-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VcSL1rDWdT+6MT2TsM6Yz1Yu7hrYIl3K9FOOHAgUl71S/zISxS8J9Bq2iLQauyRo llGT/fDbLTZMFaCxld71Lw== 0000950129-99-000535.txt : 19990217 0000950129-99-000535.hdr.sgml : 19990217 ACCESSION NUMBER: 0000950129-99-000535 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990216 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SEAGULL ENERGY CORP CENTRAL INDEX KEY: 0000320321 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 741764876 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-08094 FILM NUMBER: 99538861 BUSINESS ADDRESS: STREET 1: 1001 FANNIN STE 1700 STREET 2: 1001 FIRST CITY TOWER CITY: HOUSTON STATE: TX ZIP: 77002-6714 BUSINESS PHONE: 7139514700 MAIL ADDRESS: STREET 1: 1001 FANNIN, SUITE 1700 STREET 2: 1001 FIRST CITY TOWER CITY: HOUSTON STATE: TX ZIP: 77002-6714 FORMER COMPANY: FORMER CONFORMED NAME: SEAGULL PIPELINE CORP DATE OF NAME CHANGE: 19830815 10-K 1 SEAGULL ENERGY CORPORATION - 12/31/98 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 1-8094 SEAGULL ENERGY CORPORATION (Exact name of registrant as specified in its charter) TEXAS 74-1764876 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 1001 FANNIN, SUITE 1700 HOUSTON, TEXAS 77002-6714 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 951-4700 Securities registered pursuant to Section 12(b) of the Act: NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REGISTERED Common Stock, par value $.10 per share New York Stock Exchange Preferred Stock 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 check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of 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 February 9, 1999, the aggregate market value of the outstanding shares of Common Stock of the Company held by non-affiliates (based on the closing price of these shares on the New York Stock Exchange) was approximately $300,557,000. As of February 9, 1999, 64,158,444 shares of Common Stock, par value $0.10 per share, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE DOCUMENT PART OF FORM 10-K -------- ----------------- Proxy Statement for Annual Meeting PART III of Shareholders to be held in June 1999 ================================================================================ 2 SEAGULL ENERGY CORPORATION INDEX
Page ---- PART I Item 1. Business: Proposed Merger with Ocean Energy, Inc................................................................. 1 Oil and Gas Operations................................................................................. 2 Alaska Transmission and Distribution................................................................... 13 Corporate.............................................................................................. 16 Environmental Matters.................................................................................. 17 Employees.............................................................................................. 17 Executive Officers of the Company...................................................................... 18 Certain Oil and Gas Terms.............................................................................. 19 Item 2. Properties......................................................................................... 20 Item 3. Legal Proceedings.................................................................................. 20 Item 4. Submission of Matters to a Vote of Security Holders................................................ 20 PART II Item 5. Market for Registrant's Common Stock and Related Shareholder Matters............................... 21 Item 6. Selected Financial Data............................................................................ 22 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................................................... 23 Item 8. Financial Statements and Supplementary Data........................................................ 41 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......................................................................... 79 PART III Item 10. Directors and Executive Officers of the Registrant................................................ 79 Item 11. Executive Compensation............................................................................ 79 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................... 79 Item 13. Certain Relationships and Related Transactions.................................................... 79 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................... 80 Signatures.................................................................................................. 85
(i) 3 SEAGULL ENERGY CORPORATION PART I ITEM 1. BUSINESS Seagull Energy Corporation (the "Company" or "Seagull") is an international oil and gas company engaged primarily in exploration and development activities in the United States, Egypt, Cote d'Ivoire, Indonesia and the Russian Republic of Tatarstan. The Company also transports and distributes natural gas in the Anchorage, Alaska metropolitan area. Seagull's long-range goal is to grow its reserve base and its crude oil and natural gas production capacity. The Company seeks a balanced approach of growing through its internal drilling efforts complemented by strategic acquisitions of additional oil and gas assets in its core operating areas. PROPOSED MERGER WITH OCEAN ENERGY, INC. On November 24, 1998, Seagull and Ocean Energy, Inc. ("OEI") executed an Agreement and Plan of Merger. The merger must be approved by the shareholders of both OEI and Seagull and the Alaska Public Utilities Commission ("APUC") which regulates Seagull's operations in the Anchorage, Alaska area. If the merger is approved, OEI stockholders would receive one share of Seagull common stock in exchange for each share of OEI common stock they own. Management expects the transaction will close during the first quarter of 1999. Pursuant to the merger agreement, OEI will merge into Seagull. In connection with the merger, Seagull will be renamed "Ocean Energy, Inc." This combined company is referred to herein as "New Ocean." However, unless expressly stated in this Annual Report, the financial statements, business description and other information contained herein relate to the Company on a pre-merger basis. After the merger New Ocean will be organized into three business units: Onshore North America, Gulf of Mexico and International. New Ocean's asset base will be comprised of complementary domestic assets, primarily in the Gulf of Mexico region where the combined company will hold interests in more than 324 offshore lease blocks, including 62 deepwater blocks. In addition, New Ocean will own interests in approximately 36 production sharing contracts including interests in Angola, Equatorial Guinea, Cote d'Ivoire, Yemen, Egypt, Indonesia, Tatarstan, Pakistan and Bangladesh. Seagull and OEI believe that the stable cash flow generated from their North American onshore operations will enable New Ocean to continue to fund and develop its portfolio of international and deepwater Gulf of Mexico exploration and development projects. Seagull and OEI are developing plans to integrate their operations immediately after the merger to take full advantage of the benefits and synergies the merger will create that would not have been available to either company on a stand-alone basis. Those benefits include substantial 1 4 SEAGULL ENERGY CORPORATION cost savings, a more geographically diversified reserve composition, a larger capital base, greater financial strength and flexibility and an enhanced ability to make further acquisitions. OIL AND GAS OPERATIONS Revenues from the Oil and Gas Operations ("O&G") segment accounted for 78%, 83%, and 81% of the Company's consolidated revenues for 1998, 1997 and 1996, respectively. Production of gas and liquids for 1998 averaged 302 MMcf per day and 21,271 Bbl per day, respectively, compared to 357 MMcf per day and 20,711 Bbl per day, respectively, in 1997. For additional financial information relating to industry segments, see Note 15 of Notes to Consolidated Financial Statements of Seagull Energy Corporation for the year ended December 31, 1998 (the "Consolidated Financial Statements"). Seagull's principal oil and gas producing areas include the following:
Proved Reserves at December 31, 1998 ------------------------------------------ Gas (MMcf) Oil (Mbbl) MBOE ---------- ---------- ---------- UNITED STATES: Mid-Continent (Anadarko Basin) ...... 149,330 3,202 28,090 Mid-South: Arkansas .......................... 122,649 1 20,442 Carthage Area ..................... 183,852 6,678 37,320 East Texas/North Louisiana ........ 172,493 1,185 29,934 Other Mid-south ................... 37,864 2 6,313 Gulf Coast .......................... 129,756 3,026 24,652 ---------- ---------- ---------- 795,944 14,094 146,751 EGYPT: East Zeit ........................... -- 12,433 12,433 Qarun ............................... 2,345 9,326 9,717 Other ............................... -- 5,822 5,822 ---------- ---------- ---------- 2,345 27,581 27,972 COTE D'IVOIRE .......................... 22,932 1,097 4,919 TATARSTAN .............................. -- 13,030 13,030 INDONESIA .............................. 62,020 1,281 11,618 ---------- ---------- ---------- 883,241 57,083 204,290 ========== ========== ==========
For additional information relating to the Company's oil and gas reserves, based substantially upon reports of DeGolyer and MacNaughton, Netherland, Sewell & Associates, Inc. and Ryder Scott Company, independent petroleum engineers (collectively the "Engineers"), see Note 17 to Consolidated Financial Statements. All information in Note 17 not provided by the Engineers was supplied by the Company. The Company's reserve estimates in Indonesia have been obtained from a public source which, although not independently verified, the Company 2 5 SEAGULL ENERGY CORPORATION believes to be reliable. As required, Seagull also files estimates of oil and gas reserve data with various governmental regulatory authorities and agencies. These estimates were not materially different from the reserve estimates reported in the Consolidated Financial Statements. UNITED STATES In excess of 70% of the Company's proved oil and gas reserves and annual production are contributed by properties in the United States. These domestic properties are generally located in three geographic areas -- the Mid-South, Mid-Continent and Gulf Coast regions. Mid-South -- The Company's Mid-South properties are situated generally in the Arkoma Basin of eastern Oklahoma and western Arkansas and the Arklatex area of east Texas and northwest Louisiana. The Company's interests in the Mid-South region provide production from long-lived assets where ongoing activities are devoted principally to exploitation. At year-end 1998, the Mid-South region had production of approximately 165 MMcf per day and 1,800 Bbl per day. Mid-Continent -- The Company's Mid-Continent properties are situated generally in the Anadarko Basin of the Texas Panhandle and western Oklahoma. The Mid-Continent region also provides production from long-lived assets where ongoing activities are devoted principally to exploitation. At year-end 1998, the Mid-Continent region had production of approximately 51 MMcf per day and 700 Bbl per day. Gulf Coast -- The Company's Gulf Coast properties are located onshore in south Texas and south Louisiana and offshore waters off the coasts of the same two states. Both exploration and exploitation activities are conducted in this region. In 1997, the Company purchased its first interests in the Deep Water Gulf of Mexico play where the Company plans to be an active participant in the future. At year-end 1998, the Gulf Coast region had production of approximately 37 MMcf per day and 950 Bbl per day. During 1998 the Company participated in drilling of two deep water exploratory wells in which we have a non-operated interest. One was unsuccessful and the other is currently being evaluated for development. EGYPT The Company's Egyptian operations consist of working interests in seven concessions -- Qarun, East Beni Suef, East Zeit, Southwest Gebel el Zeit, South Hurghada, Southeast Gulf of Suez and West Abu Gharadig. The interests in Southwest Gebel el Zeit and Southeast Gulf of Suez were acquired in 1998 as exploratory concessions. The interest in West Abu Gharadig was purchased in 1997 while the East Zeit and South Hurghada interests were acquired in 1996. Each concession is governed by a concession agreement (collectively, the "Egyptian Concession Agreements") between the working interest partners, the Egyptian national oil company ("EGPC") and the Egyptian government. Under the Egyptian Concession Agreements, 3 6 SEAGULL ENERGY CORPORATION the working interest partners pay 100% of capital and operating costs and production is split between EGPC and the working interest partners. Working interest partners recover costs from a percentage, ranging from 25% to 40% depending upon the concession, of the oil and gas produced and sold from the applicable concession ("Cost Recovery Petroleum"). Cost Recovery Petroleum forms a single unified pool for the entire concession from which costs of all fields, zones, products and types may be recovered without differentiation, except that operating costs are recovered prior to the recovery of any capital