Cabot Oil & Gas Corporation
15375 Memorial Drive
Houston, Texas 77036
Telephone: 281/589-4600
Facsimile: 713/589-4912
August 12, 1998
Securitis & Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: Cabot Oil & Gas Corporation Form 10-Q
for quarter ended June 30, 1997
Ladies and Gentlemen:
On behalf of Cabot Oil & Gas Corporation, transmitted herewith for filing
under the Securities and Exchange Act of 1934, as amended, is a copy of the
Company's June 30, 1998 Form 10-Q. Pursuant to Rule 302 of Regulation S-T, the
Form 10-Q has been executed by typing the name of the signature.
This filing has been effected through the Securities and Exchange
Commission's EDGAR electronic filing system.
Please contact the undersigned at (821) 589-4642 with any questions or
statements you may have regarding this filing.
Sincerely,
JILL RIBBECK
Manager, Financial Reporting
<PAGE>
================================================================================
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 June 30, 1998
( ) 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)
(281) 589-4600
(Registrant's telephone number)
No Change
(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 and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No[_]
As of July 31, 1998, there were 24,873,693 shares of Class A Common
Stock, Par Value $.10 Per Share, outstanding.
================================================================================
<PAGE>
CABOT OIL & GAS CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statement of Operations for the
Three and Six Months Ended June 30, 1998 and 1997..................... 3
Condensed Consolidated Balance Sheet at June 30, 1998
and December 31, 1997................................................. 4
Condensed Consolidated Statement of Cash Flows for the
Three and Six Months Ended June 30, 1998 and 1997..................... 5
Notes to Condensed Consolidated Financial Statements................... 6
Independent Certified Public Accountants' Report on
Review of Interim Financial Information............................... 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................... 10
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K................................ 18
Signature ................................................................ 19
</TABLE>
2
<PAGE>
CABOT OIL & GAS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
------ ------ ------- -------
<S> <C> <C> <C> <C>
NET OPERATING REVENUES
Natural Gas Production.....................$37,252 $33,301 $72,423 $80,486
Crude Oil & Condensate..................... 1,911 2,946 4,248 6,150
Brokered Natural Gas Margin................ 1,143 932 2,536 1,429
Other...................................... 1,361 2,228 3,251 4,134
------- ------- ------- -------
41,667 39,407 82,458 92,199
OPERATING EXPENSES
Direct Operations.......................... 7,532 7,364 14,497 14,433
Exploration................................ 2,978 3,281 6,379 6,907
Depreciation, Depletion and Amortization... 10,316 10,108 20,083 20,612
Impairment of Unproved Properties.......... 1,110 723 1,806 1,446
General and Administrative................. 5,824 4,700 11,325 8,856
Taxes Other Than Income.................... 4,036 3,485 7,834 7,567
------- ------- ------- -------
31,796 29,661 61,924 59,821
Gain on Sale of Assets...................... 5 267 57 350
------- ------- ------- -------
INCOME FROM OPERATIONS...................... 9,876 10,013 20,591 32,728
Interest Expense............................ 4,579 4,358 8,834 8,919
------- ------- ------- -------
Income Before Income Taxes.................. 5,297 5,655 11,757 23,809
Income Tax Expense.......................... 2,163 2,309 4,780 9,378
------- ------- ------- -------
NET INCOME.................................. 3,134 3,346 6,977 14,431
Dividend Requirement on Preferred Stock.... 851 1,391 1,701 2,783
------- ------- ------- -------
Net Income Applicable to
Common Stockholders.......................$ 2,283 $ 1,955 $ 5,276 $11,648
======= ======= ======= =======
Basic Earnings Per Share
Applicable to Common......................$ 0.09 $ 0.09 $ 0.21 $ 0.51
======= ======= ======= =======
Diluted Earnings Per Share
Applicable to Common......................$ 0.09 $ 0.08 $ 0.21 $ 0.49
======= ======= ======= =======
Average Common Shares Outstanding........... 24,828 22,870 24,756 22,863
</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>
JUNE 30, DECEMBER 31,
1998 1997
-------- -----------
<S> <C> <C>
ASSETS
Current Assets
Cash and Cash Equivalents...............................$ 3,893 $ 1,784
Accounts Receivable..................................... 43,390 59,672
Inventories............................................. 8,747 6,875
Other................................................... 4,333 2,202
-------- --------
Total Current Assets.................................. 60,363 70,533
Properties and Equipment (Successful Efforts Method)...... 516,245 469,399
