<PAGE>
UNITED STATES
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 March 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 0-25058
OCEAN ENERGY, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 72-1277752
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1201 LOUISIANA, SUITE 1400
HOUSTON, TEXAS 77002
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (713) 654-9110
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 [ ]
The number of share outstanding of the registrant's common stock, all of which
comprise a single class with a $0.01 par value, as of May 8, 1998, the latest
practicable date, was 100,579,249.
<PAGE>
OCEAN ENERGY, INC.
FORM 10-Q
MARCH 31, 1998
TABLE OF CONTENTS
PAGE
----
PART I -- FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Statement of Income for the Three Months
Ended March 31, 1998 and 1997........................ 3
Consolidated Balance Sheet at March 31, 1998 and
December 31, 1997.................................... 4
Consolidated Statement of Changes in Stockholders'
Equity for the Year Ended December 31, 1997 and for
the Three Months Ended March 31, 1998................ 6
Consolidated Statement of Cash Flows for the Three
Months Ended March 31, 1998 and 1997................. 7
Notes to Consolidated Financial Statements........... 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 13
Item 3. Quantitative and Qualitative Disclosures About Market
Risks................................................ 19
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.................................... 20
Item 2. Changes in Securities................................ 20
Item 3. Defaults Upon Senior Securities...................... 20
Item 4. Submission of Matters to a Vote of Security Holders.. 20
Item 5. Other Information.................................... 20
Item 6. Exhibits and Reports on Form 8-K..................... 21
SIGNATURES......................................................... 21
EXHIBITS
Index to Exhibits............................................... 22
2
<PAGE>
OCEAN ENERGY, INC.
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
----------------------------
1998 1997
-------------- -----------
<S> <C> <C>
Operating revenues:
Gas sales............................................ $ 57,604 $ 52,803
Oil sales............................................ 83,405 75,154
Contract settlements and other....................... 874 698
-------- --------
141,883 128,655
-------- --------
Costs and expenses:
Production costs..................................... 37,307 28,534
General and administrative........................... 9,641 6,384
Depreciation, depletion and amortization............. 72,771 48,048
-------- --------
119,719 82,966
-------- --------
Income from operations................................. 22,164 45,689
Other income, expenses and deductions:
Interest and debt expense............................ 12,504 11,148
Merger costs......................................... 39,000
Interest and other expense (income).................. 341 (1,480)
-------- --------
Income (loss) before income taxes...................... (29,681) 36,021
Income tax provision (benefit):
Current.............................................. 1,943 1,282
Deferred............................................. (3,491) 13,354
-------- --------
Net income (loss)...................................... $(28,133) $ 21,385
======== ========
Basic earnings per share............................... $(0.28) $0.23
======== ========
Weighted average number of common shares outstanding... 100,091 91,765
======== ========
Diluted earnings per share............................. $(0.28) $0.22
======== ========
Weighted average number of common shares and common
share equivalents outstanding........................ 100,091 96,498
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
OCEAN ENERGY, INC.
CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 1998 1997
----------- -------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................. $ 13,400 $ 11,689
Accounts receivable
Oil and gas sales................................... 61,689 75,642
Joint interest and other............................ 79,074 49,289
Deferred income taxes.................................. 24 1,547
Inventory.............................................. 11,533 11,097
Prepaid expenses and other............................. 9,981 10,630
---------- ----------
175,701 159,894
---------- ----------
Property and equipment, at cost:
Oil and gas (full cost method)
Evaluated properties................................ 2,175,445 2,043,700
Unevaluated properties excluded from amortization... 300,648 232,726
Other.................................................. 34,109 28,182
---------- ----------
2,510,202 2,304,608
Accumulated depreciation, depletion and amortization... (953,639) (880,771)
---------- ----------
1,556,563 1,423,837
---------- ----------
Other assets:
Gas imbalances receivable.............................. 5,972 6,227
Deferred income taxes.................................. 13,392 130
Deferred financing costs............................... 16,109 19,661
Restricted deposits and other.......................... 8,906 33,246
---------- ----------
44,379 59,264
---------- ----------
TOTAL ASSETS........................................ $1,776,643 $1,642,995
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
OCEAN ENERGY, INC.
CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
----------- -------------
(Unaudited)
<S> <C> <C>
Current liabilities:
Accounts payable......................................... $ 219,078 $ 188,429
Advances from joint owners............................... 16,547 8,491
Interest payable......................................... 19,543 16,476
Accrued liabilities...................................... 2,594 6,572
Current maturities of long-term debt..................... 911 911
---------- ----------
258,673 220,879
---------- ----------
Long-term debt............................................. 785,741 672,298
---------- ----------
Deferred credits and other liabilities:
Deferred income taxes.................................... 18,648 11,159
Gas imbalances payable................................... 5,174 5,861
Other.................................................... 8,068 7,461
---------- ----------
31,890 24,481
---------- ----------
Commitments and contingencies
Stockholders' equity:
Common stock............................................. 1,003 1,001
Additional paid-in capital............................... 826,565 823,956
Accumulated other comprehensive income (loss)--foreign
currency translation adjustment....................... (6,315) (6,839)
Retained earnings (deficit).............................. (120,914) (92,781)
---------- ----------
700,339 725,337
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............... $1,776,643 $1,642,995
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
<TABLE>
<CAPTION>
OCEAN ENERGY, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
For the year ended December 31, 1997 and three months ended March 31, 1998
Accumulated
Common Stock Additional Other Retained Total
--------------------- Paid-In Comprehensive Earnings Stockholders'
Shares Amount Capital Income (Deficit) Equity
----------- -------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996.......................... 91,741,503 $ 918 $ 632,111 $ (4,257) $ (135,700) $ 493,072
OEI common stock offering.......................... 7,254,000 73 177,674 - - 177,747
Common shares issued in exchange for shares
tendered from a prior acquisition.............. 3,461 - - - - -
Exercise of common stock options................... 1,110,277 10 14,171 - - 14,181
Comprehensive income:
Net income........................................ - - - 42,919 42,919
Other comprehensive income (loss):
Foreign currency translation adjustment........... - - - (2,582) - (2,582)
--------------------------------------------------------------------------
Balance, December 31, 1997.......................... 100,109,241 $ 1,001 $ 823,956 $ (6,839) $ (92,781) $ 725,337
Exercise of common stock options................... 192,377 2 2,609 - 2,611
Comprehensive income:
Net loss.......................................... - - - - (28,133) (28,133)
Other comprehensive income:
Foreign currency translation adjustment............ - - - 524 - 524
--------------------------------------------------------------------------
Balance, March 31, 1998 (Unaudited)................. 100,301,618 $ 1,003 $ 826,565 $ (6,315) $ (120,914) $ 700,339
==========================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
OCEAN ENERGY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1998 1997
-------------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................... $ (28,133) $ 21,385
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation, depletion and amortization.................. 72,771 48,048
Amortization of debt issue cost........................... 5,819 648
Deferred income tax provision (benefit)................... (3,491) 13,354
Deferred hedge revenue.................................... 171 (41)
--------- ---------
47,137 83,394
Changes in assets and liabilities:
Decrease in receivables................................... 2,429 8,399
Increase in payables and other current liabilities........ 41,167 11,256
Increase in net gas imbalances............................ 343 168
Other..................................................... 698 1,458
--------- ---------
Net cash provided by operating activities.............. 91,774 104,675
--------- ---------
Cash flows from investing activities:
Additions to oil and gas properties......................... (203,567) (152,935)
Additions to other property and equipment................... (1,187) (2,118)
Net proceeds from sale of assets............................ 1,327 36,794
Increase in restricted deposits............................. (544) (544)
--------- ---------
Net cash used in investing activities.................. (203,971) (118,803)
Cash flows from financing activities:
Repayment of long-term debt................................. (326,480) (35,833)
Additions to total debt..................................... 439,892 52,500
Deferred financing cost..................................... (1,532) (2,133)
Proceeds from common stock options and warrants exercised... 2,028 3,007
--------- ---------
Net cash provided by financing activities.............. 113,908 17,541
--------- ---------
Net increase in cash and cash equivalents........................ 1,711 3,413
Cash and cash equivalents, beginning of the period............... 11,689 60,701
--------- ---------
Cash and cash equivalents, end of the period..................... $ 13,400 $ 64,114
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE>
OCEAN ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF FINANCIAL STATEMENTS
The accompanying consolidated financial statements of Ocean Energy, Inc. (OEI
or the Company), a Delaware corporation, included herein have been prepared,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC). Although certain information normally included in
financial statements prepared in accordance with generally accepted accounting
principles has been condensed or omitted, OEI believes that the disclosures are
adequate to make the information presented not misleading.
