<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
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)
1021 Main Street, Suite 2100
Houston, Texas 77002
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (713) 652-0706
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 10, 1999, the number of outstanding shares of the Registrant's
common stock was 18,470,930.
<PAGE>
NUEVO ENERGY COMPANY
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets:
September 30, 1999 (Unaudited) and December 31, 1998.................... 3
Condensed Consolidated Statements of Operations (Unaudited):
Three and nine months ended September 30, 1999
and September 30, 1998.................................................. 5
Condensed Consolidated Statements of Cash Flows (Unaudited):
Nine months ended September 30, 1999 and September 30, 1998............. 7
Notes to Condensed Consolidated Financial Statements (Unaudited).......... 8
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations................................................................ 15
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk................... 31
PART II. OTHER INFORMATION............................................................ 32
</TABLE>
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, 1999 December 31, 1998
------------------ -----------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................... $ 2,187 $ 7,403
Accounts receivable................................. 38,330 25,096
Product inventory................................... 2,131 5,998
Assets held for sale................................ 28,403 120,055
Prepaid expenses and other.......................... 4,679 2,700
---------- ----------
Total current assets.............................. 75,730 161,252
---------- ----------
PROPERTY AND EQUIPMENT, at cost:
Land................................................ 51,038 51,038
Oil and gas properties (successful efforts method).. 996,086 959,348
Gas plant facilities................................ 11,443 17,112
Other facilities.................................... 16,756 6,696
---------- ----------
1,075,323 1,034,194
Accumulated depreciation, depletion and
amortization...................................... (422,820) (417,622)
---------- ----------
652,503 616,572
---------- ----------
DEFERRED TAX ASSETS, net............................. 4,480 27,534
OTHER ASSETS......................................... 14,764 12,327
---------- ----------
$ 747,477 $ 817,685
========== ==========
</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, 1999 December 31,1998
------------------ ----------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable................................................. $ 18,220 $ 24,393
Accrued interest................................................. 2,862 4,161
Accrued liabilities.............................................. 19,873 17,917
Current maturities of long-term debt............................. 1,125 3,152
-------- ---------
Total current liabilities..................................... 42,080 49,623
-------- ---------
LONG-TERM DEBT, net of current maturities.......................... 360,500 419,150
OTHER LONG-TERM LIABILITIES........................................ 2,820 2,034
CONTINGENCIES
COMPANY-OBLIGATED MANDATORILY
REDEEMABLE CONVERTIBLE PREFERRED
SECURITIES OF NUEVO FINANCING I.................................... 115,000 115,000
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 50,000,000 shares
authorized, 20,419,871 and 20,308,462
shares issued at September 30, 1999 and December 31, 1998,
respectively.................................................... 204 203
Additional paid-in capital....................................... 357,173 355,600
Treasury stock, at cost, 1,743,200 and 473,876 shares, at
September 30, 1999 and December 31, 1998, respectively........... (38,740) (19,335)
Stock held by benefit trust, 68,628 and 47,759 shares, at
September 30, 1999 and December 31, 1998, respectively........... (1,730) (1,732)
Accumulated deficit.............................................. (89,830) (102,858)
-------- ---------
Total stockholders' equity................................... 227,077 231,878
-------- ---------
$747,477 $ 817,685
======== =========
</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)
Three Months Ended September 30,
--------------------------------
1999 1998
-------------- ---------------
REVENUES:
Oil and gas revenues...................... $ 68,254 $ 60,770
Gas plant revenues........................ 733 628
Pipeline and other revenues............... --- 19
Gain on sale of assets, net............... (309) 4,091
Interest and other income................. 1,570 458
---------- ----------
70,248 65,966
---------- ----------
COSTS AND EXPENSES:
Lease operating expenses.................. 34,485 34,022
Gas plant operating expenses.............. 1,144 884
Pipeline and other operating expenses..... 73 116
Exploration costs......................... 620 9,862
Depreciation, depletion and amortization.. 17,299 20,261
General and administrative expenses....... 4,636 3,207
Outsourcing fees.......................... 3,603 3,746
Interest expense.......................... 7,948 8,881
Dividends on Guaranteed Preferred
Beneficial Interests in Company's
Convertible Debentures (TECONS)......... 1,653 1,653
Other expense............................. 3,381 2,083
---------- ----------
74,842 84,715
---------- ----------
Loss before income taxes................... (4,594) (18,749)
Benefit for income taxes................... (1,838) (7,504)
---------- ----------
NET LOSS................................... $ (2,756) $ (11,245)
========== ==========
LOSS PER SHARE:
Basic and Diluted:
Loss per common share $ (0.14) $ (0.57)
========== ==========
Weighted average common shares outstanding 19,610 19,820
========== ==========
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,
-------------------------------
1999 1998
------------ ------------
<S> <C> <C>
REVENUES:
Oil and gas revenues........................ $ 163,306 $ 183,815
Gas plant revenues.......................... 2,021 2,033
Pipeline and other revenues................. 4 1,741
Gain on sale of assets, net................. 80,003 5,768
Interest and other income................... 4,417 1,782
---------- ----------
249,751 195,139
---------- ----------
COSTS AND EXPENSES:
Lease operating expenses.................... 92,361 99,796
Gas plant operating expenses................ 3,480 2,307
Pipeline and other operating expenses....... 216 1,958
Exploration costs........................... 10,619 12,193
Depreciation, depletion and amortization.... 63,556 66,817
General and administrative expenses......... 11,835 11,733
Outsourcing fees............................ 10,449 10,945
Interest expense............................ 24,348 23,325
Dividends on Guaranteed Preferred Beneficial
Interests in Company's Convertible
Debentures (TECONS)........................ 4,959 4,959
Other expense............................... 6,217 3,929
---------- ----------
228,040 237,962
---------- ----------
Income (loss) before income taxes............. 21,711 (42,823)
Provision (benefit) for income taxes.......... 8,683 (17,374)
---------- ----------
NET INCOME (LOSS)............................. $ 13,028 $ (25,449)
========== ==========
EARNINGS (LOSS) PER SHARE:
Basic:
Earnings (loss) per common share.............. $ 0.66 $ (1.29)
========== ==========
Weighted average common shares outstanding.... 19,768 19,781
========== ==========
Diluted:
Earnings (loss) per common share.............. $ 0.65 $ (1.29)
========== ==========
Weighted average common and dilutive
potential common shares outstanding.......... 19,902 19,781
========== ==========
</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,
-------------------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)...................................................... $ 13,028 $ (25,449)
Adjustments to reconcile net income (loss) to
net cash (used in)/provided by operating activities:
Depreciation, depletion and amortization..................... 63,556 66,817
Gain on sale of assets, net.................................. (80,003) (5,768)
Dry hole costs............................................... 7,324 10,204
Amortization of other costs.................................. 1,254 1,214
Deferred revenues............................................ --- (1,429)
Deferred taxes............................................... 7,183 (17,929)
Appreciation (depreciation) of deferred compensation plan.... 577 (695)
Other........................................................ 120 ---
----------- ------------
13,039 26,965
Changes in assets and liabilities:...................................
Accounts receivable (13,234) 3,049
Accounts payable and accrued liabilities (7,174) (1,270)
Other ............................................................ 2,127 (1,051)
----------- ------------
Net cash (used in)/provided by operating activities.................. (5,242) 27,693
----------- ------------
Cash flows from investing activities:
Additions to oil and gas properties.................................. (41,849) (134,872)
Acquisitions of oil and gas properties............................... (61,416) (7,810)
Additions to gas plant facilities.................................... (3,420) (1,238)
Additions to other facilities........................................ (8,938) (1,162)
Proceeds from sales of properties.................................... 199,663 11,830
----------- ------------
Net cash provided by/(used in) investing activities 84,040 (133,252)
----------- ------------
Cash flows from financing activities:
Proceeds from borrowings............................................. 134,590 225,000
Deferred financing costs............................................. (4,989) (3,342)
Payments of long-term debt........................................... (195,267) (122,828)
Treasury stock (purchases) sales..................................... (19,802) 100
Proceeds from issuance of common stock............................... 1,454 1,304
----------- ------------
Net cash (used in)/provided by financing activities.................... (84,014) 100,234
----------- ------------
Net decrease in cash and cash equivalents............................ (5,216) (5,325)
Cash and cash equivalents at beginning of period..................... 7,403 9,208
----------- ------------
Cash and cash equivalents at end of period............................. $ 2,187 $ 3,883
=========== ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of amounts capitalized)............................... $ 23,133 $ 16,318
Income taxes........................................................ $ 2,250 $ 475
</TABLE>
See accompanying notes to condensed consolidated financial statements.
7
<PAGE>
NUEVO ENERGY COMPANY
--------------------
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 the rules and regulations of the
Securities and Exchange Commission 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, 1999 and December 31, 1998 and the
results of operations and changes in cash flows for the periods ended
September 30, 1999 and 1998. These financial statements should be read in
conjunction with the financial statements and notes to financial statements
in the 1998 Form 10-K of Nuevo Energy Company (the "Company").
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). Actual
results could differ from those estimates.
Comprehensive Income
--------------------
Comprehensive income includes net income and all changes in an enterprise's
other comprehensive income including, among other things, foreign currency
translation adjustments, and unrealized gains and losses on certain
investments in debt and equity securities. There are no differences between
comprehensive income (loss) and net income (loss) for the periods
presented.
Derivative Financial Instruments
--------------------------------
The Company utilizes derivative financial instruments to reduce its
exposure to changes in the market prices of crude oil and natural gas.
Commodity derivatives utilized as hedges include futures, swap and option
contracts, which are used to hedge crude oil and natural gas prices. Basis
swaps are sometimes used to hedge the basis differential between the
derivative financial instrument index price and the commodity 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, 1999 or December 31, 1998. 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
$16.5 million and increased by $0.3 million in the third quarter of 1999
and 1998, respectively. During the first nine months of 1999 and 1998, oil
and gas revenues were reduced by $25.3 million and increased by $0.5
million, respectively, as a result of these transactions.
The Company entered into a swap arrangement with a major financial
institution that effectively converts the interest rate on $16.4 million
notional amount of the 9 1/2 % Senior Subordinated Notes due 2008 to a
variable LIBOR-based rate through February 25, 2000. Based on LIBOR rates
in effect at September 30, 1999, this
8
<PAGE>
NUEVO ENERGY COMPANY
--------------------
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
(Unaudited)
amounted to a net reduction in the carrying cost of the 9 1/2 % Senior
Subordinated Notes due 2008 from 9.5% to 6.01%, or 349 basis points. In
addition, the swap arrangement also effectively hedges the price at which
these Notes can be repurchased by the Company. Based on the market price of
99.81% for the Notes at September 30, 1999, an early termination of this
arrangement would result in a payment of approximately $16,900 from the
institution to Nuevo.
For the fourth quarter of 1999, the Company is party to crude oil swaps on
an average of 30,000 barrels of oil ("Bbls") per day, or approximately 64%
of its estimated crude oil production, at an average NYMEX price of $17.20
per Bbl. For calendar year 2000, the Company has entered into crude oil
swaps on 16,500 Bbls per day, or approximately 30% of its estimated crude
oil production, at an average NYMEX price of $17.94 per Bbl. In addition,
for calendar year 2000, the Company has hedged an additional 30% of its
estimated crude oil production through the purchase of put options on
16,500 Bbls per day at a NYMEX price of $16.00 per Bbl, and the sale of
call options on 16,500 Bbls per day at an average NYMEX price of $21.21 per
Bbl. There was no net cost to the Company for these options. For the first
quarter of 2001, the Company has hedged 26,000 Bbls per day at an average
NYMEX price of $19.52 per Bbl.
Recent Accounting Pronouncements
--------------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities".
This statement, as amended by SFAS No. 137, establishes standards of
accounting for and disclosures of derivative instruments and hedging
activities. This statement requires all derivative instruments to be
carried on the balance sheet at fair value and is effective for the Company
beginning January 1, 2001, however, early adoption is permitted. The
Company has not yet determined the impact of this statement on its
financial condition or results of operations or whether it will adopt the
statement early.
Reclassifications
-----------------
Certain reclassifications of prior year amounts have been made to conform
to the current presentation.
2. Property and Equipment
----------------------
The Company utilizes the successful efforts method of accounting for its
investments in oil and gas properties. Under successful efforts, oil and
gas lease acquisition costs and intangible drilling costs associated with
exploration efforts that result in the discovery of proved reserves and
costs associated with development drilling, whether or not successful, are
capitalized when incurred. When a proved property is sold, ceases to
produce or is abandoned, a gain or loss is recognized. When an entire
interest in an unproved property is sold for cash or cash equivalent, gain
or loss is recognized, taking into consideration any recorded impairment.
When a partial interest in an unproved property is sold, the amount
received is treated as a reduction of the cost of the interest retained.
Unproved leasehold costs are capitalized pending the results of exploration
efforts. Significant unproved leasehold costs are reviewed periodically and
a loss is recognized to the extent, if any, that the cost of the property
has been impaired. An impairment of unproved leasehold costs of $8.1
million was recognized as of December 31, 1998. Exploration costs,
including geological and geophysical expenses, exploratory dry holes and
delay rentals, are charged to expense as incurred.