Other Assets.............................................. 1,714 1,873
-------- --------
$578,322 $541,805
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current Portion of Long-Term Debt.......................$ 16,000 $ 16,000
Accounts Payable........................................ 48,789 52,348
Accrued Liabilities..................................... 16,197 17,524
-------- --------
Total Current Liabilities............................. 80,986 85,872
Long-Term Debt............................................ 214,000 183,000
Deferred Income Taxes..................................... 84,685 80,108
Other Liabilities......................................... 7,886 8,763
Stockholders' Equity
Preferred Stock:
Authorized--5,000,000 Shares of $.10 Par Value
Issued and Outstanding - 6% Convertible Redeemable
Preferred; $50 Stated Value; 1,134,000 Shares
in 1998 and 1997...................................... 113 113
Common Stock:
Authorized--40,000,000 Shares of $.10 Par Value
Issued and Outstanding--24,872,738 Shares and
24,667,262 Shares in 1998 and 1997, Respectively...... 2,487 2,467
Additional Paid-in Capital................................ 250,428 247,033
Accumulated Deficit....................................... (62,263) (65,551)
-------- --------
Total Stockholders' Equity............................. 190,765 184,062
-------- --------
$578,322 $541,805
======== ========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
<PAGE>
CABOT OIL & GAS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income.................................$ 3,134 $ 3,346 $ 6,977 $14,431
Adjustment to Reconcile Net Income To Cash
Provided by Operating Activities:
Depletion, Depreciation and
Amortization............................. 10,316 10,108 20,083 20,612
Impairment of Undeveloped Leasehold....... 1,110 723 1,806 1,446
Deferred Income Taxes..................... 2,289 1,628 4,577 8,183
(Gain)Loss on Sale of Ass.ets............. (5) (267) (57) (350)
Exploration Expense....................... 2,978 3,281 6,379 6,907
Other, Net................................ 791 251 1,280 285
Changes in Assets and Liabilities:
Accounts Receivable....................... 3,587 5,446 16,283 33,603
Inventories............................... (2,498) (528) (1,872) 3,114
Other Current Assets...................... (2,113) (415) (2,132) (540)
Other Assets.............................. 158 (128) 159 379
Accounts Payable and
Accrued Liabilities...................... (1,657) (4,162) (6,325) (21,084)
Other Liabilities......................... (564) (498) (680) (780)
------- ------- ------- -------
Net Cash Provided by
Operating Activities.................... 17,526 18,785 46,478 66,206
------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital Expenditures.......................(36,727) (20,223) (68,111) (31,805)
Proceeds from Sale of Assets............... 159 480 669 783
Exploration Expense........................ (2,978) (3,281) (6,379) (6,907)
------- ------- ------- -------
Net Cash Used by Investing Activities....(39,546) (23,024) (73,821) (37,929)
------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of Common Stock....................... 1,238 165 2,134 410
Increase in Debt........................... 39,000 1,000 65,000 1,000
Decrease in Debt...........................(16,000) -- (34,000 (26,000)
Dividends Paid............................. (1,845) (2,306) (3,682 (4,612)
------- ------ ------- -------
Net Cash Provided (Used) by
Financing Activities.................... 22,393 (1,141) 29,452 (29,202)
------- ------ ------- -------
Net Increase (Decrease) in Cash
and Cash Equivalents....................... 373 (5,380) 2,109 (925)
Cash and Cash Equivalents,
Beginning of Period........................ 3,520 5,822 1,784 1,367
------- ------ ------- -------
Cash and Cash Equivalents,
End of Period..............................$ 3,893 $ 442 $ 3,893 $ 442
======= ====== ======= =======
</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.
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting of Comprehensive Income ("SFAS 130").
SFAS 130 requires the disclosure of comprehensive income. Comprehensive income
is defined as the change in net assets of the Company during a period from
transactions and other events and circumstances from nonowner sources. It
includes all changes in equity during a period except those resulting from
investments by owners (sale of stock by the Company) and distributions to owners
(dividends). Since the Company has no such changes in equity other than net
income, comprehensive income is equal to Net Income Available to Common
Shareholders as presented in the Consolidated Statement of Operations contained
on page 3.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("SFAS 131"). The Company plans to adopt this
statement effective December 31, 1998. SFAS 131 requires that the Company make
certain disclosures about each operating segment of its business. This statement
will not have an effect on the financial results of the Company when adopted.
