<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q/A
Amendment No. 1
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
--------- ---------
Commission File Number 1-12480
LOUIS DREYFUS NATURAL GAS CORP.
(Exact name of registrant as specified in its charter)
Oklahoma 73-1098614
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
14000 QUAIL SPRINGS PARKWAY, SUITE 600
OKLAHOMA CITY, OKLAHOMA 73134
(Address of principal executive office) (Zip code)
Registrant's telephone number, including area code: (405) 749-1300
NONE
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO .
----- -----
27,801,500 shares of common stock, $.01 par value, issued and outstanding at
April 29, 1997.
<PAGE> 2
LOUIS DREYFUS NATURAL GAS CORP.
Table of Contents
PART I. FINANCIAL INFORMATION Page
CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Consolidated Balance Sheets:
December 31, 1996 and March 31, 1997 . . . . . . . . . . . . . . . . 3
Consolidated Statements of Income:
Three months ended March 31, 1996 and 1997 . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows:
Three months ended March 31, 1996 and 1997 . . . . . . . . . . . . . 6
Condensed Notes to Consolidated Financial Statements . . . . . . . . . 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . . 9
PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . 23
<PAGE>
<PAGE> 3
LOUIS DREYFUS NATURAL GAS CORP.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
A S S E T S
December 31, March 31,
1996 1997
----------- -----------
(unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents. . . . . . . . . . . . . $ 7,749 $ 10,101
Receivables:
Oil and gas sales . . . . . . . . . . . . . . . . 33,579 25,650
Joint interest and other. . . . . . . . . . . . . 5,358 4,403
Deposits . . . . . . . . . . . . . . . . . . . . . 5,592 4,425
Inventory and other. . . . . . . . . . . . . . . . 3,147 3,705
----------- -----------
Total current assets. . . . . . . . . . . . . . . 55,425 48,284
----------- -----------
PROPERTY AND EQUIPMENT, at cost, based on
successful efforts accounting . . . . . . . . . . 907,027 915,319
Less accumulated depreciation, depletion
and amortization . . . . . . . . . . . . . . . . (235,162) (243,800)
----------- -----------
671,865 671,519
----------- -----------
OTHER ASSETS, net. . . . . . . . . . . . . . . . . 6,323 5,918
----------- -----------
$ 733,613 $ 725,721
=========== ============
</TABLE>
<PAGE> 4
LOUIS DREYFUS NATURAL GAS CORP.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
L I A B I L I T I E S A N D S T O C K H O L D E R S ' E Q U I T Y
December 31, March 31,
1996 1997
----------- -----------
(unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable . . . . . . . . . . . . . . . . . $ 36,415 $ 22,889
Accrued liabilities. . . . . . . . . . . . . . . . 7,251 8,695
Revenues payable . . . . . . . . . . . . . . . . . 7,419 9,193
----------- -----------
Total current liabilities . . . . . . . . . . . . 51,085 40,777
----------- -----------
LONG-TERM DEBT . . . . . . . . . . . . . . . . . . 343,907 329,443
----------- -----------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred revenue . . . . . . . . . . . . . . . . . 19,049 18,654
Deferred gains from price-risk
management activities . . . . . . . . . . . . . . 26,226 25,305
Deferred income taxes. . . . . . . . . . . . . . . 22,692 29,667
Other. . . . . . . . . . . . . . . . . . . . . . . 6,961 4,137
----------- -----------
74,928 77,763
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock, par value $.01; 10 million
shares authorized; no shares outstanding. . . . . -- --
Common stock, par value $.01; 100 million
shares authorized; issued and outstanding,
27,800,750 and 27,801,500 shares, respectively. . 278 278
Additional paid-in capital . . . . . . . . . . . . 197,301 197,311
Retained earnings. . . . . . . . . . . . . . . . . 66,114 80,149
----------- -----------
263,693 277,738
----------- -----------
$ 733,613 $ 725,721
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements.<PAGE>
<PAGE> 5
LOUIS DREYFUS NATURAL GAS CORP.
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1996 1997
-------- --------
<S> <C> <C>
REVENUES
Oil and gas sales . . . . . . . . . . . . . . . . . . . $ 39,184 $ 51,766
Gain on sales of property and equipment . . . . . . . . 30 8,572
Other income. . . . . . . . . . . . . . . . . . . . . . 636 724
-------- --------
39,850 61,062
-------- --------
EXPENSES
Operating costs . . . . . . . . . . . . . . . . . . . . 10,440 11,290
General and administrative. . . . . . . . . . . . . . . 4,253 3,992
Exploration costs . . . . . . . . . . . . . . . . . . . -- 2,165
Depreciation, depletion and amortization. . . . . . . . 15,063 15,753
Interest. . . . . . . . . . . . . . . . . . . . . . . . 6,732 6,269
-------- --------
36,488 39,469
-------- --------
Income before income taxes. . . . . . . . . . . . . . . 3,362 21,593
Income taxes. . . . . . . . . . . . . . . . . . . . . . 1,110 7,558
-------- --------
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . $ 2,252 $ 14,035
======== ========
Net income per share. . . . . . . . . . . . . . . . . . $ .08 $ .50
======== ========
Weighted average common shares outstanding. . . . . . . 27,800 27,801
======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<PAGE> 6
LOUIS DREYFUS NATURAL GAS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1996 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,252 $ 14,035
Items not affecting cash flows:
Depreciation, depletion and amortization . . . . . . . . . . . . . . . 15,063 15,753
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . 870 6,975
Exploration costs. . . . . . . . . . . . . . . . . . . . . . . . . . . -- 2,165
Gain on sales of property and equipment. . . . . . . . . . . . . . . . (30) (8,572)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 59
Net change in operating assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . 3,029 8,884
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (257) 1,167
Inventory and other. . . . . . . . . . . . . . . . . . . . . . . . . . 371 (558)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,949) (13,526)
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 2,212 1,444
Revenues payable . . . . . . . . . . . . . . . . . . . . . . . . . . . (180) 1,774
-------- --------
20,446 29,600
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Oil and gas property expenditures . . . . . . . . . . . . . . . . . . . (22,037) (34,766)
Additions to other property and equipment . . . . . . . . . . . . . . . (442) (171)
Proceeds from sale of property and equipment. . . . . . . . . . . . . . 39 26,388
Expenditures for other assets . . . . . . . . . . . . . . . . . . . . . -- (61)
-------- --------
(22,440) (8,610)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term bank borrowings . . . . . . . . . . . . . . . . 47,505 61,075
Repayments of long-term bank borrowings . . . . . . . . . . . . . . . . (36,205) (75,575)
Proceeds from stock options exercised . . . . . . . . . . . . . . . . . -- 10
Change in deferred revenue. . . . . . . . . . . . . . . . . . . . . . . (551) (395)
Change in gains from price-risk management activities . . . . . . . . . (473) (921)
Change in other long-term liabilities . . . . . . . . . . . . . . . . . (135) (2,832)
-------- --------
10,141 (18,638)
--------- --------
Change in cash and cash equivalents . . . . . . . . . . . . . . . . . . 8,147 2,352
Cash and cash equivalents, beginning of period. . . . . . . . . . . . . 1,584 7,749
-------- --------
Cash and cash equivalents, end of period. . . . . . . . . . . . . . . . $ 9,731 $ 10,101
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid, net of capitalized interest. . . . . . . . . . . . . . . $ 3,542 $ 3,636
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . -- --
-------- --------
$ 3,542 $ 3,636
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<PAGE> 7
LOUIS DREYFUS NATURAL GAS CORP.
