<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 MARCH 31, 2000
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 May 10, 2000, the number of outstanding shares of the Registrant's common
stock was 17,600,635.
<PAGE>
NUEVO ENERGY COMPANY
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets:
March 31, 2000 (Unaudited) and December 31, 1999................................................... 3
Condensed Consolidated Statements of Operations (Unaudited):
Three months ended March 31, 2000 and March 31, 1999............................................... 5
Condensed Consolidated Statements of Cash Flows (Unaudited):
Three months ended March 31, 2000 and March 31, 1999............................................... 6
Notes to Condensed Consolidated Financial Statements (Unaudited).................................... 7
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 13
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.................................. 22
PART II. OTHER INFORMATION........................................................................... 23
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
- -----------------------------
NUEVO ENERGY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands)
ASSETS
------
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
--------------- ------------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................ $ 3,746 $ 10,288
Accounts receivable.................................. 35,070 45,004
Product inventory.................................... 6,082 4,610
Prepaid expenses and other........................... 3,690 6,389
---------- ----------
Total current assets............................... 48,588 66,291
---------- ----------
PROPERTY AND EQUIPMENT, AT COST:
Land................................................. 51,017 51,017
Oil and gas properties (successful efforts method)... 1,015,432 1,002,779
Gas plant facilities................................. 12,020 12,140
Other facilities..................................... 12,271 11,874
---------- ----------
1,090,740 1,077,810
Accumulated depreciation, depletion and
amortization....................................... (445,588) (429,349)
---------- ----------
645,152 648,461
---------- ----------
DEFERRED TAX ASSETS, NET.............................. 23,415 24,005
OTHER ASSETS.......................................... 20,715 21,273
---------- ----------
$ 737,870 $ 760,030
========== ==========
</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>
March 31, 2000 December 31,1999
--------------- -----------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable............................................................................ $ 13,195 $ 20,492
Accrued interest............................................................................ 8,431 2,353
Accrued liabilities......................................................................... 28,677 37,755
Current maturities of long-term debt........................................................ 375 750
-------- --------
Total current liabilities............................................................... 50,678 61,350
-------- --------
LONG-TERM DEBT, NET OF CURRENT MATURITIES.................................................... 338,752 340,750
OTHER LONG-TERM LIABILITIES................................................................... 8,914 9,292
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, 20,548,271 and 20,437,371
shares issued at March 31, 2000 and December 31, 1999, respectively........................ 205 204
Additional paid-in capital.................................................................. 359,761 357,855
Treasury stock, at cost, 2,961,996 and 2,430,074 shares, at
March 31, 2000 and December 31, 1999, respectively.......................................... (61,120) (49,605)
Stock held by benefit trust, 155,482 and 75,904 shares, at
March 31, 2000 and December 31, 1999, respectively.......................................... (3,283) (3,184)
Deferred stock compensation................................................................. (266) (216)
Accumulated deficit......................................................................... (70,771) (71,416)
-------- --------
Total stockholders' equity.............................................................. 224,526 233,638
-------- --------
$737,870 $760,030
======== ========
</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 March 31,
----------------------------
2000 1999
------------ ------------
REVENUES:
Oil and gas revenues............................ $70,729 $ 43,464
Gain on sale of assets, net..................... 140 81,699
Interest and other income....................... 626 1,480
------- --------
71,495 126,643
------- --------
COSTS AND EXPENSES:
Lease operating expenses........................ 31,111 29,914
Exploration costs............................... 3,254 2,125
Depreciation, depletion and amortization........ 16,241 23,320
General and administrative expenses............. 5,372 3,832
Outsourcing fees................................ 3,333 3,210
Interest expense................................ 8,290 7,999
Dividends on Guaranteed Preferred
Beneficial Interests in Company's
Convertible Debentures (TECONS)............... 1,653 1,653
Other expense................................... 1,160 2,522
------- --------
70,414 74,575
------- --------
Income before income taxes....................... 1,081 52,068
Provision for income taxes....................... 436 20,726
------- --------
NET INCOME....................................... $ 645 $ 31,342
======= ========
EARNINGS PER SHARE:
Basic:
Earnings per common share........................ $0.04 $1.58
======= ========
Weighted average common shares outstanding....... 17,814 19,840
======= ========
DILUTED:
Earnings per common share........................ $0.04 $1.58
======= ========
Weighted average common and dilutive potential
common shares outstanding........................ 18,209 19,840
======= ========
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
NUEVO ENERGY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Amounts in Thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................... $ 645 $ 31,342
Adjustments to reconcile net income to
