EX-13 16 ex13_123100.htm EXHIBIT 13 MD and A and Financial Statements for 2000

Ocean Energy, Inc.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations

Ocean Energy is one of the largest U.S. independent oil and gas exploration and production companies, formed by the March 30, 1999 merger of Ocean Energy, Inc. and Seagull Energy Corporation (the “Seagull Merger”). The merger was treated for accounting purposes as an acquisition of Seagull by Ocean in a purchase transaction. As such, the financial results presented here are those of Ocean Energy, Inc. on a stand-alone basis for 1998 and the first quarter of 1999 and of the combined company thereafter.

The Company's accompanying Consolidated Financial Statements contain detailed information that should be referred to in conjunction with the following discussion.

Results Of Operations

Buoyed by rising commodity prices, the Company achieved its best financial performance ever in 2000, with operating profit before impairments for 2000 of $477 million, almost three times that of 1999. Ocean was able to take advantage of one of the highest commodity environments for energy in recent years and reduce outstanding debt and fund capital expenditures with cash flow. The debt reduction helped bring about a $31 million decrease in interest expense from 1999's $106 million. Improved commodity prices and lower interest expense combined to produce record net income of $213 million or $1.22 per diluted share for 2000.

With the Seagull merger, the Company gained new operations in Egypt, Russia and Indonesia and expanded its operations in the U.S. and Côte d'Ivoire. These expanded operations combined with the recovery of world crude oil and natural gas prices during 1999 resulted in an increase in total operating profit before impairments of $155 million for the year ended December 31, 1999 as compared to 1998.

                                          Oil and Gas Operations
                                          (Amounts in Thousands)
                                                               Year Ended
                                                              December 31,
                                               ---------------------------------------------
                                                    2000            1999            1998
                                               -------------   -------------   -------------
Oil and gas operations:
   Revenues:
     Natural gas............................    $  526,417      $  343,788     $   234,936
     Oil and NGLs...........................       547,137         413,777         300,935
                                               -------------   -------------   -------------
                                                 1,073,554         757,565         535,871
                                               -------------   -------------   -------------

   Operating expenses.......................       256,882         239,028         198,797
   Depreciation, depletion and amortization.       304,976         309,699         288,164
   Impairment of oil and gas properties.....        20,066          46,403         539,915
                                               -------------   -------------   -------------
   Operating profit (loss)..................       491,630         162,435        (491,005)
Corporate...................................       (35,070)        (29,689)        (24,950)
                                               -------------   -------------   -------------
   Total operating profit (loss)............    $  456,560      $  132,746      $ (515,955)
                                               =============   =============   =============

Revenues – Ocean operates in highly competitive markets where energy prices fluctuate significantly. As oil and gas prices fluctuate, so do the Company’s revenues, results of operations and cash flows. Oil prices declined steadily throughout 1998 and the first quarter of 1999, with oil prices reaching multi-year lows in some markets. Natural gas prices, despite temporary increases, also decreased over this time frame. Beginning in the second quarter of 1999 and continuing through 2000, oil and gas prices have increased dramatically.

Ocean Energy, Inc.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations

Natural gas revenues increased $182 million, or 53%, to $526 million for the year ended December 31, 2000, from $344 million for the year ended December 31, 1999. This increase is due to continued high average natural gas prices. The average realized price for natural gas before hedging activities increased 74% to $3.85 per Mcf for 2000 as compared to $2.21 for 1999. Daily natural gas production for 2000 was 407 MMcf, a decrease of 4% from 1999 volumes due primarily to property sales.

Natural gas revenues increased $109 million, or 46%, to $344 million for the year ended December 31, 1999, from $235 million for the year ended December 31, 1998. This increase is primarily due to production from properties acquired in the Seagull Merger and to higher average gas prices realized during the period. Daily natural gas production for 1999 was 423 MMcf, an increase of 32% over 1998 volumes due primarily to the acquisition of producing properties in the Seagull Merger, partially offset by the sale of the Canadian subsidiary. The average realized price for natural gas before hedging activities increased 11% to $2.21 per Mcf for 1999 as compared to $2.00 for 1998.

Oil revenues increased $133 million, or 32%, to $547 million for the year ended December 31, 2000, from $414 million for 1999. This increase is the result of higher crude oil prices. The average realized price for oil before hedging activities increased 47% to $25.51 during 2000 compared to $17.38 for 1999. Daily oil production decreased 9% to 67,627 Bbl in 2000 as compared to 73,933 Bbl for 1999 primarily due to property sales.

