<PAGE> 1
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO ________
COMMISSION FILE NUMBER 0-26444
FORCENERGY INC
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 65-0429338
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2730 S.W. 3RD AVENUE
SUITE 800
MIAMI, FLORIDA 33129-2356
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (305) 856-8500
--------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ------------------------
Common Stock, per value $0.1 per share New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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
----- -----
Indicate by checkmark if disclosure of delinquent filings pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ______
As of March 13, 1998, there were outstanding 25,513,102 shares of
common stock of the Registrant. The aggregate market value on such date of the
voting stock of the Registrant held by non-affiliates was an estimated $384.1
million.
===============================================================================
<PAGE> 2
FORM 10-K
FORCENERGY INC
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PART I PAGE
---- ------ ----
<S> <C> <C>
1 BUSINESS......................................................................................... 1
2 PROPERTIES....................................................................................... 10
3 LEGAL PROCEEDINGS................................................................................ 12
4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............................................. 12
PART II
-------
5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS....................................................................................... 12
6 SELECTED FINANCIAL DATA.......................................................................... 13
7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS......................................................................... 14
8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................................................... 19
9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.......................................................................... 19
PART III
--------
10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............................................... 19
11 EXECUTIVE COMPENSATION........................................................................... 19
12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................... 19
13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................................... 19
PART IV
-------
14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K................................. 20
GLOSSARY OF OIL AND GAS TERMS.................................................................... 24
</TABLE>
<PAGE> 3
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act") and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). All statements other than statements of historical
fact included in this Form 10-K, including without limitation, statements under
"Business" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" regarding the planned capital expenditures, increases in
oil and gas production, the number of anticipated wells to be drilled in 1998
and thereafter, the Company's financial position, business strategy and other
plans and objectives for future operations, are forward-looking statements.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to have been correct. There are numerous uncertainties
inherent in estimating quantities of proved oil and natural gas reserves and in
projecting future rates of production and timing of development expenditures,
including many factors beyond the control of the Company. Reserve engineering is
a subjective process of estimating underground accumulations of oil and natural
gas that cannot be measured in an exact way, and the accuracy of any reserve
estimate is a function of the quality of available data and of engineering and
geological interpretation and judgment. As a result, estimates made by different
engineers often vary from one another. In addition, results of drilling, testing
and production subsequent to the date of an estimate may justify revisions of
such estimates and such revisions, if significant, would change the schedule of
any further production and development drilling. Accordingly, reserve estimates
are generally different from the quantities of oil and natural gas that are
ultimately recovered. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by such factors.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its 1998 Annual
Meeting of Stockholders, which proxy statement will be filed under the
Securities Exchange Act of 1934 within 120 days of the end of the registrant's
fiscal year ended December 31, 1997, are incorporated by reference into Part III
hereof.
<PAGE> 4
PART I
ITEM 1. BUSINESS
OVERVIEW
Forcenergy Inc, a Delaware corporation (the "Company" or "Forcenergy"),
formerly Forcenergy Gas Exploration, Inc., is an independent oil and gas company
engaged in the exploration, acquisition, development, exploitation and
production of oil and natural gas. Forcenergy, and its predecessors, have been
engaged in the oil and gas exploration and production business since 1982, the
year in which it was founded by the President and Chief Executive Officer, Stig
Wennerstrom.
Forcenergy has experienced significant growth in the last seven years,
primarily through the exploitation, enhancement and development of acquired
producing properties in the Gulf of Mexico and the 1996 acquisition of producing
properties in the Cook Inlet, Alaska area. At December 31, 1997, Forcenergy had
net proved reserves of approximately 121.5 MMBOE, 59% of which were located in
the Gulf of Mexico and 19% of which were located in Alaska. Approximately 48% of
the Company's net proved reserves on such date were oil and approximately 75% of
proved reserves were classified as proved developed. The Company currently
operates approximately 74% of its Gulf of Mexico production. The Company's
primary focus is its Gulf of Mexico and Alaska activities. However, the Company
has also acquired interests in certain undeveloped international leasehold
acreage, primarily in Gabon, Africa and Australia.
STRATEGY
GULF OF MEXICO. The Company's business strategy is to increase reserves
and cash flows primarily through the exploration, exploitation and development
of its producing properties while also selectively acquiring additional
properties with the same type of upside potential. Management believes it has
assembled a three to five year inventory of development, exploitation and
exploratory drilling opportunities in the Gulf of Mexico predominantly on
acreage currently held by production. Most of the prospects comprising this
inventory are located in fields which have prolific production histories and
which the Company believes, based on the past success of Forcenergy and other
industry participants in applying 3-D technology to mature producing properties,
will yield additional reserves through the application of modern exploration and
development technologies. Forcenergy believes that it's high quality asset base
positions it for future growth through a continuing program of further
development through selective exploitation and exploratory drilling and through
the enhancement of production through workovers and recompletions. Forcenergy
emphasizes the use of 3-D seismic and computer-aided exploration technology,
together with geologic and engineering studies of its properties, to evaluate
and prioritize drilling prospects. Focusing drilling activities on producing
properties in a relatively concentrated area in the Gulf of Mexico permits
Forcenergy to utilize its base of geological, engineering and production
experience in the region to maximize its drilling success and to minimize
finding and development costs. Furthermore, Forcenergy's concentration of
drilling activities on its producing properties allows the utilization of
existing infrastructure which greatly reduces incremental lease operating
expenses and capital costs associated with new production facilities and
minimizes timing delays in commencing production. Forcenergy plans to continue
to pursue acquisitions of working interests in producing properties that offer
further development potential and provide operating synergies with existing
properties.
Forcenergy prefers to operate its Gulf of Mexico properties because
functioning in that capacity positions it to more effectively manage production
performance and operating expenses and allows it to control the timing and
amount of capital expenditures. As of December 31, 1997 Forcenergy operated 111
structures and 501 wells in the Gulf of Mexico, and believes that the operating
expertise and experience of its personnel have been instrumental in its ability
to enhance and improve production rates and cash flows. Of particular
importance, a significant portion of the drilling prospects Forcenergy expects
to pursue during the next three to five years are accessible from existing
production facilities operated by the Company.
COOK INLET, ALASKA. Since its discovery, oil and gas activities in the
Cook Inlet area have been dominated by major oil companies, which have reduced
their activity in the region in recent years as they have refocused their
Alaskan efforts mainly to the North Slope (Prudhoe Bay). Forcenergy's business
strategy in the Cook Inlet area is to increase production and cash flow through
the exploitation of existing producing properties as well as expanding its
1
<PAGE> 5
presence in the Cook Inlet area through selective exploration on undeveloped
leases. Forcenergy believes that it has assembled a high quality, producing
asset base with exploitation potential as well as the fifth largest exploratory
lease position in the State of Alaska, both of which will give Forcenergy an
opportunity to add significant new reserves through drilling. Forcenergy
recently completed the largest proprietary 3-D seismic survey in Cook Inlet,
Alaska and additional 3-D seismic data is being acquired to identify additional
drilling prospects. Forcenergy believes that it will be able to economically
exploit opportunities previously not pursued by the major oil companies by
utilizing proprietary 3-D seismic data, smaller, less capital intensive offshore
production facilities and other methods that have proven successful in the
Company's operations in the Gulf of Mexico. The Company plans an active
development and exploration program for the Cook Inlet for at least the next two
to three years.
INTERNATIONAL. Forcenergy's international business strategy is aimed at
achieving significant reserve growth through participation in selected high
risk, high reward exploration projects. The Company also reviews international
producing property acquisition opportunities that might provide an operating
base from which it could apply its corporate strategy of finding and developing
additional reserves on producing properties through the use of advanced
technologies. Forcenergy presently holds exploratory acreage offshore Gabon,
West Africa and onshore and offshore Australia.
TECHNOLOGY
Forcenergy utilizes advanced technology in its exploration and
development activities in order to reduce drilling risks and finding costs and
to more effectively prioritize drilling prospects based on return potential. The
Company currently has acquired 1,500 square miles of 3-D seismic surveys on 185
of its 197 offshore Gulf of Mexico lease blocks and 1,630 square miles on other
Gulf of Mexico blocks in which it currently does not own an interest. Forcenergy
also owns approximately 140,000 linear miles of high quality 2-D seismic data on
Gulf of Mexico blocks. Approximately 191 square miles of 3-D seismic data has
been recently acquired in the Cook Inlet, Alaska. Additionally, the Company has
acquired 973 square miles of 3-D seismic on its exploratory Gryphon Marin
concession in Gabon, Africa. The use of the 3-D seismic data has enabled the
Company to identify multiple development and exploratory prospects in mature
producing fields which were not identified through earlier technologies.
Forcenergy's professional staff includes 24 geoscientists experienced in
interpreting 3-D data, and Forcenergy has invested in 26 networked Landmark
geophysical workstations.
1997 DRILLING ACTIVITY
During 1997, Forcenergy continued to focus on increasing reserves and
cash flow by targeting development, and exploration prospects on recently
acquired properties, with the opportunities developed in most cases through the
use of 3-D seismic data. During 1997, Forcenergy spent $287.2 million on capital
drilling expenditures, including $12.1 million in capitalized internal costs
$22.1 million in undeveloped leasehold costs and $26.8 million on geological and
geophysical costs.
GULF OF MEXICO. The Company spent approximately $222.1 million in the
Gulf of Mexico during 1997. Nine of nine development wells and twenty-one of
thirty-five exploratory wells drilled proved successful. The most significant
activity centered around the exploitation and development of producing
properties. Two successful development wells were drilled at the South Marsh
Island 106/115 fields (100% working interest). An exploratory well in the High
Island 470 field (100% working interest) was successfully completed.
Additionally one development and one exploratory well were completed in the
South Marsh Island 6/10/11/18/19/285 Complex (100% working interest). At the
High Island 280/286 Complex (100% working interest) an exploratory well was
completed Two successful exploratory wells were completed in the non-operated
South Timbalier 148 Field (15.5% working interest) and two exploratory wells
were completed at the High Island 551/552 fields (100% working interest).
Forcenergy's Gulf of Mexico drilling program added an estimated 18.2 MMBOE to
the proved reserve base during 1997.
COOK INLET, ALASKA. Forcenergy recently completed a successful
exploitation well in the 100% owned West McArthur River Field that increased
field production by approximately 490 BOPD, net to the Company. The Company is
currently drilling a second development well at West McArthur River. During 1997
the Company also participated in the drilling of 3 of 3 successful development
wells and 2 recompletions in the Trading Bay and McArthur River fields and spent
approximately $6.8 million on 3-D seismic data to identify additional drilling
prospects, including the West McArthur River Field and the Redoubt Shoal
prospect.
2
<PAGE> 6
INTERNATIONAL. In December 1997 and January 1998, the Company drilled
two exploratory dry holes on its Phenix Marin concession located offshore Gabon,
West Africa. Additional exploratory opportunities in deeper waters have been
identified within the Phenix Marin concession and Forcenergy is currently
evaluating future plans for that concession. Forcenergy and its 50% partner on
the Gryphon Marin concession recently acquired a large-scale proprietary 3-D
seismic survey over the offshore concession north of the Phenix Marin
concession. Forcenergy believes that numerous drilling opportunities will be
generated from the information obtained through this 3-D survey. The Company is
also evaluating the potential of the northern portion of the Gryphon Marin
concession where a recent discovery approximately 7 miles from Forcenergy's
concession was announced.
ADDITIONAL FUTURE PROJECTS
In addition to the activity described above, Forcenergy has identified
a substantial inventory of additional exploitation, development, exploratory,
workover and recompletion projects on its existing offshore Gulf of Mexico and
Alaska properties which it may undertake over the next three to five years. Many
of these projects are currently being reviewed by Forcenergy's geoscientists
utilizing 3-D seismic data acquired in the last three years. During 1998,
Forcenergy plans to drill approximately 30 exploratory wells and 15 development
wells offshore Gulf of Mexico. The Company also anticipates that it will drill
two development and four exploratory wells in the Cook Inlet, Alaska area during
1998. Forcenergy recently completed the largest proprietary 3-D seismic survey
in Cook Inlet, Alaska and additional 3-D seismic data is being acquired to
identify additional drilling prospects.
Forcenergy's 1998 capital expenditure budget is expected to approximate
$195 million. Forcenergy currently plans to dedicate approximately 10-15% of its
1998 capital budget to international prospects to expose the Company to high
potential opportunities. See "Forcenergy Management's Discussion and Analysis of
Financial Condition and Results of Operations."
ACQUISITIONS
During 1997, Forcenergy spent in the aggregate approximately $220.5
million in cash and common stock on several acquisitions including, (1) Great
Western Resources, Inc., an independent oil and gas company ("Great Western
Acquisition")in January 1997, (2) interests in certain producing crude oil
properties in the West McArthur River Field, located in Cook Inlet, Alaska from
Stewart Petroleum Company (the "Stewart Acquisition")in June 1997, (3) Convest
Energy Corporation and Edisto Resources Corporation, independent oil and gas
companies ("Convest/Edisto Mergers") in October 1997 and (4) various working
interests in other oil and gas properties in the Gulf of Mexico, the Permian
Basin, and onshore Louisiana. These mergers and acquisitions are discussed in
more detail in the following paragraphs.
GREAT WESTERN ACQUISITION. In January 1997, Forcenergy acquired all of
the outstanding stock of Great Western for approximately $48.3 million. Great
Western had oil and gas operations located primarily in the onshore Gulf Coast
regions of Louisiana and Texas and offshore Gulf of Mexico. Great Western's
highest value asset was South Marsh Island 18, which is strategically located
adjacent to Forcenergy's South Marsh Island 6/10/11 Complex holdings. Net proved
reserves associated with this acquisition totalled approximately 33.2 Bcf at the
acquisition date.
STEWART ACQUISITION. In June 1997, Forcenergy acquired a 97.75% working
interest in the West McArthur River Field, located in Cook Inlet, Alaska from
Stewart Petroleum Company for $18.7 million and assumed operations of the field.
In October 1997, the Company increased its working interest in this field to
100%. Total reserves acquired were estimated to be 3.5 MMBbls at the acquisition
date.
CONVEST/EDISTO MERGERS. In October 1997, the Company acquired all of
the outstanding common stock of Convest and Edisto. Forcenergy issued
approximately 2.8 million shares of common stock, valued at $34.96 per share or
approximately $98.9 million, under terms of the merger agreements. Through the
mergers, the Company acquired an average 30% working interest in 43 Gulf of
Mexico lease blocks as well as additional interests onshore in the
Bluebell/Altamont and Culp Draw fields. Estimated proven reserves were 6.3
MMBbls and 37.6 Bcf at the acquisition date.
OTHER WORKING INTEREST ACQUISITIONS. During 1997 the Company completed
several other smaller acquisitions primarily in producing Gulf of Mexico
properties for a total of $30.3 million. Net proven reserves
3
<PAGE> 7
acquired in these transactions totaled an estimated 5.7 MMBbls and 11.7 Bcf of
natural gas as of the dates of acquisition.
Also, in December 1996 Forcenergy acquired the 48% average working
interest of Marathon Oil Company ("Marathon") in the McArthur River Field
(Trading Bay Unit) and Marathon's 50% interest in the Trading Bay Field, both in
the Cook Inlet, Alaska and Marathon's 0.05% working interest in the Prudhoe Bay
Unit for $107.8 million. Net proved reserves totaled approximately 25.9 MMbbls
of oil at acquisition.
GULF OF MEXICO PROPERTIES
Forcenergy currently holds working interests in 197 federal offshore
and state lease blocks located in the Gulf of Mexico and Gulf Coast, including a
100% working interest in 44 of these blocks and a 50% or greater working
interest in 29 other blocks, and operates 54 of the producing blocks
representing 74% of its current Gulf of Mexico/Gulf Coast production. The
following table lists the average working interest, net proved reserves and the
operator for Forcenergy's 16 largest offshore Gulf of Mexico properties,
comprising approximately 78% of Forcenergy's net proved reserves in the Gulf of
Mexico and 59% of Forcenergy's total net proved reserves, as of December 31,
1997:
<TABLE>
<CAPTION>
ESTIMATED NET PROVED RESERVES AT
DECEMBER 31, 1997
---------------------------
AVERAGE OIL NATURAL GAS TOTAL
WORKING INTEREST (MMBLS) (MMCF) (MMBOE) OPERATOR
---------------- ------- ----------- ------- -----------
<S> <C> <C> <C> <C> <C>
South Marsh Island
6/10/11/18/19/285 Complex:................ 100% 2,222 46,667 10,000 Forcenergy
South Pass 24 Field............................ 71% 6,507 14,645 8,948 Third Party
South Marsh Island 137 Field,
Block 136/137............................. 100% 1,228 21,854 4,870 Forcenergy
High Island A-467 Field........................ 100% 60 26,199 4,427 Forcenergy
South Marsh Island Block 106 North
And Block 106 South/Block 115............. 100% 2,171 12,935 4,327 Forcenergy
West Cameron 205 Field......................... 100% 203 23,289 4,085 Forcenergy
High Island A-280 Field........................ 100% 54 18,459 3,131 Forcenergy
High Island A-552 Field........................ 421 13,997 2,751 Forcenergy
East Cameron 14 Field.......................... 50% 358 11,686 2,306 Forcenergy
High Island 195 Field.......................... 24% 48 13,473 2,294 Third Party
South Timbalier 176 Field, Block 148........... 16% 298 9,804 1,932 Third Party
Ship Shoal 26 Field............................ 100% 275 7,735 1,564 Forcenergy
Chandeleur 25 Field............................ 100% - 8,983 1,497 Forcenergy
Grand Isle 76 Field............................ 100% 117 6,766 1,245 Forcenergy
Mustang Island 746 Field....................... 100% 102 6,131 1,124 Forcenergy
Mustang Island 754............................. 100% 5 6,110 1,023 Forcenergy
</TABLE>
ALASKA PROPERTIES
Forcenergy currently holds an average 48% working interest in the
McArthur River Field (Trading Bay Unit) and a 50% working interest in the
Trading Bay Field located in the Cook Inlet area, both non-operated properties.
Forcenergy also owns a 100% working interest in the operated West McArthur River
Field located in the Cook Inlet. These fields had estimated net proved reserves
of 23.6 million barrels of oil and comprised approximately 19% of Forcenergy's
total estimated net proved reserves at December 31, 1997, despite an 11 million
barrel price-related downward revision in the Alaska reserves at the end of
1997. The revision made by the Company's outside reservoir engineers resulted
from a technical reduction in the economic life of the fields caused by the
steep decline in oil prices at the end of 1997.
In December 1996, Forcenergy entered into an alliance with Union Oil
Company of California ("Unocal") to jointly pursue lease sale activities and to
further develop existing alliance properties in the Cook Inlet. Under the
agreement Forcenergy expects to expend on behalf of the alliance up to $30
million in the next four years on lease acquisition and development and
exploratory drilling on prospects generated as a result of this alliance. It
also provides Forcenergy access to Unocal's geologic and geophysical data base
in the Cook Inlet, including approximately 37,000 linear miles of 2-D seismic
data and 6,000 square miles of 3-D seismic data. The agreement provides that
Forcenergy and Unocal shall each contribute technical staff to the alliance in a
joint effort to identify development prospects in and around existing alliance
properties in the Cook Inlet as well as exploratory opportunities in the area.
