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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
COMMISSION FILE NUMBER 1-12534
------------------------------
NEWFIELD EXPLORATION COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 72-1133047
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification number)
363 N. SAM HOUSTON PARKWAY E.
SUITE 2020
HOUSTON, TEXAS 77060
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (281) 847-6000
------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports, and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of July 23, 1998, there were 36,189,985 shares of the Registrant's
Common Stock, par value $0.01 per share, outstanding.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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PART I
Item 1. Financial Statements:
Consolidated Balance Sheet as of June 30,
1998 and December 31, 1997.........................................................1
Consolidated Statement of Income for the three months ended
June 30, 1998 and 1997 and for the six months ended
June 30, 1998 and 1997.............................................................2
Consolidated Statement of Cash Flows for the
six months ended June 30, 1998
and 1997...........................................................................3
Notes to Financial Statements.............................................................4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................................................6
PART II
Item 4. Submission of Matters to a Vote of Security Holders........................................15
Item 6. Exhibits and Reports on Form 8-K...........................................................16
</TABLE>
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NEWFIELD EXPLORATION COMPANY
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................... $ 10,178 $ 8,217
Accounts receivable, oil and gas ............................ 37,063 54,123
Other ....................................................... 2,423 2,426
------------ ------------
Total current assets ..................................... 49,664 64,766
------------ ------------
Oil and gas properties (full cost method, of which $82,013
at June 30, 1998 and $79,264 at December 31,
1997 were excluded from amortization) ....................... 918,629 775,585
Furniture, fixtures and equipment ............................... 3,747 3,100
Less-accumulated depreciation, depletion and amortization ....... (350,860) (293,111)
------------ ------------
571,516 485,574
------------ ------------
Other assets .................................................... 3,141 3,281
------------ ------------
Total assets ............................................. $ 624,321 $ 553,621
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities .................... $ 50,317 $ 63,834
Advances from joint owners .................................. 4,163 560
------------ ------------
Total current liabilities ............................ 54,480 64,394
------------ ------------
Other liabilities ............................................... 4,421 3,846
Long-term debt .................................................. 191,636 129,623
Deferred taxes .................................................. 69,254 63,710
------------ ------------
Total long-term liabilities .............................. 265,311 197,179
------------ ------------
Commitments and contingencies (Note 2) .......................... -- --
Stockholders' equity:
Preferred stock ($0.01 par value, 5,000,000 shares
authorized, no shares issued) ............................ -- --
Common stock ($0.01 par value, 100,000,000
shares authorized; 36,189,985 and
35,975,777 shares issued and outstanding at
June 30, 1998 and December 31, 1997,
respectively) ............................................ 362 360
Additional paid-in capital ...................................... 164,245 160,672
Unearned compensation ........................................... (6,169) (4,592)
Retained earnings ............................................... 146,092 135,608
------------ ------------
Total stockholders' equity ............................... 304,530 292,048
------------ ------------
Total liabilities and stockholders' equity ............... $ 624,321 $ 553,621
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
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NEWFIELD EXPLORATION COMPANY
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Oil and gas revenues ............................. $ 49,902 $ 42,345 $ 99,884 $ 89,272
------------ ------------ ------------ ------------
Operating expenses:
Lease operating .............................. 8,584 5,022 16,052 10,605
Depreciation, depletion and amortization ..... 30,377 22,219 57,749 41,973
General and administrative, net .............. 2,583 2,574 5,494 5,527
Stock compensation ........................... 573 278 1,108 708
------------ ------------ ------------ ------------
Total operating expenses ................ 42,117 30,093 80,403 58,813
------------ ------------ ------------ ------------
Income from operations ........................... 7,785 12,252 19,481 30,459
Other income (expense):
Interest income .............................. 287 235 612 608
Interest expense, net ........................ (2,224) (532) (3,877) (857)
------------ ------------ ------------ ------------
(1,937) (297) (3,265) (249)
------------ ------------ ------------ ------------
Income before income taxes ....................... 5,848 11,955 16,216 30,210
Income tax provision ............................. 2,076 4,182 5,732 10,550
------------ ------------ ------------ ------------
Net income ....................................... $ 3,772 $ 7,773 $ 10,484 $ 19,660
============ ============ ============ ============
Basic earnings per common share .................. $ 0.10 $ 0.22 $ 0.29 $ 0.56
============ ============ ============ ============
Diluted earnings per common share ................ $ 0.10 $ 0.21 $ 0.27 $ 0.52
============ ============ ============ ============
Weighted average number of shares
outstanding for basic earnings per share ......... 36,175 35,505 36,113 35,377
============ ============ ============ ============
Weighted average number of shares
