<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, 1997
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 6, the number of outstanding shares of the Registrant's common
stock was 19,695,046.
<PAGE>
NUEVO ENERGY COMPANY
INDEX
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets:
September 30, 1997 (Unaudited) and December 31, 1996......... 3
Condensed Consolidated Statements of Operations (Unaudited):
Three and nine months ended September 30, 1997 and
September 30, 1996.......................................... 5
Condensed Consolidated Statements of Cash Flows (Unaudited):
Nine months ended September 30, 1997 and September 30, 1996.. 7
Notes to Condensed Consolidated Financial Statements
(Unaudited).................................................. 9
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 17
PART II. OTHER INFORMATION................................... 30
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, 1997 December 31, 1996
------------------- ------------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................... $ 6,704 $ 13,636
Accounts receivable......................... 42,520 43,204
Product inventory........................... 2,527 2,731
Prepaid expenses and other.................. 3,369 4,067
---------- ----------
Total current assets...................... 55,120 63,638
---------- ----------
PROPERTY AND EQUIPMENT, AT COST:
Land........................................ 49,696 49,696
Buildings and improvements.................. 5,076 5,304
Oil and gas properties (full cost method)
($81,016 and $44,661 of unproved
properties are excluded from amortization
at September 30, 1997 and December 31,
1996, respectively)........................ 1,182,673 1,031,057
Pipeline and other facilities............... 48,220 46,887
Gas plant facilities........................ 15,000 41,694
---------- ----------
1,300,665 1,174,638
Accumulated depreciation, depletion and
amortization.............................. (460,829) (392,977)
---------- ----------
839,836 781,661
---------- ----------
OTHER ASSETS................................. 16,306 18,504
---------- ----------
$ 911,262 $ 863,803
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
NUEVO ENERGY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS - Continued
(Amounts in Thousands, except Share Data)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
September 30, 1997 December 31,1996
------------------- ----------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable...................................................... $ 23,717 $ 18,720
Accrued interest...................................................... 7,508 4,736
Accrued liabilities................................................... 19,151 11,236
Current maturities of long-term debt.................................. 3,716 5,408
-------- --------
Total current liabilities.......................................... 54,092 40,100
-------- --------
OTHER LONG-TERM LIABILITIES............................................. 1,525 3,864
DEFERRED REVENUE........................................................ 2,362 4,828
LONG-TERM DEBT, NET OF CURRENT MATURITIES............................... 293,866 287,038
DEFERRED TAXES.......................................................... 52,979 35,153
MINORITY INTEREST....................................................... 696 704
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S CONVERTIBLE
DEBENTURES (TECONS).................................................... 115,000 115,000
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 50,000,000 shares authorized,
19,695,046 and 19,852,478 shares issued and outstanding at
September 30, 1997 and December 31, 1996, respectively................. 203 199
Additional paid-in capital.............................................. 349,006 340,126
Treasury stock, at cost, 521,403 shares................................. (20,788) ---
Stock held by benefit trust, 21,088
shares.................................................................. (427) ---
Retained earnings....................................................... 62,748 36,791
-------- --------
Total stockholders' equity........................................ 390,742 377,116
-------- --------
$911,262 $863,803
======== ========
</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,
--------------------------------
1997 1996
------- -------
<S> <C> <C>
REVENUES:
Oil and gas revenues.................. $82,580 $78,666
Gas plant revenues.................... --- 8,498
Pipeline and other revenues........... 1,191 2,420
Loss on sale of asset................. (669) ---
Interest and other income............. 615 700
------- -------
83,717 90,284
------- -------
COSTS AND EXPENSES:
Lease operating expenses.............. 30,948 28,520
Gas plant operating expenses.......... --- 7,114
Pipeline and other operating expenses. 1,150 2,195
Depreciation, depletion and
amortization......................... 24,020 22,962
General and administrative expenses... 5,993 3,476
Management fees....................... 2,846 2,914
Interest expense...................... 6,585 9,642
Dividends on Guaranteed Preferred
Beneficial Interests in Company's
Convertible Debentures (TECONS)...... 1,689 ---
Other expense......................... 88 8
------- -------
73,319 76,831
------- -------
Income before income taxes and minority
interest............................... 10,398 13,453
Provision for income taxes.............. 4,186 5,448
Minority interest....................... (3) (3)
------- -------
NET INCOME.............................. $ 6,215 $ 8,008
======= =======
Dividends on Preferred Stock............ --- 237
------- -------
EARNINGS AVAILABLE TO COMMON
STOCKHOLDERS........................... $ 6,215 $ 7,771
======= =======
Earnings per common and common
equivalent
share................................. $.31 $.40
======= =======
Earnings per common and common
equivalent share assuming full
dilution............................... $.31 $.39
======= =======
Average common and common equivalent
shares outstanding..................... 20,351 19,388
======= =======
Average common and common equivalent
shares outstanding assuming full
dilution............................... 20,351 20,363
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
NUEVO ENERGY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in Thousands, Except per Share Data)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1997 1996
-------- --------
<S> <C> <C>
REVENUES:
Oil and gas revenues................................................... $251,292 $186,404
Gas plant revenues..................................................... 11,597 23,296
Pipeline and other revenues............................................ 3,928 5,765
Gain on sale of asset.................................................. 2,370 ---
Interest and other income.............................................. 1,557 1,426
-------- --------
270,744 216,891
-------- --------
COSTS AND EXPENSES:
Lease operating expenses............................................... 90,309 64,503
Gas plant operating expenses........................................... 10,220 19,568
Pipeline and other operating expenses.................................. 3,451 4,976
Depreciation, depletion and amortization............................... 68,892 54,495
General and administrative expenses.................................... 14,449 7,792
Management fees........................................................ 9,033 7,149
Interest expense....................................................... 20,593 25,825
Dividends on Guaranteed Preferred Beneficial Interests in Company's
Convertible Debentures (TECONS)....................................... 4,959 ---
Other expense.......................................................... 347 57
-------- --------
222,253 184,365
-------- --------
Income before income taxes, minority interest, and
extraordinary item..................................................... 48,491 32,526
Provision for income taxes............................................... 19,518 13,173
Minority interest........................................................ (8) (44)
-------- --------
Income before extraordinary item......................................... $ 28,981 $ 19,397
======== ========
Extraordinary loss on early extinguishment of debt, net of income
tax benefit........................................................... 3,024 ---
-------- --------
NET INCOME............................................................... $ 25,957 $ 19,397
======== ========
Dividends on Preferred Stock............................................. --- 766