net cash provided by/(used in) operating activities:
Depreciation, depletion and amortization................. 16,241 23,320
Gain on sale of assets, net.............................. (140) (81,699)
Dry hole costs........................................... (44) 827
Amortization of other costs.............................. 444 405
Deferred taxes........................................... 796 14,626
Appreciation of deferred compensation plan............... 432 152
Mark to market of liability management swap.............. 781 ---
Other.................................................... 33 ---
-------- ---------
19,188 (11,027)
Changes in assets and liabilities:
Accounts receivable........................................ 9,934 334
Accounts payable and accrued liabilities................... (10,297) (4,287)
Other...................................................... (251) 4,548
-------- ---------
NET CASH PROVIDED BY/(USED IN) OPERATING ACTIVITIES......... 18,574 (10,432)
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties........................ (12,223) (15,630)
Additions to gas plant facilities.......................... (126) (494)
Additions to other facilities.............................. (398) (1,057)
Proceeds from sales of properties.......................... --- 192,583
-------- ---------
NET CASH (USED IN)/PROVIDED BY INVESTING ACTIVITIES......... (12,747) 175,402
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings................................... 8,025 86,590
Payments of long-term debt................................. (10,398) (140,415)
Treasury stock purchases................................... (11,614) ---
Proceeds from issuance of common stock..................... 1,618 ---
-------- ---------
NET CASH USED IN FINANCING ACTIVITIES....................... (12,369) (53,825)
-------- ---------
Net (decrease)/increase in cash and cash equivalents....... (6,542) 111,145
Cash and cash equivalents at beginning of
period.................................................... 10,288 7,403
-------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 3,746 $ 118,548
======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amounts capitalized)..................... $ 1,769 $ 2,306
Income taxes.............................................. $ --- $ ---
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<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 March 31, 2000 and December 31, 1999 and the results of operations and
changes in cash flows for the periods ended March 31, 2000 and 1999. These
financial statements should be read in conjunction with the financial
statements and notes to financial statements in the 1999 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 and the disclosure of contingent assets and liabilities, as well
as 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 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 and net income 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 March 31, 2000 or December 31, 1999. 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
$26.5 million and increased by $0.2 million in the first quarter of 2000 and
1999, respectively.
In 1999, 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 ("Notes")
to a variable LIBOR-based rate. This arrangement is in effect through
February 26, 2001. Based on LIBOR rates in effect at March 31, 2000, this
amounted to a net reduction in the carrying cost of the Notes from 9 1/2 % to
6.13%, or 337 basis points. In addition, the swap arrangement also
effectively hedges the price
7
<PAGE>
NUEVO ENERGY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
at which these Notes can be repurchased by the Company. For the three months
ended March 31, 2000, the Company recorded a negative market adjustment of
$781,000 related to the change in the fair value of the Notes.
For 2000, the Company entered into swap contracts on 16,500 barrels of oil
per day ("BOPD"), at an average West Texas Intermediate ("WTI") price of
$17.94 per barrel. The Company also entered into collars on an additional
16,500 BOPD, with a floor of $16.00 per barrel and ceiling of $21.21 per
barrel. This production is hedged based on a fixed NYMEX price. Also for the
year 2000, the Company has entered into basis swaps on 3,000 BOPD of its
production in the Congo, hedging the basis differential between No. 6 fuel
oil and WTI at an average differential of $1.88 per barrel. At March 31,
2000, the market value of the hedge positions was a loss of approximately
$48.0 million. In May 2000, in connection with the sale of certain non-core
California oil and gas properties (see Note 9), the Company unwound the
$21.21 ceiling on 2,800 BOPD for the period May 2000 through December 2000.
For 2001, the Company has entered into swap arrangements on 26,000 BOPD for
the first quarter at an average WTI price of $19.52, for the second quarter
on 25,000 BOPD at an average WTI price of $19.54, and for the third quarter
on 20,000 BOPD at an average WTI price of $21.22. At March 31, 2000, the
market value of these swaps was a loss of $24.6 million. 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.
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. The Company has not yet determined the impact of this statement on its
financial condition or results of operations.
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. 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
8
<PAGE>
NUEVO ENERGY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
independent reserve engineers and are included when calculating depreciation
and depletion using the unit-of-production method.
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 all proved reserves
and commodity pricing based on available market information in its estimate
of future net revenues.
3. DEFERRED TAX ASSETS
-------------------
The Company has deferred tax assets, net of valuation allowances, of $23.4
million and $24.0 million as of March 31, 2000 and December 31, 1999,
respectively. 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 March 31, 2000, the Company's oil and gas exploration and production
operations were concentrated primarily in two geographic regions:
domestically, onshore and offshore California, and internationally, offshore
the Republic of Congo in West Africa (the "Congo").