Oil revenues increased $113 million, or 38%, to $414 million for the year ended December 31, 1999, from $301 million for 1998. This increase is the result of production from properties acquired in the Seagull Merger and an increase in the average realized oil price during 1999. The average realized price for oil before hedging activities increased 43% to $17.38 for 1999 compared to $12.16 for 1998. Daily oil production increased 19% to 73,933 Bbl in 1999 as compared to 62,269 Bbl for 1998.

                                                          Operating Data (1)

                                                     Year Ended December 31,
                                                  -----------------------------
                                                    2000      1999       1998
                                                  --------  --------  ---------
Net Daily Natural Gas Production (MMcf):
   Domestic ...................................       374       376       272
   Côte d'Ivoire ..............................        23        30        21
   Other International ........................        10        17        28
                                                  --------  --------  --------
   Total.......................................       407       423       321
                                                  ========  ========  ========

Average Natural Gas Prices ($ per Mcf):
   Domestic....................................   $  3.95   $  2.26   $  2.09
   Côte d'Ivoire ..............................   $  2.28   $  1.68   $  1.64
   Other International ........................   $  3.86   $  1.89   $  1.37
   Weighted Average............................   $  3.85   $  2.21   $  2.00
Average Natural Gas Prices Including Hedging
   Activities ($ per Mcf)......................   $  3.54   $  2.23   $  2.00

Net Daily Oil and NGL Production (Bbl):
   Domestic ...................................    27,254    37,076    40,165
   Equatorial Guinea...........................    22,798    20,062    17,910
   Côte d'Ivoire ..............................     3,849     4,835     2,960
   Egypt ......................................     8,820     8,217         -
   Other International.........................     4,906     3,743     1,234
                                                  --------  --------  --------
   Total.......................................    67,627    73,933    62,269
                                                  ========  ========  ========

Average Oil and NGL Prices ($ per Bbl) :
   Domestic ...................................   $ 25.85   $ 17.06   $ 12.51
   Equatorial Guinea...........................   $ 26.06   $ 17.91   $ 11.35
   Côte d'Ivoire ..............................   $ 24.15   $ 18.24   $ 12.56
   Egypt.......................................   $ 26.61   $ 19.32   $     -
   Other International.........................   $ 20.14   $ 12.32   $ 11.78
   Weighted Average............................   $ 25.51   $ 17.38   $ 12.16
Average Oil and NGL Prices Including
   Hedging Activities ($ per Bbl)..............   $ 22.11   $ 15.33   $ 13.24

⁽¹⁾ All price information excludes the results of hedging activities, unless otherwise stated.

Total production for 2000 was 50 MMBOE. Average daily production for the full year was 407 MMcf of gas and 67,627 Bbls of oil, or 135,388 BOE per day. Average daily production has been increasing for the past two quarters with average daily production for the fourth quarter of 2000 reaching 418 MMcf of gas and 69,830 Bbl of oil, or 139,439 BOE per day.

Ocean Energy, Inc.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations

During 1999 and the first quarter of 2000, the Company sold various non-core oil and gas assets as part of its debt reduction program as follows:

                                                                   Net Daily Production
                                                               Year Ended December 31, 1999
                                                         ----------------------------------------
                    Asset                Date of Sale     Oil and NGL (Bbl)          Gas (Mcf)
-------------------------------------   --------------   -------------------   ------------------
Canadian subsidiary..................     April 1999                  351               10,455
Arkoma Basin assets (acquired
    primarily in Seagull Merger).....     August 1999                   -               33,730
Gulf of Mexico assets................     August 1999               1,751                4,550
East Bay assets......................     March 2000                7,954               20,366
                                                         -------------------   ------------------
Total reduction in daily production
   associated with property sales....                              10,056               69,101
                                                         ===================   ==================

Reclassification of Transportation Expense – The Company has reclassified all periods to reflect transportation expenses incurred as operating expenses, instead of as a deduction from revenues as previously recorded. While this reclassification had no effect on net income, it did increase revenues and operating expenses by $24 million, $22 million, and $14 million for the years ended December 31, 2000, 1999 and 1998, respectively.