costs. Capital costs (which include exploration, development and other equipment and facilities costs) are amortized for recovery over four or five years while operating expenses are recoverable on a current basis. To the extent that the costs eligible for recovery in any quarter exceed the amount of Cost Recovery Petroleum produced and sold in that quarter, such costs are recoverable from Cost Recovery Petroleum in future quarters with no limit on the ability to carry forward such costs. The remaining oil and gas produced and sold is divided between EGPC and the working interest partners. Depending on the concession and varying with production levels, the working interest partners receive 12% to 30% of the remaining oil and up to 29% of the remaining gas. Included in EGPC's share of this remaining oil or gas are all Egyptian government royalties as well as the applicable Egyptian income taxes of the working interest partners. In January 1999, the Egyptian government issued a mandate to cease trucking of production of crude oil in all of Egypt. The Company is currently working to resolve this issue. The mandate affects net oil production from portions of the Company's Qarun concession and all of the East Beni Suef and the South Hurghada concessions, for a total of approximately 820 Bbl per day. Qarun -- The Company has a 25% non-operated working interest in the Qarun Concession Agreement. The concession covers approximately 1.5 million gross acres located 45 miles southwest of Cairo, Egypt. Initial oil production, via trucking, began in late 1995 while conventional production facilities became fully operational in 1997. With the completion of these production facilities, Qarun became one of the Company's largest producing concessions. At year-end 1998, the Company had net production at Qarun of approximately 5,700 Bbl per day. East Zeit -- The Company, as the operator, has a 100% working interest in the 6,672-acre East Zeit concession which is located offshore in the Gulf of Suez. The Company acquired its interest primarily as a producing concession and it continues to be one of the largest producing concessions among the Company's Egyptian interests. At year-end 1998, Seagull had net production at East Zeit of approximately 4,700 Bbl per day. East Beni Suef -- Seagull has a 50% non-operated working interest in the East Beni Suef Concession Agreement. The concession covers approximately 6.8 million gross acres lying adjacent and to the south of the Qarun concession. Initial oil production, via trucking, began in mid 1998. In January 1999, production from this concession was temporarily suspended while the Company revises its development plan to increase operating efficiencies. 4 7 SEAGULL ENERGY CORPORATION South Hurghada -- Seagull, as the operator, has a 100% working interest in the 61,000-acre concession, located onshore on the coast of the Gulf of Suez approximately 250 miles south of Cairo. After the completion of two successful exploratory wells in mid-1997, oil production was trucked to the nearby East Zeit production terminal. Seagull's production from this concession was 450 Bbl per day at the end of 1998. Due to the mandate related to trucking described above, production from this concession is suspended. West Abu Gharadig -- In October 1997, the Company purchased a 30% non-operating working interest in the West Abu Gharadig concession, covering 3.5 million gross acres in upper Egypt. Seagull's net production from this concession was 230 Bbl per day at the end of 1998. Southwest Gebel el Zeit and Southeast Gulf of Suez -- In July 1998, the Company entered into farmout agreements to obtain working interests in these concessions. Seagull holds a 43.75% working interest in Southwest Gebel el Zeit, which is a 52,385 gross (22,919 net) acre concession located offshore in the Gulf of Suez. Seagull holds a 25% working interest in Southeast Gulf of Suez, which is a 203,858 gross (50,965 net) acre concession also located offshore in the Gulf of Suez. Both concessions are exploratory and currently have no production. COTE D'IVOIRE Seagull's operations in Cote d'Ivoire, West Africa consist of working interests in two blocks: CI-11 and CI-12. The CI-11 concession, where the Company has a nearly 13% unitized working interest, extends from the western coast to approximately eight miles offshore Cote d'Ivoire. The Company also has an approximately 17% working interest in CI-12, which lies adjacent to and west of block CI-11. At year-end 1998, the Company had production at CI-11 of approximately 8,400 Mcf per day and 950 Bbl per day. Each block is subject to a production sharing contract whereby the working interest partners pay 100% of capital and operating costs, and production is split between the Ivorian government and the working interest partners. Working interest partners recover costs from a percentage, ranging from 50% to 63% depending upon the concession, of produced and sold petroleum. The remaining oil and gas produced and sold, and any portion of cost recovery not used to recover costs, is divided between the Ivorian government and the working interest partners. Included in the Ivorian government's share of remaining petroleum are all Ivorian government royalties as well as the applicable Ivorian income taxes for the working interest partners. TATARSTAN The Company has a net 45% interest in a joint venture in Tatarstan, a republic in the Russian Federation located west of the Ural Mountains and east of the Volga River. This joint venture with Tatneft, a Russian closed joint stock company, operates various oil fields in 5 8 SEAGULL ENERGY CORPORATION Tatarstan. Under the terms of the joint venture and various supplemental agreements, the funding for the joint venture is supplied by the Company and Tatneft through various credit agreements. During 1998, the joint venture's activities included vapor recovery projects and the development and operation of the Onbysk field, near the city of Almetyevsk. Plans for 1999 will be consistent with 1998 activity. INDONESIA Seagull has a 1.7% interest in the Indonesia Joint Venture ("IJV") for the exploration, development and production of oil and gas in East Kalimantan, Indonesia, under a production sharing contract ("PSC") with the state petroleum enterprise of Indonesia. The majority of the revenue derived from the IJV results from the sale of liquefied natural gas. Under the terms of the PSC, the IJV is authorized to explore for, develop and produce petroleum reserves in an approximately 1.1 million acre area in East Kalimantan. The original PSC between the IJV and the state petroleum enterprise of Indonesia expired on August 7, 1998 after a 30-year period. The amended and extended PSC became effective on August 8, 1998 for an additional 20-year period. Under terms of the extended PSC, the IJV's after-tax share of gas has been reduced from 35% to 30% (or 25% for certain contracts), while the IJV's after-tax share of oil remains unchanged at 15%. The applicable Indonesian tax rate has been reduced from 56% to 48%. The IJV participants are entitled to recover cumulative operating and certain capital costs out of the oil and gas produced each year, and to receive a share of the remaining oil and gas revenues. PRODUCTION The following table summarizes the Company's production, average sales prices and operating costs for the periods indicated: 6 9 SEAGULL ENERGY CORPORATION
Year Ended December 31, --------------------------------------------- 1998 1997 1996 ----------- ----------- ----------- UNITED STATES: Net production: Gas (MMcf) .................................. 104,023 110,595 116,238 Oil, condensate and NGL (Mbbl) .............. 1,834 1,763 1,561 Average sales price: (1) Gas (per Mcf) ............................... $ 2.05 $ 2.34 $ 2.17 Oil, condensate and NGL (per Bbl) ........... $ 11.41 $ 17.60 $ 19.03 Average operating costs (per BOE) (2) ......... $ 3.99 $ 3.75 $ 3.27 CANADA (SOLD IN OCTOBER 1997): Net production: Gas (MMcf) .................................. -- 13,510 21,203 Oil, condensate and NGL (Mbbl) .............. -- 243 361 Average sales price: (1) Gas (per Mcf) ............................... -- $ 1.63 $ 1.32 Oil, condensate and NGL (per Bbl) ........... -- $ 16.46 $ 16.77 Average operating costs (per BOE) (2) ......... -- $ 3.42 $ 3.57 EGYPT: Net oil production (Mbbl) ..................... 4,002 3,383 1,305 Average oil sales price (per Bbl) (1) ......... $ 11.92 $ 18.26 $ 21.56 Average operating costs (per BOE) (2) ......... $ 4.31 $ 3.46 $ 4.45 COTE D'IVOIRE: Net production: Gas (MMcf) .................................. 3,106 2,245 1,445 Oil (Mbbl) .................................. 360 603 511 Average sales price: (1) Gas (per Mcf) ............................... $ 1.59 $ 1.93 $ 1.77 Oil (per Bbl) ............................... $ 10.51 $ 19.34 $ 20.04 Average operating costs (per BOE) (2) ......... $ 3.11 $ 3.95 $ 3.56 TATARSTAN: Net oil production (Mbbl) ..................... 1,496 1,512 1,117 Average oil sales price (per Bbl) (1) ......... $ 7.67 $ 14.26 $ 13.98 Average operating costs (per BOE) (2) ......... $ 8.02 $ 9.25 $ 10.17 INDONESIA AND OTHER: Net production: Gas (MMcf) .................................. 3,168 3,965 4,429 Oil (Mbbl) .................................. 72 56 51 Average sales price: (1) Gas (per Mcf) ............................... $ 2.23 $ 3.18 $ 3.36 Oil (per Bbl) ............................... $ 13.38 $ 19.31 $ 19.58 Average operating costs (per BOE ) (2) ........ -- -- --
(1) Average sales prices are before deduction of production, severance, and other taxes. (2) Operating costs represent costs incurred to operate and maintain wells and related equipment and facilities. These costs include, among other things, repairs and maintenance, workover expenses, labor, materials, supplies, property taxes, insurance, severance taxes, transportation costs and general operating expenses. 7 10 SEAGULL ENERGY CORPORATION OIL AND GAS DRILLING ACTIVITIES Seagull's oil and gas exploratory and developmental drilling activities are as follows for the periods indicated. A well is considered productive for purposes of the following table if it justifies the installation of permanent equipment for the production of oil or gas. The term "gross wells" means the total number of wells in which Seagull owns an interest, while the term "net wells" means the sum of the fractional working interests Seagull owns in gross wells. The information should not be considered indicative of future performance, nor should it be assumed that there is necessarily any correlation between the number of productive wells drilled, quantities of reserves found or economic value. 8 11 SEAGULL ENERGY CORPORATION
Year Ended December 31, ----------------------------------------------------------------------------- 1998 1997 1996 ---------------------- ---------------------- ---------------------- GROSS NET Gross Net Gross Net --------- --------- -------- --------- --------- --------- UNITED STATES: Exploratory Drilling: Productive Wells................. 7 1.5 18 9.5 14 6.2 Dry Holes........................ 12 5.0 12 4.2 15 6.6 Development Drilling: Productive Wells................. 138 60.9 142 73.9 123 54.2 Dry Holes........................ 11 7.0 12 6.3 13 8.2 CANADA (SOLD IN OCTOBER 1997): Exploratory Drilling: Productive Wells................. - - 3 1.7 5 0.8 Dry Holes........................ - - 1 1.0 2 2.0 Development Drilling: Productive Wells................. - - 57 28.9 17 8.6 Dry Holes........................ - - 1 0.3 2 1.5 EGYPT: Exploratory Drilling: Productive Wells................. 4 1.3 4 2.8 2 0.5 Dry Holes........................ 13 5.1 11 3.0 5 1.3 Development Drilling: Productive Wells................. 7 2.8 14 3.5 14 3.5 Dry Holes........................ 3 1.3 - - - - COTE D'IVOIRE: Exploratory Drilling: Productive Wells................. 1 0.1 1 0.1 2 0.3 Dry Holes........................ 1 0.2 2 0.3 1 0.1 Development Drilling: Productive Wells................. - - 3 0.4 1 0.1 Dry Holes........................ - - - - - - TATARSTAN: Exploratory Drilling: Productive Wells................. - - 1 0.5 - - Dry Holes........................ - - - - - - Development Drilling: Productive Wells................. 10 5.0 21 10.5 20 10.0 Dry Holes........................ 1 0.5 - - - - OTHER INTERNATIONAL: Exploratory Drilling: Productive Wells................. - - - - - - Dry Holes........................ - - 1 0.2 - - TOTAL: Exploratory Drilling: Productive Wells................. 12 2.9 27 14.6 23 7.8 Dry Holes........................ 26 10.3 27 8.7 23 10.0 Development Drilling: Productive Wells................. 155 68.7 237 117.2 175 76.4 Dry Holes........................ 15 8.8 13 6.6 15 9.7
The Company had 10 gross (3.8 net) exploratory wells and 12 gross (6.3 net) development wells in progress at December 31, 1998. Wells classified as "in progress" at year-end 9 12 SEAGULL ENERGY CORPORATION represent wells where drilling activity is ongoing, wells awaiting installation of permanent equipment and wells awaiting the drilling of additional delineation wells. The following table sets forth information regarding the number of productive wells in which the Company held a working interest at December 31, 1998. Productive wells are either producing wells or wells capable of commercial production although currently shut-in. One or more completions in the same borehole are counted as one well.