Condensed Notes to Consolidated Financial Statements (unaudited)
March 31, 1997
NOTE 1 -- ACCOUNTING PRINCIPLES AND BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q as prescribed by the
Securities and Exchange Commission. All material adjustments, consisting of
only normal and recurring adjustments, which, in the opinion of Management,
were necessary for a fair presentation of the results for the interim periods
have been reflected. The results of operations for the three-month period
ended March 31, 1997 are not necessarily indicative of the results to be
expected for the full year. Certain reclassifications have been made to the
prior year statements to conform with the current year presentation.
Reference is made to the Company's Annual Report on Form 10-K/A for the year
ended December 31, 1996 for an expanded discussion of the Company's financial
disclosures and accounting policies.
NOTE 2 -- EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share" ("SFAS 128"), which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements, both basic earnings per share and
diluted earnings per share will be presented. Basic earnings per share as
determined under SFAS 128 for the three-month periods ended March 31, 1996 and
1997, were $.08 and $.50, respectively. Diluted earnings per share for both
periods were the same as basic earnings per share.
NOTE 3 -- CONTINGENCIES
Litigation. On December 22, 1995, the United States District Court for the
Western District of Oklahoma entered a $10.8 million judgment in favor of the
Company against Midcon Offshore, Inc. ("Midcon") in connection with
non-performance by Midcon under an agreement to purchase a certain offshore
oil and gas property. The judgment amount was in addition to a $1.3 million
deposit previously paid by Midcon to the Company. In January 1996, Midcon
delivered a $10.8 million promissory note to the Company secured by first and
second liens on assets of Midcon, payable in full on or before December 15,
1996 in settlement of disputes in connection with this litigation. During
1996, the Company received principal and interest payments on the promissory
note totaling $1.7 million. On December 16, 1996, Midcon filed for protection
from its creditors under Chapter 11 of the United States Bankruptcy Code in
the United States Bankruptcy Court, Southern District of Texas, Corpus Christi
Division. On January 24, 1997, Midcon filed an action in the bankruptcy court
alleging that Midcon's action in connection with the settlement constituted
fraudulent transfers or avoidable preferences and seeking a return of amounts
paid. The Company considers the allegations of Midcon to be without merit and
will vigorously defend against this action. Collection of the remaining
<PAGE> 8
LOUIS DREYFUS NATURAL GAS CORP.
Condensed Notes to Consolidated Financial Statements (unaudited)
March 31, 1997
unpaid interest and principal on the Midcon note is uncertain and no amounts
have been recorded with respect thereto in the accompanying financial
statements as of March 31, 1997. The Company will recognize income as any
payments are received.
Fixed-Price Contracts. Two Fixed-Price Contracts which hedge an aggregate
103 Bcf of natural gas as of March 31, 1997 are with independent power
producers ("IPPs") which sell electrical power under firm fixed-price
contracts to Niagara Mohawk Corporation ("NIMO"), a New York state utility.
As of March 31, 1997, the net present value of the differential between the
fixed prices provided by these contracts and forward market prices, as
adjusted for estimated basis and discounted at 10%, was approximately $137
million. This premium in the fixed prices is not reflected in the Company's
financial statements until realized. For the years ended December 31, 1994,
1995 and 1996, these contracts contributed $5.1 million, $9.6 million and $.9
million, respectively, to natural gas sales. The ability of these IPPs to
perform their obligations to the Company is largely dependent on the continued
performance by NIMO of its power purchase obligations to the IPPs. In recent
years, NIMO has taken aggressive regulatory, judicial and contractual actions
seeking to curtail power purchase obligations, including its obligations to
the IPPs that are counterparties to the Company's Fixed-Price Contracts.
These actions have not been successful. Further, NIMO has stated that its
future financial prospects are dependent on its ability to resolve these
obligations, along with other matters.
On August 1, 1996, NIMO announced an offer to terminate 44 independent power
contracts, including those to the Company's counterparties, in exchange for a
combination of cash and debt securities from a newly restructured NIMO. On
March 10, 1997, NIMO announced that an agreement in principle had been reached
with the IPPs to restructure or terminate such power contracts. This agreement
in principle is subject to negotiation of final agreements, regulatory and
shareholder approvals and other conditions, and the specific terms of the
proposed agreements with the Company's counterparties have not been disclosed
to the Company. The Company is unable to determine the effect of these
proposed agreements on the Company. The loss of a contract would subject a
greater portion of the Company's oil and gas production to market prices and
could adversely affect the carrying value of the Company's oil and gas
properties and the amount of borrowing capacity available under the Credit
Facility.<PAGE>
<PAGE> 9
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
General. The Company's business strategy is to generate strong and
consistent growth in reserves, production, earnings and cash flows through a
balanced program of exploration and development drilling and strategic
acquisitions of oil and gas properties. Since its acquisition by S.A. Louis
Dreyfus et Cie in 1990, the Company's oil and gas reserves and production have
grown significantly as the result of a number of proved reserve acquisitions
and its active drilling program.