Operating Expenses – Operating expenses per BOE increased 14% to $5.18 per BOE for the year ended December 31, 2000, compared to $4.54 per BOE in 1999. Total operating expenses increased $18 million, or 8%, to $257 million for the year ended December 31, 2000 from $239 million for 1999. Substantially all of the increase per BOE is attributable to increases in production taxes resulting from higher realized oil and gas prices.

Operating expenses per BOE decreased 3% to $4.54 per BOE for the year ended December 31, 1999, compared to $4.70 per BOE in 1998. Total operating expenses increased $40 million, or 20%, to $239 million for the year ended December 31, 1999 from $199 million for 1998. This increase primarily resulted from a 25% increase in production volumes from the acquisition of additional producing properties in the Seagull Merger and from increased production from existing properties.

Depreciation, Depletion and Amortization Expense – Total depreciation, depletion and amortization (“DD&A”) expense for oil and gas operations decreased $5 million to $305 million for the year ended December 31, 2000 from $310 million for 1999 primarily due to decreased production. DD&A expense per BOE related to oil and gas operations rose 5% to $6.15 per BOE for the year ended December 31, 2000 from $5.88 per BOE for 1999 primarily due to the effects of property sales, the mix of production, and increasing estimated future development costs.

Total DD&A for oil and gas operations increased 8% to $310 million for the year ended December 31, 1999 compared to $288 million for 1998 primarily due to the increase in production. DD&A expense per BOE related to oil and gas operations decreased $0.94, or 14%, to $5.88 per BOE for the year ended December 31, 1999, from $6.82 per BOE for 1998. This variance is primarily attributable to the effect of the impairments of oil and gas properties recognized by the Company in 1998.

Impairment of Oil and Gas Properties – During the fourth quarter of 2000 the Company recognized an impairment in the amount of $20 million ($13 million, after tax) related to the discontinuance of operations in the Republic of Yemen. During 1999, the Company recorded impairments of oil and gas properties of $46 million related primarily to the sale of the Canadian subsidiary and to the discontinuance of operations in Bangladesh and other international locations. During 1998, the Company recognized impairments of oil and gas properties in the amount of $540 million pursuant to the ceiling limitation required by the full cost method of accounting for oil and gas properties. The 1998 impairments were the result of the precipitous decline in world crude oil prices experienced during the second and fourth quarters of 1998. The Company had no such ceiling limitations in 2000 or 1999.

Corporate

Corporate expenditures are comprised of general and administrative expenses and DD&A expense for non-oil and gas assets.

General and Administrative Expenses – General and administrative expenses increased $7 million or 32% to $29 million for the year ended December 31, 2000 compared to $22 million for 1999. This increase is due primarily to an increase in expense relating to compensation plans that are tied directly to the market price of the Company’s common stock.

General and administrative expenses increased $3 million or 16% to $22 million for the year ended December 31, 1999 compared to $19 million for 1998. This increase

Ocean Energy, Inc.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations

is due to the Seagull Merger partially offset by cost savings related to personnel reduction, office consolidations and reduced combined expenses.

DD&A expense for non-oil and gas assets was approximately $6 million, $8 million and $6 million for the years 2000, 1999, and 1998, respectively.

Other

Interest Expense – Interest expense decreased $31 million, or 29%, to $75 million for the year ended December 31, 2000 from $106 million in 1999. This decrease is the result of the Company’s debt reduction program undertaken subsequent to the Seagull Merger in 1999 and to the increase in the amount of interest capitalized during 2000 ($44 million in 2000 as opposed to $41 million in 1999) due to the increase in the level of capital expenditures.

Interest expense increased $43 million, or 68%, to $106 million for the year ended December 31, 1999 from $63 million in 1998. This increase is primarily the result of an increase in debt levels in 1999 resulting from the assumption of debt in the Seagull Merger and the higher capital spending program in place throughout 1998, which was funded by borrowings.

Merger and Integration Costs – Merger and integration costs of $3 million associated with the merger of Ocean and Seagull were recorded in the first quarter of 2000 and related primarily to severance costs. Merger and integration costs of $50 million were recorded for the year ended December 31, 1999, and consisted primarily of severance costs, the write-off of certain costs relating to information technology system and compensation expense related to the vesting of restricted stock. Merger expenses of $39 million associated with the March 1998 merger between Ocean and UMC were recorded in the first quarter of 1998.