Gross Wells Net Wells ---------------------------------------------- ---------------------------------------------- Multiple Multiple Gas Oil Total Completions Gas Oil Total Completions ------- ------- ------- ------- ------- ------- ------- ------- United States ...... 2,257 309 2,566 259 1,136.6 192.7 1,329.3 133.9 Egypt .............. -- 60 60 11 -- 27.2 27.2 3.0 Cote d'Ivoire ...... 4 12 16 2 0.5 1.6 2.1 0.3 Tatarstan .......... -- 174 174 -- -- 87.0 87.0 -- ------- ------- ------- ------- ------- ------- ------- ------- 2,261 555 2,816 272 1,137.1 308.5 1,445.6 137.2 ======= ======= ======= ======= ======= ======= ======= =======
During the fourth quarter of 1998, Seagull sold some of its less strategic E&P properties located away from its various core assets and various nonstrategic pipeline assets. These nonstrategic E&P property sales included nearly 2,500 gross wells (300 net wells) with approximately 300 of those wells operated by Seagull. As a result of these nonstrategic E&P property sales, Seagull's average working interest on domestic properties increased from 29% to 52%. DEVELOPED AND UNDEVELOPED OIL AND GAS ACREAGE As of December 31, 1998, the Company owned working interests in the following developed and undeveloped oil and gas acreage:
Developed Undeveloped ------------------------------ ------------------------------ Gross Net Gross Net ------------ ------------ ------------ ------------ UNITED STATES: Oklahoma .................. 269,218 127,922 27,369 12,015 Texas ..................... 271,350 145,029 198,360 73,237 Arkansas .................. 211,620 71,650 10,828 7,079 Louisiana ................. 40,713 20,282 5,362 3,947 Other ..................... 20,235 9,794 35,320 16,236 Federal Offshore: Louisiana ............... 59,850 24,716 241,092 118,697 Texas ................... 149,549 58,269 297,532 181,641 EGYPT ........................ 461,427 142,629 11,729,926 4,849,174 COTE D'IVOIRE ................ 11,860 1,537 573,963 89,061 TATARSTAN .................... 12,630 6,315 26,159 12,729 INDONESIA .................... 97,000 1,663 1,156,780 19,827 OTHER INTERNATIONAL .......... -- -- 2,152,819 393,653 ------------ ------------ ------------ ------------ 1,605,452 609,806 16,455,510 5,777,296 ============ ============ ============ ============
10 13 SEAGULL ENERGY CORPORATION Additionally, as of December 31, 1998, the Company owned mineral and/or royalty interests in 550,693 gross (40,350 net) developed and 2,997,145 gross (117,910 net) undeveloped oil and gas acres, located primarily in the United States. For additional information relating to oil and gas producing activities, see Note 17 to the Consolidated Financial Statements. REGULATION The availability of a ready market for oil and natural gas production depends upon numerous regulatory factors beyond the Company's control. These factors include regulation of oil and natural gas production, federal and state regulations governing environmental quality and pollution control and state limits on allowable rates of production by a well or proration unit. State and federal regulations generally are intended to prevent waste of oil and natural gas, protect rights to produce oil and natural gas between owners in a common reservoir, control the amount of oil and natural gas produced by assigning allowable rates of production and control contamination of the environment. Regulation of Oil and Natural Gas Exploration and Production. Exploration and production operations of the Company 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 method of drilling and casing wells, the surface use and restoration of properties upon which wells are drilling and the plugging and abandonment of wells. The Company's operations are also subject to various conservation laws and regulations. These include the regulation of the size of drilling and spacing units or proration units and the density of wells which may be drilled and unitization or pooling of oil and gas properties. In this regard, some states allow the forced pooling or integration of tracts to facilitate exploration while other states rely on voluntary pooling of lands and leases. In addition, state conservation laws establish maximum rates of production requirements regarding the ratability of production. The Federal Energy Regulatory Commission ("FERC") regulates interstate natural gas transportation rates and service conditions, which affect the marketing of natural gas produced by the Company. Some states regulate gathering which affects the marketing of the Company's production. The FERC is currently considering proposals to deregulate or restructure not only all offshore transportation but also onshore interstate transportation markets. Additional proposals and proceedings that might affect the natural gas industry and the Company's production are considered from time to time by Congress, the FERC, state regulatory bodies and the courts. The Company cannot predict when or if any of the current or additional proposals might become effective, or their effect, if any, on the Company's production. 11 14 SEAGULL ENERGY CORPORATION Offshore Leasing. Offshore operations the Company conducts are on federal oil and gas leases. Seagull must comply with regulatory restrictions from numerous agencies, including the U.S. Minerals Management Service ("MMS"), U.S. Bureau of Land Management, U.S. Coast Guard and U.S. Environmental Protection Agency. For offshore operations, the Company must obtain regulatory approval for exploration plans and development and production plans prior to the commencement of such operations. These agencies have stringent engineering and construction specifications, safety-related regulations concerning the design and operating procedures for offshore production platforms and pipelines, regulations to prohibit the flaring of liquid hydrocarbons and oil without prior authorization, regulations governing the plugging and abandonment of wells located offshore and the removal of all production facilities and other rules and regulations governing many phases of offshore exploration and production. To cover the various obligations of lessees, governmental agencies generally require substantial bonds or other acceptable assurances that such obligations will be met. The restructuring of oil and gas markets has resulted in a shifting of markets downstream from the wells. Deregulation has altered the marketplace such that lessors, including the MMS, are challenging the methods of valuation of production for royalty purposes. In addition, the MMS is conducting an inquiry into certain contract settlement 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. COMPETITION The Company's competitors in oil and gas exploration, development and production include major oil companies, as well as numerous independent oil and gas companies, individuals and drilling programs. Some of these competitors have financial and personnel resources substantially in excess of those available to the Company and, therefore, the Company may be placed at a competitive disadvantage. The Company's success in discovering reserves will depend on its ability to select suitable prospects for future exploration in today's competitive environment. INTERNATIONAL OPERATIONS Seagull's interests in countries outside the United States are subject to the various risks inherent in foreign operations. Operations in foreign countries, particularly in the oil and gas business, are subject to political, economic and other uncertainties, including: - the risk of war, revolution, border disputes, expropriation, renegotiation or modification of existing contracts, import, export and transportation regulations and tariffs; - taxation policies, including royalty and tax increases and retroactive tax claims; and exchange controls and currency fluctuations. In addition, in the event of a dispute arising from foreign operations, the Company may be subject to the exclusive jurisdiction of foreign courts or may not be successful in subjecting foreign persons to the jurisdiction of the courts of the United States. The Company's international operations may also be adversely affected by laws and policies of the United States affecting 12 15 SEAGULL ENERGY CORPORATION foreign trade, taxation and investment. The Company seeks to manage these risks by among other things, concentrating its international exploration efforts in areas where the Company believes that the existing government is stable and favorably disposed towards United States exploration and production companies. If a country claims superior rights to oil and gas leases or concessions granted to the Company by another country, the Company's interests could be lost or decreased in value. Certain regions of Africa and other regions of the world have a history of political and economic instability. This instability could result in new governments or the adoption of new policies that might assume a substantially more hostile attitude toward foreign investment. In an extreme case, such a change could result in termination of contract rights and expropriation of foreign-owned assets. This could adversely affect the Company's interests. ALASKA TRANSMISSION AND DISTRIBUTION The Company operates in Alaska as a single business unit, ENSTAR Alaska, which is regulated by the Alaska Public Utilities Commission. ENSTAR Alaska engages in the intrastate transmission of natural gas in South-Central Alaska and the distribution of natural gas in Anchorage and other nearby communities in Alaska. Revenues from ENSTAR Alaska accounted for 22%, 17% and 19% of the Company's consolidated revenues for 1998, 1997 and 1996, respectively. GAS TRANSMISSION SYSTEM ENSTAR Alaska owns and operates the only natural gas transmission lines in its service area that are operated for utility purposes. The pipeline transmission system is composed of approximately 277 miles of 12 to 20-inch diameter pipeline and approximately 74 miles of smaller diameter pipeline. The system's present design delivery capacity is approximately 410 MMcf/d. The average throughput of the system in 1998, 1997 and 1996 was 120, 124 and 131 MMcf/d, respectively. GAS DISTRIBUTION SYSTEM ENSTAR Alaska distributes natural gas through approximately 2,175 miles of gas mains to approximately 99,800 residential, commercial, industrial and electric power generation customers in Anchorage, Alaska and other nearby cities. During the year ended December 31, 1998, ENSTAR Alaska added approximately 67 miles of new gas distribution mains and added approximately 3,000 net customers. ENSTAR Alaska anticipates relatively modest growth in its residential customer base and will install additional main and service lines to accommodate this growth. 