<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(MARK ONE)
(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
------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------- ---------
Commission File Number 1-10537
-------------------------------------------------------
NUEVO ENERGY COMPANY
---------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 76-0304436
- -----------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1331 Lamar, Suite 1650, Houston, Texas 77010
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 713/652-0706
----------------------------
Not Applicable
-----------------------------------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------- --------
As of November 8, the number of outstanding shares of the Registrant's common
stock was 18,976,085.
<PAGE>
NUEVO ENERGY COMPANY
--------------------
INDEX
-----
PAGE
NUMBER
------
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets:
September 30, 1996 (Unaudited) and December 31, 1995......... 3
Condensed Consolidated Statements of Operations (Unaudited):
Three and nine months ended September 30, 1996 and
September 30, 1995.......................................... 5
Condensed Consolidated Statements of Cash Flows (Unaudited):
Nine months ended September 30, 1996 and
September 30, 1995.......................................... 7
Notes to Condensed Consolidated Financial Statements
(Unaudited).................................................. 9
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 14
PART II. OTHER INFORMATION............................................ 23
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ------- --------------------
NUEVO ENERGY COMPANY
--------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(AMOUNTS IN THOUSANDS)
ASSETS
------
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
------------------- ------------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.................. $ 3,595 $ 5,765
Accounts receivable........................ 44,931 21,195
Product inventory.......................... 3,690 2,187
Due from affiliates........................ 1,455 ---
Prepaid expenses and other................. 2,600 573
---------- ---------
Total current assets..................... 56,271 29,720
---------- ---------
PROPERTY AND EQUIPMENT, AT COST:
Land....................................... 5,304 ---
Buildings and improvements................. 44,696 ---
Oil and gas properties (full cost method).. 1,005,396 460,800
Pipeline and other facilities.............. 46,623 50,970
Gas plant facilities....................... 41,486 25,661
---------- ---------
1,143,505 537,431
Accumulated depreciation, depletion and
amortization............................. (361,754) (269,989)
---------- ---------
781,751 267,442
---------- ---------
OTHER ASSETS 16,305 9,382
---------- ---------
$ 854,327 $ 306,544
========== =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
NUEVO ENERGY COMPANY
--------------------
CONDENSED CONSOLIDATED BALANCE SHEETS - CONTINUED
-------------------------------------------------
(AMOUNTS IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
September 30, 1996 December 31,1995
------------------- ----------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable........................ $ 18,998 $ 4,591
Accrued interest........................ 10,406 972
Accrued liabilities..................... 18,064 2,930
Gas balancing liabilities............... 430 479
Due to affiliates....................... --- 1,314
Current maturities of long-term debt.... 5,117 3,677
-------- --------
Total current liabilities............ 53,015 13,963
-------- --------
OTHER LONG-TERM LIABILITIES............... 2,272 1,949
DEFERRED REVENUE.......................... 5,764 8,932
LONG-TERM DEBT............................ 405,480 113,032
DEFERRED TAXES............................ 31,114 12,926
MINORITY INTEREST......................... 930 1,134
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value,
$1,000 per share liquidation
preference, 10,000,000 shares
authorized; 7% Cumulative Convertible
Preferred Stock, Series A, 11,220
shares issued and outstanding at
September 30, 1996 and Series A and B,
12,619 and 2,500 shares issued and
outstanding at December 31, 1995,
respectively........................... 11 15
Common stock, $.01 par value,
50,000,000 shares authorized,
18,931,735 and 11,716,919 shares
issued and outstanding at
September 30, 1996 and December 31,
1995, respectively..................... 189 117
Additional paid-in capital.............. 333,887 151,442
Retained earnings....................... 21,665 3,034
-------- --------
Total stockholders' equity.......... 355,752 154,608
-------- --------
$854,327 $306,544
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
NUEVO ENERGY COMPANY
--------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended September 30,
----------------------------------
1996 1995
---------------- ----------------
<S> <C> <C>
REVENUES:
Oil and gas revenues...................... $79,293 $24,396
Gas plant revenues........................ 8,498 6,348
Pipeline and other revenues............... 2,420 1,574
Interest and other income................. 700 97
------- -------
90,911 32,415
------- -------
COSTS AND EXPENSES:
Lease operating expenses.................. 29,147 6,970
Gas plant operating expenses.............. 7,114 5,651
Pipeline and other operating expenses..... 2,195 1,027
Depreciation, depletion and
amortization.......................... 22,962 9,700
General and administrative expenses....... 6,390 2,379
Interest expense.......................... 9,642 3,992
Other expense............................. 8 (4)
------- -------
77,458 29,715
------- -------
Income before income taxes and minority
interest.................................... 13,453 2,700
Provision for income taxes................... 5,448 1,037
Minority interest............................ (3) 4
------- -------
NET INCOME................................... $ 8,008 $ 1,659
======= =======
Dividends on preferred stock................. 237 333
------- -------
EARNINGS AVAILABLE TO COMMON STOCKHOLDERS.... $ 7,771 $ 1,326
======= =======
Earnings per common and common equivalent
share....................................... $ .40 $ .12
======= =======
Earnings per common and common equivalent
