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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 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: 1-10216
CHIEFTAIN INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Alberta, Canada None
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1201 Toronto Dominion Tower, Edmonton Centre,
Edmonton, Alberta, Canada T5J 2Z1
- --------------------------------------------- ----------------------
(Address of principal executive offices) (Zip Code/Postal Code)
Registrant's telephone number, including area code: (403) 425-1950
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) have 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 class of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Title of each class Date Number Outstanding
- ------------------- -------------- ------------------
<S> <C> <C>
Common shares April 15, 1998 13,543,475
</TABLE>
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CHIEFTAIN INTERNATIONAL, INC.
MARCH 31, 1998 FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
PART I
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
Item 1. Financial Statements
Consolidated Condensed Balance Sheet -
March 31, 1998 and December 31, 1997 3
Consolidated Condensed Statement of Income -
Three months ended March 31, 1998 and 1997 4
Consolidated Condensed Statement of Changes in Financial Position -
Three months ended March 31, 1998 and 1997 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II
Item 1. Legal Proceedings 10
Item 2. Changes in Securities 10
Item 3. Defaults Upon Senior Securities 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
</TABLE>
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CHIEFTAIN INTERNATIONAL, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED BALANCE SHEET
(Full Cost Method of Accounting)
<TABLE>
<CAPTION>
MARCH 31, December 31,
1998 1997
---------- ----------
(U.S. $ in thousands)
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and short-term deposits $ 17,774 $ 26,925
Accounts receivable 10,904 10,862
Other 861 606
---------- ----------
29,539 38,393
Capital assets - net 250,412 236,715
Deferred income taxes 3,224 3,442
---------- ----------
$ 283,175 $ 278,550
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued $ 20,314 $ 15,717
Deferred income taxes 14,230 13,367
Preferred shares of a subsidiary 63,403 63,403
Shareholders' equity:
Common shares 191,964 192,845
Contributed surplus -- 307
Deficit (6,736) (7,089)
---------- ----------
185,228 186,063
---------- ----------
$ 283,175 $ 278,550
========== ==========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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CHIEFTAIN INTERNATIONAL, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31 1998 1997
- ------------------------------------------------------------------- ----------- -----------
(U.S. $ in thousands except number of shares and per share amounts)
(unaudited)
<S> <C> <C>
Production revenue, net of royalties $ 16,566 $ 21,924
Interest and other revenue (Note 2) 2,152 639
----------- -----------
18,718 22,563
----------- -----------
Production expenses 3,870 3,361
General and administrative expenses 1,637 1,261
Depletion and amortization 10,327 9,497
----------- -----------
15,834 14,119
----------- -----------
Income before income taxes and dividends on
preferred shares of a subsidiary 2,884 8,444
Income taxes 1,093 3,285
----------- -----------
Income before dividends on preferred shares of a subsidiary 1,791 5,159
Dividends on preferred shares of a subsidiary 1,235 1,235
----------- -----------
Net income applicable to common shares $ 556 $ 3,924
=========== ===========
Net income per common share (Note 3)
- Basic $ 0.04 $ 0.29
=========== ===========
- Fully diluted $ 0.04 $ 0.28
=========== ===========
Weighted average number of common shares outstanding:
- Basic 13,600,005 13,600,658
=========== ===========
- Fully diluted 13,600,005 14,503,979
=========== ===========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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CHIEFTAIN INTERNATIONAL, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN FINANCIAL POSITION
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31 1998 1997
- --------------------------------------------------- -------- --------
(U.S. $ in thousands)
(unaudited)
<S> <C> <C>
Operating activities:
Net income applicable to common shares $ 556 $ 3,924
Items not requiring a current cash outlay 11,408 12,748
-------- --------
11,964 16,672
Net change in non-cash operating working capital (1,234) (672)
-------- --------
10,730 15,991
Financing activities:
Issue of common shares 61 178
Purchase of common shares for cancellation (1,453) --
-------- --------
(1,392) 178
Investing activities:
Lease acquisition, exploration and drilling costs (22,102) (10,112)
Pipelines and production equipment acquired (1,913) (1,885)
-------- --------
(24,015) (11,997)
Purchase of other capital assets (9) (17)
Change in investing accounts payable and accrued 5,535 199
-------- --------
(18,489) (11,815)
-------- --------
Change in cash and short term deposits (9,151) 4,354
Beginning cash and short-term deposits 26,925 42,449
-------- --------
Ending cash and short-term deposits $ 17,774 $ 46,803
======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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CHIEFTAIN INTERNATIONAL, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation:
In the opinion of Chieftain International, Inc. (the "Company" and
together with its subsidiaries "Chieftain"), the accompanying unaudited
consolidated condensed financial statements contain all adjustments
(consisting of only normal recurring accruals) necessary to present
fairly the financial position as at March 31, 1998 and December 31,
1997 and the results of operations and changes in financial position
for the three month periods ended March 31, 1998 and 1997. Certain
information and notes normally included in Chieftain's financial
statements prepared in conformity with Canadian generally accepted
accounting principles have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission. These
consolidated condensed financial statements should be read in
conjunction with the consolidated financial statements and the notes
thereto included in Chieftain's Annual Report on Form 10-K for the year
ended December 31, 1997.