Income Tax Expense (Benefit) – Income tax expense of $165 million was recognized for the year ended December 31, 2000, compared to a benefit of $0.1 million for the year ended December 31, 1999. The change in the income tax provision is primarily the result of three factors: (i) significant improvement in operating results; (ii) changes in the nature of deferred tax assets and liabilities due to the Seagull Merger and subsequent asset sales; and (iii) the relative significance of international operating results and taxes to the Company’s total results of operations.

Liquidity And Capital Resources

Liquidity – As a result of the Seagull Merger, the Company had nearly $2 billion in long-term debt as of March 31, 1999 and a debt to total capitalization ratio of 68%. One of management’s goals has been the reduction of these debt levels, with a target debt to total capitalization ratio of 54% by the end of 2000. With cash flows attributable to asset sales, prepaid oil and gas sales, higher commodity prices and disciplined capital spending, the Company reduced long-term debt to $1 billion at December 31, 2000, surpassed its debt to capitalization target by reaching a 47% debt to capitalization ratio at December 31, 2000, and achieved investment grade status from Standard and Poor’s and Moody’s Investor Services. The improvement in the debt levels will cut projected annual interest expense in 2001 to nearly half of 1999 levels.

On December 18, 2000 the Company’s Board of Directors declared the Company’s first quarterly common stock dividend. A dividend of four cents per share was payable on January 19, 2001, to stockholders of record at the close of business on January 5, 2001. The amount of future dividends for OEI common stock will be determined on a quarterly basis and will depend on earnings, financial condition, capital requirements and other factors.

As of December 31, 2000, the “Credit Facility” consisted of a $500 million revolving facility. The Credit Facility bears interest, at the Company’s option, at LIBOR or prime rates plus applicable margins ranging from zero to 1.7% or at a competitive bid. As of December 31, 2000, borrowings outstanding against the Credit Facility had been completely repaid. Letters of Credit totaled $45 million, leaving $455 million of available credit.

In September 2000, the Company entered into a market-sensitive prepaid natural gas sales contract to deliver approximately 53,500 Mcf of natural gas per day beginning in January 2002 through December 2003. In exchange for the natural gas to be provided, the Company received an advance payment of approximately $75 million. In 1999, the Company entered into a prepaid crude oil sales contract to deliver approximately 5,600 barrels of crude oil per day beginning in February 2000 through May 2003. In exchange for the crude oil to be provided, the Company received an advance payment of approximately $100 million. The obligations associated with the

Ocean Energy, Inc.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations

future delivery of the natural gas and crude oil have been recorded as deferred revenue. The contracts are amortized into revenue as scheduled deliveries of natural gas and crude oil are made.

In September 2000, the Company conveyed certain Internal Revenue Code Section 29 Tax Credit-bearing properties to a trust for approximately $70 million which was recorded in other noncurrent liabilities.

In the fourth quarter of 1999, the Company repurchased $150 million of its outstanding 10 3/8% Senior Subordinated Notes due 2005 and $158 million of its outstanding 9¾% Senior Subordinated Notes due 2006. The repurchase of these Notes was funded with available cash balances and borrowings under the Credit Facility. In connection with this repurchase, the Company recorded an after-tax extraordinary loss of $23 million, or ($0.16) per basic and diluted share. The extraordinary item is net of a current tax benefit of approximately $13 million.

Capital Expenditures And Acquisitions

(Amounts in Thousands)

                                          Year Ended December 31,
                                 -----------------------------------------
                                     2000          1999           1998
                                 -----------    -----------    -----------
Oil and Gas Operations:
  Leasehold acquisitions.....     $  62,350      $  34,043      $ 156,947
  Exploration costs..........       202,860        148,033        395,827
  Development costs..........       300,247        159,831        395,351
                                 -----------    -----------    -----------
                                    565,457        341,907        948,125
Corporate....................        12,061         20,177         13,854
                                 -----------    -----------    -----------
Total Continuing Operations..       577,518        362,084        961,979
Discontinued Operations......             -          6,942              -
                                 -----------    -----------    -----------
Total Capital Expenditures...     $ 577,518      $ 369,026      $ 961,979
                                 ===========    ===========    ===========

Acquisitions.................     $   5,598      $ 991,409      $       -
                                 ===========    ===========    ===========

Capital expenditures from oil and gas operations in 2000 totaled $565 million, an increase of 65% as compared to $342 million spent in 1999. Domestic spending in 2000 totaled $387 million, of which $149 million was for exploration, $191 million was for development and $47 million was for leasehold acquisitions. International spending in 2000 totaled $178 million, of which $54 million was for exploration, $109 million was for development and $15 million was for leasehold acquisitions. The Company completed a total of 287 wells, with an 80% success rate. Of that number, 52 were exploratory wells and 235 were development wells. Thirty-one exploratory wells were in progress at year-end.