outstanding for diluted earnings per share ....... 38,348 37,807 38,316 37,783
============ ============ ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
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NEWFIELD EXPLORATION COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------------
1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net income ........................................................... $ 10,484 $ 19,660
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation, depletion and amortization ........................... 57,749 41,973
Deferred taxes ..................................................... 5,732 9,883
Stock compensation ................................................. 1,108 708
------------ ------------
75,073 72,224
Changes in operating assets and liabilities:
Decrease in accounts receivable, oil and gas ....................... 17,060 16,188
(Increase) decrease in other current assets ........................ 3 (1,047)
Decrease in other assets ........................................... 140 4,379
Decrease in accounts payable and accrued liabilities ............... (14,772) (20,097)
Increase (decrease) in advance from joint owners ................... 3,603 (1,314)
Increase in other liabilities ...................................... 812 2,145
------------ ------------
Net cash provided by operating activities ........................ 81,919 72,478
------------ ------------
Cash flows from investing activities:
Additions to oil and gas properties ................................ (141,789) (105,490)
Additions to furniture, fixtures and equipment ..................... (647) (443)
------------ ------------
Net cash used in investing activities ............................ (142,436) (105,933)
------------ ------------
Cash flows from financing activities:
Proceeds from borrowings ........................................... 187,750 199,000
Repayments of borrowings ........................................... (125,750) (171,500)
Proceeds from issuance of common stock, net ........................ 478 6,030
Payments on capital lease obligations .............................. -- (111)
------------ ------------
Net cash provided by financing activities ........................ 62,478 33,419
------------ ------------
Increase (decrease) in cash and cash equivalents .......................... 1,961 (36)
Cash and cash equivalents, beginning of period ............................ 8,217 13,290
------------ ------------
Cash and cash equivalents, end of period .................................. $ 10,178 $ 13,254
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
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NEWFIELD EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) ACCOUNTING POLICIES
Unless the context otherwise requires, references to the "Company"
include Newfield Exploration Company and its subsidiaries. The unaudited
consolidated financial statements of the Company reflect, in the opinion of
management, all adjustments, consisting only of normal and recurring
adjustments, necessary to present fairly the Company's consolidated financial
position at June 30, 1998 and the Company's consolidated results of operations
for the three and six month periods ended June 30, 1998 and 1997 and
consolidated cash flows for the six month periods ended June 30, 1998 and 1997.
The consolidated financial statements have been prepared in accordance with the
instructions to Form 10-Q and therefore do not include all disclosures required
for financial statements prepared in conformity with generally accepted
accounting principles. Interim period results are not necessarily indicative of
results of operations or cash flows for a full-year period.
The consolidated financial statements include the accounts of Newfield
Exploration Company and its subsidiaries. All significant intercompany balances
and transactions have been eliminated.
These consolidated financial statements and the notes thereto should be
read in conjunction with the Company's Annual Report on Form 10-K for the year
ended December 31, 1997, including those financial statements and notes thereto
incorporated by reference from the Company's 1997 Annual Report to Stockholders.
The following is a calculation of basic and diluted weighted average
shares outstanding for the three and six month periods ended June 30, 1998 and
June 30, 1997, respectively:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Shares outstanding for basic EPS ....... 36,174,893 35,504,778 36,112,769 35,377,370
Dilution effect of stock options
outstanding at end of period ..... 2,173,343 2,302,279 2,203,593 2,405,435
------------ ------------ ------------ ------------
Shares outstanding for diluted EPS ..... 38,348,236 37,807,057 38,316,362 37,782,805
============ ============ ============ ============
</TABLE>
From time to time, the Company has utilized hedging transactions with
respect to a portion of its oil and gas production to achieve a more predictable
cash flow, as well as to reduce its exposure to price fluctuations. While the
use of these hedging arrangements limits the downside risk of adverse price
movements, they may also limit future revenues from favorable price movements.
The use of hedging transactions also involves the risk that the
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counterparties will be unable to meet the financial terms of such transactions.
All of the Company's hedging transactions to date were carried out in the
over-the-counter market and the obligations of the counterparties have been
guaranteed by entities with at least an investment grade rating or secured by
letters of credit. The Company accounts for these transactions as hedging
activities and, accordingly, gains or losses are included in oil and gas
revenues when the hedged production is delivered. Neither the hedging contracts
nor the unrealized gains or losses on these contracts are recognized in the
financial statements.
(2) Contingencies
The Company has been named as a defendant in certain lawsuits arising
in the ordinary course of business. While the outcome of these lawsuits cannot
be predicted with certainty, management does not expect these matters to have a
material adverse effect on the financial position, results of operations or cash
flows of the Company.