share assuming full dilution................ $ .39 $ .12
======= =======
Average common and common equivalent shares
outstanding................................. 19,388 11,352
======= =======
Average common and common equivalent shares
outstanding assuming full dilution.......... 20,363
=======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
NUEVO ENERGY COMPANY
--------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - CONTINUED
------------------------------------------------------------
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------
1996 1995
---------------- ---------------
<S> <C> <C>
REVENUES:
Oil and gas revenues......................................... $ 188,364 $ 77,100
Gas plant revenues........................................... 23,296 20,557
Pipeline and other revenues.................................. 5,765 5,613
Interest and other income.................................... 1,426 385
--------- --------
218,851 103,655
--------- ---------
COSTS AND EXPENSES:
Lease operating expenses..................................... 66,463 21,477
Gas plant operating expenses................................. 19,568 17,036
Pipeline and other operating expenses........................ 4,976 3,525
Depreciation, depletion and amortization..................... 54,495 32,328
General and administrative expenses.......................... 14,941 7,362
Interest expense............................................. 25,825 11,754
Other expense................................................ 57 20
--------- --------
186,325 93,502
--------- --------
Income before income taxes and minority
interest....................................................... 32,526 10,153
Provision for income taxes...................................... 13,173 3,755
Minority interest............................................... (44) 16
--------- --------
NET INCOME...................................................... $ 19,397 $ 6,382
========= ========
Dividends on preferred stock.................................... 766 1,208
--------- --------
EARNINGS AVAILABLE TO COMMON STOCKHOLDERS....................... $ 18,631 $ 5,174
========= ========
Earnings per common and common equivalent
share......................................................... $1.12 $.47
========= ========
Earnings per common and common equivalent
share assuming full dilution.................................. $1.09 $.47
========= ========
Average common and common equivalent
shares outstanding............................................ 16,662 11,126
========= ========
Average common and common equivalent
shares outstanding assuming full dilution..................... 17,856
=========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
NUEVO ENERGY COMPANY
--------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1996 1995
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................... $ 19,397 $ 6,382
Adjustments to reconcile net income to
net cash provided by operating activities:.............................
Depreciation, depletion and amortization.............................. 54,495 32,328
Amortization of other costs........................................... 956 273
Deferred revenues..................................................... (3,168) (4,713)
Deferred taxes........................................................ 13,173 3,741
Minority interest..................................................... (44) 16
--------- --------
84,809 38,027
Change in assets and liabilities:
Accounts receivable.................................................... (23,654) (3,765)
Gas balancing receivables/payables..................................... 62 (297)
Accounts payable and accrued liabilities............................... 39,536 1,827
Due (to) from affiliates............................................... (2,769) (5,350)
Other.................................................................. (11,684) (798)
Minority interest distributions........................................ (160) ---
--------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES.................................. 86,140 29,644
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to land....................................................... (5,304) ---
Additions to buildings and improvements................................. (44,696) ---
Additions to oil and gas properties..................................... (507,861) (33,055)
Additions to gas plant facilities....................................... (825) (401)
Additions to pipeline and other facilities.............................. --- (282)
Additions to other property............................................. (1,982) 22
Proceeds from sales of properties....................................... 33,728 590
Other................................................................... 562 2,850
--------- --------
NET CASH USED IN INVESTING ACTIVITIES...................................... (526,378) (30,276)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings................................................ 408,000 15,013
Payments of long-term debt.............................................. (114,184) (11,865)
Preferred stock dividends............................................... (766) (1,208)
Proceeds from issuance of common stock.................................. 145,018 2,432
--------- --------
NET CASH PROVIDED BY FINANCING
ACTIVITIES............................................................... 438,068 4,372
--------- --------
Net (decrease)/increase in cash and cash
equivalents............................................................ (2,170) 3,740
Cash and cash equivalents at beginning of
period................................................................. 5,765 3,447
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................................. $ 3,595 $ 7,187
========= ========
</TABLE>
7
<PAGE>
NUEVO ENERGY COMPANY
--------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
-----------------------------------------------------------
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1996 1995
-------- --------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $15,159 $ 8,497
Income taxes $ --- $ ---
</TABLE>
See accompanying notes to condensed consolidated financial statements.
