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, 1996
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
Commission file number 1-10447
CABOT OIL & GAS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 04-3072771
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
15375 Memorial Drive, Houston, Texas 77079
(Address of principal executive offices including Zip Code)
(713) 589-4600
(Registrant's telephone number)
No Change
(Former name, former address and 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 and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---
As of October 31, 1996, there were 22,811,519 shares of Class A Common
Stock, Par Value $.10 Per Share, outstanding.
<PAGE>
CABOT OIL & GAS CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Part I. Financial Information Page
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Statement of Operations for the Three and Nine Months
Ended September 30, 1996 and 1995................................................................ 3
Condensed Consolidated Balance Sheet at September 30, 1996 and December 31, 1995................... 4
Condensed Consolidated Statement of Cash Flows for the Three and Nine Months
Ended September 30, 1996 and 1995................................................................ 5
Notes to Condensed Consolidated Financial Statements............................................... 6
Independent Certified Public Accountants' Report on Review of
Interim Financial Information.................................................................... 10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................................................... 11
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K............................................................. 20
Signature .............................................................................................. 21
</TABLE>
2
<PAGE>
CABOT OIL & GAS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
NET OPERATING REVENUES
Natural Gas Production..................................... $ 29,656 $ 21,783 $ 94,521 $ 73,544
Crude Oil & Condensate..................................... 2,598 2,116 8,196 8,388
Brokered Natural Gas Margin................................ 971 435 4,185 1,865
Other...................................................... 2,272 5,289 7,139 8,033
------- -------- -------- --------
35,497 29,623 114,041 91,830
OPERATING EXPENSES
Direct Operations.......................................... 6,960 6,785 20,386 20,692
Exploration................................................ 2,926 2,025 8,974 5,016
Depreciation, Depletion and Amortization................... 10,448 11,352 30,462 38,182
Impairment of Unproved Properties.......................... 705 1,128 2,115 3,177
Impairment of Long-Lived Assets (Note 8)................... -- 113,795 -- 113,795
General and Administrative................................. 3,975 3,273 12,033 12,727
Taxes Other Than Income.................................... 2,889 2,983 9,407 8,775
Cost Reduction Program (Note 7)............................ -- -- -- 6,820
------- -------- -------- --------
27,903 141,341 83,377 209,184
Gain (Loss) on Sale of Assets................................. (17) 10 1,456 (399)
------- -------- -------- --------
INCOME (LOSS) FROM OPERATIONS................................. 7,577 (111,708) 32,120 (117,753)
Interest Expense, Net (Note 11)............................... 3,241 5,523 12,869 17,118
------- -------- -------- --------
Income (Loss) Before Income Taxes............................. 4,336 (117,231) 19,251 (134,871)
Income Tax Expense (Benefit) (Note 11)........................ (29) (45,313) 5,993 (52,234)
------- -------- -------- --------
NET INCOME (LOSS)............................................. 4,365 (71,918) 13,258 (82,637)
Dividend Requirement on Preferred Stock....................... 1,391 1,391 4,174 4,162
------- -------- -------- --------
Net Income (Loss) Applicable to Common Stockholders........... $ 2,974 $ (73,309) $ 9,084 $ (86,799)
======= ======== ======== ========
Earnings (Loss) Per Share Applicable to Common................ $ 0.13 $ (3.22) $ 0.40 $ (3.81)
======= ======== ======== =========
Average Common Shares Outstanding............................. 22,808 22,778 22,800 22,773
======= ======== ======== =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
CABOT OIL & GAS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
ASSETS
Current Assets
<S> <C> <C>
Cash and Cash Equivalents.................................................. $ 1,433 $ 3,029
Accounts Receivable........................................................ 35,038 42,014
Inventories................................................................ 10,288 5,596
Other...................................................................... 1,779 1,709
-------- --------
Total Current Assets..................................................... 48,538 52,348
Properties and Equipment (Successful Efforts Method).......................... 477,139 474,371
Other Assets.................................................................. 1,446 1,436
-------- --------
$ 527,123 $ 528,155
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable........................................................... $ 33,997 $ 48,122
Accrued Liabilities........................................................ 15,746 12,759
-------- --------