Effective March 27, 1998, pursuant to the Agreement and Plan of Merger dated
December 22, 1997, United Meridian Corporation (UMC) was merged into the Company
(the Merger). As a result of the Merger, each outstanding share of UMC common
stock was converted into 1.3 shares of OEI common stock with approximately 46
million shares issued to the shareholders of UMC representing approximately 46%
of all of the issued and outstanding shares of OEI. The Company's shareholders
received 2.34 shares of OEI shares for each share outstanding immediately
preceding the Merger representing approximately 54% of all of the issued and
outstanding shares of OEI. The Merger was accounted for as a pooling of
interests. Accordingly, the consolidated financial statements for periods prior
to the Merger have been restated to conform accounting policies and combine the
historical results of OEI and UMC and have been included in the Form 8-K filed
May 6, 1998.
The accompanying consolidated financial statements of OEI should be read in
conjunction with the supplemental consolidated financial statements and notes
thereto for the year ended December 31, 1997 included in the Form 8-K filed May
6, 1998.
The financial statements reflect all normal recurring adjustments that, in the
opinion of management, are necessary for a fair presentation.
NOTE 2 INVESTMENT IN OIL AND GAS PROPERTIES
On January 3, 1997, the Company completed the sale of its interest in the
South Marsh Island 269 field, realizing proceeds of $37.2 million from the sale.
No gain or loss was recognized on the sale.
On March 7, 1997, the Company completed the acquisition of certain interests
in various state leases in the Main Pass Block 69 field for a net purchase price
of $55.9 million.
NOTE 3 IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARD
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 130, Reporting Comprehensive Income,
which requires the reporting of comprehensive income and its components. In the
first quarter of 1998, the Company adopted the provisions of SFAS No. 130 and
disclosed comprehensive income (loss) of $(27.6) million for the three months
ended March 31, 1998 and $20.9 million for the comparable period in 1997, which
encompasses net income and foreign currency translation adjustments, in the
Consolidated Statement of Changes in Stockholders' Equity.
NOTE 4 FINANCIAL INSTRUMENTS
The Company hedges certain of its production through master swap agreements
(Swap Agreements). The Swap Agreements provide for separate contracts tied to
the NYMEX light sweet crude oil and natural gas futures contracts. The Company
has contracts which contain specific contracted prices (Swaps) that are settled
monthly based on the differences between the contract prices and the average
NYMEX prices for each month applied to the related contract volumes. To the
extent the average NYMEX price exceeds the contract price, the Company pays the
spread, and to the extent the contract price exceeds the average NYMEX price the
Company receives the spread. In addition, the Company has combined contracts
which have agreed upon price floors and ceilings (Costless Collars). To the
extent the average NYMEX price exceeds the contract
8
<PAGE>
ceiling, the Company pays the spread between the ceiling and the average NYMEX
price applied to the related contract volumes. To the extent the contract floor
exceeds the average NYMEX price, the Company receives the spread between the
contract floor and the average NYMEX price applied to the related contract
volumes. Under the terms of the Swap Agreements, each counterparty has extended
the Company a $5 million line of credit for use in conjunction with its hedging
activities. As of March 31, 1998, the fair market value of all contracts covered
by the Swap Agreements was approximately $13.6 million.
As of March 31, 1998, the Company's open forward position on its outstanding
crude oil Swaps was 3,300 MBbls at an average price of $19.88 per Bbl for the
year ended December 31, 1998. The Company currently has no outstanding natural
gas swaps.
As of March 31, 1998, the Company's open forward position on its outstanding
natural gas Costless Collars was as follows:
Effective Contracted Contracted Contracted
-------------- Volumes Floor Ceiling
Year From Through (MMBTU/day) Price Price
- ----------------- ---- ------- ----------- ---------- ----------
1998 May August 40,000 $2.00 $2.54
1998 May July 20,000 $2.00 $2.50
1998 May August 10,000 $2.00 $2.50
The Company currently has a fixed interest rate swap contract that provides
for fixed interest rates ranging from 6.10% in 1997 to 6.40% in 1998. The
effect of this swap was an increase in interest and debt expense of $77,000
during the three months ended March 31, 1998.
NOTE 5 CREDIT FACILITY
Concurrent with the closing of the Merger on March 27, 1998, the Company
entered into a $750.0 million five-year unsecured revolving credit facility (OEI
Credit Facility) with an initial borrowing base of $600.0 million. As of March
31, 1998, total borrowings outstanding against the facility were approximately
$265.0 million, leaving approximately $335.0 million of available credit.
NOTE 6 SUPPLEMENTAL GUARANTOR INFORMATION
Ocean Energy, Inc., a Louisiana corporation (Ocean Louisiana), the Company's
only direct subsidiary, has unconditionally guaranteed the full and prompt
performance of the Company's obligations under the 10 3/8% Senior Subordinated
Notes (10 3/8% Notes), the 13 1/2% Senior Notes (13 1/2% Notes), the 9 3/4%
Senior Subordinated Notes (9 3/4% Notes) and the 8 7/8% Senior Subordinated
Notes (8 7/8% Notes) and related indentures, including the payment of principal,
premium (if any) and interest. None of the referenced indentures place
significant restrictions on a wholly-owned subsidiary's ability to make
distributions to the parent. Other than intercompany arrangements and
transactions, the consolidated financial statements of Ocean Louisiana are
equivalent in all material respects to those of the Company and therefore the
separate consolidated financial statements of Ocean Louisiana are not material
to investors and have not been included herein. However, in an effort to provide
meaningful financial data relating to the guarantor (i.e., Ocean Louisiana on an
unconsolidated basis), the following condensed consolidating financial
information has been provided following the policies set forth below:
(1) Investments in subsidiaries are accounted for by the Company on the cost
basis. Earnings of subsidiaries are therefore not reflected in the related
investment accounts.
(2) Certain reclassifications were made to conform all of the financial
information to the financial presentation on a consolidated basis. The
principal eliminating entries eliminate investments in subsidiaries and
intercompany balances.
Certain intercompany notes and the related accrued interest were transferred
from the Company to a newly formed non-guarantor subsidiary effective as of
January 1, 1997.
