<PAGE> 1
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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, 1999
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 TD Tower, 10088 - 102 Avenue
Edmonton, Alberta, Canada T5J 2Z1
- ---------------------------------------- ----------------------
(Address of principal executive offices) (Zip Code/Postal Code)
Registrant's telephone number, including area code: (780) 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, 1999 13,348,391
</TABLE>
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CHIEFTAIN INTERNATIONAL, INC.
MARCH 31, 1999 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, 1999 and December 31, 1998 3
Consolidated Condensed Statement of Income (loss)
Three months ended March 31, 1999 and 1998 4
Consolidated Condensed Statement of Changes in Financial Position
Three months ended March 31, 1999 and 1998 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 12
</TABLE>
<PAGE> 3
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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,
1999 1998
- -----------------------------------------------------------------
(unaudited) (US$ in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and short-term deposits $ 2,946 $ 10,613
Accounts receivable 11,200 14,030
Other 552 282
--------- ---------
14,698 24,925
Capital assets - net 287,233 288,477
Deferred income taxes 5,470 5,182
--------- ---------
$ 307,401 $ 318,584
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued $ 16,008 $ 22,533
Long-term debt 40,000 40,000
Abandonment cost accrual 7,970 7,421
Deferred income taxes 12,418 13,684
Shareholders' equity:
Preferred shares of a subsidiary 63,403 63,403
Common shares 189,001 189,108
Contributed surplus 26 --
Deficit (21,425) (17,565)
--------- ---------
231,005 234,946
--------- ---------
$ 307,401 $ 318,584
========= =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE> 4
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CHIEFTAIN INTERNATIONAL, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENT OF INCOME (LOSS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31 1999 1998
- -----------------------------------------------------------------------------------------------------
(unaudited) (US$ in thousands except
number of shares and per
share amounts)
<S> <C> <C>
Production revenue, net of royalties $ 13,034 $ 16,566
Interest and other revenue (Note 2) 184 2,152
------------ ------------
13,218 18,718
------------ ------------
Production costs 3,312 3,870
General and administrative expenses 1,329 1,637
Interest 565 --
Depletion and amortization 12,181 10,327
------------ ------------
17,387 15,834
------------ ------------
Income (loss) before income taxes and dividends on
preferred shares of a subsidiary (4,169) 2,884
Income taxes (Note 3) (1,544) 1,093
------------ ------------
Income (loss) before dividends on preferred shares of a subsidiary (2,625) 1,791
Dividends on preferred shares of a subsidiary 1,235 1,235
------------ ------------
Net income (loss) applicable to common shares $ (3,860) $ 556
============ ============
Net income (loss) per common share (Note 4)
- Basic $ (0.29) $ 0.04
============ ============
- Fully diluted $ (0.29) $ 0.04
============ ============
Weighted average number of common shares outstanding:
- Basic 13,354,174 13,600,005
============ ============
- Fully diluted 13,354,174 13,600,005
============ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE> 5
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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 1999 1998
- ----------------------------------------------------------------------------------------
(unaudited) (US$ in thousands)
<S> <C> <C>
Operating activities:
Net income (loss) applicable to common shares $ (3,860) $ 556
Items not requiring a current cash outlay 10,627 11,408
-------- --------
6,767 11,964
Net change in non-cash operating working capital (Note 5) 1,239 (1,234)
-------- --------
8,006 10,730
Financing activities:
Purchase of common shares for cancellation (80) (1,453)
Issue of common shares -- 61
-------- --------
(80) (1,392)
Investing activities:
Lease acquisition, exploration and drilling costs (9,414) (22,102)
Pipelines and production equipment acquired (971) (1,913)
-------- --------
(10,385) (24,015)
Purchase of other capital assets (4) (9)
Change in investing accounts payable and accrued (5,204) 5,535
-------- --------
(15,593) (18,489)
-------- --------
Change in cash and short term deposits (7,667) (9,151)
Beginning cash and short-term deposits 10,613 26,925
-------- --------
Ending cash and short-term deposits $ 2,946 $ 17,774
======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE> 6
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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, 1999 and December 31, 1998
and the results of operations and changes in financial position for the
three month periods ended March 31, 1999 and 1998. 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, 1998.
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, 1999 are not necessarily indicative
of the results to be expected for the full year.