Costs of productive wells, development dry holes and productive leases are
capitalized and depleted on a unit-of-production basis over the life of the
remaining proved reserves. Capitalized drilling costs are depleted on a
unit-of-production basis over the life of the remaining proved developed
reserves. Estimated costs (net of salvage value) of dismantlement,
abandonment and site remediation are computed by the Company's independent
reserve engineers and are included when calculating depreciation and
depletion using the unit-of-production method.
9
<PAGE>
NUEVO ENERGY COMPANY
--------------------
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
(Unaudited)
The Company reviews proved oil and gas properties on a depletable unit
basis whenever events or circumstances indicate that the carrying value of
those assets may not be recoverable. For each depletable unit determined to
be impaired, an impairment loss equal to the difference between the
carrying value and the fair value of the depletable unit is recognized.
Fair value, on a depletable unit basis, is estimated to be the present
value of the undiscounted expected future net revenues computed by
application of estimated future oil and gas prices, production and
expenses, as determined by management, to estimated future production of
oil and gas reserves over the economic life of the reserves. If the
carrying value exceeds the undiscounted future net revenues, an impairment
is recognized equal to the difference between the carrying value and the
discounted estimated future net revenues of that depletable unit. The
Company considers probable reserves and escalated commodity pricing in its
estimate of future net revenues. A fair value impairment of $60.8 million
was recognized as of December 31, 1998.
Interest costs associated with non-producing leases and exploration and
development projects are capitalized only for the period that activities
are in progress to bring these projects to their intended use. The
capitalization rates are based on the Company's weighted average cost of
funds used to finance expenditures.
3. Deferred Tax Assets
-------------------
As a result of the net loss generated during 1998, the Company has deferred
tax assets, net of valuation allowances, of $4.5 million and $27.5 million
as of September 30, 1999 and December 31, 1998, respectively. During the
third quarter of 1999, the Company recorded a deferred tax liability
totaling $15.9 million, relating to the acquisition of oil and gas
properties from Texaco (see Note 8). The deferred tax liability recorded
represents the difference between the purchase price for these properties
and the underlying tax basis on the date of the acquisition, at the
applicable tax rate. The Company believes that sufficient future taxable
income will be generated and has concluded that these net deferred tax
assets will more likely than not be realized.
4. Industry Segment Information
----------------------------
As of December 31, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information", which was issued
by the FASB in June 1997. This statement establishes standards for
reporting information about operating segments in annual financial
statements and requires that enterprises report selected information about
operating segments in interim periods.
Historically, the Company's operations were concentrated primarily in two
segments: the exploration and production of oil and natural gas and gas
plant, pipeline and gas storage operations. The Company's non-core gas
gathering, pipeline and gas storage assets were reclassified to assets held
for sale as of December 31, 1997, consistent with the Company's intention
to dispose of these assets during 1998 and 1999. The Company completed the
sale of its Bright Star gas gathering system in July 1998 and the Richfield
gas storage assets in February 1998, at their approximate carrying values,
and the sale of the Illini pipeline, which closed on November 9, 1999. The
Company's policy is to record revenues and expenses associated with these
assets, which are no longer being depreciated, until they are sold.
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
---------------------------------------
1999 1998
---- ----
<S> <C> <C>
Sales to unaffiliated customers:
Oil and gas - East.............. $ 10,150 $ 35,696
Oil and gas - West.............. 132,412 135,905
Oil and gas - International..... 20,744 12,214
Gas plant, pipelines and other.. 2,025 3,774
-------- --------
Total sales....................... 165,331 187,589
Gain on sale of assets, net..... 80,003 5,768
Other revenues.................. 4,417 1,782
-------- --------
Total revenues.................... $249,751 $195,139
======== ========
</TABLE>
10
<PAGE>
NUEVO ENERGY COMPANY
--------------------
Notes to Condensed Consolidated Financial Statements (Continued)
----------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
---------------------------------------
1999 1998
---- ----
<S> <C> <C>
Operating profit before income taxes:
Oil and gas - East (a)................... $ 81,624 $ 17,532
Oil and gas - West....................... (7,040) 2,692
Oil and gas - International.............. 3,568 (8,313)
Gas plant, pipelines and other........... (2,533) (1,097)
-------- --------
75,619 10,814
Unallocated corporate expenses............. 24,601 25,353
Interest expense........................... 24,348 23,325
Dividends on TECONS........................ 4,959 4,959
-------- --------
Income (loss) before income taxes........ $ 21,711 $(42,823)
======== ========
Depreciation, depletion and amortization:
Oil and gas - East....................... $ 5,694 $ 8,411
Oil and gas - West....................... 50,518 53,530
Oil and gas - International.............. 6,174 3,742
Gas plant, pipelines and other........... 653 606
-------- --------
$ 63,039 $ 66,289
======== ========
</TABLE>
(a) Includes an $80.3 million gain on sale of the East Texas gas
properties for the nine months ended September 30, 1999.
5. Long-Term Debt
--------------
Long-term debt consists of the following (amounts in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
9 1/2% Senior Subordinated Notes due 2008 (a)......... $ 257,310 $ ---
9 1/2% Senior Subordinated Notes due 2006 (a)......... 2,540 160,000
8 7/8% Senior Subordinated Notes due 2008 (a).......... 150 100,000
Bank credit facility (b)............................... 100,500 158,400
OPIC credit facility................................... 1,125 3,902
------------- ------------
Total debt..................................... 361,625 422,302
Less: current maturities............................... (1,125) (3,152)
------------- ------------
Long-term debt......................................... $ 360,500 $ 419,150
============= ============
</TABLE>
(a) In July 1999, the Company authorized a new issuance of $260.0 million
of 9 1/2% senior subordinated notes due June 1, 2008. The Company
offered to exchange the new notes for its outstanding $160.0 million
of 9 1/2% senior subordinated notes due 2006 ("Old 9 1/2% Notes") and
$100.0 million of 8 7/8% senior subordinated notes due 2008 ("8 7/8%
Notes"). In August 1999, the Company received tenders to exchange
$157.46 million of its Old 9 1/2% Notes and $99.85 million of the 8
7/8% Notes. In connection with the exchange offers, the Company
solicited consents to proposed amendments to the indentures under
which the old notes were issued. These amendments streamline the
Company's covenant structure and provide the Company with additional
flexibility to pursue its operating strategy. The exchange was
accounted for as a debt modification. As such, the consideration that
the Company paid to the holders of the Old 9 1/2% Notes who tendered
in the exchange offer (equal to 3% of the outstanding principal amount
of the Old 9 1/2% Notes exchanged) was accounted for as deferred
financing costs. Also in connection with this exchange offer, the
Company incurred $2.9 million of third-party fees during the third
quarter of 1999, which are included in other expense.
11
<PAGE>
NUEVO ENERGY COMPANY
--------------------
Notes to Condensed Consolidated Financial Statements (Continued)
----------------------------------------------------------------
(Unaudited)
(b) Nuevo's Restated Credit Agreement dated June 30, 1999, provides for
secured revolving credit availability of up to $400.0 million (subject
to a semi-annual borrowing base determination) from a bank group led
by Bank of America, N.A. and Morgan Guaranty Trust Company of New
York, until its expiration on April 1, 2003. Effective January 6,
1999, the borrowing base on the Company's credit facility was reduced
from $380.0 million to $200.0 million, reflecting the sale on that
date of the Company's East Texas natural gas reserves, and also
reflecting a significant decline in projected oil prices since the
previous borrowing base determination. The borrowing base was
increased to $300.0 million in October 1999, as a result of the
significant increase in current commodity prices and the inclusion of
recently acquired oil and gas assets in California (see Note 8). The
restatement of the Credit Agreement also provided Nuevo with relief
under the covenant requiring minimum levels of EBITDA/Fixed Charge
coverage. The Company was in compliance with all covenants as of
September 30, 1999, and does not anticipate any issues of non-
compliance arising in the foreseeable future. At September 30, 1999,
outstanding borrowings under the revolving credit agreement were $98.5
million. Accordingly, $101.5 million of committed revolving credit
capacity was unused and available at September 30, 1999. Additionally,
Nuevo had $2.0 million of outstanding borrowings under an uncommitted
line of credit.
6. (Loss) Earnings per Share Computation
-------------------------------------
SFAS No. 128 requires a reconciliation of the numerator (income) and
denominator (shares) of the basic earnings per share ("EPS") computation to
the numerator and denominator of the diluted EPS computation. In the three-
month periods ended September 30, 1999 and 1998 and nine-month period ended
September 30, 1998, weighted average potential dilutive common shares of
259,000, 71,000 and 394,000, respectively, are not included in the
calculation of diluted loss per share due to their anti-dilutive effect.
The Company's reconciliation is as follows:
<TABLE>
<CAPTION>
For the Three Months Ended September 30,
----------------------------------------
1999 1998
-------------------- ------------------
Loss Shares Loss Shares
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Loss per Common share - Basic..................... $ (2,756) 19,610 $(11,245) 19,820
Effect of dilutive securities:
Stock options..................................... --- --- --- ---
-------- -------- -------- --------
Loss per Common share - Diluted................... $ (2,756) 19,610 $(11,245) 19,820
======== ======== ======== ========
<CAPTION>
For the Nine Months Ended September 30,
----------------------------------------
1999 1998
-------------------- ------------------
Income Shares Loss Shares
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Earnings (loss) per Common share - Basic.......... $ 13,028 19,768 $(25,449) 19,781
Effect of dilutive securities:
Stock options..................................... --- 134 --- ---
-------- -------- -------- --------
Earnings (loss) per Common share - Diluted........ $ 13,028 19,902 $(25,449) 19,781
======== ======== ======== ========
</TABLE>
7. Contingencies
-------------
The Company has been named as a defendant in Gloria Garcia Lopez and
Husband, Hector S. Lopez, Individually, and as successors to Galo Land &
Cattle Company v. Mobil Producing Texas & New Mexico, et al. in the 79th
Judicial District Court of Brooks County, Texas. The plaintiffs, based on
pleadings and deposition testimony, allege: i) underpayment of royalties
and claim damages, on a gross basis, of $56.5 million, including interest;
ii) that their production was improperly commingled with gas produced from
an adjoining lease, resulting in damages, including interest of $40.8
million (gross); iii) failure to develop claiming damages and interest of
$106.3 million (gross); and iv) numerous other claims that may result in
unspecified damages. Nuevo's working interest in these properties is 20%.
The Company, along with the other defendants in this case, denies these
allegations and is vigorously contesting these claims. Management does
12
<PAGE>
NUEVO ENERGY COMPANY
--------------------
Notes to Condensed Consolidated Financial Statements (Continued)
----------------------------------------------------------------
(Unaudited)
not believe that the final outcome of this matter will have a material
adverse impact on the Company's operating results, financial condition or
liquidity.
The Company has been named as a defendant in certain other 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.
In March 1999, the Company discovered that a non-officer employee had
fraudulently authorized and diverted for personal use Company funds
totaling $5.9 million, $4.3 million in 1998 and the remainder in 1999, that
were intended for international exploration. Accordingly, the Company
reclassified the amounts lost in 1998 to other expense. The Board of
Directors engaged a Certified Fraud Examiner to conduct an in-depth review
of the fraudulent transactions. The investigation confirmed that only one
employee was involved in the matter and that all misappropriated funds were
identified. The Company has reviewed and, where appropriate, strengthened
its internal control procedures.
In September 1997, there was a spill of crude oil into the Santa Barbara
Channel from a pipeline that connects the Company's Point Pedernales field
with shore-based processing facilities. The volume of the spill was
estimated to be 163 barrels of oil. The costs of the clean up and the cost
to repair the pipeline either have been or are expected to be covered by
insurance, less the Company's deductibles, which in total are $120,000.
Repairs were completed by the end of 1997, and production recommenced in
December 1997. The Company also has exposure to costs that may not be
recoverable from insurance, including certain fines, penalties, and
damages. Such costs are not quantifiable at this time, but are not expected
to be material to the Company's operating results, financial condition or
liquidity.
The Company's international investments involve risks typically associated
with investments in emerging markets such as an uncertain political,
economic, legal and tax environment 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 that the Company will be successful in so
protecting itself. A portion of the Company's investment in the Republic of
Congo in West Africa ("Congo") is insured through political risk insurance
provided by the Overseas Private Investment Corporation ("OPIC"). The
Company will consider its options for political risk insurance in the
Republic of Ghana in West Africa ("Ghana") as it evaluates business
opportunities.
The Company and its partners underwent a tax examination related to their
ownership interests in the Yombo field offshore the Republic of Congo, for
the years 1994 through 1997. On June 25, 1999, the Company and its partners
settled this tax assessment for a total of $1.0 million, of which the
Company's share was $400,000. The Company and its partners are currently
undergoing a tax examination related to their ownership interests in the
Yombo field for 1998. Management does not believe that the outcome of this
matter will have a material adverse effect 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 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
ensure that such losses will not be claimed. The Company's potential direct
liability could be as much as $50.0 million if a triggering event with
respect to the Company occurs, and the Company believes that CMS's
liability (for which the Company
13
<PAGE>
NUEVO ENERGY COMPANY
--------------------
Notes to Condensed Consolidated Financial Statements (Continued)
----------------------------------------------------------------
(Unaudited)
would be jointly liable with an indemnification right against CMS) could be
as much as $67.0 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.