Forcenergy has identified a number of prospects that will be further evaluated
for drilling
4
<PAGE> 8
potential. During 1997, Forcenergy expended approximately $6.8 million for the
acquisition of seismic data and in 1996 Forcenergy also acquired a 50% interest
in 17 State of Alaska lease tracts for approximately $1.7 million in conjunction
with the Unocal alliance. Through the Unocal alliance, the Marathon and Stewart
acquisitions and several other smaller property acquisitions, Forcenergy has
assembled the fifth largest exploratory lease acreage position in the State of
Alaska. An extensive 3-year exploratory program is currently underway in the
Inlet.
ONSHORE PROPERTIES
Forcenergy owns working and royalty interests in approximately 3,159
producing oil and gas wells in 1,088 fields in the Rocky Mountain, Gulf Coast,
Permian Basin and Appalachian regions of the United States. Management believes
that Forcenergy's stable reserve base of long-lived, primarily non-operated,
onshore properties complements the Gulf of Mexico and Alaska operations by
providing an additional source of cash flow that requires limited management
involvement. Forcenergy's onshore properties accounted for approximately 22% of
estimated net proved reserves at December 31, 1997. Capital expenditures on
onshore properties were not significant during 1997.
TITLE TO PROPERTIES
As is customary in the oil and natural gas industry, the Company makes
only a cursory review of title to farmout acreage and to onshore undeveloped oil
and natural gas leases upon execution of the contracts. Prior to the
commencement of drilling operations, a thorough title examination is conducted
and curative work is performed with respect to significant defects. The Company
performs complete reviews of title to federal and state offshore lease blocks
prior to acquisition. To the extent title opinions or other investigations
reflect material title defects, the seller of the property, rather than the
Company, is typically responsible for curing any such title defects at its
expense. If the Company were unable to remedy or cure any title defect of a
nature such that it would not be prudent to commence drilling operations on
undeveloped properties, the Company could suffer a loss of its entire investment
in the leasehold. The Company has obtained title opinions on substantially all
of its producing properties and believes that it has satisfactory title to such
properties in accordance with standards generally accepted in the oil and gas
industry. Substantially all of the Company's oil and natural gas properties are
and will continue to be mortgaged to secure borrowings under the Company's bank
loan agreement (the "Senior Credit Facility").
ABANDONMENT COSTS
Forcenergy is responsible for the costs associated with the plugging of
wells, the removal of facilities and equipment and site restoration on its oil
and gas properties, pro rata to its working interest. The Company provides for
expected future abandonment liabilities by accruing for such costs as a
component of depletion, depreciation and amortization as production occurs. As
of December 31, 1997, total undiscounted abandonment costs estimated to be
incurred were approximately $108.1 million for properties in federal and state
waters. For onshore properties, salvage values received for equipment are
usually sufficient to offset the abandonment costs. Estimates of abandonment
costs and their timing may change due to many factors, including actual drilling
and production results, inflation rates, and changes in environmental laws and
regulations. No significant abandonment costs are anticipated to be incurred in
1998.
The Minerals Management Service ("MMS") requires lessees of Outer
Continental Shelf ("OCS") properties to post performance bonds in connection
with the plugging and abandonment of wells located offshore and the removal of
all production facilities. Operators in the OCS waters of the Gulf of Mexico are
also currently required to post an area wide bond for the lesser of $3 million,
or $500,000 per producing lease. The Company currently has additional
supplemental bonding on its offshore leases as required by the MMS. Under
certain circumstances, the MMS has the authority to suspend or terminate
operations on federal leases for failure to comply with applicable bonding
requirements or other regulations applicable to plugging and abandonment. Any
such suspensions or terminations of the Company's operations could have a
material adverse effect on the Company's financial condition and results of
operations.
5
<PAGE> 9
COMPETITION
Forcenergy encounters competition from other oil and gas companies in
all phases of its operations, including the acquisition of producing properties.
Competitors include major integrated oil and natural gas companies, numerous
independent oil and natural gas companies, individuals and drilling and income
programs. Many competitors are large, well-established companies with
substantially larger operating staffs and greater capital resources than the
Company's and which, in many instances, have been engaged in the energy business
for a much longer time. Such companies may be able to pay more for productive
oil and natural gas properties and exploratory prospects and to define,
evaluate, bid for and purchase a greater number of properties and prospects than
the Company's financial or human resources permit. Forcenergy's ability to
acquire additional properties and to discover reserves in the future will be
dependent upon its ability to evaluate and select suitable properties and to
consummate transactions in a highly competitive environment.
MARKETING AND CUSTOMERS
Forcenergy sells substantially all of its natural gas under short-term
contracts (maximum of one year in duration) at pricing based on current spot
market indexes. A minor portion of the Company's gas production is committed to
be processed through gas plants. Crude oil and condensate is typically sold at
the wellhead on month-to-month contracts at posted field prices, plus a slight
premium, in the area where production occurs.
Most of the Company's production is transported through gas gathering
systems and oil and gas pipelines that are not owned by the Company.
Transportation space on such gathering systems and pipelines is occasionally
limited and at times unavailable due to repairs or improvements being made to
such facilities or due to such space being utilized by other companies with
priority transportation agreements. Forcenergy's access to transportation
options can also be affected by regulation of intrastate and interstate gas
transportation. In an attempt to promote competition, the Federal Energy
Regulatory Commission ("FERC") has issued a series of orders which have altered
significantly the marketing and transportation of natural gas (See "Government
Regulation"). The effect of these orders to date has been to enable producers
such as the Company to market their natural gas production to purchasers other
than the interstate pipelines located in the vicinity of their producing
properties. While the Company has not experienced any inability to market its
production, if transportation space is restricted or is unavailable, the
Company's cash flow could be adversely affected.
The Company utilizes various financial instruments to hedge portions of
its current oil and gas production to achieve more predictable cash flows and to
reduce its exposure to fluctuations in oil and gas prices. The remaining portion
of current production is not hedged so as to provide the Company the opportunity
to benefit from increases in prices on that portion of the production, should
price increases materialize. See Note 8 to the Company's Financial Statements
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations".
OPERATING RISKS OF OIL AND GAS OPERATIONS
The oil and gas business involves certain operating hazards such as
well blowouts, cratering, explosions, uncontrollable flows of oil, natural gas
or well fluids, fires, formations with abnormal pressures, pollution, releases
of toxic gas and other environmental hazards and risks, any of which could
result in substantial losses to the Company through the loss of hydrocarbons,
pollution claims, personal injury suits and damage to properties of the Company
and others. The Company's offshore operations also are subject to the additional
hazards of marine operations, such as severe weather, capsizing and collision
that can cause substantial damage to facilities, and possible business
interruption. The availability of a ready market for the Company's oil and
natural gas production also depends on the proximity of reserves to, and the
capacity of, oil and gas gathering systems, pipelines and
6
<PAGE> 10
trucking or terminal facilities. Additionally, the Company may be liable for
environmental damages caused by previous owners of property purchased or leased
by the Company. As a result, substantial liabilities to third parties or
governmental entities may be incurred, the payment of which could reduce or
eliminate the funds available for drilling or acquisitions, or result in the
loss of the Company's properties. In accordance with customary industry
practices, Forcenergy maintains insurance against some, but not all, of such
risks and losses. The Company does not carry business interruption insurance.
The occurrence of an event not fully covered by insurance could have a material
adverse effect on the financial condition, results of operations and cash flow
of the Company.
ENVIRONMENTAL MATTERS
The Company, as an owner or lessee and operator of oil and gas
properties, is subject to federal, state and local laws and regulations
governing the discharge of materials into, and the protection of, the
environment. These laws and regulations may require the acquisition of a permit
before drilling commences, restrict the types, quantities and concentration of
various substances that can be released into the environment in connection with
drilling and production activities, limit or prohibit drilling activities on
certain lands lying within wilderness, wetlands and other protected areas, and
impose substantial liabilities for pollution resulting from the Company's
operations. Stricter standards in environmental legislation may be imposed in
the oil and gas industry in the future, such as proposals made in Congress and
at the state level from time to time that would reclassify certain oil and
natural gas exploration and production wastes as "hazardous wastes" and make the
reclassified wastes subject to more stringent and costly handling, disposal and
clean-up requirements. The impact of any such changes, however, would not likely
be any more burdensome to the Company than to any other similarly situated
company involved in oil and gas exploration and production.
The Comprehensive Environmental Response, Compensation and Liability
Act ("CERCLA"), also known as the "Superfund" law, imposes liability, without
regard to fault or the legality of the original conduct, on certain classes of
persons who are considered to be responsible for the release of a "hazardous
substance" into the environment. These persons include the owner or operator of
the disposal site or sites where the release occurred and companies that
disposed or arranged for disposal of the hazardous substances found at the site.
Under CERCLA, such persons may be subject to joint and several liability for the
costs of cleaning up the hazardous substances, for damages to natural resources,
and for the costs of certain health studies. Furthermore, it is not uncommon for
neighboring landowners and other third parties to file claims for personal
injury and property damage allegedly caused by hazardous substances or other
pollutants released into the environment.
The Oil Pollution Act of 1990 and regulations promulgated pursuant
thereto ("OPA") impose a variety of obligations on "responsible parties" with
respect to the prevention of oil spills and liability for damages resulting from
such spills. A "responsible party" includes the owner or operator of a facility
or vessel that could be the source of an oil spill. For offshore facilities, the
responsible party is the lessee or permittee or holder of a right of use and
easement (granted under applicable state law or the Outer Continental Shelf
Lands Act "OCSLA") of the area in which the offshore facility is located. The
OPA assigns liability to each responsible part for oil removal costs and a
variety of public and private damages, including natural resource damages. While
liability limits apply in some circumstances, a responsible party for an Outer
Continental Shelf facility must pay all spill removal costs incurred by a
federal, state or local government. The OPA establishes a liability limit
(subject to indexing) for offshore facilities of all removal costs plus
$75,000,000. A party cannot take advantage of liability limits if the spill was
caused by gross negligence or willful misconduct or resulted from violation of a
federal safety, construction, or operating regulation. If the party fails to
report a spill or to cooperate fully in the cleanup, liability limits likewise
do not apply. Few defenses exist to the liability imposed by OPA.
The OPA also imposes ongoing requirements on a responsible party,
including proof of financial responsibility to cover a substantial portion of
environmental clean-up and restoration costs that could be incurred by
governmental entities in connection with an oil spill. Other requirements
imposed by the OPA include the preparation of an oil spill contingency plan. A
failure to comply with ongoing requirements or inadequate cooperation in a spill
event may subject a responsible party to civil or criminal enforcement action.
In short, the OPA places a burden on offshore lease holders to conduct safe
operations and take other measures to prevent oil spills; if one occurs, the OPA
then imposes liability for resulting damages.
In addition, the OCSLA authorizes regulations relating to safety and
environmental protection applicable to lessees and permittees operating on the
OCS. Specific design and operational standards may apply to OCS vessels,
7
<PAGE> 11
rigs, platforms, vehicles and structures. Violations of environmental related
lease condition or regulations issued pursuant to the OCSLA can result in
substantial civil and criminal penalties as well as potential court injunctions
curtailing operations and the cancellation of leases. Such enforcement
liabilities can result from either governmental prosecution or citizen initiated
legal actions.
The Company maintains insurance coverages which it believes are
customary in the industry, although it is not fully insured against many
environmental risks. Although the Company has not experienced any material
adverse effect from compliance with environmental requirements, nor is it aware
of any material environmental claims existing at December 31, 1997, there is no
assurance that material costs relating to environmental matters will not be
incurred in the future.
GOVERNMENT REGULATION
Forcenergy's drilling, production and transportation and marketing
operations are subject to various types of regulation at the federal, state and
local levels. Such regulation includes requiring permits for the drilling of
wells, maintaining bonding requirements in order to drill or operate wells, and
regulating the location of wells, the surface use and restoration of properties
upon which wells are drilling and the plugging and abandonment of wells.
Regulations also can limit production rates, require capital for environmental
compliance and affect the transportation and marketing of hydrocarbons.
Certain operations the Company conducts are on federal oil and gas
leases, which the MMS administers. The MMS issues such leases through
competitive bidding. These leases contain relatively standardized terms and
require compliance with detailed MMS regulations and orders pursuant to the
OCSLA (which are subject to change by the MMS). For offshore operations, lessees
must obtain MMS approval for exploration plans and development and production
plans prior to the commencement of such operations. In addition to permits
required from other agencies (such as the Coast Guard, Army Corps of Engineers
and Environmental Protection Agency), lessees must obtain a permit from the MMS
prior to the commencement of drilling. The MMS has promulgated regulations
requiring offshore production facilities located on the OCS to meet stringent
engineering and construction specifications. The MMS also has issued regulations
restricting the flaring or venting of natural gas, and proposed to amend such
regulations to prohibit the flaring of liquid hydrocarbons and oil without prior
authorization.
In December 1995, the MMS issued an advance notice of proposed
rulemaking in which it proposed to amend its regulations governing the
calculation of royalties and the valuation of natural gas produced from federal
leases. The principle feature in the amendments, as proposed, would establish an
alternative market-index based method to calculate royalties on certain natural
gas production sold to affiliates or pursuant to non-arm's-length sales
contracts. The MMS proposed this rulemaking to facilitate royalty valuation in
light of changes in the gas marketing environment. The MMS also proposed a rule
describing the types of transportation components that are deductible for
calculating and reporting royalties, as well as various cost components
associated with marketing functions that are not deductible. In addition, the
MMS has recently issued a notice of proposed rulemaking in which it proposes to
amend its regulations governing the calculation of royalties and the valuation
of crude oil produced from federal leases. This proposed rule would modify the
valuation procedures for both arm's-length and non-arm's-length crude oil
transactions to decrease reliance on crude oil posted prices and assign a value
to crude oil that better reflects market value, establish a new MMS form for
collecting value differential data, and amend the valuation procedure for the
sale of federal royalty oil. These new regulations, as proposed, would have a
minimal effect on the Company's past royalty payment practices as the Company's
production has been sold solely to non-affiliates. The Company cannot predict
what additional action the MMS will take on these matters, nor can it predict at
this stage of the rulemaking proceeding how the Company might be affected if
amendments to the regulations are adopted.
In addition, the MMS is conducting an inquiry (not specifically
directed at the Company) into certain contractual agreements from which
producers on MMS leases have received settlement proceeds that are royalty
bearing and the extent to which producers have paid the appropriate royalties on
those proceeds. The Company believes that this inquiry will not have a material
impact on its financial condition, liquidity or results of operations.
The FERC regulates interstate natural gas transportation rates and
service conditions, which affect the marketing of natural gas produced by the
Company, as well as the revenues received by the Company for sales of such
production. Since the mid-1980s, the FERC has issued a series of orders,
culminating in Order Nos. 636, 636-A, 636-B, and 636-C ("Order 636"), that have
significantly altered the marketing and transportation of natural gas.
8
<PAGE> 12
Order 636 mandates a fundamental restructuring of interstate pipeline sales and
transportation service, including the unbundling by interstate pipelines of the
sales, transportation, storage and other components of the city-gate sales
services such pipelines previously performed. One of FERC's purposes in issuing
the orders is to increase competition within all phases of the natural gas
industry. Generally, Order 636 has eliminated or substantially reduced the
interstate pipelines' traditional role as wholesalers of natural gas, and has
substantially increased competition and volatility in natural gas markets. While
significant regulatory uncertainty remains, Order 636 may ultimately enhance the
Company's ability to market and transport its natural gas, although it may also
subject the Company to greater competition and more restrictive pipeline
imbalance tolerances and greater associated penalties for violation of such
tolerances. The FERC has issued final orders in all Order No. 636 individual
pipeline restructuring proceedings. The United States Court of Appeals for the
District of Columbia Circuit ("D.C. Circuit") has generally affirmed Order No.
636 and remanded certain issues for further explanation or clarification. The
issues remanded for further action do not appear to materially affect the
Company. A number of parties have appealed the D.C. Circuit's ruling to the
United States Supreme Court and proceedings on the remanded issues are currently
ongoing before FERC following its issuance of Order No. 636-C in February 1997.
Numerous petitions for review of the individual pipeline restructuring orders
are currently pending in that court. Although it is difficult to predict when
all appeals of pipeline restructuring order will be completed or their impact on
the Company, the Company does not believe that it will be affected by the
restructuring rule and orders any differently than other natural gas producers
and markets with which it competes.
The FERC has announced several important transportation-related policy
statements and proposed rule changes, including the appropriate manner in which
interstate pipelines release capacity under Order No. 636 and, more recently,
the price that shippers can charge for their released capacity. In addition, in
1995, the FERC issued a policy statement on how interstate natural gas pipelines
can recover the costs of new pipeline facilities. In January 1996, the FERC
issued a policy statement and a request for comments concerning alternatives to
its traditional cost-of-service ratemaking methodology. A number of pipelines
have obtained FERC authorization to charge negotiated rates as one such
alternative. While any additional FERC action on these matters would affect the
Company only indirectly, any new rules and policy statements may have the effect
of enhancing competition in natural gas markets, by among other things,
encouraging non-producer natural gas marketers to engage in certain purchase and
sale transactions.
The FERC also regulates rates and service conditions for interstate
transportation of crude oil, liquids and condensate, which can affect the amount
the Company receives from the sale of these products. Sales of crude oil,
condensate and gas liquids by the Company are not currently regulated and are
made at negotiated prices. Effective January 1, 1995, the FERC adopted
regulations establishing an indexing system for transportation rates for oil
pipelines, which generally indexes such rates to inflation. The Company is not
able to predict what effect, if any, these regulations will have on it however,
these regulations, or any amendments to these regulations, could increase the
cost of transporting crude oil, liquids and condensate by pipeline.
Cook Inlet Pipeline Company is an interstate common carrier and as such
is subject to rate regulation by the FERC under the Interstate Commerce Act
("ICA"). The ICA requires that petroleum pipeline rates be just and reasonable
and non-discriminatory. The ICA permits interest parties to challenge proposed
new or changes rates and authorizes the FERC to suspend ad to investigate such
rates. If upon completion of an investigation, the FERC finds that a proposed
new or changed rate is unlawful, it is authorized to require the carrier to
refund the revenues collected during the pendency of the investigation in excess
of those that would have been collected under the prior rate. In addition, the
FERC, upon complaint or on its own motion and after investigation, may order a
carrier to change its rate prospectively. Upon an appropriate showing, a shipper
may obtain reparations for damages sustained for a period of up to two year
prior to the filing of a complaint. Cook Inlet Pipeline Company is also subject
to regulation by the Alaska Public Utilities Commission with respect to any
intrastate transportation Cook Inlet Pipeline Company provides.
Legislation affecting the oil and gas industry is under constant review
for amendment or expansion by Congress, the FERC, state regulatory bodies and
the courts. The Company cannot predict when or if any such proposals might
become effective, or their effect, if any, on the Company's operations. The
natural gas industry historically has been very heavily regulated; therefore,
there is no assurance that the less stringent regulatory approach recently
pursued by the FERC and Congress will continue indefinitely into the future. The
regulatory burden on the oil and natural gas industry increases the Company's
cost of doing business and, consequently, affects its profitability and cash
flow. In as much as such laws and regulations are frequently expanded, amended
or reinterpreted, the Company is unable to predict the future cost or impact of
complying with such regulations.
9
<PAGE> 13
OFFICES
Forcenergy currently leases approximately 12,600 square feet of office
space in Miami, Florida, where its principal offices are located, approximately
26,000 square feet in New Orleans, Louisiana, approximately 9,900 square feet in
Houston, Texas, approximately 8,500 square feet in Anchorage, Alaska, and
approximately 851 square feet in Lafayette, Louisiana.