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132, Employers' Disclosures about Pensions
and Other Postretirement Benefits ("SFAS 132"). The Company plans to adopt this
statement effective December 31, 1998. SFAS 132 standardizes the disclosure
requirements for pensions and other postretirement benefits in the Form 10-K
Annual Report to Shareholders. This is a presentation requirement only and will
not have an effect on the financial results of the Company when adopted.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 requires all derivatives
to be recognized in the statement of financial position as either assets or
liabilities and measured at fair value. In addition, all hedging relationships
must be designated, reassessed and documented pursuant to the provisions of SFAS
133. This statement is effective for financial statements for fiscal years
beginning after June 15, 1999. The Company has not yet completed its evaluation
of the impact of the provisions of SFAS No. 133.
2. PROPERTIES AND EQUIPMENT
Properties and equipment are comprised of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- ------------
(in thousands)
<S> <C> <C>
Unproved oil and gas properties......................... $ 23,050 $ 24,618
Proved oil and gas properties........................... 810,148 744,381
Gathering and pipeline systems.......................... 118,608 116,360
Land, building and improvements......................... 4,138 3,896
Other................................................... 19,161 17,525
-------- --------
975,105 906,780
Accumulated depreciation, depletion and amortization.... (458,860) (437,381)
-------- --------
$516,245 $469,399
======== ========
</TABLE>
6
<PAGE>
3. ADDITIONAL BALANCE SHEET INFORMATION
Certain balance sheet amounts are comprised of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------- -----------
(in thousands)
<S> <C> <C>
Accounts Receivable
Trade accounts.................................. $32,675 $49,315
Insurance recoveries............................ 2,537 3,043
Current income tax receivable................... 819 1,291
Other accounts.................................. 7,906 6,562
------- -------
43,937 60,211
Allowance for doubtful accounts................. (547) (539)
------- -------
$43,390 $59,672
======= =======
Accounts Payable
Trade accounts.................................. $ 7,936 $ 6,209
Natural gas purchases........................... 10,963 13,991
Royalty and other owners........................ 10,343 11,995
Capital costs................................... 13,922 12,936
Dividends payable............................... 851 851
Taxes other than income......................... 1,266 1,478
Drilling advances............................... 1,324 2,333
Other accounts.................................. 2,184 2,555
------- -------
$48,789 $52,348
======= =======
Accrued Liabilities
Employee benefits............................... $ 4,749 $ 6,067
Taxes other than income......................... 8,402 8,314
Interest payable................................ 2,196 2,147
Other accrued................................... 850 996
------- -------
$16,197 $17,524
======= =======
Other Liabilities
Postretirement benefits other than pension...... $ 796 $ 992
Accrued pension cost............................ 3,935 3,742
Taxes other than income and other............... 3,155 4,029
------- -------
$ 7,886 $ 8,763
======= =======
</TABLE>
4. LONG-TERM DEBT
At June 30, 1998, the Company had $66 million outstanding under its
facility which provides for an available credit line of $135 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. The revolving
term under this credit facility presently ends in June 2000 and is subject to
renewal.
5. EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standard ("SFAS") No.
128, "Earnings per Share" on December 31, 1997. SFAS 128 simplifies the
calculation of earnings per share for companies with complex capital structures
by replacing primary and fully diluted earnings per share with the new basic and
diluted disclosures. The adoption of SFAS 128 has not impacted the Company's
previously disclosed basic earnings per share since the Company had a simple
capital structure and because earnings per share in prior years was calculated
in the same manner as new "basic" earnings per share is presented. In periods
prior to the fourth quarter of 1997, the Company, with its then simple capital
structure, was not required to disclose fully diluted earnings per share.
However, SFAS requires all companies with any number of common stock equivalents
outstanding to disclose diluted earnings per share. Basic earnings per share
7
<PAGE>
amounts are based on the weighted average shares outstanding (24,756,031 in 1998
and 22,862,745 in 1997). The dilutive effect of outstanding stock awards of
549,249 in 1998 and 649,632 in 1997 resulted in diluted earnings per share for
the second quarter of $0.09 and $0.08 in 1998 and 1997, respectively. Year to
date diluted earnings per share was $0.21 and $0.49 in 1998 and 1997,
respectively. No adjustments were made to reported net income in the computation
of earnings per share.