13 16 SEAGULL ENERGY CORPORATION ENSTAR Alaska distributes gas to its customers under tariffs and contracts which provide for varying delivery priorities. ENSTAR Alaska's business is seasonal with approximately 65-70% of its revenues earned in the first and fourth quarters of each year. In 1998, purchase/resale volumes represented 52% of ENSTAR Alaska's throughput and 76% of ENSTAR Alaska's operating margin. The remaining volumes are transported for power, industrial and large commercial customers for a transportation fee under tariffs approved by the APUC. GAS SUPPLY ENSTAR Alaska has an APUC-approved gas purchase contract (the "Marathon Contract") with Marathon Oil Company ("Marathon") that is a "requirements" contract with no specified daily deliverability or annual take-or-pay quantities. ENSTAR Alaska has agreed to purchase and Marathon has agreed to deliver all of ENSTAR Alaska's gas requirements in excess of those provided for in other presently existing gas supply contracts, subject to certain exceptions, until the commitment has been exhausted and without limit as to time; however, Marathon's delivery obligations are subject to certain specified annual limitations after 2001. The contract has a base price, subject to annual adjustment based on changes in the price of certain traded oil futures contracts, of $1.55 per Mcf plus reimbursements for any severance taxes and other charges. During 1998, the cost of gas purchased under the Marathon Contract averaged $1.81 per Mcf, including reimbursements for severance taxes. ENSTAR Alaska also has an APUC-approved gas purchase contract with the Municipality of Anchorage, Chevron U.S.A., Inc. and ARCO Alaska, Inc. (the "Beluga Contract") which provides for the delivery of up to approximately 220 Bcf of gas through the year 2009. The pricing mechanism in the Beluga Contract is similar to that contained in the Marathon Contract. The 1998 price under the Beluga Contract, after application of contractual adjustments, averaged $1.80 per Mcf, including reimbursements for severance taxes. Based on gas purchases during the twelve months ended December 31, 1998, which are not necessarily indicative of the volume of future purchases, gas reserves committed to ENSTAR Alaska under the Marathon and Beluga Contracts are sufficient to supply all of ENSTAR Alaska's expected gas supply requirements through the year 2001. After that time supplies will still be available under the Marathon and Beluga contracts in accordance with their terms, but at least a portion of ENSTAR Alaska's requirements are expected to be satisfied outside the terms of these contracts, as currently in effect. Currently, ENSTAR Alaska's supply source, primarily through the Marathon and Beluga Contracts, is confined to the Cook Inlet area with no direct access to other natural gas pipelines. During 1997, two of the Cook Inlet area's major suppliers filed for regulatory approval to export certain quantities of gas to overseas liquefied natural gas markets. ENSTAR Alaska has filed as an intervenor in these proceedings and is actively working with regulatory authorities to insure that the supply needs of its customers are met. 14 17 SEAGULL ENERGY CORPORATION ENSTAR Alaska's average cost of gas sold in 1998, 1997 and 1996 was $1.84, $1.89 and $1.59 per Mcf, respectively. ENSTAR Alaska's average gas sales price in 1998, 1997 and 1996 was $3.63, $3.65 and $3.29 per Mcf, respectively. As stated above, ENSTAR Alaska purchases all of its natural gas under long-term contracts in which the price is indexed to changes in the price of crude oil futures contracts. However, because ENSTAR Alaska's sales prices are adjusted to include the projected cost of its natural gas, there has been and is expected to be little or no impact on margins derived from ENSTAR Alaska's gas sales as a result of fluctuations in oil prices due to worldwide political events and changing market conditions. COMPETITION ENSTAR Alaska competes primarily with municipal and cooperative electric power distributors and with various suppliers of fuel oil and propane for the available energy market. There are also extensive coal reserves proximate to ENSTAR Alaska's operating area; however, such reserves are not presently being produced. During the last nine years, ENSTAR Alaska's natural gas volumes delivered on a purchase/resale basis have declined. Beginning in 1989, several of its major customers began purchasing gas directly from gas producers or gas marketers. However, the APUC has approved tariffs allowing ENSTAR Alaska to transport these volumes for a transportation fee that approximates the margin that would have been earned had the customer remained a sales customer rather than becoming a transportation customer. Consequently, ENSTAR Alaska anticipates no adverse economic impact to result from these transportation arrangements. If any other existing large customer of ENSTAR Alaska chooses to purchase gas directly from producers, ENSTAR Alaska would expect to collect a fee for transporting that gas equivalent to the margin earned on sales volumes for those customers because the large distance of remaining user facilities from producing fields would preclude the by-pass of ENSTAR Alaska's pipelines. ENSTAR Alaska supplies natural gas to its customers at prices that at the present time economically preclude substitution of alternative fuels. Since the Beluga Contract and the Marathon Contract include prices that fluctuate based on oil indices, a competitive margin favoring natural gas over oil-based energy sources is expected to continue. However, there is no assurance that the competitive advantage over other alternative fuels will not be reduced or eliminated by the development of new energy technology, by changes in the price of oil or refined products or by decreased gas supply if additional exports are allowed out of the Cook Inlet area. 15 18 SEAGULL ENERGY CORPORATION REGULATION The APUC has jurisdiction as to rates and charges for gas sales, construction of new facilities, extensions and abandonments of service and certain other matters. Rates are generally designed to permit the recovery of the cost of providing service, including purchased gas costs, and a return on investment in plant. As a result of a proceeding filed in 1984, which was concluded in May 1986, the APUC granted ENSTAR Alaska an aggregate rate increase of 20.27% and authorized a regulatory rate of return on common equity of 15.65%. Except as described below in connection with the pending merger with OEI, ENSTAR Alaska has no significant regulatory issues pending before the APUC. Since its inception in 1961, ENSTAR Alaska has participated in only three formal rate proceedings. Through its wholly-owned subsidiary, Alaska Pipeline Company ("APC"), and its ENSTAR Natural Gas Division ("ENSTAR"), Seagull owns and operates "ENSTAR Alaska". APC and ENSTAR each holds a certificate of public convenience and necessity issued by the APUC, which regulates their activities. On December 14, 1998, Seagull applied to the APUC for approval of Seagull's merger with OEI, which will require a change in ENSTAR's certificate to reflect the name change from Seagull Energy Corporation to Ocean Energy, Inc. The merger may also be deemed by the APUC to involve a change in control of both APC and ENSTAR, which requires further APUC approval. Public notice of the application has been given by the APUC for 30 days to permit public comment. The APUC staff will analyze the application and make a report to the commissioners of the APUC with its recommendation. If the APUC staff recommends approval and no third party objects to the application, approval is expected in February 1999. The Company does not believe that this approval will result in any rate decreases or other impact on the business of ENSTAR Alaska. CORPORATE REGULATION The Company is a "public utility company" within the meaning of the Public Utility Holding Company Act of 1935, as amended (the "1935 Act"). Accordingly, if any "company" (as defined for purposes of the 1935 Act and therefore including so-called "organized groups") becomes the owner of 10% or more of the Company's outstanding voting stock, that company would be required to register as a "holding company" under the 1935 Act, in the absence of an exemption of the type described below. Section 9(a)(2) also requires a person (including both individuals and "companies") to obtain prior approval from the Securities and Exchange Commission (the "SEC") in connection with the acquisition of 5% or more of the outstanding voting stock of a public utility if that person is also the owner of 5% or more of the outstanding voting stock of another public utility. Based upon publicly available filings with the SEC, the 16 19 SEAGULL ENERGY CORPORATION Company does not believe that any person owns 10% or more of Seagull's outstanding common stock. ENVIRONMENTAL MATTERS Seagull's operations are subject to federal, state and local laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. Numerous governmental departments issue rules and regulations to implement and enforce such laws which are often difficult and costly to comply with and which carry substantial penalties for failure to comply. These laws and regulations may require the acquisition of a permit before drilling or production 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, restrict the rate of oil and gas production and impose substantial liabilities for pollution resulting from the Company's operations. State laws often require some form of remedial action to prevent pollution from former operations, such as pit closure and plugging abandoned wells. In addition, these laws and regulations may impose substantial liabilities and penalties for the Company's failure to comply with them or for any contamination resulting from the Company's operations. The Company has established policies and procedures for continuing compliance with environmental laws and regulations; however the Company does not believe costs relating to these laws and regulations have had a material adverse effect on the Company's operations or financial condition in the past. As these laws and regulations are becoming more stringent and complex, there is no assurance that changes in or additions to laws or regulations regarding the protection of the environment will not have such an impact in the future. The requirements imposed by these laws and regulations are frequently changed and subject to new interpretations. It is likely that the costs of compliance could increase the cost of operating offshore drilling equipment or significantly limit drilling activity. EMPLOYEES As of February 1, 1999, the Company had 814 full time employees. In addition to the services of its full time employees, the Company employs, as needed, the services of consulting geologists, engineers, regulatory consultants, contract pumpers and certain other temporary employees. ENSTAR Alaska operates under collective bargaining agreements with separate bargaining units for operating and clerical employees. These units represent approximately 80% of ENSTAR Alaska's work force. Contracts have been negotiated that set wages and work relationships for the two units. The operating bargaining unit contract is effective from April 1, 1996 through April 1, 2000. The clerical bargaining unit contract is effective from April 1, 1995 17 20 SEAGULL ENERGY CORPORATION through April 1, 2000. The Company is not a party to any other collective bargaining agreements. The Company has never had a work stoppage. The Company considers its relations with its employees to be satisfactory. EXECUTIVE OFFICERS OF THE COMPANY The executive officers of the Company, each of whom has been elected to serve until his successor is elected and qualified, are as follows:
Name Age Present Position and Prior Business Experience ---- --- ---------------------------------------------- JAMES T. HACKETT........... 45 PRESIDENT AND CHIEF EXECUTIVE OFFICER SINCE SEPTEMBER 1998 AND CHAIRMAN OF THE BOARD FROM JANUARY 1999; President of Duke Energy's Energy Services Division from January 1996 to September 1998. Prior to joining Duke Energy, he was senior vice president of NGC Corporation (formerly Natural Gas Clearinghouse) and president of NGC's gathering, processing and liquids marketing division. He joined Natural Gas Clearinghouse as senior vice president and partner in 1990 and became executive vice president, partner and a member of the management committee in 1993. Previously, he held a number of senior positions at Meridian Oil Incorporated, a subsidiary of Burlington Resources Incorporated, and Texas Gas Resources Corporation, a subsidiary of CSX Corporation. WILLIAM L. TRANSIER........ 44 EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER SINCE SEPTEMBER 1998; Senior Vice President and Chief Financial Officer from May 1996 to September 1998; For the previous 20 years, he held a variety of positions at KPMG LLP and was promoted to partner in July 1986. GERALD R. COLLEY........... 47 SENIOR VICE PRESIDENT, INTERNATIONAL EXPLORATION AND PRODUCTION SINCE NOVEMBER 1996; Senior Vice President - International Exploration of Global from December 1994 to November 1996; Vice President - International Exploration of Global from July 1993 to December 1994; Vice President - International Exploration of Global Natural Resources Corporation of Nevada ("GNRC"), a wholly owned subsidiary of Global, since October 1992; Vice President and Exploration Director of Hadson Europe, Inc. from August 1986 to October 1992. SCOTT A. GRIFFITHS......... 45 SENIOR VICE PRESIDENT OF DOMESTIC EXPLORATION SINCE SEPTEMBER 1998; Vice President of Domestic Exploration from October 1996 to May 1997; Vice President of Exploration of Global from 1992 to October 1996; Exploration Geologist for Global from October 1984 to 1992. CARL B. KING............... 56 SENIOR VICE PRESIDENT AND GENERAL COUNSEL SINCE FEBRUARY 1998; Senior Vice President and General Counsel of PanEnergy Corp from 1991 to February 1998; For the previous 16 years, he served in a variety of positions with Cooper Industries/Cameron Iron Works.