Over the three-year period ended December 31, 1996, the Company acquired 322
Bcfe of proved reserves through various acquisitions for a total consideration
of $191.4 million, or $.59 per Mcfe. Such acquisitions have been
geographically concentrated in regions where the Company has significant
expertise and where the Company benefits from operational synergies. The
Company intends to continue this acquisition strategy.
The Company's drilling program over the three-year period ended December 31,
1996 resulted in the drilling of 745 gross wells (450 net wells), with an
overall drilling success rate of 95%. This program added 251 Bcfe of proved
reserves (including revisions of previous estimates) during this period.
Total finding costs (total costs incurred to acquire, explore and develop oil
and gas properties divided by the increase in proved reserves through
acquisitions of proved properties, extensions and discoveries, and revisions
of previous estimates) over this three-year period averaged $.75 per Mcfe.
Recently, the Company has emphasized exploratory drilling as an integral
component of its operating strategy. During 1996, the Company invested $15
million in connection with exploration prospects, including drilling, seismic
data collection and leasehold acquisition activities. The Company has
allocated $25 million, or 25%, of its current capital budget for exploratory
activities in 1997.
The Company has a portfolio of long-term physical delivery contracts, energy
swaps, collars, futures contracts, basis swaps and option agreements
(collectively "Fixed-Price Contracts") designed to reduce the risk associated
with fluctuations in natural gas and oil prices. For the years ended December
31, 1994, 1995 and 1996, Fixed-Price Contracts hedged 98%, 84% and 51% of the
Company's natural gas production not otherwise subject to fixed prices and
91%, 86% and 67% of its oil production, respectively. Over the past few
years, competition in Fixed-Price Contracts has increased, the opportunities
for attractive Fixed-Price Contracts have diminished and spot prices for
natural gas are presently higher than nearby forward market prices. In
response to these changes, a progressively smaller share of the Company's
production and reserve growth has been hedged due to Management's reluctance
to sell into a forward market where prices trend down or are essentially flat
over the next several years. Management believes that the current
relationship between cash flow protection and exposure to oil and gas prices
<PAGE> 10
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
is an appropriate balance for the Company. However, the Company may decide to
hedge a greater or smaller share of production in the future, depending upon
market conditions, capital investment considerations and other factors. See
"Fixed-Price Contracts."
Forward-Looking Statements. All statements in this document concerning the
Company other than purely historical information (collectively
"Forward-Looking Statements") reflect the current expectations of Management
and are based on the Company's historical operating trends, its proved reserve
position as of December 31, 1996, its Fixed-Price Contract position as of
March 31, 1997, and other information currently available to management.
These statements assume, among other things, (i) that no significant changes
will occur in the operating environment for the Company's oil and gas
properties, and (ii) that there will be no material acquisitions or
divestitures except as disclosed herein. The Company cautions that the
Forward-Looking Statements are subject to all the risks and uncertainties
incident to the acquisition, development and marketing of, and exploration
for, oil and gas reserves. These risks include, but are not limited to,
commodity price risk, environmental risk, drilling risk, reserve, operations
and production risk, and counterparty risk. Many of these risks are described
elsewhere herein. Moreover, the Company may make material acquisitions,
modify its Fixed-Price Contract position by entering into new contracts or
terminating existing contracts, or enter into financing transactions. None of
these can be predicted with certainty and, accordingly, are not taken into
consideration in the Forward-Looking Statements made herein. For all of the
foregoing reasons, actual results may vary materially from the Forward-Looking
Statements and there is no assurance that the assumptions used are necessarily
the most likely.
Certain Definitions. As used herein, the abbreviations listed below are
defined as follows:
<TABLE>
<S> <C>
Bbl. 42 U.S. gallons, the basic unit for measuring crude oil and natural gas condensate.
Bcf. Volume of one billion cubic feet.
Bcfe. Bcf equivalent, determined using the ratio of one Bbl of oil or condensate to six Mcf of
natural gas.
BBtu. Billion Btus.
Btu. British thermal unit, which is the quantity of heat required to raise the temperature of
a one-pound mass of water from 58.5 to 59.5 degrees Fahrenheit.
MBbls. Volume of one thousand barrels.
Mcf. Volume of one thousand cubic feet, the basic unit for measuring natural gas.
Mcfe. Mcf equivalent, determined using the ratio of one Bbl of oil or condensate to six Mcf of
natural gas.
MMBbls. Volume of one million barrels.
MMBtu. Million Btus.
MMcf. Volume of one million cubic feet.
MMcfe. Mmcf equivalent, determined using the ratio of one Bbl of oil or condensate to six Mcf
of natural gas.
TBtu. Trillion Btus.
</TABLE>
<PAGE> 11
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Selected Operating Data. The following table provides certain operating data
relating to the Company's operations.