8. Acquisitions
------------
In late June 1999, the Company acquired oil and gas properties located
onshore and offshore California for $61.4 million from Texaco, Inc. To
purchase these assets, the Company used funds from a $100.0 million
interest-bearing escrow account that provided "like-kind exchange" tax
treatment for the purchase of domestic oil and gas producing properties.
The escrow account was created with proceeds from the Company's January
1999 sale of its East Texas natural gas assets (see discussion in Note 9
below). Following the Texaco transaction, the $41.0 million remaining in
the escrow account, which included $2.4 million of interest income, was
used to repay a portion of outstanding bank debt in early July 1999.
The acquired properties had estimated net proved reserves at June 30, 1999
of 33.7 million barrels of oil equivalent ("BOE") and will increase the
Company's production from California by approximately 5.0 thousand BOE per
day. All of these properties are additional interests in the Company's
existing properties or are located near its existing properties. The
acquisition includes interests in Cymric, East Coalinga, Dos Cuadras and
other fields the Company operates.
9. Divestitures
------------
On January 6, 1999, the Company completed the sale of its East Texas
natural gas assets to an affiliate of Samson Resources Company for an
adjusted purchase price of approximately $191.0 million. Of the proceeds,
$100.0 million was set aside to fund an escrow account, as discussed above
in Note 8. The remainder of the proceeds were used to repay outstanding
senior bank debt. The Company realized an $80.3 million adjusted pre-tax
gain on the sale of the East Texas natural gas assets resulting in the
realization of $14.6 million of the Company's deferred tax asset. A $5.2
million gain on settled hedge transactions was realized in connection with
the closing of this sale in 1999. The effective date of the sale is July 1,
1998. The Company reclassified these assets to assets held for sale and
discontinued depleting these assets during the third quarter of 1998.
Estimated net proved reserves associated with these properties totaled
approximately 329.0 billion cubic feet of natural gas equivalent at January
1, 1999.
During the third quarter of 1999, the Company reclassified certain of its
non-core California properties to assets held for sale, as it intends to
purse the sale of these assets prior to the end of the year. Accordingly,
the Company discontinued depleting and depreciating these assets during the
third quarter.
10. Share Repurchases
-----------------
In August 1999, the Company implemented a share repurchase program,
pursuant to the Board of Directors' December 1997 authorization to
repurchase up to 1,000,000 shares at times and at prices deemed attractive
by management. In September 1999, the Board of Directors increased the
authorization by 616,600 shares. As of September 30, 1999, the Company had
repurchased 1,176,600 shares of its common stock in open market
transactions at an average purchase price, including commissions, of $16.83
per share. In October 1999, the Board of Directors authorized the
repurchase of up to an additional 1,000,000 shares at times and at prices
deemed appropriate by management. As of November 11, 1999, the Company had
repurchased 1,510,600 shares at an average purchase price of $16.67 per
share, including commissions.
14
<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 and in the Company's
Annual Report on Form 10-K and other filings made with the Securities and
Exchange Commission. 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 inception, the Company has expanded its operations through a series
of disciplined, low-cost acquisitions of oil and gas properties and the
subsequent exploitation and development of these properties. The Company
has complemented these efforts with strategic divestitures and an
opportunistic exploration program, which provides exposure to prospects
that have the potential to add substantially to the growth of the Company.
The funding of these activities has historically been provided by operating
cash flows, bank financing, private and public placements of debt and
equity securities, property divestitures and joint ventures with industry
participants. Net cash (used in) provided by operating activities was
$(5.2) million and $27.7 million for the nine months ended September 30,
1999 and 1998, respectively. The Company invested $103.3 million and $142.7
million in oil and gas properties for the nine months ended September 30,
1999 and 1998, respectively. Such amounts include $61.4 million and $7.8
million for acquisitions of oil and gas properties during the first nine
months of 1999 and 1998, respectively.
Effective January 6, 1999, the borrowing base on the Company's credit
facility was reduced from $380.0 million to $200.0 million, reflecting the
sale on that date of the Company's East Texas natural gas reserves, and
also reflecting a significant decline in projected oil prices since the
previous borrowing base determination. The borrowing base was increased to
$300.0 million in October 1999, as a result of the significant increase in
current commodity prices and the inclusion of recently acquired oil and gas
assets in California (see Note 8 to Notes to Condensed Consolidated
Financial Statements). At September 30, 1999, outstanding borrowings under
the revolving credit agreement were $98.5 million. Accordingly, $101.5
million of committed revolving credit capacity was unused and available at
September 30, 1999. Additionally, Nuevo had $2.0 million of outstanding
borrowings under an uncommitted line of credit. At September 30, 1999, the
Company had $33.7 million of working capital.
In July 1999, the Company authorized a new issuance of $260.0 million of 9
1/2% senior subordinated notes due June 1, 2008. The Company offered to
exchange the new notes for its outstanding $160.0 million of 9 1/2% senior
subordinated notes due 2006 ("Old 9 1/2% Notes") and $100.0 million of 8
7/8% senior subordinated notes due 2008 ("8 7/8% Notes"). In August 1999,
the Company received tenders to exchange $157.46 million of its Old 9 1/2%
Notes and $99.85 million of the 8 7/8% Notes. In connection with the
exchange offers, the Company solicited consents to proposed amendments to
the indentures under which the old notes were issued. These amendments
streamline the Company's covenant structure and provide the Company with
additional flexibility to pursue its operating strategy. The exchange was
accounted for as a debt modification. As such, the consideration that the
Company paid to the holders of the Old 9 1/2% Notes who tendered in the
exchange offer (equal to 3% of the outstanding principal amount of the Old
9 1/2% Notes exchanged) was accounted for as deferred financing costs. Also
in connection with this exchange offer, the Company incurred $2.9 million
of third-party fees during the third quarter of 1999, which are included in
other expense.
15
<PAGE>
NUEVO ENERGY COMPANY
--------------------
Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations
-----------------------------------
In late June 1999, the Company acquired oil and gas properties located
onshore and offshore California for $61.4 million from Texaco, Inc. To
purchase these assets, the Company used funds from a $100.0 million
interest-bearing escrow account that provided "like-kind exchange" tax
treatment for the purchase of domestic oil and gas producing properties.
The escrow account was created with proceeds from the Company's January
1999 sale of its East Texas natural gas assets. Following the Texaco
transaction, the $41.0 million remaining in the escrow account was used to
repay a portion of outstanding bank debt in early July 1999.
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.
Capital Expenditures
--------------------
In late June 1999, the Company acquired oil and gas properties located
onshore and offshore California for $61.4 million from Texaco, Inc. The
acquired properties had estimated net proved reserves at June 30, 1999 of
33.7 million barrels of oil equivalent ("BOE") and are expected to increase
the Company's production from California by approximately 5.0 thousand BOE
per day. All of these properties are additional interests in the Company's
existing properties or are located near its existing properties. The
acquisition includes interests in Cymric, East Coalinga, Dos Cuadras and
other fields the Company operates.
Due to lower average realized oil prices in 1998 which continued into the
first quarter of 1999, the Company's capital spending plans for 1999 were
reduced significantly from levels in previous years. In the Company's
original 1999 capital budget, approximately $40.0 million was allocated to
exploitation and development projects and approximately $17.0 million was
directed to prospect generation and exploration. The Company anticipates
spending an additional $19.0 million on exploration and development
activities during the remainder of 1999. This includes a $13.0 million
increase in the Company's capital spending plans relating to the addition
of the Texaco properties acquired in June 1999, which brings the total 1999
capital budget up from $57.0 million to $70.0 million. Development
activities for the remainder of the year will primarily be focused in
California.
Exploration and development expenditures for the first nine months of 1999
and 1998 are as follows (amounts in thousands):
For the Nine Months Ended
September 30,
-------------------------
1999 1998
------------ ------------
Domestic - East $ 4,252 $ 19,367
Domestic - West 21,370 98,855
International 22,148 22,158
------------ ------------
Total $ 47,770 $ 140,380
============ ============
Following is a description of significant exploration and development
activity during the first nine months of 1999.
Exploration Activity
Domestic -- East
----------------
The Company plugged and abandoned the DeBord #1 well in the Fuller Prospect
in Texas and the LL&E 12-14 well at Four Isle Dome in Louisiana during the
first nine months of 1999. Dry hole costs for these wells totaled $0.8
million for the nine months ended September 30, 1999.
16
<PAGE>
NUEVO ENERGY COMPANY
--------------------
Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations (Continued)
-----------------------------------------------
Domestic - West
---------------
During the third quarter of 1999, the Company drilled an exploratory well
in California to the East of its Monument Junction field. The Company is
currently testing this well, which is the first of a series of prospects
that the Company has identified from seismic data across its 15,000-acre
San Joaquin block. The Company will continue to evaluate and rank these
opportunities and plans to drill the next exploratory well late in the
first quarter of 2000. In the second quarter of 1999, the Company decided
to plug and abandon the Cree Fee #1A well in the Midway Peak prospect area
onshore California after it tested at non-commercial rates. The dry hole
costs associated with this well were $6.5 million.
International
-------------
The Company has selected a contractor to conduct a 3-D seismic survey
across the Eastern portion of its Accra-Keta concession offshore the
Republic of Ghana in West Africa ("Ghana"). The timing for the survey is
currently scheduled for the fourth quarter of 1999 or the first quarter of
2000. Due to the presence of multiple opportunities identified from our
existing 2-D seismic data across this portion of the concession, the
Company has decided to survey a rather large area ranging in size between
800 to 900 square kilometers. This survey extends from the outer shelf,
across the slope, and into the deepwater regions of the block. The Company
currently plans to drill its first exploratory well on the concession late
next year.
Onshore the Republic of Tunisia in Africa, the Company recently acquired
additional regional seismic data across its Chott-Fejaj concession. This
data was acquired to better evaluate the sub-salt potential beneath the
Chott-Fejaj # 3 well, which the Company plans to deepen in late 2000. A
large four-way anticline has been mapped beneath the salt body, and the
regional data will allow the Company to correlate its main objectives into
the pertinent well control surrounding the block.
Development Activity
Domestic - East
---------------
No significant activity during the first nine months of 1999.
Domestic - West
---------------
In the Bakersfield area, the Company drilled four horizontal wells, five
injectors and one vertical producer in its Cymric Field during the nine
months ended September 30, 1999. Also in Cymric, the Company drilled 11
wells on the properties acquired from Texaco (see Note 8 to the Notes to
Condensed Consolidated Financial Statements). The Company drilled 10
vertical potter wells in its Midway Sunset field and four horizontal wells
in its Belridge Field during the first nine months of 1999. Also at
Belridge, the Company started the continuous injection of steam on a new
steamdrive project. As a part of this project, 12 injector wells were
drilled this year. A significant facility expansion is underway at the Brea
Olinda field. Currently, the Company flares approximately 2 MMCF of natural
gas per day. The Company is in the process of installing a cogeneration
unit, which will utilize the flared gas and convert it to electricity to
supply all of the field electrical needs as well as provide excess
electricity for sale. In addition, the Company has started up a propane
extraction facility in the Brea Olinda field. The completion of the
cogeneration project and the propane extraction facility, which is expected
to be on-stream by the end of the year, should result in significant cost
savings for the Brea Olinda property.
International
-------------
During the first nine months of 1999, the Company drilled eight wells as
part of its waterflood project on its property in the Republic of Congo in
West Africa ("Congo"). As a result, Congo production is currently at a net
production rate of approximately 5,700 barrels of oil per day, compared to
a first half 1999 net production rate of approximately 4,700 barrels of oil
per day.
17
<PAGE>
NUEVO ENERGY COMPANY
--------------------
Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations (Continued)
-----------------------------------------------
Derivative Financial Instruments
--------------------------------
The Company utilizes derivative financial instruments to reduce its
exposure to changes in the market prices of crude oil and natural gas.
Commodity derivatives utilized as hedges include futures, swap and option
contracts, which are used to hedge crude oil and natural gas prices. Basis
swaps are sometimes used to hedge the basis differential between the
derivative financial instrument index price and the commodity 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, 1999 or December 31, 1998. 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
$16.5 million and increased by $0.3 million in the third quarter of 1999
and 1998, respectively. During the first nine months of 1999 and 1998, oil
and gas revenues were reduced by $25.3 million and increased by $0.5
million, respectively, as a result of these transactions.
The Company entered into a swap arrangement with a major financial
institution that effectively converts the interest rate on $16.4 million
notional amount of the 9 1/2% Senior Subordinated Notes due 2008 to a
variable LIBOR-based rate through February 25, 2000. Based on LIBOR rates
in effect at September 30, 1999, this amounted to a net reduction in the
carrying cost of the 9 1/2% Senior Subordinated Notes due 2008 from 9.5%
to 6.01%, or 349 basis points. In addition, the swap arrangement also
effectively hedges the price at which these Notes can be repurchased by the
Company. Based on the market price of 99.81% for the Notes at September 30,
1999, an early termination of this arrangement would result in a payment of
approximately $16,900 from the institution to Nuevo.