Preparation of financial statements in conformity with generally
accepted accounting principles requires management to make informed
judgements and estimates. Actual results may differ from those
estimates.
The results of operations and changes in financial position for the
three month period ended March 31, 1998 are not necessarily indicative
of the results to be expected for the full year.
Material differences between Canadian and U.S. accounting principles
that affect Chieftain are referred to in Note 4, which provides the
condensed effects of the differences on earnings and balance sheet
accounts.
2. Interest and Other Revenue:
Interest and other revenue for the first quarter of 1998 includes $1.6
million awarded by the courts pursuant to a successful claim for
recovery of excess transportation charges incurred from 1990 through
1997. The award comprises transportation charges, legal fees and
judgement interest in the amounts of $1,129,000, $282,000 and $189,000,
respectively.
3. Per Share Amounts:
Net income per common share is computed by dividing net income
applicable to common shares, by the weighted average number of common
shares outstanding during the period.
In the calculation of fully diluted earnings per share, shares
outstanding are adjusted for share options and shares issuable on
conversion of preferred shares. Earnings are adjusted by the amount of
imputed interest on share option proceeds and preferred share
dividends.
4. United States Accounting Principles:
U.S. full cost accounting rules differ materially from the Canadian
full cost accounting guidelines followed by Chieftain. The U.S. rules
require an impairment test to be conducted quarterly whereas the
Canadian guidelines require this test only at year-end. In determining
the limitation on carrying values, U.S. rules require the discounting
of future net revenues at 10%
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and Canadian guidelines require the use of undiscounted future net
revenues and the deduction of estimated future administrative costs.
The effect on the Consolidated Condensed Balance Sheet of the
differences between Canadian and U.S. accounting principles is as
follows:
<TABLE>
<CAPTION>
AS AT MARCH 31, 1998 December 31, 1997
------------------------- --------------------------- ---------------------------
(U.S.$ in thousands)
Under U.S. Under U.S.
As Accounting As Accounting
reported Principles reported Principles
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net capital assets $ 250,412 $ 233,140 $ 236,715 $ 218,673
Deferred tax - asset $ 3,224 $ 5,198 $ 3,442 $ 5,537
Deferred tax - liability $ 14,230 $ 9,715 $ 13,367 $ 8,737
Deficit $ (6,736) $ (17,519) $ (7,089) $ (18,406)
</TABLE>
The effect on consolidated earnings of these differences is summarized
as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31 1998 1997
------------------------------------------------------------------ ------------ ------------
(U.S.$ in thousands except number of shares and per share amounts)
<S> <C> <C>
Net income applicable to common shares as reported $ 556 $ 3,924
Add reduction in depletion expense 770 893
Less increase in deferred tax provision (236) (341)
------------ ------------
Net income applicable to common shares under U.S.
accounting principles $ 1,090 $ 4,476
============ ============
Net income per common share under U.S.
accounting principles:
- Basic $ 0.08 $ 0.33
============ ============
- Fully diluted 0.08 0.32
============ ============
Fully diluted number of common shares outstanding 13,922,248 13,822,413
============ ============
</TABLE>
The Company applies the intrinsic value method prescribed by APB
Opinion 25 and related interpretations in accounting for share option
transactions. Accordingly, no compensation cost is recognized in the
accounts. U.S. accounting principles require disclosure of the impact
on earnings and earnings per share of the value of options granted
after 1994, calculated in accordance with FAS 123. Such impact would
amount to a net of tax charge to income of $422,000 (1997 - $225,000).