-------- --------
EARNINGS AVAILABLE TO COMMON STOCKHOLDERS................................ $ 25,957 $ 18,631
======== ========
Earnings per common and common equivalent share:
Earnings before extraordinary item..................................... $ 1.41 $ 1.12
Extraordinary item (net of income tax benefit)......................... (.15) ---
-------- --------
Net earnings.......................................................... $ 1.27 $ 1.12
======== ========
Earnings per common and common equivalent share assuming full
dilution................................................................ $ 1.27 $ 1.09
======== ========
Average common and common equivalent shares outstanding.................. 20,499 16,662
======== ========
Average common and common equivalent shares outstanding assuming
full dilution......................................................... 20,499 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, Except per Share Data)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................... $ 25,957 $ 19,397
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation, depletion and amortization............................ 68,892 54,495
Amortization of other costs......................................... 1,166 956
Gain on sale of asset............................................... (2,370) ---
Extraordinary loss on early extinguishment of debt, net of income
tax benefit........................................................ 3,024 ---
Deferred revenues................................................... (2,466) (3,168)
Deferred taxes...................................................... 19,863 13,173
Minority interest................................................... (8) (44)
Stock bonus awards.................................................. 1,145 ---
--------- ---------
115,203 84,809
Changes in assets and liabilities:
Accounts receivable.................................................. (7,484) (25,047)
Accounts payable and accrued liabilities............................. 23,804 38,222
Minority interest distributions...................................... --- (160)
Other................................................................ (1,576) (11,684)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES................................ 129,947 86,140
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties.................................... (151,618) (507,861)
Additions to gas plant facilities...................................... (704) (825)
Additions to pipeline and other facilities............................. (1,105) (51,420)
Proceeds from sale of gas plant........................................ 24,992 ---
Proceeds from sales of properties...................................... 4,050 33,728
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES.................................... (124,385) (526,378)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings............................................... 183,500 408,000
Payments of long-term debt............................................. (179,077) (114,184)
Premium to retire long-term debt....................................... (3,440) ---
Proceeds from sale of put options...................................... 1,630 ---
Treasury stock purchase................................................ (21,173) ---
Preferred stock dividends.............................................. --- (766)
Common stock held by benefit trust..................................... (427) ---
Proceeds from issuance of common stock................................. 6,493 145,018
--------- ---------
NET CASH (USED IN)/PROVIDED BY FINANCING ACTIVITIES...................... (12,494) 438,068
--------- ---------
Net decrease in cash and cash equivalents.............................. (6,932) (2,170)
Cash and cash equivalents at beginning of period....................... 13,636 5,765
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................... $ 6,704 $ 3,595
========= =========
</TABLE>
7
<PAGE>
NUEVO ENERGY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued (Unaudited)
(Amounts in Thousands, Except per Share Data)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1997 1996
------- -------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of $1,902 capitalized
during nine months ended September 30, 1997)............ $18,238 $15,159
Income taxes............................................... $ 350 $ ---
</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, 1997 and December 31, 1996 and
the results of operations and changes in cash flows for the periods ended
September 30, 1997 and 1996. These financial statements should be read in
conjunction with the financial statements and notes to the financial
statements in the 1996 Form 10-K of Nuevo Energy Company (the "Company") that
was filed with the Securities and Exchange Commission.
DERIVATIVE FINANCIAL INSTRUMENTS
--------------------------------
The Company utilizes derivative financial instruments to reduce its exposure
to changes in the market price of natural gas and crude oil. Commodity
derivatives utilized as hedges include futures and swap contracts, which are
used to hedge natural gas, and option contracts, which are used to hedge oil.
Natural gas basis swaps are sometimes used to hedge the basis differential
between the derivative financial instrument index price and the natural gas
field price. In order to qualify as a hedge, price movements in the
underlying commodity derivative must be highly correlated with the hedged
commodity. Settlement of gains and losses on price 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 and operating cash
flows in the period realized.
Gains and losses on option and futures contracts that qualify as a hedge of
firmly committed or anticipated purchases and sales of oil and gas
commodities are deferred on the balance sheet and recognized in income and
operating cash flows when the related hedged transaction occurs. Premiums
paid on option contracts are deferred in other assets and amortized into oil
and gas revenues over the terms of the respective option contracts. Gains or
losses attributable to the termination of a derivative financial instrument
are deferred on the balance sheet and recognized in revenue when the hedged
crude oil and natural gas is sold. There were no such deferred gains or
losses at September 30, 1997 or December 31, 1996. Gains or losses on
derivative financial instruments that do not qualify as a hedge are
recognized in income currently.
As a result of hedging transactions, oil and gas revenues were reduced by
$1.6 million and $.9 million in the third quarter of 1997 and 1996,
respectively. During the first nine months of 1997 and 1996, oil and gas
revenues were reduced by $3.3 million and $2.0 million, respectively, as a
result of these transactions.
9
<PAGE>
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
(Unaudited)
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.
RECLASSIFICATIONS
-----------------
Certain reclassifications of prior year amounts have been made to conform
with current reporting practices.
10
<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,
1997 1996
-------------- -------------
<S> <C> <C>
Sales to unaffiliated customers:
Oil and gas/(1)/........................ $251,292 $186,404
Gas plant, pipelines and other.......... 15,525 29,061
-------- --------
Total sales................................ 266,817 215,465
Gain on sale of asset................... 2,370 ---
Other revenues.......................... 1,557 1,426
-------- --------
Total revenues............................. $270,744 $216,891
======== ========
Operating profit (loss) before income
taxes:
Oil and gas/(1)/........................ $ 94,835 $ 70,637
Gas plant, pipelines and other.......... (378) 1,674
-------- --------
94,457 72,311
Unallocated corporate expenses............. 20,414 13,960
Interest expense........................... 20,593 25,825
Dividends on Guaranteed Beneficial
Interests in Company's Convertible
Debentures (TECONS)...................... 4,959 ---
-------- --------
Income before income taxes, minority
interest, and extraordinary item........ $ 48,491 $ 32,526
======== ========
Depreciation, depletion and amortization:
Oil and gas............................. $ 66,148 $ 51,264
Gas plant, pipelines and other.......... 2,232 2,843
-------- --------
$ 68,380 $ 54,107
======== ========
</TABLE>
(1) Oil and gas sales and operating profit before income taxes include revenues
associated with gas plant facilities in California, which process immaterial
amounts of third party gas.