8
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with instructions to Form 10-Q and, therefore, do
not include all disclosures required by generally accepted accounting
principles. However, in the opinion of management, these statements include
all adjustments, which are of a normal recurring nature, necessary to present
fairly the financial position at September 30, 1996 and December 31, 1995 and
the results of operations and changes in cash flows for the periods ended
September 30, 1996 and 1995. These financial statements should be read in
conjunction with the financial statements and notes to the financial
statements in the 1995 Form 10-K of Nuevo Energy Company (the "Company") that
was filed with the Securities and Exchange Commission.
USE OF ESTIMATES
----------------
In order to prepare these financial statements in conformity with generally
accepted accounting principles, management of the Company has made a number
of estimates and assumptions relating to the reporting of assets and
liabilities, the disclosure of contingent assets and liabilities and reserve
information (which affects the depletion calculation as well as the
computation of the full cost ceiling limitation). Actual results could
differ from those estimates.
9
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
(UNAUDITED)
2. INDUSTRY SEGMENT INFORMATION
----------------------------
The Company's operations are concentrated primarily in two segments; the
exploration and production of oil and natural gas and gas plant, pipeline and
gas storage operations.
<TABLE>
<CAPTION>
For the Nine Months Ended
---------------------------
September 30, September 30,
1996 1995
------------ -------------
<S> <C> <C>
Sales to unaffiliated customers:
Oil and gas................................. $188,364 $ 77,100
Gas plant, pipelines and other................ 29,061 26,170
-------- --------
Total sales................................... 217,425 103,270
Other revenues.............................. 1,426 385
-------- --------
Total revenues................................ $218,851 $103,655
======== ========
Operating profit before income taxes:
Oil and gas................................. $ 70,637 $ 25,934
Gas plant, pipelines and other.............. 1,674 3,096
-------- --------
72,311 29,030
Unallocated corporate expenses................ 13,960 7,123
Interest expense.............................. 25,825 11,754
-------- --------
Income before income taxes and
minority interest........................... $ 32,526 $ 10,153
======== ========
Depreciation, depletion and amortization:
Oil and gas................................. $ 51,264 $ 29,689
Gas plant, pipelines and other.............. 2,843 2,513
-------- --------
$ 54,107 $ 32,202
======== ========
</TABLE>
10
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
(UNAUDITED)
3. ACCOUNTING PRONOUNCEMENTS
-------------------------
Statement of Financial Accounting Standard No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"
issued by the Financial Accounting Standards Board ("FASB") in March 1995,
was implemented by the Company in the first quarter of 1996. This standard
addresses the accounting for the recognition and measurement of impairment
losses for long-lived assets, certain identifiable intangibles and goodwill
related to those assets to be held and used. This standard also addresses
the accounting for long-lived assets and certain identifiable intangibles to
be disposed of.
The adoption of Accounting Standard 121 did not have a significant impact
on consolidated results of operations or the financial position of the
Company.
The Company follows the intrinsic value method for stock options granted to
employees. In October 1995, the FASB issued Statement of Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation." The
Company did not adopt the fair value method for stock-based compensation
plans, but will provide pro forma disclosures pursuant to an optional
provision of Accounting Standard 123.
4. ACQUISITIONS
------------
On April 9, 1996 the Company consummated the acquisition of (i) certain
upstream oil and gas properties located onshore and offshore California
("Unocal Properties") of Union Oil Company of California ("Unocal") for an
adjusted purchase price of $480.5 million in cash and (ii) certain California
oil properties ("Point Pedernales Properties," and together with the Unocal
Properties, the "California Properties") from Torch Energy Advisors
Incorporated ("Torch") and certain of its wholly owned subsidiaries for a net
adjusted purchase price of $35.7 million. The acquisition of the California
Properties was effective as of October 1, 1995, and the purchase price was
reduced by the net cash flows from production between such date and closing.
The Unocal acquisition was recorded using the purchase method effective
April 1, 1996 for accounting purposes. See the Company's current report on
Form 8-K filed with the Securities and Exchange Commission on April 23, 1996.
The following table presents the unaudited pro forma results of operations as
if the acquisition of the California Properties had occurred as of the
beginning of the nine months ended September 30, 1996. These pro forma
results are based on assumptions and estimates and are not necessarily
indicative of the Company's results of operations had the transaction
occurred as of the beginning of the nine months ended September 30, 1996 or
in the future (amounts in thousands except per share data).
11
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
(UNAUDITED)
<TABLE>
<S> <C>
Revenues.............................. $269,273
Income................................ $ 36,091
Net income............................ $ 21,519
Earnings per common and common
equivalent share.................... $ 1.25
Earnings per common and common
equivalent share assuming full
dilution............................ $ 1.21
</TABLE>
In July 1996, the Company completed the acquisition of a package of East
Texas oil and gas properties for a net purchase price of $9.3 million. The
acquisition of these properties was effective as of December 1, 1995, and the
purchase price was reduced by the net cash flows from production between such
date and closing.