8
<PAGE>
Independent Accountant's Report
To the Board of Directors and Shareholders
Cabot Oil & Gas Corporation:
We have reviewed the accompanying condensed consolidated balance sheet and the
related condensed consolidated statements of operations and cash flows of Cabot
Oil & Gas Corporation as of June 30, 1998, and for the three-month and six-month
periods then ended. 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 financial statements for them to be in conformity
with generally accepted accounting principles.
PricewaterhouseCoopers L.L.P.
Houston, Texas
August 6, 1998
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following review of operations for the first six months of 1998 and
1997 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, 1997.
In previous years, the Company operated as two regions: the Appalachian
Region and the Western Region, which included the Anadarko, Rocky Mountain and
Gulf Coast areas. Beginning in 1998, the Gulf Coast Region was formed, leaving
the Anadarko and Rocky Mountain areas in the Western Region and leaving the
Appalachian Region unchanged. For purposes of the comparisons below, prior
period results have been restated to conform to the new structure.
OVERVIEW
Along with unseasonably warm temperatures, the first half of 1998 brought
gas prices substantially below first half of 1997 prices, due to the low prices
in the first quarter of 1998. This decline in price was the primary cause of the
$9.7 million reduction in net revenues, the $6.4 million reduction in net
income.
The Company drilled 84 gross wells with a success rate of 86% compared to
102 gross wells and an 88% success rate in the first half of 1997. In 1998, the
Company has budgeted to drill 270 gross wells and spend $111 million in capital
and exploration expenditures compared to 225 gross wells and $87.4 million of
capital and exploration expenditures in 1997. The 1998 budget did not include
the $5.0 million spent in 1998 as part of the joint exploration agreement with
Union Pacific Resources Group, Inc. or the $6.6 million expended to acquire the
9.3 Bcfe of proved reserves in the Mid-Continent.
Natural gas production was 34.2 Bcf, up 1.2 Bcf compared to the 1997 first
half. This production increase was due primarily to new production brought on by
the expanded drilling program of 225 gross (151 net) wells in 1997 and the
fourth quarter 1997 acquisition of producing properties in the Green River Basin
from Equitable Resources.
The Company's strategic pursuits are sensitive to energy commodity prices,
particularly the price of natural gas. While natural gas prices in most regions
of the U.S. softened in January and February of 1998, gas prices strengthened
somewhat in March of 1998, demonstrating significant price volatility in the
first quarter of 1998. Prices continued above 1997 levels into April and May
1998. Although prices fell below 1997 levels in June, they rebounded in July due
to record high monthly temperatures. Consequently, there is considerable
uncertainty about the level of natural gas prices for the remainder of this year
and beyond.
The Company remains focused on its strategies to grow through the drill
bit, from synergistic acquisitions and from exploitation of its marketing
abilities. Management believes that these strategies are appropriate in the
current industry environment, enabling the Company to add shareholder value over
the long term.
The preceding paragraphs, discussing the Company's strategic pursuits and
goals, contains forward-looking information. See Forward-Looking Information on
page 17.
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 natural gas has historically been subject to seasonal
influences characterized by peak demand and higher prices in the winter heating
10
<PAGE>
season. Due to mild winter conditions, natural gas prices softened significantly
in January and remained well below 1997 prices until March. While temperatures
for much of the U.S. have been unseasonably warm during the second quarter and
the natural gas price in the second quarter was up $0.16 per Mcf over 1997,
natural gas prices for the first half of 1998 average $0.33 per Mcf lower than
1997 due to the low prices of the first quarter. Although July was the warmest
on record accompanied by natural gas prices above the 1997 levels, the Company
can not predict a price trend throughout the remainder of the year.
The primary sources of cash for the Company during the first half of 1998
were from funds generated from operations and increased borrowings on the
revolving credit facility. Primary uses of cash were funds used in exploration
and development expenditures and in the repayment of debt and dividends.