EMPLOYEES
As of February 28, 1998, Forcenergy had 275 full time employees, 31 of
whom are located at the Company's headquarters in Miami, Florida and 114 of whom
are located at the Company's regional offices in New Orleans, Lafayette and
Intracoastal City, Louisiana, Houston, Texas, and Anchorage, Alaska. One hundred
and thirty employees work offshore in the Gulf of Mexico. None of Forcenergy's
employees are represented by a labor union.
ITEM 2. PROPERTIES
ACREAGE DATA
The following table sets forth the approximate developed and
undeveloped acreage in which the Company held a leasehold, mineral or other
interest at December 31, 1997. Undeveloped acreage includes leased acres on
which wells have not been drilled or completed to a point that would permit the
production of commercial quantities of oil and gas, regardless of whether or not
such acreage contains proved reserves.
<TABLE>
<CAPTION>
DEVELOPED ACRES UNDEVELOPED ACRES
------------------------ -------------------------
GROSS NET GROSS NET
---------- ------- ---------- -----------
<S> <C> <C> <C> <C>
Offshore - Gulf of Mexico................. 596,085 261,268 129,709 70,312
Offshore - Cook Inlet Alaska............. 69,381 33,072 149,009 92,047
Onshore - United States................... 1,015,426 151,637 383,464 95,861
Australia................................. 1,000 500 32,786,623 15,314,356
Offshore - Gabon, Africa.................. -- -- 3,082,428 1,882,428
--------- ------- ---------- ----------
Total................................... 1,681,892 446,477 36,531,233 17,455,004
========= ======= ========== ==========
</TABLE>
OIL AND GAS RESERVES
The following table summarizes the estimates of the Company's
historical net proved reserves as of January 1, 1998 and the present values
attributable to those reserves on such date using constant prices and operating
costs as of the valuation date, discounted at a rate of 10% per annum, in
accordance with Securities and Exchange Commission ("Commission") guidelines.
The reserve data and present values as of January 1, 1998 for the onshore
properties, the Alaska properties and a small portion of the offshore properties
have estimated by Netherland, Sewell & Associates, Inc., independent petroleum
engineering consultants. The reserve data and present values as of January 1,
1998 for the majority of the offshore properties have been estimated by the
Company and the reserve data has been audited by Collarini Engineering Inc.,
independent petroleum engineering consultants.
<TABLE>
<CAPTION>
As of January 1, 1998
---------------------
<S> <C>
NET PROVED RESERVES:
Liquids(Mbbls)(1)........................................................ 58,043
Natural gas (Mmcf)....................................................... 380,761
Total (MBOE).................................................... 121,503
Present value of future net revenues before income taxes (thousands)..... $636,419
Standardized measure of discounted future net cash flows (thousands)(2).. $595,198
</TABLE>
- --------------------
(1) Includes crude oil, condensate and natural gas liquids.
(2) The standardized measure of discounted future net cash flows
represents the present value of future net revenues after income taxes
discounted at 10% in accordance with Statement of Financial Accounting
Standards No. 69.
Since January 1, 1997, the Company has not filed any estimates of
proved oil and gas reserves with any federal authority or agency other than
with the Commission.
10
<PAGE> 14
DRILLING ACTIVITY
The following table sets forth the drilling activity of the Company on
its properties for the twelve month periods ended December 31, 1997, 1996 and
1995.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1997 1996 1995
------------------------------------------------------------
GROSS NET GROSS NET GROSS NET
------ --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C>
OFFSHORE DRILLING ACTIVITY:
- --------------------------------------------
Development:
Oil..................................... 5 3.7 11 10.4 8 5.9
Gas..................................... 6 4.1 8 5.7 2 1.7
Non productive.......................... - - 1 .2 - -
-- ---- -- ---- --- ---
Total.............................. 11 7.8 20 16.3 10 7.6
== ==== == ==== === ===
Exploratory:
Oil..................................... - - 5 4.4 5 5.0
Gas..................................... 21 13.2 2 1.3 2 1.5
Non productive.......................... 15 12.2 4 1.4 2 2.0
-- ---- -- ---- --- ---
Total.............................. 36 25.4 11 7.1 9 8.5
== ==== == ==== === ===
ONSHORE DRILLING ACTIVITY:
- --------------------------------------------
Development:
Oil..................................... 10 4.5 4 2.0 2 0.1
Gas..................................... 2 .8 - - -
Non productive.......................... 2 .8 - - - -
-- ---- -- ---- --- ---
Total.............................. 14 6.1 4 2.0 2 0.1
== ==== == ==== === ===
Exploratory:
Oil..................................... 3 2.4 - - - -
Gas..................................... 3 1.0 - - 1 0.5
Non productive.......................... 7 4.0 1 .2 3 2.0
-- ---- -- ---- --- ---
Total.............................. 13 7.4 1 .2 4 2.5
== ==== == ==== === ===
</TABLE>
PRODUCTIVE WELLS
The following table sets forth the number of productive oil and gas
wells in which the Company owned a working interest at December 31, 1997:
<TABLE>
<CAPTION>
TOTAL PRODUCTIVE WELLS
----------------------
GROSS NET
------- -----
<S> <C> <C>
Oil............................................ 2,774 1,008
Gas............................................ 815 288
------- -------
Total..................................... 3,589 1,296
======= =======
</TABLE>
Productive wells consist of producing wells and wells capable of
production, including gas wells awaiting pipeline connections. The Company has
only 21 wells that are completed in more than one producing horizon; those wells
have been counted as single wells.
11
<PAGE> 15
ITEM 3. LEGAL PROCEEDINGS
Forcenergy is not a party to, nor are any of its properties subject to,
any pending legal proceedings that in the opinion of management, are likely to
have a material adverse effect on its financial condition or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the fourth quarter of the Company's fiscal year ended December 31, 1997.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common stock is listed on the New York Stock Exchange
(the "NYSE") under the symbol "FEN". Prior to June 18, 1997, the Company's stock
was quoted on the NASDAQ National Market (the "NASDAQ") under the symbol "FGAS".
The following table sets forth, for the periods indicated, the range of closing
high and low prices of the common stock as reported by the NYSE and the NASDAQ.
<TABLE>
<CAPTION>
HIGH LOW
-------- -------
<S> <C> <C>
1996
First Quarter........................................... $ 11.69 $ 10.50
Second Quarter.......................................... $ 19.25 $ 11.63
Third Quarter........................................... $ 24.88 $ 17.75
Fourth Quarter.......................................... $ 37.50 $ 22.88
1997
First Quarter........................................... $ 37.13 $ 25.38
Second Quarter.......................................... $ 35.13 $ 27.13
Third Quarter........................................... $ 38.81 $ 26.75
Fourth Quarter.......................................... $ 39.00 $ 25.19
</TABLE>
At March 2, 1998, the Company had 3,876 shareholders of record of its
common stock. The Company estimates that an additional 7,500 shareholders hold
the Company's common stock in street name.
FORCENERGY AB ACQUISITION
On December 19, 1997 Forcenergy made a public tender offer for all of
the outstanding shares of Forcenergy AB ("FAB"). The transaction was approved by
Forcenergy shareholder vote on March 17, 1998. On March 20, 1998 more than 97%
of the outstanding common shares of FAB had been tendered in connection with the
offer. All conditions of the offer have been met and delivery of Forcenergy
common stock or Swedish Depository Receipts for Forcenergy Inc. common stock in
exchange for such tendered shares is expected to be made on March 31, 1998.
Forcenergy will issue approximately 7.9 million shares of common stock pursuant
to the offer.
FAB, was formed in 1990 to provide capital for Forcenergy's oil and gas
operations in the United States. FAB currently owns 8,740,486 shares of
Forcenergy common stock representing a 34% interest, its only significant asset.
The 8,740,486 Forcenergy shares currently owned by FAB will be controlled by
Forcenergy and for accounting purposes, will no longer be considered
outstanding.
12
<PAGE> 16
DIVIDEND POLICY
Certain covenants set forth in the Company's Senior Credit Facility and
the 9 1/2% and 8 1/2% Senior Subordinated Notes restrict and/or limit the
ability of the Company to pay cash dividends. The Company does not contemplate
the payment of any cash dividends in the near future.
ITEM 6. SELECTED FINANCIAL INFORMATION
The following table sets forth selected historical financial data for
the Company as of and for each of the periods indicated. The following data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's financial
statements included elsewhere in this report. Per share data has been restated
for all years presented in accordance with Statement of Financial Accounting
Standard No. 128 "Earnings Per Share".
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- --------- ---------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
REVENUES:
Oil and gas sales (1)................... $ 281,690 $ 138,698 $ 72,147 $ 58,354 $ 49,652
Other (1)............................... 2,495 683 494 388 441
----------- ----------- ---------- ---------- ----------
284,185 139,381 72,641 58,742 50,093
----------- ----------- ---------- ---------- ----------
EXPENSES:
Lease operating......................... 77,174 38,786 24,507 23,744 16,632
Depletion, depreciation and amortization 313,347 58,464 31,295 24,572 19,889
Production taxes........................ 4,791 3,454 1,868 1,701 1,560
General and administrative.............. 15,244 7,971 5,670 6,463 3,166
----------- ----------- ---------- ---------- ----------
410,556 108,675 63,340 56,480 41,247
----------- ----------- ---------- ---------- ----------
INCOME FROM OPERATIONS....................... (126,371) 30,706 9,301 2,262 8,846
Interest and other income (loss)............. 3,354 650 (561) 789 545
Interest expense, net of amounts capitalized. (32,422) (13,367) (11,668) (9,529) (6,192)
----------- ----------- ------------ ---------- ----------
Income (loss) before income taxes............ (155,439) 17,989 (2,928) (6,478) 3,199
Income tax (provision) benefit (2)........... 20,621 (6,711) 1,075 2,403 (2,337)
Minority interest............................ -- -- -- -- 107
----------- ----------- ---------- ---------- ----------
Net income (loss) (2)........................ $ (134,818) $ 11,278 $ (1,853) $ (4,075) $ 755
=========== =========== ========== ========== ==========
NET INCOME (LOSS) PER SHARE:
Basic.................................... $ (5.83) $ .60 (.14) (.50)
========== =========== ========== ==========
Diluted.................................. $ (5.83) $ .57 (.14) (.50)
========== =========== ========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic.................................... 23,142 18,934 12,910 8,188
Diluted.................................. 23,142 19,672 12,910 8,188
UNAUDITED PRO FORMA DATA (2):
Income before income taxes, including
minority interest...................... $ 3,092
Income tax provision..................... $ (1,207)
Net income............................... $ 1,885
==========
Net income per share..................... $ .29
==========
Weighted average shares outstanding:.....
Basic.................................. 6,520
Diluted................................ 6,520
</TABLE>
13
<PAGE> 17
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- --------- ---------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)............... $ (12,894) $ 8,035 $ (11,775) $ 5,445 $ 1,865
Total assets............................ 824,230 585,925 335,090 220,287 187,786
Total liabilities....................... 609,239 336,989 180,129 149,226 144,450
Long-term debt.......................... 506,564 272,932 130,729 131,646 127,234
Stockholders' equity.................... 214,991 248,936 154,961 71,061 43,336
</TABLE>
(1) Natural gas liquid revenues for 1994 and 1993 have been
reclassified from other revenues to oil and gas sales for consistent
presentation with 1997, 1996 and 1995 revenues.
(2) Prior to September 14, 1993, the Company was exempt from United
States federal and certain state income taxes as a result of its partnership
status. The unaudited pro forma data reflects the income tax expense that would
have been recorded had the Company not been exempt from paying such income
taxes. Net income per share data for 1993 is described as unaudited pro forma
because of the Company's former partnership status.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion is intended to assist in an understanding of
the Company's historical financial position and results of operations for each
year of the three-years in the period ended December 31, 1997 and should be read
in conjunction with the financial statements of the Company appearing elsewhere
in this report.
RESULTS OF OPERATIONS
OPERATIONS
The following table sets forth the Company's historical operations
production data during the periods indicated (production in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
--------- -------- ------
<S> <C> <C> <C>
Production:
Liquids (Mbbls) (1)............................ 8,210 4,006 2,343
Natural gas (MMcf)............................. 57,737 32,738 21,112
Total (MBOE)................................... 17,833 9,462 5,862
Average realized sales prices (2):
Oil (per Bbl).................................. $ 17.57 $ 17.07 $ 17.23
Plant products (per Bbl)....................... 13.57 14.96 10.00
Liquids (1).................................... 17.34 16.93 16.46
Natural gas (per Mcf).......................... 2.41 2.16 1.59
Expenses (per BOE):
Lease operating................................ $ 4.33 $ 4.08 $ 4.20
Production taxes............................... .27 .36 .30
Depletion, depreciation and amortization (3)... 6.36 6.18 5.28
General and administrative, net................ .85 .84 .96
</TABLE>
-------------
(1) Includes crude oil, condensate and natural gas liquids.
(2) Net of effects of hedging.
(3) Does not include $200 million impairment provision recorded in the
fourth quarter of 1997.
14
<PAGE> 18
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996
OPERATING AND NET INCOME/LOSS. The Company recorded an operating loss
of $126.4 million for the year ended December 31, 1997, compared to the $30.7
million operating income reported for the prior year. Net loss for 1997 was
$134.8 million compared to net income of $11.3 million in 1996. The decline in
operating income and net income is attributable to a $162.8 million ($200
million pre-tax) non-cash impairment of oil and gas assets recorded pursuant to
full cost accounting rules mandated by the Securities and Exchange Commission.
Excluding the impairment provision, operating income would have been $73.6
million, a 140% increase over 1996, that was attributable to higher production
volumes and higher commodity prices received during 1997.
PRODUCTION. The Company's net liquids production rose to 8,210 MBbls
for the year ended December 31, 1997 from 4,006 MBbls in 1996, an 105%
improvement. Net gas production increased to 57,737 MMcf in 1997, a 76% increase
over the 32,738 MMcf produced last year. On an equivalent unit basis, 1997 oil
and gas production increased to 17,833 MBOE, 88% more than the 9,462 MBOE
produced during 1996. The increase in equivalent production resulted from new
oil production in the Cook Inlet, Alaska area acquired in December 1996, from
producing properties in the Gulf of Mexico acquired late 1996 and 1997, and from
the success of the Company's late 1996 and 1997 drilling and workover programs.
REVENUES. Revenues for 1997 year increased to $284.2 million, an 104%
increase over $139.4 million in 1996, primarily because of higher production
volumes and higher net realized prices. Average net realized liquid prices rose
to $17.34 per Bbl in 1997, an 1% increase over the $16.93 per Bbl received in
1996. Average net realized gas prices rose to $2.41 per Mcf in 1997, a 12%
increase over the $2.16 per Mcf reported in 1996.
Average prices received for field production for 1997 were $17.95 per
Bbl and $2.55 per mcf for oil and natural gas, respectively. After taking into
account the effects of 1997 hedging activities entered into to guarantee a
certain level of cash flow from production, specifically a $4.9 million
reduction in oil revenue and a $5.8 million reduction in gas revenue, net
realized prices were reduced to $17.34 per Bbl and $2.41 per Mcf for oil and
natural gas, respectively. Average field prices for 1996 were $20.49 per Bbl of
oil and $2.40 per Mcf of gas. After taking into account the effects of 1996
hedging activities entered into to guarantee a certain level of cash flow from
production, specifically a $12.8 million reduction in oil revenue and a $7.7
million reduction in gas revenue, net realized prices were reduced to $17.07 per
Bbl and $2.16 per Mcf for oil and natural gas respectively.
LEASE OPERATING EXPENSES. Lease operating expenses were $77.2 million
in 1997 compared to $38.8 million in 1996. On an equivalent unit of production
basis, lease operating expenses increased to $4.33 per BOE in 1997 from $4.08
per BOE in 1996 an increase attributable to the higher costs in the non-operated
Cook Inlet, Alaska fields. For the Gulf of Mexico properties, which are
primarily operated fields, lease operating expenses per BOE were reduced by 16%
to $3.22 in 1997 compared with $3.84 in 1996, due to increased production and to
operating improvements.
DEPLETION, DEPRECIATION AND AMORTIZATION ("DD&A"). DD&A expense
increased to $313.3 million in 1997 from $58.5 million in for 1996, an increase
primarily attributable to a $200 million non-cash impairment of oil and gas
assets in the fourth quarter of 1997. Excluding the impairment provision, DD&A
would have been $113.3 million compared to the $58.5 million in 1996, or $6.36
and $6.18 per BOE, respectively.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative
expense, net of overhead reimbursements and capitalized internal costs, was
$15.2 million in 1997 compared with $8.0 million in 1996. This increase was
attributable to the overall growth of the Company, including the opening of an
Anchorage, Alaska office, expansion of the onshore exploration efforts through a
new office in Houston, Texas and the establishment of an international
exploration group during 1997. On a barrel equivalent basis, general and
administrative expenses remained flat at $.85 per BOE and $.84 per BOE for 1997
and 1996, respectively.
INTEREST AND OTHER INCOME. Interest and other income increased to
$3.4 million in 1997 from $650,000 in 1996. The increase resulted primarily from
$1.5 million attributable to the Company's equity in the earnings of Cook Inlet
Pipeline Company, a 30% owned affiliate acquired in January 1997 as part of the
acquisition of producing oil properties in the Cook Inlet area of Alaska.
15
<PAGE> 19
INTEREST EXPENSE. Interest expense, net of amounts capitalized,
increased to $32.4 million in 1997, compared to the $13.4 million in 1996. The
increase in interest expense was due primarily to increased debt levels.
Interest rates were slightly higher in 1997 as borrowings under the Senior
Credit Facility were repaid through issuance of fixed rate, long-term
subordinated debt issued in late 1996 and early 1997.
INCOME TAX PROVISION/BENEFIT. The Company recorded an income tax
benefit in 1997 of $20.6 million compared to an income tax expense of $6.7
million in 1996. The benefit results from the $200 million non-cash impairment
of oil and gas assets recorded in 1997. The recording of a valuation allowance
for a portion of the deferred tax asset created by the year end impairment
provision resulted in a reduction in the effective tax rate to 13.3% in 1997,
from 37.3% in 1996. The effective rate is expected to be 38.3% for 1998.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995
OPERATING AND NET INCOME. Operating income increased to $30.7 million
for the year ended December 31, 1996, a 230% improvement compared to $9.3
million reported for 1995. Net income for 1996 rose to $11.3 million compared to
a net loss of $1.9 million in 1995. The improvement in both operating income and
net income/loss was attributable primarily to higher production volumes and
higher net realized oil and gas prices.
PRODUCTION. The Company's net liquids production rose to 4,006 Mbbls
for the year ended December 31, 1996 from 2,343 Mbbls in 1995, a 71%
improvement. Net gas production increased to 32,738 Mmcf in 1996, a 55% increase
over the 21,112 Mmcf produced in 1995. On an equivalent unit basis, 1996 oil and
gas production increased to 56,774 Mmcfe, 61% more than the 35,170 Mmcfe
produced during 1995. The increase in both oil and gas production was
attributable to new production from recent acquisitions of oil and gas
properties as well as from successful drilling and workover programs begun in
late 1995 and continuing through 1996.