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
------------------------------------
<S> <C> <C>
2000 1999
------- --------
Sales to unaffiliated customers:
Oil and gas - Domestic.................... $59,549 $ 39,803
Oil and gas - International............... 11,180 3,661
------- --------
Total sales................................. 70,729 43,464
Gain on sale of assets, net............... 140 81,699
Other revenues............................ 626 1,480
------- --------
Total revenues.............................. $71,495 $126,643
======= ========
Operating profit before income taxes:
Oil and gas - Domestic (a)................ $17,879 $ 71,936
Oil and gas - International............... 2,751 (1,963)
------- --------
20,630 69,973
Unallocated corporate expenses.............. 9,606 8,253
Interest expense............................ 8,290 7,999
Dividends on TECONS......................... 1,653 1,653
------- --------
Income before income taxes................ $ 1,081 $ 52,068
======= ========
Depreciation, depletion and amortization:
Oil and gas - Domestic.................... $13,705 $ 21,147
Oil and gas - International............... 2,169 1,798
Other..................................... 367 375
------- --------
$16,241 $ 23,320
======= ========
</TABLE>
(a) Includes an $80.3 million gain on sale of the East Texas gas properties for
the three months ended March 31, 1999.
9
<PAGE>
NUEVO ENERGY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. LONG-TERM DEBT
--------------
Long-term debt consists of the following (amounts in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------------- ------------------
<S> <C> <C>
9 1/2% Senior Subordinated Notes due 2008.................................... $257,310 $257,310
9 1/2% Senior Subordinated Notes due 2006.................................... 2,417 2,440
Bank credit facility (a)...................................................... 79,025 81,000
OPIC credit facility.......................................................... 375 750
------------------- ------------------
Total debt............................................................ 339,127 341,500
Less: current maturities...................................................... (375) (750)
-------------------
Long-term debt................................................................ $338,752 $340,750
=================== ==================
</TABLE>
(a) 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. In October 1999 and April 2000, the borrowing
base on the Company's credit facility was determined to be $300.0 million.
The Company was in compliance with all covenants as of March 31, 2000, and
does not anticipate any issues of non-compliance arising in the foreseeable
future. At March 31, 2000, outstanding borrowings under the revolving credit
agreement were $71.0 million. Accordingly, $229.0 million of committed
revolving credit capacity was unused and available at March 31, 2000.
Additionally, Nuevo had $8.0 million of outstanding borrowings under an
uncommitted line of credit.
In May 2000, the Company announced that it has reached an agreement with a
group of nine major U.S and international banks to amend and restate its
credit facility, in order to make structural changes that increase the value
of the facility to the Company. This amendment is expected to be finalized
in the second quarter of 2000.
6. 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 period ended March 31, 1999, there were no potential dilutive common
shares. The Company's reconciliation is as follows:
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
-----------------------------------------------------------
2000 1999
----------------------------- ---------------------------
Income Shares Income Shares
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Earnings per Common share - Basic........................ $645 17,814 $31,342 19,840
Effect of dilutive securities:
Stock options............................................ --- 395 --- ---
---- ------ ------- ------
Earnings per Common share - Diluted...................... $645 18,209 $31,342 19,840
==== ====== ======= ======
</TABLE>
10
<PAGE>
NUEVO ENERGY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
7. CONTINGENCIES AND OTHER MATTERS
-------------------------------
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, based on the most recent estimate 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 based on the most recent estimate of $40.8 million
(gross); iii) failure to develop claiming damages including interest based
on the most recent estimate 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 present 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, $1.6 million in 1999 and the remainder in 1998, that were
intended for international exploration. 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. The Company is attempting to recoup the loss; however,
there is no certainty that any of the funds will be recovered.
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.
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
11
<PAGE>
NUEVO ENERGY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 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 $48.5 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 $64.1 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. CONTINGENT PAYMENT AND PRICE SHARING AGREEMENTS
-----------------------------------------------
In connection with the acquisition from Unocal in 1996 of the properties
located in California, the Company is obligated to make a contingent payment
for the years 1998 through 2004 if oil prices exceed thresholds set forth in
the agreement with Unocal. The contingent payment will equal 50% of the
difference between the actual average annual price received on a field-by-
field basis (capped by a maximum price) and a minimum price, less ad valorem
and production taxes, multiplied by the actual number of barrels of oil sold
during the respective year. The minimum price of $17.75 per Bbl under the
agreement (determined based on near month of delivery of WTI crude oil on
the NYMEX) is escalated at 3% per year and the maximum price of $21.75 per
Bbl on the NYMEX is escalated at 3% per year. Minimum and maximum prices are
reduced to reflect the field level price by subtracting a fixed differential
established for each field. The reduction was established at approximately
the differential between actual sales prices and NYMEX prices in effect in
1995 ($4.34 per Bbl weighted average for all the properties acquired from
Unocal). The Company accumulates credits to offset the contingent payment
when prices are $.50 per Bbl or more below the minimum price. The Company
computes this calculation annually and had accumulated $30.8 million in
price credits as of December 31, 1999, which will be used to reduce future
amounts owed under the contingent payment.