9
<PAGE>
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the three months ended March 31, 1998 and 1997
(In thousands)
<TABLE>
<CAPTION>
Unconsolidated
--------------------------------------------
Guarantor Non-Guarantor Consolidated
OEI Subsidiary Subsidiaries OEI
--------- --------------- -------------- -------------
<S> <C> <C> <C> <C>
1998
- ----
Revenues..................................... $ -- $110,408 $31,475 $141,883
-------- -------- ------- --------
Costs and expenses:
Production costs........................... -- 32,418 4,889 37,307
General and administrative................. -- 9,142 499 9,641
Depreciation, depletion and amortization... -- 53,761 19,010 72,771
-------- -------- ------- --------
Income from operations....................... -- 15,087 7,077 22,164
Interest expense (income), net............. 4,029 10,549 (2,074) 12,504
Merger costs............................... -- 39,000 -- 39,000
Other credits, net......................... -- 116 225 341
-------- -------- ------- --------
Income (loss) before income taxes............ (4,029) (34,578) 8,926 (29,681)
Income tax provision (benefit)............... (21,822) 19,732 542 (1,548)
-------- -------- ------- --------
Net income (loss)............................ $ 17,793 $(54,310) $ 8,384 $(28,133)
======== ======== ======= ========
1997
- ----
Revenues..................................... $ -- $102,446 $26,209 $128,655
-------- -------- ------- --------
Costs and expenses:
Production costs........................... -- 24,882 3,652 28,534
General and administrative................. 30 5,884 470 6,384
Depreciation, depletion and amortization... -- 35,210 12,838 48,048
-------- -------- ------- --------
Income (loss) from operations................ (30) 36,470 9,249 45,689
Interest expense (income), net............. (4,761) 11,615 4,294 11,148
Other credits, net......................... -- (1,504) 24 (1,480)
-------- -------- ------- --------
Income before income taxes................... 4,731 26,359 4,931 36,021
Income tax provision........................ 1,723 10,150 2,763 14,636
-------- -------- ------- --------
Net income................................... $ 3,008 $ 16,209 $ 2,168 $ 21,385
======== ======== ======= ========
</TABLE>
10
<PAGE>
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
At March 31, 1998 and December 31, 1997
(In thousands)
<TABLE>
<CAPTION>
Unconsolidated
---------------------------------------------
Guarantor Non-Guarantor Eliminating Consolidated
OEI Subsidiary Subsidiaries Entries OEI
---------- --------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
MARCH 31, 1998
- --------------
ASSETS
Current assets............................. $ 12,251 $ 100,903 $ 74,796 $ (12,249) $ 175,701
Intercompany investments................... 1,097,156 9,584 303,524 (1,410,264) --
Property and equipment, net................ -- 1,187,632 368,931 -- 1,556,563
Other assets............................... 3,333 40,732 314 -- 44,379
---------- ---------- -------- ----------- ----------
Total assets............................. $1,112,740 $1,338,851 $747,565 $(1,422,513) $1,776,643
========== ========== ======== =========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities........................ $ 19,468 $ 205,128 $ 46,326 $ (12,249) $ 258,673
Long-term debt............................. 509,182 259,301 17,258 -- 785,741
Deferred credits and other liabilities..... -- 30,854 1,036 -- 31,890
Stockholders' equity....................... 584,090 843,568 682,945 (1,410,264) 700,339
---------- ---------- -------- ----------- ----------
Total liabilities & stockholders' equity... $1,112,740 $1,338,851 $747,565 $(1,422,513) $1,776,643
========== ========== ======== =========== ==========
DECEMBER 31, 1997
- -----------------
ASSETS
Current assets............................. $ 11,480 $ 103,243 $ 56,649 $ (11,478) $ 159,894
Intercompany investments................... 1,094,737 (19,479) 335,024 (1,410,282) --
Property and equipment, net................ -- 1,033,193 390,644 -- 1,423,837
Other assets............................... 5,395 89,189 (35,320) -- 59,264
---------- ---------- -------- ----------- ----------
Total assets............................. $1,111,612 $1,206,146 $746,997 $(1,421,760) $1,642,995
========== ========== ======== =========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities........................ $ 14,804 $ 180,345 $ 37,208 $ (11,478) $ 220,879
Long-term debt............................. 509,152 147,800 15,346 -- 672,298
Deferred credits and other liabilities..... -- 27,936 (3,455) -- 24,481
Stockholders' equity....................... 587,656 850,065 697,898 (1,410,282) 725,337
---------- ---------- -------- ----------- ----------
Total liabilities & stockholders' equity... $1,111,612 $1,206,146 $746,997 $(1,421,760) $1,642,995
========== ========== ======== =========== ==========
</TABLE>
11
<PAGE>
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the three months ended March 31, 1998 and 1997
(In thousands)
<TABLE>
<CAPTION>
Unconsolidated
--------------------------------------------
Guarantor Non-Guarantor Consolidated
OEI Subsidiary Subsidiaries OEI
--------- --------------- -------------- -------------
<S> <C> <C> <C> <C>
1998
- ----
Cash flows from operating activities:
Net income (loss)..................................... $ 17,793 $ (54,310) $ 8,384 $ (28,133)
Adjustments to reconcile net income (loss) to
cash from operating activities..................... (21,684) 78,738 18,216 75,270
Changes in assets and liabilities..................... 3,863 55,608 (14,834) 44,637
-------- --------- -------- ---------
Net cash provided by (used in)
operating activities.............................. (28) 80,036 11,766 91,774
Cash flows used in investing activities................. -- (142,051) (61,920) (203,971)
Cash flows provided by financing activities............. 28 68,702 45,178 113,908
-------- --------- -------- ---------
Net increase (decrease) in cash and cash equivalents.... -- 6,687 (4,976) 1,711
Cash and cash equivalents at beginning of period........ 2 2,653 9,034 11,689
-------- --------- -------- ---------
Cash and cash equivalents at end of period.............. $ 2 $ 9,340 $ 4,058 $ 13,400
======== ========= ======== =========
1997
- ----
Cash flows from operating activities:
Net income............................................ $ 3,008 $ 16,209 $ 2,168 $ 21,385
Adjustments to reconcile net income to
cash from operating activities..................... 1,861 45,768 14,380 62,009
Changes in assets and liabilities..................... 18,223 3,030 28 21,281
-------- --------- -------- ---------
Net cash provided by operating activities.......... 23,092 65,007 16,576 104,675
Cash flows used in investing activities................. -- (79,571) (39,232) (118,803)
Cash flows provided by (used in) financing activities... (23,093) 20,562 20,072 17,541
-------- --------- -------- ---------
Net increase (decrease) in cash and cash equivalents.... (1) 5,998 (2,584) 3,413
Cash and cash equivalents at beginning of period........ 3 47,518 13,180 60,701
-------- --------- -------- ---------
Cash and cash equivalents at end of period.............. $ 2 $ 53,516 $ 10,596 $ 64,114
======== ========= ======== =========
</TABLE>
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
On December 23, 1997, the Company announced that it entered into a Merger
Agreement with UMC that provided in part for a stock-for-stock merger of UMC
with and into the Company. Pursuant to the Merger Agreement, at the effective
time of the Merger, the Company's stockholders received 2.34 shares of the
combined company's common stock for each share of the Company's common stock
then owned and UMC stockholders received 1.30 shares of the combined company's
common stock for each share of UMC stock then owned. The Merger, effective
March 27, 1998, was treated as a pooling of interests for accounting purposes.