18 21 SEAGULL ENERGY CORPORATION
Name Age Present Position and Prior Business Experience ---- --- ---------------------------------------------- JOHN D. SCHILLER, JR....... 39 SENIOR VICE PRESIDENT, OPERATIONS SINCE SEPTEMBER 1998; Production Manger - Gulf Coast Division of Burlington Resources from October 1997 to August 1998; Engineering Manager - Offshore Division of Burlington Resources from April 1994 to September 1997; Acquisition Manager of Burlington Resources from November 1992 to March 1994. RICHARD F. BARNES.......... 55 PRESIDENT OF ENSTAR ALASKA SINCE SEPTEMBER 1987. MATTHIAS BEIER............. 46 VICE PRESIDENT AND CHIEF INFORMATION OFFICER SINCE APRIL 1998; Mr. Beier joined Seagull from El Paso Energy Corp. where he had served since 1987, most recently as Director, Computer Services and Infrastructure. Earlier in his career at El Paso Energy he was Manager, Information Systems. JOHN H. CAMPBELL, JR....... 41 VICE PRESIDENT AND CHIEF ENGINEER SINCE OCTOBER 1998; Regional Engineer - Offshore Division from 1994 to 1998 with Burlington Resources; New Ventures Engineer from 1993 to 1994 with Burlington Resources. GORDON L. MCCONNELL........ 52 VICE PRESIDENT AND CONTROLLER SINCE NOVEMBER 1996; Vice President - Accounting of Global from January 1996 to November 1996; Controller of Global from July 1993 to January 1996; Controller of GNRC since October 1991; Assistant Controller of GNRC from July 1991 to October 1991. H. ALAN PAYNE.............. 57 VICE PRESIDENT, INVESTOR RELATIONS SINCE NOVEMBER 1996; Director, Investor Relations from December 1984 to November 1996. JACK M. ROBERTSON.......... 55 VICE PRESIDENT, HUMAN RESOURCES SINCE NOVEMBER 1996; Director, Human Resources from November 1990 to November 1996. STEPHEN A. THORINGTON...... 43 VICE PRESIDENT, FINANCE AND TREASURER SINCE MAY 1996; Managing Director of Chase Securities Inc. from April 1994 to May 1996; Managing Director for The Chase Manhattan Bank, N.A. from June 1991 through April 1994. M. LEE VAN WINKLE.......... 46 VICE PRESIDENT, CORPORATE PLANNING SINCE NOVEMBER 1996; Vice President - Corporate Planning of Global from July 1993 to November 1996; Vice President - Corporate Planning of GNRC since August 1992; Corporate Manager - Planning and Budget for Adobe Resources Corporation for more than five years prior to August 1992. CARL E. VOLKE.............. 55 VICE PRESIDENT, ADMINISTRATION SINCE NOVEMBER 1996; Director, Administration from November 1986 to November 1996.
CERTAIN OIL AND GAS TERMS The following are abbreviations and definitions of terms commonly used in the oil and gas industry and this document. Unless otherwise indicated in this document, natural gas volumes are stated at the legal pressure base of the state or area in which the reserves are located and at 60 degrees Fahrenheit. 19 22 SEAGULL ENERGY CORPORATION o "Bbl" means a barrel of 42 U.S. gallons of oil. o "Bcf" means billion cubic feet of natural gas. o "BOE" means barrels of oil equivalent, which is determined using the ratio of six Mcf of natural gas to one Bbl of oil. o "BOEPD" means barrels of oil equivalent per day. o "Btu" or "British Thermal Unit" means the quantity of heat required to raise the temperature of one pound of water by one degree Fahrenheit. o "MBbl" means thousands of barrels of oil. o "MBOE" means a thousand barrels of oil equivalent. o "Mcf" means thousand cubic feet of natural gas. o "Mcfe" means a thousand cubic feet equivalent, which is determined using the ratio of one barrel of oil to six Mcf of natural gas. o "MMbbl" means millions of barrels of oil. o "MMBOE" means million barrels of oil equivalent. o "MMBtu" means one million British Thermal Units. o "MMcf" means million cubic feet of natural gas. o "Net" acres, production or wells refers to the total acres, production or wells in which the Company has a working interest, multiplied by the percentage working interest owned by the Company. ITEM 2. PROPERTIES Incorporated herein by reference to Item 1 of this Annual Report on Form 10-K. ITEM 3. LEGAL PROCEEDINGS Incorporated herein by reference to Note 16 of the Consolidated Financial Statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 20 23 SEAGULL ENERGY CORPORATION PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS A. The Company's Common Stock (the "Common Stock") is traded on the New York Stock Exchange under the ticker symbol "SGO." The high and low sales prices on the New York Stock Exchange Composite Tape for each quarterly period during the last two fiscal years were as follows:
1998 1997 --------------------------------------- --------------------------------------- HIGH LOW High Low ----------------- ----------------- ----------------- ----------------- First Quarter............. $20.94 $15.44 $24.13 $17.88 Second Quarter............ 19.44 13.94 19.25 15.75 Third Quarter............. 17.69 7.63 25.88 17.75 Fourth Quarter............ 12.44 5.69 27.63 19.06
B. As of February 9, 1999, there were approximately 3,972 holders of record of Common Stock. C. Seagull has not declared any cash dividends on its Common Stock since it became a public entity in 1981. The decision to pay Common Stock dividends in the future will depend upon the Company's earnings and financial condition and such other factors as the Company's Board of Directors deems relevant. The Company's revolving credit agreement (the "Revolving Credit Facility") restricts the Company's declaration or payment of dividends on and repurchases of Common Stock unless each of the following tests has been met: (i) the Company's Total Debt/Capitalization Ratio cannot be more than 60% and (ii) no Default or Event of Default shall have occurred and be continuing. The capitalized terms used herein to describe the restrictions contained in the Revolving Credit Facility have the meanings assigned to them in the Revolving Credit Facility. Under the most restrictive of these tests, as of December 31, 1998, approximately $130 million was available for payment of dividends or repurchase of Common Stock. In addition, certain debt instruments of ENSTAR Alaska restrict the ability of ENSTAR Alaska to transfer funds to the Company in the form of cash dividends, loans or advances. For a description of such restrictions, reference is made to Note 8 of the Consolidated Financial Statements. 21 24 SEAGULL ENERGY CORPORATION ITEM 6. SELECTED FINANCIAL DATA SELECTED FINANCIAL DATA (1) (Amounts in Thousands Except Per Share Data)
Year Ended December 31, --------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ------------- ------------- -------------- -------------- -------------- Revenues ............................ $ 426,171 $ 549,367 $ 517,211 $ 406,280 $ 467,579 Net income (loss)(2) ................ (96,696) 49,130 28,961 (1,738) (4,405) Earnings (loss) per share(2): Basic ............................ (1.53) 0.78 0.46 (0.03) (0.07) Diluted .......................... (1.53) 0.77 0.46 (0.03) (0.07) Net cash provided by operating activities before changes in operating assets and liabilities... 147,184 249,587 220,543 124,822 182,413 Net cash provided by operating activities ........................ 148,718 262,749 258,439 117,727 207,339 Total assets ........................ 1,416,090 1,411,066 1,515,063 1,359,125 1,454,050 Long-term debt ...................... 582,675 469,017 573,455 557,107 622,080 Shareholders' equity ................ 555,091 647,204 597,730 562,621 557,646 Capital expenditures ................ 275,297 275,608 213,462 144,101 202,553 Acquisitions, net of cash acquired .. 129,276 17,665 104,420 -- 193,859 Standardized measure of discounted future net cash flows before income taxes ......... 776,180 1,219,363 2,137,870 1,103,962 865,047
(1) Includes Seagull Energy Canada Ltd. from January 4, 1994 through October 6, 1997. (2) 1998 includes a non-cash pre-tax charge for the impairment of long-lived assets of $78 million, a one-time pre-tax charge for compensation expenses of $6 million and an extraordinary loss of $1 million or $ 0.02 per basic and diluted share. 1995 includes a non-cash pre-tax charge for the impairment of long-lived assets of $49 million. 22 25 SEAGULL ENERGY CORPORATION 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 financial position and results of operations of Seagull for each of the periods indicated. The accompanying Consolidated Financial Statements contain detailed information that should be referred to in conjunction with the following discussion. CONSOLIDATED HIGHLIGHTS (Amounts in Thousands)
Year Ended December 31, -------------------------------------------- 1998 1997 1996 ------------- ------------- -------------- Revenues: Oil and gas operations ................................. $ 332,579 $ 453,648 $ 419,595 Alaska transmission and distribution ................... 93,592 95,719 97,616 --------- --------- --------- $ 426,171 $ 549,367 $ 517,211 ========= ========= ========= Operating profit (loss): Oil and gas operations ................................. $ (99,544) $ 106,983 $ 97,192 Alaska transmission and distribution ................... 23,143 22,588 25,781 Corporate .............................................. (21,803) (19,095) (19,530) --------- --------- --------- $ (98,204) $ 110,476 $ 103,443 ========= ========= ========= Net income (loss) ......................................... $ (96,696) $ 49,130 $ 28,961 Net cash provided by operating activities before changes in operating assets and liabilities ....................... $ 147,184 $ 249,587 $ 220,543 Net cash provided by operating activities ................. $ 148,718 $ 262,749 $ 258,439
During 1998, the oil prices realized by Seagull dropped 37%, from 1997's $17.34 per barrel to $10.93 per barrel. These low oil prices in 1998 represent the lowest oil prices received in a number of years and were a major contributing factor to the $46 million, or 35%, decrease in oil revenues from 1997 to $85 million for the year ended December 31, 1998. Additionally, domestic natural gas prices decreased 12% from $2.29 per Mcf in 1997 to $2.04 per Mcf for 1998. This gas price decrease and a 6% decrease in domestic gas production combined to create a $46 million decrease in domestic natural gas revenues. These decreases in oil and gas prices in combination with other key factors led to significant decreases in revenues, operating profit, net income and net cash provided by operating activities as compared to 1997. The other key items affecting 1998 results include the following: o Seagull recorded noncash charges of $78 million in the third quarter of 1998 related to the impairment of the Company's oil and gas assets and nonstrategic pipeline assets; 23 26 SEAGULL ENERGY CORPORATION o Oil and gas reserves decreased from 217 MMBOE to 204 MMBOE at December 31, 1997 and 1998, respectively; o Substantial increases in exploration charges for 1998 versus 1997 due to increases in dry hole expenses and leasehold impairments; o The sale of the Company's Canadian oil and gas operations in October 1997; o One-time compensation costs of approximately $6 million associated with the retirement of Barry J. Galt and the appointment of James T. Hackett as the Company's Chief Executive Officer; and o Income tax benefit of 29% of the loss before taxes for 1998, reflecting primarily the tax benefits of the impairment of long-lived assets and one-time compensation matters, versus 1997's tax expense of 43% of earnings before taxes. During 1997, as a result of the addition of Seagull's Egyptian properties and an increase in domestic gas prices, Seagull's net income improved by $20 million to $49 million in 1997 versus 1996 and cash flow provided by operating activities before changes in operating assets and liabilities improved $29 million to $250 million for 1997. The increase in net income and cash flow was concentrated in the O&G segment. OIL AND GAS OPERATIONS (Amounts in Thousands)
Year Ended December 31, ------------------------------------------ 1998 1997 1996 ------------ ------------- ------------- Revenues: Natural gas ......................... $ 225,055 $ 298,223 $ 298,235 Oil and NGL ......................... 84,866 131,096 90,779 Pipeline and marketing .............. 22,658 24,329 30,581 --------- --------- --------- 332,579 453,648 419,595 --------- --------- --------- Production expenses ...................... 110,426 115,713 102,158 Pipeline and marketing expenses .......... 27,178 28,670 24,091 Exploration charges ...................... 59,787 42,085 50,772 Depreciation, depletion and amortization.. 156,905 160,197 145,382 Impairment of long-lived assets .......... 77,827 -- -- --------- --------- --------- Operating profit (loss) .................. $ (99,544) $ 106,983 $ 97,192 ========= ========= =========
Exploration and Production Revenue -- The decline in commodity prices was the significant factor in the 27% decrease in revenues for the O&G segment to $333 million for 1998. The 12% gas price decrease and a 6% decrease in domestic gas production combined to create a $46 million decrease in domestic natural gas revenues. While the declining oil prices mentioned previously were the primary factor for the decrease in oil revenues, this was slightly offset by a 13% increase in oil and NGL production in the U.S. and Egypt combined as Seagull 24 27 SEAGULL ENERGY CORPORATION realized additional contributions from several new domestic wells and three Egyptian concessions - Qarun, where additional facilities became operational during mid-1997; East Beni Suef, where production began in mid-1998; and West Abu Gharadig, which was purchased in late 1997. In 1997, the O&G segment showed a $34 million increase in revenues to $454 million and a $10 million increase in operating profit to $107 million. This 8% increase in O&G revenues was principally due to stronger natural gas prices in nearly all areas of the Company's production operations and increases in international oil and gas production, excluding Canada which was sold in October 1997. The effect of stronger gas prices and international liquids production was partially offset by a decline in oil prices in all areas other than Tatarstan, particularly Egypt where the price decreased 15% from 1996 to 1997, and a decrease in pipeline and marketing revenues. In October 1997, the Company sold its Canadian oil and gas operations, which had revenues of approximately $26 million and $34 million and income (loss) before income taxes of approximately $6 million and $(5) million for the years ended December 31, 1997 and 1996, respectively. Pipeline and Marketing -- Pipeline and marketing revenues declined $1.7 million for the year ended 1998 as compared to 1997 due primarily to lower revenues related to the Company's gas gathering and processing facilities caused by the lower natural gas prices in 1998 as compared to 1997. This decrease in revenues was partially offset by an increase in marketing revenues due to higher margins realized and by a decrease in the related cost of gas, resulting in a constant operating margin from 1997 to 1998. Pipeline and marketing revenues declined from $31 million in 1996 to $24 million in 1997 with the absence of the higher margins created from the high volatility in the natural gas markets during early 1996, partially offset by an increase in revenues related to the Company's gas gathering and processing facilities. This increase in gas gathering and processing revenues was substantially offset by an increase in the related cost of gas. A decision to dispose of the pipeline assets was made in September 1998. At that time, the Company also announced its intentions to exit its third-party marketing business and to explore alternatives for marketing its equity production, including outsourcing. Subsequent to year-end, Seagull entered into an agreement with a third-party to buy substantially all of the Company's domestic production. With the elimination of the pipeline and marketing function, Seagull was able to reduce staff by approximately 25 employees and effectively closed all derivative financial positions prior to December 31, 1998. Income and costs related to the Company's commodity hedging activities were recognized in oil and gas revenues when the commodities were produced. The Company recorded $1 million, $10 million, and $9 million for 1998, 1997 and 1996, respectively, in costs 25 28 SEAGULL ENERGY CORPORATION related to equity hedging activities, including costs related to the monetary production payment hedges of approximately $1 million, $3 million and $4 million in 1998, 1997 and 1996, respectively. The Company also recorded hedging costs related to third-party marketing activities of $5 million in costs, $3 million in costs and $0.5 million in income for 1998, 1997 and 1996, respectively.