REVENUES. Revenues for the 1996 year increased to $139.4 million, a 92%
improvement over the $72.6 million reported in 1995, primarily because of higher
production volumes and higher net realized prices. Average net realized liquid
prices rose to $16.93 per Bbl in 1996, a 3% increase over the $16.46 per Bbl
received in 1995. Average net realized gas prices rose to $2.16 per Mcf in 1996,
a 36% increase over the $1.59 per Mcf reported in 1995.
Average prices received for field production for the 1996 year were
$20.49 per Bbl and $2.40 per Mcf for oil and natural gas, respectively. After
taking into account the effects of 1996 hedging activities entered into to
guarantee a certain level of cash flow from production, specifically a $12.8
million reduction in oil revenue and a $7.7 million reduction in gas revenue,
net realized prices were reduced to $17.07 per Bbl and $2.16 per Mcf for oil and
natural gas, respectively. Average realized prices for 1995 were $17.23 per Bbl
of oil and $1.59 per mcf of gas. Effects of hedging activities were not
significant in the year ended December 31, 1995.
LEASE OPERATING EXPENSES. Lease operating expenses were $38.8 million
in 1996 compared to the $24.5 million in 1995, an increase primarily due to new
fields acquired during 1995 and 1996 and to workover-type repair and maintenance
activities in 1996. On an equivalent unit of production basis, expenses
decreased to $.68 per Mcfe in 1996 from $.70 per Mcf in 1995, a decrease
attributable primarily to increased production levels on existing properties
during the latter part of 1996.
DEPLETION, DEPRECIATION AND AMORTIZATION ("DD&A"). DD&A expense
increased to $58.5 million in 1996 from $31.3 million reported for 1995, an
increase attributable to higher production levels and to an increase in the DD&A
rate per unit of production to $1.03 per Mcfe, compared to $.88 per Mcf in 1995.
GENERAL AND ADMINISTRATIVE COSTS. General and administrative costs were
$8.0 million in 1996 compared with $5.7 million reported in 1995, an increase
due to the overall growth of the Company during the latter half of 1995 and
through 1996. On an equivalent Mcf produced basis, general and administrative
expenses decreased to $.14 per Mcfe in 1996 from a rate of $.16 per Mcfe in
1995, primarily due to the higher production levels in 1996.
INTEREST EXPENSE. Interest expense, net of amounts capitalized,
increased to $13.4 million in 1996 compared to $11.7 million in 1995. The
increase in interest expense is primarily due to higher debt levels during 1996.
16
<PAGE> 20
INCOME TAX PROVISION/BENEFIT. Income tax expense increased to $6.7
million in 1996, from a benefit of $1.1 million in 1995, due to the improvement
in results of operations compared to 1995.
EARNINGS/LOSS PER SHARE
During 1997 the Company adopted Statement of Financial Accounting
Standards No. 128 "Earnings Per Share" ("SFAS No. 128") and has restated all
years presented in accordance therewith. SFAS No. 128 requires a dual
presentation of basic and diluted earnings per share ("EPS") on the face of the
statement of operations. Basic EPS is computed by dividing income available to
common stockholders by the weighted-average number of common shares for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that would then
share in earnings (see Notes 1 & 7 to the Company's financial statements). Basic
loss per share was ($5.83) for 1997 calculated on weighted average shares
outstanding of 23,142,504 shares. Diluted per share amounts were anti-dilutive
in 1997. Basic and diluted earnings per share for 1996 were $.60 and $.57 per
share calculated on 18,934,102 and 19,672,361 weighted average shares
outstanding, respectively. Basic loss per share for 1995 was $(.14) per share
calculated on 12,909,828 weighted average shares outstanding. Diluted per share
amounts were anti-dilutive in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its operations, acquisitions,
capital expenditures and working capital requirements from cash flow from
operations, bank borrowings and private and public placements of debt and equity
securities. The Company's primary sources of funds for each of the past three
years were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- --------- --------
<S> <C> <C> <C>
Net cash provided by operating activities..................... $ 177,621 $ 65,228 $ 28,574
Borrowings under the Senior Credit Facility................... 287,144 255,968 35,709
Repayments under the Senior Credit Facility................... (253,512) (250,091) (38,666)
Net Proceeds from issuance of common stock.................... 2,661 46,318 55,753
Issuance of long-term debt, net of expenses................... 193,414 169,114 --
</TABLE>
The Company had negative working capital of $12.9 million at December
31, 1997 compared to working capital of $8.0 million at December 31, 1996. The
decrease in working capital was mainly attributable to an increase in accounts
payable and accrued liabilities associated with the Company's fourth quarter
1997 drilling activities and, to a lesser extent, accrued interest on the
subordinated notes. The decreases were partially offset by an increase in other
current assets for prepayments for drilling activities, seismic data, and lease
operations.
Forcenergy generated approximately $177.6 million in cash from
operations during 1997 compared to $65.2 million during 1996. Revenue increases
from producing property acquisitions and success in the 1996/1997 drilling
programs, and to a lesser extent, higher net realized oil and gas prices
contributed to the increase in cash flow.
Total capital expenditures were $496.9 million for 1997, including
$220.5 million for acquisitions. Capital expenditures were funded by the
Company's existing Senior Credit Facility, proceeds from the offering of 8 1/2%
Senior Subordinated Notes and cash generated from operations. Expenditures for
acquisitions include the issuance of approximately 2.8 million shares of common
stock valued at approximately $98.9 million in consideration for the
Convest/Edisto Mergers.
Total long-term debt at December 31, 1997 was $506.6 million compared
to $272.9 million at December 31, 1996. During February 1997, the Company
completed a private placement of $200 million in 8 1/2% Senior Subordinated
Notes priced at $99.338 for a yield to maturity of 8.6%. The Company received
approximately $194.0 million in net proceeds, the majority of which was used to
repay all outstanding indebtedness under the Company's Senior Credit Facility
and to fund producing property acquisitions.
On December 31, 1997, the borrowing base under the Senior Credit
Facility was $195 million, of which $59.3 million was available for borrowing.
The maximum commitment under the Senior Credit Facility is $200 million.
17
<PAGE> 21
The Company's capital expenditure budget for 1998 is estimated to be
approximately $195 million. Forcenergy will continue to evaluate its capital
spending plans throughout the year. Actual levels of capital expenditures may
vary significantly due to a variety of factors, including drilling results, oil
and gas prices, industry conditions and outlook, future acquisitions of
properties and the availability of capital. Although the 1998 budget does not
incorporate any acquisitions, the Company will continue to selectively seek
acquisition opportunities where it believes significant exploration and
development potential exists.
Revenues generated from operations are highly dependent upon the price
of, and demand for, oil and natural gas. Historically, the markets for oil and
natural gas have been volatile and are likely to continue to be volatile in the
future as prices are subject to wide fluctuations in response to relatively
minor changes in the supply of and demand for oil and natural gas, market
uncertainty and a variety of additional factors that are beyond the control of
the Company. These uncontrollable factors include the level of consumer product
demand, weather conditions, domestic and foreign governmental regulations, the
price and availability of alternative fuels and political and economic
conditions in the Middle East, Russia, Mexico and Canada that can affect the
supply and price of foreign oil and natural gas. It is impossible to predict
future oil and natural gas price movements with any certainty. Declines in oil
and natural gas prices may adversely affect the Company's financial condition,
liquidity and results of operations. Lower prices also may reduce the amount of
reserves that can be produced economically, as well as limit the ability to
continue to exploit and develop the existing reserve base.
Forcenergy utilizes, from time to time, various financial instruments
to hedge portions of its current oil and gas production to achieve more
predictable cash flows and to reduce its exposure to fluctuations in oil and gas
prices. The remaining portion of current production is not hedged so as to
provide Forcenergy the opportunity to benefit from oil and natural gas price
increases, should they occur. The Company considers these financial instruments
to be hedging activities and, as such, monthly settlements on these contracts
are reflected in oil and gas sales. In order to consider these arrangements as
hedges, (i) the Company must designate the 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 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. Specifically, Forcenergy utilizes, from time to time, forward
sales contracts and commodity swaps on portions of its current oil and gas
production to achieve more predictable cash flows and to reduce its exposure to
fluctuations in oil and gas prices. The remaining portion of current production
is not hedged so as to provide Forcenergy the opportunity to benefit from oil
and natural gas price increases, should they occur. The Company has entered into
forward sales and swap arrangements with respect to approximately 9% of its
estimated natural gas production through May 1998 at a weighted average price of
$2.36 per Mcf. The Company has also hedged an additional 26% of its estimated
natural gas production through March 1998 using a collar arrangement with a
floor of $2.25 per Mcf and a ceiling of $3.00 per Mcf. Furthermore, Forcenergy
has hedged, through three-way options, 9% of its estimated first quarter 1998
natural gas production, and 23% of second and third quarter 1998 natural gas
production, with a maximum benefit of $.30 per Mcf if prices decline below an
average floor of $2.71 per Mcf, and with no exposure if prices remain below an
average ceiling of $3.93 per Mcf. Finally, another 33% of gas production for the
April through September 1998 period has been hedged through no-cost three-way
options with an average floor of $2.33 and an average ceiling of $2.58 per Mcf.
If prices fall below an average of $2.03 per Mcf in any month, the floor for
that month resets to that lower price. Forcenergy has also hedged approximately
17% of its estimated oil production through December 1998 using collar
arrangements with weighted average floors of $18.21 per Bbl and weighted average
ceilings of $23.08 per Bbl. All of these arrangements are settled on a monthly
basis. The production percentages reflected assume current production rates. As
a result of hedging activities, the Company recognized a decrease in oil and gas
sales revenue of $10.8 million, $20.5 million and a gain of $117,000 for the
years ended December 31, 1997, 1996 and 1995, respectively. The fair market
value of all contracts in place at December 31, 1997 and 1996 were
insignificant.
Management believes that cash on hand at year-end, cash flows from
operations and the borrowing capacity under the Company's Senior Credit Facility
will be adequate to meet future liquidity needs, including funding the Company's
financial obligations and capital program.
YEAR 2000 COMPLIANCE
The Company's primary information systems are compliant with year 2000
requirements. The Company's cost of compliance has been minimal and is not
material to financial condition or results of operations.
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.
18
<PAGE> 22
NEW ACCOUNTING PRONOUNCEMENTS
In September 1997, the FASB issued Statement of Financial Accounting
Standard No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
establishes standards of reporting and display of comprehensive income and its
components. In September 1997, the FASB also issued Statement of Financial
Accounting Standard No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"). SFAS 131 establishes standards for reporting
operating and geographic segments and the type and level of financial
information to be discussed about those segments. Both SFAS 130 and SFAS 131 are
effective for fiscal years beginning after December 15, 1997.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary financial information
required to be filed under this item are presented on pages F-1 through F -27 of
this Form 10-K, and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
CHANGES IN ACCOUNTANTS
None.
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PART III
Items 10, 11, 12 and 13 of Part III are incorporated herein by
reference from Forcenergy's Proxy Statement for the 1998 Annual Meeting of the
Stockholders, which is expected to be filed with the Securities and Exchange
Commission no later than April 15, 1998.
19
<PAGE> 23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) DOCUMENTS INCLUDED IN THIS REPORT:
1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of independent accountants....................................................... F-2
Consolidated balance sheets as of December 31, 1997 and 1996............................ F-3
Consolidated statements of operations for each of the three years in the period ended
December 31, 1997..................................................................... F-4
Consolidated statements of stockholders' equity for each of the three years in the period
ended December 31, 1997............................................................... F-5
Consolidated statements of cash flows for each of the three years in the period ended
December 31, 1997..................................................................... F-6
Notes to consolidated financial statements.............................................. F-7
</TABLE>
2. FINANCIAL STATEMENT SCHEDULES
All financial statement schedules have been omitted because
they are either not required, not applicable or the information
required to be presented is included in the Company's financial
statements and related notes.
3. A. EXHIBITS:
2.1 Agreement and Plan of Merger dated as of May 25, 1995 among
the Company, Ashlawn Energy, Inc., Jeannie M. Hines, William
A. Hines, Donna B. Hines, William M. Hines, Ann Gilbert and
Louis F. Gilbert. (Filed as Exhibit 10.34 to the Registration
Statement on Form S-1 filed on June 2, 1995, as amended on
July 6, 1995 and July 25, 1995 and is included herein by
reference (File No. 33-93020)).
2.2 Purchase and Sale Agreement dated April 19, 1996 between
Amerada Hess Corporation and the Company. (Filed as Exhibit 2
to the Current Report on Form 8-K on July 15, 1996, as
subsequently amended, and is included herein by reference
(File No. 0-26444)).
2.3 Purchase and Sale Agreement dated December 12, 1996 between
Marathon Oil Company and the Company. (Filed as Exhibit 2.1 to
the Current Report on Form 8-K filed on January 14, 1997 and
is included herein by reference (File No. 0-26444)).
2.4 Agreement and Plan of Merger dated as of June 19, 1997, as
amended, by an among Forcenergy, EDI-Sub, Edisto and Convest
(Included as Exhibit 2.1 to the Company's Registration
Statement on Form S-4 (File No. 333-31675).
3.1 Amended and Restated Certificate of Incorporation of the
Company dated July 25, 1995. (Filed as Exhibit 3.1 to the
Quarterly Form on 10-Q filed on November 14, 1995 for the nine
month period ending September 30, 1995 and is included herein
by reference (File No. 0-26444)) and Amendment No. 1 thereto
filed with Amendment No. 2 to Form S-1 filed on June 6, 1996
and is included herein by reference (File No. 333-4600).
3.2 Bylaws of the Company. (Filed as Exhibit 3.2 to the
Registration Statement on Form S-1 filed on June 2, 1995, as
amended on July 6, 1995 and July 25, 1995 and is included
herein by reference (File No. 33-93020)).
20
<PAGE> 24
4.1 Specimen Common Stock certificate. (Filed as Exhibit 4.1 to
the Registration Statement on Form S-1 on June 2, 1995, as
amended on July 6, 1995 and July 25, 1995 and is included
herein by reference (File No. 33-93020)).
4.2 Rights Agreement, dated as of November 26, 1997, between the
Company and American Stock Transfer & Trust Company, as Rights
Agent, specifying the terms of the Rights, including the form
of Certificate of Designation of Junior Participating
Preferred Stock as Exhibit A, the form of Right Certificate as
Exhibit B and the form of the Summary of Rights to Purchase
Preferred Shares as Exhibit C. ("Included as Exhibit 2 to the
Company's Form 8-A filed with the Commission on December 5,
1997).
4.3 Form of Certificate of Designation of Junior Participating
Preferred Stock setting forth the terms of the Junior
Participating Preferred Stock, par value $.01 per share.
(Included as Exhibit 2 to the Company's Form 8-A filed with
the Commission on December 5, 1997).
4.4 Registration Rights Agreement dated as of October 10, 1995 by
and between Forcenergy Gas Exploration, Inc. and Forcenergy
AB. (Filed as Exhibit 4.3 with the Annual Report on Form 10-K
for the fiscal year ended December 31, 1995 and is included
herein by reference .
4.5 Form of Indenture dated as of November 6, 1996 between
Forcenergy Inc, as Issuer, and Bankers Trust Company, as
Trustee. (Filed as Exhibit 4.2 to the Registration Statement
on Form S-3 on October 30, 1996, as subsequently amended, and
is included herein by reference (File No. 333-13657)).
4.6 Form of Indenture dated as of February 14, 1997 between
Forcenergy Inc, as Issuer and Bankers Trust Company, as
Trustee (Filed as Exhibit 4.4 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1996.)
10.1 Employment Agreement, dated as of September 14, 1993 between
the Company and Stig Wennerstrom. (Filed as Exhibit 10.1 to
the Registration Statement on Form S-1 filed on June 2, 1995,
as amended on July 6, 1995 and July 25, 1995 and is included
herein by reference (File No. 33-93020)).
10.2 First Amendment to Employment Agreement dated effective as of
May 18, 1995 between the Company and Stig Wennerstrom. (Filed
as Exhibit 10.2 to the Registration Statement on Form S-1
filed on June 2, 1995, as amended on July 6, 1995 and July 25,
1995 and is included herein by reference (File No. 33-93020)).
10.3 Indemnification Agreement, dated as of September 14, 1993
between the Company and Stig Wennerstrom. (Filed as Exhibit
10.3 to the Registration Statement on Form S-1 filed on June
2, 1995, as amended on July 6, 1995 and July 25, 1995 and is
included herein by reference (File No. 33-93020)).
10.4 Form of Indemnification Agreement between the Company and
certain officers and directors. (Filed as Exhibit 10.5 to the
Registration Statement on Form S-1 filed on June 2, 1995, as
amended on July 6, 1995 and July 25, 1995 and is included
herein by reference (File No. 33-93020)).
10.5 Forcenergy Gas Exploration, Inc. 1993 Stock Option Plan for
Officers and Key Employees and forms of incentive and
nonqualified stock option agreements. (Filed as Exhibit 10.6
to the Registration Statement on Form S-1 filed on June 2,
1995, as amended on July 6, 1995 and July 25, 1995 and is
included herein by reference (File No. 33-93020)).
10.6 Forcenergy Gas Exploration, Inc. 1995 Stock Option Plan and
forms of incentive and nonqualified stock option agreements.
(Filed as Exhibit 10.7 to the Registration Statement on Form
S-1 filed on June 2, 1995, as amended on July 6, 1995 and July
25, 1995 and is included herein by reference (File No.
33-93020)).
21
<PAGE> 25
10.7 Forcenergy Gas Exploration, Inc. 1995 Non-Employee Director
Stock Option Plan and forms of nonqualified stock option
agreement. (Filed as Exhibit 10.8 to the Registration
Statement on Form S-1 filed on June 2, 1995, as amended on
July 6, 1995 and July 25, 1995 and is included herein by
reference (File No. 33-93020)).
10.8 Forcenergy Gas Exploration, Inc. 1995 Employee Stock Purchase
Plan. (Filed as Exhibit 10.9 to the Registration Statement on
Form S-1 filed on June 2, 1995, as amended on July 6, 1995 and
July 25, 1995 and is included herein by reference (File No.
33-93020)).
10.9 Deed of Trust, Mortgage, Assignment, Security Agreement and
Financing Statement dated September 15, 1993 between the
Company and Internationale Nederlanden (U.S.) Capital
Corporation, as Agent. (Filed as Exhibit 10.15 to the
Registration Statement on Form S-1 filed on June 2, 1995, as
amended on July 6, 1995 and July 25, 1995 and is included
herein by reference (File No. 33-93020)).
10.10 Warrants to Purchase Common Stock of the Company dated October
28, 1994 issued to Donaldson, Lufkin & Jenrette Securities
Corporation and DLJ First ESC L.L.C. (Filed as Exhibit 10.24
to the Registration Statement on Form S-1 filed on June 2,
1995, as amended on July 6, 1995 and July 25, 1995 and is
included herein by reference (File No. 33-93020)).
10.11 Consulting Agreement dated January 18, 1991 between the
Company and Wictor Forss. (Filed as Exhibit 10.25 to the
Registration Statement on Form S-1 filed on June 2, 1995, as
amended on July 6, 1995 and July 25, 1995 and is included
herein by reference (File No. 33-93020)).
10.12 Incentive Stock Option Agreement dated September 14, 1993
between the Company and Stig Wennerstrom. (Filed as Exhibit
10.26 to the Registration Statement on Form S-1 filed on June
2, 1995, as amended on July 6, 1995 and July 25, 1995 and is
included herein by reference (File No. 33-93020)).