11
<PAGE>
Notes to Condensed Consolidated Financial Statements (Continued)
----------------------------------------------------------------
(Unaudited)
3. ACCOUNTING PRONOUNCEMENTS
-------------------------
Statement of Financial Accounting Standard ("SFAS") No. 128, "Earnings per
Share," was issued by the Financial Accounting Standards Board ("FASB") in
February 1997. This statement addresses the computation, presentation, and
disclosure requirements for earnings per share ("EPS"). The Company is
required to adopt the new standard in its year-end 1997 financial statements.
All prior period EPS information (including interim EPS) is required to be
restated at that time. Early adoption is not permitted. Proforma EPS, as if
the Company adopted SFAS No. 128 on January 1, of each period presented, are
as follows:
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
--------------------------------------------------------
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Basic EPS.... $ .32 $ .42 $1.31 $1.17
Diluted EPS.. $ .31 $ .39 $1.27 $1.09
</TABLE>
SFAS No. 130, "Reporting Comprehensive Income", was issued by the FASB in
June 1997. This Statement established standards for reporting and display of
comprehensive income and its components. Comprehensive income includes all
changes in an enterprise's equity, including, among other things, foreign
currency translation adjustments, notes receivable from employee stock
ownership plans, and deferred gains or losses on hedging activities. Also in
June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This Statement established standards for
reporting information about operating segments in annual financial
statements, and requires that an enterprise report selected information about
operating segments in interim reports issued to shareholders. Both of these
Statements are effective for fiscal periods beginning after December 15,
1997. The Company does not expect the adoption of these statements to have a
material impact on its financial condition or results of operations.
4. PROPERTIES AND EQUIPMENT
------------------------
In March 1997, Nuevo Ghana, Inc., ("Nuevo Ghana"), a wholly-owned subsidiary
of the Company, signed a petroleum agreement (the "Agreement") with the
Republic of Ghana and the Ghana National Petroleum Corporation, ("GNPC"), for
petroleum rights covering approximately 1.7 million acres offshore of Ghana
in the East Cape Three Points Prospect area. The Company is the operator
with a 75% working interest and a third party holds the remaining 25% working
interest. Since signing the Agreement, the Company has reprocessed
approximately 4,000 kilometers of seismic and will be shooting an additional
1,800 kilometers of seismic in late 1997. The first well is scheduled to be
drilled in the second half of 1998. This Agreement was ratified by the
Parliament in Ghana on August 1, 1997.
In October 1997, Nuevo Ghana signed a second petroleum agreement with the
Republic of Ghana and GNPC for petroleum rights covering an additional 2.7
million acres offshore of Ghana in the Accra-Keta prospect area. The
12
<PAGE>
Notes to Condensed Consolidated Financial Statements (Continued)
----------------------------------------------------------------
(Unaudited)
Company is the operator of this prospect with a 100% working interest. This
new prospect area is sixty miles to the east of the Company's 1.7 million
acres awarded in August 1997. The exploration program for the Company's new
acreage is similar to the initial Agreement and involves reprocessing
existing seismic, shooting additional seismic and drilling an exploration
well during the first phase of the agreement.
5. FINANCING ACTIVITIES
--------------------
On June 16, 1997, the Company redeemed its 12-1/2% Senior Subordinated Notes
at a total cost of $78.0 million, representing $75.0 million face value of
the debt plus a 4% premium of $3.0 million. The redemption resulted in an
extraordinary loss on early extinguishment of debt, net of the related tax
benefit, of $3.0 million. The Company used proceeds from its bank facility
to fund the redemption.In connection with the sale of its interest in NuStar
Joint Venture, the Company used a portion of the proceeds from the sale, $5.9
million, to repay the project financing associated with the Benedum Gas
Plant.The borrowing base on the Company's credit facility with a bank group
led by NationsBank of Texas, N.A., was increased during the second quarter,
from $289.0 million to $330.0 million.
6. STOCKHOLDERS' EQUITY
--------------------
In March 1997, the Company adopted a Shareholder Rights Plan (the "Plan") to
protect the Company's shareholders from coercive or unfair takeover tactics.
Under the Plan, each outstanding share and each share of subsequently issued
Common Stock has attached to it one Right. Generally, in the event a person
or group ("Acquiring Person") acquires or announces an intention to acquire
beneficial ownership of 15% or more of the outstanding shares of Common Stock
without the prior consent of the Company, or the Company is acquired in a
merger or other business combination, or 50% or more of its assets or earning
power is sold, each holder of a Right will have the right to receive, upon
exercise at the exercise price of the Right, that number of shares of common
stock of the acquiring company which at the time of such transaction will
have a market price of two times the exercise price of the Right. The
Company may redeem each Right for $.01 at any time before a person or group
becomes an Acquiring Person without prior approval. The Rights will expire
on March 21, 2007, subject to earlier redemption by the Board of Directors of
the Company.
In March 1997, the Board of Directors of the Company authorized the open
market repurchase of up to one million shares of outstanding Common Stock
during 1997, at times and prices deemed attractive by management. During
April 1997, the Company repurchased 500,000 shares of Common Stock in open
market transactions, at an average purchase price of $38.94 per share, plus
42,491 shares acquired from the cancellation of warrants issued during 1996.
13
<PAGE>
Notes to Condensed Consolidated Financial Statements (Continued)
----------------------------------------------------------------
(Unaudited)
In May 1997, the Company sold put options on its Common Stock to a third
party. The options give the purchaser the right to sell the Company 500,000
shares of its Common Stock at prices ranging from $40.26 to $41.04 per share
through December 31, 1997. The contract gives the Company the choice of net
cash, net share, or physical settlement. Any repurchased shares will be
treated as Treasury Stock. The Company generated $1.6 million in option
premium from these transactions which is reflected as additional paid-in
capital on the balance sheet. As of October 31, 1997, 300,000 of these
options have expired with the Company's share prices above the strike price,
hence no shares were repurchased pursuant to these options.
During July 1997, the Board of Directors of the Company adopted a plan to
encourage senior executives to personally invest in the shares of the
Company, and to regularly review executives' ownership versus targeted
ownership objectives. These incentives include a deferred compensation plan
(the "Plan") that gives executives the ability to defer all or a portion of
their salaries and bonuses and invest in Common Stock of the Company at a
discount to market prices. Stock acquired at a discount will be held in a
benefit trust and restricted for a two-year period, and the Plan does not
permit investment in a diversified equity portfolio until and unless targeted
levels of Common Stock ownership in the Company are achieved and maintained.
Target levels of ownership will be based on multiples of base salary and will
be administered by the Compensation Committee of the Board of Directors.
Initially, the Plan will apply to all executives at a level of Vice-President
and above.