This financial review summarizes the combined financial condition and results
of operations giving retroactive effect to the Merger and should be read in
conjunction with the Company's supplemental consolidated financial statements
and the notes thereto included in the Form 8-K filed May 6, 1998. The
consolidated financial statements previously filed in the Company's Form 10-K
for the year ended December 31, 1997, have been restated therein to reflect the
combination of the historical results of OEI and UMC and conforming of
accounting policies in accordance with pooling of interests method of accounting
and included in the Form 8-K filed May 6, 1998.
RESULTS OF OPERATIONS
The following table sets forth certain operating information of the Company for
the periods shown:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------
1998 1997
---------- -------------
<S> <C> <C>
PRODUCTION:
Oil (MBO)
U.S............................................ 3,816 2,544
Canada......................................... 107 102
Cote d'Ivoire.................................. 209 294
Equatorial Guinea.............................. 1,394 750
------- -------
Total......................................... 5,526 3,690
======= =======
Natural gas (MMCF)
U.S............................................ 24,530 17,343
Canada......................................... 2,258 1,636
Cote d'Ivoire.................................. 1,844 951
------- -------
Total........................................ 28,632 19,930
======= =======
AVERAGE WELLHEAD SALES PRICE, INCLUDING HEDGING:
Oil ($ per bbl)
U.S............................................ $ 15.34 $ 21.34
Canada......................................... $ 12.88 $ 21.36
Cote d'Ivoire.................................. $ 15.67 $ 19.92
Equatorial Guinea.............................. $ 14.52 $ 17.11
Average...................................... $ 15.09 $ 20.37
Natural Gas ($ per MCF)
U.S............................................ $ 2.10 $ 2.76
Canada......................................... $ 1.31 $ 1.90
Cote d'Ivoire.................................. $ 1.71 $ 1.87
Average...................................... $ 2.01 $ 2.65
ADDITIONAL DATA ($ PER BOE):
Production and operating costs (1)............... $ 3.07 $ 3.24
General and administrative expense............... $ 0.94 $ 0.91
Oil and natural gas depletion and depreciation... $ 6.97 $ 6.73
</TABLE>
________________
(1) Costs incurred to operate and maintain wells and related equipment,
excluding ad valorem and production taxes of $0.55 and $0.83 per BOE for the
three months ended March 31, 1998 and 1997, respectively.
13
<PAGE>
THREE MONTHS ENDED MARCH 31, 1998 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1997
Operating revenues. The Company's total operating revenues increased
approximately $13.2 million, or 10%, to $141.9 million for the three months
ended March 31, 1998, from $128.7 million for the comparable period in 1997.
Production levels for the three months ended March 31, 1998, increased 47% to
10,298 MBOE from 7,012 MBOE for the comparable period in 1997. The increase in
oil and gas revenues is due to increased oil volumes in the Gulf of Mexico and
Equatorial Guinea, resulting partially from a full year's production from the
Central Gulf Properties and overall higher U.S. gas volumes.
Oil revenues increased $8.3 million, or 11%, to $83.4 million for the three
months ended March 31, 1998, from $75.1 million for the three months ended March
31, 1997, the result of significantly increased worldwide production volumes
offset by a drop in the average realized price received. Oil production
increased 50% to 5,526 MBO in the first quarter of 1998 as compared to the same
period in 1997 due primarily to increased oil production in the Gulf of Mexico
and Equatorial Guinea. The average sales price before hedging for oil decreased
31% to $14.23 in the first quarter of 1998 compared to $20.63 in the same period
in 1997.
Natural gas revenues increased $4.8 million, or 9%, to $57.6 million for the
three months ended March 31, 1998, from $52.8 million for the three months ended
March 31, 1997, the result of increased worldwide production which more than
offsets the decline in prices received for gas. Natural gas production
for the first quarter of 1998 was 28,632 MMCF, an increase of 44% over 1997
volumes due primarily to the impact of acquisitions and increased production in
the Gulf of Mexico, Cote d'Ivoire and Canada, offset by property sales and
natural production declines in North America. The average sales price before
hedging for natural gas decreased 24% to $2.01 per MCF in the first quarter of
1998 as compared to $2.65 in the first quarter of 1997.
For the quarter ended March 31, 1998, the Company's total revenues were
further affected by a $4.8 million increase in hedging revenues. In order to
manage its exposure to price risks in the sale of its crude oil and natural gas,
the Company from time to time enters into price hedging arrangements. The
Company's average sales prices including hedging for oil and natural gas for the
quarter ended March 31, 1998 were $15.09 per Bbl and $2.01 per Mcf compared to
$20.37 per Bbl and $2.65 per Mcf in the comparable 1997 period.
Production costs. Total production costs increased $8.8 million, or 31%, to
$37.3 million for the three months ended March 31, 1998, to $28.5 million for
the comparable 1997 period. This increase primarily results from fluctuations in
normal operating expenses, including operating expenses associated with
increased production from new facilities. Production and operating costs (costs
incurred to operate and maintain wells and related equipment, excluding ad
valorem and production taxes) decreased $0.17 per BOE, or 5%, to $3.07 per BOE
for the quarter ended March 31, 1998, from $3.24 per BOE in the comparable 1997
period. This decrease is primarily the result of increased production in the
Company's offshore Gulf of Mexico and Equatorial Guinea fields and resulting
increased utilization of existing facilities.
General and administrative expenses. General and administrative expenses
increased $3.3 million, or 51%, to $9.6 million for the three months ended March
31, 1998 from $6.3 million in the comparable 1997 period. This increase
is primarily due to costs of increased corporate staffing associated with both
an increase in drilling activities and the Company's property acquisitions in
1997. In addition, a new systems implementation partially offset by an increase
in 1997 in the capitalization of a portion of the salaries paid to employees
directly engaged in the acquisition, exploration and development of oil and gas
properties in accordance with the full cost method of accounting contributed to
the increase. As a result of these factors, general and administrative expenses
per BOE increased slightly by $0.03 per BOE, or 3%, to $0.94 per BOE for the
quarter ended March 31, 1998, from $0.91 per BOE for the comparable 1997 period.
Depreciation, depletion and amortization expense. Depreciation, depletion and
amortization (DD&A) expense increased $24.7 million, or 51%, to $72.8 million
for the three months ended March 31, 1998, from $48.1 million for the comparable
1997 period. This variance is primarily attributable to the Company's increased
production and related current and future capital costs from the 1997 and 1998
Gulf of Mexico and international drilling programs and acquisitions, partially
offset by the increase in proved reserves resulting from such programs and
acquisitions. DD&A increased $0.24 per BOE, or 4%, to $6.97 per BOE for the
quarter ended March 31, 1998, from $6.73 per BOE for the comparable 1997 period.
This unit increase is primarily the result of increased production from the
Company's Gulf of Mexico and Equatorial Guinea fields.
14
<PAGE>
Interest and debt expense. Interest and debt expense increased $1.4 million,
or 12%, to $12.5 million for the three months ended March 31, 1998, from $11.1
million in the comparable 1997 period. This increase is primarily the result of
an increase in debt levels in the first quarter of 1998 resulting from the
higher capital spending program in the quarter.
Merger Costs. Merger costs of $39.0 million have been recorded in the first
quarter of 1998. These costs consist primarily of investment banking and other
transaction fees, employee severance and relocation costs as well as the write-
off of deferred financing costs related to the former credit facilities replaced
by the OEI Credit Facility in March 1998.