The Company’s capital expenditure budget for the year 2001 is approximately $700 million (excluding proved property acquisitions). Approximately 45-55% will be exploratory spending. Actual capital spending may vary from the capital expenditure budget. The Company will evaluate its level of capital spending throughout the year based upon drilling results, commodity prices, cash flows from operations and property acquisitions. In general, the Company’s strategy is to maintain capital spending, excluding acquisitions, at levels below discretionary cash flows.

During 2000, the Company entered into agreements in which the lessors have agreed to fund up to $189 million for the construction of certain offshore platforms that will be completed during 2001 and 2002. Lease payments begin upon completion of construction and annual rental expense will total approximately $3 million. The Company intends to arrange for long-term operating leases to replace these leases at the end of the construction periods for the platforms.

Primarily through extensions and discoveries, the Company experienced a 269% reserve replacement of 2000 production. The Company’s proved oil and gas reserves increased by 11% or 45 MMBOE to 460 MMBOE at December 31, 2000 from 415 MMBOE at December 31, 1999. The Company’s finding and development (“F&D”) cost per BOE for the year ended December 31, 2000, was $4.28.

The standardized measure of discounted future net cash flows before taxes for the Company’s proved oil and gas reserves, calculated based on Securities and Exchange Commission (“SEC”) criteria, increased to $8.5 billion at December 31, 2000 compared with $3.0 billion at the end of 1999. This increase was primarily due to discoveries of new reserves and the increase in oil and gas prices, offset by property sales. Year-end calculations were made using weighted average prices of $8.81 and $2.04 per Mcf for gas and $22.97 and $23.33 per Bbl for oil for 2000 and 1999, respectively. The Company’s average realized prices for the year ended December 31, 2000, excluding the effects of hedging, were $3.85 per Mcf for gas and $25.51 per Bbl for oil. The Company’s average realized prices for the month ended January 31, 2001, excluding the effects of hedging, were $9.93 per Mcf for gas and $22.69 per Bbl for oil. Because the disclosure requirements for discounted future net cash flows are standardized by the SEC, significant changes can occur in these estimates based upon

Ocean Energy, Inc.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations

oil and gas prices in effect at year-end. The above estimates should not be viewed as an estimate of fair market value. See Note 18 to the Company’s Consolidated Financial Statements.

The Company makes, and will continue to make, substantial capital expenditures for the acquisition, exploration, development, and production of its oil and gas reserves. The Company has historically funded its expenditures from cash flow from operating activities, bank borrowings, sales of equity and debt securities, sales of non-strategic oil and gas properties, sales of partial interests in exploration concessions and project finance borrowings. The Company intends to finance capital expenditures for the year 2001 primarily with cash flow provided by operations.

The ability of the Company to satisfy its obligations and fund planned capital expenditures will be dependent upon its future performance. Such future performance is subject to many conditions that are beyond the Company’s control, particularly oil and gas prices, and the Company’s ability to obtain additional debt and equity financing, if necessary. The Company currently expects that its cash flow from operations and availability under the Credit Facility will be adequate to execute its business plan for the year 2001. No assurance can be given that the Company will not experience liquidity problems from time to time or on a long-term basis. If the Company’s cash flow from operations and availability under the Credit Facility is not sufficient to satisfy its cash requirements, there can be no assurance that additional debt or equity financing will be available to meet its requirements.

Subsequent Event – In January 2001, the Company announced that it had signed an agreement to acquire all outstanding shares of stock of Texoil, Inc. at a price of $8.25 per share for common stock and $18.04 per share for Series A convertible preferred stock for a total purchase price of approximately $130 million including assumed bank debt of approximately $15 million plus certain liabilities. The transaction is expected to be completed during the first quarter of 2001. Texoil, Inc. is an independent oil and gas company engaged in the acquisition of oil and gas reserves through a program, which includes purchases of reserves, reengineering, development and exploration activities in Texas and Louisiana.

