<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
---------- ----------
Commission File Number 1-12480
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 .
----- -----
27,802,000 shares of common stock, $.01 par value, issued and outstanding at
July 29, 1997.
<PAGE>
<PAGE> 2
LOUIS DREYFUS NATURAL GAS CORP.
Table of Contents
PART I. FINANCIAL INFORMATION Page
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Consolidated Balance Sheets:
December 31, 1996 and June 30, 1997. . . . . . . . . . . . . . . . . 3
Consolidated Statements of Income:
Three months and six months ended June 30, 1996 and 1997 . . . . . . 5
Consolidated Statements of Cash Flows:
Six months ended June 30, 1996 and 1997. . . . . . . . . . . . . . . 6
Condensed Notes to Consolidated Financial Statements . . . . . . . . . 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . . 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
. 26
PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . 27
<PAGE>
<PAGE> 3
LOUIS DREYFUS NATURAL GAS CORP.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
A S S E T S
December 31, June 30,
1996 1997
----------- -----------
(unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents. . . . . . . . . . . . . $ 7,749 $ 4,160
Receivables:
Oil and gas sales . . . . . . . . . . . . . . . . 33,579 26,033
Joint interest and other. . . . . . . . . . . . . 5,358 6,045
Deposits . . . . . . . . . . . . . . . . . . . . . 5,592 2,956
Inventory and other. . . . . . . . . . . . . . . . 3,147 3,612
----------- -----------
Total current assets . . . . . . . . . . . . . . . 55,425 42,806
----------- -----------
PROPERTY AND EQUIPMENT, at cost, based on
successful efforts accounting . . . . . . . . . . 907,027 949,756
Less accumulated depreciation, depletion
and amortization. . . . . . . . . . . . . . . . . (235,162) (259,776)
----------- -----------
671,865 689,980
----------- -----------
OTHER ASSETS, net. . . . . . . . . . . . . . . . . 6,323 5,390
----------- -----------
$ 733,613 $ 738,176
=========== ===========
</TABLE>
<PAGE> 4
LOUIS DREYFUS NATURAL GAS CORP.
CONSOLIDATED BALANCE SHEETS (continued)
(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, June 30,
1996 1997
----------- -----------
(unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable . . . . . . . . . . . . . . . . . $ 36,415 $ 26,831
Accrued liabilities. . . . . . . . . . . . . . . . 7,251 7,076
Revenues payable . . . . . . . . . . . . . . . . . 7,419 7,633
----------- -----------
Total current liabilities . . . . . . . . . . . . 51,085 41,540
----------- -----------
LONG-TERM DEBT . . . . . . . . . . . . . . . . . . 343,907 335,980
----------- -----------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred revenue . . . . . . . . . . . . . . . . . 19,049 18,245
Deferred gains from price-risk
management activities . . . . . . . . . . . . . . 26,226 24,118
Deferred income taxes. . . . . . . . . . . . . . . 22,692 31,756
Other. . . . . . . . . . . . . . . . . . . . . . . 6,961 4,587
----------- -----------
74,928 78,706
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 27,802,000 shares, respectively. . 278 278
Additional paid-in capital . . . . . . . . . . . . 197,301 197,318
Retained earnings. . . . . . . . . . . . . . . . . 66,114 84,354
----------- -----------
263,693 281,950
----------- -----------
$ 733,613 $ 738,176
=========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 5
LOUIS DREYFUS NATURAL GAS CORP.
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
(in thousands, except per share data)
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1996 1997 1996 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES
Oil and gas sales. . . . . . . . . . . $ 44,455 $ 44,336 $ 83,639 $ 96,102
Gain (loss) on sales of property
and equipment . . . . . . . . . . . . (96) 45 (66) 8,617
Other income . . . . . . . . . . . . . 1,457 559 2,093 1,283
-------- -------- -------- --------
45,816 44,940 85,666 106,002
-------- -------- -------- --------
EXPENSES
Operating costs. . . . . . . . . . . . 11,104 10,575 21,544 21,865
General and administrative . . . . . . 4,118 3,899 8,371 7,891
Exploration costs. . . . . . . . . . . 242 1,249 242 3,414
Depreciation, depletion and
amortization. . . . . . . . . . . . . 16,661 16,498 31,724 32,251
Interest . . . . . . . . . . . . . . . 6,925 6,250 13,657 12,519
-------- -------- -------- --------
39,050 38,471 75,538 77,940
-------- -------- -------- --------
Income before income taxes . . . . . . 6,766 6,469 10,128 28,062
Income taxes . . . . . . . . . . . . . 2,232 2,264 3,342 9,822
-------- -------- -------- --------
NET INCOME . . . . . . . . . . . . . . $ 4,534 $ 4,205 $ 6,786 $ 18,240
======== ======== ======== ========
Net income per share . . . . . . . . . $ .16 $ .15 $ .24 $ .66
======== ======== ======== ========
Weighted average common shares
outstanding . . . . . . . . . . . . . 27,800 27,802 27,800 27,801
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 6
LOUIS DREYFUS NATURAL GAS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
- ------------------
1996 1997
- -------- --------
<S>
<C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
6,786 $ 18,240
Items not affecting cash flows:
Depreciation, depletion and amortization . . . . . . . . . . . . . . . . .