The Company had a net cash inflow of $2.1 million in the first half of
1998. Net cash inflow from operating and financing activities totaled $76
million year to date through June 1998, sufficiently funding the $74.5 million
of capital and exploration expenditures.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1998 1997
----- -----
(in millions)
<S> <C> <C>
Cash Flows Provided by Operating Activities............ $46.5 $66.2
===== =====
</TABLE>
Cash flows from operating activities in the 1998 first half were lower by
$19.7 million compared to the corresponding half of 1997 primarily due to lower
natural gas prices and smaller favorable changes in working capital. Accounts
receivable increased in part due to outstanding insurance claims on two well
blowouts in the Gulf Coast.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1998 1997
----- -----
(in millions)
<S> <C> <C>
Cash Flows Used in Investing Activities................ $73.8 $37.9
===== =====
</TABLE>
Cash flows used by investing activities in both the first half of 1998 and
1997 were substantially attributable to capital and exploration expenditures of
$74.5 million and $38.7 million, respectively. Proceeds from the sale of certain
oil and gas properties in the first half of 1998 and 1997 were $0.7 million and
$0.8 million, respectively.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1998 1997
----- -----
(in millions)
<S> <C> <C>
Cash Flows Provided (Used) by Financing Activities..... $29.5 $(29.2)
===== ======
</TABLE>
Cash flows provided by financing activities were primarily increases in
borrowings on the Company's revolving credit facility in 1998. The cash from the
increased borrowings was used primarily to fund capital and exploration
expenditures. During the first six months of 1998, these expenditures included
$5 million for leasehold acquisitions as part of the Company's joint exploration
program with Union Pacific Resources Group, Inc. as well as $6.6 million for the
purchase of 9.3 Bcfe of proved reserves in the Mid-Continent during the second
quarter. Cash flows used by financing activities in 1997 were primarily debt
reductions under the Company's revolving credit facility and dividend payments.
Under the Company's revolving credit facility, the available credit line,
currently $135 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 1999. Management believes that the Company's has the ability to finance, if
necessary, its capital requirements, including acquisitions.
The Company's 1998 interest expense is projected to be approximately $18.6
million. In May 1999, a $16 million principal payment is due on the 10.18%
Notes. This amount is reflected as "Current Portion of Long-Term Debt" on the
11
<PAGE>
Company's balance sheet. This payment is expected to be made with cash from
operations and, if necessary, from increased borrowings on the revolving credit
facility.
The Company has begun making necessary changes to its computer software
systems in preparation for the year 2000. These projects are on schedule and the
Company believes that the related costs will be less than $0.3 million.
Additionally, the Company is reviewing year 2000 compliance of certain business
partners in order to determine any exposure to the Company. At this time, the
Company does not anticipate that the arrival of the year 2000 will impact its
financial position or results.
Capitalization information on the Company is as follows:
<TABLE>
<CAPTION>
JUNE, 30, DECEMBER 31,
1998 1997
------ -----------
(in millions)
<S> <C> <C>
Long-Term Debt.................................... $214.0 $183.0
Current Portion of Long-Term Debt................. 16.0 16.0
------ ------
Total Debt...................................... 230.0 199.0
------ ------
Stockholders' Equity
Common Stock..................................... 134.1 127.4
Preferred Stock.................................. 56.7 56.7
------ ------
Total........................................... 190.8 184.1
------ ------
Total Capitalization.............................. $420.8 $383.1
====== ======
Debt to Capitalization............................ 54.7% 51.9%
</TABLE>
11
<PAGE>
CAPITAL AND EXPLORATION EXPENDITURES
The Company generally funds most of its capital and exploration activities,
excluding major oil and gas property acquisitions, with cash generated from
operations, and budgets such capital expenditures based upon projected cash
flows.
The following table presents major components of capital and exploration
expenditures:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1998 1997
----- -----
(in millions)
<S> <C> <C>
Capital Expenditures
Drilling and Facilities............................. $50.0 $27.3
Leasehold Acquisitions.............................. 9.3 2.6
Pipeline and Gathering.............................. 2.0 1.3
Other............................................... 1.1 0.6
----- -----
62.4 31.8
----- -----
Proved Property Acquisitions........................ 6.3 --
Exploration Expenses................................. 6.4 6.9
----- -----
Total............................................... $75.1 $38.7
===== =====
</TABLE>
Total capital and exploration expenditures in the first half of 1998
increased $36.4 million compared to the same period of 1997, primarily as a
result of the expanded 1998 drilling program. Unlike the winter of 1997, mild
conditions in 1998 allowed the Company to drill without weather interruption in
the Western Region. Additionally, in the first quarter of 1998, the Company made
an initial expenditure of $5 million for leasehold acquisitions as part of its
joint exploration program with Union Pacific Resources Group, Inc. In the second
quarter of 1998, the Company also purchased 9.3 Bcfe of proved reserves in the
Mid-Continent for $6.6 million.