5. Financing Activities
--------------------
In April 1996, the Company financed the acquisition of the Unocal Properties
with the proceeds from the sale to the public of 5,109,200 shares of common
stock (the "Common Stock Offering") and a principal amount of $160 million,
9.5% Senior Subordinated Notes due 2006 of the Company, and by borrowings
under a revolving credit facility dated as of April 1, 1996 with a syndicate
of banks which provides the Company with a line of credit of up to $385.0
million. Such proceeds were also used to retire the borrowings under an
existing credit facility in the amount of $27.0 million. The purchase of the
Point Pedernales Properties was financed by the issuance to Torch of
1,275,000 shares of the Company's Common Stock valued at the public offering
price of $28 per share in the Common Stock offering.
The Company also entered into a bridge commitment with a bank group led by
NationsBank of Texas, N. A. The facility was not drawn down; however, $1.7
million in fees associated with the bridge commitment was expensed in the
second quarter of 1996.
In February 1995, in connection with the acquisition of the Yombo field
properties, a subsidiary of the Company entered into a $25.0 million non-
recourse credit facility with the Overseas Private Investment Corporation and
an agent bank to finance $8.8 million of the purchase price for such
properties. The remaining funds under the credit facility will be used to
finance 75% of a development drilling program in the Yombo field. A portion
of the remaining outstanding commitment, $6.0 million, was drawn down in
January 1996 to fund the first phase of the development drilling program in
the Yombo field. The interest rate associated with such credit facility is
LIBOR plus 20 basis points and a guaranty fee of 2.75% of the outstanding
loan balance, all of which is payable quarterly. The loan agreement requires
principal to be repaid in 16 equal quarterly installments.
12
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
(UNAUDITED)
6. Property Sales
--------------
On June 28, 1996, the Company consummated the sale of most of its Austin
Chalk properties to a third party for $24.8 million in net proceeds which
were credited to the full cost pool. Such proceeds were used to reduce debt
outstanding under the Company's credit facility.
7. Contingencies
-------------
The Company has been named as a defendant in certain lawsuits incidental to
its business. Management does not believe that the outcome of such
litigation will have a material adverse impact on the Company.
In connection with their respective acquisitions of two subsidiaries owning
interests in the Yombo field offshore West Africa (each a "Congo
subsidiary"), the Company and a wholly owned subsidiary of CMS NOMECO Oil &
Gas Co. ("CMS") agreed with the seller of the subsidiaries not to claim
certain tax losses ("dual consolidated losses") incurred by such subsidiaries
prior to the acquisitions. Pursuant to the agreement, the Company and CMS
may be liable to the seller for the recapture of dual consolidated losses
utilized by the seller in years prior to the acquisitions if certain
triggering events occur, including (i) a disposition by either the Company or
CMS of its respective Congo Subsidiary, (ii) either Congo subsidiary's sale
of its interest in the Yombo field, (iii) the acquisition of the Company or
CMS by another consolidated group or (iv) the failure of the Company's or
CMS's Congo subsidiary to continue as a member of its respective consolidated
group. A triggering event will not occur, however, if a subsequent purchaser
enters into certain agreements specified in the U. S. Internal Revenue
Service's consolidated return regulations intended to ensure that such dual
consolidated losses will not be claimed. The Company and CMS have agreed
among themselves that the party responsible for the triggering event shall
indemnify the other for any liability to the seller as a result of such
triggering event. The Company's potential direct liability could be as much
as $60 million if a triggering event with respect to the Company occurs, and
the Company believes that CMS's liability (for which the Company will be
jointly liable with an indemnification right against CMS) could be as much as
$80 million. The Company does not expect a triggering event to occur with
respect to it or CMS and does not believe the agreement will have a material
adverse effect upon the Company.
13
<PAGE>
NUEVO ENERGY COMPANY
--------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
------------------------------------
Forward Looking Statements
--------------------------
This document contains certain forward looking statements concerning the
Company's operations, economic performance and financial conditions,
including, in particular, the integration of the Company's recent
acquisitions into the Company's existing operations. Although the Company
believes that all such statements are based upon reasonable assumptions, no
assurance can be given that the actual results will not differ materially
from those contained in such forward looking statements.
Capital Resources and Liquidity
-------------------------------
Nuevo seeks to increase reserves, production and cash flow from operations
through its ongoing strategy of (i) acquiring producing oil and gas
properties, at favorable prices, with significant exploitation and
development potential, (ii) focusing on exploitation activities to maximize
production and ultimate reserve recovery, (iii) exploring and developing non-
producing properties, (iv) utilizing advanced technologies in its
exploitation, development and exploration activities and (v) maintaining a
low cost operating structure. Funding for the Company's activities has
historically been provided by operating cash flows, debt and bank financing,
equity sales, property divestitures and joint ventures with industry
participants. Net cash provided by operating activities was $86.1 million
and $29.6 million for the nine months ended September 30, 1996 and 1995,
respectively. The Company invested $507.9 million and $33.1 million in oil
and gas properties for the nine months ended September 30, 1996 and 1995
respectively. The Company also has $3.3 million of working capital and
unused commitments under the revolving credit line of $132.0 million subject
to borrowing base determination. The Company believes cash flows from
operations, working capital and financing sources are sufficient to meet its
obligations as they become due and to finance its exploration and development
programs.