Income tax expense (benefit). An income tax benefit of $1.6 million (of which
$1.9 million is a current provision and $3.5 million is a deferred benefit) was
recognized for 1998, compared to a provision of $14.6 million (of which $1.3
million was a current provision and $13.3 million was a deferred provision) for
1997. A significant portion of current taxes in 1997 is a $4.6 million non-cash
provision representing current taxes incurred in Cote d'Ivoire which, under the
terms of the production sharing contract, will be paid by the Ivorian government
from their production proceeds. The first quarter of 1998 deferred tax benefit
is further impacted by the tax treatment of certain Merger costs, a portion of
which was not deductible for tax purposes. Consistent with Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes, the
deferred income tax provision or benefit was derived primarily from changes in
deferred income tax assets and liabilities recorded on the balance sheet.
Net income. Due to the factors described above, net income (loss) for the
three months ended March 31, 1998, decreased to $(28.1) million, a decrease of
$49.5 million from net income of $21.4 million for the comparable 1997 period.
LIQUIDITY AND CAPITAL RESOURCES
The following summary table reflects comparative cash flows for the Company
for the three months ended March 31, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------
1998 1997
-------------- -------------
<S> <C> <C>
Net cash provided by operating activities $ 91,774 $ 104,675
Net cash used in investing activities (203,971) (118,803)
Net cash provided by financing activities 113,908 17,541
</TABLE>
For the three months ended March 31, 1998, net cash provided by operating
activities decreased by $12.9 million, or 12%, as compared to the three months
ended March 31, 1997, resulting primarily from an increase in depreciation,
depletion and amortization.
Cash used in investing activities during the three months ended March 31,
1998, increased to $204.0 million, or 72%, as compared to $118.8 million in the
comparable 1997 period. This increase relates primarily to the Company's active
acquisition programs, primarily in the Gulf of Mexico with the Main Pass 69 and
South Pass acquisitions, active exploration programs in the Gulf of Mexico and
Equatorial Guinea and development project expenditures.
Financing activities during the three months ended March 31, 1998, generated
cash of $113.9 million, as compared to $17.5 million in the comparable 1997
period, resulting from increased drawdowns on the OEI Credit Facility.
Capital requirements. The Company's capital investments to date have focused
primarily on exploration, acquisitions and development of proved properties. The
Company's expenditures for property acquisition, exploration and development for
the three months ended March 31, 1998 and 1997 are as follows:
15
<PAGE>
<TABLE>
<CAPTION>
Three months ended March 31,
-----------------------------
1998 1997
-------------- ------------
(in thousands)
<S> <C> <C>
Property acquisition costs:
Proved......................................... $ (147) $ 50,442
Unproved....................................... 5,358 10,772
Exploration costs................................ 84,220 41,468
Development costs................................ 104,990 66,901
Capitalized interest on unevaluated properties... 4,973 2,224
Capitalized general and administrative costs..... 4,828 3,244
-------- --------
Total costs incurred............................. $204,222 $175,051
======== ========
</TABLE>
The Company makes, and will continue to make, substantial capital expenditures
for the acquisition, exploration, development, production and abandonment of its
oil and natural gas reserves. The Company has historically funded its
operations, acquisitions, exploration and development expenditures from cash
flows from operating activities, bank borrowings, sales of common and preferred
stock, issuance of senior subordinated notes, sales of non-strategic oil and
natural gas properties, sales of partial interests in exploration concessions
and project finance borrowings. The Company intends to finance 1998 capital
expenditures related to this strategy primarily with funds provided by
operations, borrowings or other capital market activities.
The Company's capital expenditure budget for 1998 is expected to be
approximately $600.0 million. Primary areas of emphasis will be West Africa,
East Texas, the Gulf of Mexico and other international areas. In addition, the
Company will evaluate its level of capital spending throughout the year based
upon drilling results, commodity prices, cash flows from operations and property
acquisitions. Actual capital spending may vary from the capital expenditure
budget.
The Company continues to maintain a sound financial structure. The Company's
debt to total capitalization ratio has increased slightly to 53% at March 31,
1998, from 48% at December 31, 1997. However, the Company's interest coverage
ratio (calculated as the ratio of income from operations plus DD&A and
impairment of proved oil and gas properties to interest plus capitalized
interest less non-cash amortization of debt issue costs) was 5.7 to 1 for the
first quarter of 1998 compared with 7.4 to 1 for first quarter of 1997. This
measure provides investors with a measure of the Company's ability to service
debt. This ratio is an indicator of the Company's strong financial position and
future capability to service debt and fund operations. Access to various
capital markets, combined with cash flows from operating activities, provide the
Company with the financial strength, leverage and liquidity that will allow it
to fund its 1998 capital expenditure program, including both Gulf of Mexico and
international exploration and development opportunities in Cote d'Ivoire,
Equatorial Guinea, Pakistan and Bangladesh, and continue to selectively pursue
strategic acquisitions.
Concurrent with the closing of the Merger on March 27, 1998, the Company
entered into a $750.0 million five-year unsecured revolving credit facility (OEI
Credit Facility) which combines and replaces the Revolving Credit Facility and
the Global Credit Facility. The OEI Credit Facility, which is with a group of
commercial banks, provides for various borrowing options under either a base
rate or Eurodollar margin rates. As of March 31, 1998, the OEI Credit Facility
provides a $600.0 million initial borrowing base. As of March 31, 1998, total
borrowings outstanding against the facility were approximately $265.0 million,
leaving approximately $335.0 million of available credit.
In addition to developing its existing reserves, the Company attempts to
increase its reserve base, production and operating cash flow by engaging in
strategic acquisitions of oil and gas properties. In order to finance other
possible future acquisitions, the Company may seek to obtain additional debt or
equity financing. The availability and attractiveness of these sources of
financing will depend upon a number of factors, some of which will relate to the
financial condition and performance of the Company, and some of which will be
beyond the Company's control, such as prevailing interest rates, oil and gas
prices and other market conditions. There can be no assurance that the Company
will acquire any additional producing properties. In addition, the ability of
the Company to incur additional indebtedness and grant security interests with
respect thereto will be subject to the terms of the various indentures.
Liquidity. The ability of the Company to satisfy its obligations and fund
planned capital expenditures will be dependent upon its future performance,
which will be subject to prevailing economic conditions, including oil and gas
prices, and to financial and business conditions and other factors, many of
which are beyond its control, supplemented if
16
<PAGE>
necessary with existing cash balances and borrowings under the OEI Credit
Facility. The Company currently expects that its cash flow from operations and
availability under the OEI Credit Facility will be adequate to execute its 1998
business plan. However, no assurance can be given that the Company will not
experience liquidity problems from time to time in the future or on a long-term
basis. If the Company's cash flow from operations and availability under the
OEI Credit Facility are not sufficient to satisfy its cash requirements, there
can be no assurance that additional debt or equity financing will be available
to meet its requirements.
Effects of Leverage. The Company has outstanding indebtedness of
approximately $786.7 million as of March 31, 1998. The Company's level of
indebtedness has several important effects on its future operations, including
(i) a substantial portion of the Company's cash flow from operations must be
dedicated to the payment of interest on its indebtedness and will not be
available for other purposes, (ii) the covenants contained in the various
indentures require the Company to meet certain financial tests, and contain
other restrictions which limit the Company's ability to borrow additional funds
or to dispose of assets and may affect the Company's flexibility in planning
for, and reacting to, changes in its business, including possible acquisition
activities and (iii) the Company's ability to obtain additional financing in the
future for working capital, expenditures, acquisitions, general corporate
purposes or other purposes may be impaired. None of the indentures place
significant restrictions on a wholly-owned subsidiary's ability to make
distributions to the parent company.
