasonable worst case
scenario for the Company would be a complete or partial failure of one or more
of the three gathering systems or the complete or partial failure of one of the
transportation lines in the San Juan Basin. Such a failure could disrupt or
delay a significant portion of the gas sales out of the San Juan Basin during
the time of the failure and could be material to the Company.
The Company has enhanced existing crisis management plans and year 2000
contingency plans to address potential operational disruptions throughout its
production areas. The Company has substantially completed its year 2000
readiness project at a cost of approximately $3 million. The costs of the
contingency plans are estimated to be $500,000.
The Company's plan to complete the year 2000 modifications and its estimate
of the worst case scenarios and contingency plans are based on management's best
estimates, which were derived utilizing numerous assumptions of future events
including the continued availability of certain resources and other factors.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those plans. Specific factors that
might cause such materialdifferences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, the failure of embedded chip
technology, the inability to control third parties and their year 2000 readiness
programs, the failure of electric, communication or transportation
infrastructure in the areas where the Company operates and other uncertainties.
Presently, based on information available, the Company cannot conclude that
any failure of the Company or third parties to achieve year 2000 compliance will
not adversely affect the Company.
Recent Accounting Pronouncements
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 137, Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133.
SFAS No. 137 defers the effective date of SFAS No. 133 to fiscal years
beginning after June 15, 2000. The Company plans to adopt SFAS No. 133 during
the first quarter of the year ended December 31, 2001.
12
<PAGE>
Forward-looking Statements
This Quarterly Report contains projections and other forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934. These projections and statements reflect the Company's current views with
respect to future events and financial performance. No assurances can be given,
however, that these events will occur or that these projections will be achieved
and actual results could differ materially from those projected as a result of
certain factors. A discussion of these factors is included in the Company's 1998
Form 10-K.
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
See Note 2 of Notes to Consolidated Financial Statements.
ITEM 6. Exhibits and Reports on Form 8-K
A. Exhibits
The following exhibits are filed as part of this report.
Exhibit Nature of Exhibit Page
4.1 The Company and its subsidiaries either *
have filed with the Securities and Exchange
Commission or upon request will furnish a
copy of any instrument with respect to
long-term debt of the Company.
27.1 Financial Data Schedule **
* Exhibit incorporated by reference.
** Exhibit required only for filings made electronically using the Securities
and Exchange Commission's EDGAR System.
B. Reports on Form 8-K
On August 18, 1999, the Company filed Form 8-K which included
as an exhibit a Press Release dated August 16, 1999, announcing
that it had entered into a definitive combination agreement
providing for the combination of Poco Petroleums Ltd. ("Poco") with
the Company.
On August 19, 1999, the Company filed Form 8-K which included as
exhibits copies of slide presentations made to analysts in the
United States and Canada related to the combination agreement
between the Company and Poco.
Items 2, 3, 4 and 5 of Part II are not applicable and have been omitted.
14
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) 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.
BURLINGTON RESOURCES INC.
(Registrant)
By /s/ John E. Hagale
John E. Hagale
Executive Vice President and
Chief Financial Officer
By /s/ Philip W. Cook
Philip W. Cook
Vice President, Controller and
Chief Accounting Officer
Date: October 22, 1999
15
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM
THE BURLINGTON RESOURCES INC. CONSOLIDATED BALANCE
SHEET AS OF SEPTEMBER 30,1999 AND THE RELATED CONSOLIDATED
STATEMENT OF INCOME FOR THE NINE MONTH PERIOD ENDED
SEPTEMBER 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
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