The Company has a $111.0 million capital and exploration expenditures
budget for 1998 which includes $63.8 million for drilling and facilities, $24.7
million for exploration expenses, $7.1 million for pipelines and $2.5 million
12
<PAGE>
for proved property acquisitions. This budget does not include expenditures made
in 1998 for the joint exploration program begun this year with Union Pacific
Resources Group, Inc. or the $6.6 million acquisition of proved reserves in the
Mid-Continent. Compared to 1997 capital and exploration expenditures of $87.4
million, the 1998 budgeted expenditures are up 27%. The Company budgeted to
drill 270 gross wells (173.2 net) in 1998 compared with 225 gross wells (151.4
net) drilled in 1997.
During the first half of 1998, the Company paid dividends of $2.0 million
on the Common Stock and $1.7 million on the 6% convertible redeemable preferred
stock. A regular dividend of $0.04 per share of Common Stock was declared for
the quarter ending June 30, 1998, to be paid August 28, 1998 to shareholders of
record as of August 14, 1998.
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 natural gas prices rose slightly in the second quarter of
1998 after the downward trend experienced as the year began, but the increase
was not sufficient to offset the downturn in first quarter prices. The average
produced natural gas sales price received in the first half of 1998 was down 13%
over the first half in 1997. Second quarter prices in 1998 were higher than the
prior year, but not sufficient to offset the downturn in first quarter prices.
The volatility of natural gas prices in recent years remains prevalent in 1998
with wide price swings in day-to-day trading on the Nymex futures market. Given
this continued price volatility, management cannot predict with certainty what
pricing levels will be for the remainder of 1998. 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 1998 plans include a significant increase in capital
spending, potentially negative changes in industry conditions might require the
Company to adjust its 1998 spending plan to ensure the availability of capital,
including, among other things, reductions in capital expenditures or common
stock dividends.
The Company believes its capital resources, supplemented, if necessary,
with external financing, are adequate to meet its capital requirements.
The preceding paragraphs contains forward-looking information. See
Forward-Looking Information on page 17.
13
<PAGE>
RESULTS OF OPERATIONS
For the purpose of reviewing the Company's results of operations, "Net
Income" is defined as net income available to common shareholders.
<TABLE>
<CAPTION>
SELECTED FINANCIAL AND OPERATING DATA
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
------ ------ ------ ------
(in millions, except where noted)
<S> <C> <C> <C> <C>
Net Operating Revenues.................... $ 41.7 $ 39.4 $ 82.5 $ 92.2
Operating Expenses........................ 31.8 29.7 61.9 59.8
Operating Income.......................... 9.9 10.0 20.6 32.7
Interest Expense.......................... 4.6 4.4 8.8 8.9
Net Income................................ 2.3 2.0 5.3 11.6
Earnings Per Share - Basic................ $ 0.09 $ 0.09 $ 0.21 $ 0.51
Earnings Per Share - Diluted.............. $ 0.09 $ 0.08 $ 0.21 $ 0.49
Natural Gas Production (Bcf)
Appalachia.............................. 5.6 6.7 10.7 13.4
West.................................... 7.6 7.0 15.1 13.8
Gulf Coast.............................. 3.4 2.3 6.3 3.9
------ ------ ------ ------
Total Company........................... 16.6 16.0 32.1 31.1
====== ====== ====== ======
Natural Gas Production Sales Prices ($/Mcf)
Appalachia.............................. $ 2.60 $ 2.38 $ 2.68 $ 3.04
West.................................... $ 1.96 $ 1.81 $ 1.95 $ 2.21
Gulf Coast.............................. $ 2.29 $ 2.05 $ 2.27 $ 2.37
------ ------ ------ ------
Total Company........................... $ 2.24 $ 2.08 $ 2.26 $ 2.59
====== ====== ====== ======
Crude/Condensate
Volume ((Bbbl).......................... 141 153 297 295
Price $/Bbl............................. $13.55 $19.24 $14.30 $20.85
Brokered Natural Gas Margin
Volume (Bcf)............................ 8.8 6.5 19.4 15.6
Margin $/Mcf............................ $ 0.13 $ 0.15 $ 0.13 $ 0.09
</TABLE>
Second Quarters of 1998 and 1997 Compared
Net Income and Revenues. The Company reported net income in the second
quarter 1998 of $2.3 million, or $0.09 per share. During the corresponding
quarter of 1997, the Company reported net income of $2.0 million, or $0.09 per
share. Operating revenues increased by $2.3 million while operating income
decreased by $0.1 million. Natural gas made up 89%, or $37.2 million, of net
operating revenue. The increase in net operating revenues was driven primarily
by an 8% increase in the average natural gas price, as well as a 4% increase in
natural gas production as discussed below. Net income and operating income were
positively impacted by the increase in the average natural gas price, but this
impact was offset by higher operating costs as discussed below. The $0.3 million
increase in net income also reflects the benefit of the reduction of preferred
dividends in 1998.