Capital Expenditures
--------------------
The Company has identified substantial development and exploitation
opportunities, and plans a development program for the California Properties
with estimated capital expenditures of approximately $20.0 million in the
fourth quarter of 1996. In addition to capital expenditures relating to the
California Properties, the Company has a capital expenditure budget of
approximately $10.0 million for the fourth quarter of 1996 for its other
properties.
Financing Activities
--------------------
The Company has negotiated a commitment from a bank group led by NationsBank
of Texas, N.A. to extend to the Company a $385.0 million credit facility
maturing on May 17, 2001. The maximum borrowings that may be outstanding
under the credit facility may not exceed a borrowing base ("Borrowing Base")
based on the present value of the Company's oil and gas reserves based on
assumptions regarding prices, production and costs approved by the bank
group. The Borrowing Base is currently $289.0 million, and will be reset
annually. Sales of assets in excess of $10.0
14
<PAGE>
NUEVO ENERGY COMPANY
--------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (CONTINUED
----------------------------------------------
million will trigger a requirement to re-calculate the Borrowing Base. If
amounts outstanding under the credit facility exceed the Borrowing Base, as
redetermined from time to time, the Company will be required to repay such
excess, and may be required to sell assets to make such repayments. Amounts
outstanding under the credit facility will bear interest at a rate equal to
the London Interbank Offered Rate ("LIBOR") plus a number of basis points
which increases as the senior indebtedness of the Company as a percent of the
Borrowing Base increases. Currently, the Company's interest rate under the
line of credit is LIBOR plus .5% with outstanding borrowings in the amount of
$157.0 million. Such proceeds were used to finance a portion of the purchase
price of the Unocal Properties as well as retire the borrowings under an
existing credit facility in the amount of $27.0 million.
In April 1996, the Company financed a portion of the purchase price of the
Unocal Properties with the proceeds from the sale to the public of a
principal amount of $160 million, 9.5% Senior Subordinated Notes (the
"Notes") due 2006 of the Company. The Notes mature on April 15, 2006 and
interest expense is payable semi-annually on April 15 and October 15. The
Company also has $75 million of 12.5% Senior Subordinated Notes outstanding
due 2002.
The Company also entered into a bridge commitment with a bank group led by
NationsBank of Texas, N.A. The facility was not drawn down; however, $1.7
million in fees associated with the bridge commitment was expensed in the
second quarter of 1996.
In February 1995, in connection with the acquisition of the Yombo field
properties, a subsidiary of the Company entered into a $25.0 million non-
recourse credit facility with the Overseas Private Investment Corporation and
an agent bank to finance $8.8 million of the purchase price for such
properties. The remaining funds under the credit facility will be used to
finance 75% of a development drilling program in the Yombo field. A portion
of the remaining outstanding commitment, $6.0 million, was drawn down in
January 1996 to fund the first phase of the development drilling program in
the Yombo field. The interest rate associated with such credit facility is
LIBOR plus 20 basis points and a guaranty fee of 2.75% of the outstanding
loan balance, all of which is payable quarterly. The loan agreement requires
principal to be repaid in 16 equal quarterly installments. At September 30,
1996, $12.2 million is outstanding of which $3.7 million is due in 1996.
Gas Balancing
-------------
It is customary in the industry for various working interest partners to sell
more or less than their entitled share of natural gas. The settlement or
disposition of existing gas balancing positions is not anticipated to
materially impact the financial condition of the Company.
Derivative Financial Instruments
--------------------------------
The Company periodically uses derivative financial instruments to manage
oil and natural gas price risk. Settlement of gains and losses on price
15
<PAGE>
NUEVO ENERGY COMPANY
--------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
-----------------------------------------------
swap contracts are realized monthly, generally based upon the difference
between the contract price and the average closing New York Mercantile
Exchange (NYMEX) price and are reported as a component of oil and gas
revenues. Gains or losses attributable to the termination of a swap
contract are deferred and recognized in revenue when the hedged crude oil
and natural gas are sold. There were no such deferred gains or losses at
September 30, 1996 or 1995.
As of September 30, 1996, the Company had two separate energy swap
agreements, the first of which hedges 1,500 barrels per day of No. 6 fuel
oil at an average price of $15.75 for March through November 1996
designated for the Congo oil production. The second contract hedges
10,000 MMBtu of natural gas per day at a ceiling price of $2.00 and a
floor price of $1.70 for April through October 1996.