Total Current Liabilities................................................ 49,743 60,881
Long-Term Debt................................................................ 244,000 249,000
Deferred Income Taxes......................................................... 69,804 62,752
Other Liabilities............................................................. 8,560 7,666
Commitments and Contingencies (Note 6)
Stockholders' Equity
Preferred Stock:
Authorized--5,000,000 Shares of $.10 Par Value
Issued and Outstanding - $3.125 Cumulative Convertible
Preferred; $50 Stated Value; 692,439 Shares in 1996 and 1995 - 6%
Convertible Redeemable Preferred; $50
Stated Value; 1,134,000 Shares in 1996 and 1995........................ 183 183
Common Stock:
Authorized--40,000,000 Shares of $.10 Par Value
Issued and Outstanding--22,811,109 Shares and
22,783,319 Shares in 1996 and 1995, Respectively....................... 2,281 2,278
Additional Paid-in Capital................................................. 242,868 242,058
Accumulated Deficit........................................................ (90,316) (96,663)
-------- --------
Total Stockholders' Equity............................................... 155,016 147,856
-------- --------
$ 527,123 $ 528,155
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
<PAGE>
CABOT OIL & GAS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C> <C>
Net Income (Loss).......................................... $ 4,365 $ (71,918) $ 13,258 $ (82,637)
Adjustment to Reconcile Net Income (Loss) To Cash
Provided by Operating Activities:
Depletion, Depreciation and Amortization............. 10,448 11,352 30,462 38,182
Impairment of Undeveloped Leasehold.................. 705 1,128 2,115 3,177
Impairment of Long-Lived Assets (Note 8)............. -- 113,795 -- 113,795
Deferred Income Taxes................................ 1,497 (45,935) 7,052 (52,321)
(Gain) Loss on Sale of Assets........................ 17 (10) (1,456) 399
Exploration Expense.................................. 2,926 2,025 8,974 5,016
Other, Net........................................... 73 (474) 168 2,530
Changes in Assets and Liabilities:
Accounts Receivable.................................. 1,004 4,203 6,976 10,961
Inventories.......................................... (5,388) (1,797) (4,692) 1,325
Other Current Assets................................. 165 (540) (71) (18)
Other Assets......................................... (5) (9) (10) (43)
Accounts Payable and Accrued Liabilities............. 230 (5,515) (11,503) (10,250)
Other Liabilities.................................... 495 82 1,462 652
------ ------- ------ ------
Net Cash Provided by Operating Activities............ 16,532 6,387 52,735 30,768
------ ------- ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital Expenditures....................................... (14,654) (2,907) (38,569) (10,933)
Cost of Major Acquisition (Note 10)........................ -- 8,402 -- 8,402
Proceeds from Sale of Assets (Notes 9)..................... 340 2,019 4,749 9,716
Exploration Expense........................................ (2,926) (2,025) (8,974) (5,016)
------ ------- ------ ------
Net Cash Provided (Used) by Investing Activities..... (17,240) 5,489 (42,794) 2,169
------ ------- ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of Common Stock....................................... 145 78 373 339
Increase in Debt........................................... 2,000 -- 2,000 7,000
Decrease in Debt........................................... (1,000) (10,000) (7,000) (35,027)
Dividends Paid............................................. (2,304) (2,303) (6,910) (7,061)
------ ------- ------ ------
Net Cash Used by Financing Activities................ (1,159) (12,225) (11,537) (34,749)
------ ------- ------ ------
Net Decrease in Cash and Cash Equivalents.................... (1,867) (349) (1,596) (1,812)
Cash and Cash Equivalents, Beginning of Period............... 3,300 2,310 3,029 3,773
------ ------- ------ ------
Cash and Cash Equivalents, End of Period..................... $ 1,433 $ 1,961 $ 1,433 $ 1,961
====== ======= ====== ======
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
<PAGE>
CABOT OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. FINANCIAL STATEMENT PRESENTATION
During interim periods, the Company follows the accounting policies set
forth in its Annual Report to Stockholders and its Report on Form 10-K filed
with the Securities and Exchange Commission. Users of financial information
produced for interim periods are encouraged to refer to the footnotes contained
in the Annual Report to Stockholders when reviewing interim financial results.
In the opinion of management, the accompanying interim financial statements
contain all material adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation.
2. RECLASSIFICATIONS
Certain items within the Condensed Consolidated Statement of Operations for
the three and nine months ended September 30, 1995 have been reclassified to
conform with the September 30, 1996 presentation. Under the new presentation,
the Company presents gas revenues from its equity production net of related
costs (principally transportation and storage costs) in a new revenue item
called "Natural Gas Production". Similarly, the procurement costs related to the
purchase and resale (brokered) activity are netted against the gas revenues and
presented in a new item called "Brokered Natural Gas Margin" in the net
operating revenues section.