The Company's operations are subject to various federal, state and
local laws and regulations relating to the protection of the environment. The
Company believes its current operations are in material compliance with current
environmental laws and regulations. There can be no assurance, however, that
current regulatory requirements will not change, currently unforeseen
environmental incidents will not occur or past non-compliance with environment
laws will not be discovered.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
As an independent oil and gas producer, the Company's revenue,
profitability and future rate of growth are substantially dependent upon
prevailing prices for natural gas, oil and condensate, which are dependent upon
numerous factors beyond the Company's control, such as economic, political and
regulatory developments and competition from other sources of energy. The energy
markets have historically been very volatile and there can be no assurance that
oil and gas prices will not be subject to wide fluctuations in the future. A
substantial or extended decline in oil and gas prices could have a material
adverse effect on the Company's financial position, results of operations, cash
flows, quantities of oil and gas reserves that may be economically produced and
access to capital.
The Company's results of operations may vary significantly from quarter
to quarter as a result of development operations, commodity prices, the
curtailment of production in association with workover and recompletion
activities and the incurrence of expenses related thereto, the timing and amount
of reimbursement for customary overhead costs received by the Company and other
factors, and, therefore, the results of operations for any one quarter may not
be indicative of results for the full fiscal year.
The Company uses the full cost method of accounting for its oil and gas
properties. Under this method, all acquisition, exploration and development
costs, including certain related employee costs (less any joint interest
reimbursements for such costs) incurred for the purpose of acquiring and finding
oil and gas reserves are capitalized in a "full cost pool" as incurred. These
costs are grouped into cost centers on a country-by-country basis. The Company
records depletion of its full cost pool using the unit of production method and
uses its internal estimates of proved quantities of oil and gas reserves for
financial accounting matters. For each cost center, to the extent that such
capitalized costs in a full cost pool (net of depreciation, depletion and
amortization and related deferred taxes) exceed the present value (using a 10%
discount rate) of estimated future net after-tax cash flows from proved oil and
gas reserves, such excess costs are charged to operations. Once incurred, a
write-down of oil and gas properties is not reversible at a later date even if
oil or gas prices increase.
In June 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("Statement No. 130"). The statement establishes standards
with respect to reporting and display of comprehensive income and its
components. Statement No. 130 became effective for the Company on January 1,
1998; however, the Company has no comprehensive income other than net income. In
June 1997, the FASB issued Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information"
("Statement No. 131"). The statement specifies revised guidelines for
determining an entity's operating and geographic segments and the type and level
of financial information about those segments to be disclosed. In March 1998,
the FASB issued Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pensions and Other
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Postretirement Benefits" ("Statement No 132"). This statement standardizes the
disclosure requirements for pensions and other postretirement benefits to the
extent practicable, requires additional information on changes in the benefits
obligations and fair values of plan assets that will facilitate analysis and
eliminates certain disclosures that are no longer as useful as they were
previously. The Company will adopt the provisions of Statement Nos. 131 and 132
in its consolidated financial statements for the year ended December 31, 1998.
The Company does not believe that such adoption will have a material effect on
its results of operations.
In June 1998, the FASB issued statement of Financial Accounting
Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("Statement No. 133"). The statement requires companies to report the
fair-market value of derivatives on the balance sheet and record in income or
other comprehensive income, as appropriate, any changes in the fair value of the
derivative. Statement No. 133 will become effective with respect to the Company
on January 1, 2000. The Company is currently evaluating the impact of the
statement.
Certain terms relating to the oil and gas business are defined under
the caption "Oil and Gas Terms" at the end of Management's Discussion and
Analysis.
RESULTS OF OPERATIONS
The following table sets forth certain operating information with
respect to the oil and gas operations of the Company:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- --------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Production:
Oil and condensate (MBbls)............................. 975 819 1,905 1,625
Gas (MMcf)............................................. 16,545 12,896 31,032 24,283
Total production (MMcfe)............................... 22,393 17,808 42,460 34,030
Average Realized Price:
Oil and condensate (per Bbl)........................... $ 12.84 $ 18.01 $ 13.69 $ 20.15
Gas (per Mcf).......................................... 2.27 2.15 2.38 2.34
Average Costs (per Mcfe)
Lease operating........................................ $ 0.38 $ 0.28 $ 0.38 $ 0.31
Depreciation, depletion and amortization............... 1.36 1.25 1.36 1.23
General and administrative, net........................ 0.12 0.14 0.13 0.16
</TABLE>
PRODUCTION. Net production increased 25%, from 34.0 Bcfe for the six
months ended June 30, 1997 to 42.5 Bcfe for the six months ended June 30, 1998.