As a result of hedging transactions, oil and gas revenues were reduced by
$.9 million and increased by $.3 million in the third quarter of 1996 and
1995, respectively. During the first nine months of 1996, oil and gas
revenues were reduced by $2.0 million as a result of these transactions.
Gains and losses on other derivative financial instruments that qualify
as a hedge of firmly committed or anticipated purchases and sales of oil
and gas commodities are deferred and recognized in income when the
related hedged transaction occurs. Gains or losses on derivative
financial instruments that do not qualify as a hedge are recognized in
income currently.
Accounting Pronouncements
-------------------------
Statement of Financial Accounting Standard No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"
issued by the Financial Accounting Standards Board ("FASB") in March 1995,
was implemented by the Company in the first quarter of 1996. This standard
addresses the accounting for the recognition and measurement of impairment
losses for long-lived assets, certain identifiable intangibles and goodwill
related to those assets to be held and used. This standard also addresses
the accounting for long-lived assets and certain identifiable intangibles to
be disposed of.
The adoption of Accounting Standard 121 did not have a significant impact on
consolidated results of operations or the financial position of the Company.
The Company follows the intrinsic value method for stock options granted to
employees. In October 1995, the FASB issued Statement of Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation." The
Company did not adopt the fair value method for stock-based compensation
plans, but will provide pro forma disclosures pursuant to an optional
provision of Accounting Standard 123.
16
<PAGE>
NUEVO ENERGY COMPANY
--------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
-----------------------------------------------
Contingencies
-------------
The Company has been named as a defendant in certain lawsuits incidental to
its business. Management does not believe that the outcome of such
litigation will have a material adverse impact on the Company.
In connection with their respective acquisitions of two subsidiaries owning
interests in the Yombo field offshore West Africa (each a "Congo
subsidiary"), the Company and a wholly owned subsidiary of CMS NOMECO Oil &
Gas Co. ("CMS") agreed with the seller of the subsidiaries not to claim
certain tax losses ("dual consolidated losses") incurred by such subsidiaries
prior to the acquisitions. Pursuant to the agreement, the Company and CMS
may be liable to the seller for the recapture of dual consolidated losses
utilized by the seller in years prior to the acquisitions if certain
triggering events occur, including (i) a disposition by either the Company or
CMS of its respective Congo Subsidiary, (ii) either Congo subsidiary's sale
of its interest in the Yombo field, (iii) the acquisition of the Company or
CMS by another consolidated group or (iv) the failure of the Company's or
CMS's Congo subsidiary to continue as a member of its respective consolidated
group. A triggering event will not occur, however, if a subsequent purchaser
enters into certain agreements specified in the U. S. Internal Revenue
Service's consolidated return regulations intended to ensure that such dual
consolidated losses will not be claimed. The Company and CMS have agreed
among themselves that the party responsible for the triggering event shall
indemnify the other for any liability to the seller as a result of such
triggering event. The Company's potential direct liability could be as much
as $60.0 million if a triggering event with respect to the Company occurs,
and the Company believes that CMS's liability (for which the Company will be
jointly liable with an indemnification right against CMS) could be as much as
$80.0 million. The Company does not expect a triggering event to occur with
respect to it or CMS and does not believe the agreement will have a material
adverse effect upon the Company.
17
<PAGE>
NUEVO ENERGY COMPANY
--------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
-----------------------------------------------
Results of Operations (Three months ended September 30, 1996, and 1995)
- -----------------------------------------------------------------------
The following table sets forth certain operating information of the Company
(inclusive of the effect of crude oil and natural gas price swaps) for the
periods presented:
<TABLE>
<CAPTION>
Three Months
Ended September 30, %
---------------------
Increase/
1996 1995 (Decrease)
------- ------- -----------
<S> <C> <C> <C>
Production:
Oil and condensate (MBBLS)............... 4,065 984 313%
Natural gas (MMCF)....................... 8,952 6,875 30%
Natural gas liquids (MBBLS).............. 205 --- 100%
Average Sales Price:
Oil and condensate....................... $15.15 $13.94 9%
Natural gas/(1)/......................... $ 1.95 $ 1.52 28%
Average unit production cost/(2)/ per BOE..... $ 5.06 $ 3.25 56%
Average unit depletion rate per BOE-Domestic.. $ 3.97 $ 4.80 (17%)
Average unit depletion rate per BOE-Congo..... $ .75 $ .75 ---
/(1)/ Average sales price for natural gas includes revenues received from the
sale of natural gas liquids.
/(2)/ Costs incurred to operate and maintain wells and related equipment and
facilities, including ad valorem and severance taxes.