Natural gas production volume in the Appalachian Region was down 1.1 Bcf to
5.6 Bcf due primarily to the sale of producing properties in this region during
the fourth quarter of 1997. This was offset by natural gas production volume
growth in the Gulf Coast Region, up 1.1 Bcf to 3.4 Bcf primarily due to new
14
<PAGE>
production brought on by drilling in 1997 and 1998. Natural gas production
volume in the Western Region was up 0.6 Bcf to 7.6 Bcf due primarily to the
acquisition of producing properties in the Green River Basin of Wyoming during
the fourth quarter of 1997 and in part to new production brought on by drilling
in 1997 and 1998.
The average Appalachian natural gas production sales price increased $0.22
per Mcf, or 9%, to $2.60, increasing net operating revenues by approximately
$1.2 million on 5.6 Bcf of production. In the Western Region, the average
natural gas production sales price increased $0.15 per Mcf, or 8%, to $1.96,
increasing net operating revenues by approximately $1.1 million on 7.6 Bcf of
production. In the Gulf Coast Region, the average natural gas production sales
price increased $0.24 per Mcf, or 12%, to $2.29, increasing net operating
revenues by approximately $0.8 million on 3.4 Bcf of production. The overall
weighted average natural gas production sales price increased $0.16 per Mcf, or
8%, to $2.24.
Crude oil prices decreased $5.69 per Bbl, or 30%, to $13.55, resulting in a
decrease to net operating revenue of $0.8 million. Additionally, a volume
decrease of 12 Mbbl, or 8%, to 141 Mbbl, resulted in a decrease to net operating
revenues by approximately $0.2 million.
The brokered natural gas margin increased $0.2 million to $1.1 million due
to a 2.3 Bcf increase in volume which was partially offset by a $0.02 per Mcf
decrease in net margin.
Costs and Expenses. Total costs and expenses from recurring operations
increased $2.1 million in the second quarter of 1998 primarily due to the
following:
- Depreciation, depletion, amortization and impairment expense increased
$0.6 million due to the higher level of production in the second
quarter of 1998, and in part to the amortization of impairment of
undeveloped leases has increased due to the newly acquired leases in
the Gulf Coast region.
- Taxes other than income increased $0.5 million, or 16%, due to higher
severance taxes as a result of the increase in oil and gas revenue, as
well as increases in Ad Valorem taxes in West Virginia, brought about
by higher taxable values related to higher gas prices in prior years.
- General and administrative expenses increased $1.1 million, or 24%,
largely due to staffing increases in the third and fourth quarters of
1997 ($0.1 million), non-cash stock compensation from stock awards in
the second quarter of 1997 ($0.1 million), certain executive
retirement and severance packages accrued in 1998 ($0.5 million), and
relocation and other travel expenses ($0.1 million).
Interest expense increased $0.2 million as a result of a higher average
level of outstanding debt during the second quarter of 1998 when compared to the
second quarter of 1997.
Income tax expense was down $0.2 million due to the comparable decrease in
earnings before income tax.
Dividends on preferred stock were $0.5 million less than in the second
quarter of 1997 due to the conversion of all of the Company's $3.125 cumulative
convertible preferred stock into shares of common stock during the fourth
quarter of 1997.
15
<PAGE>
Six Months of 1998 and 1997 Compared
Net Income and Revenues. The Company reported net income in the first half
of 1998 of $5.3 million, or $0.21 per share. During the corresponding half of
1997, the Company reported net income of $11.6 million, or $0.51 per share.
Operating income and operating revenues decreased $12.1 million and $9.7
million, respectively. Natural gas made up 88%, or $72.4 million, of net
operating revenue. The decrease in net operating revenues was driven primarily
by a 13% decrease in the average natural gas price, partially offset by a 3%
increase in natural gas production as discussed below. Net income and operating
income were similarly impacted by the decrease in natural gas prices.
Natural gas production volume in the Appalachian Region was down 2.7 Bcf to
10.7 Bcf due primarily to the sale of producing properties in this region during
the fourth quarter of 1997. Natural gas production volume in the Western Region
was up 1.3 Bcf to 15.1 Bcf due primarily to the acquisition of producing
properties in the Green River Basin of Wyoming during the fourth quarter of 1997
and in part to new production brought on by drilling in 1997 and 1998. Natural
gas production volume in the Gulf Coast Region was up 2.4 Bcf,or 62%, to 6.3 Bcf
primarily due to new production brought on by drilling in 1997 and 1998.