<TABLE>
<CAPTION>
SELECTED OPERATING DATA
Three Months Ended
March 31,
--------------------
1996 1997
-------- --------
<S> <C> <C>
OIL AND GAS SALES: (M$)
Wellhead oil sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,297 $ 9,517
Effect of Fixed-Price Contracts (1) . . . . . . . . . . . . . . . . . . . (198) (109)
-------- --------
Total oil sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,099 $ 9,408
======== ========
Wellhead natural gas sales. . . . . . . . . . . . . . . . . . . . . . . . $ 29,692 $ 46,596
Effect of Fixed-Price Contracts (1) . . . . . . . . . . . . . . . . . . . 1,393 (4,238)
-------- --------
Total natural gas sales . . . . . . . . . . . . . . . . . . . . . . . . . $ 31,085 $ 42,358
======== ========
PRODUCTION:
Oil production (MBbls). . . . . . . . . . . . . . . . . . . . . . . . . . 449 423
Natural gas production (MMcf) . . . . . . . . . . . . . . . . . . . . . . 14,580 15,476
Net equivalent production (MMcfe) . . . . . . . . . . . . . . . . . . . . 17,273 18,012
AVERAGE SALES PRICE:
Oil (per Bbl):
Wellhead price. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18.49 $ 22.52
Effect of Fixed-Price Contracts (1) . . . . . . . . . . . . . . . . . . (.44) (.26)
-------- --------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18.05 $ 22.26
======== ========
Average fixed price received under Fixed-Price Contracts. . . . . . . . $ 19.22 $ 22.32
Net effective realization (2) . . . . . . . . . . . . . . . . . . . . . 94% 99%
Natural gas (per Mcf):
Wellhead price. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.03 $ 3.01
Effect of Fixed-Price Contracts (1) . . . . . . . . . . . . . . . . . . .10 (.27)
-------- --------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.13 $ 2.74
======== ========
Average fixed price received under Fixed-Price Contracts. . . . . . . . $ 2.32 $ 2.50
Net effective realization (2) . . . . . . . . . . . . . . . . . . . . . 95% 102%
Equivalent price (per Mcfe) . . . . . . . . . . . . . . . . . . . . . . . $ 2.27 $ 2.87
EXPENSES: (per Mcfe)
Operating costs:
Lease operating . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .49 $ .47
Production taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 .16
General and administrative. . . . . . . . . . . . . . . . . . . . . . . . .25 .22
Depreciation, depletion and amortization - oil and gas. . . . . . . . . . .82 .81
(1) - Represents the hedging results from the Company's Fixed-Price Contracts. See
"Fixed-Price Contracts."
(2) - Represents the net effective price realized for the Company's hedged production (after
consideration for basis results and amortization of deferred hedging gains and losses) as
a percentage of the fixed prices in the Company's Fixed-Price Contracts. See
"Fixed-Price Contracts -- Market Risk."
</TABLE>
<PAGE> 12
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS -- THREE MONTHS ENDED MARCH 31, 1997 COMPARED
TO THREE MONTHS ENDED MARCH 31, 1996
Net Income and Cash Flows from Operating Activities. For the quarter ended
March 31, 1997, the Company realized net income of $14.0 million, or $.50 per
share, on total revenue of $61.1 million. This compares with net income of
$2.3 million, or $.08 per share, on total revenue of $39.9 million for the
first quarter of 1996. Cash flows from operating activities (before working
capital changes) for the first quarter of 1997 were $30.4 million compared to
$18.2 million reported for the first quarter of 1996. The increases in first
quarter 1997 earnings and cash flows were primarily driven by higher oil and
gas prices and, to a lesser extent, growth in natural gas production. In
addition, net income included a $5.5 million after-tax gain on the sale of a
West Texas waterflood property in January 1997. Cash flows provided by
operating activities after consideration of the net change in working capital
increased to $29.6 million from the $20.4 million reported for the first
quarter of 1996, primarily due to the reasons stated above.
Production. The Company produced 18.0 Bcfe for the first quarter of 1997
compared to 17.3 Bcfe for the prior-year first quarter, an increase of 4%.
Gas production increased to 15.5 Bcf compared to 14.6 Bcf for the first
quarter of 1996, an increase of 6%. This increase in production is
attributable to the results of the Company's drilling and acquisition programs
during the previous twelve months. Oil production for the first quarter of
1997 decreased 6% to 423 MBbls compared to 449 MBbls for the prior-year first
quarter. This decline is primarily attributable to the sale of the West Texas
waterflood property in January 1997.
Oil and Gas Prices. On a natural gas equivalent basis, the Company received
an average price of $2.87 per Mcfe for the quarter ended March 31, 1997, an
increase of 26% from the $2.27 received for the first quarter of 1996. The
Company's gas production yielded an average price of $2.74 per Mcf, an
improvement of 29% compared to $2.13 per Mcf for the prior-year first quarter.
The Company's average gas price for the 1997 first quarter was reduced $.27
per Mcf as a result of the Company's hedging activities. The average gas
price for the first quarter of 1996 was enhanced $.10 as a result of the
Fixed-Price Contracts in effect for that period. The average oil price for
the first quarter of 1997 was $22.26 per Bbl compared to $18.05 per Bbl for
the prior-year first quarter. The 1997 first quarter average oil price was
reduced $.26 per Bbl as a result of the Company's hedging activities.
Fixed-Price contracts in effect during the first quarter of 1996 decreased the
average oil price by $.44 per Bbl.
The combination of higher gas production and higher gas prices increased gas
sales to $42.4 million for the first quarter of 1997 compared to $31.1 million
for the first quarter of 1996. The net effect of lower oil production and
higher oil prices was to increase oil sales to $9.4 million from the $8.1
million reported for the prior-year quarter. The aggregate impact of the
Company's oil and gas hedging activities was to decrease oil and gas sales by
<PAGE> 13
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
$4.3 million for the quarter ended March 31, 1997 and to increase oil and gas
sales by $1.2 million for the quarter ended March 31, 1996. See "Fixed-Price
Contracts."
Gain on Sales of Property and Equipment. Gain on sales of property and
equipment for the first quarter of 1997 was $8.6 million, the majority of
which was realized upon the sale of a non-core West Texas waterflood property
in January 1997. Gain on sales of property and equipment for the first
quarter of 1996 was immaterial.
Other Income. Other income for the first quarter of 1997 was $.7 million
compared to $.6 million for the first quarter of 1996. This increase in other
income is primarily attributable to gas gathering income from a gathering
system acquired in the fourth quarter of 1996.
Operating Costs. Operating costs, which include lease operating expenses
and production taxes, increased to $11.3 million for the first quarter of 1997
compared to $10.4 million for the first quarter of 1996. This increase is
principally attributable to properties acquired and wells drilled during the
previous twelve months. On a natural gas equivalent unit of production basis,
lease operating expenses were $.47 and $.49 for the three months ended March
31, 1997 and 1996, respectively. This improvement is due, in part, to the
sale of the West Texas waterflood property sold in January 1997 which had
higher average operating costs per unit of production.