PRODUCTION AND UNIT PRICE BY AREA Net Daily Production Unit Price ----------------------------------------- ----------------------------------------- Year Ended December 31, Year Ended December 31, ----------------------------------------- ----------------------------------------- 1998 1997 1996 1998 1997 1996 ----------- ---------- ----------- ----------- ----------- ---------- Gas Sales(*): Domestic .............. 285 303 318 $ 2.05 $ 2.34 $ 2.17 Canada (sold in 1997) . -- 37 58 -- 1.63 1.32 Cote d'Ivoire ......... 9 6 4 1.59 1.93 1.77 Indonesia and other ... 8 11 12 2.23 3.18 3.36 ------ ------ ------ ------ ------ ------ 302 357 392 $ 2.04 $ 2.29 $ 2.08 ====== ====== ====== ====== ====== ====== Oil and NGL Sales(*): Domestic ............. 5,025 4,830 4,264 $11.41 $17.60 $19.03 Canada (sold in 1997)....... -- 665 985 -- 16.46 16.77 Egypt ................ 10,965 9,268 3,565 11.92 18.26 21.56 Cote d'Ivoire ........ 986 1,653 1,395 10.51 19.34 20.04 Tatarstan ............ 4,099 4,143 3,053 7.67 14.26 13.98 Indonesia and other .. 196 152 147 13.38 19.31 19.58 ------ ------ ------ ------ ------ ------ 21,271 20,711 13,409 $10.93 $17.34 $18.50 ====== ====== ====== ====== ====== ======
(*) Natural gas is stated in MMcf and $ per Mcf. Oil and NGLs are stated in Bbl and $ per Bbl. Production Expenses -- Production expenses for 1998 decreased $5 million from 1997's $116 million, primarily due to the sale of the Company's Canadian operations in October 1997, partially offset by increases in production expenses in Egypt. Production expenses increased to $4.22 per BOE for 1998 from $3.95 per BOE for 1997. Production expenses for 1997 increased approximately $14 million over 1996, primarily due to the increased production associated with the Company's Egyptian operations and increased domestic operating expenses. This increase in production expenses associated with the Company's domestic operations was the primary reason for the $0.40 per BOE increase in production expense per equivalent unit of production to $3.95 per BOE for 1997 over 1996. Increased production taxes as natural gas prices increased, a change in the mix of producing properties and an increase in transportation expenses were the major contributing factors to the increase in domestic operating expenses during 1997. Exploration Charges -- In comparison to 1997, exploration charges for 1998 were approximately $18 million higher for the year primarily due to increases in dry hole expense and 26 29 SEAGULL ENERGY CORPORATION impairment of leaseholds, both domestically and on certain of the Company's Egyptian concessions. Exploration charges declined $8.7 million for the year ended 1997 as compared to 1996 due to decreases in dry hole costs, domestically and in Canada, and in G&G expense, primarily in Cote d'Ivoire. Depreciation, Depletion and Amortization -- The decrease in depreciation, depletion and amortization ("DD&A") expense to $157 million for 1998 from $160 million for the prior year is primarily due to the decrease in domestic gas production and the sale of the Company's Canadian operations, partially offset by increased oil production in Egypt and an increase in the DD&A expense per equivalent unit of production related to the Company's Egyptian operations. The downward revision of reserves in the Egyptian concessions previously discussed and the sale of Canadian properties, which had an average DD&A expense of less than $3.00 per BOE, combined to increase DD&A expense per equivalent unit of production for oil and gas producing activities to $5.93 per BOE from $5.42 per BOE for 1998 and 1997, respectively. DD&A expense per equivalent unit of production increased to $5.42 per BOE in 1997 from $4.98 per BOE in 1996 and combined with the increase in Egyptian production to produce a 10% increase in DD&A expense for the O&G segment. A change in the mix of the properties being produced internationally was the primary factor for the increase, partially offset by a decrease in DD&A expense related to Canadian oil and gas properties. Noncash Impairments -- During the third quarter of 1998, the Company recorded noncash impairment charges of $74 million related to its oil and gas assets located in Egypt. The impairments of the oil and gas assets were primarily a result of disappointing well performance, much lower oil and natural gas prices and a lack of any perceived significant near-term improvement in oil prices that led to a reduction in reserves at Seagull's East Zeit, South Hurghada and East Beni Suef concessions. The oil and gas impairment tests were based upon estimates of future cash flows using an initial crude oil price of approximately $11 per barrel, escalated by quoted forward market prices when available and moderate escalation thereafter. There are no future cash flows from gas, as there is no gas production from these assets. Future cash flows at September 30, 1998 were based upon the Company's estimate of proved reserves. No probable and possible reserves were taken into consideration in this particular circumstance because they were not justified by economic conditions, actual or planned drilling. During this quarter, the Company also decided to dispose of nonstrategic pipeline assets, which resulted in an additional noncash impairment of $4 million related to those assets. The impairment reflected the difference between the recorded book value of the pipeline assets and the net realizable value expected to be received upon disposal of the assets. 27 30 SEAGULL ENERGY CORPORATION CAPITAL SPENDING AND OIL AND GAS RESERVES OIL AND GAS OPERATIONS CAPITAL EXPENDITURES AND ACQUISITIONS (Amounts in Thousands)
Year Ended December 31, ------------------------------------------ 1998 1997 1996 ------------ ------------- ------------- Capital Expenditures: Lease acquisitions ................ $ 40,718 $ 23,141 $ 12,986 Exploration ....................... 83,526 95,681 77,774 Development ....................... 132,331 137,806 108,763 -------- -------- -------- 256,575 256,628 199,523 Other oil and gas operations ...... 788 885 228 -------- -------- -------- Total oil and gas operations ...... $257,363 $257,513 $199,751 ======== ======== ======== Acquisitions of oil and gas properties $126,895 $ 17,665 $ 90,867 ======== ======== ========
Capital expenditures in 1998, excluding acquisitions, remained unchanged from 1997. The absence of the Company's Canadian operations, which had expenditures of $13 million in 1997, and a decline in Egyptian capital expenditures were offset by increased expenditures related to the Company's domestic operations. Spending outside North America in 1998 totaled $87 million, of which $28 million was for exploration, $48 million for exploitation and $11 million for leasehold acquisitions. Seagull participated in the drilling of 38 exploratory wells during 1998, of which 12 were successful. Another 10 exploratory wells were in progress at year-end. Of the successes, seven were in the U.S., four in Egypt and one in Cote d'Ivoire. O&G capital expenditures increased to $257 million in 1997, up 29% from $200 million in 1996. Spending outside North America totaled $103 million, of which $43 million was for exploration and $60 million for exploitation. On June 1, 1998, the Company completed the purchase of the stock of BRG Petroleum, Inc. and its related partnership interests for $103 million in cash, net of cash acquired of $2 million and noncash deferred tax liabilities of $25 million. The assets acquired include proved oil and gas reserves of 102 Bcfe. BRG operated approximately 70 percent of its 600 oil and gas wells located in approximately 140 fields. At year-end 1998, daily production from these acquired properties averaged approximately 20 MMcf of gas and 450 barrels of oil and natural gas liquids. The most significant of these assets are concentrated in East Texas, primarily in Freestone, Upshur, Rusk and Nacogdoches counties. During the fourth quarter of 1998, Seagull sold some of its less strategic E&P properties and various nonstrategic pipeline assets. The sale of these assets, and the additional pipeline asset sales expected to occur in early 1999, were steps taken to reduce debt and focus the Company's attention on assets within core areas. Prior to the sales, daily production from the E&P properties sold averaged approximately 18 MMcf of gas and 480 barrels of oil and natural gas liquids. The total reserves sold associated with these 28 31 SEAGULL ENERGY CORPORATION properties was approximately 12 MMBOE. The pipeline assets contributed $3 million, $5 million and $4 million in revenues for the years ended December 31, 1998, 1997 and 1996, respectively, but did not have a material effect on operating profit for any of these periods. Through drilling and proved property acquisitions, the Company replaced 90% of its production during 1998, including downward revisions of 11 MMBOE, at a cost of $16.32 per BOE and 158% of its production over the five-year period ended December 31, 1998 at a cost of $6.86 per BOE. Seagull's proved oil and gas reserves decreased from 217 MMBOE at year-end 1997 to 204 MMBOE at December 31, 1998, because of reserve declines due to lower commodity prices, disappointing well performance in certain Egyptian concessions and the nonstrategic property sales, partially offset by the 17 MMBOE purchased from BRG Petroleum. The standardized measure of discounted future net cash flows before taxes for Seagull's proved oil and gas reserves, calculated based on Securities and Exchange Commission criteria, decreased to $776 million at December 31, 1998 compared with $1.2 billion at the end of 1997. This decrease was primarily the result of significantly lower year-end commodity prices at December 31, 1998 compared to December 31, 1997. Year-end calculations were made using an average price of $9.06 and $15.41 per Bbl for oil, condensate and NGL and $2.03 and $2.42 per Mcf for gas for 1998 and 1997, respectively. The Company's average realized prices for the year ended December 31, 1998 were $10.93 per Bbl for oil, condensate and NGL and $2.04 per Mcf for gas. The Company's average realized prices for the month ended January 31, 1999 were $9.63 per Bbl for oil, condensate and NGL and $1.79 per Mcf for gas. Because the disclosure requirements for discounted future net cash flows are standardized by the SEC, significant changes can occur in these estimates based upon 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 17 to Consolidated Financial Statements. OUTLOOK As the O&G segment represents the majority of the Company's operations, continued depressed commodity prices will have a significant negative impact on the Company's total operating results. Oil prices in particular have reached multi-year lows in some markets in recent months and gas prices for the current winter season have been lower than in recent winters. Faced with continued depressed oil prices, if the OEI merger is completed, Seagull and New Ocean plan to spend significantly less on capital expenditures in 1999. Capital expenditures will focus on contractually obligated expenditures and drilling results that will yield immediate cash flow opportunities. With this decrease in capital expenditures, the Company may not be able to replace reserves or maintain production at current levels. 29 32 SEAGULL ENERGY CORPORATION ALASKA TRANSMISSION AND DISTRIBUTION (Amounts in Thousands Except Degree Days)
Year Ended December 31, ------------------------------------------ 1998 1997 1996 ------------ ------------- ------------- Revenues ............................... $93,592 $95,719 $97,616 Cost of gas sold ....................... 41,232 43,684 42,600 ------- ------- ------- Gross margin ........................... 52,360 52,035 55,016 Operations and maintenance expense ..... 20,688 21,079 21,045 Depreciation, depletion and amortization 8,529 8,368 8,190 ------- ------- ------- Operating profit ....................... $23,143 $22,588 $25,781 ======= ======= ======= Operating Data: Degree days (*) ..................... 10,026 9,727 10,975