3. PROPERTIES AND EQUIPMENT
Properties and equipment are comprised of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
(in thousands)
<S> <C> <C>
Unproved oil and gas properties....................................... $ 14,738 $ 12,488
Proved oil and gas properties......................................... 799,339 800,373
Gathering and pipeline systems........................................ 147,489 146,330
Land, building and improvements....................................... 5,214 5,551
Other................................................................. 15,610 15,243
-------- --------
982,390 979,985
Accumulated depreciation, depletion and amortization.................. (505,251) (505,614)
-------- --------
$ 477,139 $ 474,371
======== ========
</TABLE>
6
<PAGE>
CABOT OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - continued
4. ADDITIONAL BALANCE SHEET INFORMATION
Certain balance sheet amounts are comprised of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
(in thousands)
Accounts Receivable
<S> <C> <C>
Trade accounts.................................................... $ 30,168 $ 38,119
Other accounts.................................................... 5,555 5,138
------- -------
35,723 43,257
Allowance for doubtful accounts................................... (685) (1,243)
------- -------
$ 35,038 $ 42,014
======= =======
Inventories
Natural gas in storage............................................ $ 8,681 $ 4,058
Tubular goods and well equipment.................................. 1,669 1,485
Pipeline exchange balances........................................ (62) 53
------- -------
$ 10,288 $ 5,596
======= =======
Accounts Payable
Trade accounts.................................................... $ 10,530 $ 9,312
Natural gas purchases............................................. 7,586 12,523
Royalty and other owners.......................................... 9,505 10,842
Capital costs..................................................... 2,912 6,518
Dividends payable................................................. 1,391 1,391
Taxes other than income........................................... 768 749
Gas price swaps................................................... -- 3,205
Gas transportation................................................ 255 552
Other accounts.................................................... 1,050 3,030
------- -------
$ 33,997 $ 48,122
======= =======
Accrued Liabilities
Employee benefits................................................. $ 3,218 $ 2,506
Taxes other than income........................................... 7,161 7,633
Interest payable.................................................. 4,032 1,883
Income taxes payable.............................................. 528 --
Other accrued..................................................... 807 737
------- -------
$ 15,746 $ 12,759
======= =======
Other Liabilities
Postretirement benefits other than pension....................... $ 2,072 $ 2,640
Accrued pension cost.............................................. 3,767 3,144
Taxes other than income........................................... 2,324 1,482
Other............................................................. 397 400
------- -------
$ 8,560 $ 7,666
======= =======
</TABLE>
7
<PAGE>
CABOT OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - continued
5. LONG-TERM DEBT
At September 30, 1996, the Company had borrowed $160 million against an
available credit line of $235 million. The available credit line is subject to
adjustment from time-to-time on the basis of the projected present value (as
determined by a petroleum engineer's report incorporating certain assumptions
provided by the lender) of estimated future net cash flows from proved oil and
gas reserves and other assets. In May 1996, the revolving term under this credit
facility was extended one year to June 1998.
The Company had $4 million drawn at September 30, 1996 on a $5 million term
note agreement designed to meet working capital needs. The agreement was
established in February 1996, matures December 31, 1997 and has an interest rate
principally based on the prime rate minus one percent.
6. CONTINGENCIES
Subsequent to the developments with regard to the Barby lawsuits as
described in the Company's 1995 Annual Report on Form 10-K, both actions have
been settled. The settlement resulted in a charge to earnings in the second
quarter of 1996 that was not material to the Company's operating results or
financial position.
7. COST REDUCTION PROGRAM
In January 1995, the Company announced a cost reduction program which
included a voluntary early retirement program, a 15% targeted reduction in
workforce and a consolidation of management in the Rocky Mountain, Anadarko and
onshore Gulf Coast areas into a single Western Region. Accordingly, the Company
recognized a liability and charged to expense $6.8 million in termination
benefits for 115 employees, or 23% of the total workforce, including 24
employees who elected early retirement. See Note 12 of the Notes to the
Consolidated Financial Statements in the Company's 1995 Annual Report for
further discussion.
8. ACCOUNTING FOR LONG-LIVED ASSETS
Effective September 30, 1995, the Company adopted Statement of Financial
Accounting Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of". SFAS 121
requires that an impairment loss be recognized when the carrying amount of an
asset exceeds the sum of the undiscounted estimated future cash flow of the
asset. Under SFAS 121, the Company reviewed the impairment of oil and gas
properties and related assets on an economic unit basis. For each economic unit
determined to be impaired, an impairment loss equal to the difference between
the carrying value and the fair value of the economic unit was recognized. Fair
value, on a economic unit basis, was estimated to be the present value of
expected future net cash flows over the economic life of the reserves. As a
result of the adoption of SFAS 121, the Company recognized a non-cash charge
during the 1995 third quarter of $113.8 million ($69.1 million after tax).
8
<PAGE>
CABOT OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - continued
9. SALE OF NON-CORE OIL AND GAS PROPERTIES
The Company sold various non-core oil and gas properties in the Appalachian
Region, receiving $4.4 million in the nine months of 1996, and in the Western
Region, receiving proceeds of $7.9 million in the nine months of 1995.
10. VALUATION ADJUSTMENT
In the third quarter of 1995, the Company received an $8.4 million net cash
settlement in connection with a valuation adjustment on the 1994 Washington
Energy Resources Company acquisition ("WERCO Valuation Adjustment"). The WERCO
Valuation Adjustment was recorded as a reduction to the net book value of
certain oil and gas properties purchased in the WERCO acquisition.
11. INCOME TAX REFUND
In September 1996, the Company received $3.1 million, including a $1.8
million federal income tax refund and $1.3 million of interest income, in
connection with percentage depletion claimed in certain periods prior to 1990.