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's operating
results or financial condition. However, these actions and claims in the
aggregate seek substantial damages against the Company and are subject to the
inherent uncertainties in any litigation. The Company is defending itself
vigorously in all such matters.
The Company's international investments involve risks typically associated
with investments in emerging markets such as uncertain political, economic,
legal and tax environments and expropriation and nationalization of assets.
In addition, if a dispute arises in its foreign operations, the Company may
be subject to the exclusive jurisdiction of foreign courts or may not be
successful in subjecting foreign persons to the jurisdiction of the United
States. The Company attempts to conduct its business and financial affairs
so as to protect against political and economic risks applicable to
operations in the various countries where it operates, but there can be no
assurance the Company will be successful in so protecting itself. The
Company's investment in the Congo is insured through political risk insurance
provided by the Overseas Private Investment Corporation. The Company is
currently investigating its options for policial risk insurance in Ghana.
14
<PAGE>
Notes to Condensed Consolidated Financial Statements (Continued)
----------------------------------------------------------------
(Unaudited)
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 not to claim certain tax 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 these tax losses utilized by the seller in years prior to the acquisitions
if certain triggering events occur. A triggering event will not occur,
however, if a subsequent purchaser enters into certain agreements specified
in the consolidated return regulations intended to insure that such losses
will not be claimed. The Company's potential direct liability could be as
much as $54.0 million if a triggering event with respect to the Company
occurs, and the Company believes that CMS's liability (for which the Company
would be jointly liable with an indemnification right against CMS) could be
as much as $72.0 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.
During the third quarter of 1997, a civil war erupted in the Congo, resulting
in a new government being put in place. The operator of the properties
temporarily moved its field offices to Gabon, but is currently in the process
of re-establishing its offices in the Congo. The Company's Congo production
is over 30 miles offshore and flows into a floating production, storage and
off-loading vessel for direct shipment to western markets. The Company has
experienced no production interruption as a result of the conflict and, while
there can be no assurances, the Company does not expect there to be any
disruption in the future.
8. PROPERTY SALES
--------------
On May 2, 1997, Nuevo Liquids, a wholly-owned subsidiary of the Company, sold
its 95% interest in NuStar Joint Venture, which held the Company's investment
in the Benedum Plant System, for proceeds of $25.0 million. The effective
date of the sale is January 1, 1997. Proceeds from the sale were used to
reduce outstanding debt under the Company's revolving credit facility, as
well as project debt related to the Benedum Gas Plant in the amount of $5.9
million. The Company recorded a pre-tax gain of $2.4 million relating to the
sale during 1997. Final accounting for this transaction was completed during
the third quarter of 1997, resulting in a $.7 million negative adjustment to
the gain recorded by the Company in the second quarter. The Company is
currently formulating plans to dispose of other non-strategic assets.
9. POINT PEDERNALES PIPELINE SPILL
-------------------------------
On Sunday, September 28, 1997, there was a spill of crude oil into Santa
Barbara Channel from a pipeline which connects the Company's Point Pedernales
field with shore-based processing facilities. The volume of the spill was
estimated to be between 200 and 500 barrels of oil. Torch Operating Company,
which operates the platform and pipeline for the Company, responded
immediately by shutting down the pipeline and notified the National Response
Center and all appropriate federal, state, and local
15
<PAGE>
Notes to Condensed Consolidated Financial Statements (Continued)
----------------------------------------------------------------
(Unaudited)
authorities as well as petroleum industry environmental response consortia.
Tests are currently being conducted to determine the cause of the leak in the
pipeline. Cost of the clean up will be covered by general liability insurance
held by the Company, less the related deductible of $40,000 net to the
Company. Total cost of the repair of the pipeline is currently estimated to
be approximately $2.5 million, and is expected to be covered by insurance
less the Company's deductible of $80,000. Coverage by insurance will be based
on the determination of the cause of the leak in the pipeline. A final
determination of the cause of the leak is expected by the end of the year. At
the time of the spill, the Point Pedernales field was producing 7,300 barrels
per day, net to the Company's interest. Production from the field has been
halted until the pipeline can be repaired and the Company can receive all
required permits from regulatory bodies. Repairs are expected to be completed
by the end of 1997 and production is currently expected to recommence no
later than mid-1998, although no assurances in this regard can be given.
Additionally, the Company has exposure to certain costs which may not be
recoverable by insurance, including fines, penalties, and damages as well as
costs to repair the pipeline. Such costs are not quantifiable at this time,
but are not expected to be material to the Company.
10. RESIGNATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER
----------------------------------------------------
On August 14, 1997, the Company's President and Chief Executive Officer,
Michael D. Watford, resigned his position with the Company. In accordance
with the terms of Mr. Watford's Separation Agreement with the Company, he
received a severance payment in the amount of $1.7 million. Mr. Watford was
replaced by Douglas L. Foshee, former President and Chief Executive Officer
of Torch Energy Advisors Incorporated. In addition, the Chairman of the
Board, J. P. Bryan, announced his intention to resign his chairmanship of the
Company by the end of 1997. A search is ongoing to indentify a new Chairman
before Mr. Bryan's resignation takes effect.
16
<PAGE>
NUEVO ENERGY COMPANY
--------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Forward Looking Statements
--------------------------
This document includes "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934 ("Exchange Act"). All
statements other than statements of historical facts included in this
document, including without limitation, statements under "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
regarding the Company's financial position, estimated quantities and net
present values of reserves, business strategy, plans and objectives of
management of the Company for future operations and covenant compliance, are
forward-looking statements. Although the Company believes that the
assumptions upon which such forward-looking statements are based are
reasonable, it can give no assurances that such assumptions will prove to
have been correct. Important factors that could cause actual results to
differ materially from the Company's expectations ("Cautionary Statements")
are disclosed below and elsewhere in this document. All subsequent written
and oral forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified by the Cautionary Statements.
Capital Resources and Liquidity
-------------------------------
Since the formation of the Company, management's strategy has been to
purchase and develop producing oil and gas properties, participate in gas
processing, gas gathering and pipeline investments and to participate
selectively in exploration activities. The funding of these activities was
provided by operating cash flows, debt and bank financing, private and public
placements of equity, property divestitures and joint ventures with industry
participants. Net cash provided by operating activities was $129.5 million
and $86.1 million for the nine months ended September 30, 1997 and 1996,
respectively. The Company invested $151.6 million and $507.9 million in oil
and gas properties for the nine months ended September 30, 1997 and 1996,
respectively. The Company also has $1.0 million of working capital and
unused commitments under the revolving credit line of $201.0 million, subject
to borrowing base determination. The Company believes its working capital,
cash flow from operations, and available financing sources are sufficient to
meet its obligations as they become due and to finance its exploration and
development programs.