The Company believes it is currently in compliance with all covenants
contained in the respective indentures and has been in compliance since the
issuance of the 13 1/2% Notes, the 9 3/4% Notes, the 8 7/8% Notes and the
10 3/8% Notes.
The Company's ability to meet its debt service obligations and to reduce its
total indebtedness will be dependent upon the Company's future performance,
which will be subject to oil and gas prices, general economic conditions and to
financial, business and other factors affecting the operations of the Company,
many of which are beyond its control. There can be no assurance that the
Company's future performance will not be adversely affected by such economic
conditions and financial, business and other factors.
OTHER MATTERS
Energy swap agreements. The Company engages in futures contracts with certain
of its production through master swap agreements (Swap Agreements). The Company
considers these futures contracts to be hedging activities and, as such, monthly
settlements on these contracts are reflected in oil and gas sales. In order to
consider these futures contracts as hedges, (i) the Company must designate the
futures contract as a hedge of future production and (ii) the contract must
reduce the Company's exposure to the risk of changes in prices. Changes in the
market value of futures contracts treated as hedges are not recognized in income
until the hedged item is also recognized in income. If the above criteria are
not met, the Company will record the market value of the contract at the end of
each month and recognize a related gain or loss. Proceeds received or paid
relating to terminated contracts or contracts that have been sold are amortized
over the original contract period and reflected in oil and gas sales. The
Company enters into hedging activities in order to secure an acceptable future
price relating to a portion of future production. The primary objective of
these activities is to protect against decreases in price during the term of the
hedge.
The Swap Agreements provide for separate contracts tied to the NYMEX light
sweet crude oil and natural gas futures contracts. The Company has contracts
which contain specific contracted prices (Swaps) that are settled monthly based
on the differences between the contract prices and the average NYMEX prices for
each month applied to the related contract volumes. To the extent the average
NYMEX price exceeds the contract price, the Company pays the spread, and to the
extent the contract price exceeds the average NYMEX price the Company receives
the spread. Under the terms of the Swap Agreements, each counterparty has
extended the Company a $5.0 million line of credit for use in conjunction with
its hedging activities. As of March 31, 1998, the fair market value of all
contracts covered by the Swap Agreements was approximately $13.6 million.
As of March 31, 1998, after giving effect to three hedges that were unwound in
January 1998, the Company's open forward position on its outstanding crude oil
Swaps was 3,300 MBbls at an average price of $19.88 per Bbl for the year ended
December 31, 1998. The Company currently has no outstanding natural gas Swaps.
It is the Company's current intention to commit no more than 50% of its
production on a BOE basis to such arrangements at any point in time. As the
current swap agreements expire, the portion of the Company's oil and natural
17
<PAGE>
gas production which is subject to price fluctuations will increase
substantially, unless the Company enters into additional hedging transactions.
Price fluctuations and volatile nature of markets. Despite the measures taken
by the Company to attempt to control price risk, the Company remains subject to
price fluctuations for natural gas and oil sold on the spot market. Prices
received for natural gas sold on the spot market are volatile due primarily to
seasonality of demand and other factors beyond the Company's control. Domestic
oil prices generally follow worldwide oil prices which are subject to price
fluctuations resulting from changes in world supply and demand. Any significant
decline in prices for oil and gas could have a material adverse effect on the
Company's financial position, results of operations and quantities of reserves
recoverable on an economic basis.
Environmental. The Company's business is subject to certain federal, state,
and local laws and regulations relating to the exploration for, and the
development, production and transportation of, oil and natural gas, as well as
environmental and safety matters. Many of these laws and regulations have
become more stringent in recent years, often imposing greater liability on a
larger number of potentially responsible parties. Although the Company believes
it is in substantial compliance with all applicable laws and regulations, the
requirements imposed by such laws and regulations are frequently changed and
subject to interpretation, and the Company is unable to predict the ultimate
cost of compliance with these requirements or their effect on its operations.
Under certain circumstances, the MMS may require any Company operations on
federal leases to be suspended or terminated. Any such suspensions, terminations
or inability to meet applicable bonding requirements could materially and
adversely affect the Company's financial condition and operations. Although
significant expenditures may be required to comply with governmental laws and
regulations applicable to the Company, to date such compliance has not had a
material adverse effect on the earnings or competitive position of the Company.
It is possible that such regulations in the future may add to the cost of
operating offshore drilling equipment or may significantly limit drilling
activity. The Company has included $10.0 million in its 1998 exploration and
development capital budget to reformat operations for alternative disposal of
water produced from its offshore wells in accordance with an approved zero
discharge plan.
The Oil Pollution Act of 1990 (OPA) imposes ongoing requirements on a
responsible party including proof of financial responsibility to cover at least
some costs in a potential spill. For tank vessels, including mobile offshore
drilling rigs, the OPA imposes on owners, operators and charterers of the
vessels, an obligation to maintain evidence of financial responsibility of up to
$10.0 million depending on gross tonnage. With respect to offshore facilities,
proof of greater levels of financial responsibility may be applicable. This
amount is subject to upward regulatory adjustment up to $150.0 million.
Year 2000 compliance. The Company is currently in the process of evaluating
its information technology infrastructure for the year 2000 (Year 2000)
compliance. The Company's primary information systems are in the process of
being replaced with fully compliant new systems as part of a regularly scheduled
upgrade to meet the Company's growing capacity and performance requirements.
These replacements are expected to be completed by early 1999.
The Company does not expect that the cost to modify and replace its
information technology infrastructure to be Year 2000 compliant will be material
to its financial condition or results of operations. The Company does not
anticipate any material disruption in its operations as a result of any failure
by the Company to be in compliance. The costs of these projects and the date on
which the Company plans to complete modifications and replacements are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events including the continued availability of certain resources,
third party modification plans and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those plans.
The Company does not currently have any information concerning the Year 2000
compliance status of its suppliers and customers. In the event that any of the
Company's significant suppliers or customers do not successfully and timely
achieve Year 2000 compliance, the Company's business or operations could be
adversely affected.
The Company has not incurred significant costs related to Year 2000 compliance
prior to December 31, 1997, other than internal costs to evaluate the extent of
compliance.
Forward-looking statements. Certain statements in this report, including
statements of the Company's and management's expectation, intentions, plans and
beliefs, including those contained in or implied by "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the Notes to
Consolidated Financial
18
<PAGE>
Statements, are "forward-looking statements", within the meaning of Section 21E
of the Securities Exchange Act of 1934, that are subject to certain events, risk
and uncertainties that may be outside the Company's control. These forward-
looking statements include statements of management's plans and objectives for
the Company's future operations and statements of future economic performance;
information regarding drilling schedules, expected or planned production or
transportation capacity, future production levels of international and domestic
fields, the Company's capital budget and future capital requirements, the
Company's meeting its future capital needs, the Company's realization of its
deferred tax assets, the level of future expenditures for environmental costs
and the outcome of regulatory and litigation matters; and the assumptions
described in this report underlying such forward-looking statements. Actual
results and developments could differ materially from those expressed in or
implied by such statements due to a number of factors, including, without
limitation, those described in the context of such forward-looking statements,
fluctuations in the price of crude oil and natural gas, the success rate of
exploration efforts, timeliness of development activities, risk incident to the
drilling and completion for oil and gas wells, future production and development
costs, the political and economic climate in which the Company conducts
operations and the risk factors described from time to time in the Company's
other documents and reports filed with the Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
Not applicable.