(*) A measure of weather severity calculated by subtracting the mean temperature for each day from 65 degrees Fahrenheit. More degree days equate to colder weather. Operating profit of the Alaska transmission and distribution segment of the Company is primarily a function of the weather in the Anchorage, Alaska area during the winter heating season. Cold weather equates to higher gas volumes delivered, resulting in increased profits. This relationship between operating profit and degree days held true in 1998 and 1997 as the percentage change in operating profit (2% increase in 1998 versus 1997 and 12% decrease in 1997 versus 1996) was approximately equal to the percentage change in degree days (3% increase in 1998 and 11% decrease in 1997). OUTLOOK Even though its activities may be somewhat different from the Company's other O&G-oriented activities, management expects ENSTAR Alaska's stable cash flows and activities to continue to contribute to Seagull's goals and financial stability. Future operating profit for this segment will be affected by weather, regulatory action and customer growth in ENSTAR Alaska's service area. The 1998 degree days were 3% under the previous 30-year average degree days. The Company expects customer growth to continue at a modest 2% to 3% rate. During the 1998 summer construction season, approximately 67 miles of new distribution pipelines were installed to connect some 3,000 new customers (a 3% increase in customers over 1997). ENSTAR Alaska purchases all of its natural gas under long-term contracts in which the price is indexed to changes in the price of crude oil futures contracts. However, because ENSTAR Alaska's sales prices are adjusted to include the projected cost of its natural gas, there has been and is expected to be little or no impact on margins derived from ENSTAR Alaska's gas sales as a result of fluctuations in commodity prices due to worldwide political events and changing market conditions. 30 33 SEAGULL ENERGY CORPORATION Currently, ENSTAR Alaska's supply source is confined to the Cook Inlet area. During 1997, two of the Cook Inlet area's major suppliers filed for regulatory approval to export certain quantities of gas to overseas liquified natural gas markets. ENSTAR Alaska has filed as an intervenor in these proceedings and is actively working with regulatory authorities to ensure that the future gas supply needs of its customers are met. OTHER General and administrative ("G&A") expense increased from $16 million to $18 million for 1998 primarily due to the $6 million in one-time compensation charges, partially offset by decreases in G&A expense from compensation plans that are tied directly to the market price of Seagull's common stock. The closing price of Seagull's common stock was $6.31 and $20.63 at December 31, 1998 and 1997, respectively. After excluding the effects of provisions for litigation ($4.5 million in 1997 for a proposed settlement and $3 million in 1996 covering several minor settlements), general and administrative expenses decreased from $14.4 million in 1996 to $11.6 million in 1997. This decrease in G&A expenses from 1996 to 1997 was primarily due to efficiencies realized as a result of the Global merger and a decline in expenses associated with compensation plans that are tied directly to the market price of Seagull's common stock. In November 1997, the Company, NorAm Gas Transmission Company and Arkansas Western Gas Company signed a settlement proposal regarding certain litigation. The final settlement was signed in 1998 and was substantially the same as the initial settlement proposal. The payments to NorAm and other parties settled complex litigation over contract terms, conditions and conduct for the period October 1, 1994 to the date of the settlement. Interest expense increased only slightly from $38.5 million for 1997 to $39.2 million for 1998. Despite the increase in outstanding long-term debt from $469 million at December 31, 1997 to $583 million at December 31, 1998, average debt outstanding, and therefore interest expense, was approximately the same for each of the years. Interest expense declined from $45 million in 1996 to $39 million for 1997 through utilization of the proceeds from the sale of the Company's Canadian operations in late 1997 to repay amounts outstanding under the Company's existing credit facilities. Interest cost capitalized as property, plant and equipment amounted to approximately $7 million, $7 million and $3 million in 1998, 1997 and 1996, respectively. The Company and Global Natural Resources, Inc. completed a merger in October 1996, which was accounted for as a pooling-of-interests. As a result of the merger, expenses of $10 million ($9 million after taxes) representing investment banking fees, legal, accounting and other expenses were recorded. 31 34 SEAGULL ENERGY CORPORATION Gain on sales of assets in 1997 is primarily comprised of pre-tax gains of approximately $12 million related to the sale of the Company's Canadian oil and gas operations. Seagull's tax expense changed from approximately 43% of earnings before taxes for the year ended December 31, 1997 to an approximate 29% benefit for 1998, reflecting primarily the tax benefits of the impairment of long-lived assets and one-time compensation matters. Seagull's effective tax rate for 1997 of 43% decreased from the effective tax rate of 47% for 1996 primarily due to an income tax benefit associated with the gain on the sale of the Company's Canadian operations. OUTLOOK In the current low commodity price environment, Seagull has begun implementing cost cutting measures, such as the elimination of the pipeline and marketing function and an additional reduction of approximately 100 employees, approximately 11% of total employees, in January 1999. These personnel reductions are expected to generate an annual savings of approximately $14 million, excluding severance costs of $6 million. In addition, Seagull and OEI are developing plans to integrate their operations immediately after the merger to take full advantage of the benefits and synergies the merger will create. Seagull and OEI believe that New Ocean's organizational structure will allow for substantial overhead cost savings through the consolidation of duplicative corporate and field offices and staff. LIQUIDITY AND CAPITAL RESOURCES Seagull's capital resources primarily consist of a revolving credit facility (the "Revolving Credit Facility") with a maximum commitment of $500 million, $350 million of senior, unsecured debt and money market facilities with three U.S. banks with a combined maximum commitment of $110 million. The major changes in these obligations are as follows: o The repurchase of $50 million of senior debt in the third quarter of 1998, financed through additional borrowings under the Revolving Credit Facility; o The purchase of the BRG properties for $103 million in the second quarter of 1998, financed through additional borrowings under the Revolving Credit Facility; and o The issuance of $150 million of senior notes, due 2027, in September 1997. At December 31, 1998, there was $175 million borrowed under the Revolving Credit Facility and $307 million of the unused commitment was immediately available. The Revolving Credit Facility contains certain covenants and restrictive provisions, including limitations on the incurrence of additional debt or liens, the declaration or payment of dividends and the repurchase 32 35 SEAGULL ENERGY CORPORATION or redemption of capital stock and the maintenance of certain financial ratios. Under the most restrictive of these provisions, approximately $130 million was available for payment of cash dividends on common stock or to repurchase common stock as of December 31, 1998. During the third quarter of 1998, the Company repurchased in open market transactions approximately $50 million in aggregate principal amount of its 8 5/8% Senior Subordinated Notes due 2005. These purchases were funded using borrowings under the Credit Facility. In connection with this repurchase, the Company recorded an after-tax extraordinary loss of $1 million, or $0.02 per basic and diluted share. At current interest rates under the Revolving Credit Facility, the Company expects to save approximately $1.6 million in annual interest expense by refinancing the $50 million of Senior Subordinated Notes under the Revolving Credit Facility. On June 1, 1998, the Company completed the purchase of the stock of BRG Petroleum, Inc. and its related partnership interests for $103 million in cash, excluding cash acquired of $2 million and noncash deferred tax liabilities of $25 million. The Company funded this acquisition through its existing credit facility. On September 30, 1997, Seagull issued $150 million of senior notes (the "1997 Senior Notes") at a public offering price of 99.544% of face value. The 1997 Senior Notes have a coupon of 7 1/2% and mature September 15, 2027. The 1997 Senior Notes are not redeemable prior to maturity and are not subject to any sinking fund. The net proceeds of approximately $146 million were used to repay existing debt and for general corporate purposes. The 1997 Senior Notes represent unsecured obligations of the Company and rank pari passu with all other unsecured, unsubordinated obligations of the Company. The Company has money market facilities with three U.S. banks with a combined maximum commitment of $110 million. These lines of credit bear interest at rates made available by the banks at their option and may be canceled at either Seagull's or the banks' option. There was $48 million outstanding under these money market facilities at December 31, 1998, included in accounts and notes payable. CAPITAL EXPENDITURES AND ACQUISITIONS (Amounts in Thousands)
Year Ended December 31, ------------------------------------------ 1998 1997 1996 ------------ ------------- ------------- Capital Expenditures: Oil and gas operations ............. $257,363 $257,513 $199,751 Alaska transmission and distribution 9,626 9,607 9,287 Corporate .......................... 8,308 8,488 4,424 -------- -------- -------- $275,297 $275,608 $213,462 ======== ======== ======== Acquisitions .......................... $129,276 $ 17,665 $104,420 ======== ======== ========
33 36 SEAGULL ENERGY CORPORATION Combined with the Company's long-term goal to grow its reserve base through its drilling efforts and complementary strategic acquisitions, a strong balance sheet is also a specific objective of management. In its present low commodity price environment, Seagull began a series of nonstrategic properties sales in late 1998. In 1997, Seagull also reduced its borrowings under existing bank facilities by $133 million with a portion of the proceeds from the sale of the Company's Canadian operations. During the fourth quarter of 1998, Seagull sold some of its less strategic E&P properties located away from its various core assets. During the third quarter of 1998, the Company also decided to liquidate its nonstrategic pipeline assets. As of December 31, 1998, approximately 25% of these pipeline assets had been sold. The E&P and pipeline sales generated approximately $53 million in net proceeds. Seagull is in final negotiations to sell the remaining 75% of the pipeline assets. OUTLOOK After the merger with OEI, New Ocean will have higher levels of debt and interest expense than Seagull on a stand-alone basis. This increased debt level will require the use of a substantial portion of New Ocean's cash flow to pay interest and principal on New Ocean's debt. Within the low commodity price environment, New Ocean anticipates substantially reduced capital expenditures and expects to keep capital expenditures at a level below cash flow from operations. New Ocean will have higher levels of debt and interest expense than Seagull on a stand-alone basis. The following table compares debt and leverage for Seagull and New Ocean, based on December 31, 1998 information, giving pro forma effect to the merger in the case of New Ocean:
Seagull New Ocean ------------------ ------------------ Total Debt......................... $590 million $1,939 million Debt/capitalization ratio.......... 52% 67%