10.13 Non-Qualified Stock Option Agreement dated September 14, 1993
and amendment dated November 23, 1993 between the Company and
Stig Wennerstrom. (Filed as Exhibit 10.27 to the Registration
Statement on Form S-1 filed on June 2, 1995, as amended on
July 6, 1995 and July 25, 1995 and is included herein by
reference (File No. 33-93020)).
10.14 Form of Incentive Stock Option Agreement between the Company
and Stig Wennerstrom under the 1995 Stock Option Plan. (Filed
as Exhibit 10.28 to the Registration Statement on Form S-1
filed on June 2, 1995, as amended on July 6, 1995 and July 25,
1995 and is included herein by reference (File No. 33-93020)).
10.15 Form of Non-Qualified Stock Option Agreement between the
Company and Stig Wennerstrom under the 1995 Stock Option Plan.
(Filed as Exhibit 10.29 to the Registration Statement on Form
S-1 filed on June 2, 1995, as amended on July 6, 1995 and July
25, 1995 and is included herein by reference (File No.
33-93020)).
10.16 Form of Incentive Stock Option Agreement between the Company
and its officers and directors excluding Stig Wennerstrom
under the 1995 Stock Option Plan or the 1995 Non-Employee
Director Plan. (Filed as Exhibit 10.30 to the Registration
Statement on Form S-1 filed on June 2, 1995, as amended on
July 6, 1995 and July 25, 1995 and is included herein by
reference (File No. 33-93020)).
10.17 Form of Non-Qualified Stock Option Agreement between the
Company and its officers and directors excluding Stig
Wennerstrom under the 1995 Stock Option Plan or the 1995
Non-Employee Director Plan. (Filed as Exhibit 10.31 to the
Registration Statement on Form S-1 filed on June 2, 1995, as
amended on July 6, 1995 and July 25, 1995 and is included
herein by reference (File No. 33-93020)).
22
<PAGE> 26
10.18 Stock Purchase Agreement dated May 12, 1994 between the
Company and Forcenergy AB. (Filed as Exhibit 10.33 to the
Registration Statement on Form S-1 filed on June 2, 1995, as
amended on July 6, 1995 and July 25, 1995 and is included
herein by reference (File No. 33-93020)).
10.19 Form of Waiver letter of Donaldson, Lufkin & Jenrette
Securities Corporation related to Warrant to purchase Common
Stock dated October 28, 1994. (Filed as Exhibit 10.35 to the
Registration Statement on Form S-1 filed on June 2, 1995, as
amended on July 6, 1995 and July 25, 1995 and is included
herein by reference (File No. 33-93020)).
10.20 Form of Waiver letter of DLJ First ESC L.L.C. related to
Warrant to purchase Common Stock dated October 28, 1994.
(Filed as Exhibit 10.36 to the Registration Statement on Form
S-1 filed on June 2, 1995, as amended on July 6, 1995 and July
25, 1995 and is included herein by reference (File No.
33-93020)).
10.21 Amendment to the Forcenergy Inc 1995 Stock Option Plan. (Filed
as Exhibit 10.2 to the Quarterly Form on 10-Q filed on
November 7, 1996 and is included herein by reference (File No.
0-26444)).
10.22 Fourth Restatement of Credit Agreement by and among Forcenergy
Inc. and ING (U.S.) Capital Corporation and certain financial
institutions named therein as Lenders. (Filed as Exhibit 10.1
to the Registration Statement on Form S-4 filed on April 10,
1997, as amended on April 18, 1997, and is included herein by
reference (file No. 333-249227)).
10.23 The 1997 $60 a share Stock Performance Plan for Employees of
Forcenergy Inc filed as Appendix A to Schedule 14A filed on
April 21, 1997 and incorporated herein by reference.
10.24 Amendment to the Forcenergy Inc 1995 Stock Option Plan filed
as Appendix B to Schedule 14A filed on April 21, 1997 and
incorporated herein by reference.
21.1* Subsidiaries of the Company.
23.1* Consent of Coopers & Lybrand L.L.P.
23.2* Consent of Netherland, Sewell & Associates, Inc.
23.3* Consent of Collarini Engineering Inc.
27.1* Financial Data Schedule
* Filed herewith.
All other exhibits have been previously filed.
B. REPORTS ON FORM 8-K
On December 9, 1997 the Company filed a Current Report on Form 8-K
reporting the adoption of a stockholder rights plan.
On November 5, 1997 the Company filed a Current Report on Form 8-K for
the Convest Energy Corporation ("Convest") (ASE:COV) and the Edisto Resources
Corporation (ASE:EDT) mergers which included the unaudited interim and audited
annual financial statements of Convest and Edisto.
23
<PAGE> 27
GLOSSARY OF OIL AND GAS TERMS
The definitions set forth below shall apply to the indicated terms as
used herein. 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.
Bcf. Billion cubic feet.
Bcfe. Billion cubic feet equivalent, determined using the ratio of six
Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids.
Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used
herein in reference to crude oil or other liquid hydrocarbons.
BOPD. Barrels of oil per day.
BOE. Barrel of oil equivalent.
Btu. British thermal unit, which is the heat required to raise the
temperature of a one-pound mass of water from 58.5 to 59.5 degrees Fahrenheit.
Completion. The installation of permanent equipment for the production
of oil or gas, or in the case of a dry hole, the reporting of abandonment to the
appropriate agency.
Developed acreage. The number of acres which are allocated or
assignable to producing wells or wells capable of production.
Development well. A well drilled within the proved area of an oil or
gas reservoir to the depth of a stratigraphic horizon known to be productive.
Discounted Present Value. A method of determining the present value of
proved reserves. Under the SEC method, the future net revenues before income
taxes from proved reserves are estimated assuming that oil and natural gas
prices and production costs remain constant. The resulting stream of revenues is
then discounted at the rate of 10% per year to obtain the present value.
Dry hole or well. A well found to be incapable of producing
hydrocarbons in sufficient quantities such that proceeds from the sale of such
production exceed production expenses and taxes.
Exploratory well. A well drilled to find and produce oil or gas
reserves not classified as proved, to find a new reservoir in a field previously
found to be productive of oil or gas in another reservoir or to extend a known
reservoir.
Farm-in or farm-out. An agreement whereupon the owner of a working
interest in an oil and gas lease assigns the working interest or a portion
thereof to another party who desires to drill on the leased acreage. Generally,
the assignee is required to drill one or more wells in order to earn its
interest in the acreage. The assignor usually retains a royalty or reversionary
interest in the lease. The interest received by an assignee is a "farm-in" while
the interest transferred by the assignor is a "farm-out."
Field. An area consisting of single reservoir or multiple reservoirs
all grouped on or related to the same individual geological structural feature
and/or stratigraphic condition.
Gross acres or gross wells. The total acres or wells, as the case may
be, in which a working interest is owned.
Mbbls. One thousand barrels of crude oil or other liquid hydrocarbons.
Mbbls/d. One thousand barrels of crude oil or other liquid hydrocarbons
per day.
24
<PAGE> 28
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.
MMbbls. One million barrels of crude oil or other liquid hydrocarbons.
MMBtu. One million Btus.
MMcf. One million cubic feet.
MCFPD. One million cubic feet per day.
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.
Net acres or net wells. The sum of the fractional working interests
owned in gross acres or gross wells.
Oil. Crude oil and condensate.
Present value. When used with respect to oil and gas reserves, the
estimated future gross revenue to be generated from the production of proved
reserves, net of estimated production and future development costs, using prices
and costs in effect at the date indicated, without giving effect to non-property
related expenses such as general and administrative expenses, debt service and
future income tax expenses or to depreciation, depletion and amortization,
discounted using an annual discount rate of 10%.
Productive well. A well that is found to be capable of producing
hydrocarbons in sufficient quantities such that proceeds from the sale of such
production exceed production expenses and taxes.
Proved developed producing reserves. Proved developed reserves that are
expected to be recovered from completion intervals currently open in existing
wells and able to produce to market.
Proved developed nonproducing reserves. Proved developed reserves
expected to be recovered from zones behind casing in existing wells.
Proved reserves. The estimated quantities of crude oil, natural gas and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions.
Proved undeveloped location. A site on which a development well can be
drilled consistent with spacing rules for purposes of recovering proved
undeveloped reserves.
Proved undeveloped reserves. Proved reserves that are expected to be
recovered from new wells on undrilled acreage or from existing wells where a
relatively major expenditure is required from recompletion.
Recompletion. The completion for production of an existing well bore in
another formation from that in which the well has been previously completed.
Reservoir. A porous and permeable underground formation containing a
natural accumulation of producible oil and/or gas that is confined by
impermeable rock or water barriers and is individual and separate from other
reservoirs.
Royalty interest. An interest in an oil and gas property entitling the
owner to a share of oil or gas production free of costs of production.
25
<PAGE> 29
Undeveloped acreage. Lease acreage on which wells have not been drilled
or completed to a point that would permit the production of commercial
quantities of oil and gas regardless of whether such acreage contains proved
reserves.
Updip. A higher point in the reservoir.
Working interest. The operating interest which gives the owner the
right to drill, produce and conduct operating activities on the property and a
share of production, subject to all royalties, overriding royalties and other
burdens and to all costs of exploration, development and operations and all
risks in connection therewith.
Workover. Operations on a producing well to restore or increase
production.
26
<PAGE> 30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
FORCENERGY INC
Dated: March 24, 1998 By: /s/ E. Joseph Grady
---------------------------------------
E. Joseph Grady
Vice President - Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities and
on the dates indicated:
<TABLE>
<CAPTION>
<S> <C>
By: Date: March 24, 1998
--------------------------------------------------------
Stig Wennerstrom
President and Chief Executive Officer
(Principal Executive Officer)
By: Date: March 24, 1998
--------------------------------------------------------
E. Joseph Grady
Vice President - Chief Financial Officer
(Principal Financial and Accounting Officer)
By: Date: March 24, 1998
-------------------------------------------------------
Bruce L. Burnham, Director
By: Date: March 24, 1998
-------------------------------------------------------
Eric Forss, Director
By: Date: March 24, 1998
-------------------------------------------------------
Robert Issal
Director & Chairman of the Board of Directors
By: Date: March 24, 1998
-------------------------------------------------------
William F. Wallace, Director
</TABLE>
27
<PAGE> 31
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997
FORCENERGY INC
MIAMI, FLORIDA
F-1
<PAGE> 32
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Forcenergy Inc
We have audited the accompanying consolidated balance sheets of Forcenergy Inc
as of December 31, 1997 and 1996 and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Forcenergy Inc as
of December 31, 1997 and 1996, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Miami, Florida
March 20, 1998
F-2
<PAGE> 33
FORCENERGY INC
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1997 1996
----------- ------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS:
- -------
CURRENT ASSETS:
Cash.................................................................. $ 16,048 $ 9,669
Accounts receivable, net.............................................. 43,502 29,416
Other current assets.................................................. 30,231 11,963
----------- -----------
Total current assets.............................................. 89,781 51,048
----------- -----------
INVESTMENT IN SURETY BONDS, at cost........................................ -- 3,926
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, at cost (full cost
method) net of accumulated depletion, depreciation
and amortization...................................................... 713,983 523,711
----------- -----------
OTHER ASSETS............................................................... 20,466 7,240
----------- -----------
$ 824,230 $ 585,925
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
- -------------------------------------
CURRENT LIABILITIES:
Accounts payable...................................................... $ 32,666 $ 8,643
Accrued liabilities................................................... 70,009 34,370
----------- -----------
Total current liabilities......................................... 102,675 43,013
----------- -----------
LONG-TERM DEBT............................................................. 506,564 272,932
----------- -----------
DEFERRED INCOME TAXES...................................................... -- 21,044
----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTE 10)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 5,000,000 shares
authorized; none issued or outstanding........................... -- --
Common stock, $.01 par value; 50,000,000 shares
authorized; 25,504,617 and 22,577,838 issued
and outstanding at December 31, 1997 and
1996, respectively................................................ 255 226
Capital in excess of par value........................................ 346,876 246,032
Retained earnings (deficit)........................................... (132,140) 2,678
----------- -----------
Total stockholders' equity................................................. 214,991 248,936
----------- -----------
$ 824,230 $ 585,925
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 34
FORCENERGY INC
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------
1997 1996 1995
----------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
REVENUES:
Oil and gas sales................................... $ 281,690 $ 138,698 $ 72,147
Other............................................... 2,495 683 494
----------- ----------- ---------
284,185 139,381 72,641
----------- ----------- ---------
EXPENSES:
Lease operating..................................... 77,174 38,786 24,507
Depletion, depreciation and amortization............ 313,347 58,464 31,295
Production taxes.................................... 4,791 3,454 1,868
General and administrative.......................... 15,244 7,971 5,670
----------- ----------- -----------
410,556 63,340 56,480
----------- ----------- -----------
INCOME FROM OPERATIONS................................. (126,371) 30,706 9,301
Interest and other income (expense).................... 3,354 650 (561)
Interest expense, net of amounts capitalized........... (32,422) (13,367) (11,668)
----------- ----------- -----------
Income (loss) before income taxes...................... (155,439) 17,989 (2,928)
Income tax (provision) benefit......................... 20,621 (6,711) 1,075
----------- ----------- -----------
Net income (loss)...................................... $ (134,818) $ 11,278 $ (1,853)
=========== =========== ===========
NET INCOME (LOSS) PER SHARE:
Basic............................................... $ (5.83) $ .60 $ (.14)
=========== =========== ===========
Diluted............................................. (5.83) $ .57 $ (.14)
=========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic............................................... 23,142 18,934 12,910
Diluted............................................. 23,142 19,672 12,910
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 35
FORCENERGY INC
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK CAPITAL IN EARNINGS
------------------- EXCESS OF (ACCUMULATED
SHARES AMOUNT PAR VALUE DEFICIT) TOTAL
------ ------ --------- ------------ ------
(IN THOUSANDS, EXCEPT SHARES)
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995.................... 9,040,486 $ 91 $ 77,717 $ (6,747) $ 71,061
Issuance of common stock.................... 9,219,961 92 85,661 85,753
Net loss.................................... (1,853) (1,853)
----------- ---------- ----------- ---------- ---------
BALANCE, DECEMBER 31, 1995.................. 18,260,447 183 163,378 (8,600) 154,961
----------- ----------- ----------- ---------- ---------
Conversion of 7% Exchangeable
Subordinated Notes..................... 2,343,047 23 35,813 35,836
Exercises of stock options and warrants..... 323,503 3 5,442 5,445
Issuance of common stock.................... 1,650,841 17 41,399 41,416
Net income.................................. 11,278 11,278
----------- ----------- ----------- ---------- ---------
BALANCE, DECEMBER 31, 1996.................. 22,577,838 226 246,032 2,678 248,936
----------- ----------- ----------- ---------- ---------
Exercises of stock options and warrants..... 150,915 1 2,503 2,504
Issuance of common stock.................... 2,775,864 28 98,341 98,369
Net loss.................................... (134,818) (134,818)
----------- ----------- ----------- ---------- ---------
BALANCE, DECEMBER 31, 1997.................. 25,504,617 $ 255 $ 346,876 $ (132,140) $ 214,991
=========== =========== =========== =========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 36
FORCENERGY INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ (134,818) $ 11,278 $ (1,853)
----------- ----------- -----------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depletion, depreciation and amortization.................... 313,347 59,518 32,516
Deferred income taxes....................................... (20,621) 6,612 (1,075)
Deferred interest........................................... -- 2,107 2,040
Equity in net income of subsidiary.......................... (1,510) -- --
Other....................................................... 1,287 (210) (194)
(Increase) decrease in accounts receivable.................. 496 (14,091) (4,965)
Increase in other current assets............................ (18,597) (3,674) (63)
Increase in other assets.................................... -- -- (113)
(Decrease) increase in accounts payable..................... 18,900 (4,859) 3,688
(Decrease) increase in other accrued liabilities............ 19,137 8,547 (1,407)
----------- ----------- -----------
312,439 53,950 30,427
----------- ----------- -----------
Net cash provided by operating activities:....................... 177,621 65,228 28,574
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of oil and gas properties...................... (119,503) (152,478) (41,462)
Capital expenditures........................................ (287,229) (130,269) (36,913)
Purchase of surety bonds.................................... -- -- (1,020)
Sale of surety bonds........................................ 4,426 2,151 2,730
Dividends from affiliate.................................... 900 -- --
Proceeds from sale of assets................................ -- 1,072 803
Increase in other assets.................................... 457 (340) --
----------- ----------- -----------
Net cash used in investing activities............................ (400,949) (279,864) (75,862)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under senior credit facility..................... 287,144 255,968 35,709
Repayments under senior credit facility..................... (253,512) (250,091) (38,666)
Issuance of long-term debt, net of expenses................. 193,414 169,114 --
Repayment of acquisition debt............................... -- -- (5,700)
Issuance of common stock, net............................... 2,661 46,318 55,753
----------- ----------- -----------
Net cash provided by financing activities........................ 229,707 221,309 47,096
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH.................................. 6,379 6,673 (192)
CASH AT BEGINNING OF PERIOD...................................... 9,669 2,996 3,188
----------- ----------- -----------
CASH AT END OF PERIOD............................................ $ 16,048 $ 9,669 $ 2,996
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 37
FORCENERGY INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Forcenergy Inc, formerly Forcenergy Gas Exploration, Inc., a Delaware
Corporation, and its subsidiaries ("Forcenergy" or the "Company"), is an
independent oil and gas company engaged in the exploration, acquisition,
development, exploitation and production of oil and natural gas properties.
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 and 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, as evidenced by the recent
volatility of gas prices, 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, quantities of oil and
gas reserves that may be economically produced and access to capital.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of Forcenergy Inc, and it's subsidiaries after elimination of all intercompany
transactions and balances. Forcenergy's investment in the Cook Inlet Pipeline
Company is accounted for under the equity method.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses and disclosure of contingent assets and liabilities. Actual results
could differ from those estimates.
CASH/CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. The Company
maintains cash deposits with a single financial institution. At certain times,
these deposits may exceed federally insured limits.
ACCOUNTS RECEIVABLE
Accounts receivable relate primarily to sales of oil and gas production
and amounts due from joint interest partners for expenditures made by the
Company on behalf of such partners. The Company reviews the financial condition
of potential purchasers and partners prior to signing sales or joint interest
agreements. At December 31, 1997 and 1996, the allowance for doubtful accounts
was $400,000 and $250,000, respectively. The Company requires certain forms of
financial assurance from its most significant customers.
F-7
<PAGE> 38
FORCENERGY INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
OIL AND GAS PROPERTIES
The Company follows the full cost method of accounting for oil and gas
properties whereby all productive and non-productive exploration, development
and acquisition costs incurred for the purpose of finding oil and gas reserves
are capitalized. Such capitalized costs include lease acquisition, geological
and geophysical work, delay rentals, drilling, completing and equipping oil and
gas wells, together with internal costs directly attributable to property
acquisition, exploration and development activities. No gains or losses are
recognized upon the sale or other disposition of oil and gas properties, except
in unusually significant transactions.
Depreciation, depletion and amortization of oil and gas properties are
computed on a composite unit-of-production method based on estimated proved
reserves. All costs associated with evaluated oil and gas properties, including
an estimate of future development, restoration, dismantlement and abandonment
costs associated therewith, are included in the computation base. The Company
evaluates all unevaluated oil and gas properties on a quarterly basis to
determine if any impairment has occurred or if the property has been otherwise
evaluated. If a property has been evaluated, or if there is determined to be any
impairment, costs related to the particular unevaluated properties are
reclassified as an evaluated oil and gas property, and thus subject to
amortization if there are proved reserves associated with the related cost
center. Otherwise, such impairment will be recognized in the period in which it
occurs.