17
<PAGE>
NUEVO ENERGY COMPANY
--------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Capital Expenditures
--------------------
The Company has identified substantial development and exploitation
opportunities for the remainder of 1997, which it believes offer meaningful
opportunities to grow reserves and increase production. The Company
anticipates spending an additional $30.0 million on development activities
during the remainder of 1997, primarily in California and in East Texas.
The Company also has an active and growing exploration program targeting
high-potential reserve opportunities in California and the onshore Gulf Coast
region, as well as offshore of Ghana. The Company anticipates spending an
additional $3.0 million during the remainder of 1997 on exploration projects.
Exploration and Development Activities
--------------------------------------
During the first nine months of 1997, the Company drilled or participated in
approximately 200 wells. Following is a description of significant
exploration and development activity during the first nine months of 1997.
Domestic Exploration
The Bardsdale Irwin Berylwood #8, located in Ventura County, California, was
successfully completed in April 1997, and tested at a rate of 1,241 barrels
of oil per day and is still producing 900 barrels of oil per day. This oil is
33.8 gravity. The Company is the operator and owns a 98% net revenue interest
in this well. Also completed as successful in California was the A-28
exploration well in the Tranquillon Ridge Unit in offshore California, a
newly identified structure southeast of the existing Point Pedernales
production and platform. The Company believes that this new unit may
establish significant additional reserves. This well tested at a rate of
1,173 barrels of oil per day and 569 thousand cubic feet (mcf) of gas per
day. The Company is the operator and owns an 80% working interest in the
well.
The No. 1 Maximus well, an exploratory well located in Fayette County, Texas,
was horizontally drilled and completed as a dual-lateral in the Austin Chalk
formation. The well tested at a rate of 1,207 barrels of oil per day and 2.0
mcf of gas per day. The Company owns a 25% working interest in this well.
During the third quarter the Company had a discovery at Four Isle Dome. The
"72" sand has 40.5 net feet of pay. The Company sidetracked to 15,336 feet
and logged another 57 feet of net pay in the "78" sand. A dual completion in
the "72" and "78" sands is producing approximately 7 mcf of gas per day. An
additional 100 foot possible pay section is behind pipe in the "74" sand.
International Exploration
In the Republic of Congo, the Company completed the B-14 well in the
Yombo field. The well initially tested at rates exceeding 3,600 gross
barrels
18
<PAGE>
NUEVO ENERGY COMPANY
--------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (Continued)
-----------------------------------------------
of oil per day. The Company owns a 43.75% working interest in the well. Also
in the Republic of Congo, the Masseko #4 well has tested at rates exceeding
3,000 gross barrels of oil per day from the Mid-Sendji formation. The Company
is currently working with the operator and vendors on developing and sizing a
platform for this new structure.
Development Activity
During the first nine months of 1997, the Company participated in several oil
and gas development projects. These projects include workovers,
recompletions, development drilling, secondary and tertiary recovery
operations and other production enhancement techniques to maximize current
production and the ultimate recovery of reserves. The Company has identified
in excess of 1,000 exploitation projects on its existing properties which it
believes offer meaningful opportunities to grow reserves and increase
production, irrespective of acquisition or exploration successes.
In California, the Company continued successful development drilling at
Cymric East Welport. During the first nine months of 1997, the Company
drilled nine additional wells and increased production from 300 to 1,500
barrels of oil per day. The Company also continued its successful workover
program in the Belmont field with four additional workovers, as well as
redrilling a sidetrack in an updip location. As a result of these workovers
and this redrill, field production has increased from 1,750 to 2,600 barrels
of oil per day. The Company also utilized frac-pac technology for the first
time in offshore California at Santa Clara. Two completions performed with
this technology are each producing at a rate of 500 barrels of oil per day.
The Company continued a two rig drilling program in the Oakhill field in East
Texas that began in July 1996. Initial rates from these wells have averaged
2.0 mmcf of gas per well per day. Three significant Austin Chalk wells in the
Giddings field were drilled and completed during the nine months ended
September 30, 1997. The Que Pasa #4 tested at rates of 16.9 mmcf of gas per
day, the Robinson #2-H tested at rates of 21.8 mmcf of gas per day, and the
Jolly #1-H tested at rates of 19.1 mmcf of gas per day. The Company owns at
50% working interest in each of these Austin Chalk wells.
Financing Activities
--------------------
On June 16, 1997, the Company redeemed its 12-1/2% Senior Subordinated Notes,
at a total cost of $78.0 million, representing $75.0 million face value of
the debt, plus a 4% premium of $3.0 million. The redemption resulted in an
extraordinary loss on early extinguishment of debt, net of the related tax
benefit, of $3.0 million. The Company used proceeds from its bank facility
to fund the redemption.
In connection with the sale of its interest in NuStar Joint Venture, the
Company used a portion of the proceeds from the sale, $5.9 million, to repay
the project debt associated with the Benedum Gas Plant.
19
<PAGE>
NUEVO ENERGY COMPANY
--------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (Continued)
-----------------------------------------------
The borrowing base on the Company's credit facility with a bank group led by
NationsBank of Texas, N.A., was increased during the second quarter, from
$289.0 million to $330.0 million.
Derivative Financial Instruments
--------------------------------
The Company utilizes derivative financial instruments to reduce its exposure
to changes in the market price of natural gas and crude oil. Commodity
derivatives utilized as hedges include futures and swap contracts, which are
used to hedge natural gas, and option contracts, which are used to hedge oil.
Natural gas basis swaps are sometimes used to hedge the basis differential
between the derivative financial instrument index price and the natural gas
field price. In order to qualify as a hedge, price movements in the
underlying commodity derivative must be highly correlated with the hedged
commodity. Settlement of gains and losses on price 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 and operating cash
flows in the period realized.
Gains and losses on option and futures contracts that qualify as a hedge of
firmly committed or anticipated purchases and sales of oil and gas
commodities are deferred on the balance sheet and recognized in income and
operating cash flows when the related hedged transaction occurs. Premiums
paid on option contracts are deferred in other assets and amortized into oil
and gas revenues over the terms of the respective option contracts. Gains or
losses attributable to the termination of a derivative financial instrument
are deferred on the balance sheet and recognized in revenue when the hedged
crude oil and natural gas is sold. There were no such deferred gains or
losses at September 30, 1997 or December 31, 1996. Gains or losses on
derivative financial instruments that do not qualify as a hedge are
recognized in income currently.