Oil and condensate production for the six months ended June 30, 1998 increased
280 MBbls, or 17%, compared to the same period of 1997. Increased oil production
for the first six months of 1998 was due primarily to production increases from
development drilling activities during 1997 at Ship
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Shoal 354, West Delta 152 and Eugene Island 324. Gas production increased by 6.7
Bcf, or 28%, from 24.3 Bcf for the six months ended June 30, 1997 to 31.0 Bcf
for the comparable period of 1998. Increased gas production was due to
production increases from development drilling activities during 1997 at West
Cameron 561 and the acquisition of interests in nine offshore blocks in the East
Cameron, West Cameron and High Island areas of the Gulf of Mexico in July 1997.
These increases were partially offset by natural production decline on other
properties of the Company.
Net production increased 26%, from 17.8 Bcfe for the three months ended
June 30, 1997 to 22.4 Bcfe for the three months ended June 30, 1998. Oil and
condensate production for the three months ended June 30, 1998 increased 156
MBbls, or 19%, compared to the same period of 1997. Increased oil production was
due primarily to production increases from development drilling activities
during 1997 at Ship Shoal 354, West Delta 152 and Eugene Island 324. Gas
production increased by 3.6 Bcf, or 28%, from 12.9 Bcf for the three months
ended June 30, 1997 to 16.5 Bcf for the comparable period of 1998. Increased gas
production was due to production increases from development drilling activities
during 1997 at West Cameron 561 and the acquisition of interests in nine
offshore blocks in the East Cameron, West Cameron and High Island areas of the
Gulf of Mexico in July 1997.
OIL AND GAS REVENUES. Oil and gas revenues for the six months ended
June 30, 1998 increased by $10.6 million, or 12%, compared to the same period of
1997, primarily as a result of increased oil and gas production and higher
realized gas prices offset by significantly lower realized oil prices. The
average realized price of oil and condensate decreased by 32% for the six months
ended June 30, 1998 compared to the same period of 1997.
For the six months ended June 30, 1998, the average realized gas price
was $2.38 per Mcf, which, as a result of hedging activities, was 106% of the
$2.24 per Mcf average gas sales price that would have otherwise been received.
As a result of hedging activities for gas production for the six months ended
June 30, 1997, the Company realized an average gas price of $2.34 per Mcf, or
93% of the $2.52 per Mcf average gas sales price that would have otherwise been
received. For the six months ended June 30, 1998, the average realized oil and
condensate price was $13.69, which, as a result of hedging activities, was 102%
of the $13.41 per barrel average oil and condensate sales price that would have
otherwise been received. There were no oil hedging activities for the six months
ended June 30, 1997.
Oil and gas revenues for the three months ended June 30, 1998 increased
by $7.6 million, or 18%, compared to the same period of 1997, primarily as a
result of increased oil and gas production and higher realized gas prices offset
by significantly lower realized oil prices. The average realized price of oil
and condensate decreased by 29% for the three months ended June 30, 1998
compared to the same period of 1997.
For the three months ended June 30, 1998, the average realized gas
price was $2.27 per Mcf, which, as a result of hedging activities, was 101% of
the $2.24 per Mcf average gas sales price that would have otherwise been
received. As a result of hedging activities for gas production for the three
months ended June 30, 1997, the Company realized an average gas price of $2.15
per Mcf, or 99% of the $2.16 per Mcf average gas sales price
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that would have otherwise been received. For the three months ended June 30,
1998, the average realized oil and condensate price was $12.84, which, as a
result of hedging activities, was 102% of the $12.56 per barrel average oil and
condensate sales price that would have otherwise been received. There were no
oil hedging activities for the three months ended June 30, 1997.
LEASE OPERATING EXPENSE. Lease operating expense for the six months
ended June 30, 1998 increased to $16.1 million from $10.6 million for the
comparable period of 1997. Lease operating expense per Mcfe increased from $0.31
for the six months ended June 30, 1997 to $0.38 for the comparable period of
1998. These increases are primarily attributable to a general increase in fees
charged by the oilfield service industry, increased workover activities, lease
operating costs associated with properties acquired after June 30, 1997 and
lease operating costs associated with the initiation of production at East
Cameron 373.
Lease operating expense for the three months ended June 30, 1998
increased to $8.6 million from $5.0 million for the comparable period of 1997.
Lease operating expense per Mcfe increased from $0.28 for the three months ended
June 30, 1997 to $0.38 for the comparable period of 1998. The increase in lease
operating expense per unit is primarily attributable to a general increase in
fees charged by the oilfield service industry, lease operating costs associated
with properties acquired after June 30, 1997, and lease operating costs
associated with the initiation of production at East Cameron 373 and increased
workover activity in the second quarter of 1998 as compared to the second
quarter of 1997.
DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE. During the six and
three month periods ended June 30, 1998, depreciation, depletion, and
amortization expense increased to $57.7 million and $30.4 million, respectively,
from $42.0 million and $22.2 million, respectively, for the comparable periods
of 1997. The increases were the result of an increased depletion rate per Mcfe
and production increases from acquisitions and exploratory and development
drilling activities during 1997 and 1998. The depletion rate per unit for each
of the six and three month periods ended June 30, 1998 increased to $1.36 per
Mcfe, from $1.23 and $1.25 per Mcfe for the comparable periods of 1997,
respectively. The increases in the depletion rate per unit are primarily
attributable to a general increase in the costs of drilling goods and services,
platform and facilities construction and transportation services to the
industry.
GENERAL AND ADMINISTRATIVE EXPENSE, NET. General and administrative
expense, which is net of overhead reimbursements received by the Company from
other working interest owners, remained at $5.5 million and $2.6 million for the
six and three month periods ended June 30, 1998 and 1997, respectively. Direct
costs associated with staff increases during 1997 were partially offset by joint
interest reimbursements and a decrease in performance based compensation.
General and administrative expenses per Mcfe however, decreased from $0.16 and
$0.14 for the six and three month periods ended June 30, 1997 to $0.13 and $0.12
for the comparable periods of 1998, respectively. The decrease per Mcfe is due
to increased production during 1998. Performance based compensation, as a
component of general and administrative expense, decreased from $2.5 million, or
$0.07 per Mcfe, and $1.2 million, or $0.07 per Mcfe, for the six and three month
periods ended June 30, 1997, respectively, to $1.6 million, or $0.04 per Mcfe,
and $0.7 million, or $0.03 per Mcfe, for the six and three month periods ended
June 30, 1998, respectively. To the extent that the Company continues to grow
and increase its
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ownership in certain properties, the Company expects general and administrative
expenses, in the aggregate, to increase.
INTEREST EXPENSE, NET. Interest expense, net of capitalized interest,
for the six and three months ended June 30, 1998 increased to $3.9 million and
$2.2 million, respectively, from $0.9 million and $0.5 million, respectively,
for the comparable periods of 1997. The increase was attributable to higher
average debt levels during the first half of 1998 and a lower percentage of
total interest cost being capitalized.
NET INCOME. As a result of the foregoing, particularly the substantial
decrease in realized oil and condensate prices for the six and three months
ended June 30, 1998 compared to the same periods of 1997, the Company had net
income of $10.5 million and $3.8 million, or $0.27 and $0.10 per diluted share,
for the six and three month periods ended June 30, 1998, respectively, as
compared to $19.7 million and $7.8 million, or $0.52 and $0.21 per diluted
share, respectively, for the comparable periods of 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company had a working capital deficit of $4.8 million at June 30,
1998 compared to $0.4 million at December 31, 1997. The $5.2 million decrease in
working capital is primarily due to increased drilling activity during the first
six months of 1998. Long-term debt increased from $129.6 million at December 31,
1997 to $191.6 million at June 30, 1998. Working capital balances may fluctuate
from quarter to quarter to the extent the Company increases or decreases
borrowings under its revolving credit facility (the "Credit Facility"). The
Company has funded its oil and gas activities through cash flow from operations,
equity capital from private and public sources, a private placement of $125
million in senior unsecured notes due October, 2007 and bank borrowings.
The Company filed a "universal shelf" registration statement with the
Securities and Exchange Commission with respect to the offering and sale of an
array of debt and equity securities in July 1998 in order to better position
itself to take advantage of future opportunities and to provide additional
financing alternatives.
The Company maintains its reserve-based revolving Credit Facility with
The Chase Manhattan Bank, as agent. As of June 30, 1998, $50 million was
outstanding under the Credit Facility. The Credit Facility provides a $125
million revolving credit maturing on October 31, 2002. The amount available
under the Credit Facility is subject to a borrowing base, which is reduced by
the principal amount of the senior notes outstanding at the time of calculation.
The Company has an option, subject to the borrowing base, to increase the
facility to $200 million. Without so increasing the facility, the Company
currently has approximately $60 million of available capacity under the Credit
Facility.
The Company has also established money market lines of credit with
various banks. As of June 30, 1998, the Company had aggregate borrowings of $17
million under these lines of credit.
The Company's net cash flow from operations for the first six months of
1998 was $81.9 million compared to $72.5 million for the same period of 1997.
The increase is primarily due to increases in oil and gas production and changes
in operating assets and liabilities. Net cash flow from operations before
changes in operating assets and liabilities for the first six months of 1998 was
$75.1 million compared to $72.2 million for the same period of 1997. The
increase in net cash flow from operations before changes in operating assets and
liabilities is primarily attributable to increases in oil and gas production
offset by decreased average realized oil prices and higher operating expenses.