31,724 32,251
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . .
2,620 9,064
Exploration costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
242 3,414
(Gain) loss on sales of property and equipment . . . . . . . . . . . . . .
66 (8,617)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
236 119
Net change in operating assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,251) 6,859
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(35) 2,636
Inventory and other. . . . . . . . . . . . . . . . . . . . . . . . . . . .
(541) (465)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,027) (9,584)
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . .
869 (175)
Revenues payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
713 214
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(4,310) --
- -------- --------
36,092 53,956
- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Oil and gas property expenditures . . . . . . . . . . . . . . . . . . . . .
(76,162) (70,087)
Additions to other property and equipment . . . . . . . . . . . . . . . . .
(1,417) (1,034)
Proceeds from sale of property and equipment. . . . . . . . . . . . . . . .
291 26,862
Expenditures for other assets . . . . . . . . . . . . . . . . . . . . . . .
-- --
- -------- --------
(77,288) (44,259)
- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term bank borrowings . . . . . . . . . . . . . . . . . .
150,805 123,575
Repayments of long-term bank borrowings . . . . . . . . . . . . . . . . . .
(127,705) (131,575)
Proceeds from stock options exercised . . . . . . . . . . . . . . . . . . .
-- 17
Change in deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . .
(1,112) (804)
Change in gains from price-risk management activities . . . . . . . . . . .
28,477 (2,108)
Change in other long-term liabilities . . . . . . . . . . . . . . . . . . .
(213) (2,391)
- -------- --------
50,252 (13,286)
Change in cash and cash equivalents . . . . . . . . . . . . . . . . . . . .
9,056 (3,589)
Cash and cash equivalents, beginning of period. . . . . . . . . . . . . . .
1,584 7,749
- -------- --------
Cash and cash equivalents, end of period. . . . . . . . . . . . . . . . . . $
10,640 $ 4,160
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid, net of capitalized interest. . . . . . . . . . . . . . . . . $
12,395 $ 11,713
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
668 462
- -------- --------
$
13,063 $ 12,175
======== ========
</TABLE>
See accompanying notes to consolidated financial
statements.
<PAGE> 7
LOUIS DREYFUS NATURAL GAS CORP.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
JUNE 30, 1997
NOTE 1 -- ACCOUNTING PRINCIPLES AND BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Louis
Dreyfus Natural Gas Corp. (the "Company" or "LDNG") 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 and six-month
periods ended June 30, 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, as amended, 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 and diluted earnings per
share as determined under SFAS 128 for the three-month and six-month periods
ended June 30, 1996 and 1997, were the same as the respective net income per
share amounts shown on the accompanying Consolidated Statements of Income.
NOTE 3 -- MERGER WITH AMERICAN EXPLORATION COMPANY
On June 24, 1997, the Company and American Exploration Company ("American")
jointly announced the signing of a definitive agreement to merge companies.
Under the agreement, holders of American common stock will receive .72 shares
of LDNG common stock and $3.00 cash for each share of American common stock.
Based on the number of outstanding shares of American as of June 24, 1997, the
Company anticipates the issuance of 11.3 million shares of common stock and
cash consideration of $47.1 million at closing. Holders of American's $20
million convertible preferred stock will receive LDNG preferred shares.
Shares of preferred stock will be convertible thereafter at the option of the
holders, unless earlier redeemed, into a total of 960,000 shares of LDNG
common stock plus $4 million cash.
Consummation of the transactions contemplated in the definitive agreement is
subject to the terms and conditions contained in the agreement, including,
among other things, approval by the respective shareholders of both companies.
Louis Dreyfus Natural Gas Holdings Corp., which owns approximately 72 percent
of the outstanding common stock of LDNG, has agreed to vote in favor of the
merger. The shareholder vote is expected to occur in late September.
<PAGE> 8
LOUIS DREYFUS NATURAL GAS CORP.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(continued)
JUNE 30, 1997
NOTE 4 -- 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
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 June 30, 1997. The Company will recognize income as any
payments are received.