For the fourth quarter of 1999, the Company is party to crude oil swaps on
an average of 30,000 barrels of oil ("Bbls") per day, or approximately 64%
of its estimated crude oil production, at an average NYMEX price of $17.20
per Bbl. For calendar year 2000, the Company has entered into crude oil
swaps on 16,500 Bbls per day, or approximately 30% of its estimated crude
oil production, at an average NYMEX price of $17.94 per Bbl. In addition,
for calendar year 2000, the Company has hedged an additional 30% of its
estimated crude oil production through the purchase of put options on
16,500 Bbls per day at a NYMEX price of $16.00 per Bbl, and the sale of
call options on 16,500 Bbls per day at an average NYMEX price of $21.21 per
Bbl. There was no net cost to the Company for these options. For the first
quarter of 2001, the Company has hedged 26,000 Bbls per day at an average
NYMEX price of $19.52 per Bbl.
Contingencies
-------------
The Company has been named as a defendant in Gloria Garcia Lopez and
Husband, Hector S. Lopez, Individually, and as successors to Galo Land &
Cattle Company v. Mobil Producing Texas & New Mexico, et al. in the 79th
Judicial District Court of Brooks County, Texas. The plaintiffs, based on
pleadings and deposition testimony, allege: i) underpayment of royalties
and claim damages, on a gross basis, of $56.5 million, including interest;
ii) that their production was improperly commingled with gas produced from
an adjoining lease, resulting in damages, including interest of $40.8
million (gross); iii) failure to develop
18
<PAGE>
NUEVO ENERGY COMPANY
--------------------
Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations (Continued)
-----------------------------------------------
claiming damages and interest of $106.3 million (gross); and iv) numerous
other claims that may result in unspecified damages. Nuevo's working
interest in these properties is 20%. The Company, along with the other
defendants in this case, denies these allegations and is vigorously
contesting these claims. Management does not believe that the final outcome
of this matter will have a material adverse impact on the Company's
operating results, financial condition or liquidity.
The Company has been named as a defendant in certain other 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.
In March 1999, the Company discovered that a non-officer employee had
fraudulently authorized and diverted for personal use Company funds
totaling $5.9 million, $4.3 million in 1998 and the remainder in 1999, that
were intended for international exploration. Accordingly, the Company
reclassified the amounts lost in 1998 to other expense. The Board of
Directors engaged a Certified Fraud Examiner to conduct an in-depth review
of the fraudulent transactions. The investigation confirmed that only one
employee was involved in the matter and that all misappropriated funds were
identified. The Company has reviewed and, where appropriate, strengthened
its internal control procedures.
In September 1997, there was a spill of crude oil into the Santa Barbara
Channel from a pipeline that connects the Company's Point Pedernales field
with shore-based processing facilities. The volume of the spill was
estimated to be 163 barrels of oil. The costs of the clean up and the cost
to repair the pipeline either have been or are expected to be covered by
insurance, less the Company's deductibles, which in total are $120,000.
Repairs were completed by the end of 1997, and production recommenced in
December 1997. The Company also has exposure to costs that may not be
recoverable from insurance, including certain fines, penalties, and
damages. Such costs are not quantifiable at this time, but are not expected
to be material to the Company's operating results, financial condition or
liquidity.
The Company's international investments involve risks typically associated
with investments in emerging markets such as an uncertain political,
economic, legal and tax environment 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 that the Company will be successful in so
protecting itself. A portion of the Company's investment in the Congo is
insured through political risk insurance provided by the Overseas Private
Investment Corporation ("OPIC"). The Company will consider its options for
political risk insurance in Ghana as it evaluates business opportunities.
The Company and its partners underwent a tax examination related to their
ownership interests in the Yombo field offshore the Republic of Congo, for
the years 1994 through 1997. On June 25, 1999, the Company and its partners
settled this tax assessment for a total of $1.0 million, of which the
Company's share was $400,000. The Company and its partners are currently
undergoing a tax examination related to their ownership interests in the
Yombo field for 1998. Management does not believe that the outcome of this
matter will have a material adverse effect 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 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
ensure that such losses will not
19
<PAGE>
NUEVO ENERGY COMPANY
--------------------
Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations (Continued)
-----------------------------------------------
be claimed. The Company's potential direct liability could be as much as
$50.0 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 $67.0 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.
Recent Accounting Pronouncements
--------------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities".
This statement, as amended by SFAS No. 137, establishes standards of
accounting for and disclosures of derivative instruments and hedging
activities. This statement requires all derivative instruments to be
carried on the balance sheet at fair value and is effective for the Company
beginning January 1, 2001, however, early adoption is permitted. The
Company has not yet determined the impact of this statement on its
financial condition or results of operations or whether it will adopt the
statement early.
Share Repurchases
-----------------
In August 1999, the Company implemented a share repurchase program,
pursuant to the Board of Directors' December 1997 authorization to
repurchase up to 1,000,000 shares at times and at prices deemed attractive
by management. In September 1999, the Board of Directors increased the
authorization by 616,600 shares. As of September 30, 1999, the Company had
repurchased 1,176,600 shares of its common stock in open market
transactions at an average purchase price, including commissions, of $16.83
per share. In October 1999, the Board of Directors authorized the
repurchase of up to an additional 1,000,000 shares at times and at prices
deemed appropriate by management. As of November 11, 1999, the Company had
repurchased 1,510,600 shares at an average purchase price of $16.67 per
share, including commissions.
Deferred Income Taxes
---------------------
At September 30, 1999, the Company had a deferred tax asset of $4.5
million, which is net of a valuation allowance of $17.6 million. The
Company has determined that it is more likely than not that this net
deferred tax asset will be realized. As conditions in the oil and gas
industry have improved over the last six months, the Company has continued
to evaluate its valuation allowance in light of current conditions. A
continued improvement in oil and gas prices, or a continuation of prices
existing at September 30, 1999, may result in a reduction in the valuation
allowance in subsequent quarters.
Year 2000
---------
Nuevo, like all other enterprises that utilize computer technology, faces a
threat of business disruption from the Year 2000 Issue. The Year 2000 Issue
("Y2K") refers to the inability of computer and other information
technology systems to properly process date and time information, stemming
from the outdated programming practice of using two digits rather than four
to represent the year in a date. The consequence of Y2K is that computer
and embedded processing systems are at risk of malfunctioning, particularly
during the transition from 1999 to 2000.
The effects of Y2K are exacerbated by the interdependence of computer and
telecommunication systems throughout the world. This interdependence also
exists among Nuevo and its vendors, customers and business partners, as
well as with regulators in the United States and host governments abroad.
The risks associated with Y2K fall into three general areas: i) financial
and administrative systems, ii) embedded systems in field process control
units, and iii) third party exposures. Nuevo has addressed each of these
three areas through a readiness process that has:
20
<PAGE>
NUEVO ENERGY COMPANY
--------------------
Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations (Continued)
-----------------------------------------------
a) increased the awareness of the issue among all employees;
b) identified areas of potential risk;
c) assessed the relative impact of these risks and the Company's
ability to manage them;
d) remediated high priority risks wherever possible; and
e) engaged in contingency planning and testing.
The Company's Board of Directors has assigned the oversight of Y2K to the
Audit Committee of the Board. From the Audit Committee, all responsibility
for the readiness effort runs through the Chief Executive Officer ("CEO")
of the Company, and from the CEO through the Chief Financial Officer (for
financial and administrative systems) and the Vice President of
Exploitation (for embedded systems in field process control units). As a
matter of routine, management of the Company updates the Audit Committee,
and the entire Board, of its efforts to increase Nuevo's readiness for Y2K.
The Company and Torch Energy Advisors, Inc. ("Torch"), with the assistance
of outside Y2K consultants, have jointly developed a plan to address
Nuevo's risks associated with Y2K. Torch provides the financial and
administrative systems for Nuevo and operates a substantial portion of its
properties. (As used in the remainder of this Y2K discussion, references to
the Company may include the Torch employees and outside consultants
assisting Nuevo in its Y2K readiness program). As of November 1, 1999, the
Company was in various stages of implementation of the plan, as summarized
below:
Financial and Administrative Systems
------------------------------------
Awareness. Nuevo has conducted numerous Y2K informational programs with its
employees and the employees of Torch who provide input to or utilize the
output of the financial and administrative systems of the Company.
Employees at all levels of the organization have been asked to participate
in the identification of potential Y2K risks which might otherwise go
unnoticed by higher level employees and officers of Nuevo, and as a result,
awareness of the issue is considered high.
Risk Identification. Nuevo's most significant financial and administrative
systems exposure is the Y2K status of the accounting and land
administration software package that Torch uses to collect and manage data
for internal management decision making and for external financial
reporting purposes. Other concerns include network hardware and software,
desktop computing hardware and software, telecommunications and office
space readiness.
Risk Assessment. The failure to identify and correct a material Y2K problem
could result in inaccurate or untimely financial information for management
decision-making or financial and regulatory reporting purposes. The
severity of any such problems will impact the time period during which the
quality of management information comes under question. At this time,
management is confident that any Y2K disruptions associated with its or
Torch's financial and administrative systems will not have a material
effect on Nuevo's ability to make prudent business decisions nor impede its
reporting responsibilities.
Remediation. Following upgrades to its accounting software, Nuevo achieved
full Y2K compliance for its Oracle-based financial and administrative
systems in July 1999. In addition, Torch has inventoried all network and
desktop software applications used by Nuevo and believes them to be
generally Y2K compliant. Testing of these systems is scheduled to be
completed by December 1. The costs of all such risk assessments and
remediation for financial and administrative systems are borne by Torch
under the terms of Nuevo's outsourcing agreements.
Contingency Planning. Notwithstanding the previously described efforts,
should there be significant unanticipated disruptions in Nuevo's financial
and administrative systems, a number of accounting processes that are
currently automated will need to be performed manually. In some cases, the
Company may have to include estimates of its results of operations in its
financial reporting detail. If deemed necessary, Nuevo may also use
temporary staffing to shoulder the increased workload required in the
absence of system automation.
21
<PAGE>
NUEVO ENERGY COMPANY
--------------------
Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations (Continued)
----------------------------------------------
Even though the Company's contingency plans are designed to minimize
economic disruptions, the Company's primary intent is to preserve and
protect human health and safety and the environment.
Embedded Systems
----------------
Awareness. The Company's Y2K program has involved all levels of management
of field assets from production foremen and higher. Employees at all levels
of the organization have been asked to participate in the identification of
potential Y2K risks, which might otherwise go unnoticed by higher level
employees and officers of Nuevo, and, as a result, awareness of the issue
is considered high.
Risk Identification. The Company has completed a comprehensive inventory
of embedded computer components within the process control systems of its
operated oil and natural gas fields and processing plants. This inventory
identified approximately 2,000 embedded components in critical computerized
systems. Each component was researched with the manufacturer and/or
installer to determine its anticipated Y2K compliance or non-compliance. To
date, the vast majority of embedded components so researched have been
deemed either date insensitive or Y2K compliant. However, the Company does
not have manufacturer Y2K compliant representation for 16% of its
components. Research on these components is continuing.
Risk Assessment. The failure to identify and correct a material Y2K
problem could result in outcomes ranging from errors in data reporting, to
curtailments or shutdowns in production, to environmental or safety
incidents. In an attempt to prevent such failures, system-level testing of
assets owned at June 30, 1999 was conducted. The system-level evaluation is
virtually complete with approximately 98% of all critical systems owned at
June 30, 1999 fully tested. Testing on the remaining systems is expected to
be completed by November 15, 1999. For properties acquired after June 30,
1999, evaluation is ongoing and testing is also scheduled to be completed
by November 15, 1999.
Remediation. Remediation and re-testing are scheduled to be completed by
December 1, 1999. Costs incurred through September 30, 1999 were not
material to Nuevo's results of operations, and the cost of the assessment
is not expected to be material to Nuevo's future financial results.
However, management is unable to express any degree of confidence that
there will not be material production disruptions associated with Y2K non-
compliance. Depending on the magnitude of any such disruptions and the time
required to correct them, such failures could materially and adversely
impact the Company's results of operations, liquidity and financial
condition.
The Company has prioritized the remediation of embedded components and
systems that are either known to be Y2K non-compliant or that have higher
risk of Y2K failures. First priority was given to the remediation of any
situation that could potentially impact human health and safety or the
environment. The Company is testing, upgrading and re-testing those
embedded components and systems in field process control units deemed to
pose the greatest risk. It is important to note that in some circumstances,
the procedures that are used to test embedded components for Y2K compliance
themselves pose a risk of damaging the component or corrupting the system,
thereby accelerating the consequences of Y2K failures. Accordingly, in some
situations, it may be deemed the most prudent decision not to test certain
embedded components and systems. The amount of capital that Nuevo budgeted
for these anticipated costs to remediate or replace embedded components and
systems that pose the greatest risk of Y2K non-compliance is approximately
$1.6 million and is not considered to be material to the liquidity or
financial condition of the Company. However, additional Y2K risks may be
identified during and beyond the year 1999, so there can be no assurances
that actual capital spending on Y2K remediation will not significantly
exceed any amounts originally budgeted.
Contingency Planning. Should material production disruptions occur as a
result of Y2K failures in field operations, Nuevo's operating cash flow
will be impacted. This contingency is being factored into deliberations on
capital budgeting, liquidity and capital adequacy. It is management's
intention to maintain adequate financial flexibility to sustain the Company
during any such period of cash flow disruption. Nuevo is continuing its
evaluation of contingency alternatives and is assessing its levels of risks
based on its business continuity plan testing to date and updates about
third-party Y2K readiness.