Change in Accounting Method Subsequent to Year-end

Environmental

Compliance with applicable environmental and safety regulations by the Company has not required any significant capital expenditures or materially affected its business or earnings. The Company believes it is in substantial compliance with environmental and safety regulations and foresees no material expenditures in the future; however, the Company is unable to predict the impact that compliance with future regulations may have on its capital expenditures, earnings and competitive position.

Forward-Looking Statements May Prove Inaccurate

This document contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and information that is based on management’s belief and assumptions made by management based on currently available information. All statements other than statements of historical fact included in this document are forward-looking statements. When used in this document, words such as “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “intend,” “project” and similar expressions serve to identify forward-looking statements. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we can give no assurance that these expectations will prove correct. Our forward-looking statements are subject to risks, uncertainties and assumptions. Should one of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, our actual results may vary materially from

Ocean Energy, Inc.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations

those expected. Among the key factors that may have a direct bearing on our results of operations and financial condition are:

competitive practices in the oil and gas industry;
operational and systems risk incident to the drilling and operation of oil and gas wells;
volatility of energy commodity prices, generally, and fluctuations in the commodity prices for crude oil and natural gas that have not been properly hedged or that are inconsistent with our marketing activities, in particular;
general economic and capital markets conditions, including fluctuations in interest rates;
the impact of current and future laws and governmental regulations, particularly environmental regulations, affecting the energy industry in general, and our oil and gas operations, in particular;
environmental liabilities that are not covered by insurance or indemnity;
the political and economic climate in the foreign jurisdictions in which we conduct oil and gas operations; and
the effect on our results of operations and financial condition associated with implementing various accounting rules and regulations.

Defined Terms

Natural gas is stated herein in billion cubic feet (“Bcf”), million cubic feet (“MMcf”) or thousand cubic feet (“Mcf”). Oil, condensate and natural gas liquids (“NGL”) are stated in barrels (“Bbl”) or thousand barrels (“MBbl”). Oil, condensate and NGL are converted to gas at a ratio of one barrel of liquids per six Mcf of gas, based on relative energy content. MMBOE, MBOE and BOE represent one million barrels, one thousand barrels and one barrel of oil equivalent, respectively, with six Mcf of gas converted to one barrel of liquid.

Selected Quarterly Financial Data

Summarized quarterly financial data is as follows (amounts in thousands except per share data):

                                                                     Quarter Ended
                                     -------------------------------------------------------------------------------
                                         March 31            June 30           September 30         December 31
                                     ------------------ ------------------  --------------------  ------------------
2000:
  Revenues (1).....................      $   251,408        $   241,873         $    267,837         $   312,436
  Operating Profit (2).............      $   100,046        $    99,637         $    120,642         $   136,235
  Net Income (2)...................      $    42,978        $    45,493         $     57,869         $    66,864
  Earnings per Share:
    Basic (3)......................      $      0.25        $      0.27         $       0.34         $      0.39
    Diluted (3)....................      $      0.25        $      0.26         $       0.33         $      0.38

1999:
  Revenues (1).....................      $   109,625        $   201,747         $    220,440         $   225,753
  Operating Profit (Loss) (4)......      $   (31,150)       $    32,744         $     69,151         $    62,001
  Income (Loss) Before
     Extraordinary Item (4)........      $   (81,051)       $     2,136         $     28,805         $    29,685
  Earnings (Loss) per Share
    Before Extraordinary Item:
    Basic (3)......................      $     (0.79)       $      0.01         $       0.17         $      0.17
    Diluted (3)....................      $     (0.79)       $      0.01         $       0.16         $      0.17
  Net Income (Loss) (4)............      $   (81,051)       $     2,136         $     28,805         $     6,272
  Earnings (Loss) per Share:
    Basic (3)......................      $     (0.79)       $      0.01         $       0.17         $      0.03
    Diluted (3)....................      $     (0.79)       $      0.01         $       0.16         $      0.03

⁽¹⁾ Revenues have been reclassified to reflect transportation expenses as operating expenses instead of as a reduction from revenues as previously recorded.

⁽²⁾ Includes pre-tax impairment of oil and gas assets of $20 million in the fourth quarter of 2000 and merger and integration costs of $3 million in the first quarter of 2000.