Fixed-Price Contracts. Two fixed-price contracts which hedge an aggregate
101 Bcf of natural gas as of June 30, 1997 are with independent power
producers ("IPPs") which sell electric power under firm fixed-price contracts
to Niagara Mohawk Corporation ("NIMO"), a New York state utility. As of June
30, 1997, the present value at a discount rate of 10% of the differential
between the fixed prices provided by these contracts and forward market
prices, as adjusted for estimated basis, was approximately $134 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 July 9, 1997, NIMO entered into a Master Restructuring Agreement (the
"MRA") with 16 IPPs, including the Company's counterparties. Pursuant to the
MRA, the power purchase agreements between NIMO and the IPPs would be
terminated, restated or amended, in exchange for an aggregate of $3.6
<PAGE> 9
LOUIS DREYFUS NATURAL GAS CORP.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(continued)
JUNE 30, 1997
billion in cash, $50 million in notes or cash, 46 million shares of NIMO
common stock and certain fixed-price swap contracts. The allocation of the
consideration among the IPPs has not been disclosed. The closing of the MRA
is conditioned upon, among other things, NIMO and the IPPs negotiating their
individual restated and amended contracts, the receipt of all regulatory
approvals, the receipt of all consents by third parties necessary for the
transactions contemplated by the MRA (including the termination of the
existing power purchase contracts and the termination or amendment of all
related third party agreements), the IPPs entering into new third party
arrangements which will enable each IPP to restructure its projects on a
reasonably satisfactory economic basis, NIMO having completed all necessary
financing arrangements and NIMO and the IPPs having received all necessary
approvals from their respective boards of directors, shareholders and
partners.
The Company anticipates that preliminary discussions with its IPP
counterparties will commence in the third quarter of 1997, but is unable to
determine the impact of the MRA on the Company at this time. The loss of a
contract would subject a greater portion of the Company's oil and gas
production to market prices, could adversely affect the carrying value of the
Company's oil and gas properties and the amount of borrowing capacity
available under its bank credit facility and could otherwise have an adverse
effect on the Company.
<PAGE>
<PAGE> 10
LOUIS DREYFUS NATURAL GAS CORP.
ITEM 2. 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, exploratory drilling has become an integral component of the
Company's 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
is an appropriate balance for the Company. However, the Company may decide to
<PAGE> 11
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
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 June
30, 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.
Specifically, the Forward-Looking Statements contained herein do not take into
consideration any effects of the proposed merger with American. 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:
CERTAIN DEFINITIONS
<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> 12
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 Six Months Ended
June 30, June 30,
------------------ ------------------
1996 1997 1996 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
OIL AND GAS SALES: (M$)
Wellhead oil sales . . . . . . . . . . $ 9,694 $ 8,008 $ 17,991 $ 17,525
Effect of Fixed-Price Contracts (1). . (907) 431 (1,105) 322
-------- -------- -------- --------
Total oil sales. . . . . . . . . . . . $ 8,787 $ 8,439 $ 16,886 $ 17,847
======== ======== ======== ========
Wellhead natural gas sales . . . . . . $ 35,316 $ 32,912 $ 65,008 $ 79,508
Effect of Fixed-Price Contracts (1). . 352 2,985 1,745 (1,253)
-------- -------- -------- --------
Total natural gas sales. . . . . . . . $ 35,668 $ 35,897 $ 66,753 $ 78,255
======== ======== ======== ========
TOTAL PRODUCTION:
Oil production (MBbls) . . . . . . . . 466 414 915 837
Natural gas production (MMcf). . . . . 16,389 16,129 30,969 31,605
Net equivalent production (MMcfe). . . 19,187 18,613 36,460 36,625
PRODUCTION HEDGED BY FIXED-PRICE
CONTRACTS:
Oil production (MBbls) . . . . . . . . 363 182 645 362
Natural gas production (MMcf). . . . . 7,225 8,760 15,594 17,568
Net equivalent production (MMcfe). . . 9,403 9,852 19,464 19,740
AVERAGE SALES PRICE:
Oil (per Bbl):
Wellhead price . . . . . . . . . . . $ 20.79 $ 19.34 $ 19.66 $ 20.95
Effect of Fixed-Price Contracts (1). (1.95) 1.04 (1.21) .38
-------- -------- -------- --------
Total. . . . . . . . . . . . . . . . $ 18.84 $ 20.38 $ 18.45 $ 21.33
======== ======== ======== ========
Average fixed price received under
Fixed-Price Contracts . . . . . . . $ 19.26 $ 22.32 $ 19.24 $ 22.32
Net effective realization (2). . . . 95% 97% 95% 98%
</TABLE>
<PAGE> 13
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
<TABLE>
<CAPTION>
SELECTED OPERATING DATA, continued
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1996 1997 1996 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Natural gas (per Mcf):
Wellhead price . . . . . . . . . . . $ 2.16 $ 2.04 $ 2.10 $ 2.52
Effect of Fixed-Price Contracts (1). .02 .19 .06 (0.04)
-------- -------- -------- --------
Total. . . . . . . . . . . . . . . . $ 2.18 $ 2.23 $ 2.16 $ 2.48
======== ======== ======== ========
Average fixed price received under