General and Administrative Expense. General and administrative expense
("G&A") for the first quarter of 1997 was $4.0 million, a decrease of 6% from
the prior-year first quarter amount of $4.3 million. On a natural gas
equivalent unit of production basis, G&A decreased 12% to $.22 per unit of
production for the 1997 first quarter compared to $.25 for the first quarter
of 1996. These decreases are primarily attributable to growth in oil and gas
production without corresponding increases in personnel costs.
Exploration Costs. Exploration costs, comprised of geological and
geophysical costs, exploratory dry holes and leasehold impairment costs, were
$2.2 million for the quarter ended March 31, 1997. This amount includes $.7
million of seismic costs incurred during the quarter.
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization ("DD&A") for the first quarter of 1997 was $15.8 million compared
to $15.1 million for the prior-year first quarter. This increase in DD&A is
attributable to the increase in production volumes previously discussed. The
oil and gas DD&A rate per equivalent unit of production was $.81 for the 1997
first quarter compared to $.82 for the first quarter of 1996.
Interest Expense. Interest expense for the first quarter of 1997 was $6.3
million compared to $6.7 million for the first quarter of 1996. This decrease
is primarily attributable to a lower level of outstanding indebtedness for the
<PAGE> 14
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
1997 first quarter. The net impact of interest rate swaps in effect for the
first quarter of 1997 was to increase interest expense by $.1 million. The
net impact of interest rate swaps in effect during the first quarter of 1996
was to increase interest expense by $.2 million. See "Capital Resources and
Liquidity -- Credit Facility."
Income Taxes. For the first quarter of 1997, the Company recorded a tax
provision of $7.6 million on pretax income of $21.6 million, an effective rate
of 35%. This compares to an income tax provision of $1.1 million provided on
pretax income of $3.4 million, an effective rate of 33%, for the first quarter
of 1996. The effective rate for both quarters was lower than the statutory
rate primarily due to the availability of Section 29 credits.
CAPITAL RESOURCES AND LIQUIDITY
Cash Flows. The Company's business of acquiring, exploring and developing
oil and gas properties is capital intensive. The Company's ability to grow
its reserve base is contingent, in part, upon its ability to generate cash
flows from operating activities and to access outside sources of capital to
fund its investing activities. For the quarters ended March 31, 1996 and
1997, the Company expended $22.0 million and $34.8 million, respectively, in
oil and gas property acquisition, exploration and development activities,
representing substantially all of the cash flow invested by the Company during
the three-month periods. See "Commitments and Capital Expenditures." Cash
flows from operating activities before changes in working capital for the
quarters ended March 31, 1996 and 1997 were $18.2 million and $30.4 million,
representing 83% and 87%, respectively, of the oil and gas property
investments made for each quarter. Substantially all of the cash flows from
operating activities are generated from oil and gas sales which are highly
dependent upon oil and gas prices. Significant decreases in the market prices
of oil or gas could result in reductions of both cash flows from operating
activities and the amount available for borrowing under the bank credit
facility. This, in turn, could impact the amount of capital investment. See
"Fixed-Price Contracts" and "-- Credit Facility."
The Company received net proceeds of $26.2 million in connection with the
January 1997 sale of a non-core West Texas waterflood property. The proceeds
were applied initially to outstanding indebtedness. As a result, cash flows
from financing activities for the first quarter of 1997 reflected a net
application of cash of $18.6 million, compared to a $10.1 million source of
cash for the first quarter of 1996. Historically, the Company has relied upon
availability under various revolving bank credit facilities and proceeds from
the issuance of subordinated notes to fund its investing activities.
The Company's EBITDA increased from $25.2 million in the first quarter of
1996 to $43.6 million in the first quarter of 1997. EBITDA is defined herein
as income before interest, income taxes and DD&A. EBITDA before deduction of
exploration costs ("EBITDAX") was $25.2 million and $45.8 million for the
three-month periods ended March 31, 1996 and 1997, respectively. Increases in
<PAGE> 15
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
EBITDA have occurred primarily as a result of increases in the Company's oil
and gas sales. EBITDA is a financial measure commonly used in the oil and gas
industry as an indicator of a company's ability to service and incur debt.
The Company's bank credit facility and the indenture agreement for the 9-1/4%
Senior Subordinated Notes due 2004 include certain covenants based in part on
EBITDA. However, EBITDA should not be considered in isolation or as a
substitute for net income, cash flows provided by operating activities or
other data prepared in accordance with generally accepted accounting
principles, or as a measure of a company's profitability or liquidity. EBITDA
measures as presented may not be comparable to other similarly titled measures
of other companies.
Credit Facility. The Company has a revolving credit facility with
a syndicate of banks, as most recently amended July 31, 1996, which provides
up to $300 million in borrowings and letters of credit (the "Commitment"),
with letters of credit limited to $75 million of such availability. The
Commitment reduces at the rate of $18.75 million per quarter commencing
October 31, 1999 through July 31, 2003. Borrowings and letters of credit
under the Credit Facility are limited to the lesser of the Commitment or the
Oil and Gas Reserves Loan Value. The Oil and Gas Reserves Loan Value is a
borrowing base calculation determined by a periodic valuation of the Company's
oil and gas reserves and Fixed-Price Contracts. The Oil and Gas Reserves Loan
Value was increased in April 1997 from $330 million to $400 million. The
Company has relied upon the Credit Facility to provide funds for acquisitions
and to provide letters of credit to meet the Company's margin requirements
under Fixed-Price Contracts. See "Fixed-Price Contracts -- Margining." As of
March 31, 1997, the Company had $223.0 million of principal and $2.8 million
of letters of credit outstanding under the Credit Facility.
The Company has the option of borrowing at a LIBOR-based interest rate or
the Base Rate (approximating the prime rate). The agreement also provides for
a competitive bid option for borrowings under the facility. The LIBOR
interest rate margin and the commitment fee payable under the Credit Facility
are subject to a sliding scale based on the relationship of outstanding
indebtedness to the Present Value of the Company's oil and gas reserves and
Fixed-Price Contracts. The LIBOR interest rate margin varies from .25% to
.55% per annum. At March 31, 1997, the applicable interest rate was LIBOR
plus .30%. The Credit Facility also requires the payment of a facility fee
equal to .20% of the Commitment.