22
<PAGE>
NUEVO ENERGY COMPANY
--------------------
Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations (Continued)
----------------------------------------------
Third-Party Exposures
---------------------
Awareness. Nuevo has conducted numerous Y2K informational programs with
its employees and the employees of Torch who have significant interaction
with outside vendors, customers, and third-party operators of the Company.
All such employees have been asked to participate in the identification of
potential third party Y2K risks, which might otherwise go unnoticed by
higher level employees and officers of Nuevo, and as a result, awareness of
the issue is considered high.
Risk Identification. Nuevo's most significant third-party Y2K exposure is
to the refinery customers who purchase its oil production, on the customer
side, and from electricity and other utility companies supplying field
operations, on the supplier side. Other significant concerns include the
readiness of third-party crude oil and natural gas pipeline facilities
involved in the transportation of Nuevo's products, the integrity of global
telecommunication systems, the readiness of third-party operators, the
readiness of commercial banks to execute electronic fund transfers, and of
the ability of the financial community to maintain an orderly market in
Nuevo's securities.
Risk Assessment. Refineries are extremely complex operations containing
hundreds or thousands of computerized processes. The failure on the part of
a Nuevo refining customer to identify and correct a material Y2K problem
could result in material disruptions in the sale of Nuevo's production to
that refinery. In many cases, affected Nuevo production may not be easily
shifted to other markets, and the result can range from reduced
realizations on crude oil produced, curtailed production or even shut-in
production. Failures of pipelines that connect Nuevo's production to
markets may have similar effects. Although the Company has made inquiries
to key third parties on the subject of Y2K readiness and will continue to
do so, it has no ability to require responses to such inquiries or to
independently verify their accuracy. Accordingly, management is unable to
express any degree of confidence that there will not be material production
disruptions associated with third party Y2K non-compliance. Depending on
the magnitude of any such disruptions and the time required to correct
them, such failures could materially and adversely impact the Company's
results of operations, liquidity and financial condition.
Remediation. Where Nuevo has perceived significant risks of Y2K non-
compliance that may have a material impact on the Company and where the
relationship is between the Company and a vendor, customer or third-party
operators, Nuevo has and is endeavoring to obtain a complete understanding
of the nature of these risks and will pursue joint testing during fourth
quarter 1999.
Contingency Planning. Should material production disruptions occur as a
result of Y2K failures of third parties, Nuevo's operating cash flow will
be impacted. This contingency is being factored into deliberations on
capital budgeting, liquidity and capital adequacy. It is management's
intention to maintain adequate financial flexibility to sustain the Company
during any such period of cash flow disruption. Nuevo has and is continuing
to evaluate its levels of Y2K risk associated with material third-party
vendors based on the testing performed to date. The Company has conducted
phone interviews, reviewed SEC filings, obtained vendor correspondence, and
other techniques to ascertain the Y2K readiness of most major/critical
suppliers, third-party operators, and customers. Though the feedback from
these reviews was positive, the Company is still unable to express any
degree of confidence that there will not be a material production
disruption associated with third-party Y2K non-compliance.
23
<PAGE>
NUEVO ENERGY COMPANY
--------------------
Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations (Continued)
----------------------------------------------
Results of Operations (Three months ended September 30, 1999 and 1998)
- ----------------------------------------------------------------------
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/
1999 1998 (Decrease)
--------- -------- -----------
<S> <C> <C> <C>
Production:
Oil and condensate - East (MBBLS)........................ 53 207 (74%)
Oil and condensate - West (MBBLS)........................ 3,909 4,153 (6%)
Oil and condensate - International (MBBLS)............... 501 372 35%
------ ------
Oil and condensate - Total (MBBLS)....................... 4,463 4,732 (6%)
Natural gas - East (MMCF)............................... 583 4,600 (87%)
Natural gas - West (MMCF)................................ 4,343 3,292 32%
------ ------
Natural gas - Total (MMCF)............................... 4,926 7,892 (38%)
Natural gas liquids - East (MBBLS)...................... 12 16 (25%)
Natural gas liquids - West (MBBLS)....................... 42 43 (2%)
------ ------
Natural gas liquids - Total (MBBLS)...................... 54 59 (8%)
Equivalent barrels of production - East (MBOE)........... 162 990 (84%)
Equivalent barrels of production - West (MBOE)........... 4,674 4,744 (1%)
Equivalent barrels of production - International (MBOE).. 501 372 35%
------ ------
Equivalent barrels of production - Total (MBOE).......... 5,337 6,106 (13%)
Average Sales Price:
Oil and condensate - East................................ $19.75 $12.34 60%
Oil and condensate - West(2)............................. $11.28 $ 9.12 24%
Oil and condensate - International(2).................... $19.62 $10.97 79%
Oil and condensate - Total(2)............................ $12.32 $ 9.41 31%
Natural gas - East....................................... $ 2.19 $ 1.90 15%
Natural gas - West....................................... $ 2.58 $ 2.11 22%
Natural gas - Total...................................... $ 2.53 $ 1.99 27%
Lease Operating Expense:
Average unit production cost(1) per BOE - East........... $ 2.39 $ 2.71 (12%)
Average unit production cost(1) per BOE - West........... $ 6.69 $ 5.90 13%
Average unit production cost(1) per BOE - International.. $ 5.65 $ 9.01 (37%)
Average unit production cost(1) per BOE - Total.......... $ 6.46 $ 5.57 16%
</TABLE>
(1) Costs incurred to operate and maintain wells and related equipment and
facilities, including ad valorem and severance taxes.
(2) Inclusive of hedging results.
24
<PAGE>
NUEVO ENERGY COMPANY
--------------------
Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations (Continued)
----------------------------------------------
Revenues
- --------
Oil and Gas Revenues:
Oil and gas revenues for the three months ended September 30, 1999 were $68.3
million, or 12% higher than oil and gas revenues of $60.8 million for the same
period in 1998. This increase is primarily due to an increase in realized oil
and gas prices, which was partially offset by reduced gas volumes as a result of
the sale of the East Texas natural gas properties on January 6, 1999, and
reduced oil volumes as a result of less capital spending in 1999. Third quarter
1999 oil price realizations reflect hedging losses of $16.5 million, or $3.70
per barrel.
East: Oil and gas revenues in the Eastern division for the three months ended
- ----
September 30, 1999 were $2.5 million, or 78% lower than oil and gas revenues of
$11.5 million for the same period in 1998. This decrease results primarily from
lower natural gas production due to the sale of the East Texas natural gas
properties.
West: Oil and gas revenues for the three months ended September 30, 1999 were
- ----
$56.0 million, or 24% higher than oil and gas revenues of $45.2 million for the
same period in 1998. This increase is primarily due to a 24% improvement in
average realized oil prices, a 22% improvement in average realized gas prices
and a 32% increase in gas production. The realized oil price of $11.28 per
barrel for the third quarter of 1999 includes negative hedging results of $4.36
per barrel of oil.
International: Oil revenues for the three months ended September 30, 1999 were
- -------------
$9.8 million as compared to $4.1 million for the same period in 1998. The 139%
increase results from a 79% increase in oil price realizations to $19.62 per
barrel, coupled with a 35% increase in oil production. The realized oil price of
$19.62 per barrel for the third quarter of 1999 includes hedging gains of $1.05
per barrel of oil.
Gain on Sale, net:
Gain on sale, net, for the three months ended September 30, 1999 was ($0.3)
million, representing a negative revision for accounting adjustments in
connection with the Company's sale of the Illini pipeline and certain
insignificant oil and gas properties. Gain on sale for the three months ended
September 30, 1998 was $4.1 million, resulting from the Company's sale of its
interest in the Sansinena field in California.
Interest and Other Income:
Interest and other income for the three months ended September 30, 1999 includes
a $0.6 million gain on the sale of an unconsolidated subsidiary, as well as
several individually insignificant items.
Expenses
- --------
Lease Operating Expenses:
Lease operating expenses for the three months ended September 30, 1999 totaled
$34.5 million, or 1% higher than $34.0 million for the three months ended
September 30, 1998. Lease operating expenses per barrel of oil equivalent were
$6.46 in the third quarter of 1999, compared to $5.57 in the same period in
1998. The per barrel increase is primarily due to the 13% decrease in total
production, an increase in steam costs, and a change in asset mix resulting from
the January 1999 sale of the East Texas properties, which had relatively low
operating costs, and the June 1999 purchase of the Texaco properties, which have
relatively higher operating costs.
East: Lease operating expenses for the three months ended September 30, 1999
- ----
totaled $0.4 million, or 85% lower than $2.7 million for the three months ended
September 30, 1998. The decrease is primarily attributable to the sale of the
East Texas natural gas properties in January of 1999. Lease operating expenses
per barrel of oil equivalent were $2.39 in the third quarter of 1999, compared
to $2.71 in the same period in 1998.
25
<PAGE>
NUEVO ENERGY COMPANY
--------------------
Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations (Continued)
----------------------------------------------
West: Lease operating expenses for the three months ended September 30, 1999
- ----
totaled $31.3 million, or 12% higher than $28.0 million for the three months
ended September 30, 1998. Lease operating expenses per barrel of oil equivalent
were $6.69 in the third quarter of 1999, compared to $5.90 in the same period in
1998. Higher steam costs contributed to the higher lease operating expenses
quarter over quarter, as did the purchase of the Texaco properties, which have
relatively high operating costs.
International: Lease operating expenses for the three months ended September
- -------------
30, 1999 totaled $2.8 million, or 15% lower than $3.3 million for the three
months ended September 30, 1998. Lease operating expenses per barrel of oil
were $5.65 in the third quarter of 1999, compared to $9.01 in the same period in
1998. The decrease in lease operating expenses per barrel of oil is primarily
attributable to the 35% increase in production.
Gas Plant Operating Expenses:
Gas plant operating expenses were $1.1 million for the three months ended
September 30, 1999 as compared to $0.9 million for the three months ended
September 30, 1998. The 29% increase in gas plant expenses in 1999 compared to
1998 is attributable to ad valorem taxes.
Exploration Costs:
Exploration costs, including geological and geophysical ("G&G") costs, dry hole
costs, delay rentals and expensed project costs, were $0.6 million and $9.9
million for the three months ended September 30, 1999 and 1998, respectively.
For the three months ended September 30, 1999, exploration costs were comprised
of $0.2 million in G&G, $0.1 million in delay rentals and $0.3 million in
expensed project costs. For the three months ended September 30, 1998,
exploration costs were comprised of $8.1 of dry hole costs (most of which relate
to exploration activity in Ghana), $1.0 million in G&G, $0.5 million in delay
rentals and $0.3 million of other exploration costs.
Depreciation, Depletion and Amortization:
Depreciation, depletion and amortization of $17.3 million for the three months
ended September 30, 1999 reflects a 15% decrease from $20.3 million in the same
period in 1998, due primarily to the impairment of oil and gas properties of
$60.8 million recognized in the fourth quarter of 1998, which reduced the
capitalized costs to be depleted in 1999.
General and Administrative Expenses:
General and administrative expenses were $4.6 million and $3.2 million in the
three months ended September 30, 1999 and 1998, respectively. The 45% increase
is due primarily to a $0.9 million increase in the fair market value of
securities in the Company's deferred compensation plan and $0.2 million of non-
recurring costs associated with relocating employees in California. The
remaining increase is made up of individually insignificant items.
Interest Expense:
Interest expense of $7.9 million incurred in the three months ended September
30, 1999 reflects a decrease of 11% as compared to interest expense of $8.9
million in the three months ended September 30, 1998. The decrease is primarily
attributable to lower average bank debt outstanding during the third quarter of
1999 versus the same period in 1998.
Other Expense:
In connection with the exchange of its senior subordinated notes (see Note 5 to
the Notes to Condensed Consolidated Financial Statements), the Company incurred
$2.9 million of third-party fees during the third quarter of 1999, which are
included in other expense.
In March 1999, the Company discovered that a non-officer employee had
fraudulently authorized and diverted for personal use Company funds totaling
$5.9 million, $4.3 million in 1998 and the remainder in the first quarter of
1999, that were intended for international exploration. Accordingly, amounts
lost in the third quarter of 1998 were reclassified from exploration costs to
other expense.
26
<PAGE>
NUEVO ENERGY COMPANY
--------------------
Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations (Continued)
----------------------------------------------
Net Loss
- --------
Net loss of $2.8 million, $0.14 per common share - basic and diluted, was
reported for the three months ended September 30, 1999, as compared to a net
loss of $11.2 million, $0.57 per common share - basic and diluted, in the same
period in 1998.