Under the Securities and Exchange Commission's full cost accounting
rules, the Company reviews the carrying value of its oil and gas properties each
quarter. Under full cost accounting rules, capitalized costs of oil and gas
properties, net of deferred tax reserves, may not exceed the present value of
estimated future net revenues from proved reserves, discounted at 10 percent,
plus the lower of cost or fair market value of unproved properties, as adjusted
for related tax effects. Application of this rule generally requires pricing
future production at the unescalated oil and gas prices in effect at the end of
each fiscal quarter and requires a permanent write-down of capitalized costs if
the "ceiling" is exceeded, even if prices declined for only a short period of
time.
During the fourth quarter of 1997 the Company recognized a non - cash
impairment of recorded oil and gas assets amounting to $200 million ($162.8
million after tax) pursuant to the above discussed "ceiling test" provisions.
During the first quarter of 1998, oil and natural gas prices declined from those
being received as of the year end reserve valuation date. If prices decline
further from average prices being received as of March 1, 1998 the Company's
capitalized costs could again exceed the present values of estimated future net
revenues.
The majority of the Company's oil and gas properties are located in the
Gulf of Mexico and Cook Inlet, Alaska.
DEFERRED FINANCING COSTS
Deferred financing costs amortized over the terms of the related debt
consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------------------------- ----------------------------
OTHER CURRENT OTHER OTHER CURRENT OTHER
ASSETS ASSETS ASSETS ASSETS
------------- ----------- ------------- ---------
<S> <C> <C> <C> <C>
Senior Credit Facility $ 741 $ 3,575 $ 701 $ 3,459
9 1/2% Senior Subordinated Notes 651 5,360 589 5,298
8 1/2% Senior Subordinated Notes 602 5,896 - -
----------- ----------- ----------- ---------
$ 1,994 14,831 1,290 8,757
Accumulated amortization - 4,741 - 2,839
----------- ----------- ----------- ---------
$ 1,994 $ 10,090 $ 1,290 $ 5,918
=========== =========== =========== =========
</TABLE>
F-8
<PAGE> 39
FORCENERGY INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
REVENUE RECOGNITION
Revenues from oil and natural gas production are recorded using the
sales method, net of royalties and net profits interests. When the Company's
share of sales volumes differ from the Company's entitled share of production
based on the net revenue interest attributable to its working interest, an
imbalance occurs. Under the sales method of revenue recognition, the net
over/under-produced volumes are not recorded as a liability, or receivable,
respectively. The under-produced party later takes sales volumes in excess of
its entitled share of future production to eliminate the imbalance. To the
extent an imbalance exceeds the remaining estimated proved oil and natural gas
reserves for a given property, the Company records a liability or a receivable,
as appropriate. At December 31, 1997, the Company's net imbalance position was
not material.
During 1997, 1996 and 1995 the Company maintained a hedging program on
a portion of its estimated future production to provide a certain minimum level
of cash flow from its sales of crude oil and natural gas (See Note 8). Any
hedging gains or losses under these contracts are recognized in revenue upon
monthly settlement of hedged production.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation," ("SFAS No.123") encourages, but does not require
companies to record compensation costs for stock-based employee compensation
plans at fair value. The Company has chosen to continue to account for
stock-based employee compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees". Accordingly, compensation cost for stock options, awards and
warrants is measured as the excess, if any, of the quoted market price of the
Company's stock at the date of the grant over the amount an employee must pay to
acquire the stock (See Note 6).
INCOME TAXES
The Company follows the asset and liability approach to account for
income taxes. Under this method, deferred taxes are recognized for temporary
differences between the book and tax basis of assets and liabilities. These
temporary differences are measured using applicable enacted tax rates and
provisions of enacted tax laws.
EARNINGS PER SHARE
During 1997 the Company adopted Statement of Financial Accounting
Standards No. 128 "Earnings Per Share" ("SFAS No. 128") and has restated all
years presented in accordance therewith. SFAS No. 128 requires a dual
presentation of basic and diluted earnings per share ("EPS") on the face of the
statement of operations. Basic EPS is computed by dividing income available to
common stockholders by the weighted-average number of common shares for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that would then
share in earnings (see Note 7).
ENVIRONMENTAL EXPENDITURES
Environmental expenditures relating to current operations are expensed
or capitalized, as appropriate, depending on whether such expenditures provide
future economic benefits. Liabilities are recognized when the expenditures are
considered probable and can be reasonably estimated. Measurement of liabilities
is based on currently enacted laws and regulations, existing technology and
undiscounted site-specific costs. Generally, such recognition coincides with the
Company's commitment to a formal plan of action.
F-9
<PAGE> 40
FORCENERGY INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
COMMON STOCK CONVERSION AND SPLIT
Effective July 6, 1995 the Company increased the authorized number of
shares of common and preferred stock to 50,000,000 and 5,000,000, respectively,
and reclassified and converted each share of Class A Common Stock and Class B
Common Stock into 98.337 shares of Common Stock.
NEW ACCOUNTING PRONOUNCEMENTS
In September 1997, the Financial Accounting Standards Board (the
"FASB") issued Statement of Financial Accounting Standard No. 130, "Reporting
Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards of reporting
and display of comprehensive income and its components. In September 1997, the
FASB also issued Statement of Financial Accounting Standard No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"). SFAS 131 establishes standards for reporting operating and geographic
segments and the type and level of financial information to be discussed about
those segments. Both SFAS 130 and SFAS 131 are effective for fiscal years
beginning after December 15, 1997.
RECLASSIFICATIONS
Certain reclassifications have been made to the Company's financial
statements to conform them to classifications between years.
NOTE 2 -- ACQUISITIONS AND MERGERS
1997 ACQUISITIONS
The Company completed several acquisitions during 1997 at an aggregate
cost of approximately $220.5 million. The three most significant acquisitions,
all of which were accounted for as purchases, are discussed below, including pro
forma results of operations for the Company assuming the acquisitions had been
completed on January 1, 1996. The aggregate effect of other acquisitions on the
results of operations of the Company for the periods presented was not material.
On January 21, 1997, Forcenergy acquired all of the outstanding stock
of Great Western Resources, Inc. ("Great Western") for approximately $48.3
million. The net assets acquired consisted primarily of producing oil and gas
properties. The results of operations of the acquired properties are included in
the Company's results of operations beginning January 21, 1997.
On June 4, 1997, Forcenergy acquired a 97.75% working interest in
certain oil and gas properties located in the Cook Inlet, Alaska from Stewart
Petroleum Company ("Stewart") for $18.7 million and assumed operations of the
field. The results of operations for the acquired properties are included in the
Company's operations beginning June 4, 1997. In October 1997 the Company
increased it's interest in this field to 100%.
On October 22, 1997, Forcenergy, in separate transactions, acquired all
of the outstanding common stock of Edisto Resources Corporation ("Edisto") and
Convest Energy Corporation ("Convest"). Forcenergy issued approximately 2.8
million shares of common stock valued at $34.96 per share, or approximately
$98.9 million. The shareholders of Edisto also received $69.3 million in cash
from balances Forcenergy received in the merger. Edisto owned 73% of the
outstanding common stock of Convest. The net assets acquired consisted
principally of producing oil and gas properties. The results of operations of
the acquired properties are included in the Company's operations beginning
October 22, 1997.
1996 ACQUISITIONS
The Company completed several acquisitions during 1996 at an aggregate
cost of approximately $148.0 million. The two most significant acquisitions are
discussed below, including pro forma results of operations for the Company
assuming the acquisitions had been completed on January 1, 1995. The aggregate
effect of other acquisitions on the results of operations of the Company for the
periods presented was not material.
F-10
<PAGE> 41
FORCENERGY INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
On June 28, 1996, the Company acquired certain producing oil and gas
leasehold interest and related equipment from Amerada Hess Corporation ("Amerada
Hess") for a net cash consideration of $6.9 million. The acquisition has been
accounted for as a purchase and the results of operations of the properties
acquired are included in the Company's results of operations effective June 28,
1996.
On December 30, 1996, the Company acquired Marathon Oil Company's
interests in certain crude oil properties in the Cook Inlet area and Prudhoe Bay
Unit, Alaska ("Marathon") for a net cash consideration of $107.8 million. The
acquisition has been accounted for as a purchase and the results of operations
of the properties acquired are included in the Company's results of operations
effective December 30, 1996.
1995 ACQUISITIONS
The Company completed several acquisitions during 1995 at an aggregate
cost of approximately $92.1 million. The two most significant acquisitions are
discussed below, including pro forma results of operations for the Company
assuming the acquisitions had been completed on January 1, 1995. The aggregate
effect of other acquisitions on the results of operations of the Company for the
periods presented was not material.
On March 3, 1995, the Company acquired certain offshore oil and gas
properties from Conoco, Inc. ("Conoco") for a cash acquisition price of $24.5
million. The acquisition has been accounted for as a purchase and the results of
operations for the properties acquired are included in the Company's results of
operations effective March 3, 1995.
On August 2, 1995, the Company completed a plan of merger with Ashlawn
Energy, Inc. ("Ashlawn"). The consideration for the acquisition of Ashlawn was
approximately $3.3 million in net cash, common stock of the Company with an
indicated market value of $30.0 million, based upon the initial public offering
price and the assumption of $5.7 million of Ashlawn debt. The net assets
acquired consisted primarily of oil and gas properties. This transaction was
accounted for as a purchase and the results of operations of the properties
acquired are included in the Company's results of operations effective August 2,
1995.
The following pro forma statements of operations have been prepared to
give effect to the Great Western, Stewart, Edisto, Convest, Amerada Hess and
Marathon acquisitions as if they had occurred on January 1, 1996 and the Amerada
Hess, Marathon, Conoco and Ashlawn acquisitions as if they had occurred on
January 1, 1995. The historical results of operations have been adjusted to
reflect (i) revenues and expenses attributable to the properties, (ii) the
difference between the properties' historical depletion, depreciation, and
amortization and such expense calculated based on the value allocated to the
acquired assets, (iii) the increase in interest expense associated with the debt
incurred, and (iv) the increase in income taxes giving retroactive effect to the
transactions. Management does not believe the pro forma amounts purport to be
indicative of the results of operations that would have been reported had the
acquisitions occurred at the dates indicated below or that may be reported in
the future (in thousands, except per share amounts).
<TABLE>
<CAPTION>
PRO FORMA (UNAUDITED)
---------------------------------------------
FOR THE YEARS ENDED
1997 1996 1995
----------- -------- --------
<S> <C> <C> <C>
Revenues.................................. $ 330,717 $283,977 $138,007
Income (loss) from operations............. $(113,954) $ 68,266 $ 22,278
Net income (loss)......................... $ (84,407) $ 33,022 $ 13,810
Net income (loss) per share
Basic................................. $ (3.25) $ 1.27 $ 1.07
Diluted............................... $ (3.25) $ 1.24 $ 1.07
</TABLE>
F-11
<PAGE> 42
FORCENERGY INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
FORCENERGY AB ACQUISITION
On December 19, 1997 Forcenergy made a public tender offer for all of
the outstanding shares of Forcenergy AB ("FAB"). The transaction was approved by
Forcenergy shareholder vote on March 17, 1998. On March 20, 1998 more than 97%
of the outstanding common shares of FAB had been tendered in connection with the
offer. All conditions of the offer have been met and delivery of Forcenergy
common stock or Swedish Depository Receipts for Forcenergy Inc common stock in
exchange for such tendered shares is expected to be made on March 31, 1998.
Forcenergy will issue approximately 7.9 million shares pursuant to the offer.
FAB, was formed in 1990 to provide capital for Forcenergy's oil and gas
operations in the United States. FAB currently owns 8,740,486 shares of
Forcenergy common stock representing a 34% voting and equity interest, its only
significant asset. The 8,740,486 Forcenergy shares currently owned by FAB will
be controlled by Forcenergy and for accounting purposes, will no longer be
considered outstanding.
NOTE 3 -- PROPERTY, PLANT AND EQUIPMENT
Investments in property, plant and equipment were as follows at
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Oil and Gas Properties:
Proved....................................................... $ 999,126 $ 601,725
Unproved..................................................... 165,480 63,077
---------- ----------
1,164,606 664,802
Office Equipment................................................... 7,530 3,712
Less: accumulated depletion, depreciation and amortization......... (458,153) (144,803)
---------- ----------
Net Property, Plant and Equipment.................................. $ 713,983 $ 523,711
========== ==========
</TABLE>
Depletion, depreciation, and amortization for oil and gas properties
for the years ended December 31, 1997, 1996 and 1995 was, $313.3 million
including the $200 million impairment (See Note 1), $57.8 million and $30.8
million, respectively. Depletion, depreciation and amortization rates per BOE of
hydrocarbons produced (using a Mcf-to-Bbl conversion factor of 6 to 1) for the
years ended December 31, 1997, 1996 and 1995 were $6.36 (exclusive of
impairment), $6.18 and $5.28, respectively.
Included in property, plant and equipment are capitalized internal
costs relating to oil and gas property acquisition, exploration and development
costs of $7.9 million, $2.3 million and $1.1 million for the years ended
December 31, 1997, 1996 and 1995 respectively.
During the years ended December 31, 1997, 1996 and 1995 the Company
capitalized interest of $4.2 million, $2.2 million and $2.6 million,
respectively, on expenditures made in connection with exploration and
development projects on significant unproved properties that are not subject to
current depletion, depreciation or amortization. Interest is capitalized only
for the period that activities to bring the properties to their intended use are
ongoing.
The following sets forth the composition of capitalized costs excluded
from the depletion, depreciation, and amortization base at December 31, 1997,
1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
--------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Property Acquisition..................................... $ 75,669 $ 44,941 $ 30,394
Development Costs........................................ 83,892 13,567 4,916
Interest Capitalized..................................... 5,919 4,569 3,747
-------- --------- ---------
$165,480 $ 63,077 $ 39,057
======== ========= =========
</TABLE>
F-12
<PAGE> 43
FORCENERGY INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
At December 31, 1997, approximately 68% of excluded costs relate to
offshore activities in the Gulf of Mexico, 20% relate to offshore activities in
Alaska and the remainder relates to domestic onshore and international
activities. The inclusion of these costs in the depletion, depreciation and
amortization computation will be at the point in time that it is determined,
through drilling activities, that proved reserves do or do not exist on the
applicable properties, typically within three to five years.
NOTE 4 -- DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1996
-------- --------
<S> <C> <C>
Senior Credit Facility.............................. $131,564 $ 97,932
9 1/2% Senior Subordinated Notes.................... 175,000 175,000
8 1/2% Senior Subordinated Notes.................... 200,000 --
-------- --------
$506,564 $272,932
======== ========
</TABLE>
SENIOR CREDIT FACILITY
During 1996 the Company renegotiated its Senior Credit Facility to
increase both the maximum loan amount and the borrowing base from $120 million
to $195 million. Advances under the facility during 1996 bore interest at either
the prime rate, or LIBOR plus 1.375% at the Company's option. The borrowing base
is subject to redetermination semi-annually based on revised reserve estimates.
The loan is collateralized by substantially all of the Company's oil and gas
properties. During 1997 the Company's Senior Credit Facility was amended to
reduce the borrowing rates under the facility, to extend the term of the
revolver and to revise various administrative provisions of the facility.
Specifically, the facility now provides for a base borrowing rate on advances
under the revolver at either the prime rate or LIBOR plus 1.0%, at the election
of the Company. The amendment also provides for borrowings on a revolving basis
through January 1, 1999, at which time the amounts outstanding convert to a term
loan with quarterly payments of principal and accrued interest through June 30,
2002. Future annual principal payments, as a percentage of the principal balance
outstanding at the conversion to the term loan, will be 36% in 1999, 30% in
2000, 23% in 2001 and 11% in 2002. Interest on prime loans is due quarterly
while interest on LIBOR loans is due the earlier of quarterly, or at the end of
each designated interest period. Commitment fees on the unused portion of the
facility are due quarterly at an annual rate between .125% and 0.5%.
At December 31, 1997 the Company had drawn down $131.6 million under
the facility and an additional $4.3 million of availability was utilized for
outstanding letters of credit issued under the facility. The Company had
available funds pursuant to this agreement of $59.3 million at December 31,
1997.
The Senior Credit Facility contains certain covenants which include
maintenance of a minimum tangible net worth, certain financial ratios,
restrictions on asset sales, affiliated transactions and compensation and
certain limitations on dividends and additional debt or liens.
9 1/2% NOTES
On November 6, 1996, the Company issued an aggregate principal amount
of $175 million of 9 1/2% SeniOR Subordinated Notes (the "9 1/2% Notes") which
mature on November 1, 2006. The 9 1/2% Notes were issued undER AN Indenture (the
"9 1/2% Notes Indenture") which provides that interest is payable semiannually,
in arrears, on May 1 and November 1 of each year, commencing May 1, 1997, with
principal due at maturity.
F-13
<PAGE> 44
FORCENERGY INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The 9 1/2% Notes are redeemable in whole or in part at the option of
the Company, at any time on or aftER November 1, 2001, at the redemption prices
(expressed as percentages of principal amount) set forth below, plus accrued and
unpaid interest, if any, thereon.
YEAR PERCENTAGE
---- ----------
2001................................................... 104.750%
2002................................................... 103.167%
2003................................................... 101.583%
2004 and thereafter.................................... 100.000%
Prior to November 1, 2001, the Company may redeem the 9 1/2% Notes, in
whole or in part, at the Make-WhoLE Price, plus accrued and unpaid interest, if
any, through the date of redemption. The Make-Whole Price is defined as the
greater of (i) the sum of the outstanding principal amount and Make-Whole Amount
(defined below) of such 9 1/2% Notes, and (ii) the redemption price of such 9
1/2% Notes on November 1, 2001, determined pursuant tO THE Indenture (104.75% of
the principal amount). The Make-Whole Amount is defined as the excess, if any,
of (i) the present value of the remaining interest premium and principal
payments due on such 9 1/2% Notes as if such 9 1/2% NOTES were redeemed on
November 1, 2001, computed using a discount rate equal to the Treasury Rate plus
50 basis points, over (ii) the outstanding principal amount of such 9 1/2%
Notes. In addition, during the first 36 montHS after October 31, 1996, the
Company may redeem up to $61.25 million in aggregate principal amount of the 9
1/2% Notes at a redemption price of 109.5% of the principal amount thereof plus
accrued and unpaid interest, if any, thereon to the redemption date with the net
proceeds of an offering of common equity; provided that at least $113.75 million
in aggregate principal amount of the 9 1/2% Notes remain outstanding immediately
after tHE occurrence of such redemption.
The 9 1/2% Notes holders may, at their election, require that the
Company prepay the 9 1/2% Notes upoN THE occurrence of a "change of control" as
defined in the 9 1/2% Notes Indenture. Upon a "change of control", tHE holders
may require the Company to repurchase all or any part of the 9 1/2% Notes at a
repurchase price equal TO 101% of the aggregate principal amount thereof plus
accrued and unpaid interest, if any, thereon. Furthermore, under certain
circumstances, the Company may become obligated to offer to purchase all or a
portion of the 9 1/2% Notes at 100% of the principal amount thereof, together
with accrued and unpaid interest, if any, with the net proceeds of certain asset
sales.