In connection with the acquisition of the Congo properties in 1995, the
Company entered into a price sharing agreement with the seller. Under the
terms of the agreement, if the average price received for the oil production
during the year is greater than the benchmark price established by the
agreement, then the Company is obligated to pay the seller 50% of the
difference between the benchmark price and the actual price received, for
all the barrels associated with this acquisition. The benchmark price for
2000 is $15.19 per Bbl. The benchmark price increases each year, based on
the increase in the Consumer Price Index. For 2000, the effect of this
agreement is that Nuevo is entitled to receive the pricing upside above
$15.19 per Bbl on approximately 56% of its Congo production.
The Company acquired a 12% working interest in the Point Pedernales oil
field from Unocal in 1994 and the remainder of its interest from Torch
Energy Advisors Inc. ("Torch") in 1996. The Company is entitled to all
revenue proceeds up to $9.00 per Bbl, with the excess over $9.00 per barrel,
if any, shared among the Company and the original owners from whom Torch
acquired its interest. For 2000, the effect of this agreement is that Nuevo
is entitled to receive the pricing upside above $9.00 per Bbl on
approximately 28% of the Point Pedernales production.
9. SUBSEQUENT EVENT
----------------
In May 2000, the Company sold certain of its non-core California properties
for proceeds of approximately $4.6 million. The Company reclassified these
assets to assets held for sale during the third quarter of 1999, at which
time it discontinued depleting and depreciating these assets. In connection
with this sale, the Company unwound hedges of 2,800 BOPD for the period May
2000 through December 2000 (See Note 1).
10. SHARE REPURCHASES
-----------------
In August 1999, the Company implemented a share repurchase program, pursuant
to the Board of Directors' authorizations to repurchase up to a total of
3,616,600 shares at times and at prices deemed attractive by management. As
of March 31, 2000, the Company has repurchased 2,610,600 shares of its common
stock in open market transactions at an average purchase price, including
commissions, of $16.75 per share.
12
<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 provided by (used in) operating activities was $18.6 million and $(10.4)
million for the three months ended March 31, 2000 and 1999, respectively.
The Company invested $12.2 million and $15.6 million in oil and gas
properties for the three months ended March 31, 2000 and 1999, respectively.
The current borrowing base on the Company's credit facility is $300.0
million. At March 31, 2000, outstanding borrowings under the revolving
credit agreement were $71.0 million. Accordingly, $229.0 million of
committed revolving credit capacity was unused and available at March 31,
2000. Additionally, Nuevo had $8.0 million of outstanding borrowings under an
uncommitted line of credit. At March 31, 2000, the Company had a working
capital deficit of $2.1 million.
In May 2000, the Company announced that it has reached an agreement with a
group of nine major U.S. and international banks to amend and restate its
credit facility in order to make structural changes that increase the value
of the facility to the Company. The banks, led by Bank of America, agreed to
an amended facility with a face amount of $410 million. The amount can be
expanded at Nuevo's option to an amount not to exceed $800 million, with
increased commitments from existing banks, or with new commitments from
additional banks. Concurrently, the bank group approved a $300.0 million
borrowing base governing the availability under this new bank facility
through October 2000. Subsequent semi-annual borrowing base redeterminations
will require the consent of banks holding 60% of the total facility
commitments, while an increase in the borrowing base will require the consent
of banks holding 66 2/3% of the total facility commitments. The adjustments
to the agreement include adding two years to the current three-year term,
relaxing certain limitations on restricted payments, streamlining the
borrowing base determination process and simplifying the administration of
the facility with fewer banks.
The Company believes its 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
--------------------
The Company anticipates spending an additional $96.0 million on development
activities and an additional $28.0 million on exploration activities and
other capital projects during the remainder of the year.
13
<PAGE>
NUEVO ENERGY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Exploration and development expenditures, including amounts expensed under
the successful efforts method, for the first three months of 2000 and 1999
are as follows (amounts in thousands):
For the Three Months Ended
March 31,
--------------------------------------------------
2000 1999
---------------------- ----------------------
Domestic $ 12,400 $ 5,838
International 3,506 10,580
---------------- ----------------
Total $ 15,906 $ 16,418
================ ================
The following is a description of significant exploration and development
activity during the first three months of 2000.
Exploration Activity
Domestic
---------
There was no significant activity during the first quarter of 2000.