Results of Operations (Nine months ended September 30, 1999 and 1998)
- ---------------------------------------------------------------------
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>
Nine Months
Ended September 30, %
-------------------
Increase/
1999 1998 (Decrease)
--------- -------- -----------
<S> <C> <C> <C>
Production:
Oil and condensate - East (MBBLS)........................ 355 632 (44%)
Oil and condensate - West (MBBLS)........................ 11,422 12,265 (7%)
Oil and condensate - International (MBBLS)............... 1,350 1,084 25%
------- -------
Oil and condensate - Total (MBBLS)....................... 13,127 13,981 (6%)
Natural gas - East (MMCF)............................... 2,567 14,100 (82%)
Natural gas - West (MMCF)................................ 10,586 10,528 1%
------- -------
Natural gas - Total (MMCF)............................... 13,153 24,628 (47%)
Natural gas liquids - East (MBBLS)...................... 37 58 (36%)
Natural gas liquids - West (MBBLS)....................... 110 117 (6%)
------- -------
Natural gas liquids - Total (MBBLS)...................... 147 175 (16%)
Equivalent barrels of production - East (MBOE)........... 821 3,040 (73%)
Equivalent barrels of production - West (MBOE)........... 13,295 14,136 (6%)
Equivalent barrels of production - International (MBOE).. 1,350 1,084 25%
------- -------
Equivalent barrels of production - Total (MBOE).......... 15,466 18,260 (15%)
Average Sales Price:
Oil and condensate - East................................ $ 14.27 $ 13.10 9%
Oil and condensate - West(2)............................. $ 9.43 $ 9.10 4%
Oil and condensate - International(2).................... $ 15.37 $ 11.27 36%
Oil and condensate - Total(2)............................ $ 10.17 $ 9.45 8%
Natural gas - East....................................... $ 1.85 $ 1.91 (3%)
Natural gas - West....................................... $ 2.19 $ 2.17 1%
Natural gas - Total...................................... $ 2.12 $ 2.02 5%
Lease Operating Expense:
Average unit production cost(1) per BOE - East........... $ 2.36 $ 2.96 (20%)
Average unit production cost(1) per BOE - West........... $ 6.11 $ 5.79 6%
Average unit production cost(1) per BOE - International.. $ 6.78 $ 8.21 (17%)
Average unit production cost(1) per BOE - Total.......... $ 5.97 $ 5.47 9%
</TABLE>
(1) Costs incurred to operate and maintain wells and related equipment and
facilities, including ad valorem and severance taxes.
(2) Inclusive of hedging results.
27
<PAGE>
NUEVO ENERGY COMPANY
--------------------
Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations (Continued)
----------------------------------------------
Revenues
- --------
Oil and Gas Revenues:
Oil and gas revenues for the nine months ended September 30, 1999 were $163.3
million, or 11% lower than oil and gas revenues of $183.8 million for the same
period in 1998. This decrease is primarily due to reduced gas volumes as a
result of the sale of the East Texas natural gas properties on January 6, 1999,
partially offset by improved oil and gas prices. The Company's oil price
realization reflects hedging losses of $25.3 million, or $1.93 per barrel, for
the nine months ended September 30, 1999.
East: Oil and gas revenues in the Eastern division for the nine months ended
- ----
September 30, 1999 were $10.2 million, or 72% lower than oil and gas revenues of
$35.7 million for the same period in 1998. The decrease results primarily from
lower natural gas production due to the sale of the East Texas natural gas
properties.
West: Oil and gas revenues for the nine months ended September 30, 1999 were
- ----
$132.4 million, or 3% lower than oil and gas revenues of $135.9 million for the
same period in 1998. The decrease is mostly due to the 6% decrease in
production as a result of reduced capital spending in 1999, partially offset by
a 4% improvement in realized oil prices. The realized oil price of $9.43 per
barrel for the nine months ended September 30, 1999, includes negative hedging
results of $2.33 per barrel.
International: Oil revenues for the nine months ended September 30, 1999 were
- -------------
$20.7 million as compared to $12.2 million for the same period in 1998. The 70%
increase results from a 25% increase in oil production along with a 36% increase
in oil price realizations to $15.37 per barrel. The realized oil price of
$15.37 per barrel for the nine months ended September 30, 1999, includes hedging
gains of $1.01 per barrel.
Gain on Sale, net:
Gain on sale, net, for the nine months ended September 30, 1999 was $80.0
million. Such gain was recognized in connection with the sale of the Company's
East Texas natural gas properties for proceeds of approximately $191.0 million,
as adjusted for final accounting, along with the sale of several non-core
assets. Gain on sale for the nine months ended September 30, 1998 was $5.8
million, $1.7 of which relates to the sale of the Company's interest in the Coke
field in Chapel Hill, Texas and $4.1 million of which relates to the sale of the
Company's interest in the Sansinena field in California.
Interest and Other Income:
Interest and other income for the nine months ended September 30, 1999 includes
$2.4 million associated with interest earned on the $100.0 million in proceeds
from the sale of the East Texas natural gas properties funded into an escrow
account to provide "like-kind exchange" tax treatment in the event the Company
acquired domestic producing oil and gas properties in the first half of 1999.
The escrow account was liquidated in late June and early July 1999, in
connection with the Company's June 1999 acquisition of certain California oil
properties from Texaco, Inc. and repayment of a portion of bank debt. Also
included in interest and other income in 1999 is $0.6 million related to the
sale of an unconsolidated subsidiary.
Expenses
- --------
Lease Operating Expenses:
Lease operating expenses for the nine months ended September 30, 1999 totaled
$92.4 million, or 7% lower than $99.8 million for the nine months ended
September 30, 1998. Lease operating expenses per barrel of oil equivalent were
$5.97 in the first nine months of 1999, compared to $5.47 in the same period in
1998.
28
<PAGE>
NUEVO ENERGY COMPANY
--------------------
Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations (Continued)
----------------------------------------------
East: Lease operating expenses for the nine months ended September 30, 1999
- ----
totaled $1.9 million, or 79% lower than $9.0 million for the nine months ended
September 30, 1998. The decrease is primarily attributable to the sale of the
East Texas natural gas properties in January of 1999. Lease operating expenses
per barrel of oil equivalent were $2.36 in the first nine months of 1999,
compared to $2.96 in the same period in 1998.
West: Lease operating expenses for the nine months ended September 30, 1999
- ----
totaled $81.3 million, or 1% lower than $81.9 million for the nine months ended
September 30, 1998. Lease operating expenses per barrel of oil equivalent were
$6.11 in the first nine months of 1999, compared to $5.79 in the same period in
1998, which is primarily due to the 6% decrease in total production and an
increase in steam costs.
International: Lease operating expenses for the nine months ended September 30,
- -------------
1999 totaled $9.2 million, or 3% higher than $8.9 million for the nine months
ended September 30, 1998. Lease operating expenses per barrel of oil were $6.78
in the first nine months of 1999, compared to $8.21 in the same period in 1998,
due primarily to the 25% increase in production.
Gas Plant Operating Expenses:
Gas plant operating expenses were $3.5 million for the nine months ended
September 30, 1999 as compared to $2.3 million for the nine months ended
September 30, 1998. The 51% increase in gas plant expenses in 1999 compared to
1998 is primarily due to increased ad valorem taxes.
Exploration Costs:
Exploration costs, including G&G costs, dry hole costs, delay rentals and
expensed project costs, were $10.6 million and $12.2 million for the nine months
ended September 30, 1999 and 1998, respectively. For the nine months ended
September 30, 1999, exploration costs are comprised of $7.3 million in dry hole
costs, $1.7 million in G&G, $0.4 million in delay rentals and $1.2 million in
expensed project costs. The Company plugged and abandoned the Cree Fee #1A well
in the Midway Peak prospect area onshore California, during 1999. The dry hole
costs associated with this well were $6.5 million. During the first nine months
of 1999, the Company incurred $1.0 million in G&G costs related to its
exploration efforts offshore Ghana and $0.6 million in expensed project costs.
For the nine months ended September 30, 1998, exploration costs were comprised
of $10.2 million in dry hole costs, $0.9 million in G&G, $0.8 million in delay
rentals and $0.3 million in dry hole costs. During the first nine months of
1998, the Company plugged and abandoned its first well offshore Ghana due to the
lack of commercial quantities of reserves. Dry hole costs for this well were
$7.0 million net to the Company.
Depreciation, Depletion and Amortization:
Depreciation, depletion and amortization of $63.6 million for the nine months
ended September 30, 1999 reflects a 5% decrease from $66.8 million in the same
period in 1998, due primarily to the impairment of oil and gas properties of
$60.8 million recognized in the fourth quarter of 1998, which reduced the
capitalized costs to be depleted in 1999. Also, the East Texas properties were
depleted for the first six months in 1998. The Company discontinued depleting
these assets in the third quarter of 1998, when it was decided to sell these
properties. The 5% decrease was partially offset by higher international
depletion, due to increased production.
Interest Expense:
Interest expense of $24.3 million incurred in the nine months ended September
30, 1999 reflects an increase of 4% as compared to interest expense of $23.3
million in the nine months ended September 30, 1998. The increase is primarily
attributable to the Company's issuance of $100.0 million of 8 7/8% Senior
Subordinated Notes due 2008 in June 1998, which was used to repay lower-interest
bank debt. The increase was partially offset by lower interest expense on the
Company's bank debt as a result of lower average borrowings outstanding during
1999.
29
<PAGE>
NUEVO ENERGY COMPANY
--------------------
Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations (Continued)
----------------------------------------------
Other Expense:
In March 1999, the Company discovered that a non-officer employee had
fraudulently authorized and diverted for personal use Company funds totaling
$5.9 million, $4.3 million in 1998 and the remainder in 1999, that were intended
for international exploration. Accordingly, the Company reclassified the
amounts lost in 1998 to other expense. The Board of Directors engaged a
Certified Fraud Examiner to conduct an in-depth review of the fraudulent
transactions. The investigation confirmed that only one employee was involved in
the matter and that all misappropriated funds were identified. The Company has
reviewed and, where appropriate, strengthened its internal control procedures.
Net Income (Loss)
- -----------------
Net income of $13.0 million, $0.66 per common share - basic and $0.65 per common
share - diluted, was generated for the nine months ended September 30, 1999, as
compared to a net loss of $25.4 million, ($1.29) per common share - basic and
diluted, in the same period in 1998.
30
<PAGE>
NUEVO ENERGY COMPANY
--------------------
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- ------ ----------------------------------------------------------
Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risk, including adverse changes in commodity
prices and interest rates.
Commodity Price Risk - The Company produces and sells crude oil, natural gas and
natural gas liquids. As a result, the Company's operating results can be
significantly affected by fluctuations in commodity prices caused by changing
market forces. The Company periodically seeks to reduce its exposure to price
volatility by hedging its production through swaps, options and other commodity
derivative instruments. The Company uses hedge accounting for these
instruments, and settlements of gains or losses on these contracts are reported
as a component of oil and gas revenues and operating cash flows in the period
realized. These agreements expose the Company to counterparty credit risk to
the extent that the counterparty is unable to meet its settlement commitments to
the Company. At September 30, 1999, the fair value of commodity derivative
instruments outstanding was a loss of $35.7 million. A 10% increase in the
underlying commodity price would increase this loss by $27.4 million.
Changes in prices for California crude oil production, especially sour heavy oil
production, do not always follow changes in the prices of oil futures prices on
the NYMEX or other established futures markets. The difference the Company
receives for its California production and the NYMEX prices or prices on other
established futures markets is referred to as basis differential. The
volatility of the basis differential makes it difficult to effectively hedge
California production.
For the fourth quarter of 1999, the Company is party to crude oil swaps on an
average of 30,000 barrels of oil ("Bbls") per day, or approximately 64% of its
estimated crude oil production, at an average NYMEX price of $17.20 per Bbl. For
calendar year 2000, the Company has entered into crude oil swaps on 16,500 Bbls
per day, or approximately 30% of its estimated crude oil production, at an
average NYMEX price of $17.94 per Bbl. In addition, for calendar year 2000, the
Company has hedged an additional 30% of its estimated crude oil production
through the purchase of put options on 16,500 Bbls per day at a NYMEX price of
$16.00 per Bbl, and the sale of call options on 16,500 Bbls per day at an
average NYMEX price of $21.21 per Bbl. There was no net cost to the Company for
these options. For the first quarter of 2001, the Company has hedged 26,000 Bbls
per day at an average NYMEX price of $19.52 per Bbl.
Interest Rate Risk - The Company may enter into financial instruments such as
interest rate swaps to manage the impact of changes in interest rates. For
1999, the Company has entered into a swap agreement, with a notional amount of
$16.4 million, which hedges the price at which the Company may repurchase a
portion of its fixed rate debt and effectively converts such debt to a floating
rate exposure for a period of one year. This agreement is not held for trading
purposes. As the swap provider is a major financial institution, the Company
does not anticipate non-performance by the provider. In addition, the swap
arrangement also effectively hedges the price at which these Notes can be
repurchased by the Company. At September 30, 1999, an early termination of this
arrangement would result in a payment of approximately $16,900 from the
institution to Nuevo. A 10% decrease in the fair value of the notes would
result in a payment of approximately $1.6 million from the Company to the
financial institution.
The Company's exposure to changes in interest rates primarily results from its
short-term and long-term debt with both fixed and floating interest rates. The
following table presents principal amounts (stated in thousands) and the related
average interest rates by year of maturity for the Company's debt obligations at
September 30, 1999:
<TABLE>
<CAPTION>
Fair
Value
1999 2000 2001 2002 2003 Thereafter Total Liability
---- ---- ---- ---- ------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt, including
current maturities:
Variable rate $1,125 -- -- -- $100,500 -- $101,625 $101,625
Average interest rate 5.8% -- -- -- 6.0% -- 6.0%
Fixed rate -- -- -- -- -- $260,000 $260,000 $254,134
Average interest rate -- -- -- -- -- 9.5% 9.5%
</TABLE>
31
<PAGE>
NUEVO ENERGY COMPANY
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
- ------- -----------------
See Note 7 to the Notes to Condensed Consolidated Financial
Statements.