8 1/2% NOTES
On February 14, 1997, the Company issued an aggregate principal amount
of $200 million in 8 1/2% SeniOR Subordinated Notes priced at $99.338, with an
effective yield to maturity of 8.6% (the 8 1/2% Notes), which matuRE on February
15, 2007. The 8 1/2% Notes were issued under an Indenture (the "8 1/2% Notes
Indenture") which proVIDES that interest on the 8 1/2% Notes will be payable in
cash in arrears semiannually on February 15 and August 15 OF each year,
commencing August 15, 1997.
The 8 1/2% Notes are redeemable in whole or in part at the option of the
Company, at any time on or after February 15, 2002, at the redemption prices set
forth below plus, in each case, accrued and unpaid interest, if any, thereon.
YEAR PERCENTAGE
---- ----------
2002................................................. 104.250%
2003................................................. 102.833%
2004................................................. 101.417%
2005 and thereafter.................................. 100.000%
F-14
<PAGE> 45
FORCENERGY INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Prior to February 15, 2002, the Company may redeem the 8 1/2% Notes, in
whole or in part, at the Make-WhoLE Price, plus accrued and unpaid interest, if
any, through the date of redemption. The Make-Whole Price is defined as the
greater of (i) the sum of outstanding principal amount and Make-Whole Amount
(defined below) of such 8 1/2% Notes, and (ii) the redemption price of such 8
1/2% Notes on February 15, 2002, determined pursuant to the 8 1/2% NOTES
Indenture (104.25% of the principal amount). The Make-Whole Amount is defined as
the excess, if any, of (i) the present value of the remaining interest premium
and principal payments due on such 8 1/2% Notes as if such 8 1/2% NOTES were
redeemed on February 15, 2002, computed using a discount rate equal to the
Treasury Rate plus 50 basis points, over (ii) the outstanding principal amount
of such 8 1/2% Notes. In addition, during the first 36 montHS after February 11,
1997, the Company may redeem up to $70 million in aggregate principal amount of
the 8 1/2% NotES at a redemption price of 108.5% of the principal amount thereof
plus accrued and unpaid interest, if any, thereon to the redemption date with
the net proceeds of an offering of common equity of the Company; provided that
at least $130.0 million in aggregate principal amount of the 8 1/2% Notes remain
outstanding immediately after tHE occurrence of such redemption. Any such
redemption must occur within 60 days of the date of the closing of such common
equity offering.
Upon a "change of control" in the Company, as defined in the 8 1/2%
Notes Indenture, the 8 1/2% Notes hoLDERS may require, at their election, that
the Company prepay all or a portion of the 8 1/2% Notes at a purchase priCE
equal to 101% of the aggregate principal amount thereof plus accrued and unpaid
interest, if any, thereon. Furthermore, under certain circumstances, the Company
may become obligated to offer to purchase all or a portion of the 8 1/2% Notes
at 100% of the principal amount thereof, together with accrued and unpaid
interest, if any, wiTH the net proceeds of certain asset sales.
The 9 1/2% Notes Indenture and the 8 1/2% Notes Indenture both contain
certain covenants which includE THE following: (i) limitations on disposition of
proceeds from asset sales; (ii) limitations on payment of dividends, making of
distributions or certain investments; (iii) limitations on the incurrence of
additional indebtedness or liens (iv) limitations on sale and leaseback
transactions; (v) limitations on mergers, consolidations and transfers of
substantially all of the Company's assets; and (vi) limitation on certain
transactions with affiliates. The Company is in compliance with all covenants
under both indentures.
The 9 1/2% Notes and the 8 1/2% Notes are both subordinate to the
Senior Credit Facility and rank pari PASSU with each other.
7% EXCHANGEABLE SUBORDINATED NOTES
On November 6, 1996, in conjunction with a public offering of common
stock by the Company, the Company's Exchangeable Notes were exchanged into a
total of 2,343,047 shares of common stock. The exchange resulted in a non-cash
credit to stockholder's equity totaling $35.8 million, representing principal,
accrued deferred interest and capitalized debt issuance cost relating to the
Exchangeable Notes.
The Company's aggregate long-term debt maturities for each of the next
five calendar years are estimated to be as follows:
(IN THOUSANDS)
1998................................................... $ --
1999................................................... 47,363
2000................................................... 39,469
2001................................................... 30,260
2002................................................... 14,472
Thereafter............................................. 375,000
---------
Total.................................................. $ 506,564
=========
F-15
<PAGE> 46
FORCENERGY INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The fair value of the Company's fixed rate 9 1/2% Notes and 8 1/2%
Notes at December 31, 1997 is $186.4 million and $202.0 million, respectively
based on current market prices at December 31, 1997. The Senior Credit Facility,
with interest at the prime rate and LIBOR, approximates market at December 31,
1997.
NOTE 5 -- INCOME TAXES
The Company's (provision) benefit for income taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred:
Federal...................................................... $17,929 $(5,991) $ 980
State........................................................ 2,692 (720) 95
------- ------- ------
Total.................................................... $20,621 $(6,711) $1,075
======= ======= ======
</TABLE>
The Company's deferred income tax assets and liabilities were comprised
of the following differences between financial and tax reporting (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Capitalized costs and write-offs............................. $ (7,914) $(28,556) $(21,660)
Net operating loss carry forwards............................ 47,210 7,512 7,611
Deferred interest deductions................................. -- -- 1,744
Valuation allowance.......................................... (39,296)
-------- -------- --------
Deferred tax liability....................................... $ -- $(21,044) $(12,305)
======== ======== ========
</TABLE>
At December 31, 1997 the Company had approximately $39 million of
unrecognized deferred tax assets comprised mainly of capitalized costs and
write-offs and net operating loss carryforwards available to offset future
taxable income for federal purposes. A valuation allowance has been provided
against this deferred tax asset as it is presently more likely than not that the
benefit will not be utilized. The Company continues to evaluate the
realizability of its deferred tax assets and its estimate is subject to change.
The Company had no deferred tax asset valuation allowance at December 31, 1996
or 1995.
A reconciliation of the federal statutory income tax rates to the
Company's effective rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Income taxes at federal statutory rates...................... 35.0% 35.0% 34.0%
State income tax, less federal benefit....................... 3.3 2.6 3.3
Valuation allowance.......................................... (25.3)
Other, net................................................... .3 (.3) (0.6)
---- ---- ----
Total........................................................ 13.3% 37.3% 36.7%
==== ==== ====
</TABLE>
At December 31, 1997, the Company had a net operating loss carryforward
("NOL") for tax purposes of $123.4 million. Of this amount, approximately $103.2
million was acquired from 1997 acquisitions. The NOLs will expire unless
otherwise utilized, beginning in 1999. The Company's initial public offering of
its common stock during 1995 resulted in a change of ownership under Section 382
of the Internal Revenue Code of 1986, as amended, and caused an annual
limitation in the utilization of the Company's NOLs. The Company's NOLs acquired
through acquisitions are also subject to an annual limitation. The Company has
determined that the annual limitation for all NOLs is approximately $11.8
million.
F-16
<PAGE> 47
FORCENERGY INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 6 -- STOCK BASED COMPENSATION PLANS
The Company has adopted the disclosure provisions of SFAS No. 123.
Accordingly, no compensation costs have been recorded for the stock options or
warrants as the exercise price of all options granted was the fair market value
on the date of grant.
The Company has reserved 4,100,000 shares of common stock for issuance
to officers, employees, and directors under stock option and employee stock
purchase plans.
STOCK OPTION PLANS
The exercise price for options granted to directors, officers and
employees is the fair market value of the stock at the date of grant. The
outstanding options have varying vesting periods, expire at various dates
through the year 2007, and are exercisable at prices ranging from $10.00 to
$38.88 per share, with an aggregate exercise price of $73.8 million.
The Company's President and Chief Executive Officer has the right to
require the Company to purchase any shares of Common Stock owned as a result of
the exercise of stock options at the then current market price of the Common
Stock and any unexercised stock options at the excess of the fair market value
of the Common Stock over the option price, upon (i) a termination of employment,
(ii) the maturity of, or inability to obtain financing to exercise the stock
options and (iii) any expiration of the right to exercise stock options.
The following table summarizes the stock option activity for the 1995,
1996 and 1997:
<TABLE>
<CAPTION>
NUMBER OPTION PRICE WEIGHTED AVERAGE
OF SHARES PER SHARE EXERCISE PRICE
--------- ------------- ----------------
<S> <C> <C> <C>
Outstanding at December 31, 1994............ 702,141 12.02 - 14.51 13.27
Granted................................ 1,003,777 10.00 - 14.51
----------- -------------
Outstanding at December 31, 1995............ 1,705,918 10.00 - 14.51 11.59
Granted................................ 1,070,929 10.50 - 32.00 20.58
Exercised.............................. (108,637) 10.00 - 14.51 14.09
Canceled............................... (157,292) 10.00 - 14.51 12.18
----------- -------------
Outstanding at December 31, 1996............ 2,510,918 10.00 - 32.00 15.25
Granted................................ 1,512,225 25.81 - 38.88 28.93
Exercised.............................. (120,562) 10.00 - 26.88 14.73
Canceled............................... (277,579) 10.00 - 36.25 23.70
------------ -------------
Outstanding at December 31, 1997............ 3,625,002 10.00 - 38.88 20.25
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------------------------- ---------------------------------
RANGE OF OUTSTANDING WEIGHTED AVERAGE WEIGHTED WEIGHTED
EXERCISE AT REMAINING LIFE AVERAGE EXERCISABLE AT AVERAGE
PRICES DECEMBER 31, 1997 YEARS EXERCISE PRICE DECEMBER 31, 1997 EXERCISE PRICE
- --------------- ----------------- ---------------- -------------- ----------------- --------------
<C> <C> <C> <C> <C> <C>
$10.00 - $12.02 1,213,912 7.6 $10.54 788,970 $10.67
14.13 - 20.00 630,015 6.8 16.48 352,710 14.89
23.50 - 27.00 1,211,250 9.3 26.68 235,000 26.88
28.75 - 34.75 514,050 9.2 31.58 -- --
35.25 - 38.88 55,775 9.4 36.64 -- --
--------- --------- ------
3,625,002 1,376,680 $14.52
========= ========= ======
</TABLE>
The weighted average fair value for options granted during 1997 was
$13.30.
F-17
<PAGE> 48
FORCENERGY INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
If compensation expense for the stock options and warrants had been determined
and recorded based on the fair value on the grant date and using the
Black-Scholes option pricing model to estimate the theoretical future value of
those options, the Company's net income (loss) and net income (loss) per share
amounts would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ------ -------
<S> <C> <C> <C>
Pro forma net income (loss).............................. $(142,585) $9,196 $(5,039)
========== ====== =======
Pro forma net income (loss) per share.................... $ (6.16) $ .46 $ (.39)
========== ====== =======
</TABLE>
Due to the uncertainties in these estimates, such as market prices,
exercise possibilities, and the possibility of future awards and cancellations,
these pro forma disclosures are not likely to be representative of the effects
on reported income for future years.
For proforma purposes, the fair value of each option grant is estimated
on the date of grant with the following weighted-average assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
------ ----- ----
<S> <C> <C> <C>
Expected life (years)................................... 4.5 10 10
Interest rate........................................... 6.17% 6.5% 6.5%
Volatility.............................................. 45.6% 40% 40%
Dividend yield.......................................... -- -- --
</TABLE>
STOCK PRICE PERFORMANCE INCENTIVE PLAN
On November 21, 1996, the Board of Directors of the Company adopted, the
1997 Stock Price Performance Incentive Plan (the "Performance Plan") covering
all employees of the Company which was approved by shareholder vote in May 1997.
The Performance Plan has a commencement date of January 1, 1997 and expires on
December 31, 1999. The purpose of the Performance Plan is to provide a
meaningful financial incentive to employees that will assist the Company in
recruiting and retaining high quality industry professionals, while
simultaneously benefiting the shareholders by aligning the financial interests
of employees with those of the shareholders by focusing their efforts on the
price performance of the stock. The plan provides that should the price of the
Company's stock reach $60 per share at any time during the term of the plan,
every employee will receive a non-cash award of the right to receive common
stock in the Company in an amount equivalent in value to five (5) times his/her
annual salary on January 1, 1997 (or date of hire, if later). For employees
hired after January 1, 1997, the award will be prorated giving consideration to
the date of hire and the stock price on the date of hire. The right to receive
the common stock, and the granting of the common stock, will vest to each
employee still employed by the Company, in equal amounts, on the first through
third anniversaries of the date that the common stock reaches $60 per share.
Should the price of the common stock not reach $60 per share during the
term of the plan, but reaches $50 per share, each employee will receive, on
December 31, 1999, a similar right to receive common stock with similar vesting
provisions but with an equivalent value of two and one-half times his/her
salary. That right would vest, in equal amounts on December 31, in the years
2000 through 2002. Compensation expense will be recognized by the Company from
the award date through the vesting period with a cumulative recognition of
compensation expense recognized on the date of award, giving consideration to
employee services rendered prior to the award date. At December 31, 1997, annual
salaries for all employees was approximately $17 million.
F-18
<PAGE> 49
FORCENERGY INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
STOCKHOLDER RIGHTS PLAN
On December 10, 1997 the Company adopted a stockholder rights plan
(the "Rights Plan"). Under the Rights Plan, each shareholder became entitled to
receive one right for each outstanding share of common stock, should a
triggering event occur. The rights which expire on December 10, 2007 become
exercisable if a person or group other than Forcenergy AB (see Note 2) acquires
20% or more of the Company's outstanding voting stock or announces a tender or
exchanger offer that would result in ownership of 20% or more of the outstanding
voting common stock.
Each right will entitle the holder to buy one one-thousandth of a share
of a new series of junior participating preferred stock at an exercise price of
$200 per right, subject to antidilution adjustments. Each one one-thousandth of
a share of this new preferred stock has the dividend and voting rights of, and
is designed to be substantially equivalent to, one share of common stock.
Forcenergy's Board of Directors may, at its option, redeem all rights for $.01
per right at any time prior to the acquisition of 20% or more of Forcenergy's
voting stock by a person or group.
If a person or group other than Forcenergy AB acquires 20% or more of
Forcenergy's outstanding voting stock, each right will entitle holders, other
than the acquiring party, to purchase for $200 shares of Forcenergy common stock
having a market value of twice that amount.
The plan also includes an exchange option. If a person or group
acquires 20% or more, but less than 50%, of the outstanding voting stock, the
Board of Directors may, at its option, exchange the rights in whole or in part
for shares of Forcenergy stock. Under this option, Forcenergy would issue one
share of common stock, or one one-thousandth of a share of the new preferred
stock, for each outstanding right. This exchange would not apply to shares held
by the person or group holding 20% or more of Forcenergy's voting stock.
If, after the rights have become exercisable, Forcenergy merges or
otherwise combines with another entity, or sells 50% or more of its assets or
earning power, each right then outstanding will entitle its holder to purchase
for $200, subject to antidilution adjustments, a number of the acquiring party's
common shares having a market value of twice that amount.
EMPLOYEE STOCK PURCHASE PLAN
The Company has adopted the Forcenergy Employee Stock Purchase Plan
(the "Stock Purchase Plan"), which permits full-time Company employees (or part
time for at least 20 hours per week and at least five months per year) to
acquire common stock at a small discount from its fair market value through
payroll deductions. Up to a maximum 100,000 shares of common stock may be sold
to participants under the Stock Purchase Plan. As of December 31, 1997, a total
of 44,415 shares had been purchased by participants in the plan.
F-19
<PAGE> 50
FORCENERGY INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 7 -- EARNINGS PER SHARE
The following reconciles the numerators and denominators of the basic
and diluted EPS computations (in thousands, except per share data):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1997 1996 1995
---------------------------- ------------------------ ---------------------
PER PER PER
INCOME/(LOSS) SHARES SHARE INCOME SHARES SHARE LOSS SHARES SHARE
------------- ------ ----- ------ ------ ----- ---- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income/(Loss) available
to common stockholders $(134,818) 23,142 $(5.83) $11,278 18,934 $.60 $(1,853) 12,910 $(.14)
=====
EFFECT OF DILUTIVE SECURITIES
Options & Warrants - - (1) - 738 (1)
7% Exchangeable Notes - - - - - - - - (1)
--------- ------ ------ ------- ------ ---- ------- ------ -----
DILUTED EPS
Income available
to common stockholders
and assumed exercises $(134,818) 23,142 $(5.83) $11,278 19,672 $.57 $(1,853) 12,910 $(.14)
========= ====== ====== ======= ====== ==== ======= ====== =====
</TABLE>
(1) The effect of 1,293,866 and 484,448 shares of potential common stock were
anti-dilutive in 1997 and 1995, respectively due to the losses in both
years.
NOTE 8 -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is a party to various financial instruments with
off-balance-sheet risk in the normal course of business to reduce its exposure
to changing commodity prices. The instruments are utilized to hedge oil and gas
prices for varying time periods. The instruments contain an element of credit
risk and price risk. The Company attempts to minimize the extent of credit risk
by limiting the counterparties to major banks or significant industry
participants. All of these arrangements are settled on a monthly basis. The
Company accounts for these arrangements as hedging activities and, accordingly,
gains or losses are included in oil and gas revenues for the period the
production was hedged. In order to consider these arrangements as hedges, (i)
the Company must designate the 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 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. Under these agreements, monthly settlements are based on the
differences between the prices specified in the instrument and/or the settlement
price of certain oil and gas futures contracts quoted on the New York Mercantile
Exchange ("NYMEX"). In instances where the applicable settlement price is less
than the price specified in the contract, the Company receives a settlement
based on the difference and in instances where the applicable settlement price
is higher than the specified prices, the Company pays an amount based on the
difference. The Company utilizes these arrangements for portions of its current
oil and gas production to achieve more predictable cash flows and to reduce its
exposure to fluctuations in oil and gas prices. The remaining portion of current
production is not hedged so as to provide the Company the opportunity to benefit
from increases in prices on that portion of the production, should price
increases materialize. The Company recognized decreases in oil and gas sales of
$10.8 million, $20.5 million and a gain of $117,000 in 1997, 1996 and 1995,
respectively as a result of these agreements. The fair market value of all
contracts in place at December 31, 1997 and 1996 were insignificant.
F-20
<PAGE> 51
FORCENERGY INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Specifically, the Company has entered into forward sales and swap
arrangements with respect to approximately 19% of its estimated natural gas
production through May 1998 at a weighted average price of $2.36 per Mcf. The
Company has also hedged an additional 26% of its estimated natural gas
production through March 1998 using a collar arrangement with a floor of $2.25
per Mcf and a ceiling of $3.00 per Mcf. Furthermore, Forcenergy has hedged,
through three-way options, 9% of its estimated first quarter 1998 natural gas
production and 23% of second and third quarter 1998 natural gas production, with
a maximum benefit of $.30 per Mcf if prices decline below an average floor of
$2.71 per Mcf, and with no exposure if prices remain below an average ceiling of
$3.93 per Mcf. Another 33% of gas production for the April through September
1998 period has been hedged through no-cost three-way collars with an average
floor of 2.33 and an average ceiling of $2.58 per Mcf. If prices fall below an
average of $2.03 per Mcf in any one month, the floor for that month resets to
that lower price. Forcenergy has also hedged approximately 17% of its estimated
oil production through December 1998 using collar arrangements with weighted
average floors of $18.21 per Bbl and weighted average ceilings of $23.08 per
Bbl. The production percentages reflected assume current production rates.