International
-------------
In the first quarter of 2000, the Company completed its acquisition of the
3-D seismic survey across the Eastern portion of its Accra-Keta concession
offshore the Republic of Ghana in West Africa ("Ghana"). This survey extends
from the outer shelf, across the slope, and into the deepwater regions of the
block. The Company is currently interpreting the data, which is expected to
be complete by the end of the second quarter. The Company currently plans to
drill its first exploratory well on the concession late this year.
Development Activity
Domestic
--------
The Company drilled a total of 50 development wells in the first quarter of
2000, most of which relate to the interests acquired from Texaco in 1999.
The Company completed the first phase of its development drilling program on
its Cymric lease acquired from Texaco. This first phase included drilling 40
wells, all of which are currently producing at a combined rate of 3,200
barrels of oil per day ("BOPD"). The Company plans to begin the second phase
of this development program in June 2000, which includes drilling an
additional 60 wells. The Company expects this program to be completed by the
end of the year. In addition to the development activity at Cymric, the
Company successfully drilled two offshore wells at its Huntington Beach
property. These two wells should be completed and placed in production in the
second quarter of 2000.
A significant facility expansion is underway at the Brea Olinda field. The
Company had flared approximately 2.5 MMCF of natural gas per day, due to the
lack of a gas market. In the first quarter of 2000, the Company completed the
installation of its first cogeneration unit, which utilizes the gas and
converts it to electricity to supply all of the field electrical needs as
well as provides excess electricity for sale. The completion of the
cogeneration project should result in significant cost savings for the Brea
Olinda property. Also, the Company is currently beginning construction of a
water plant at its Cymric Field that will provide a long-term source of water
to be used in the Company's steam operations and help reduce expenses in the
long-term.
International
-------------
There was no significant activity during the first quarter of 2000.
14
<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 March 31, 2000 or December 31, 1999. 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
$26.5 million and increased by $0.2 million in the first quarter of 2000 and
1999, respectively.
In 1999, 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 ("Notes")
to a variable LIBOR-based rate. This arrangement is in effect through
February 26, 2001. Based on LIBOR rates in effect at March 31, 2000, this
amounted to a net reduction in the carrying cost of the Notes from 9 1/2% to
6.13%, or 337 basis points. In addition, the swap arrangement also
effectively hedges the price at which these Notes can be repurchased by the
Company. For the three months ended March 31, 2000, the Company recorded a
negative market adjustment of $781,000 related to the change in the fair
value of the Notes.
For 2000, the Company entered into swap contracts on 16,500 BOPD, at an
average West Texas Intermediate ("WTI") price of $17.94 per barrel. The
Company also entered into collars on an additional 16,500 BOPD, with a floor
of $16.00 per barrel and ceiling of $21.21 per barrel. This production is
hedged based on a fixed NYMEX price. Also for the year 2000, the Company has
entered into basis swaps on 3,000 BOPD of its production in the Congo,
hedging the basis differential between No. 6 fuel oil and WTI at an average
differential of $1.88 per barrel. At March 31, 2000, the market value of the
hedge positions was a loss of approximately $48.0 million. In May 2000, in
connection with the sale of certain non-core California oil and gas
properties (see Note 9), the Company unwound the $21.21 ceiling on 2,800 BOPD
for the period May 2000 through December 2000.
For 2001, the Company has entered into swap arrangements on 26,000 BOPD for
the first quarter at an average WTI price of $19.52, for the second quarter
on 25,000 BOPD at an average WTI price of $19.54, and for the third quarter
on 20,000 BOPD at an average WTI price of $21.22. At March 31, 2000, the
market value of these swaps was a loss of $24.6 million. 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.
CONTINGENCIES AND OTHER MATTERS
-------------------------------
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
15
<PAGE>
NUEVO ENERGY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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, based on the
most recent estimate 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 based on the most recent
estimate of $40.8 million (gross); iii) failure to develop claiming damages
including interest based on the most recent estimate 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 present 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, $1.6 million in 1999 and the remainder in 1998, that were
intended for international exploration. 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. The Company is attempting to recoup the loss; however, there is
no certainty that any of the funds will be recovered.
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.
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 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
$48.5 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
$64.1 million. The Company
16
<PAGE>
NUEVO ENERGY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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.