9
<PAGE>
Independent Certified Public Accountants' Report on Review of Interim Financial
Information
To the Board of Directors and Shareholders
Cabot Oil & Gas Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of
Cabot Oil & Gas Corporation as of September 30, 1996, and the related condensed
consolidated statements of operations and cash flows for the three-month and
nine-month periods ended September 30, 1996 and 1995. These financial statements
are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial statements
for them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year then ended (not presented herein); and, in our report dated
March 1, 1996, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31, 1995, is
fairly stated in all material respects, in relation to the consolidated
financial statements from which it has been derived.
Coopers & Lybrand L.L.P.
Houston, Texas
November 12, 1996
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following review of operations for the third quarter and nine months
of 1996 and 1995 should be read in conjunction with the Condensed Consolidated
Financial Statements of the Company and the Notes thereto included elsewhere in
this Form 10-Q and with the Consolidated Financial Statements, Notes and
Management's Discussion and Analysis included in the Company's Form 10-K for the
year ended December 31, 1995.
Overview
In addition to the substantial up swing in gas prices, actions taken in
1995, designed to return the Company to long-term profitability, played an
important part in the nine months performance of 1996 with record earnings and
strong operating cash flows. Refer to the Overview section of Management's
Discussion and Analysis of Financial Condition in the Company's 1995 Annual
Report on Form 10-K for a discussion of these actions. Nine month operating
results for 1996 included the benefit of the following realizations:
(*) The average produced natural gas price was $2.18 per Mcf, up 29%
compared to the nine months of 1995.
(*) As a result of the improved pricing environment, margins on brokered
natural gas sales increased 124%, or $2.3 million over the nine
months of 1995.
(*) Direct operating and administrative costs were reduced by $1.0
million compared to the nine months of 1995.
(*) Under its continued program to divest non-strategic properties, the
Company sold approximately 260 net wells located in the Appalachian
Region, generating $4.4 million in cash proceeds and a gain on sale
of $1.5 million in the first quarter of 1996.
(*) Net interest costs were down $4.2 million, or 25%, primarily due to
the absence of interest rate swaps that were in place in 1995, lower
interest rates, a reduced debt balance and $1.3 million of interest
income in September 1996 related to an income tax refund for tax
periods prior to 1990.
(*) Depreciation, depletion and amortization ("DD&A") expenses were down
$7.5 million or $0.19 per Mcfe of production. This reduction was
primarily the result of the impairment of long-lived assets recorded
as a result of adopting FAS 121 in 1995, which reduced the
depreciable basis of properties and equipment by $113.8 million.
Operating cash flows were also up significantly, increasing $22.0
million, or 71%, over the nine months of 1995. Cash flows from operations, along
with the $4.4 million of proceeds from the sale of non-strategic properties,
funded (1) $47.5 million of capital and exploration expenditures, $32 million
higher than the nine months in 1995, and (2) a $5.0 million reduction in
outstanding debt.
The Company drilled 115.7 net wells with a success rate of 85% compared
to 23.0 net wells and a 77% success rate in nine months of 1995. In 1996 the
Company plans to drill 160 net wells and spend $71.3 million in capital and
exploration expenditures compared to 55 net wells and $32.7 million of capital
and exploration expenditures in 1995.
Natural gas production was 43.3 Bcf, virtually unchanged compared to the
nine months of 1995. The production from new wells reverses the overall decline
in production experienced in the past three quarters due to (1) the low level of
development activity in 1995, drilling only 55 net wells compared to an average
11
<PAGE>
of 135 net wells per year over the previous five years, and (2) the sale of
non-strategic properties, representing quarterly production of 0.6 Bcf. The
Company expects the natural gas production for the full year will be slightly
above the production for 1995.
The Company had a number of gas price swaps in place to hedge a
significant portion of its production for the first four months of 1996. For the
remainder of 1996, the Company had one small hedge contract for the months of
May through September 1996 in a notional quantity equal to 5,000 Mmbtu per day,
or less than 4% of the Company's daily production. While the Company will
selectively use gas price hedges from time-to-time to protect certain markets
when substantial downside risks are perceived, management intends to structure
the hedge positions in a manner that retains upside potential.
The Company's strategic pursuits are sensitive to energy commodity
prices, particularly the price of natural gas. While gas prices in certain
regions of the U.S. have moved up sharply in 1996 and some industry analysts
predict continued improvements in 1996 pricing compared to 1995, the gas market
has demonstrated significant price volatility in the nine months of 1996.
Consequently, there is considerable uncertainty about gas prices for the
remainder of this year and beyond.
The Company remains focused on the following goals established in 1995
and believes that progress toward these goals is appropriate in the current
industry environment, enabling the Company to pursue its strategic objectives
over the long term.
(*) Increase cash flows, using a balance of increased production and
reduced costs. Significant progress has been made toward this goal,
and the Company expects to be profitable in 1996 if the Henry Hub
average price for the full year is $1.80 or more, assuming a
traditional correlation between Henry Hub prices and prices realized
by the Company in its regional markets.