As a result of hedging transactions, oil and gas revenues were reduced by
$1.6 million and $.9 million in the third quarter of 1997 and 1996,
respectively. During the first nine months of 1997 and 1996, oil and gas
revenues were reduced by $3.3 million and $2.0 million, respectively, as a
result of these transactions.
For the period July 1997 through December 1997, the Company purchased put
option contracts on 19,100 barrels per day of West Texas Intermediate
Crude at a strike price of $19.00 per barrel. The total cost of these
options was $1.8 million, which is being amortized into revenue over the
six month term. The effect of these put options is to establish a floor
price on a large percentage of the Company's estimated oil production in
the third and fourth quarters.
20
<PAGE>
NUEVO ENERGY COMPANY
--------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (Continued)
-----------------------------------------------
Accounting Pronouncements
-------------------------
Statement of Financial Accounting Standard No. 128, "Earnings per Share," was
issued by the Financial Accounting Standards Board ("FASB") in February 1997.
This statement addresses the computation, presentation, and disclosure
requirements for earnings per share ("EPS"). The Company is required to
adopt the new standard in its year-end 1997 financial statements. All prior
period EPS information (including interim EPS) is required to be restated at
that time. Early adoption is not permitted. Proforma EPS, as if the Company
adopted SFAS No. 128 on January 1, of each period presented, are as follows:
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
--------------------------- ---------------------------
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Basic EPS.... $ .32 $ .42 $1.31 $1.17
Diluted EPS.. $ .31 $ .39 $1.27 $1.09
</TABLE>
SFAS No. 130, "Reporting Comprehensive Income", was issued by the FASB in
June 1997. This Statement established standards for reporting and display of
comprehensive income and its components. Comprehensive income includes all
changes in an enterprise's equity, including, among other things, foreign
currency translation adjustments, notes receivable from employee stock
ownership plans, and deferred gains or losses on hedging activities. Also in
June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This Statement established standards for
reporting information about operating segments in annual financial
statements, and requires that an enterprise report selected information about
operating segments in interim reports issued to shareholders. Both of these
Statements are effective for fiscal periods beginning after December 15,
1997. The Company does not expect the adoption of these statements to have a
material impact on its financial condition or results of operations.
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's operating
results or financial condition. However, these actions and claims in the
aggregate seek substantial damages against the Company and are subject to the
inherent uncertainties in any litigation. The Company is defending itself
vigorously in all such matters.
The Company's international investments involve risks typically associated
with investments in emerging markets such as uncertain political, economic,
legal and tax environments and expropriation and nationalization of assets.
In addition, if a dispute arises in its foreign operations, the Company may
be subject to the exclusive jurisdiction of foreign courts or may not be
successful in subjecting
21
<PAGE>
NUEVO ENERGY COMPANY
--------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (Continued)
-----------------------------------------------
foreign persons to the jurisdiction of the United States. The Company
attempts to conduct its business and financial affairs so as to protect
against political and economic risks applicable to operations in the various
countries where it operates, but there can be no assurance the Company will
be successful in so protecting itself. The Company's investment in the Congo
is insured through political risk insurance provided by the Overseas Private
Investment Corporation. The Company is currently investigating its options
for policial risk insurance in Ghana.
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 not to claim certain tax 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 these tax losses utilized by the seller in years prior to the acquisitions
if certain triggering events occur. A triggering event will not occur,
however, if a subsequent purchaser enters into certain agreements specified
in the consolidated return regulations intended to insure that such losses
will not be claimed. The Company's potential direct liability could be as
much as $54.0 million if a triggering event with respect to the Company
occurs, and the Company believes that CMS's liability (for which the Company
would be jointly liable with an indemnification right against CMS) could be
as much as $72.0 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.
During the third quarter of 1997, a civil war erupted in the Congo, resulting
in a new government being put in place. The operator of the properties
temporarily moved its field offices to Gabon, but is currently in the process
of re-establishing its offices in the Congo. The Company's Congo production
is over 30 miles offshore and flows into a floating production, storage and
off-loading vessel for direct shipment to western markets. The Company has
experienced no production interruption as a result of the conflict and, while
there can be no assurances, the Company does not expect there to be any
disruption in the future.
On Sunday, September 28, 1997, there was a spill of crude oil into Santa
Barbara Channel from a pipeline which connects the Company's Point Pedernales
field with shore-based processing facilities. The volume of the spill was
estimated to be between 200 and 500 barrels of oil. Torch Operating Company,
which operates the platform and pipeline for the Company, responded
immediately by shutting down the pipeline and notified the National Response
Center and all appropriate federal, state, and local authorities as well as
petroleum industry environmental response consortia. Tests are currently
being conducted to determine the cause of the leak in the pipeline. Cost of
the clean up will be covered by general liability insurance held by the
Company, less the related deductible of $40,000 net to the Company. Total
cost of the repair of the pipeline is currently estimated to be approximately
$2.5 million, and is expected to be covered by insurance less the Company's
deductible of $80,000. Coverage by insurance will be based on the
determination of the cause of the leak in
22
<PAGE>
NUEVO ENERGY COMPANY
--------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (Continued)
-----------------------------------------------
the pipeline. A final determination of the cause of the leak is expected by
the end of the year. At the time of the spill, the Point Pedernales field was
producing 7,300 barrels per day, net to the Company's interest. Production
from the field has been halted until the pipeline can be repaired and the
Company can receive all required permits from regulatory bodies. Repairs are
expected to be completed by the end of 1997 and production is currently
expected recommence no later than in mid-1998, although no assurances in this
regard can be given. Additionally, the Company has exposure to certain costs
which may not be recoverable by insurance, including fines, penalties, and
damages as well as costs to repair the pipeline. Such costs are not
quantifiable at this time, but are not expected to be material to the
Company.
23
<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, 1997, and 1996)
- -----------------------------------------------------------------------
The following table sets forth certain operating information of the Company
(inclusive of the effect of crude oil and natural gas hedging) for the periods
presented:
<TABLE>
<CAPTION>
Three Months
Ended September 30, %
------------------- Increase/
1997 1996 (Decrease)
------- ------- ----------
<S> <C> <C> <C>
Production:
Oil and condensate (MBBLS) 4,564 4,065 12.3%
Natural gas (MMCF) 9,052 8,952 1.1%
Natural gas liquids (MBBLS) 77 205 (62.4%)
Average Sales Price:
Oil and condensate ($ per barrel) $13.93 $15.09 (7.7%)
Natural gas ($ per mcf) $ 1.89 $ 1.91 (1.0%)
Average unit production cost/(1)/ per BOE $ 5.03 $ 4.95 1.6%
Average unit depletion rate per BOE-Domestic $ 3.96 $ 3.97 (0.3%)
Average unit depletion rate per BOE-Foreign $ .95 $ .75 26.7%
</TABLE>
/(1)/ Costs incurred to operate and maintain wells and related equipment
and facilities, including ad valorem and severance taxes.