Fixed-Price Contracts. . . . . . . $ 2.37 $ 2.46 $ 2.34 $ 2.48
Net effective cash realization (2) . 93% 97% 94% 99%
Equivalent price (per Mcfe). . . . . . $ 2.32 $ 2.38 $ 2.29 $ 2.62
EXPENSES: (per Mcfe)
Operating costs:
Lease operating. . . . . . . . . . . $ .46 $ .45 $ .47 $ .46
Production taxes . . . . . . . . . . $ .12 $ .12 $ .12 $ .14
General and administrative . . . . . . $ .21 $ .21 $ .23 $ .22
Depreciation, depletion and
amortization - oil & gas . . . . . . $ .82 $ .82 $ .82 $ .82
<FN>
(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>
RESULTS OF OPERATIONS -- THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO
THREE
MONTHS ENDED JUNE 30, 1996
Net Income and Cash Flows from Operating Activities. For the quarter ended
June 30, 1997, the Company realized net income of $4.2 million, or $.15 per
share, on total revenue of $44.9 million. This compares with net income of
$4.5 million, or $.16 per share, on total revenue of $45.8 million for the
second quarter of 1996. Cash flows from operating activities (before working
capital changes) for the second quarter of 1997 increased to $24.1 million
from the $23.5 million reported for the second quarter of 1996. The modest
decline in second quarter 1997 earnings was principally the result of an
increase in 3-D seismic costs incurred in connection with the Company's
exploration drilling program. The increase in operating cash flows for the
<PAGE> 14
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
second quarter of 1997 was principally attributable to lower interest expense
and operating costs for the quarter. Cash flows provided by operating
activities after consideration for the net change in working capital increased
to $24.4 million compared to $15.6 million for the second quarter of 1996.
This increase is due to the reasons stated above for the second quarter of
1997, and to an increase in oil and gas receivables and a reduction in
deferred revenue for the second quarter of 1996.
Production. The Company produced 18.6 Bcfe for the second quarter of 1997
compared to 19.2 Bcfe for the prior year second quarter, a decrease of 3%.
Natural gas production decreased to 16.1 Bcf, down 2% from the 16.4 Bcf
produced in the second quarter of 1996. Oil production for the second quarter
of 1997 decreased 11% to 414 MBbls compared to 466 MBbls for the second
quarter of 1996. The decrease in oil production was primarily the result of
the sale of a non-core West Texas waterflood property in January 1997.
Oil and Gas Prices. On a natural gas equivalent basis, the Company received
an average price of $2.38 per Mcfe for the quarter ended June 30, 1997, a
slight increase from the $2.32 per Mcfe received for the second quarter of
1996. The Company's gas production yielded an average price of $2.23 per Mcf
compared to $2.18 per Mcf for the prior year second quarter. The average gas
price for the second quarter of 1997 was enhanced $.19 per Mcf as a result of
the Company's hedging activities. The average gas price for the second
quarter of 1996 increased $.02 per Mcf as a result of Fixed-Price Contracts in
effect for that period. The average oil price received for the second quarter
of 1997 was $20.38 per Bbl, an increase of 8% compared to $18.84 per Bbl for
the prior-year second quarter. The 1997 second quarter average oil price
increased $1.04 per Bbl as a result of the Company's hedging activities.
Fixed-Price Contracts hedging the Company's crude oil production during the
second quarter of 1996 decreased the average price by $1.95 per Bbl.
The net effect of lower gas production and higher average price increased
gas sales to $35.9 million for the second quarter of 1997 compared to $35.7
million for the second quarter of 1996. The net effect of lower oil
production and higher prices was to decrease oil sales by 4% to $8.4 million
from the $8.8 million reported for the second quarter of 1996. See additional
discussion under "Fixed-Price Contracts."
Other Income. Other income for the second quarter of 1997 was $.6 million
compared to $1.5 million for the second quarter of 1996. The 1996 second
quarter amount is higher primarily due to the receipt of a $1.0 million
installment payment from Midcon Offshore, Inc. in connection with a $10.8
million judgment in the Company's favor. See Note 4 of the Condensed Notes to
Consolidated Financial Statements, "Contingencies -- Litigation," appearing
elsewhere in this document.
Operating Costs. Operating costs, which include direct lease operating
expenses and production taxes, decreased to $10.6 million for the second
quarter of 1997 compared to $11.1 million for second quarter of 1996. This
<PAGE> 15
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
improvement is due, in part, to the sale of the West Texas waterflood property
sold in January 1997. On an equivalent unit of production basis, total
operating costs remained relatively constant at $.57 per Mcfe for the second
quarter of 1997 compared to $.58 per Mcfe for the prior-year second quarter.
General and Administrative Expense. General and administrative expense
("G&A") for the second quarter of 1997 was $3.9 million compared to $4.1
million for the prior-year second quarter. This improvement is primarily
attributable to an increase in overhead recoveries from third parties. On an
equivalent unit of production basis, G&A remained constant at $.21 per Mcfe
for the 1997 second quarter in relation to the prior-year second quarter.