From time to time, the Company has utilized hedging transactions with
respect to a portion of its oil and gas production to achieve a more predictable
cash flow, as well as to reduce its exposure to price fluctuations. While the
use of these hedging arrangements limits the downside risk of adverse price
movements, they may also limit future revenues from
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<PAGE> 13
favorable price movements. The use of hedging transactions also involves the
risk that the counterparties will be unable to meet the financial terms of such
transactions. All of the Company's hedging transactions to date were carried out
in the over-the-counter market and the obligations of the counterparties have
been guaranteed by entities with at least an investment grade rating or secured
by letters of credit. The Company accounts for these transactions as hedging
activities and, accordingly, gains or losses are included in oil and gas
revenues when the hedged production is delivered. Neither the hedging contract
nor the unrealized gains and losses on these contracts are recognized in the
financial statements.
As of June 30, 1998, the Company had entered into commodity price
hedging contracts with respect to its gas production for 1998 and 1999 as
follows:
<TABLE>
<CAPTION>
Swaps Collars Floor Contracts
-------------------------- --------------------------------- -------------------------
Weighted NYMEX
Average Contract Price
NYMEX per MMBtu NYMEX
Volume in Contract Price Volume in --------------------- Volume in Contract Price
Period MMMBtus per MMBtu MMMBtus Floor Ceiling MMMBtus per MMBtu
- ------------------------------------- --------- -------------- --------- ----------- -------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
July 1998 ......................... 1,500(1) $2.34 2,250 $2.20-$2.32 $3.00 250 $2.32
August 1998 ....................... 1,500(1) $2.34 1,250 $2.32 $3.00 1,250 $2.20-$2.21
September 1998 .................... 1,500(1) $2.34 1,250 $2.32 $3.00 1,250 $2.20-$2.21
October 1998 - December 1998 ...... -- -- -- -- -- 300 $2.44
January 1999 - March 1999 ......... -- -- -- -- -- 300 $2.47
</TABLE>
- -----------------------
(1) THE COMPANY HAS ENTERED INTO A BASIS SWAP WITH RESPECT TO 16% OF THE
INDICATED VOLUME.
These hedging transactions are settled based upon the average of the
reported settlement prices on the NYMEX for the last three trading days or,
occasionally, the penultimate trading day of a particular contract month (the
"settlement price"). With respect to any particular swap transaction, the
counterparty is required to make a payment to the Company in the event that the
settlement price for any settlement period is less than the swap price for such
transaction, and the Company is required to make payment to the counterparty in
the event that the settlement price for any settlement period is greater than
the swap price for such transaction. For any particular collar transaction, the
counterparty is required to make a payment to the Company if the settlement
price for any settlement period is below the floor price for such transaction,
and the Company is required to make payment to the counterparty if the
settlement price for any settlement period is above the ceiling price for such
transaction. For any particular floor transaction, the counterparty is required
to make a payment to the Company if the settlement price for any settlement
period is below the floor price for such transaction. The Company is not
required to make any payment in connection with the settlement of a floor
transaction.
The Company enters into basis swaps (either as part of a particular
hedging transaction or separately) tied to a particular NYMEX-based transaction
to mitigate basis risk. Because substantially all of the Company's natural gas
production is sold under spot contracts that have historically correlated with
the swap price, the Company believes that it has no material basis risk with
respect to gas swaps that are not coupled with basis swaps.
11
<PAGE> 14
As of June 30, 1998, the Company had entered into commodity price
hedging contracts with respect to its oil production for 1998 and 1999 as
follows:
<TABLE>
<CAPTION>
Swaps Collars
---------------------------- ----------------------------------------
NYMEX
Contract Price
NYMEX per Bbl
Volume in Contract Price Volume in -------------------------
Period Bbls per Bbl Bbls Floor Ceiling
- ----------------------------------- ---------- -------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
October 1998 -December 1998 ....... 92,000 $ 17.20 -- -- --
January 1999-March 1999 ........... -- -- 90,000 $ 17.00 $ 18.10
April 1999-June 1999 .............. -- -- 91,000 $ 17.00 $ 18.70
July 1999-September 1999 .......... -- -- 92,000 $ 17.00 $ 19.15
</TABLE>
Because substantially all of the Company's oil production is sold under
spot contracts that correlate to the NYMEX West Texas Intermediate price, the
Company believes that it has no material Basis Risk with respect to these
transactions. The actual cash price the Company receives however, generally
averages approximately $2.00 per barrel less than the NYMEX West Texas
Intermediate price when adjusted for location and quality differences.