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
3. Articles of Incorporation and bylaws
3.1 Certificate of Incorporation of Nuevo Energy Company
(Incorporated by reference from Exhibit 3.1 to Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 1999).
3.2 Certificate of Amendment to the Certificate of Incorporation of
Nuevo Energy Company (Incorporated by reference from Exhibit 3.2
to Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1999).
3.3 Bylaws of Nuevo Energy Company (Incorporated by reference from
Exhibit 3.3 to Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1999).
3.4 Amendment to Section 3.1 of the Bylaws of Nuevo Energy Company
(Incorporated by reference from Exhibit 3.4 to Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 1999).
4. Instruments defining the rights of security holders, including indentures.
4.1 Specimen Stock Certificate (Incorporated by reference to Exhibit
4.1 to Registration Statement on Form S-4 (No. 33-33873) filed
under the Securities Act of 1933).
4.2 Indenture dated April 1, 1996 among Nuevo Energy Company as
Issuer, various Subsidiaries as the Guarantors, and State Street
Bank and Trust company as the Trustee - 9 1/2% Senior
Subordinated Notes due 2006 (Incorporated by reference from Form
S-3 (No. 333-1504).
4.3 Form of Amended and Restated Declaration of Trust dated December
23, 1996, among the Company, as sponsor, Wilmington Trust
Company, as Institutional Trustee and Delaware Trustee, and
Michael D. Watford, Robert L. Gerry III and Robert M. King, as
Regular Trustees (Incorporated by reference from Exhibit 4.1 to
Form 8-K filed on December 23, 1996).
32
<PAGE>
4.4 Form of Subordinated Indenture dated as of November 25, 1996,
between the Company and Wilmington Trust Company, as Indenture
Trustee (Incorporated by reference from Exhibit 4.2 to Form 8-K
filed on December 23, 1996).
4.5 Form of First Supplemental Indenture dated December 23, 1996,
between the Company and Wilmington Trust Company, as Indenture
Trustee (Incorporated by reference from Exhibit 4.3 to Form 8-K
filed on December 23, 1996).
4.6 Form of Preferred Securities Guarantee Agreement dated as of
December 23, 1996, between the Company and Wilmington Trust
Company, as Guarantee Trustee (Incorporated by reference from
Exhibit 4.4 to Form 8-K filed on December 23, 1996).
4.7 Form of Certificate representing TECONS (Incorporated by
reference from Exhibit 4.5 to Form 8-K filed on December 23,
1996).
4.8 Shareholder Rights Plan, dated March 5, 1997, between Nuevo
Energy Company and American Stock Transfer & Trust Company, as
Rights Agent (Incorporated by reference to Exhibit I to the
Company's Form 8-A filed on April 1, 1997).
4.9 Release and Termination of Subsidiary Guarantees with respect to
the 9 1/2% Senior Subordinated Notes due 2006 (Incorporated by
reference to Exhibit 4.11 to Form 10-K for the year ended
December 31, 1997).
4.10 Indenture dated June 8, 1998, among Nuevo Energy Company as
Issuer, various Subsidiaries as the Guarantors, and State Street
Bank and Trust Company as the Trustee - 8 7/8% Senior
Subordinated Notes due 2008 (Incorporated by reference from
Exhibit 4.1 to Registration Statement on Form S-4 (No. 333-60655)
filed on August 5, 1998).
4.11 First Supplemental Indenture to the Indenture dated June 8, 1998,
dated August 9, 1999 between Nuevo Energy Company and State
Street Bank and Trust Company - 8 7/8% Senior Subordinated Notes
due 2008 (Incorporated by reference from Exhibit 4.9 to
Registration Statement on Form S-4 (No. 333-90235) filed on
November 3, 1999).
4.12 Second Supplemental Indenture to the Indenture dated April 1,
1996, dated August 9, 1999 between Nuevo Energy Company and State
Street Bank and Trust Company - 9 1/2% Senior Subordinated Notes
due 2006 (Incorporated by reference from Exhibit 4.10 to
Registration Statement on Form S-4 (No. 333-90235) filed on
November 3, 1999).
4.13 Indenture, dated as of August 20, 1999 between Nuevo Energy
Company and State Street Bank and Trust Company, as Trustee
(Incorporated by reference from Exhibit 4.11 to Registration
Statement on Form S-4 (No. 333-90235) filed on November 3, 1999).
4.14 Registration Agreement dated August 20, 1999, between Nuevo
Energy Company, Banc of America Securities LLC and Salomon Smith
Barney Inc. (Incorporated by reference from Exhibit 4.12 to
Registration Statement on Form S-4 (No. 333-90235) filed on
November 3, 1999).
10. Material Contracts
10.1 Second Restated Credit Agreement dated June 30, 1999 between
Nuevo Energy Company (Borrower) and Bank of America N.A.,
formerly NationsBank, N.A. (Administrative Agent), Morgan
Guaranty Trust Company of New York (Documentation Agent), Banc of
America Securities LLC (Lead Arranger and Sole Book Manager) and
certain lenders (Incorporated by reference from Exhibit 10.1 to
Quarterly Report on Form 10-Q for the quarterly period ended June
30, 1999).
10.2 1990 Stock Option Plan of the Company, as amended (Incorporated
by reference from Exhibit 10.8 to Registration Statement on Form
S-1 dated July 13, 1992).
33
<PAGE>
10.3 1993 Stock Incentive Plan, as amended (Incorporated by reference
from Exhibit 4.2 to Registration Statement on Form S-8 (No. 333-
21063) filed on February 4, 1997).
10.4 1999 Stock Incentive Plan (Incorporated by reference from Exhibit
99.1 to Registration Statement on Form S-8 (No. 333-87899) filed
on September 28, 1999).
10.5 Nuevo Energy Company Deferred Compensation Plan (Incorporated by
reference from Exhibit 99 to Registration Statement on Form S-8
(No. 333-51217) filed on April 28, 1998).
10.6 Stock Purchase Agreement, dated as of June 30, 1994, among Amoco
Production Company ("APC"), Walter International Inc. ("Walter"),
Walter Congo Holdings, Inc. ("Walter Holdings"), Walter
International Congo, Inc. (before the merger "Walter Congo" and
after the merger "Old Walter Congo"), Nuevo, Nuevo Holding and
The Nuevo Congo Company (before the merger, "Nuevo Congo" and
after the merger, "Old Nuevo Congo") (Incorporated by reference
from Exhibit 2.1 to Form 8-K dated March 10, 1995).
10.7 Amendment to Stock Purchase Agreement dated as of September 19,
1994, among APC, Walter Congo, Nuevo Congo, Walter Holdings,
Nuevo Holding, Walter and Nuevo (Incorporated by reference from
Exhibit 2.2 to Form 8-K dated March 10, 1995).
10.8 Second Amendment to Stock Purchase Agreement dated as of October
15, 1994, among APC, Walter Congo, Nuevo Congo, Walter Holdings,
Nuevo Holding, Walter and Nuevo (Incorporated by reference from
Exhibit 2.3 to Form 8-K dated March 10, 1995).
10.9 Third Amendment to Stock Purchase Agreement dated as of December
2, 1994, among APC, Walter Congo, Nuevo Congo, Walter Holdings,
Nuevo Holding, Walter and Nuevo (Incorporated by reference from
Exhibit 2.4 to Form 8-K dated March 10, 1995).
10.10 Fourth Amendment to Stock Purchase Agreement dated as of February
23, 1995, among APC, Walter Congo, Nuevo Congo, Walter Holdings,
Nuevo Holding, Walter and Nuevo (Incorporated by reference from
Exhibit 2.5 to Form 8-K dated March 10, 1995).
10.11 Tax Agreement dated as of February 23, 1995, executed by APC,
Amoco Congo Exploration Company ("ACEC"), Amoco Congo Production
Company ("ACPC"), Walter, Walter Holdings, Walter Congo, Nuevo,
Nuevo Holding and Nuevo Congo (Incorporated by reference from
Exhibit 2.6 to Form 8-K dated March 10, 1995).
10.12 Agreement and Plan of Merger executed by Nuevo Congo, Nuevo
Holding and APC dated February 24, 1995 (Incorporated by
reference from Exhibit 2.7 to Form 8-K dated March 10, 1995).
10.13 Finance Agreement dated as of December 28, 1994, among Nuevo
Holding, Nuevo Congo and The Overseas Private Investment
Corporation ("OPIC") (Incorporated by reference from Exhibit 2.8
to Form 8-K dated March 10, 1995).
10.14 Subordination Agreement dated December 28, 1994, among Nuevo
Congo, Nuevo Holding, Walter Congo, Walter Holdings and APC
(Incorporated by reference from Exhibit 2.9 to Form 8-K dated
March 10, 1995).
10.15 Guaranty covering the obligations of Nuevo Congo and Walter Congo
under the Stock Purchase Agreement dated February 24, 1995,
executed by Walter and Nuevo (Incorporated by reference from
Exhibit 2.10 to Form 8-K dated March 10, 1995).
10.16 Inter-Purchaser Agreement dated as of December 28, 1994, among
Walter, Old Walter Congo, Walter Holdings, Nuevo, Old Nuevo Congo
and Nuevo Holding (Incorporated by reference from Exhibit 2.11 to
Form 8-K dated March 10, 1995).
34
<PAGE>
10.17 Latent ORRI Contract dated February 25, 1995, among Walter,
Walter Holdings, Walter Congo, Nuevo, Nuevo Holding and Nuevo
Congo (Incorporated by reference from Exhibit 2.12 to Form 8-K
dated March 10, 1995).
10.18 Latent Working Interest Contract dated February 25, 1995, among
Walter, Walter Holdings, Walter Congo, Nuevo, Nuevo Holding and
Nuevo Congo (Incorporated by reference form Exhibit 2.13 to Form
8-K dated March 10, 1995).
10.19 Asset Purchase Agreement dated as of February 16, 1996 between
Nuevo Energy Company, the Purchaser, and Union Oil Company of
California as Seller (Incorporated by reference from Exhibit 2.1
to Form S-3 (No. 333-1504)).
10.20 Asset Purchase Agreement dated as of April 4, 1997, by and among
Torch California Company and Express Acquisition Company, as
Sellers, and Nuevo Energy Company, as Purchaser. (Incorporated by
reference from Exhibit 2.2 to Form S-3(No. 333-1504)).
10.21 Employment Agreement with Douglas L. Foshee (Incorporated by
reference to Exhibit 10.23 to Form 10-K for the year ended
December 31, 1997).
10.22 Employment Agreement with Robert M. King (Incorporated by
reference from Exhibit 10.24 to Form 10-K for the year ended
December 31, 1998).
10.23 Employment Agreement with Dennis Hammond (Incorporated by
reference to Exhibit 10.26 to Form 10-K for the year ended
December 31, 1997).
10.24 Employment Agreement with Michael P. Darden (Incorporated by
reference from Exhibit 10.1 to Form 10-Q filed November 13,
1998).
10.25 Purchase and sale agreement dated October 16, 1998 between Nuevo
Energy Company (Seller) and Samson Lone Star Limited Partnership
(Buyer) (Incorporated by reference from Exhibit 10.28 to Form 10-
K for the year ended December 31, 1998).
10.26 Master Services Agreement among Nuevo Energy Company and Torch
Energy Advisors Incorporated, Torch Operating Company, Torch
Energy Marketing, Inc., and Novistar, Inc. dated January 1, 1999
(Incorporated by reference from Exhibit 10.29 to Form 10-K for
the year ended December 31, 1998).
10.27 Employment Agreement with Bruce Murchison dated June 1, 1999.
10.28 Employment Agreement with John P. McGinnis dated July 15, 1999.
27. Financial Data Schedule
(b) Reports on Form 8-K.
1) A Current Report on Form 8-K, dated July 26, 1999, reporting Item
5. Other Events and Item 7. Financial Statements and Exhibits
were filed on August 2, 1999.
2) A Current Report on Form 8-K, dated July 12, 1999, reporting Item
5. Other Events and Item 7. Financial Statements and Exhibits
were filed on July 23, 1999.
35
<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 15, 1999 By: /s/ Douglas L. Foshee
----------------- ----------------------
Douglas L. Foshee
Chairman, President and Chief
Executive Officer
Date: November 15, 1999 By: /s/ Robert M. King
----------------- ----------------------
Robert M. King
Senior Vice President and Chief
Financial Officer
36
<PAGE>
Exhibit 10.27
EMPLOYMENT AGREEMENT
Agreement made as of this date by and between Bruce Murchison ("Murchison")
and Nuevo Energy Company, a Delaware corporation having a principal place of
business at 1331 Lamar, Suite 1650, Houston, Texas 77010 (the "Company").
Murchison has been offered employment with the Company as Vice President,
General Counsel, in accordance with the terms set forth more fully below.
Murchison has accepted such offer by the Company.
NOW, THEREFORE, for value received, it is mutually agreed between the
parties hereto as follows:
1. Employment and Terms. The Company hereby employs Murchison and
Murchison hereby agrees to serve as the Vice President, General Counsel of the
Company.
2. Position and Responsibilities. Murchison shall serve as Vice
President, General Counsel of the Company, and Murchison shall exercise such
powers and comply with and perform such directions and duties in relation to the
business and affairs of the Company as are consistent with the duties of
individuals having similar positions with similar corporations, and as may from
time to time be vested in or given to him by the President and Chief Executive
Officer or the Board of Directors of the Company and shall use his best efforts
to improve and extend the business of the Company. Murchison shall at all times
report to, and his activities shall be subject to the direction and control of,
the President and Chief Executive Officer. Murchison agrees to devote
substantially all of his business time, attention and services to the diligent,
faithful and competent discharge of such duties for the successful operation of
the Company's business.