Exploration Costs. Exploration costs, comprised of geological and
geophysical costs, exploratory dry holes and leasehold impairment costs were
$1.2 million for the quarter ended June 30, 1997 compared to $.2 million for
the second quarter of 1996. This increase is primarily due to higher seismic
costs incurred for the second quarter of 1997 in connection with the Company's
exploratory drilling program.
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization ("DD&A") for the second quarter of 1997 was $16.5 million
compared to $16.7 million for the prior-year second quarter. This decrease in
DD&A is attributable to the decrease in production volumes previously
discussed. The oil and gas DD&A rate per equivalent unit of production
(including leasehold impairment) remained constant at $.82 per Mcfe for the
second quarter of 1997 compared to the second quarter of 1996.
Interest Expense. Interest expense for the second quarter of 1997 was $6.3
million compared to $6.9 million for the second quarter of 1996. This
decrease is primarily attributable to a lower level of outstanding
indebtedness for the 1997 second quarter. The net impact of interest rate
swaps in effect for the second quarter of 1997 was not material. The net
impact of interest rate swaps in effect during the second quarter of 1996 was
to increase interest expense by $.3 million. See "Capital Resources and
Liquidity -- Credit Facility."
Income Taxes. For the second quarter of 1997, the Company recorded an
income tax provision of $2.3 million on pretax income of $6.5 million, an
effective rate of 35%. This compares to an income tax provision of $2.2
million on pretax income of $6.8 million, an effective rate of 33%, for the
second quarter of 1996. The effective rate for both quarters was lower than
the statutory rate primarily due to the availability of Section 29 credits.
RESULTS OF OPERATIONS -- SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX
MONTHS
ENDED JUNE 30, 1996
Net Income and Cash Flows from Operating Activities. The Company realized
net income of $18.2 million, or $.66 per share, on total revenue of $106.0
million for the six months ended June 30, 1997. This compares with net income
of $6.8 million, or $.24 per share, on total revenue of $85.7 million for the
<PAGE> 16
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
first six months of 1996. Cash flows from operating activities (before
working capital changes) for the first six months of 1997 increased 31% to
$54.5 million from the $41.7 million reported for the first six months of
1996. The increase in earnings and cash flows was primarily the result of
higher oil and gas prices. In addition, net income for the 1997 six-month
period 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 for the net change in working capital increased
to $54.0 million compared to $36.1 million for the six-months ended June 30,
1996. This increase is attributable to higher oil and gas prices in the 1997
six-month period and a reduction in deferred revenue during the first six
months of 1996.
Production. The Company produced 36.6 Bcfe for the first six months of 1997
compared to 36.5 Bcfe for the comparable prior-year period. This increase in
overall production is principally attributable to producing property
acquisitions made during the previous twelve months and to the results of the
Company's drilling program. Natural gas production for the six months ended
June 30, 1997 was 31.6 Bcf, a 2% increase over the 31.0 Bcf produced in the
first half of 1996. Oil production for the first six months of 1997 decreased
9% to 837 MBbls compared to 915 MBbls for the first six months of 1996. The
decrease in oil production was primarily the result of the sale of a non-core
West Texas waterflood property in January 1997.
Oil and Gas Prices. On a natural gas equivalent basis, the Company received
an average price of $2.62 per Mcfe for the first six months of 1997, an
increase of 14% compared to $2.29 per Mcfe for the first six months of 1996.
The average gas price for the first six months of 1997 was $2.48 per Mcf, an
increase of 15% compared to $2.16 per Mcf for the six months ended June 30,
1996. The Company's average gas price for the first six months of 1997
decreased $.04 per Mcf as a result of the Company's hedging activities. The
average gas price for the first six months of 1996 was enhanced $.06 per Mcf
as a result of Fixed-Price Contracts in effect for that period. The average
oil price for the first six months of 1997 was $21.33 per Bbl compared to
$18.45 per Bbl for the first six months of 1996, an increase of 16%. The
average oil price for the current year six-month period increased $.38 per Bbl
as a result of Fixed-Price Contracts in effect for the period. The effect of
Fixed-Price Contracts hedging the Company's crude oil production during the
first six months of 1996 was to decrease the average price by $1.21 per Bbl.
The combination of higher gas production and higher average price increased
natural gas sales to $78.3 million for the first six months of 1997, an
increase of 17% from the $66.8 million reported for the first six months of
1996. The net effect of lower oil production and higher average price was to
increase oil sales by 6% to $17.8 million compared to $16.9 million for the
prior-year six-month period.
Gain (Loss) on Sales of Property and Equipment. During the first six months
of 1997, the Company recognized a net gain on sales of property and equipment
<PAGE> 17
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
of $8.6 million. The comparable amount for the first six months of 1996 was
not material. The majority of the increase is attributable to an $8.4 million
gain realized upon the sale of a non-core West Texas waterflood property in
January 1997.