(*) Maintain reserves per share while increasing production to protect
long-term shareholder value. An aggressive 1996 drilling program is
designed to result in 1996 production exceeding 1995, and reserves
are also expected to increase.
(*) Reduce debt as a percentage of total capitalization without diluting
existing shareholder value. To achieve this goal, project returns
will be compared with the marginal cost of debt when deciding whether
to reinvest or pay down debt. Other financing alternatives will also
be reviewed.
The preceding paragraphs, discussing the Company's strategic pursuits and
goals, contain forward-looking information. See Forward-Looking Information on
page 19.
Financial Condition
Capital Resources and Liquidity
The Company's capital resources consist primarily of cash flows from its
oil and gas properties and asset-based borrowing supported by its oil and gas
reserves. The Company's level of earnings and cash flows depend on many factors,
including the price of oil and natural gas and its ability to control and reduce
costs. Demand for oil and gas has historically been subject to seasonal
influences characterized by peak demand and higher prices in the winter heating
season. However, 1995 was a year in which natural gas prices did not follow the
traditional seasonal influences and remained at some of the lowest levels in
recent history, adversely affecting cash flows. Natural gas prices and demand
were up significantly in the first nine months of 1996, resulting in higher cash
flows.
The primary source of cash for the Company during the nine months of 1996
was from funds generated from operations. Primary uses of cash were funds used
in operations, exploration and development expenditures, acquisitions, repayment
of debt and dividends.
12
<PAGE>
The Company had a net cash outflow of $1.6 million in the nine months of
1996. Net cash inflow from operating and financing activities totalled $41.2
million in nine months, funding 96% of the $42.8 million of capital and
exploration expenditures, net of the $4.7 million in proceeds from the sale of
assets.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1996 1995
(in millions)
<S> <C> <C>
Cash Flows Provided (Used) by Operating Activities........................ $ 52.7 $ 30.8
====== ======
</TABLE>
Cash flows from operating activities in the nine months of 1996 were higher
by $21.9 million compared to the same period in 1995 primarily due to higher
natural gas prices, lower interest expense due to decreased bank debt and
reduced operating and administrative costs.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1996 1995
(in millions)
<S> <C> <C>
Cash Flows Provided (Used) by Investing Activities........................ $ (42.8) $ 2.2
======== =====
</TABLE>
Cash flows used by investing activities in nine months of 1996 were
substantially due to capital and exploration expenditures of $47.5 million
offset by $4.7 million of proceeds primarily from the sale of oil and gas
properties. See Capital and Exploration Expenditures on page 14 for a comparison
to 1995.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1996 1995
(in millions)
<S> <C> <C>
Cash Flows Provided (Used) by Financing Activities........................ $ (11.5) $ (34.7)
======== ========
</TABLE>
Cash flows used by financing activities were primarily dividend payments and
debt reductions under the Company's revolving credit facility.
Under the Company's revolving credit facility, the available credit line,
currently $235 million, is subject to adjustment on the basis of the projected
present value of estimated future net cash flows from proved oil and gas
reserves and other assets. The revolving term of the credit facility runs to
June 1998. Management believes that the Company has the ability to finance, if
necessary, its capital requirements, including acquisitions.
The Company's 1996 interest expense, net of the $1.3 million interest
income related to a federal income tax refund, is projected to be approximately
$17.7 million. No principal payments are due in 1996.
Capitalization information on the Company is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
(in millions)
<S> <C> <C>
Long-Term Debt............................................................ $ 244.0 $ 249.0
Stockholders' Equity...................................................... 155.0 147.9
----- -----
Total Capitalization...................................................... $ 399.0 $ 396.9
===== =====
Debt to Capitalization.................................................... 61.2% 62.7%
</TABLE>
13
<PAGE>
Capital and Exploration Expenditures
The following table presents major components of capital and exploration
expenditures:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1996 1995
(in millions)
Capital Expenditures
<S> <C> <C>
Drilling and Facilities.......................................... $ 30.7 $ 8.8
Leasehold Acquisitions........................................... 2.2 0.5
Pipeline and Gathering .......................................... 2.9 1.1
Other............................................................ 0.4 0.1
------ ------
36.2 10.5
------ ------
Proved Property Acquisitions........................................... 2.3 0.4
Exploration Expenses................................................... 9.0 5.0
------ ------
Total............................................................ $ 47.5 $ 15.9
====== ======
</TABLE>
Total capital and exploration expenditures in the nine months of 1996
increased $31.6 million compared to the nine months of 1995, primarily due to
the increased capital spending program for 1996.
The Company generally funds most of its capital and exploration activities,
excluding oil and gas property acquisitions, with cash generated from
operations, and budgets such capital expenditures based upon projected cash
flows, exclusive of acquisitions.