The Credit Facility contains various affirmative and restrictive covenants.
These covenants, among other things, limit additional indebtedness, the extent
to which volumes under Fixed-Price Contracts can exceed proved reserves in any
year and in the aggregate, the sale of assets and the payment of dividends,
and require the Company to meet certain financial tests. Borrowings under the
Credit Facility are unsecured.
The Company has entered into interest rate swaps to hedge the interest rate
<PAGE> 16
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
exposure associated with the Credit Facility. As of March 31, 1997, the
Company had fixed the interest rate on average notional amounts of $148
million for the balance of 1997, and $99 million and $33 million for the years
ended December 31, 1998 and 1999, respectively. Under the interest rate
swaps, the Company receives the LIBOR three-month rate (5.8% at March 31,
1997) and pays an average rate of 6.0% for the balance of 1997, 6.3% for 1998
and 6.5% for 1999. The notional amounts are less than the maximum amount
anticipated to be available under the Credit Facility in such years. As of
March 31, 1997, the effective interest rate for borrowings under the Credit
Facility was 6.4%. The Company has an additional interest rate swap under
which the Company pays the LIBOR three-month rate and receives 7.1% on a
notional amount of $25 million. This interest rate swap matures June 2004.
For each interest rate swap, the differential between the fixed rate and the
floating rate multiplied by the notional amount is the swap gain or loss.
Such gain or loss is included in interest expense in the period for which the
interest rate exposure was hedged. If an interest rate swap is liquidated or
sold prior to maturity, the gain or loss is deferred and amortized as interest
expense over the original contract term. At March 31, 1997, the amount of
such deferrals was not material.
Subordinated Notes. In June 1994, the Company completed the sale of $100
million of 9-1/4% Senior Subordinated Notes due 2004 (the "Notes") in a public
offering. The Notes were sold at 98.534% of face value to yield 9.48% to
maturity. Interest is payable semi-annually on June 15 and December 15. The
associated indenture agreement contains certain restrictive covenants which
limit, among other things, the prepayment of the Notes, the incurrence of
additional indebtedness, the payment of dividends and the disposition of
assets.
Other. The Company has certain other unsecured lines of credit available
to it which aggregated $60 million as of March 31, 1997. Such short-term
lines of credit are primarily used to meet margining requirements under
Fixed-Price Contracts and for working capital purposes. As of March 31, 1997,
the Company had $7.5 million of indebtedness and $17.9 million of letters of
credit outstanding under such credit lines. Repayment of indebtedness
thereunder is expected to be made through Credit Facility availability.
The Company believes that the borrowing capacity currently available and to
be made available upon future Oil and Gas Reserves Loan Value redeterminations
under the Credit Facility, combined with the Company's internal cash flows,
will be adequate to finance the capital expenditure program planned for the
balance of 1997 and to meet the Company's margin requirements under its
Fixed-Price Contracts. See "Commitments and Capital Expenditures" and
"Fixed-Price Contracts -- Margining." At March 31, 1997, the Company had
working capital of $7.5 million and a current ratio of 1.2 to 1. Total
long-term debt outstanding at March 31, 1997 was $329.4 million. The
Company's long-term debt as a percentage of its total capitalization was 54%.
<PAGE> 17
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
COMMITMENTS AND CAPITAL EXPENDITURES
The Company's primary business strategy is to increase oil and gas
production and reserves through acquisition, development and exploration
activities. For the quarter ended March 31, 1997, the Company expended $34.8
million in connection with this strategy, including $24.9 million for
development activities, $7.0 million for proved reserve acquisitions and $2.9
million for exploration activities, the majority of which was leasehold and
seismic costs. For the balance of 1997, the Company currently plans to spend
approximately $70 million in connection with its drilling program focused
principally in its core operating areas of Sonora, the Mid-Continent, the Gulf
Coast and the Permian Basin. Such planned expenditure levels include
approximately $20 million of additional exploratory drilling, leasehold and
seismic costs. Actual levels of development and exploration expenditures may
vary due to many factors, including drilling results, new drilling
opportunities, oil and natural gas prices and acquisition opportunities. As
of March 31, 1997, the Company had drilled 44 wells, 42 of which were
successfully completed as producers, and an additional 11 wells were in
progress.
The Company continues to actively search for attractive proved reserve
acquisitions but is not able to predict the timing or amount of capital
expenditure which may be employed in acquisitions during 1997 and is not
currently obligated to make any material acquisitions.
FIXED-PRICE CONTRACTS
Description of Contracts. The Company has entered into Fixed-Price
Contracts to reduce its exposure to unfavorable changes in oil and gas prices
which are subject to significant and often volatile fluctuation. The
Company's Fixed-Price Contracts are comprised of long-term physical delivery
contracts, energy swaps, collars, futures contracts, basis swaps and option
agreements. These contracts allow the Company to predict with greater
certainty the effective oil and gas prices to be received for its hedged
production and benefit the Company when market prices are less than the fixed
prices provided in its Fixed-Price Contracts. However, the Company will not
benefit from market prices that are higher than the fixed prices in such
contracts for its hedged production. For the years ended December 31, 1994,
1995 and 1996, Fixed-Price Contracts hedged 98%, 84% and 51% of the Company's
natural gas production not otherwise subject to fixed prices and 91%, 86% and
67% of its oil production, respectively. For the quarter ended March 31,
1997, Fixed-Price Contracts hedged 57% of the Company's natural gas production
and 43% of its oil production for the quarter. As of March 31, 1997,
Fixed-Price Contracts are in place to hedge 340 Bcf of the Company's estimated
future production from proved gas reserves and 182 MBbls of its 1997 oil
production. See Note 3 of the Condensed Notes to Consolidated Financial
Statements, "Contingencies -- Fixed-Price Contracts," appearing elsewhere in
this document.