Other Income. Other income for the first six months of 1997 was $1.3
million compared to $2.1 million for the first six months of 1996. The 1996
second quarter amount is higher primarily due to the receipt of a $1.0 million
installment payment from Midcon Offshore, Inc. in connection with a $10.8
million judgment in the Company's favor. See Note 4 of the Condensed Notes to
Consolidated Financial Statements, "Contingencies -- Litigation," appearing
elsewhere in this document.
Operating Costs. Operating costs, which include direct lease operating
expenses and production taxes, increased to $21.9 million for the first six
months of 1997 compared to $21.5 million for the first six months of 1996.
This increase is principally the result of higher production taxes due to
higher wellhead oil and gas prices. On a natural gas equivalent basis, total
operating costs remained relatively constant at $.60 per Mcfe for the first
six months of 1997 compared to $.59 per Mcfe for the comparable prior-year
period.
General and Administrative Expense. G&A for the first six months of 1997
was $7.9 million compared to $8.4 million for the comparable prior-year
period. On a natural gas equivalent basis, G&A decreased to $.22 per Mcfe for
the first six months of 1997 compared to $.23 per Mcfe for the first six
months of 1996. This improvement is primarily attributable to an increase in
overhead recoveries from third parties.
Exploration Costs. Exploration costs, comprised of geological and
geophysical costs, exploratory dry holes and leasehold impairment costs were
$3.4 million for the six months ended June 30, 1997 compared to $.2 million
for the six months ended June 30, 1996. This increase is consistent with the
increase in exploration activity conducted by the Company for the first half
of 1997 relative to the comparable period of 1996. The 1997 amount consists
of $1.8 million of seismic acquisition costs, $.2 million of other geological
and geophysical expenses, $.8 million of dry hole costs and $.6 million of
leasehold impairment.
Depreciation, Depletion and Amortization. DD&A for the first six months of
1997 was $32.3 million compared to $31.7 million for the first six months of
1996. 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 remained constant at $.82 per Mcfe for the first six months of
1997 compared to the first six months of 1996.
Interest Expense. For the six months ended June 30, 1997, interest expense
was $12.5 million compared to $13.7 million for the first six months of 1996.
This decrease is primarily attributable to a lower level of outstanding
<PAGE> 18
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
indebtedness for the first six months of 1997. The net impact of interest
rate swaps in effect during the first six months of 1997 was to increase
interest expense by $.1 million. Interest rate swaps in effect for the first
six months of 1996 increased interest expense by $.5 million. See "Capital
Resources and Liquidity -- Credit Facility."
Income Taxes. For the first six months of 1997, the Company recorded a tax
provision of $9.8 million on pretax income of $28.1 million, an effective rate
of 35%. This compares to a tax provision of $3.3 million provided on pretax
income of $10.1 million for the first six months of 1996, an effective rate of
33%. The effective rate for both periods 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 six months ended June 30, 1996 and
1997, the Company expended $76.2 million and $70.1 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 six-month periods. See "Commitments and Capital Expenditures." Cash
flows from operating activities before changes in working capital for the six
months ended June 30, 1996 and 1997 were $41.7 million and $54.5 million,
representing 55% and 78%, respectively, of the oil and gas property
investments made for each period. 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 and 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. Such proceeds
were applied to reduce outstanding indebtedness. As a result, cash flows from
financing activities for the first six months of 1997 reflected a net
application of cash of $13.3 million, compared to a $50.3 million source of
cash for the first six months 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 EBITDAX increased from $55.8 million for the first six months
of 1996 to $76.2 million for the first six months of 1997. EBITDAX is defined
herein as income before interest, income taxes, DD&A, impairments and
exploration costs. Increases in the EBITDAX have occurred primarily as a
result of increases in the Company's oil and gas sales. LDNG believes that
<PAGE> 19
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
EBITDAX 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. However, EBITDAX
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. EBITDAX 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 June
30, 1997, the Company had $228.0 million of principal and $1.8 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 June 30, 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
exposure associated with the Credit Facility. As of June 30, 1997, the
Company had fixed the interest rate on average notional amounts of $147
million for the balance of 1997, and $99 million and $33 million for the years
ending December 31, 1998 and 1999, respectively. Under the interest rate
swaps, the Company receives the LIBOR three-month rate (5.8% at June 30, 1997)
<PAGE> 20
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
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
June 30, 1997, the effective interest rate for borrowings under the Credit
Facility, including the effect of interest rate swaps, was 6.3%. 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 June 30, 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 June 30, 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 June 30, 1997, the Company
had $9.0 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 June 30, 1997, the Company had
working capital of $1.3 million and a current ratio of 1.0 to 1. Total
long-term debt outstanding at June 30, 1997 was $336.0 million. The Company's
long-term debt as a percentage of its total capitalization was 54%.