The Company has planned $71.3 million of capital and exploration
expenditures for 1996 which includes $42.4 million for drilling and facilities,
$12.3 million for exploration expenses and $6.2 million for proved property
acquisitions. Compared to 1995 capital and exploration expenditures (excluding
the $8.4 million valuation adjustment on the Washington Energy Resources Company
acquisition), the 1996 planned expenditures are up 125%. The Company plans to
drill 160 net wells in 1996 compared with 55 net wells drilled in 1995.
During the nine months of 1996, the Company paid dividends of $2.7 million
on the Common Stock and $4.2 million in aggregate on the $3.125 convertible
preferred stock and 6% convertible redeemable preferred stock. A regular
dividend of $0.04 per share of Common Stock was declared for the quarter ending
September 30, 1996, to be paid November 29, 1996 to shareholders of record as of
November 15, 1996.
Other Issues and Contingencies
Subsequent to the developments with regard to the Barby lawsuits as
described in the Company's 1995 Annual Report on Form 10-K, both actions have
been settled. The settlement resulted in a charge to earnings in the second
quarter of 1996 that was not material to the Company's operating results or
financial position.
Conclusion
The Company's financial results depend upon many factors, particularly the
price of natural gas, and its ability to market gas on economically attractive
terms. The Company's average produced natural gas prices rose sharply during the
nine months of 1996, up 29% compared to prices received for the nine months of
1995. However, the volatility of natural gas prices in recent years remains
prevalent in 1996 with wide price swings in day-to-day trading on the Nymex
futures market. Given this continued price volatility,
14
<PAGE>
management cannot predict with certainty what pricing levels will be for the
remainder of 1996. Because future cash flows are subject to such variables,
there can be no assurance that the Company's operations will provide cash
sufficient to fully fund its capital expenditures if prices should return to the
depressed levels of 1995.
While the Company's 1996 plans include a significant increase in capital
spending, potentially negative changes in industry conditions might require the
Company to adjust its 1996 spending plan to ensure the availability of capital,
including, among other things, reductions in capital expenditures or common
stock dividends.
The Company believes that higher production volumes and natural gas prices
over time coupled with its continuing efforts to reduce costs and invest in
projects with high rates of return will return the Company to long-term
profitability. Furthermore, the Company believes its capital resources,
supplemented, if necessary, with external financing, are adequate to meet its
capital requirements.
The preceding paragraphs contain forward-looking information. See
Forward-Looking Information on page 19.
15
<PAGE>
Results of Operations
For the purpose of reviewing the Company's results of operations, "Net
Income (Loss)" is defined as net income (loss) applicable to common
shareholders.
Selected Financial and Operating Data
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
(in millions, except where noted)
<S> <C> <C> <C> <C>
Net Operating Revenues.................................... $ 35.5 $ 29.6 $ 114.0 $ 91.8
Operating Expenses........................................ 27.9 141.3 83.4 209.2
Operating Income (Loss)................................... 7.6 (111.7) 32.1 (117.8)
Interest Expense.......................................... 3.2 5.5 12.9 17.1
Net Income (Loss)......................................... 3.0 (73.3) 9.1 (86.8)
Earnings (Loss) Per Share................................. 0.13 (3.22) 0.40 (3.81)
Natural Gas Production (Bcf)
Appalachia............................................. 6.6 6.6 19.8 21.0
West................................................... 7.6 6.7 23.5 22.5
Total Company.......................................... 14.2 13.3 43.3 43.5
Natural Gas Production Sales Prices ($/Mcf)
Appalachia............................................. 2.31 2.02 2.61 2.13
West................................................... 1.89 1.26 1.83 1.28
Total Company.......................................... 2.08 1.64 2.18 1.69
Crude/Condensate
Volume (MBbl).......................................... 124 119 403 470
Price $/Bbl............................................ 20.92 17.83 20.32 17.86
Brokered Natural Gas Margin
Volume (Bcf)........................................... 8.5 9.7 25.2 27.1
Margin $/Mcf........................................... 0.11 0.04 0.16 0.07
</TABLE>
Third Quarters of 1996 and 1995 Compared
Net Income (Loss) and Revenues. The Company reported net income in the
third quarter 1996 of $3.0 million, or $0.13 per share, including a $2.6
million, or $0.11 per share, benefit related to an income tax refund for certain
periods prior to 1990. During the corresponding quarter of 1995, the Company
reported a net loss of $73.3 million, or $3.22 per share, including $6.6
million, or $0.29 per share, from recurring operations and $66.7 million, or
$2.93 per share, due to a $113.8 million charge ($69.1 million after tax)
related to the adoption of SFAS 121, partially offset by other revenue of $4.1
million ($2.5 million after tax) in connection with the sale of a Columbia
bankruptcy claim. Operating income (loss) and net operating revenues from
recurring operations increased $9.6 million and $10.0 million, respectively.