Contingent Payment and Price Sharing Agreements
-----------------------------------------------
In connection with the acquisition from Unocal in 1996 of the properties
located in California, the Company is obligated to make a contingent payment
for the years 1998 through 2004 if oil prices exceed thresholds set forth in
the agreement with Unocal. The contingent payment will equal 50% of the
difference between the actual average annual price received on a field-by-
field basis (capped by a maximum price) and a minimum price, less ad valorem
and production taxes, multiplied by the actual number of barrels of oil sold
during the respective year. The minimum price of $17.75 per Bbl under the
agreement (determined based on near month of delivery of WTI crude oil on the
NYMEX) is escalated at 3% per year and the maximum price of $21.75 per Bbl on
the NYMEX is escalated at 3% per year. Minimum and maximum prices are reduced
to reflect the field level price by subtracting a fixed differential
established for each field. The reduction was established at approximately
the differential between actual sales prices and NYMEX prices in effect in
1995 ($4.34 per Bbl weighted average for all the properties acquired from
Unocal). The Company accumulates credits to offset the contingent payment
when prices are $.50 per Bbl or more below the minimum price. The Company
computes this calculation annually and had accumulated $30.8 million in price
credits as of December 31, 1999, which will be used to reduce future amounts
owed under the contingent payment.
In connection with the acquisition of the Congo properties in 1995, the
Company entered into a price sharing agreement with the seller. Under the
terms of the agreement, if the average price received for the oil production
during the year is greater than the benchmark price established by the
agreement, then the Company is obligated to pay the seller 50% of the
difference between the benchmark price and the actual price received, for all
the barrels associated with this acquisition. The benchmark price for 2000 is
$15.19 per Bbl. The benchmark price increases each year, based on the
increase in the Consumer Price Index. For 2000, the effect of this agreement
is that Nuevo is entitled to receive the pricing upside above $15.19 per Bbl
on approximately 56% of its Congo production.
The Company acquired a 12% working interest in the Point Pedernales oil field
from Unocal in 1994 and the remainder of its interest from Torch Energy
Advisors Inc. ("Torch") in 1996. The Company is entitled to all revenue
proceeds up to $9.00 per Bbl, with the excess over $9.00 per barrel, if any,
shared among the Company and the original owners from whom Torch acquired its
interest. For 2000, the effect of this agreement is that Nuevo is entitled to
receive the pricing upside above $9.00 per Bbl on approximately 28% of the
Point Pedernales production.
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. The Company has not yet determined the impact of this statement on its
financial condition or results of operations.
SHARE REPURCHASES
-----------------
In August 1999, the Company implemented a share repurchase program, pursuant
to the Board of Directors' authorizations to repurchase up to a total of
3,616,600 shares at times and at prices deemed attractive by management. As
of March 31, 2000, the Company has repurchased 2,610,600 shares of its common
stock in open market transactions at an average purchase price, including
commissions, of $16.75 per share.
17
<PAGE>
NUEVO ENERGY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
DEFERRED INCOME TAXES
---------------------
The Company has deferred tax assets, net of valuation allowances, of $23.4
million and $24.0 million as of March 31, 2000 and December 31, 1999,
respectively. 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.
YEAR 2000
---------
In 1998, the Company and its outside service provider, Torch Energy Advisers
Incorporated ("Torch"), jointly developed a plan to address Nuevo's risks
associated with the Year 2000 issues ("Y2K.") The plan grouped the risks
associated with Y2K into three general areas: i) financial and administrative
systems, ii) embedded systems in field process control units, and iii) third
party exposures. The Company did not encounter any critical financial and
administrative system or embedded system failures during the date roll over
to the Year 2000, and has not experienced any disruptions of business
activities as a result of Y2K failures encountered by third parties
(customers, suppliers and service providers.) To date, the Company has not
incurred, and does not expect to incur, any material expenditures in
connection with identifying, assessing or remediating Y2K compliance issues.
18
<PAGE>
NUEVO ENERGY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (THREE MONTHS ENDED MARCH 31, 2000 AND 1999)
- ------------------------------------------------------------------
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 March 31,
---------------- %
Increase/
2000 1999 (Decrease)
------ ------ ---------
<S> <C> <C> <C>
Production:
Oil and condensate - Domestic (MBBLS)..................... 3,714 3,985 (7%)
Oil and condensate - International (MBBLS)................ 501 389 29%
------ ------
Oil and condensate - Total (MBBLS)........................ 4,215 4,374 (4%)
Natural gas - Domestic/Total (MMCF)....................... 3,995 4,092 (2%)
Natural gas liquids - Domestic/Total (MBBLS).............. 41 43 (5%)
Equivalent barrels of production - Domestic (MBOE)........ 4,421 4,710 (6%)
Equivalent barrels of production - International (MBOE)... 501 389 29%
------ ------
Equivalent barrels of production - Total (MBOE)........... 4,922 5,099 (3%)
Average Sales Price:
Oil and condensate - Domestic............................. $13.13 $ 7.84 67%
Oil and condensate - International........................ $22.32 $ 9.46 136%
Oil and condensate - Total................................ $14.22 $ 7.99 78%
Natural gas - Domestic/Total.............................. $ 2.42 $ 1.83 32%
Lease Operating Expense:
Average unit production cost(1) per BOE - Domestic........ $ 6.28 $ 5.72 10%
Average unit production cost(1) per BOE - International... $ 6.69 $ 7.64 (12%)
Average unit production cost(1) per BOE - Total........... $ 6.32 $ 5.87 8%
</TABLE>
(1) Costs incurred to operate and maintain wells and related equipment and
facilities, including ad valorem and severance taxes.