After reflecting this charge, pro forma net income applicable to common
shares under U.S. accounting principles would be $668,000 (1997 -
$4,251,000); net income per common share under U.S. accounting
principles would be $0.05 (1997- $0.31); and pro forma fully diluted
earnings per common share under U.S. accounting principles would be
$0.05 (1997 - $0.31). These effects are not necessarily indicative of
those to be expected in future periods.
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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
To be read in conjunction with the accompanying consolidated
condensed financial statements.
RESULTS OF OPERATIONS
Three months ended March 31, 1998 and 1997
The 25% decrease in first quarter 1998 production revenue resulted from a 25%
decrease in average price received for natural gas to $2.12 per mcf, a 36%
decrease in average oil price received to $13.84 per barrel, a 1% decrease in
natural gas production to 7.5 bcf and a 29% increase in oil production volume to
294,000 barrels, all as compared to the corresponding 1997 period.
Quarter ended March 31,
<TABLE>
<CAPTION>
1998 1997
--------------------------------------------- ---------------------------------------------
Natural Gas Oil and NGLs Natural Gas Oil and NGLs
(mmcfd) (bd) (mmcfd) (bd)
Gulf of North Gulf of North
Mexico Sea Total Total Mexico Sea Total Total
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gross production 67.7 15.3 83.0 3,269 69.2 15.0 84.2 2,528
Royalties 13.8 -- 13.8 412 13.5 -- 13.5 370
Net production 53.9 15.3 69.2 2,857 55.7 15.0 70.7 2,158
Average price $ 2.24 $ 1.55 $ 2.12 $13.84 $ 3.02 $ 1.92 $ 2.82 $21.73
</TABLE>
U.S. gas prices in the first quarter were significantly lower relative to last
year. Demand for energy was reduced due to mild temperatures during the quarter.
The degree day indicator, a measure of heating demand for energy, was down 9%
from normal in the primary markets for Chieftain's gas in eastern and central
parts of the continent. However, by April the effects of the warm winter had
diminished and gas prices for the remainder of the year, based on NYMEX futures
prices, rose above the levels of last year. Oil prices fell more than gas prices
due to reduced demand caused by warmer weather and by adverse economic
conditions in some parts of the world. Increased supply also contributed to the
oil price decline.
Production expenses for the first three months of 1998 increased 15% from the
1997 period, primarily reflecting the commencement of production at East Cameron
349 and significant pipeline repair costs in the South Pass area. Depletion and
amortization expense increased 9%, the result of a 3% increase in units of
production and a 6% increase in the average depletion rate to $1.12 per gas
equivalent unit.
CAPITAL RESOURCES AND LIQUIDITY
The following table summarizes cash provided from or (used in) operating,
financing and investing activities for each of the periods shown:
<TABLE>
<CAPTION>
Three months ended March 31, 1998 1997
- ----------------------------- -------- --------
<S> <C> <C>
Cash provided from (used in):
Operating activities $ 10,730 $ 15,991
Financing activities (1,392) 178
Investing activities (18,489) (11,815)
-------- --------
Increase (decrease) in cash $ (9,151) $ 4,354
======== ========
</TABLE>
29
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Cash generated from operating activities decreased 28% primarily as a result of
lower operating revenue.
Financing activities in 1998 used $1.4 million of cash, the net result of the
exercise of employee stock options for $0.1 million and the purchase, for $1.5
million, of 66,500 common shares for cancellation. In October 1997, the Company
announced a normal course issuer bid for up to 500,000 common shares. Financing
activities in the comparable period in 1997 provided $0.2 million of cash, the
result of the exercise of employee stock options.
Cash used in investing activities increased 56% to $18.5 million, in comparison
to the 1997 period. During the 1998 period, Chieftain participated in 22 wells
of which 6 were drilling at quarter end. During the comparable 1997 period,
Chieftain participated in 19 wells of which 4 were drilling at quarter end. All
of the 1998 and 1997 wells were in the U.S. Chieftain plans to drill up to 32
exploratory and 10 development wells in the Gulf of Mexico during the remaining
three quarters of 1998. The high levels of industry activity in 1997 have
carried through to the first quarter of 1998, particularly in the Gulf of
Mexico. Such continuing high levels of demand for drilling and services have
resulted in cost increases and delays in exploration and development programs. A
continuation of depressed oil prices could lead to a reduction in demand for
drilling and related services resulting in improved availability and lower
exploration costs.