24
<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, 1997 were
$82.6 million, or 5% higher than oil and gas revenues of $78.7 million for the
same period in 1996, primarily attributable to increased oil and natural gas
production and offset by 8% lower realized oil prices during the period.
Pipeline and other revenues for the three months ended September 30, 1997 were
$1.2 million, or 50% lower than pipeline and other revenues of $2.4 million for
the same period in 1996, primarily due to the sale of the West Delta 152
pipeline during July 1996, as well as decreased throughput volumes on the Illini
and Bright Star pipelines.
During the second quarter of 1997, the Company sold its interest in the Benedum
Plant System. As a result, there are no operating revenues from the gas plant
during the third quarter. Final accounting for this transaction was completed
during the third quarter, resulting in a negative adjustment to the gain of $.7
million. Total gain on the sale was $2.4 million.
Expenses
- --------
Lease operating expenses for the three months ended September 30, 1997 totaled
$30.9 million, or 8% higher than $28.5 million for the three months ended
September 30, 1996, primarily due to a 7% increase in production volumes on a
BOE basis during the quarter, as well as an increased use and cost of steam, as
compared to the third quarter of 1996. Also contributing to this increase are
new production operations, pump changeouts on offshore properties, and start-up
costs on a number of other areas such as a gas plant at Point Pedernales and the
installation of waterfloods on several properties. These increases resulted in
lease operating expenses per barrel of oil equivalent of $5.03 in the third
quarter of 1997, compared to $4.95 in the same period in 1996.
Pipeline and other operating expenses for the three months ended September 30,
1997 were $1.2 million, or 45% lower than pipeline and other operating expenses
of $2.2 million for the same period in 1996, which is primarily attributable to
reduced costs on both the Illini and Bright Star pipelines associated with lower
throughput volumes.
Depreciation, depletion and amortization of $24.0 million for the three months
ended September 30, 1997 reflects a 4% increase from $23.0 million in the same
period in 1996 due to the increase in production volumes, as well as an increase
in the depletion rate per barrel for the Company's foreign operations from $.75
per barrel in third quarter of 1996 to $.95 per barrel in the third quarter of
1997.
General and administrative expenses were $6.0 million for the three months ended
September 30, 1997, as compared to $3.5 million for the same period in 1996.
This 71% increase is due to severance costs of $1.7 million associated with the
resignation of the President and Chief Executive Officer, Michael D. Watford, as
well as a reduction in the amount of capitalized administrative costs.
25
<PAGE>
NUEVO ENERGY COMPANY
--------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (Continued)
-----------------------------------------------
Interest expense decreased to $6.6 million for the three months ended September
30, 1997 from $9.6 million in the same period of 1996. The 31% decrease in
interest expense is primarily the result of the redemption of the Company's
$75.0 million, 12-1/2% Senior Subordinated Notes during the second quarter, as
well as the reduction in borrowings under the credit facility, due to the
repayment of debt under this facility with the proceeds from the issuance of
$115.0 million Guaranteed Preferred Beneficial Interests in Company's
Convertible Debentures ("TECONS") in late 1996, which pay dividends at a rate of
5.75%.
Net Income
- ----------
Net income of $6.2 million was generated for the three months ended September
30, 1997 as compared to $8.0 million in the same period of 1996. Earnings
available to common stockholders totaled $6.2 million for the three months ended
September 30, 1997 versus $7.8 million for the same period in 1996, after
deductions for preferred stock dividends.
26
<PAGE>
NUEVO ENERGY COMPANY
--------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (Continued)
-----------------------------------------------
Results of Operations (Nine months ended September 30, 1997, and 1996)
- ----------------------------------------------------------------------
The following table sets forth certain operating information of the Company
(inclusive of the effect of crude oil and natural gas hedging) for the periods
presented:
<TABLE>
<CAPTION>
Three Months
Ended September 30, %
------------------- Increase/
1997 1996 (Decrease)
------- ------- ----------
<S> <C> <C> <C>
Production:
Oil and condensate (MBBLS)............... 13,021 9,051 43.9%
Natural gas (MMCF)....................... 26,812 25,245 6.2%
Natural gas liquids (MBBLS).............. 207 205 1.0%
Average Sales Price:
Oil and condensate ($ per barrel)........ $ 14.90 $ 15.28 (2.5%)
Natural gas ($ per mcf).................. $ 1.94 $ 1.88 3.2%
Average unit production cost/(1)/ per BOE..... $ 5.10 $ 4.79 6.5%
Average unit depletion rate per BOE-Domestic.. $ 3.95 $ 4.06 (2.7%)
Average unit depletion rate per BOE-Foreign... $ .81 $ .75 8.0%
</TABLE>
/(1)/ Costs incurred to operate and maintain wells and related equipment and
facilities, including ad valorem and severance taxes.
27
<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, 1997 were $251.3
million, or 35% higher than oil and gas revenues of $186.4 million for the same
period in 1996. The increase in oil and gas revenues was attributable primarily
to production from certain upstream oil and gas properties located onshore and
offshore California (the "California Properties") which were acquired during the
second quarter of 1996.
Gas plant revenues of $11.6 million and $23.3 million are reflected in the nine
months ended September 30, 1997 and 1996, respectively. The 50% decrease in
revenues is due to the sale of the Company's interest in the Benedum Plant
System during the second quarter of 1997, which resulted in a gain of $2.4
million.
Pipeline and other revenues for the nine months ended September 30, 1997 were
$3.9 million, or 33% less than pipeline and other revenues of $5.8 million for
the same period in 1996. The decrease is primarily due to the sale of the West
Delta pipeline during the second quarter of 1996, as well as decreased
throughput on both the Illini and Bright Star pipelines. In addition, revenues
were lower on the Richfield Gas Storage System due to several storage contracts
that were not renegotiated during the period.
Expenses
Lease operating expenses for the nine months ended September 30, 1997 totaled
$90.3 million, compared to $64.5 million for the same period in 1996. This 40%
increase is a result of the acquisition of the California Properties in the
second quarter of 1996. Lease operating expenses per BOE were $5.10 in the
first nine months of 1997 when compared to $4.79 in the same period in 1996 due
primarily to higher lifting costs associated with the California Properties.