Material differences between Canadian and US accounting principles that
affect Chieftain are referred to in Note 6, 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 included $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 $189,000,
respectively.
3. Income Taxes:
The provision for income taxes differs from the amount of income tax
determined by applying the Canadian statutory rate to pre-tax income
(loss) before dividends paid on preferred shares of a subsidiary as a
result of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31 1999 1998
--------------------------------------------------------------------------------
(US$ in thousands) (unaudited)
<S> <C> <C>
Tax at statutory Canadian rate 44.62% $(1,860) $ 1,287
Lower income tax rate on earnings of US subsidiaries 325 (222)
Other (9) 28
------- -------
Tax at effective rate $(1,544) $ 1,093
======= =======
Effective tax rate 37.0% 37.9%
======= =======
</TABLE>
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Page 7 of 12
4. Per Share Amounts:
Net income (loss) per common share is computed by dividing net income
(loss) 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 where dilutive. Earnings are adjusted by
the amount of imputed interest on share option proceeds and preferred
share dividends.
5. Supplemental Cash Flow Information:
Cash outflows for income taxes were $10,000 (1998 - $18,000). Cash
outflows for long-term debt interest were $567,000 (1998 - $nil).
6. United States Accounting Principles:
(a) Full cost accounting
US full cost accounting rules differ materially from the Canadian
full cost accounting guidelines followed by Chieftain. The US 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, US rules require the
discounting of future net revenues at 10%, and Canadian guidelines
require the use of undiscounted future net revenues and the deduction
of estimated future administrative and financing costs. The quarterly
test required by US accounting rules, using a March 31 UK gas price
of $0.84 per mcf to determine future net revenues, would have
resulted in a write-down of UK property carrying costs of $7.1
million which, after providing for tax recoveries of $3.1 million,
results in a net charge to operations of $4.0 million.
(b) Effect on earnings
The effect on consolidated earnings of these differences is
summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31 1999 1998
-----------------------------------------------------------------------------------------------------
(US$ in thousands except number of shares and per share amounts)
<S> <C> <C>
Net income (loss) applicable to common shares
as reported $ (3,860) $ 556
Additional depletion (7,104) --
------------ ------------
(10,964) 556
Add reduction in depletion expense 3,697 770
Decrease (increase) in deferred tax provision 1,831 (236)
------------ ------------
Net income (loss) applicable to common shares
under US accounting principles $ (5,436) $ 1,090
============ ============
Net income (loss) per common share under US
accounting principles:
- Basic $ (0.41) $ 0.08
============ ============
- Fully diluted $ (0.41) $ 0.08
============ ============
Fully diluted number of common shares
outstanding 13,354,174 13,922,248
============ ============
</TABLE>
<PAGE> 8
Page 8 of 12
(c) Effect on balance sheet
The effect on the Consolidated Condensed Balance Sheet of the
differences between Canadian and US accounting principles is as
follows:
<TABLE>
<CAPTION>
AS AT MARCH 31, 1999 December 31, 1998
-----------------------------------------------------------------------------------------
(US$ in thousands)
Under US Under US
As Accounting As Accounting
reported Principles reported Principles
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Net capital assets $ 287,233 $ 180,866 $ 288,477 $ 185,517
Deferred tax - asset $ 5,470 $ 31,618 $ 5,182 $ 28,233
Deferred tax - liability $ 12,418 $ -- $ 13,684 $ --
Deficit $ (21,425) $ (89,226) $ (17,565) $ (83,790)
</TABLE>
Additionally for US reporting purposes, the preferred shares shown as
shareholders' equity in these consolidated condensed financial
statements would be shown outside the equity section.
(d) Stock-based compensation
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. US 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. For the first
quarter of 1999 such impact would amount to a net of tax charge to
income (loss) of $261,000 (1998 - $422,000). Under US accounting
principles after reflecting this charge, pro forma net income (loss)
applicable to common shares would be $(5,697,000) (1998 - $668,000);
net income (loss) per common share would be $(0.43) (1998- $0.05);
and pro forma fully diluted earnings (loss) per common share would be
$(0.43) (1998 - $0.05). These effects are not necessarily indicative
of those to be expected in future periods.
<PAGE> 9
Page 9 of 12
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, 1999 and 1998
For the first quarter of 1999, production revenues decreased 21% ($3.5 million),
to $13.0 million.