3. Compensation.
A. In consideration of the services to be rendered by Murchison to the
Company, the Company will pay to Murchison a salary of $160,000 per annum for
the year ending December 31, 1999, for a monthly rate of $13,333.34. Salary for
subsequent years shall be at equivalent or increased rates as may be agreed by
the Company and Murchison. Such salary shall be payable in conformity with the
Company's prevailing practice for executives' compensation as such practice
shall be established or modified from time to time. Salary payments shall be
subject to all applicable federal and state withholding, payroll and other
taxes. In addition to the base salary, the Company will pay Murchison a one-time
signing bonus in the amount of $60,000. This signing bonus will be paid and
deposited on or about Murchison's first day of employment into Murchison's Nuevo
Energy Company Deferred Compensation Plan.
1
<PAGE>
B. The Company agrees to provide the following benefits to Murchison as
a part of his employment;
(1) Four weeks of paid vacation (calculated on a per pay period
basis).
(2) Eleven paid holidays per year.
(3) Participation in the 401(k) Retirement Plan upon date of
hire.
(4) Health and welfare benefits in accordance with the various
plan documents.
(5) Participation in the Nuevo Energy Deferred Compensation
Plan.
(6) Short term illness plan upon hire and long term illness plan
after one year of employment.
(7) Company-paid parking.
(8) Houston Center Club Fitness Membership Program.
C. The Company also will award Murchison 25,000 options to purchase
Nuevo Energy Company common stock in accordance with the grant agreement under
the Nuevo Energy Company 1999 Stock Incentive Program; subject to the approval
of the Compensation Committee of the Nuevo Energy Company Board of Directors.
The option price will be the average price of a share of Nuevo stock on your
hire date.
4. Termination. Murchison's term of employment under this
Employment Agreement may be terminated as follows:
A. At Murchison's Option. Murchison may terminate his
employment hereunder, with or without cause, at any time upon at least thirty
(30) days' advance written notice to the Company. In such event, Murchison
shall be entitled to no severance or other termination benefits.
B. At the Election of the Company for Just Cause. The
Company may, immediately and unilaterally, terminate Murchison's employment for
just cause at any time by written notice to Murchison. Termination of
Murchison's employment by the Company shall constitute a termination "for just
cause" if such termination is for one or more of the following reasons: (i) the
willful failure or refusal of Murchison to render services to the Company in
accordance with his obligations under this Employment Agreement, such failure or
refusal to be uncured and continuing for a period of not less than 15 days after
written notice outlining the situation is given by the Company to Murchison;
(ii) the commission by Murchison of an act of fraud or embezzlement against the
Company or the commission by Murchison or any other action with the intent to
injure the Company or (iii) Murchison having been convicted of a felony. In
such event, Murchison shall be entitled to no severance or other termination
benefits.
2
<PAGE>
C. At the Election of the Company for Reasons Other than Just Cause.
The Company may, immediately and unilaterally, terminate Murchison's employment
at any time or may constructively discharge him by substantially reducing his
responsibilities to less than those outlined in Section 2 herein without cause
by giving written notice to Murchison of the Company's election to so terminate
or constructively discharge. In the event the Company exercises its right to
terminate or constructively discharge Murchison under this Paragraph 4 (C), the
Company agrees to pay Murchison two (2) years salary and bonus (calculated based
on the average of the last two year's bonus award, but using only years in which
Murchison was actually employed by the Company). In addition, in the event the
Company exercises its right to terminate or constructively discharge Murchison
under this Paragraph 4 (C), all options previously awarded to Murchison will, to
the extent not already vested, vest immediately and Murchison will have 365 days
to exercise any of his vested options.
5. Consent and Waiver by Third Parties. Murchison hereby represents
and warrants that he has obtained all necessary waivers and/or consents from
third parties as to enable him to accept employment with the Company on the
terms and conditions set forth herein and to execute and perform this Employment
Agreement without being in conflict with any other agreement, obligations or
understanding with any such third party.
6. Waivers and Modifications. This Employment Agreement may be
modified, and the rights and remedies of any provision hereof may be waived,
only in accordance with this Paragraph 6. No modification or waiver by the
Company shall be effective without the consent of a least a majority of the
Board of Directors then in office at the time of such modification or waiver.
No waiver by either party of any breach by the other or any provision hereof
shall be deemed to be a waiver of any later or other breach thereof or as a
waiver of any other provision of this Employment Agreement. This Employment
Agreement sets forth all of the terms of the understandings between the parties
with reference to the subject matter set forth herein and may be waived,
changed, discharged or terminated orally or by any course of dealing between the
parties, but only by an instrument in writing signed by the party against whom
any waiver, change, discharge or termination is sought.
7. Governing Law. This Employment Agreement shall be construed in
accordance with the laws of the State of Texas.
8. Severability. In case any one or more of the provisions
contained in this Employment Agreement for any reason shall be held to be
invalid, illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision of this Employment
Agreement, but this Employment Agreement shall be construed as if such invalid,
illegal or unenforceable provisions had never been contained herein.
3
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has executed this
Employment Agreement under seal as of this 1st day of June 1999.
NUEVO ENERGY COMPANY
By: /s/ Douglas L. Foshee
--------------------------------
Douglas L. Foshee
Chairman, CEO & President
/s/ Bruce Murchison
-----------------------------------
Bruce Murchison
4
<PAGE>
Exhibit 10.28
EMPLOYMENT AGREEMENT
Agreement made as of this date by and between John P. McGinnis ("McGinnis")
and Nuevo Energy Company, a Delaware corporation having a principal place of
business at 1331 Lamar, Suite 1650, Houston, Texas 77010 (the "Company").
McGinnis has been offered employment with the Company as Vice President,
Exploration, in accordance with the terms set forth more fully below.
McGinnis has accepted such offer by the Company.
NOW, THEREFORE, for value received, it is mutually agreed between the
parties hereto as follows:
1. Employment and Terms. The Company hereby employs McGinnis and McGinnis
hereby agrees to serve as the Vice President - Exploration of the Company.
2. Position and Responsibilities. McGinnis shall serve as Vice President
- - Exploration of the Company, and McGinnis shall exercise such powers and comply
with and perform such directions and duties in relation to the business and
affairs of the Company as are consistent with the duties of individuals having
similar positions with similar corporations, and as may from time to time be
vested in or given to him by the President and Chief Executive Officer or the
Board of Directors of the Company and shall use his best efforts to improve and
extend the business of the Company. McGinnis shall at all times report to, and
his activities shall be subject to the direction and control of, the President
and Chief Executive Officer. McGinnis agrees to devote substantially all of his
business time, attention and services to the diligent, faithful and competent
discharge of such duties for the successful operation of the Company's business.
3. Compensation.
A. In consideration of the services to be rendered by McGinnis to the
Company, the Company will pay to McGinnis a salary of $140,000 per annum for the
year ending December 31, 1999, for a monthly rate of $11,666.67. Salary for
subsequent years shall be at equivalent or increased rates as may be agreed by
the Company and McGinnis. Such salary shall be payable in conformity with the
Company's prevailing practice for executives' compensation as such practice
shall be established or modified from time to time. Salary payments shall be
subject to all applicable federal and state withholding, payroll and other
taxes. In addition to the base salary, the Company will pay McGinnis a one-time
signing bonus in the amount of $50,000. This signing bonus will be paid and
deposited on or about McGinnis' first day of employment into McGinnis' Nuevo
Energy Company Deferred Compensation Plan.
1
<PAGE>
B. The Company agrees to provide the following benefits to McGinnis as a
part of his employment;
(1) Four weeks of paid vacation (calculated on a per pay period
basis).
(2) Eleven paid holidays per year.
(3) Participation in the 401(k) Retirement Plan upon date of
hire.
(4) Health and welfare benefits in accordance with the various
plan documents.
(5) Participation in the Nuevo Energy Deferred Compensation
Plan.
(6) Short term illness plan upon hire and long term illness plan
after one year of employment.
(7) Company-paid parking.
(8) Houston Center Club Fitness Membership Program.
C. The Company also will award McGinnis 25,000 options to purchase
Nuevo Energy Company common stock in accordance with the grant agreement under
the Nuevo Energy Company 1999 Stock Incentive Program; subject to the approval
of the Compensation Committee of the Nuevo Energy Company Board of Directors.
The option price will be the average price of a share of Nuevo stock on your
hire date.
4. Termination. McGinnis' term of employment under this Employment
Agreement may be terminated as follows:
A. At McGinnis' Option. McGinnis may terminate his
employment hereunder, with or without cause, at any time upon at least thirty
(30) days' advance written notice to the Company. In such event, McGinnis shall
be entitled to no severance or other termination benefits.
B. At the Election of the Company for Just Cause. The Company may,
immediately and unilaterally, terminate McGinnis' employment for just cause at
any time by written notice to McGinnis. Termination of McGinnis' employment by
the Company shall constitute a termination "for just cause" if such termination
is for one or more of the following reasons: (i) the willful failure or refusal
of McGinnis to render services to the Company in accordance with his obligations
under this Employment Agreement, such failure or refusal to be uncured and
continuing for a period of not less than 15 days after written notice outlining
the situation is given by the Company to McGinnis; (ii) the commission by
McGinnis of an act of fraud or embezzlement against the Company or the
commission by McGinnis or any other action with the intent to injure the Company
or (iii) McGinnis having been convicted of a felony. In such event, McGinnis
shall be entitled to no severance or other termination benefits.
2
<PAGE>
C. At the Election of the Company for Reasons Other than Just Cause.
The Company may, immediately and unilaterally, terminate McGinnis' employment at
any time or may constructively discharge him by substantially reducing his
responsibilities to less than those outlined in Section 2 herein without cause
by giving written notice to McGinnis of the Company's election to so terminate
or constructively discharge. In the event the Company exercises its right to
terminate or constructively discharge McGinnis under this Paragraph 4 (C), the
Company agrees to pay McGinnis two (2) years salary and bonus (calculated based
on the average of the last two year's bonus award, but using only years in which
McGinnis was actually employed by the Company). In addition, in the event the
Company exercises its right to terminate or constructively discharge McGinnis
under this Paragraph 4 (C), all options previously awarded to McGinnis will, to
the extent not already vested, vest immediately and McGinnis will have 365 days
to exercise any of his vested options.
5. Consent and Waiver by Third Parties. McGinnis hereby represents
and warrants that he has obtained all necessary waivers and/or consents from
third parties as to enable him to accept employment with the Company on the
terms and conditions set forth herein and to execute and perform this Employment
Agreement without being in conflict with any other agreement, obligations or
understanding with any such third party.
6. Waivers and Modifications. This Employment Agreement may be
modified, and the rights and remedies of any provision hereof may be waived,
only in accordance with this Paragraph 6. No modification or waiver by the
Company shall be effective without the consent of a least a majority of the
Board of Directors then in office at the time of such modification or waiver.
No waiver by either party of any breach by the other or any provision hereof
shall be deemed to be a waiver of any later or other breach thereof or as a
waiver of any other provision of this Employment Agreement. This Employment
Agreement sets forth all of the terms of the understandings between the parties
with reference to the subject matter set forth herein and may be waived,
changed, discharged or terminated orally or by any course of dealing between the
parties, but only by an instrument in writing signed by the party against whom
any waiver, change, discharge or termination is sought.
7. Governing Law. This Employment Agreement shall be construed in
accordance with the laws of the State of Texas.
8. Severability. In case any one or more of the provisions
contained in this Employment Agreement for any reason shall be held to be
invalid, illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision of this Employment
Agreement, but this Employment Agreement shall be construed as if such invalid,
illegal or unenforceable provisions had never been contained herein.
3
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has executed this
Employment Agreement under seal as of this 15th day of July, 1999.
NUEVO ENERGY COMPANY
By: /s/ Douglas L. Foshee
---------------------------------
Douglas L. Foshee
Chairman, CEO & President
/s/ John P. McGinnis
------------------------------------
John P. McGinnis
4
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND THE CONDENSED CONSOLIDATED STATEMENT OF
OPERATIONS AND IS QUALIFIED IN ITS ENTIRELY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-30-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,187
<SECURITIES> 0
<RECEIVABLES> 38,330
<ALLOWANCES> 0
<INVENTORY> 2,131
<CURRENT-ASSETS> 75,730
<PP&E> 1,075,323
<DEPRECIATION> (422,820)
<TOTAL-ASSETS> 747,477
<CURRENT-LIABILITIES> 42,080
<BONDS> 360,500
115,000
0
<COMMON> 204
<OTHER-SE> 226,873
<TOTAL-LIABILITY-AND-EQUITY> 747,477
<SALES> 165,331
<TOTAL-REVENUES> 249,751
<CGS> 96,057
<TOTAL-COSTS> 170,232
<OTHER-EXPENSES> 33,460
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,348
<INCOME-PRETAX> 21,711
<INCOME-TAX> 8,683
<INCOME-CONTINUING> 13,028
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,028
<EPS-BASIC> 0.66
<EPS-DILUTED> 0.65
</TABLE>