<PAGE> 18
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
For energy swap sales contracts, the Company receives a fixed price for the
respective commodity and pays a floating market price, as defined in each
contract (generally NYMEX futures prices or a regional spot market index), to
the counterparty. For physical delivery contracts, the Company purchases gas
in the spot market at floating market prices and delivers such gas to the
contract counterparty at a fixed price. Under energy swap purchase contracts,
the Company pays a fixed price for the commodity and receives a floating
market price.
The following table summarizes the estimated volumes, fixed prices,
fixed-price sales, fixed-price purchases and future net revenues (as defined
below) attributable to the Company's Fixed-Price Contracts as of March 31,
1997.
<PAGE>
<PAGE> 19
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
<TABLE>
<CAPTION>
FIXED-PRICE CONTRACTS
Nine
Months
Ending
December Years Ending December 31, Balance
31, -------------------------------------- through
1997 1998 1999 2000 2001 2017 Total
-------- -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
NATURAL GAS SWAPS
Sales Contracts:
Contract volumes
(BBtu) . . . . . . . . . 5,118 13,825 15,825 9,830 7,475 29,832 81,905
Weighted average fixed
price per MMBtu (1). . . $ 2.25 $ 2.33 $ 2.44 $ 2.46 $ 2.47 $ 3.08 $ 2.65
Future fixed-price sales
(M$) . . . . . . . . . . $ 11,536 $ 32,243 $ 38,629 $ 24,164 $ 18,446 $ 92,005 $ 217,023
Future net revenues
(M$) (2) . . . . . . . . $ 1,161 $ 3,349 $ 4,764 $ 2,784 $ 2,039 $ 24,369 $ 38,466
Purchase Contracts:
Contract volumes (BBtu). . (1,975) (9,125) (10,950) -- -- -- (22,050)
Weighted average fixed
price per MMBtu (1). . . . $ 2.01 $ 2.09 $ 2.18 $ -- $ -- $ -- $ 2.13
Future fixed-price
purchases (M$) . . . . . . $ (3,965)$(19,108) $(23,880) $ -- $ -- $ -- $ (46,953)
Future net revenues
(M$) (2) . . . . . . . . $ 36 $ (37) $ (447) $ -- $ -- $ -- $ (448)
NATURAL GAS PHYSICAL
DELIVERY CONTRACTS
Contract volumes (BBtu). . 25,696 36,060 28,204 26,749 27,300 134,096 278,105
Weighted average fixed
price per MMBtu (1). . . . $ 2.48 $ 2.64 $ 2.84 $ 3.04 $ 3.19 $ 4.11 $ 3.45
Future fixed-price
sales (M$) . . . . . . . . $ 63,706 $ 95,130 $ 80,125 $ 81,403 $ 86,963 $551,455 $ 958,782
Future net revenues
(M$) (2) . . . . . . . . $ 11,297 $ 19,793 $ 19,606 $ 22,689 $ 26,618 $213,104 $ 313,107
TOTAL NATURAL GAS
CONTRACTS (3) (4)
Contract volumes (Bbtu). . 28,839 40,760 33,079 36,579 34,775 163,928 337,960
Weighted average fixed
price per MMBtu (1). . . $ 2.47 $ 2.66 $ 2.87 $ 2.89 $ 3.03 $ 3.93 $ 3.34
Future fixed-price
sales (M$) . . . . . . . $ 71,277 $108,265 $ 94,874 $105,567 $105,409 $643,460 $1,128,852
Future net revenues
(M$) (2) . . . . . . . . $ 12,494 $ 23,105 $ 23,923 $ 25,473 $ 28,657 $237,473 $ 351,125
CRUDE OIL SWAPS
Contract volumes (MBbls) . 182 -- -- -- -- -- 182
Weighted average fixed
price per Bbl (1). . . . $ 22.32 $ -- $ -- $ -- $ -- $ -- $ 22.32
Future fixed-price
sales (M$) . . . . . . . $ 4,062 $ -- $ -- $ -- $ -- $ -- $ 4,062
Future net revenues
(M$) (2) . . . . . . . . $ 323 $ -- $ -- $ -- $ -- $ -- $ 323
<PAGE> 20
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
FIXED-PRICE CONTRACTS (continued)
<FN>
(1)- The Company expects the prices to be realized for its hedged production will vary from the
prices shown dues to location, quality and other factors which create a differential
between wellhead prices and the floating prices under its Fixed-Price contracts. See "--
Market Risk."
(2)- Future net revenues for any period are determined as the differential between the fixed
prices provided by Fixed-Price Contracts and forward market prices as of March 31, 1997, as
adjusted for estimated basis. Future net revenues change as market prices and basis
fluctuate. See "--Market Risk."
(3)- Does not include basis swaps with notional volumes by year, as follows: 1997 - 16.7 TBtu;
1998 - 24.5 TBtu; 1999 - 19.0 TBtu; 2000 - 21.3 TBtu; 2001 - 9.4 TBtu; and 2002 - 5.5 Tbtu.
(4)- Does not include 1.8 TBtu of natural gas hedged by a fixed-price collar for April through
September 1997 with a floor price of $2.22 per MMBtu and a ceiling price of $2.84 per
MMBtu.
</TABLE>
The estimates of the future net revenues from the Company's Fixed-Price
Contracts contained herein are computed based on the difference between the
prices provided by the Fixed-Price Contracts and forward market prices as of
the specified date. Such estimates do not necessarily represent the fair
market value of the Company's Fixed-Price Contracts or the actual future net
revenues that will be received. The forward market prices for natural gas and
oil are highly volatile, are dependent upon supply and demand factors in such
forward market and may not correspond to the actual market prices at the
settlement dates of the Company's Fixed-Price Contracts. Such forward market
prices are available in a limited over-the-counter market and are obtained
from sources the Company believes to be reliable.