19
<PAGE>
OCEAN ENERGY, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On December 29, 1997, a class action complaint (Newman v. Carson, et al.,
Civil Action No. 16109-NC) was filed in the Court of Chancery of the State of
Delaware, by a person claiming to represent the stockholders of UMC against UMC
and each of its directors. On January 9, 1998, a similar class action complaint
(Ross v. Brock. et al., Civil Action No. 98-00845) was filed in the District
Court of Harris County, Texas, 164th Judicial District by another person
claiming to represent the stockholders of UMC against UMC and each of its
directors. Preliminary settlements have been reached in each of these
complaints, the effects of which are not material to the consolidated financial
statements.
The U.S. Environmental Protection Agency has indicated that the Company may
be potentially responsible for costs and liabilities associated with alleged
releases of hazardous substances at two sites in Louisiana under the
Comprehensive Environmental Response, Compensation and Liability Act. Given the
extremely large number of companies that have been identified as potentially
responsible for releases of hazardous substances at the sites and the small
volume of hazardous substances allegedly disposed of by the companies whose
properties the Company acquired, management believes that the Company's
potential liability arising from these sites, if any, will not have a material
adverse impact on the Company.
In February 1998, the Tulane Environmental Law Clinic (Clinic), claiming to
represent several southeastern Louisiana environmental groups, gave notice that
it intends to file a Clean Water Act citizens' suit against the Company after a
sixty-day waiting period expires in connection with the discharge of produced
water in East Bay. The Clinic claims that the Company is violating the Clean
Water Act by discharging produced water from its East Bay Central Facilities
into Southwest Pass, and has stated that it will seek an injunction to require
the Company to cease its discharge of produced water, and will seek civil
penalties and attorney's fees. If the Clinic were to successfully obtain an
injunction, certain production operations at the Company's East Bay Facilities
could be interrupted until favorable resolution of the issue in court or
accelerated completion of the Company's plan to reformat operations to provide
for alternative produced water disposal. The Company believes that its zero
discharge compliance plan, which permits the temporary continued discharge of
produced water into Southwest Pass through July 1, 1999, is completely lawful as
authorized by a Compliance Order issued by the Louisiana Department of
Environmental Quality, and intends to vigorously defend any such citizens' suit,
if filed. The Clinic has delivered similar notices to other Louisiana coastal
producers.
The Company is a named defendant in lawsuits and is a party in governmental
proceedings from time to time arising in the ordinary course of business. While
the outcome of such lawsuits or other proceedings against the Company cannot be
predicted with certainty, management does not expect these matters to have a
material adverse effect on the financial position or results of operations of
the Company.
ITEM 2. CHANGES IN SECURITIES
In connection with the merger of United Meridian Corporation with and into
the Company, the Company's stockholders received 2.34 shares of the combined
Company's common stock for each share of the Company's common stock owned and
United Meridian Corporation stockholders received 1.30 shares of the combined
Company's common stock for each share of the United Meridian Corporation stock
owned.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On March 27, 1998, the shareholders approved a stock-for-stock merger of
United Meridian Corporation with and into the Company, approved the OEI 1998
Long-Term Incentive Plan, elected certain directors and ratified the appointment
of Arthur Andersen LLP as auditors.
ITEM 5. OTHER INFORMATION
None
20
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
[A] Exhibits: See Index to Exhibits on page 22.
[B] Reports on Form 8-K
A Form 8-K dated February 19, 1998 was filed announcing earnings as of
December 31, 1997.
A Form 8-K dated March 3, 1998 was filed announcing an exclusive Gulf of
Mexico exploration alliance with Shell Offshore Inc.
A Form 8-K dated March 31, 1998 was filed announcing the Merger and related
debt refinancings and the results of matters voted on by security holders.
A Form 8-K dated May 6, 1998 was filed containing the Company's
Supplemental Consolidated Financial Statements and Related Management's
Discussion and Analysis of Financial Condition and Results of Operations
giving retroactive effect of the merger between United Meridian Corporation
and Ocean Energy, Inc.
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.
Signature Title Date
--------- ----- ----
/s/ Jonathan M. Clarkson Executive Vice President and May 13, 1998
- ------------------------- Chief Financial Officer
Jonathan M. Clarkson
/s/ Christopher E. Cragg Vice President and Controller May 13, 1998
- ------------------------ (Chief Accounting Officer)
Christopher E. Cragg
21
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
- ------- ----------------------------------------------------------------------
2.1 Agreement and Plan of Merger, dated as of December 22, 1997, by and
among the Company, United Meridian Corporation, a Delaware
Corporation, and OEI Holding Corporation, a Delaware corporation,
incorporated by reference to Exhibit 2.1 to United Meridian
Corporation's Current Report on Form 8-K filed on December 23, 1997.
2.2 Amendment No. 1 to Agreement and Plan of Merger, dated as of January
7, 1997, among the Company, OEI Holding Corporation, a Delaware
corporation and United Meridian Corporation, a Delaware corporation,
incorporated by reference to Exhibit 2.2 to the Company's
Registration Statement on Form S-4 (Registration No. 333-43933).
2.3 Amendment No. 2 to Agreement and Plan of Merger, dated as of February
20, 1998, among the Company, OEI Holding Corporation, a Delaware
corporation, and United Meridian Corporation, a Delaware corporation,
incorporated by reference to Exhibit 2.3 to the Company's
Registration Statement on Form S-4 (Registration No. 333-43933).
3.1 Certificate of Incorporation of the Company, as amended, incorporated
by reference to Exhibit 99.1 to the Company's Form 8-K filed with the
Securities and Exchange Commission on March 31, 1998.
3.2 Amended and Restated Bylaws of the Company, incorporated by reference
to Exhibit 99.2 to the Company's Form 8-K filed with the Securities
and Exchange Commission on March 31, 1998.
10.1 Employment Agreement, dated as of March 27, 1998, among the Company
and John B. Brock, incorporated by reference to Exhibit 10.1 to the
Company's Form 8-K filed with the Securities and Exchange Commission
on March 31, 1998.
10.2 Employment Agreement, dated as of March 27, 1998, among the Company
and James C. Flores, incorporated by reference to Exhibit 10.2 to the
Company's Form 8-K filed with the Securities and Exchange Commission
on March 31, 1998.
10.3 Global Credit Agreement, dated as of March 27, 1998, by and among the
Company, OEI Louisiana, Chase Bank of Texas, National Association
("Chase Texas") as Administrative Agent, Morgan Guaranty Trust of New
York ("Morgan Guaranty") as Syndication Agent, Barclay Bank PLC as
Documentation Agent, and the other Lenders named therein, incorporated
by reference to Exhibit 10.3 to the Company's Form 8-K filed with the
Securities and Exchange Commission on March 31, 1998.
10.4 Guaranty Agreement, dated as of March 27, 1998, by and among the
Company, Chase Texas as Administrative Agent, Morgan Guaranty as
Syndication Agent, Barclays Bank PLC as Documentation Agent, and the
other Lenders named therein, incorporated by reference to Exhibit 10.4
to the Company's Form 8-k filed with the Securities and Exchange
Commission on March 31, 1998.