March 31, 1998 cash of $17.8 million was down $29.0 million from the comparable
1997 amount. Chieftain's $100,000,000 revolving credit facility was not drawn
upon at March 31, 1998 and Chieftain remains debt-free.
OUTLOOK
While lower first quarter prices for natural gas and oil from year earlier
levels indicate the possibility of lower average prices for 1998, higher
production volumes are anticipated which should result in steadily increasing
cash flow from operations.
Capital expenditures for 1998 are budgeted at $85 million, of which $24 million
was spent in the first quarter. The capital expenditures are expected to be
funded by cash flow from operations and working capital. Such capital
expenditures can be varied significantly with respect to timing and priority
dependent upon exploration success, availability of equipment and services and
current opportunities.
INFORMATION REGARDING FORWARD LOOKING FINANCIAL STATEMENTS
This Form 10-Q report contains forward-looking statements that are subject to
risk factors associated with the oil and gas business. Chieftain believes that
the expectations reflected in these statements are reasonable, but may be
affected by a variety of variables including, but not limited to: price
fluctuations, currency fluctuations, drilling and production results,
imprecision of reserve estimates, loss of market, industry competition,
environmental risks, political risks and capital restrictions.
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PART II
Item 1. Legal Proceedings
Chieftain is not party to, and none of its properties is the subject
of, any material legal proceedings.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
Chieftain has declared and paid all cumulative dividends.
Item 4. Submission of Matters to a Vote of Security Holders
No matters have been submitted to a vote of the security holders of the
Company during the first quarter of 1998.
Item 5. Other Information
None
Item 6. Exhibits and Reports of Form 8-K
None
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Chieftain International, Inc.
(Registrant)
/s/ E. L. Hahn
- --------------------------------------------
E. L. Hahn
Senior Vice President, Finance and Treasurer
(Chief Financial Officer)
Dated: April 17, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH
31, 1998 BALANCE SHEET AND THE STATEMENT OF INCOME FOR THE THREE MONTHS ENDED
MARCH 31, 1998 INCLUDED IN THE COMPANY'S MARCH 31, 1998 10-Q AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 17,774
<SECURITIES> 0
<RECEIVABLES> 10,904
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 29,539
<PP&E> 485,878<F1>
<DEPRECIATION> 235,466
<TOTAL-ASSETS> 283,175<F2>
<CURRENT-LIABILITIES> 20,314
<BONDS> 0
0
0
<COMMON> 191,964
<OTHER-SE> 56,667<F3>
<TOTAL-LIABILITY-AND-EQUITY> 283,175<F4>
<SALES> 16,566
<TOTAL-REVENUES> 18,718<F5>
<CGS> 0
<TOTAL-COSTS> 15,834<F6>
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,884
<INCOME-TAX> 1,093
<INCOME-CONTINUING> 1,791
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,791
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
<FN>
<F1>CHIEFTAIN ACCOUNTS FOR GAS AND OIL PROPERTIES IN ACCORDANCE WITH CANADIAN
GUIDELINES ON FULL COST ACCOUNTING.
<F2>DEFERRED INCOME OF TAXES OF $3,224 HAVE BEEN INCLUDED IN TOTAL ASSETS.
<F3>PREFERRED SHARES OF A SUBSIDIARY OF $63,403, AND RETAINED EARNINGS (DEFICIT)
OF $(6,736), HAVE BEEN COMBINED IN CALCULATING OTHER STOCKHOLDERS' EQUITY.
<F4>DEFERRED INCOME TAXES OF $14,230 HAVE BEEN INCLUDED IN TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY.
<F5>INCLUDES A SUCCESSFUL $1,600 CLAIM FOR RECOVERY OF PAST YEARS' EXCESS
TRANSPORTATION CHARGES.
<F6>PRODUCTION EXPENSES OF $3,870 GENERAL AND ADMINISTRATIVE EXPENSES OF $1,637 AND
DEPLETION AND AMORTIZATION OF $10,327, HAVE BEEN COMBINED IN CALCULATING TOTAL
COSTS.
</FN>
</TABLE>