Subsequent to June 30, 1998, the Company entered into commodity price
hedging contracts with respect to its gas production for 1998 and 1999 as
follows:
<TABLE>
<CAPTION>
Collars Floor Contracts
------------------------------------- ---------------------------
NYMEX
Contract Price
per MMBtu NYMEX
Volume in --------------------- Volume in Contract Price
Period MMMBtus Floor Ceiling MMMBtus per MMBtu
- ----------------------------- --------- ------- ------- ---------- --------------
<S> <C> <C> <C> <C> <C>
October 1998................. 1,200 $ 2.00 $ 2.46 1,000 $ 2.11
November 1998................ 1,200 $ 2.20 $ 2.66 1,750 $2.17 - $ 2.31
December 1998................ 1,200 $ 2.41 $ 2.86 1,750 $2.42 - $ 2.52
January 1999................. 1,200 $ 2.47 $ 2.93 1,750 $2.50 - $ 2.58
February 1999................ 1,200 $ 2.36 $ 2.82 1,750 $2.40 - $ 2.46
March 1999................... 1,200 $ 2.23 $ 2.69 1,750 $2.30 - $ 2.34
</TABLE>
Capital expenditures for the six months ended June 30, 1998 were $143
million, consisting of $46 million for exploration, $90 million for development
and $7 million for property acquisitions. The Company's exploration capital
expenditures budget for 1998 is $73 million. The Company has budgeted $133
million in 1998 for development drilling and construction expenditures for
platforms, facilities and pipelines, including $2 million for abandonment or
dismantlement of existing wells and facilities. The Company continues to pursue
attractive acquisition opportunities. Additionally, the Company has budgeted $17
million for property acquisitions. The timing and size of any acquisition and
the associated capital commitments are unpredictable.
Actual levels of capital expenditures may vary significantly due to
many factors, including drilling results, oil and gas prices, industry
conditions, the prices and availability of goods and services and the extent to
which proved properties are acquired. The Company anticipates that these capital
expenditures will be funded principally from cash flow from
12
<PAGE> 15
operations, working capital and bank borrowings. During the first six months of
1998, the Company borrowed $187.8 million and repaid $125.8 million under the
Credit Facility and its money market lines. The Company anticipates additional
borrowings under the Credit Facility and its money market lines during the
remainder of 1998.
To cover the various obligations of lessees on the Outer Continental
Shelf (the "OCS"), the MMS generally requires that lessees post substantial
bonds or other acceptable assurances that such obligations will be met. The cost
of such bonds or other surety can be substantial and there is no assurance that
bonds or other surety can be obtained in all cases. Additionally, the MMS may
require operators in the OCS to post supplemental bonds in excess of lease and
area wide bonds to assure that abandonment obligations on specific properties
will be met. The Company is currently exempt from the supplemental bonding
requirements of the MMS. Under certain circumstances, the MMS may require any
Company operations on federal leases to be suspended or terminated. Any such
suspension or termination could materially and adversely affect the Company's
financial condition and operations.
The Company's operations are subject to various federal, state and
local laws and regulations relating to the protection of the environment. The
Company believes its current operations are in material compliance with current
environmental laws and regulations. There can be no assurance, however, that
current regulatory requirements will not change, currently unforeseen
environmental incidents will not occur or past non-compliance with environment
laws will not be discovered.
The Company has been named as a defendant in certain lawsuits arising
in the ordinary course of business. While the outcome of these lawsuits cannot
be predicted with certainty, management does not expect these matters to have a
material adverse effect on the financial position, results of operations or cash
flows of the Company.
FORWARD LOOKING INFORMATION
Certain of the statements set forth in this document regarding
production targets and growth and planned capital expenditures and activities
are forward looking and are based upon assumptions and anticipated results that
are subject to numerous uncertainties. Actual results may vary significantly
from those anticipated due to many factors, including drilling results, oil and
gas prices, industry conditions, the prices of goods and services, the
availability of drilling rigs and other support services and the availability of
capital resources. In addition, the drilling of oil and gas wells and the
production of hydrocarbons are subject to governmental regulations and operating
risks.
CERTAIN OIL AND GAS TERMS
The definitions set forth below shall apply to the indicated terms as
used in this document. All volumes of natural gas referred to herein are stated
at the legal pressure base of the state or area where the reserves exist and at
60 degrees Fahrenheit and in most instances are rounded to the nearest major
multiple.
13
<PAGE> 16
BASIS RISK. The risk associated with the sales point price for oil or gas
production varying from the reference (or settlement) price for a
particular hedging transaction.
BBL. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein
in reference to crude oil or other liquid hydrocarbons.