</TABLE>
18
<PAGE>
NUEVO ENERGY COMPANY
--------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
-----------------------------------------------
Revenues
- --------
Oil and gas revenues for the three months ended September 30, 1996 were $79.3
million, or 225% higher than oil and gas revenues of $24.4 million for the same
period in 1995 mainly due to the acquisition of the California Properties and
higher oil and gas prices.
Gas plant revenues of approximately $8.5 million and $6.3 million are reflected
in the three months ended September 30, 1996 and 1995, respectively. The 35%
increase in gas plant revenues is primarily due to increased natural gas liquids
prices.
Pipeline and other revenues for the three months ended September 30, 1996 were
$2.4 million, or 50% higher than pipeline and other revenues of $1.6 million for
the same period in 1995, primarily due to increased throughput on the Illini
pipeline resulting from additional transportation contracts.
Expenses
- --------
Lease operating expenses for the three months ended September 30, 1996 totaled
$29.1 million, or 316% higher than $7.0 million for the three months ended
September 30, 1995, primarily due to the acquisition of the California
Properties. Lease operating expenses per barrel of oil equivalent were $5.06 in
the third quarter of 1996, compared to $3.25 in the same period in 1995, due
primarily to higher lifting costs associated with the California Properties.
Plant operating expenses were approximately $7.1 million for the three months
ended September 30, 1996 as compared to $5.7 million for the three months ended
September 30, 1995. The 25% increase in gas plant expenses in 1996 over 1995 is
due primarily to increased liquids settlements under percent of proceeds
contracts resulting from higher natural gas and natural gas liquids prices.
Pipeline and other operating expenses for the three months ended September 30,
1996 were $2.2 million, or 120% higher than pipeline and other operating
expenses of $1.0 million for the same period in 1995, which is primarily
attributable to increased tariffs on the Illini pipeline due to additional
transportation contracts.
Depreciation, depletion and amortization of $23.0 million for the three months
ended September 30, 1996 reflects a 137% increase from $9.7 million in the same
period in 1995 due to increased production volumes resulting from the
acquisition of the California Properties, partially offset by a decreased
depletion rate per barrel of oil equivalent caused by an increase in estimated
proved oil and gas reserves.
General and administrative expenses totaled $6.4 million and $2.4 million in the
three months ended September 30, 1996 and 1995, respectively. The 167% increase
is due primarily to the increase in management fees resulting from significant
growth in the assets of the Company.
19
<PAGE>
NUEVO ENERGY COMPANY
--------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
-----------------------------------------------
Interest expense increased to $9.6 million for the three months ended September
30, 1996 from $4.0 million in the same period of 1995. The increase in interest
expense is the result of increased borrowings under the new credit facility as
well as the issuance of $160 million, 9.5% Senior Subordinated Notes due 2006 in
order to finance the acquisition of the California Properties.
Net Income
- ----------
Net income of $8.0 million was generated for the three months ended September
30, 1996 as compared to net income of $1.7 million in the same period of 1995.
Earnings available to common stockholders totaled $7.8 million after deductions
for preferred stock dividends for the three months ended September 30, 1996
versus $1.3 million for the same period in 1995.
Results of Operations (Nine months ended September 30, 1996 and 1995)
- ---------------------------------------------------------------------
The following table sets forth certain operating information of the Company
(inclusive of the effect of crude oil and natural gas price swaps) for the
periods presented:
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
-------------------- %
Increase/
1996 1995 (Decrease)
----------- ------- -----------
<S> <C> <C> <C>
Production:
Oil and condensate (MBBLS)............... 9,051 2,921 210%
Natural gas (MMCF)....................... 25,245 22,429 13%
Natural gas liquids (MMBBLS)............. 205 --- 100%
Average Sales Price:
Oil and condensate....................... $ 15.38 $ 14.45 6%
Natural gas/(1)/......................... $ 1.92 $ 1.52 26%
Average unit production cost/(2)/ per BOE..... $ 4.94 $ 3.23 53%
Average unit depletion rate per BOE-Domestic.. $ 4.06 $ 5.01 (19%)
Average unit depletion rate per BOE-Congo..... $ .75 $ .75 ---
/(1)/ Average sales price for natural gas includes revenues received from the
sale of natural gas liquids.
/(2)/ Costs incurred to operate and maintain wells and related equipment and
facilities including ad valorem and severance taxes.
</TABLE>
20
<PAGE>
NUEVO ENERGY COMPANY
--------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
-----------------------------------------------
Revenues
- --------
Oil and gas revenues for the nine months ended September 30, 1996 were $188.4
million, or 144% higher than oil and gas revenues of $77.1 million for the same
period in 1995. The increase in oil and gas revenues was attributable primarily
to production from the California Properties and higher oil and gas prices.