COMMITMENTS AND CAPITAL EXPENDITURES
The Company's primary business strategy is to increase production and
reserves through acquisition, development and exploration activities. For the
six months ended June 30, 1997, the Company expended $70.1 million in
<PAGE> 21
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
connection with this strategy, including $52.9 million for development
activities, $7.5 million for proved reserve acquisitions and $9.7 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
$50 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 $15
million of additional exploration drilling and other exploration 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 July 29, 1997, the
Company had drilled 146 wells, 134 of which were successfully completed as
producers. The Company plans to drill approximately 180 additional wells by
year-end 1997.
On June 24, 1997, LDNG and American Exploration Company ("American") signed
a definitive agreement to merge the two companies. The terms of the agreement
provide for the issuance of .72 shares of LDNG common stock and $3.00 cash for
each share of American common stock. The proposed merger is subject to the
approval of the shareholders of both companies. Based on the number of
outstanding shares of American as of June 24, 1997, the Company anticipates
the issuance of 11.3 million shares of common stock and cash consideration of
$47.1 million at closing. Such cash consideration is expected to be funded
through availability under the Credit Facility. See Note 3 of the Condensed
Notes to Consolidated Financial Statements appearing elsewhere in this
document.
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 six months ended June 30,
1997, Fixed-Price Contracts hedged 56% of the Company's natural gas production
and 43% of its oil production. As of June 30, 1997, Fixed-Price Contracts are
in place to hedge 331 Bcf of the Company's estimated future production from
proved gas reserves. See Note 4 of the Condensed Notes to Consolidated
Financial Statements, "Contingencies -- Fixed-Price Contracts," appearing
elsewhere in this document.
<PAGE> 22
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
commodity being hedged 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.
<PAGE>
<PAGE> 23
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
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 June 30,
1997.
<TABLE>
<CAPTION>
FIXED-PRICE CONTRACTS
Six
Months
Ending Years Ending December 31,
Balance
December --------------------------------------
through
31, 1997 1998 1999 2000 2001
2017 Total
-------- -------- -------- -------- --------
- -------- ----------
<S> <C> <C> <C> <C> <C>
<C> <C>
NATURAL GAS SWAPS
Sales Contracts
Contract volumes (BBtu). . 3,840 13,825 15,825 9,830 7,475
29,838 80,633
Weighted average fixed
price per MMBtu (1). . . . $ 2.23 $ 2.33 $ 2.44 $ 2.46 $ 2.47 $
3.08 $ 2.66
Future fixed-price
sales (M$) . . . . . . . . $ 8,579 $ 32,243 $ 38,629 $ 24,164 $ 18,446 $
92,020 $ 214,081
Future net
revenues (M$) (2). . . . . $ (707)$ 2,520 $ 4,922 $ 3,324 $ 2,450 $
25,497 $ 38,006
Purchase Contracts
Contract volumes (BBtu). . (1,220) (9,125) (10,950) -- --
-- (21,295)
Weighted average
fixed price per MMBtu (1). $ 2.01 $ 2.09 $ 2.18 $ -- $ -- $
-- $ 2.13
Future fixed-price
purchases (M$) . . . . . . $ (2,450)$(19,108) $(23,880) $ -- $ -- $
-- $ (45,438)
Future net
revenues (M$) (2). . . . . $ 501 $ 512 $ (556) $ -- $ -- $
-- $ 457
NATURAL GAS PHYSICAL
DELIVERY CONTRACTS
Contract volumes (BBtu). . 18,453 36,060 28,204 26,749 27,300
134,096 270,862
Weighted average fixed
price per MMBtu (1). . . . $ 2.50 $ 2.64 $ 2.84 $ 3.04 $ 3.19 $
4.11 $ 3.48
Future fixed-price
sales (M$) . . . . . . . . $ 46,055 $ 95,130 $ 80,125 $ 81,403 $ 86,963
$551,455 $ 941,131
Future net
revenues (M$) (2). . . . . $ 1,347 $ 17,419 $ 19,689 $ 23,973 $ 27,923
$217,399 $ 307,750
TOTAL NATURAL GAS
CONTRACTS (3) (4)
Contract volumes (BBtu). . 21,073 40,760 33,079 36,579 34,775
163,934 330,200
Weighted average fixed
price per MMBtu (1). . . . $ 2.48 $ 2.66 $ 2.87 $ 2.89 $ 3.03 $
3.93 $ 3.36
Future fixed-price
sales (M$) . . . . . . . . $ 52,184 $108,265 $ 94,874 $105,567 $105,409
$643,475 $1,109,774
Future net
revenues (M$) (2). . . . . $ 1,141 $ 20,451 $ 24,055 $ 27,297 $ 30,373
$242,896 $ 346,213
<PAGE> 24
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
FIXED-PRICE CONTRACTS, (continued)
(1)- The Company expects the prices to be realized for its hedged production
will vary from the
prices shown due 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
June 30, 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 - 11.4 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 0.9 TBtu of natural gas hedged by a fixed-price collar
for July 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 settled prior to maturity, the
gain or loss is deferred and amortized into oil and gas sales over the
original life of the contract. At June 30, 1997, the Company had $24.1
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 as obligations under the contracts are fulfilled. At June 30, 1997, the
Company had $18.2 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
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
<PAGE> 25
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
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 4 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 June 30, 1997, hedge
331 Bcf of proved natural gas reserves, substantially all of which are proved
developed reserves. 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 greater than the volumes provided for
in its contracts.