Natural gas made up 84%, or $29.7 million, of net operating revenue. The
increase in net operating revenues was driven primarily by a 27% increase in the
average natural gas price. Net income (loss) and operating income (loss) from
recurring operations were similarly impacted by the increase in the average
natural gas price, as well as lower interest expenses (discussed below).
16
<PAGE>
Natural gas production volume in the Appalachian Region was unchanged while
natural gas production volume in the Western Region was up 0.9 Bcf to 7.6 Bcf
primarily due to Rocky Mountains area wells drilled and put on line in the
second and third quarters.
The average Appalachian natural gas production sales price increased $0.29
per Mcf, or 14%, to $2.31, increasing net operating revenues by approximately
$1.9 million on 6.6 Bcf of production. In the Western Region, the average
natural gas production sales price increased $0.63 per Mcf, or 50%, to $1.89,
increasing net operating revenues by approximately $4.8 million on 7.6 Bcf of
production. The overall weighted average natural gas production sales price
increased $0.44 per Mcf, or 27%, to $2.08.
The brokered natural gas margin increased $0.5 million to $1.0 million
primarily due to an $0.07 per Mcf increase in the net margin to $0.11 per Mcf.
Other net operating revenues, excluding the $4.6 million Columbia
settlement income in 1995, increased $1.6 million to $2.3 million due primarily
to $0.9 million from the monetization of the Company's Section 29 tight sands
tax credits and $0.7 million in non-recurring miscellaneous revenues.
Costs and Expenses. Total costs and expenses from recurring operations
increased $0.9 million due primarily to the following:
(*) General and administrative expenses increased $0.7 million, or 21%,
primarily due to the timing of a $0.6 million adjustment which reduced
health benefit costs estimated for the nine months of 1995.
(*) Exploration expense increased $0.9 million due primarily to the $0.5
million increase in dry hole expense and the $0.4 million increase in
geological and geophysical expenses, a direct result of the increased
capital expenditures program in 1996.
(*) Depreciation, depletion, amortization and impairment expense
decreased $1.3 million, or 11%, due to a $0.14 per Mcfe decline in the
DD&A rate caused by the third quarter 1995 impairment of long-lived
assets which reduced depreciable basis by $113.8 million.
(*) Taxes other than income increased $0.4 million, or 16%, due primarily
to the increase in natural gas production revenues.
Interest expense, excluding the $1.3 million interest income related to a
federal income tax refund, declined $0.9 million, or 17%, due to the absence of
the interest rate swaps which effectively increased interest expense in 1995 and
to decreased interest rates and in bank debt.
Income tax expense, excluding the $1.8 million income tax refund for
percentage depletion claimed in periods prior to 1990, was up due to the
comparable increase in earnings before income tax.
Nine Months of 1996 and 1995 Compared
Net Income (Loss) and Revenues. The Company reported net income in the nine
months of 1996 of $9.1 million, or $0.40 per share including a $2.6 million, or
$0.11 per share, benefit related to an income tax refund for certain periods
prior to 1990. During the nine months of 1995, the Company reported a net loss
of $86.8 million, or $3.81 per share, including $15.4 million, or $0.68 per
share, from recurring operations and $71.4 million, or $3.13 per share, due to a
$113.8 million charge ($69.1 million after tax) related to the adoption of SFAS
121 and $7.7 million ($4.9 million after tax) for the cost reduction program and
other severance costs, partially offset by other revenue of $4.1 million ($2.5
million after tax) in connection with the sale of a Columbia bankruptcy claim.
Operating income and net operating revenues from recurring operations increased
$33.4 million and $26.8 million, respectively. Natural gas made up 83%, or $94.5
million, of net operating revenue. The increase in net operating revenues was
driven primarily by a 29% increase in the average produced natural gas price.
Net income (loss) and operating income (loss) from recurring operations were
similarly impacted by the increase in the average natural gas price, as well as
lower general and administrative, depreciation and interest expenses (discussed
below).
Natural gas production volume in the Appalachian Region was down 1.2 Bcf to
19.8 Bcf, a result from the low level of drilling activity in 1995 and the sale
of non-strategic properties. Natural gas production
17
<PAGE>
volume in the Western Region was up 1.0 Bcf , or 4%, to 23.5 Bcf primarily due
to Rocky Mountains area wells drilled and put on line in the second and third
quarters.
The average Appalachian natural gas production sales price increased $0.48
per Mcf, or 23%, to $2.61, increasing net operating revenues by approximately
$9.5 million on 19.8 Bcf of production. In the Western Region, the average
natural gas production sales price increased $0.55 per Mcf, or 43%, to $1.83,
increasing net operating revenues by approximately $12.9 million on 23.5 Bcf of
production. The overall weighted average natural gas production sales price
increased $0.49 per Mcf, or 29%, to $2.18.
Crude oil and condensate sales decreased 67 MBbl, or 14%, due primarily to
the low drilling activity in 1995 and the sale of various non-strategic oil
properties in 1995.