The average Appalachian natural gas production sales price decreased $0.36
per Mcf, or 12%, to $2.68, decreasing net operating revenues by approximately $
3.9 million on 10.7 Bcf of production. In the Western Region, the average
natural gas production sales price decreased $0.26 per Mcf, or 12%, to $1.95,
decreasing net operating revenues by approximately $3.9 million on 15.1 Bcf of
production. The average Gulf Coast natural gas production sales price decreased
$0.10 per Mcf, or 4%, to $2.27, decreasing net operating revenues by
approximatley $0.6 million on 6.3 Bcf of production. The overall weighted
average natural gas production sales price decreased $0.33 per Mcf, or 13%,
to $2.26.
Crude oil and condensate sales volumes were essentially flat at 297 MBbl
while crude oil prices decreased $6.55 per Bbl, or 31%, to $14.30, decreasing
net operating revenues by approximately $1.9 million.
The brokered natural gas margin increased $1.1 million to $2.5 million
primarily due to a 3.8 Bcf increase in volume, combined with a $0.04 per Mcf
improvement in net margin to $0.13 per Mcf. The 1997 net margin was low due to
below normal market conditions in the first quarter of that year.
Other net operating revenues decreased $0.8 million to $3.3 million due
primarily to net miscellaneous revenues in the first half of 1997 related
primarily to contract settlements.
Costs and Expenses. Total costs and expenses from operations increased $2.1
million, or 4%, due primarily to the following:
- Exploration expense decreased $0.5 million, or 8%, due to the higher
dry hole expenses related to the exploration activity during the first
six months of 1997.
- Taxes other than income increased $0.3 million, or 4%, due to the
increase in Ad Valorem taxes in West Virginia, brought about by higher
taxable values related to higher natural gas prices in prior years.
- General and administrative expenses increased $2.5 million, or 28%,
largely due to staffing increases in the third and fourth quarters of
1997 ($0.4 million), non-cash stock compensation from stock awards in
the second quarter of 1997 ($0.4 million), certain executive
retirement and severance packages accrued in 1998 ($0.9 million), and
relocation and other travel expenses ($0.3 million).
Income tax expense was down $4.6 million due to the comparable decrease in
earnings before income tax.
16
<PAGE>
* * *
Forward-Looking Information
The statements regarding future financial performance and results, market
prices, financing and capital activities, including drilling activities and the
other statements which are not historical facts contained in this report are
forward-looking statements. The words "expect," "project," "estimate,"
"believe," "anticipate," "intend," "budget," "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 for 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.
17
<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 Second Quarter
1998 Form 10-Q
(b) Reports on Form 8-K
None
18
<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
---------------------------------------------
August 12, 1998 Ray R. Seegmiller, President and Chief
Executive Officer
(Principal Executive Officer Duly Authorized
to Sign on Behalf of the Registrant)
By: /s/ Paul F. Boling
---------------------------------------------
Paul F. Boling, Vice President - Finance
(Principal Accounting Officer)
19
<PAGE>
EXHIBIT 15.1
PricewaterhouseCoopers 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 August 6, 1998 on our review of the interim
consolidated financial information of Cabot Oil & Gas Corporation for the
three-month and six-month periods ended June 30, 1998 and 1997 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.
PricewaterhouseCoopers L.L.P.
Houston, Texas
August 6, 1998
20
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 325
<SECURITIES> 3,568
<RECEIVABLES> 43,937
<ALLOWANCES> (547)
<INVENTORY> 8,747
<CURRENT-ASSETS> 60,363
<PP&E> 975,105
<DEPRECIATION> (458,860)
<TOTAL-ASSETS> 578,322
<CURRENT-LIABILITIES> 80,986
<BONDS> 230,000
<COMMON> 196,328
0
56,700
<OTHER-SE> (62,263)
<TOTAL-LIABILITY-AND-EQUITY> 578,322
<SALES> 40,306
<TOTAL-REVENUES> 41,667
<CGS> 31,796
<TOTAL-COSTS> 31,796
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,579
<INCOME-PRETAX> 5,297
<INCOME-TAX> 2,163
<INCOME-CONTINUING> 3,134
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,134
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
</TABLE>