Revenues
- --------
Oil and Gas Revenues:
Oil and gas revenues for the three months ended March 31, 2000, were $70.7
million, or 63% higher than oil and gas revenues for the same period in 1999.
This increase is primarily due to a 78% increase in realized oil prices and a
32% increase in realized gas prices. These increases were partially offset by a
decrease in production, which was primarily attributable to less capital
spending in 1999. First quarter 2000 oil price realizations reflect hedging
losses of $26.5 million, or $6.29 per barrel.
Domestic: Oil and gas revenues for the three months ended March 31, 2000, were
50% higher than oil and gas revenues for the same period in 1999. This increase
is primarily due to a 67% improvement in average realized oil prices and a 32%
improvement in average realized gas prices, partially offset by a 6% decrease in
total production as a result of reduced capital spending in 1999. The realized
oil price of $13.13 per barrel for the first quarter of 2000 includes negative
hedging results of $7.50 per barrel of oil.
19
<PAGE>
NUEVO ENERGY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
International: Oil revenues for the three months ended March 31, 2000, more than
tripled as compared to the same period in 1999. This significant increase
resulted from a 136% increase in oil price realizations to $22.32 per barrel,
coupled with a 29% increase in oil production. The realized oil price for the
first quarter of 2000 includes hedging gains of $2.70 per barrel of oil,
compared to hedging gains of $0.49 per barrel in the first quarter of 1999.
Gain on Sale of Assets, net:
Gain on sale of assets for the three months ended March 31, 2000, was $140,000,
representing positive revisions for accounting adjustments in connection with
the Company's sale of certain oil and gas properties in 1999. Gain on sale of
assets for the three months ended March 31, 1999, was $81.7 million, resulting
from the Company's sale of its East Texas natural gas properties in
January 1999.
Interest and Other Income:
Interest and other income for the three months ended March 31, 2000, is
comprised of several individually insignificant items. Interest and other income
for the three months ended March 31, 1999, includes $1.3 million associated with
interest earned on an escrow account for the $100.0 million representing a
portion of the proceeds from the sale of the East Texas natural gas properties,
as well as several individually insignificant items.
Expenses
- --------
Lease Operating Expenses:
Lease operating expenses for the three months ended March 31, 2000, were $31.1
million, or 4% higher than for the three months ended March 31, 1999. Lease
operating expenses per barrel of oil equivalent were $6.32 in the first quarter
of 2000, compared to $5.87 in the same period in 1999. The per barrel increase
is primarily due to the 3% decrease in total production, an increase in steam
and workover costs, and a change in asset mix resulting from the June 1999
purchase of the Texaco properties, which have relatively higher operating costs.
Domestic: Lease operating expenses per barrel of oil equivalent ("BOE") were
$6.28 in the first quarter of 2000, compared to $5.72 in the same period in
1999. Decreased production and higher steam and workover costs contributed to
the higher lease operating expenses quarter over quarter.
International: Lease operating expenses per BOE were $6.69 in the first quarter
of 2000, compared to $7.64 in the same period in 1999. The decrease in lease
operating expenses per BOE is primarily attributable to the 29% increase in
production.
Exploration Costs:
Exploration costs, including geological and geophysical ("G&G") costs, dry hole
costs, delay rentals and expensed project costs, were $3.3 million and $2.1
million for the three months ended March 31, 2000 and 1999, respectively. For
the three months ended March 31, 2000, exploration costs were comprised of $3.2
million in G&G (primarily for 3-D seismic acquisition and processing in the
Accra-Keta prospect offshore Ghana), and $0.1 million in delay rentals. For the
three months ended March 31, 1999, exploration costs were comprised of $0.8
million of dry hole costs, $0.8 million in G&G, $0.2 million in delay rentals
and $0.3 million of other project costs.
Depreciation, Depletion and Amortization:
Depreciation, depletion and amortization for the three months ended March 31,
2000, reflects a 30% decrease from the same period in 1999, due to a lower
depletion rate, which primarily resulted from a significant increase in reserve
estimates at year-end 1999 versus year-end 1998.