NOTE 9-- LEASES
The following is a schedule, by calendar year, of future minimum rental
payments, covering primarily office space, required under operating leases with
a term in excess of one year:
(IN THOUSANDS)
1998................................................... $ 2,828
1999................................................... 2,909
2000................................................... 2,899
2001................................................... 2,966
2002................................................... 1,992
-------
Total.................................................. $13,594
=======
Total rental expense for operating leases was $1,765,000, $584,000 and
$419,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
NOTE 10 -- COMMITMENTS AND CONTINGENCIES
The Company is involved in various litigation matters arising in the
normal course of business. Management's assessment is that none of these matters
are anticipated to have a material adverse affect on the financial position or
results of operations of the Company.
The Company is committed over five years to spend up to $15.0 million
under the terms of a joint exploration agreement.
NOTE 11 -- SIGNIFICANT CUSTOMERS
The following table reflects sales to oil and gas purchasers who
individually accounted for more than 10% of the Company's total oil and gas
revenues in a given year (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Texon Corporation................................ -- $24,793 $ --
Cornerstone Propane, Inc......................... 93,342 69,491 21,155
Mobil Oil Corp................................... -- -- 7,930
</TABLE>
During 1997, one purchaser of the Company's production accounted for
more than 10% of the value of oil and gas sold by the Company. Based on current
demand for oil and natural gas sold, the Company does not believe the loss of
this purchaser would have a material adverse effect on the Company's results of
operations or cash flow. The Company currently relies on one purchaser for its
Alaska production. The contract with this purchaser runs through December 1998
at which time a new contract must be negotiated or another purchaser found. The
inability to negotiate a new contract or to find a new purchaser could
materially impact the Company's results of operations and cash flows.
F-21
<PAGE> 52
FORCENERGY INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 12 -- CURRENT ASSETS AND LIABILITIES
Current assets and liabilities include the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996
--------- --------
<S> <C> <C>
CURRENT ASSETS:
Accounts receivable-joint interest billings................. $ 7,975 $ 1,567
Accrued oil and gas sales................................... 35,472 27,416
Other....................................................... 455 683
Allowance for doubtful accounts............................. (400) (250)
------- -------
Accounts receivable, net................................. $43,502 $29,416
======= =======
Prepaid drilling cost....................................... $13,145 $ 4,868
Royalties and production taxes receivable from joint
interest owners........................................... 5,964 2,584
Other....................................................... 11,122 4,511
------- -------
Other current assets..................................... $30,231 $11,963
======= =======
CURRENT LIABILITIES:
Accrued drilling cost....................................... $30,239 $17,155
Accrued lease operating expenses............................ 10,417 5,921
Accrued interest expense.................................... 9,434 2,650
Revenue and royalties payable............................... 7,255 2,574
Other....................................................... 12,664 6,070
------- -------
Accrued liabilities...................................... $70,009 $34,370
======= =======
</TABLE>
NOTE 13 -- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
During October 1997 Forcenergy acquired Edisto and Convest for
Forcenergy common stock and cash balances Forcenergy received in the mergers.
The accompanying financial statements include the following attributable to the
Edisto and Convest mergers:
Issuance of common stock................................... $98,934
Working capital acquired................................... (4,196)
-------
Total included in oil and gas properties................... $94,738
=======
and the following attributable to the 1995 Ashlawn acquisition:
Issuance of common stock................................... $30,000
Deferred income taxes recognized........................... 10,689
Assumption of debt......................................... 5,700
-------
Total included in oil and gas properties..... $46,389
=======
The Company paid cash interest costs, including capitalized interest,
of $34.8 million, $11.5 million and $10.0 million for the years ended December
31, 1997, 1996 and 1995 respectively. During 1996 and 1995 the invested in
additions to oil and gas properties through accounts payable and other accrued
liabilities amounting to $21.2 million and $19.9 million, respectively.
F-22
<PAGE> 53
FORCENERGY INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 14 -- SUPPLEMENTAL QUARTERLY INFORMATION (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 FIRST SECOND THIRD FOURTH ANNUAL
- ---- ----- ------ ----- ------ ------
<S> <C> <C> <C> <C> <C>
Revenues............................ $71,005 $64,141 $63,515 $ 85,524 $ 284,185
Earnings from Operations............ $24,622 $12,430 $13,100 $(176,523)(1) $(126,371)
Net Income (loss)................... $11,174 $ 3,946 $ 3,765 $(153,703) $(134,818)
Net Income (loss) per share:
Basic........................... $ .49 $ .17 $ .17 $ (6.66) $ (5.83)
Diluted......................... $ .47 $ .16 $ .16 $ (6.66) $ (5.83)
1996
- ----
Revenues............................ $28,468 $29,285 $37,039 $ 44,589 $ 139,381
Earnings from Operations............ $ 5,662 $ 5,882 $ 7,421 $ 11,741 $ 30,706
Net Income (loss)................... $ 1,818 $ 1,862 $ 2,491 $ 5,107 $ 11,278
Net Income (loss) per share:
Basic........................... $ .10 $ .10 $ .14 $ .26 $ .60
Diluted......................... $ .10 $ .10 $ .13 $ .24 $ .57
</TABLE>
(1) Includes a $200 million ($162.8 million after tax) non-cash impairment of
oil and gas assets recorded pursuant to the full cost accounting rules
mandated by the Securities and Exchange Commission ("SEC").
F-23
<PAGE> 54
NOTE 15 -- SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES
COST INCURRED IN OIL AND GAS PRODUCING ACTIVITIES
Presented below are costs incurred in petroleum property acquisition,
exploration and development activities (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Acquisition of properties:
Proved properties................................. $168,450 $123,015 $ 75,836
Unproved properties............................... 41,907 25,179 16,300
Exploration costs.................................... 176,543 42,262 6,264
Development costs.................................... 106,260 92,555 45,485
-------- -------- --------
Total....................................... $493,160 $283,011 $143,885
======== ======== ========
</TABLE>
CAPITALIZED COSTS RELATED TO OIL AND GAS PRODUCING ACTIVITIES
The following table presents total capitalized costs of proved and
unproved properties and accumulated depletion, depreciation and amortization
related to oil and gas producing operations (thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- -------
<S> <C> <C> <C>
Proved properties...................................... $ 995,517 $ 601,725 $343,378
Unproved properties.................................... 165,480 63,077 39,057
---------- ---------- --------
$1,160,997 $ 664,802 $382,435
Accumulated depletion, depreciation and amortization... (455,424) (143,061) (85,251)
---------- --------- --------
Total......................................... $ 705,573 $ 521,741 $297,184
========== ========= ========
</TABLE>
Of the capitalized cost of unproved properties at December 31, 1997,
$99,775,000, $32,650,000, $22,940,000 and $10,115,000 were incurred in 1997,
1996, 1995 and years prior to 1995, respectively. The Company anticipates
evaluating these properties over the next three to five years as it continues
its property exploitation and development program.
RESULTS OF OPERATIONS FROM OIL AND GAS PRODUCING ACTIVITIES
The results of operations from oil and gas producing activities, which
do not include revenues associated with the production and sale of sulfur and
processing fees for third party gas, and excluding corporate overhead and
interest costs are as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
--------- -------- -------
<S> <C> <C> <C>
Revenues(1)............................................ $ 292,456 $159,232 $ 72,147
Production costs....................................... (81,965) (42,240) (26,375)
Depreciation, depletion and amortization (2)........... (313,347) (57,811) (30,830)
Income tax (provision) benefit........................ 20,621 (14,415) (5,573)
--------- -------- --------
Results of operations for petroleum producing activities $ (82,235) $ 24,232 $ 9,369
========== ======== ========
Average realized sales prices;
Liquids (per Bbl)(3)................................... $ 17.10 $ 16.93 $ 16.46
Natural Gas (per Mcf).................................. $ 2.45 $ 2.16 $ 1.59
</TABLE>
- -----------
(1) Does not include 1997 and 1996 hedging losses amounting to $10.8
million and $20.5 million, respectively.
(2) Includes a $200 million non cash impairment of oil and gas assets
recorded pursuant to full cost accounting rules mandated by the
SEC.
(3) Includes condensate, oil and natural gas liquids and hedging gains
and losses.
F-24
<PAGE> 55
FORCENERGY INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
RESERVE QUANTITIES (UNAUDITED)
Estimates of proved reserves of the Company and the related
standardized measure of discounted future net cash flow information are based on
the reports of independent petroleum engineers. All of the Company's proved
reserves are located offshore or onshore - United States. There are numerous
uncertainties inherent in estimating oil and natural gas reserves and their
estimated values, including many factors beyond the control of the producer. The
reserve data set forth herein represents only estimates. Reservoir engineering
is a subjective process of estimating underground accumulations of oil and
natural gas that cannot be measured in an exact manner. Estimates of
economically recoverable oil and gas reserves and of future net cash flows
necessarily depend upon a number of variable factors and assumptions, such as
historical production from the area compared with production from other
producing areas, the assumed effects of regulations by governmental agencies and
assumptions concerning future oil and gas prices, future operating costs,
severance and excise taxes, development costs and workover and remedial costs,
all of which may in fact vary considerably from actual results. For these
reasons, estimates of the economically recoverable quantities of oil and natural
gas attributable to any particular group of properties, classifications of such
reserves based on risk of recovery, and estimates of the future net cash flows
expected therefrom prepared by different engineers or by the same engineers at
different times may vary substantially and such reserve estimates may be subject
to downward or upward adjustment based upon such factors. Actual production,
revenues and expenditures with respect to the Company's reserves will likely
vary from estimates, and such variances may be material.
The present value of estimated future net cash flows included herein
should not be construed as the current market value of estimated oil and natural
gas reserves attributable to the Company's operations. In accordance with the
applicable requirements of the Securities and Exchange Commission (the
"Commission"), the estimated discounted net cash flows from proved reserves are
generally based on current prices and costs as of the date of the estimate,
whereas actual future prices and costs may be materially higher or lower.
Current prices in effect as of the valuation date incorporated the estimated
effects of hedging agreements in place (see Note 8) as of the valuation date,
and for the period the agreements will be in effectActual future cash flows will
also be affected by factors such as the amount and timing of actual production,
supply and demand for oil and natural gas, curtailments or increases in
consumption by purchasers and changes in governmental regulation or taxation.
The timing of actual future net cash flows from proved reserves, and their
actual present value, will be affected by the timing of both production and the
incurrence of expenses in connection with development and production of oil and
gas properties. In addition, the calculation of the present value of the future
net revenues using a 10% discount as required by the Commission, is not
necessarily the most appropriate discount factor based on interest rates in
effect from time to time and the risk associated with the Company's reserves or
the oil and gas industry in general.
The Company's estimates of its proved reserves and proved developed
reserves of oil and gas as of December 31, 1995, 1996 and 1997 and the changes
in its proved reserves are as follows:
<TABLE>
<CAPTION>
OIL GAS
(MBBL) (MMCF)
--------- --------
1995
----
<S> <C> <C>
Proved developed and undeveloped:
Beginning of year................................ 11,310 172,122
Production....................................... (2,343) (21,112)
Purchases of minerals-in-place................... 10,691 57,786
Extensions and discoveries....................... 6,018 21,344
Sales of minerals-in-place....................... (467) (5,586)
Revisions to previous estimates.................. (751) (6,502)
------ -------
End of year...................................... 24,458 218,052
====== =======
Proved developed:
Beginning of year................................ 9,035 125,468
====== =======
End of year...................................... 16,050 154,705
====== =======
</TABLE>
F-25
<PAGE> 56
FORCENERGY INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
<S> <C> <C>
1996
----
Proved developed and undeveloped:
Beginning of year................................ 24,458 218,502
Production....................................... (4,006) (32,738)
Purchases of minerals-in-place................... 27,206 38,107
Extensions and discoveries....................... 4,718 19,419
Sales of minerals-in-place....................... (38) (3,552)
Revisions to previous estimates.................. 2,321 17,625
------ -------
End of year...................................... 54,659 256,913
====== =======
Proved developed:
Beginning of year................................ 16,050 154,705
====== =======
End of year...................................... 45,040 187,949
====== =======
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
1997
----
Proved developed and undeveloped:
Beginning of year................................ 54,659 256,913
Production....................................... (8,210) (57,737)
Purchases of minerals-in-place................... 12,229 63,004
Extensions and discoveries....................... 48 110,270
Revisions to previous estimates.................. (683) 8,311
------ -------
End of year...................................... 58,043 380,761
====== =======
Proved developed:
Beginning of year................................ 45,040 187,949
====== =======
End of year...................................... 39,766 309,542
====== =======
</TABLE>
Proved reserves are estimated quantities of crude oil and
natural gas which geological and engineering data indicate with reasonable
certainty to be recoverable in future years from known reservoirs under existing
economic and operating conditions. Proved developed reserves are proved reserves
which can be expected to be recovered through existing wells with existing
equipment and operating methods.
Revisions to previous estimates for the periods ended December 31, 1996
and 1995 were primarily the result of property performance revisions. In 1997,
an 11 million barrel price-related negative volume reduction in the Alaskan
reserves, due to a technical reduction in the economic life of the reserves
caused by a steep decline in oil prices at year end, was substantially offset by
other upward revisions.
F-26
<PAGE> 57
FORCENERGY INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS (UNAUDITED)
The standardized measure of discounted future net cash flows relating
to proved oil and gas reserves is as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
----------- ------------ -----------
<S> <C> <C> <C>
Future cash inflows....................................... $ 1,683,235 $ 2,220,916 $ 1,128,646
Future production costs................................... (530,327) (588,973) (242,370)
Future development and dismantlement costs................ (311,065) (191,022) (143,845)
Future income tax expense................................. ( 52,291) (377,857) (183,850)
------------ ----------- -----------
Future net cash flows..................................... 789,552 1,063,064 558,581
10% annual discount for estimated timing of cash flows.... (194,354) (260,919) (151,625)
----------- ----------- -----------
Standardized measure of discounted future net cash flows.. $ 595,198 $ 802,145 $ 406,956
=========== =========== ===========
</TABLE>
The following table summarizes the principal sources of change in the
standardized measure of discounted future net cash flows (in thousands):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
----------- ------------ -----------
<S> <C> <C> <C>
Standardized measure -- beginning of period.............. $ 802,145 $ 406,956 $ 152,627
Sales of oil and gas produced, net of production costs... (210,491) (116,993) (45,655)
Purchases of minerals-in-place........................... 160,608 277,205 167,129
Extensions and discoveries............................... 144,126 122,500 91,413
Sales of minerals-in-place............................... (1,322) (4,268) (4,395)
Net changes in prices and production costs............... (575,863) 131,553 181,480
Changes in estimated future development and
dismantlement costs.................................... (21,217) (7,436) (6,322)
Revisions to previous quantity estimates................. 11,087 70,230 (20,468)
Accretion of discount.................................... 80,215 40,696 15,263
Changes in timing of production and other................ (6,635) 1,523 (10,611)
Net changes in income taxes.............................. 212,545 (119,821) (113,505)
----------- ----------- -----------
Standardized measure-end of period....................... $ 595,198 $ 802,145 $ 406,956
=========== =========== ===========
</TABLE>
The standardized measure is based on current prices as of the valuation
date and reflects overall weighted average prices of:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
----------- ------------ -----------
<S> <C> <C> <C>
Oil (per Bbl)............................................ $ 14.72 $ 23.19 $ 19.16
Gas (per Mcf)............................................ $ 2.18 $ 3.71 $ 3.02
</TABLE>
The standardized measure of discounted future net cash flows was
calculated by applying current prices to estimated future production, less
future expenditures (based on current costs) to be incurred in developing and
producing such proved reserves and the estimated effect of future income taxes
based on the current tax law. The resulting future net cash flows were
discounted using a rate of 10% per annum.
During the first quarter of 1998, oil and natural gas prices continued
to decline from those being received as of the year end reserve valuation date.
Weighted average prices that the Company estimates it will receive for March
1998 production are $12.65 per barrel and $2.14 per Mcf for oil and natural gas,
respectively. If prices decline further from average prices being received as of
March 1, 1998, the Company's capitalized cost could again exceed the present
values of estimated future net revenues.
F-27
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
SUBSIDIARY STATE OF INCORPORATION
---------- -----------------------
Forcenergy International Inc. Delaware
Forcenergy Phenix Marin Corp. Virgin Islands
Forcenergy Gryphon B.V. Netherlands
Forcenergy Resources Inc. Texas
Forcenergy Onshore Inc. Delaware
Forcenergy GOM Inc. Delaware
Forcenergy Ltd. Cayman Islands
Forcenergy Drilling Inc. Delaware
Edisto Energy Inc. Texas
Edisto Energy Canada, Inc. Canada
Mint Holding Company Texas
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement of
Forcenergy Inc on Form S-8, (File No. 33-80919) of our report dated March 20,
1998 on our audits of the consolidated financial statements of Forcenergy Inc as
of December 31, 1997 and 1996, and for the years ended December 31, 1997, 1996
and 1995, which report is included in this Annual Report on Form 10-K.
COOPERS & LYBRANDS L.L.P.
Miami, Florida
March 25, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF NETHERLAND, SEWELL & ASSOCIATES, INC.
To the Board of Directors of Forcenergy Inc:
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (File No. 33-80919) and on Form S-4 (File No. 333-46099)
of Forcenergy Inc. of our reports dated March 4, 1998, March 3, 1997 and March
1, 1996, of the estimates of net proved oil and natural gas reserves of
Forcenergy Inc, and their present values, as of January 1, 1998, 1997 and 1996,
included in this Annual Report on Form 10-K for the year ended December 31,
1997.
NETHERLAND, SEWELL & ASSOCIATES, INC.
By: /s/ DANNY SIMMONS
-----------------------------------
Danny D. Simmons
Senior Vice President
Houston, Texas
March 24, 1998
<PAGE> 1
EXHIBIT 23.3
March 24, 1998
To the Board of Directors of Forcenergy Inc:
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (File No. 33-80919) and on Form S-4 (File No. 333-46099)
of Forcenergy Inc. of our reports dated February 16, 1998, February 7, 1997 and
February 9, 1996, and our estimates of the net proved natural gas and oil
reserves of Forcenergy, as of January 1, 1998, 1997 and 1996, and to all
references to our estimates of the net proved natural gas and oil reserves of
the Company as of those dates, included in this Annual Report on form 10-K for
the year ended December 31, 1997.
COLLARINI ENGINEERING INC.
/s/ CHERYL R. COLLARINI, P.E.
-------------------------------------
Cheryl R. Collarini, P.E.
President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED
INTERIM DECEMBER 31, 1997 BALANCE SHEET AND STATEMENT OF OPERATIONS OF
FORCENERGY INC FOR THE YEAR ENDED DECEMBER 3, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 16,048
<SECURITIES> 0
<RECEIVABLES> 43,502
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 30,231
<PP&E> 713,983
<DEPRECIATION> 0
<TOTAL-ASSETS> 824,230
<CURRENT-LIABILITIES> 102,675
<BONDS> 506,564
0
0
<COMMON> 255
<OTHER-SE> 214,736
<TOTAL-LIABILITY-AND-EQUITY> 824,320
<SALES> 281,690
<TOTAL-REVENUES> 284,185
<CGS> 0
<TOTAL-COSTS> 410,556
<OTHER-EXPENSES> (3,354)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,422
<INCOME-PRETAX> (155,439)
<INCOME-TAX> (20,621)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (134,818)
<EPS-PRIMARY> (5.83)
<EPS-DILUTED> (5.83)
</TABLE>