⁽³⁾ Quarterly earnings (loss) per common share may not total to the full year per share amount, as the weighted average number of shares outstanding for each quarter fluctuated as a result of the assumed exercise of stock options.

⁽⁴⁾ Includes pre-tax impairments of oil and gas assets of $29 million and $17 million in the first and fourth quarters of 1999, respectively, and merger and integration costs of $41 million, $3 million, and $6 million in the first, third and fourth quarters of 1999, respectively.

Ocean Energy, Inc.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations

Market Risk Disclosures

The Company experiences market risk primarily in the area of commodity prices. To mitigate a portion of its exposure to fluctuations in energy prices, the Company has in place put options covering portions of its 2001 oil and gas production. The put options place an annual floor price of $25.00 per Bbl on 20,000 Bbl of oil per day and annual floor prices of $4.00 and $5.00 per Mcf each on 100,000 Mcf of gas per day. In addition, oil swaps covering 15,000 Bbl of oil per day at an average price of $21.53 per Bbl will continue through June 2001. A related trust has a swap agreement covering 14,500 Mcf of gas per day at a price of $4.77 for 2001 and covering additional quantities through 2005. To calculate the potential effect of the derivative financial instruments on future revenues, the Company applied the average NYMEX oil and gas strip prices as of the end of 2000 to the quantity of the oil and gas production covered by derivative financial instruments at December 31, 2000. The following table shows the estimated potential effects of the derivative financial instruments on revenues (in millions):

                                      Estimated             Estimated Decrease in      Estimated Decrease in
                                 Decrease in Revenues         Revenues with 10%          Revenues with 10%
          Instrument              at Current Prices          Decrease in Prices         Increase in Prices
---------------------------    ------------------------    ------------------------   ------------------------

Oil and gas puts.........            $         (18)            $           -              $         (18)

Oil swaps................                      (12)                       (5)                       (19)

Gas swap of related trust                      (13)                       (3)                       (22)

At December 31, 1999, the Company had in place derivative financial instruments covering approximately 10 MMBbl and 18 Bcf of its 2000 oil and gas production. At that time, the estimated potential effects of the derivative financial instruments were calculated as increases (decreases) in future revenues of $(4) million at current prices, $15 million with a 10% decrease in prices, and $(18) million with a 10% increase in prices.

Because substantially all the Company's debt obligations at December 31, 2000 were at fixed interest rates, changes in market interest rates would not have a material effect on the Company's results of operations. In addition, as the U.S. dollar is the functional currency for all of the Company's existing foreign operations, with predominantly all transactions being denominated in U.S. dollars, the Company has little risk from foreign currency translation.

Ocean Energy, Inc.
Report of Management to Shareholders

The management of Ocean Energy, Inc. is responsible for the preparation and integrity of financial statements and related data in this Annual Report, whether audited or unaudited. The financial statements were prepared in conformity with generally accepted accounting principles and include certain estimates and judgments which management believes are reasonable under the circumstances.

Management is also responsible for and maintains a system of internal accounting controls that is sufficient to provide reasonable assurance that assets are safeguarded against loss or unauthorized use and that financial records are reliable for preparing financial statements, as well as to prevent and detect fraudulent financial reporting. The internal control system is supported by written policies and procedures and the employment of trained, qualified personnel. The Company has an internal audit function which reviews the adequacy of the internal accounting controls and compliance with them. Management has considered the recommendations of internal audit and KPMG LLP, independent certified public accountants, concerning the Company’s system of internal controls and has responded appropriately to those recommendations.

The accompanying consolidated financial statements of Ocean Energy, Inc. as of December 31, 2000 have been audited by KPMG LLP, independent certified public accountants, and their report is included herein. Their audit was made in accordance with generally accepted auditing standards and included a review of the system of internal controls to the extent considered necessary to determine the audit procedures required to support their opinion on the consolidated financial statements.

The Board of Directors, through its Audit Committee composed exclusively of outside directors, meets periodically with representatives of management, internal audit and the independent auditors to ensure the existence of effective internal accounting controls and to ensure that financial information is reported accurately and timely with all appropriate disclosures included. The independent auditors and internal audit have full and free access to, and meet with, the Audit Committee, with and without management present.