Accounting. The differential between the fixed price and the floating price
for each contract settlement period multiplied by the associated contract
volumes is the contract profit or loss. The realized contract profit or loss
is included in oil and gas sales in the period for which the underlying
commodity was hedged. All of the Company's Fixed-Price Contracts have been
executed in connection with its natural gas and crude oil hedging program and
not for trading purposes. Consequently, no amounts are reflected in the
Company's balance sheet or income statement related to changes in market value
of the contracts. If a Fixed-Price Contract is liquidated or sold prior to
maturity, the gain or loss is deferred and amortized into oil and gas sales
over the original life of the contract. At March 31, 1997, the Company had
$25.3 million of unamortized deferred hedging gains recorded on its balance
sheet. Prepayments received under Fixed-Price Contracts with continuing
performance obligations are recorded as deferred revenue and amortized into
oil and gas sales over the term of the underlying contract. At March 31,
1997, the Company had $18.7 million of deferred revenue recorded on its
balance sheet.
Credit Risk. The terms of the Company's Fixed-Price Contracts generally
provide for monthly settlements and energy swap contracts provide for the
<PAGE> 21
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
netting of payments. The counterparties to the contracts are comprised of
independent power producers, pipeline marketing affiliates, financial
institutions, a municipality and S.A. Louis Dreyfus et Cie, among others. In
some cases, the Company requires letters of credit or corporate guarantees to
secure the performance obligations of the contract counterparty. Should a
counterparty to a contract default on a contract, there can be no assurance
that the Company would be able to enter into a new contract with a third party
on terms comparable to the original contract. The loss of a contract would
subject a greater portion of the Company's oil and gas production to market
prices and could adversely affect the carrying value of the Company's oil and
gas properties and the amount of borrowing capacity available under the Credit
Facility. The Company has not experienced non-performance by any
counterparty. See Note 3 of the Condensed Notes to Consolidated Financial
Statements, "Contingencies -- Fixed-Price Contracts," appearing elsewhere in
this document.
Market Risk. The Company's Fixed-Price Contracts at March 31, 1997 hedge
340 Bcf of proved natural gas reserves, substantially all of which are proved
developed reserves, and 182 MBbls of oil at fixed prices. If the Company's
proved reserves are produced at rates less than anticipated, the volumes
specified under the Fixed-Price Contracts may exceed production volumes. In
such case, the Company would be required to satisfy its contractual
commitments at market prices in effect for each settlement period, which may
be above the contract price, without a corresponding offset in wellhead
revenue for such volumes. The Company expects future production volumes to be
equal to or greater than the volumes provided for in its contracts.
The differential between the floating price paid under each energy swap
contract, or the cost of gas to supply physical delivery contracts, and the
price received at the wellhead for the Company's production is termed "basis"
and is the result of differences in location, quality, contract terms, timing
and other variables. The effective price realizations which result from the
Company's Fixed-Price Contracts are affected by movements in basis. For the
years ended December 31, 1994, 1995 and 1996, the Company received on an Mcf
basis approximately 11%, 3% and 3% less than the prices specified in its
natural gas Fixed-Price Contracts, respectively, due to basis. For its oil
production hedged by Fixed-Price Contracts, the Company realized approximately
8%, 7% and 4% less than the specified contract prices for such years,
respectively. For the quarter ended March 31, 1997, the Company received
prices which were approximately 2% more and 1% less than the prices specified
in its natural gas contracts and crude oil contracts, respectively. Basis
results for the first quarter of 1997 are not necessarily indicative of the
results to be expected for the full year. Basis movements can result from a
number of variables, including regional supply and demand factors, changes in
the Company's portfolio of Fixed-Price Contracts and the composition of the
Company's producing property base. Basis movements are generally considerably
less than the price movements affecting the underlying commodity, but their
effect can be significant. A 1% change in price realization for hedged
<PAGE> 22
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
natural gas production for the balance of 1997 would represent a $715,000
change in gas sales. A 1% change in price realization for hedged oil
production for the balance of 1997 would represent a $40,000 change in oil
sales. The Company actively manages its exposure to basis movements and from
time to time will enter into contracts designed to reduce such exposure.
Margining. The Company is required to post margin in the form of bank
letters of credit or treasury bills under certain of its Fixed-Price
Contracts. In some cases, the amount of such margin is fixed; in others, the
amount changes as the market value of the respective contract changes, or if
certain financial tests are not met. For the years ended December 31, 1994,
1995, and 1996, the maximum aggregate amount of margin posted by the Company
was $41.0 million, $23.4 million, and $25.9 million, respectively. For the
quarter ended March 31, 1997, the highest amount of posted margin was $25.4
million. If natural gas prices were to rise, or if the Company fails to meet
the financial tests contained in certain of its Fixed-Price Contracts, margin
requirements could increase significantly. The Company believes that it will
be able to meet such requirements through the Credit Facility and such other
credit lines that it has or may obtain in the future. If the Company is
unable to meet its margin requirements, a contract could be terminated and the
Company could be required to pay damages to the counterparty which generally
approximate the cost to the counterparty of replacing the contract. At March
31, 1997, the Company had issued margin in the form of letters of credit and
treasury bills totaling $19.8 million and $4.4 million, respectively. In
addition, approximately 30 Bcf of the Company's proved gas reserves are
mortgaged to a Fixed-Price Contract counterparty, securing the Company's
performance under the associated contract.
OUTLOOK FOR FISCAL 1997
Reference is made to "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Outlook for Fiscal Year 1997" included
in the Company's Annual Report on Form 10-K/A for the year ended December 31,
1996 for an expanded discussion of 1997 estimates. Subject to the
uncertainties identified in "Forward-Looking Statements," no material
modifications to previously disclosed estimates are deemed necessary.<PAGE>
<PAGE> 23
LOUIS DREYFUS NATURAL GAS CORP.
PART II. OTHER INFORMATION
Item 1 -- None
Item 2 -- None
Item 3 -- None
Item 4 -- None
Item 5 -- None
Item 6 -- Exhibits and Reports on Form 8-K
Exhibits:
27.1 -- Financial Data Schedule (previously filed).
No reports on Form 8-K.
<PAGE>
<PAGE> 24
LOUIS DREYFUS NATURAL GAS CORP.
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.
LOUIS DREYFUS NATURAL GAS CORP.
---------------------------------------
(Registrant)
Date: June 27, 1997 /s/ Jeffrey A. Bonney
---------------------------------------
Jeffrey A. Bonney
Vice President and Chief Accounting Officer