The differential between the floating price paid under each 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 six months ended June 30, 1997, the Company received
prices which were 1% less and 2% less than the prices specified in its natural
gas contracts and crude oil contracts, respectively. Basis results for the
first six months 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
natural gas production for the balance of 1997 would represent a $.5 million
change in gas sales. The Company actively manages its exposure to basis
movements and from time to time will enter into contracts designed to reduce
such exposure.
<PAGE> 26
LOUIS DREYFUS NATURAL GAS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
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 six
months ended June 30, 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 June
30, 1997, the Company had issued margin in the form of letters of credit and
treasury bills totaling $18.8 million and $3.0 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 YEAR 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, as amended, for the year ended
December 31, 1996 for an expanded discussion of 1997 estimates. Such
estimates have been made without regard to the effects of the proposed merger
with American. Subject to the uncertainties identified in "Forward-Looking
Statements," no material modifications to previously disclosed estimates are
deemed necessary, except for such modifications as may arise from the proposed
merger with American. A discussion of the estimated financial consequences
assuming the merger with American is consummated will be included in a Joint
Proxy/Prospectus expected to be made available in August 1997.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Fixed-Price Contracts."
<PAGE>
<PAGE> 27
LOUIS DREYFUS NATURAL GAS CORP.
PART II. OTHER INFORMATION
Item 1 -- None
Item 2 -- None
Item 3 -- None
Item 4 -- Submission of Matters to a Vote of Security Holders
The 1997 Annual Meeting of Shareholders was held on May 20, 1997. The
following matters were submitted to a vote of the Company's shareholders:
1. The election of eight directors for the ensuing year and until their
successors are duly elected and qualified. The results of the election
for each director are as follows:
Gerard Louis-Dreyfus 26,321,641 votes for; 399,841 votes withheld; 0
votes abstaining
Simon B. Rich, Jr. 26,715,141 votes for; 6,341 votes withheld; 0
votes abstaining
Mark E. Monroe 26,715,041 votes for; 6,441 votes withheld; 0
votes abstaining
Richard E. Bross 26,715,461 votes for; 6,021 votes withheld; 0
votes abstaining
Daniel R. Finn, Jr. 26,714,441 votes for; 7,041 votes withheld; 0
votes abstaining
John J. Hogan, Jr. 26,714,661 votes for; 6,821 votes withheld; 0
votes abstaining
James R. Paul 26,714,661 votes for; 6,821 votes withheld; 0
votes abstaining
James T. Rodgers, III 26,714,661 votes for; 6,821 votes withheld; 0
votes abstaining
2. Approval of the amendment and restatement of the Stock Option Plan. The
results of the shareholder vote included 24,078,876 votes for; 1,593,466
votes against; and 2,085 votes abstaining.
3. Ratification of the selection of Ernst & Young as independent auditors
of the Company for the year ending December 31, 1997. The results of
the shareholder vote included 26,716,182 votes for; 4,800 votes against;
and 500 votes abstaining.
Item 5 -- None
Item 6 -- Exhibit and Reports on Form 8-K
(a) Exhibits:
27.1 -- Financial Data Schedule
(b) Reports on Form 8-K:
A Form 8-K dated June 24, 1997 disclosing under Item 5 the proposed merger
with American Exploration Company was filed with the Securities and Exchange
Commission on July 3, 1997. No financial statements were filed with such
report.
<PAGE> 28
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: August 12, 1997 /s/ Jeffrey A. Bonney
-----------------------------------
Jeffrey A. Bonney
Vice President and Chief Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited consolidated balance sheet at June 30, 1997 and the unaudited
consolidated statement of income for the six months ended June 30, 1997 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 4,160
<SECURITIES> 0
<RECEIVABLES> 33,163
<ALLOWANCES> (1,085)
<INVENTORY> 2,309
<CURRENT-ASSETS> 42,806
<PP&E> 949,756
<DEPRECIATION> (259,776)
<TOTAL-ASSETS> 738,176
<CURRENT-LIABILITIES> 41,540
<BONDS> 335,980
0
0
<COMMON> 278
<OTHER-SE> 281,672
<TOTAL-LIABILITY-AND-EQUITY> 738,176
<SALES> 96,102
<TOTAL-REVENUES> 106,002
<CGS> 21,865
<TOTAL-COSTS> 77,940
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,519
<INCOME-PRETAX> 28,062
<INCOME-TAX> 9,822
<INCOME-CONTINUING> 18,240
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,240
<EPS-PRIMARY> .66
<EPS-DILUTED> .66
</TABLE>