10.5 Intercreditor Agreement, dated as of March 27, 1998, by and among
the Company, OEI Louisiana, UMC Canada, Chase Texas as Administrative
Agent and Paying Agent, Morgan Guaranty as Syndication Agent, Barclays
Bank PLC as Documentation Agent, and the other Lenders named therein,
incorporated by reference to Exhibit 10.5 to the Company's Form 8-K
filed with the Securities and Exchange Commission on March 31, 1998.
10.6 Credit Agreement, dated as of March 27, 1998, by and among UMC
Canada, the Chase Manhattan Bank of Canada ("Chase Canada") as Agent,
and the other Lenders named therein, incorporated by reference to
Exhibit 10.6 to the Company's Form 8-K filed with the Securities and
Exchange Commission on March 31, 1998.
10.7 Guaranty Agreement, dated as of March 27, 1998, by and among the
Company, Chase Canada as Administrative Agent, and the other Lenders
named therein, incorporated by reference to Exhibit 10.7 to the
Company's Form 8-K filed with the Securities and Exchange Commission
on March 31, 1998.
10.8 Guaranty Agreement, dated as of March 27, 1998, by and among OEI
Louisiana, Chase Canada as Administrative Agent and the other Lenders
named therein, incorporated by reference to Exhibit 10.8 to the
Company's Form 8-K filed with the Securities and Exchange Commission
on March 31, 1998.
10.9 Third Supplemental Indenture, dated as of March 27, 1998, among Ocean
Energy, Inc., a Delaware corporation, Ocean Energy, Inc., a Louisiana
corporation, and State Street Bank and Trust Company, relating to the
13 1/2% Senior Notes due 2004, incorporated by reference to Exhibit
10.9 to the Company's Form 8-K filed with the Securities and Exchange
Commission on March 31, 1998.
10.10 First Supplemental Indenture, dated as of March 27, 1998, among Ocean
Energy, Inc. a Delaware corporation, Ocean Energy, Inc., a Louisiana
corporation, and State Street Bank and Trust Company, relating to the
9 3/4% Senior Subordinated Notes due 2006, incorporated by reference
to Exhibit 10.10 to the Company's Form 8-K filed with the Securities
and Exchange Commission on March 31, 1998.
10.11 First Supplemental Indenture, dated as of March 27, 1998, among Ocean
Energy, Inc., a Delaware corporation, Ocean Energy, Inc., a Louisiana
corporation, and State Street Bank and Trust Company, relating to the
8 7/8% Senior Subordinated Notes due 2007, incorporated by reference
to Exhibit 10.11 to the Company's Form 8-K filed with the Securities
and Exchange Commission on March 31, 1998.
10.12 Second Supplemental Indenture, dated as of March 27, 1998, among Ocean
Energy, Inc. a Delaware corporation (successor by merger to United
Meridian Corporation), Ocean Energy, Inc., a Louisiana corporation,
(successor by merger to UMC Petroleum Corporation), and U.S. Bank
Trust National Association, relating to the 10 3/8% Senior
Subordinated Notes due 2005, incorporated by reference to Exhibit
10.12 to the Company's Form 8-K filed with the Securities and Exchange
Commission on March 31, 1998.
10.13 Ocean Energy, Inc. 1998 Long Term Incentive Plan, incorporated by
reference to Exhibit 10.13 to the Company's Form 8-K filed with the
Securities and Exchange Commission on March 31, 1998.
10.14 Petroleum Production Sharing Contract on Block CI-11 dated June 27,
1992 among the Republic of Cote d'Ivoire, UMIC Cote d'Ivoire
Corporation and Societe Nationale d'Operations Petrolieres de la Cote
d'Ivoire (including English translation), incorporated herein by
reference to Exhibit 10.5 to Amendment No. 3 to United Meridian
Corporation's Form S-1 (No. 33-63532) filed with the Securities and
Exchange Commission on July 20, 1993.
10.15 Production Sharing Contract dated August 18, 1992 between the Republic
of Equatorial Guinea and United Meridian International Corporation
(Area A - Offshore NE Bioco), incorporated herein by reference to
Exhibit 10.6 to Amendment No. 1 to United Meridian Corporation's Form
S-1 (No. 33-63532) filed with the Securities and Exchange Commission
on June 18, 1993.
10.16 Production Sharing Contract dated June 29, 1992 between the Republic
of Equatorial Guinea and United Meridian International Corporation
(Area B - Offshore NW Bioco), incorporated herein by reference to
Exhibit 10.7 to Amendment No. 1 to United Meridian Corporation's Form
S-1 (No. 33-63532) filed with the Securities and Exchange Commission
on June 18, 1993.
10.17 Production Sharing Contract dated June 29, 1994 between the Republic
of Equatorial Guinea and United Meridian International Corporation
(Area C - Offshore Bioco), incorporated by reference to Exhibit 10.15
to United Meridian Corporation's 1994 Form 10-K filed with the
Securities and Exchange Commission on March 10, 1995.
10.18 Production Sharing Contract on Block CI-01 dated December 5, 1994
among The Republic of Cote d'Ivoire, UMIC Cote d'Ivoire Corporation
and Societe National d'Operations Petrolieres de la Cote d'Ivoire
(English translation), incorporated by reference to Exhibit 10.16 to
United Meridian Corporation's 1994 Form 10-K filed with the Securities
and Exchange Commission on March 10, 1995.
10.19 Production Sharing Contract on Block CI-02 dated December 5, 1994
among The Republic of Cote d'Ivoire, UMIC Cote d'Ivoire Corporation
and Societe Nationale d'Operations Petrolieres de la Cote d'Ivoire
(English translation), incorporated by reference to Exhibit 10.17 to
United Meridian Corporation's 1994 Form 10-K filed with the Securities
and Exchange Commission on March 10, 1995.
10.20 Production Sharing of Block CI-12 dated April 27, 1995 among The
Republic of Cote d'Ivoire, UMIC Cote d'Ivoire Corporation and others
(English translation), incorporated by reference to Exhibit 10.18 to
United Meridian Corporation's 1995 Form 10-K filed with the Securities
and Exchange Commission on March 7, 1996.
10.21 Production Sharing Contract dated April 5, 1995 between The Republic
of Equatorial Guinea and UMIC Equatorial Guinea Corporation (Area D -
Offshore Bioco), incorporated by reference to Exhibit 10.20 to United
Meridian Corporation's Form 10-Q for the period ended September 30,
1995 filed with the Securities and Exchange Commission on August 10,
1995.
27.1* Financial Data Schedule, included solely in the Form 10-Q filed
electronically with the Securities and Exchange Commission.
______________________________
* Filed herewith.
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 13,400
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 1,190
<INVENTORY> 11,533
<CURRENT-ASSETS> 175,701
<PP&E> 2,510,202
<DEPRECIATION> 953,639
<TOTAL-ASSETS> 1,776,643
<CURRENT-LIABILITIES> 258,673
<BONDS> 785,741
0
0
<COMMON> 1,003
<OTHER-SE> 699,336
<TOTAL-LIABILITY-AND-EQUITY> 1,776,643
<SALES> 141,009
<TOTAL-REVENUES> 141,883
<CGS> 0
<TOTAL-COSTS> 37,307
<OTHER-EXPENSES> 72,771
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,504
<INCOME-PRETAX> (29,681)
<INCOME-TAX> (1,548)
<INCOME-CONTINUING> (28,133)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (28,133)
<EPS-PRIMARY> (0.28)
<EPS-DILUTED> (0.28)
</TABLE>