Gas plant revenues of approximately $23.3 million and $20.6 million are
reflected in the nine months ended September 30, 1996 and 1995, respectively.
The 13% increase in gas plant revenues is primarily due to increased natural gas
liquids prices.
Pipeline and other revenues for the nine months ended September 30, 1996 were
approximately $5.8 million, or 4% higher than pipeline and other revenues of
approximately $5.6 million for the same period in 1995. The increase is
primarily due to increased throughput on the Illini pipeline due to additional
transportation contracts.
Expenses
- --------
Lease operating expenses for the nine months ended September 30, 1996 totaled
$66.5 million, compared to $21.5 million for the same period in 1995. Lease
operating expenses per BOE were $4.94 in the first nine months of 1996 compared
to $3.23 in the same period in 1995 due primarily to higher lifting costs
associated with the California Properties.
Plant operating expenses of $19.6 million are reflected in the nine months ended
September 30, 1996 as compared to $17.0 million for the nine months ended
September 30, 1995. The 15% increase in gas plant expenses in 1996 compared to
1995 primarily relates to increased liquids settlements under percent of
proceeds contracts resulting from higher natural gas and natural gas liquids
prices.
Pipeline and other operating expenses for the nine months ended September 30,
1996 were $5.0 million, or 43% higher than pipeline operating expenses of
approximately $3.5 million for the same period in 1995, primarily due to
increased natural gas and natural gas liquids prices, as well as to the
increased tariffs on the Illini pipeline caused by increased throughput.
Depreciation, depletion and amortization of $54.5 million for the nine months
ended September 30, 1996 reflects an increase of 69% from $32.3 million in the
same period in 1995 due to increased oil and gas production volumes resulting
from the acquisition of the California Properties, partially offset by a
decreased depletion rate per barrel of oil equivalent caused by an increase in
estimated proved oil and gas reserves.
General and administrative expenses totaled $14.9 million and $7.4 million in
the nine months ended September 30, 1996 and 1995, respectively. The 101%
increase in general and administrative expense is due primarily to the increase
in management fees resulting from significant growth in the assets of the
Company.
21
<PAGE>
NUEVO ENERGY COMPANY
--------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
-----------------------------------------------
Interest expense increased to $25.8 million for the nine months ended September
30, 1996 from $11.8 million in the same period of 1995. The increase in interest
expense is the result of increased borrowings under the new credit facility as
well as the issuance of $160 million, 9.5% Senior Subordinated Notes due 2006 in
order to finance the acquisition of the California Properties. Additionally, the
Company entered into a bridge commitment in relation to the acquisition of the
California Properties. The facility was not drawn down; however, $1.7 million in
fees associated with the bridge commitment was expensed in the second quarter of
1996.
Net Income
- ----------
Net income of approximately $19.4 million was generated for the nine months
ended September 30, 1996, as compared to net income of $6.4 million in the same
period of 1995. Earnings available to common stockholders totaled $18.6 million
after deductions for preferred stock dividends for the nine months ended
September 30, 1996 versus $5.2 million for the same period in 1995.
22
<PAGE>
NUEVO ENERGY COMPANY
--------------------
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- ------- -----------------
None.
ITEM 2. CHANGES IN SECURITIES
- ------- ---------------------
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- ------- -------------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
None.
ITEM 5. OTHER INFORMATION
- ------- -----------------
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------- --------------------------------
a. Exhibits
None
b. Reports on Form 8-K.
None.
23
<PAGE>
NUEVO ENERGY COMPANY
--------------------
PART II. OTHER INFORMATION (CONTINUED)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NUEVO ENERGY COMPANY
--------------------
(Registrant)
Date: November 12, 1996 By: /s/ Michael D. Watford
----------------------------- -----------------------------
Michael D. Watford
President, Chief Executive
Officer and Chief Operating
Officer
Date: November 12, 1996 By: /s/ Robert M. King
----------------------------- ------------------------------
Robert M. King
Chief Financial Officer
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 3,595
<SECURITIES> 0
<RECEIVABLES> 44,931
<ALLOWANCES> 0
<INVENTORY> 3,690
<CURRENT-ASSETS> 56,271
<PP&E> 1,143,505
<DEPRECIATION> 361,754
<TOTAL-ASSETS> 854,327
<CURRENT-LIABILITIES> 53,015
<BONDS> 0
0
11
<COMMON> 189
<OTHER-SE> 355,552
<TOTAL-LIABILITY-AND-EQUITY> 854,327
<SALES> 217,425
<TOTAL-REVENUES> 218,851
<CGS> 145,502
<TOTAL-COSTS> 145,502
<OTHER-EXPENSES> 14,998
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,825
<INCOME-PRETAX> 32,526
<INCOME-TAX> 13,173
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,397
<EPS-PRIMARY> 1.12
<EPS-DILUTED> 1.09
</TABLE>