20
<PAGE>
NUEVO ENERGY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
General and Administrative Expenses:
General and administrative expenses were $5.4 million and $3.8 million in the
three months ended March 31, 2000 and 1999, respectively. The 40% increase is
due primarily to a $0.7 million increase in bonus accruals, as bonuses were not
projected or accrued in the first quarter of 1999 and a $0.3 million increase in
the fair market value of securities in the Company's deferred compensation plan.
The remaining increase is made up of individually insignificant items.
Interest Expense:
Interest expense of $8.3 million for the three months ended March 31, 2000,
increased 4% as compared to interest expense in the same period in 1999. The
increase is primarily attributable to higher interest rates as the Company
exchanged its 8 7/8% Senior Subordinated Notes for 9 1/2% Senior Subordinated
Notes due 2008 in the third quarter of 1999.
Other Expense:
The 54% decrease in other expense from the first quarter of 1999 to the first
quarter of 2000 is primarily due to fraud charges incurred in the first quarter
of 1999. 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. This decrease was
partially offset by a negative mark to market adjustment of $781,000 related to
the Company's liability management swap (see Note 1 to the Notes to Condensed
Consolidated Financial Statements) in the first quarter of 2000.
Net Income
- ----------
Net income of $645,000 million, $0.04 per common share - basic and diluted, was
reported for the three months ended March 31, 2000, as compared to net income of
$31.3 million, $1.58 per common share - basic and diluted, reported for the same
period in 1999.
21
<PAGE>
NUEVO ENERGY COMPANY
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained in Item 3 updates, and should be read in conjunction
with, information set forth in Part II, Item 7a in Nuevo's Annual Report on Form
10-K for the year ended December 31, 1999, in addition to the interim condensed
consolidated financial statements and accompanying notes presented in Items 1
and 2 of this Form 10-Q.
There are no material changes in market risks faced by the Company from those
reported in Nuevo's Annual Report on Form 10-K for the year ended
December 31, 1999.
22
<PAGE>
NUEVO ENERGY COMPANY
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- ------- -----------------
See Note 7 to the Notes to Condensed Consolidated Financial Statements.
On April 5, 2000, the Company filed a lawsuit against Exxon Mobil
Corporation in the United States District Court for the Central
District of California, Western Division. The Company and Exxon Mobil
each own a 50% interest in the Sacate Field, offshore Santa Barbara
County, California. The Company has alleged that by grossly inflating
the fee that Exxon Mobil insists the Company must pay to use an
existing Exxon Mobil platform and production infrastructure, Exxon
Mobil failed to submit a proposal for the development of the Sacate
field consistent with the Unit Operating Agreement. The Company
therefore believes that it has been denied a reasonable opportunity to
exercise its rights under the Unit Operating Agreement. The Company has
alleged that Exxon actions breach the Unit Operating Agreement and the
covenant of good faith and fair dealing. The Company is seeking damages
and a declaratory judgment as to the payment that must be made to
access Exxon Mobil's platform and facilities.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------ --------------------------------
(A) EXHIBITS
27. Financial Data Schedule
(B) REPORTS ON FORM 8-K.
1) A Current Report on Form 8-K, dated February 23, 2000, reporting
Item 5. Other Events and Item 7. Financial Statements and Exhibits
were filed on February 23, 2000.
2) A Current Report on Form 8-K, dated February 4, 2000, reporting
Item 5. Other Events and Item 7. Financial Statements and Exhibits
were filed on March 6, 2000.
23
<PAGE>
NUEVO ENERGY COMPANY
PART II. OTHER INFORMATION (CONTINUED)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NUEVO ENERGY COMPANY
(Registrant)
Date: May 15, 2000 By:/s/ Douglas L. Foshee
------------ ----------------------------
Douglas L. Foshee
Chairman, President and Chief Executive
Officer
Date: May 15, 2000 By:/s/ Robert M. King
------------ --------------------------
Robert M. King
Senior Vice President and Chief Financial
Officer
24
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 3,746
<SECURITIES> 0
<RECEIVABLES> 35,070
<ALLOWANCES> 0
<INVENTORY> 6,082
<CURRENT-ASSETS> 48,588
<PP&E> 1,090,740
<DEPRECIATION> (445,588)
<TOTAL-ASSETS> 737,870
<CURRENT-LIABILITIES> 50,678
<BONDS> 338,752
115,000
0
<COMMON> 205
<OTHER-SE> 224,321
<TOTAL-LIABILITY-AND-EQUITY> 737,870
<SALES> 70,729
<TOTAL-REVENUES> 71,495
<CGS> 31,111
<TOTAL-COSTS> 50,606
<OTHER-EXPENSES> 11,518
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,290
<INCOME-PRETAX> 1,081
<INCOME-TAX> 436
<INCOME-CONTINUING> 645
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 645
<EPS-BASIC> 0.04
<EPS-DILUTED> 0.04
</TABLE>