BCF. Billion cubic feet.
BCFE. Billion cubic feet equivalent, determined by using the ratio of six
Mcf of natural gas to one Bbl of crude oil, condensate or natural
gas liquids.
BTU. British thermal unit, which is the heat required to raise the
temperature of a one-pound mass of water from 58.5 degrees to 59.5
degrees Fahrenheit.
MBBLS. One thousand barrels of crude oil or other liquid hydrocarbons.
MCF. One thousand cubic feet.
MCFE. One thousand cubic feet equivalent, determined using the ratio of
six Mcf of natural gas to one Bbl of crude oil, condensate or
natural gas liquids.
MMS. Minerals Management Service of the United States Department of the
Interior.
MMBBLS. One million barrels of crude oil or other liquid hydrocarbons.
MMBTU. One million Btus.
MMMBTU Ten million Btus.
MMCF. One million cubic feet.
MMCFE. One million cubic feet equivalent, determined using the ratio of six
Mcf of natural gas to one Bbl of crude oil, condensate or natural
gas liquids.
NYMEX. New York Mercantile Exchange.
WORKOVER. Operations on a producing well to restore or increase production.
14
<PAGE> 17
PART II
Item 4. Submission of Matters to a Vote of Security Holders
At the May 7, 1998 Annual Meeting of Stockholders, the Company's
stockholders voted on three matters; 36,050,775 shares of common stock were
outstanding and entitled to vote as of the March 31, 1998 record date.
(1) Election of Ten Directors:
The Stockholders elected the ten nominees as directors for a
one-year term by the following vote:
<TABLE>
<CAPTION>
NOMINEE ELECTED FOR WITHHELD
------------------- ----------------- ---------
<S> <C> <C>
Joe B. Foster 32,867,618 9,360
Robert W. Waldrup 32,867,888 9,090
Charles W. Duncan, Jr. 32,866,988 9,990
Howard H. Newman 32,867,888 9,090
Thomas G. Ricks 32,867,888 9,090
C.E. (Chuck) Shultz 32,867,618 9,360
Terry Huffington 32,867,888 9,090
Dennis R. Hendrix 32,867,488 9,490
Philip J. Burguieres 32,867,798 9,180
John C. Sawhill 32,867,888 9,090
</TABLE>
(2) Approval of the Newfield Exploration Company 1998 Omnibus Stock
Plan:
The stockholders approved the adoption of the Newfield Exploration
Company 1998 Omnibus Stock plan by the following vote:
FOR AGAINST ABSTENTIONS
---------- --------- -----------
27,593,870 5,258,888 24,220
(3) Appointment of Independent Public Accountants:
The stockholders ratified the appointment of
PricewaterhouseCoopers LLP as the Company's independent public
accountants for the year 1998 by the following vote:
FOR AGAINST ABSTENTIONS
---------- --------- -----------
32,868,116 5,256 3,606
15
<PAGE> 18
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial Data Schedule (included only in the electronic
filing of this document)
(b) Reports on Form 8-K:
None.
16
<PAGE> 19
SIGNATURE
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.
NEWFIELD EXPLORATION COMPANY
Date: July 24, 1998 By: /s/ TERRY W. RATHERT
------------------------------------------
Terry W. Rathert
Vice President-Planning and Administration
and Secretary
(Authorized Officer and Principal
Financial Officer)
17
<PAGE> 20
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
------ -----------------------
<S> <C>
27 Financial Data Schedule (included only in the electronic
filing of this document)
</TABLE>
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NEWFIELD
EXPLORATION COMPANY'S BALANCE SHEET AT JUNE 30, 1998 AND STATEMENT OF INCOME FOR
THE SIX MONTHS ENDED JUNE 30, 1998, THAT ARE CONTAINED IN ITS FORM 10-Q FOR THE
QUARTERLY PERIOD ENDED JUNE 30, 1998. THE SCHEDULE IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 10,178
<SECURITIES> 0
<RECEIVABLES> 37,063
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 49,664
<PP&E> 922,376
<DEPRECIATION> 350,860
<TOTAL-ASSETS> 624,321
<CURRENT-LIABILITIES> 54,480
<BONDS> 191,636
164,607
0
<COMMON> 0
<OTHER-SE> 139,923
<TOTAL-LIABILITY-AND-EQUITY> 624,321
<SALES> 99,884
<TOTAL-REVENUES> 99,884
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 73,801
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,877
<INCOME-PRETAX> 16,216
<INCOME-TAX> 5,732
<INCOME-CONTINUING> 10,484
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,484
<EPS-PRIMARY> 0.29
<EPS-DILUTED> 0.27
</TABLE>