CHANGE IN NATURAL GAS AND OIL AND NGLS REVENUES
<TABLE>
<CAPTION>
Quarter ended March 31, 1999 compared to 1998
Price Volume Total
- ----------------------------------------------------------------------
(US dollars in thousands)
<S> <C> <C> <C>
Natural Gas
US $(3,466) $ 1,263 $(2,203)
UK (410) (600) (1,010)
---------------------------------------
Total (3,876) 663 (3,213)
Oil and Ngls (691) 372 (319)
---------------------------------------
$(4,567) $ 1,035 $(3,532)
=======================================
</TABLE>
Average daily first quarter production increased to 109 mmcfe in 1999 from 103
mmcfe in 1998. Though the first quarter's production rate of 109 mmcfe per day
is below the annual production target range of 115 to 125 mmcfe per day, it is
in step with the Company's expectations for the first quarter. Initial
production from South Marsh Island 39 commenced at the end of the first quarter.
Natural gas production increased to 7.8 bcf compared to 7.5 bcf in 1998. Oil and
ngls production increased to 331 mb compared to 294 mb in 1998. First quarter
natural gas prices averaged $1.54 per mcf in 1999 compared to $2.12 in 1998.
First quarter oil and ngls prices averaged $10.94 per b in 1999 compared to
$13.84 in 1998.
PRODUCTION AND PRICING
<TABLE>
<CAPTION>
Quarter ended
March 31, 1999 1998
---------------------------------------- ---------------------------------------
Natural Gas Oil and NGLs Natural Gas Oil and NGLs
(mmcfd) (bd) (mmcfd) (bd)
North North
US Sea Total Total US Sea Total Total
- --------------------------------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gross production 76.1 11.0 87.1 3,679 67.7 15.3 83.0 3,269
Royalties 16.0 -- 16.0 523 13.8 -- 13.8 412
Net production 60.1 11.0 71.1 3,156 53.9 15.3 69.2 2,857
Average price $ 1.60 $ 1.13 $ 1.54 $10.94 $ 2.24 $ 1.55 $ 2.12 $13.84
</TABLE>
As indicated, Gulf of Mexico gas prices during the first quarter of 1999 were
lower than those of the 1998 first quarter. The decline is attributed to mild
weather, resulting in larger volumes of US gas in storage. It is anticipated
that declining gas deliverability will support stronger gas prices in the
remainder of 1999.
Oil prices, also weak in the first quarter, were strengthening as the second
quarter began.
<PAGE> 10
Page 10 of 12
Production costs for the first three months of 1999 decreased 14% from the 1998
period, primarily reflecting the significant pipeline repair costs in the South
Pass area during the first quarter of 1998. Production costs decreased to $0.34
per gas equivalent unit, down 19% from the first quarter 1998 rate of $0.42 per
gas equivalent unit.
General and administrative expenses for the first three months of 1999 decreased
19% from the 1998 period, reflecting the higher performance based compensation
payments made during the first quarter of 1998. On a gas equivalent basis,
general and administrative costs decreased 22% to $0.14/mcfe compared to $0.18
in the corresponding period of 1998.
Depletion and amortization expense increased 18%, the result of a 6% increase in
units of production and an 11% increase in the average depletion rate to $1.24
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, 1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
Cash provided from (used in):
Operating activities $ 8,006 $ 10,730
Financing activities (80) (1,392)
Investing activities (15,593) (18,489)
-------- --------
Increase (decrease) in cash $ (7,667) $ (9,151)
======== ========
</TABLE>
Cash generated from operating activities decreased 25% primarily as a result of
lower operating revenue.
Financing activities in 1999 used $0.1 million of cash, the result of the
purchase for cancellation of 7,500 common shares under a normal course issuer
bid. Financing activities in the comparable period 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 cancellation of 66,500 common shares at the cost of $1.5
million under a normal course issuer bid.
Cash used in investing activities decreased 16% to $15.6 million. During the
1999 period, the Company participated in 8 wells of which 3 were drilling at
quarter end. During the comparable 1998 period, the Company participated in 22
wells of which 6 were drilling at quarter end. The Company plans to drill
approximately 15 exploratory and development wells in the Gulf of Mexico during
1999.