The brokered natural gas margin increased $2.3 million to $4.2 million
primarily due to a $0.09 per Mcf increase in the net margin to $0.16 per Mcf.
Other net operating revenues, excluding the $4.6 million Columbia
settlement income in 1995, increased $3.7 million to $7.1 million due in part to
$2.3 million from the monetization of the Company's Section 29 tight sands tax
credits and $1.4 million of miscellaneous net revenues primarily related to
contract settlements.
Costs and Expenses. Total costs and expenses from recurring operations
decreased $4.7 million, or 5%, due primarily to the following:
(*) General and administrative expenses decreased in total by $0.7
million, or 5%, primarily due to the impact of the cost reduction
program implemented in 1995.
(*) Exploration expense increased $4.0 million due primarily to the $2.5
million increase in dry hole expense and the $1.5 million increase in
geological and geophysical expenses, a direct result of the increased
capital expenditures program in 1996.
(*) Depreciation, depletion, amortization and impairment expense
decreased $8.8 million, or 21%, due to a $0.17 per Mcfe decline in the
DD&A rate caused by the 1995 impairment of long-lived assets which
reduced depreciable basis by $113.8 million, and, to a lesser extent,
by a 2% decline in equivalent production.
(*) Taxes other than income increased $0.6 million, or 7%, due primarily
to the increase in natural gas production revenues.
(*) The cost reduction program in 1995 consisted primarily of a 23% staff
reduction, achieved through early retirement and involuntary
termination programs. The pre-tax charges related to this action
totalled $6.8 million, comprised of $3.8 million in salary and other
severance related expense ($2.6 million paid during the quarter) and a
$3.0 million non-cash charge for curtailments to pension and
postretirement benefits plans.
Interest expense, excluding the $1.3 million interest income related to a
federal income tax refund, declined $2.9 million, or 17%, due to the absence of
the interest rate swaps which effectively increased interest expense in 1995 and
to decreased bank debt and interest rates.
Income tax expense, excluding the $1.8 million income tax refund for
percentage depletion claimed in periods prior to 1990, was up due to the
comparable increase in earnings before income tax.
18
<PAGE>
* * *
Forward-Looking Information
The statements regarding future financial performance and results and
the other statements which are not historical facts contained in this report are
forward-looking statements. The words "expect," "project," "estimate," "predict"
and similar expressions are also intended to identify forward-looking
statements. Such statements involve risks and uncertainties, including, but not
limited to, market factors, market prices (including regional basis
differentials) of natural gas and oil, results of future drilling and marketing
activity, future production and costs and other factors detailed herein and in
the Company's other Securities and Exchange Commission filings. Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual outcomes may vary materially from those
indicated.
19
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
15.1 -- Awareness letter of independent accountants.
27 -- Article 5. Financial Data Schedule for Third Quarter
1996 Form 10-Q
(b) Reports on Form 8-K
None
20
<PAGE>
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.
CABOT OIL & GAS CORPORATION
(Registrant)
By: /s/ Ray R. Seegmiller
-------------------------------------
November 12, 1996 Ray R. Seegmiller, Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer and Officer Duly
Authorized to Sign on Behalf of the Registrant)
21
<PAGE>
EXHIBIT 15.1
Coopers & Lybrand L.L.P. Awareness Letter
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D. C. 20549
Re: Cabot Oil & Gas Corporation
Registration Statements on Form S-8
We are aware that our report dated November 12, 1996 on our review of the
interim condensed consolidated financial information of Cabot Oil & Gas
Corporation for the three-month and nine-month periods ended September 30, 1996
and 1995 and included in this Form 10-Q is incorporated by reference in the
Company's registration statements on Form S-8 filed with the Securities and
Exchange Commission on June 23, 1990, November 1, 1993 and May 20, 1994.
Pursuant to Rule 436(c) under the Securities Act of 1933, this report should not
be considered a part of the registration statement prepared or certified by us
within the meanings of Section 7 and 11 of the Act.
Coopers & Lybrand L.L.P.
Houston, Texas
November 12, 1996
22
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,433
<SECURITIES> 0
<RECEIVABLES> 35,723
<ALLOWANCES> (685)
<INVENTORY> 10,288
<CURRENT-ASSETS> 48,538
<PP&E> 982,390
<DEPRECIATION> (505,251)
<TOTAL-ASSETS> 527,123
<CURRENT-LIABILITIES> 49,743
<BONDS> 244,000
<COMMON> 154,011
0
91,321
<OTHER-SE> (90,316)
<TOTAL-LIABILITY-AND-EQUITY> 527,123
<SALES> 106,902
<TOTAL-REVENUES> 114,041
<CGS> 83,377
<TOTAL-COSTS> 83,377
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,869
<INCOME-PRETAX> 19,251
<INCOME-TAX> 5,993
<INCOME-CONTINUING> 9,084
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,084
<EPS-PRIMARY> 0.40
<EPS-DILUTED> 0
</TABLE>