Plant operating expenses of $10.2 million are reflected in the nine months ended
September 30, 1997 as compared to $19.6 million for the nine months ended
September 30, 1996. The 48% decrease in gas plant expenses is due to the sale
of the Company's interest in the Benedum Plant System during the second quarter
of 1997.
Pipeline and other operating expenses for the nine months ended September 30,
1997 were $3.5 million, or 30% lower than pipeline operating expenses of
approximately $5.0 million for the same period in 1996, due to decreased
operating expenses on both the Illini and Bright Star pipelines associated with
decreased throughput volumes.
Depreciation, depletion and amortization of $68.9 million for the nine months
ended September 30, 1997 reflects an increase of 26% from $54.5 million in the
same period in 1996 due to increased oil and gas production volumes as a result
of the acquisition of the California Properties partially offset by a decreased
depletion rate per barrel of oil equivalent as a result of increased estimated
proved oil and gas reserves.
28
<PAGE>
NUEVO ENERGY COMPANY
--------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (Continued)
-----------------------------------------------
General and administrative expenses were $14.4 million for the nine months ended
September 30, 1997, as compared to $7.8 million for the same period in 1996.
This 85% increase is primarily due to an increase in administrative expenses
associated with the California Properties acquired during the second quarter of
1996, as well as severance costs of $1.7 million associated with the resignation
of the Company's President and Chief Executive Officer, Michael D. Watford, and
a reduction in the amount of capitalized administrative costs.
Management fees totaled $9.0 million for the nine months ended September 30,
1997, as compared to $7.1 million for the same period in 1996. This 27%
increase is due to the increase in assets under management during the period,
primarily associated with the acquisition of the California Properties during
the second quarter of 1996.
Interest expense decreased to $20.6 million for the nine months ended September
30, 1997 from $25.8 million in the same period of 1996. The 20% decrease in
interest expense is primarily the result of the redemption of the Company's
$75.0 million, 12 1/2% Senior Subordinated Notes during the second quarter of
1997, as well as decreased debt under the credit facility due to the repayment
of a portion of the debt outstanding under this facility with the proceeds from
the issuance of the TECONS in late 1996. In addition, interest expense for the
nine months ended September 30, 1996 included $1.7 million in fees associated
with a bridge commitment entered into in connection with the acquisition of the
California Properties.
Net Income
Income before extraordinary items of $29.0 million was generated for the nine
months ended September 30, 1997, as compared to $19.4 million in the same period
of 1996. Earnings available to common stockholders after extraordinary items
totaled $26.0 million for the nine months ended September 30, 1997 versus $18.6
million for the same period in 1996, after deductions for preferred stock
dividends.
29
<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
- ------- ---------------------------------------------------
ITEM 5. OTHER INFORMATION
- ------- -----------------
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------ --------------------------------
10. Material Contracts
10.1 Separation Agreement with Michael D. Watford
Reports on Form 8-K.
1. Report filed on Form 8-K on September 4, 1997 regarding
the resignation of Michael D. Watford from the positions
of President, Chief Executive Officer and Chief Operating
Officer of Nuevo Energy Company, the appointment of
Douglas L. Foshee as its President and Chief Executive
Officer and the intention of Mr. J. P. Bryan to resign
his chairmanship of Nuevo Energy Company by the end of
1997.
30
<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 14, 1997 By: /s/ Douglas L. Foshee
------------------ ----------------------------
Douglas L. Foshee
President,
and Chief Executive Officer
Date: November 14, 1997 By: /s/ Robert M. King
----------------- ----------------------------
Robert M. King
Chief Financial Officer
31
<PAGE>
EXHIBIT 10.1
SEPARATION AGREEMENT
It is hereby agreed by and between Michael D. Watford ("Watford") and his
former employer, Nuevo Energy Company (hereinafter "Nuevo"), that Watford has
terminated his employment with Nuevo effective August 31, 1997. In connection
with the termination of Watford's employment, and the payment to Watford of
severance benefits provided for under his January 1, 1997 Employment Agreement
with Nuevo, and in consideration of their mutual promises and other
consideration itemized below, Watford and Nuevo agree to the following:
1. Watford shall be paid his salary, less standard deductions, through August
31, 1997.
2. Nuevo agrees that upon execution of this Agreement, Nuevo will grant
Watford an extension in the deadline for exercising Nuevo Energy Company Stock
options which had previously been granted to him, and that all options and bonus
stock previously granted him are fully vested as of the date of this agreement.
All options must be exercised by August 31, 1999, at which time the options will
terminate.
3. Watford's rights under his 401K and Deferred Compensation Plan with Nuevo
shall be fully vested on August 31, 1997.
4. Watford shall be entitled to continue participation in the Nuevo medical
plan, dental plan and vision plan for a total of eighteen (18) months from
August 31, 1997. Watford shall be entitled to no other employee benefits from
Nuevo, including those described under Paragraph 3(D) of his Employment
Agreement. It is expressly understood, however, that this Agreement and this
language in particular has no effect on Watford's rights under the Torchmark
Corporation retirement/pension plan.
<PAGE>
5. Watford shall be paid a 1997 bonus of $225,000.00 which shall be treated
in accordance with the existing deferred compensation plan. He shall also
receive a severance payment in the amount of $1,408,333.30, less applicable
withholding taxes.
6. Neuvo shall transfer the title to Watford's automobile to him, and shall
pay the title transfer costs and any applicable sales tax or fees. Taxes, if
any, due by reason of such transfer shall be paid by Watford.
7. Watford shall receive a lump sum payment of $17,200.00 to obtain and pay a
country club membership for two (2) years following his termination.
8. Watford shall be given possession of and title to his portable personal
computer.
9. Watford shall and hereby does resign his seat on Nuevo's Board of
Directors, and the Boards of any subsidiaries of Nuevo, and the Boards of The
Los Angeles Oil Company and Sepulveda Oil & Gas Company.
10. Watford and Nuevo agree that other than the payments and other
consideration provided for above, there shall be no further compensation due
Watford by reason of his employment with and termination by Nuevo.
IN WITNESS HEREOF, the parties to this Agreement have executed this instrument
on the dates set forth below.
Date: ___________________________ ______________________________________
MICHAEL D. WATFORD
<PAGE>
NUEVO ENERGY COMPANY
Date: ________________________ By: _________________________________________
Name: ______________________________________
Title: ______________________________________
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<PAGE>
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<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> JUL-01-1997 JAN-01-1997
<PERIOD-END> SEP-30-1997 SEP-30-1997
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