/s/James T. Hackett /s/William L. Transier /s/Robert L. Thompson

Chairman of the Board, Executive Vice President Vice President and
President and Chief and Chief Financial Officer Controller
Executive Officer

January 25, 2001

Ocean Energy, Inc.
Independent Auditors’ Report

The Board of Directors and Shareholders
Ocean Energy, Inc.:

We have audited the accompanying consolidated balance sheets of Ocean Energy, Inc. and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of operations, shareholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ocean Energy, Inc. and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

/s/KPMG LLP

Houston, Texas
January 25, 2001

Ocean Energy, Inc.
Report of Independent Public Accountants

The Board of Directors and Shareholders
Ocean Energy, Inc.:

We have audited the accompanying consolidated statements of operations, shareholders’ equity and cash flows of Ocean Energy, Inc. and subsidiaries for the year ended December 31, 1998. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States. 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 audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and the cash flows of Ocean Energy, Inc. and subsidiaries for the year ended December 31, 1998, in conformity with accounting principles generally accepted in the United States.

/s/ARTHUR ANDERSEN LLP

Houston, Texas
February 15, 1999

Ocean Energy, Inc.
Consolidated Statements of Operations

(Amounts in Thousands Except Per Share Data)

                                                                           Year Ended December 31,
                                                             ----------------------------------------------------
                                                                   2000                1999             1998
                                                             ----------------    ---------------   --------------
Revenues.................................................       $1,073,554         $  757,565        $  535,871

Costs of Operations:
   Operating expenses....................................          256,882            239,028           198,797
   Depreciation, depletion and amortization..............          311,383            317,487           293,905
   Impairment of oil and gas properties..................           20,066             46,403           539,915
   General and administrative............................           28,663             21,901            19,209
                                                             ----------------    ---------------   --------------
                                                                   616,994            624,819         1,051,826
                                                             ----------------    ---------------   --------------

Operating Profit (Loss)..................................          456,560            132,746          (515,955)
Other (Income) Expense:
   Interest expense......................................           75,065            106,081            62,852
   Merger and integration costs..........................            3,273             49,603            39,000
   Interest income and other.............................              132             (1,314)           (1,229)
                                                             ----------------    ---------------   --------------

Income (Loss) Before Income Taxes........................          378,090            (21,624)         (616,578)
Income Tax Expense (Benefit).............................          164,887                (72)         (209,699)
                                                             ----------------    ---------------   --------------

Income (Loss) From Continuing Operations.................          213,203            (21,552)         (406,879)
Income From Discontinued Operations, Net of Income Taxes.                -              1,127                 -
                                                             ----------------    ---------------   --------------

Income (Loss) Before Extraordinary Loss..................          213,203            (20,425)         (406,879)
Extraordinary Loss, Net of Income Taxes..................                -            (23,413)                -
                                                             ----------------    ---------------   --------------

Net Income (Loss)........................................          213,203            (43,838)         (406,879)
Preferred Stock Dividends................................            3,250              3,264               454
                                                             ----------------    ---------------   --------------

Net Income (Loss) Available to Common Shareholders.......      $   209,953       $    (47,102)     $   (407,333)
                                                             ================    ===============   ==============

Basic Earnings (Loss) Per Common Share:
   Income (Loss) From Continuing Operations..............      $      1.26         $    (0.16)       $    (4.04)
   Income From Discontinued Operations, Net of
     Income Taxes........................................             -                  0.01                 -
   Extraordinary Loss, Net of Income Taxes...............             -                 (0.16)                -
                                                             ----------------    ---------------   --------------
   Net Income (Loss) to Common Shareholders..............      $      1.26         $    (0.31)       $    (4.04)
                                                             ================    ===============   ==============

Diluted Earnings (Loss) Per Common Share:
   Income (Loss) From Continuing Operations..............      $      1.22         $    (0.16)       $    (4.04)
   Income From Discontinued Operations, Net of
     Income Taxes........................................             -                  0.01                 -
   Extraordinary Loss, Net of Income Taxes...............             -                 (0.16)                -
                                                             ----------------    ---------------   --------------
   Net Income (Loss).....................................      $      1.22         $    (0.31)       $    (4.04)
                                                             ================    ===============   ==============

Weighted Average Number of Common Shares Outstanding:
   Basic.................................................          167,144            151,022           100,705
                                                             ================    ===============   ==============
   Diluted...............................................          174,749            151,022           100,705
                                                             ================    ===============   ==============