The March 31, 1999 cash balance of $2.9 million was down $14.8 million from the
comparable 1998 balance. $40 million of the Company's $100 million revolving
credit facility was utilized at March 31, 1999. The weighted average interest
rate was 5.59%.
OUTLOOK
The Company's 1999 annual production target range remains unchanged at 115 to
125 mmcfe per day as compared to annual average production of 103 mmcfe in 1998.
The Company expects that its 1999 capital expenditure program will be
approximately $50 million. 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. The Company
will monitor capital spending and adjust investment levels based on cash flow
projections. Natural gas in the Gulf of Mexico will continue to be the focus of
the Company.
<PAGE> 11
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YEAR 2000 DISCLOSURE
The Company has completed its assessment of its internal Year 2000 issues, has
made changes and employed testing procedures as deemed necessary and at this
time is confident that no issues remain which could have a material effect on
its financial condition or results of operations. The Company's assessment of
the readiness of third parties is in process and should be completed by the end
of the second quarter of 1999. Costs incurred to date and expected to be
incurred in the future are not material to the Company.
The Company has interests in a substantial number of offshore oil and gas
production facilities which are operated by others and is required to rely on
assessments by such third parties as to Year 2000 readiness of such facilities.
Production volumes are transported through pipelines and processed through
facilities which are also operated by third parties. There is extensive use of
computers to control and operate such pipelines and facilities in the oil and
gas industry and it is reasonably likely that one or more of such facilities
will experience a computer related event which could result in shut down of
production, transportation or processing facilities for such time as is required
to effect alternative controls. The Company can not reasonably quantify the
estimated lost revenue, if any, which would result from such an interruption. To
mitigate the effect of any interruptions, the Company intends to continue its
review of contingency plans prepared by its various operating partners.
FORWARD LOOKING INFORMATION
This 10-Q contains forward-looking statements that are subject to risk factors
associated with the oil and gas business. The Company believes that the
expectations reflected in these statements are reasonable, but may be affected
by a number 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.
<PAGE> 12
Page 12 of 12
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 1999.
Item 5. Other Information
None
Item 6. Exhibits and Reports of Form 8-K
None
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, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH
31, 1999 BALANCE SHEET AND THE STATEMENT OF INCOME (LOSS) FOR THE THREE MONTHS
ENDED MARCH 31, 1999 INCLUDED IN THE COMPANY'S MARCH 31, 1999 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,946
<SECURITIES> 0
<RECEIVABLES> 11,200
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 14,698
<PP&E> 564,888<F1>
<DEPRECIATION> 277,655
<TOTAL-ASSETS> 307,401<F2>
<CURRENT-LIABILITIES> 16,008
<BONDS> 40,000<F3>
0
0
<COMMON> 189,001
<OTHER-SE> 42,004<F4>
<TOTAL-LIABILITY-AND-EQUITY> 307,401<F5>
<SALES> 13,034
<TOTAL-REVENUES> 13,218
<CGS> 0
<TOTAL-COSTS> 16,822<F6>
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 565
<INCOME-PRETAX> (4,169)
<INCOME-TAX> (1,544)
<INCOME-CONTINUING> (2,625)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,625)
<EPS-PRIMARY> (0.29)
<EPS-DILUTED> (0.29)
<FN>
<F1>The Company accounts for gas and oil properties in accordance with Canadian
guidelines on full cost accounting.
<F2>Deferred income taxes of $5,470 have been included in total assets.
<F3>Unsecured revolving credit facility with a syndicate of banks, in the amount of
U.S. $100 million, fully revolving for 364 day periods with extensions at the
option of the lenders upon notice from the Company. If not extended, the
facility converts to term loans repayable over a period not exceeding four
years. Advances under the facility bear interest at Canadian prime or U.S. base
rate, or at Bankers' Acceptance rates or LIBOR plus applicable margins.
<F4>Preferred shares of a subsidiary of $63,403, contributed surplus of $26 and
retained earnings (deficit) of $(21,425), have been combined in calculating
other stockholders' equity.
<F5>Abandonment cost accrual of $7,970 and deferred income taxes of $12,418 have
been included in total liabilities and stockholders' equity.
<F6>Production costs of $3,312, general and administrative expenses of $1,329 and
depletion and amortization of $12,181, have been combined in calculating total
costs.
</FN>
</TABLE>