The increase in total indebtedness and leverage of the combined company after the merger may have a negative impact on New Ocean's ability to realize the expected benefits of the merger, including a possible downgrade in the credit rating of the combined company. In this regard, Standard & Poor's has announced that, because of the higher leverage of the combined company and the current uncertain commodity price environment, upon completion of the merger, it will reduce Seagull's corporate credit and senior unsecured debt ratings from "BBB-" to "BB+," with a stable outlook. 34 37 SEAGULL ENERGY CORPORATION FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE This document includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact included in this document, including, without limitation, statements regarding the financial position, business strategy, production and reserve growth and other plans and objectives for the future operations of Seagull or New Ocean are forward-looking statements. Although Seagull believes that such forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will in fact occur. Important factors could cause actual results to differ materially from those in the forward-looking statements. Forward-looking statements are subject to risks and uncertainties and include whether the merger with OEI is actually completed, information concerning cost savings from the merger, integration of the businesses of OEI and Seagull, general economic conditions and possible or assumed future results of operations of Seagull or New Ocean, estimates of oil and gas production and reserves, drilling plans, future cash flows, anticipated capital expenditures and management's strategies, plans and objectives as set forth herein. When used in this document, the words "believes," "expects," "anticipates," "intends" or similar expressions are intended to identify such forward-looking statements. The following important factors, in addition to those discussed elsewhere in this document could affect the future results of the energy industry in general, and Seagull and/or New Ocean after the merger in particular, and could cause those results to differ materially from those expressed in such forward-looking statements: o Risks incident to the drilling and operation of oil and gas wells; o Future production and development costs; o The effect of existing and future laws and regulatory actions; o The political and economic climate in the foreign jurisdictions in which Seagull conducts oil and gas operations; o The effect of changes in commodity prices, hedging activities and conditions in the capital markets; o A significant delay in the expected closing of the merger (or a failure to consummate the merger); and o Competition from others in the energy industry. ENVIRONMENTAL To date, 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 35 38 SEAGULL ENERGY CORPORATION to predict the impact that compliance with future regulations may have on capital expenditures, earnings and competitive position. YEAR 2000 Historically, most computer systems (including microprocessors embedded into field equipment and other machinery) utilized software that recognized a calendar year by its last two digits. Beginning in the year 2000, these systems will require modification to distinguish twenty-first century dates from twentieth century dates ("Year 2000 issues"). Accordingly, the Company has initiated a comprehensive plan to address the Year 2000 issues associated with its operations and business (the "Year 2000 plan"). Seagull's Board of Directors has been briefed about the Year 2000 problem generally and as it may affect Seagull. The Board has created a committee consisting of senior executives and a representative from the Board to oversee the adoption and implementation of the Year 2000 plan covering all of Seagull's business units. The plan has been developed with an aim towards taking reasonable steps to prevent Seagull's mission-critical functions from being impaired due to the Year 2000 problem. The plan includes several phases - (i) assessment of all of the Company's systems and technology; (ii) implementation and testing of modifications to or replacements of existing systems and technology, both financial and operational; (iii) communication with key business partners regarding Year 2000 issues; and (iv) contingency planning. In planning and developing the project, Seagull has considered both its information technology ("IT") and its non-IT systems. The term "computer equipment and software" includes systems that are commonly thought of as IT systems, including accounting, data processing, telephone systems, scanning equipment, and other miscellaneous systems. Non-IT systems include alarm systems, fax machines, monitors for field operations, and other miscellaneous systems. Both IT and non-IT systems may contain embedded technology, which complicates Seagull's Year 2000 identification, assessment, remediation, and testing efforts. Based upon its identification and assessment efforts to date, Seagull is in the process of replacing the computer equipment and software it currently uses to become Year 2000 compliant. In addition, in the ordinary course of replacing computer equipment and software, Seagull plans to obtain replacements that are Year 2000 compliant. During 1997, the Company utilized both internal and external resources to test, reprogram or replace many of its IT systems, primarily financial and operational software, for necessary modifications identified in its assessment of Year 2000 issues. As of the date of this filing, the Company estimates that approximately 80% of its Year 2000 plan related to these IT systems has been implemented and anticipates that the remainder of the plan, including any necessary remedial action, will be completed by June 30, 1999. During September 1998, the Company 36 39 SEAGULL ENERGY CORPORATION began utilizing internal and external resources to evaluate its vulnerability to Year 2000 issues related to its non-IT systems, primarily field operational systems and equipment. The Company is working with Stone & Webster to identify embedded chips that may need to be replaced or avoided. Stone & Webster is an internationally recognized engineering firm that has developed and maintains a database of systems that are susceptible to Year 2000 problems. The database comparisons that have been completed to date have not revealed any material problems. This effort should be completed by the end of the first quarter of 1999. Areas that will require contingency plans will be determined as part of these efforts relative to embedded chips and microcontrollers and as a result of our correspondence and meetings with key business partners. This effort should be completed by the end of the second quarter of 1999. The Company has also initiated formal communications with all of its key business partners to determine the extent to which the Company is vulnerable to those third parties' potential failure to remediate their own Year 2000 issues. Key business partners were identified in four categories of companies including: (a) major vendors and contractors (including banks and other financial service companies); (b) major customers; (c) utility companies; and (d) third party operators of major oil and gas properties. Questionnaires were sent to the Company's key business partners to confirm their Year 2000 activities and follow-up letters, telephone calls, and meetings are being used, as appropriate, to obtain additional information. During the fourth quarter of 1998, the Company began developing contingency plans for its financial and operational systems. Seagull's contingency plans are being designed to minimize the disruptions or other adverse effects resulting from Year 2000 incompatibilities regarding these systems, and to facilitate the early identification and remediation of Year 2000 problems that first manifest themselves after January 1, 2000. The failure to correct a material Year 2000 issue could result in an interruption in, or a failure of, certain normal business activities, resulting in a material, adverse affect on the Company's results of operations, liquidity and financial position. The Company's remediation efforts are expected to reduce significantly the Company's level of uncertainty about Year 2000 compliance and the possibility of interruptions of normal operations. However, there can be no guarantee that other companies' systems, on which the Company's systems rely, will be timely converted, or that a failure to convert by another company, or a conversion that is incompatible with the Company's systems, would not have a material adverse effect on the Company. Disruptions to the oil and gas transportation networks controlled by third-party carriers could result in reduced production volumes delivered to market. In addition, risks associated with foreign operations may increase with the uncertainty of Year 2000 compliance by foreign governments and their supporting infrastructures. The Company's Year 2000 task force members have been asked to investigate the compliance activities of certain third parties and foreign governments to determine the risks to the Company. This investigation is in progress. 37 40 SEAGULL ENERGY CORPORATION In a recent Securities and Exchange Commission release regarding Year 2000 disclosures, the Securities and Exchange Commission stated that public companies must disclose the most reasonably likely worst case Year 2000 scenario. Analysis of the most reasonably likely worst case Year 2000 scenarios Seagull may face leads to contemplation of the following possibilities which, though unlikely in some or many cases, must be included in any consideration of worst cases: widespread failure of electrical, gas, and similar supplies by utilities serving Seagull domestically and internationally; widespread disruption of the services of communications common carriers domestically and internationally; similar disruption to means and modes of transportation for Seagull and its employees, contractors, suppliers, and customers; significant disruption to Seagull's ability to gain access to, and remain working in, office buildings and other facilities; the failure of substantial numbers of Seagull's mission-critical information (computer) hardware and software systems, including both internal business systems and systems (such as those with embedded chips) controlling operational facilities such as onshore and offshore oil and gas rigs, oil and gas pipelines and gas plants domestically and internationally, the effects of which would have a cumulative material adverse impact on Seagull. Among other things, Seagull could face substantial claims by customers or loss of revenues due to service interruptions, inability to fulfill contractual obligations, inability to account for certain revenues or obligations or to bill customers accurately and on a timely basis, and increased expenses associated with litigation, stabilization of operations following mission-critical failures, and the execution of contingency plans. Seagull could also experience an inability by customers, traders, and others to pay, on a timely basis or at all, obligations owed to Seagull. Under these circumstances, the adverse effect on Seagull, and the diminution of Seagull's revenues, would be material, although not quantifiable at this time. Further in this scenario, the cumulative effect of these failures could have a substantial adverse effect on the economy, domestically and internationally. The adverse effect on Seagull, and the diminution of Seagull's revenues, from a domestic or global recession or depression is also likely to be material, although not quantifiable at this time. The total costs for the Year 2000 compliance review, evaluation, assessment and remediation efforts are not expected to be in excess of $1 million. Of this amount, approximately $0.3 million had been incurred as of December 31, 1998. ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes standards of accounting for and disclosures of derivative instruments and hedging activities. This statement is effective for fiscal years beginning after June 15, 1999. The Company has not yet determined the impact of this statement on the Company's financial condition or results of operations. 38 41 SEAGULL ENERGY CORPORATION 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 ------------------ ------------------ ------------------- -------------------- 1998: REVENUES ................... $ 122,325 $ 103,529 $ 93,099 $ 107,218 OPERATING PROFIT (LOSS) (2) $ 14,201 $ 5,575 $(108,817) $ (9,163) NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM(2) ... $ 3,155 $ (1,051) $ (86,607) $ (11,162) EARNINGS (LOSS) PER SHARE BEFORE EXTRAORDINARY ITEM: BASIC .................... $ 0.05 $ (0.02) $ (1.37) $ (0.18) DILUTED(1) ............... $ 0.05 $ (0.02) $ (1.37) $ (0.18) NET INCOME (LOSS) (2) ...... $ 3,155 $ (1,051) $ (87,638) $ (11,162) EARNINGS (LOSS) PER SHARE: BASIC .................... $ 0.05 $ (0.02) $ (1.39) $ (0.18) DILUTED(1) ............... $ 0.05 $ (0.02) $ (1.39) $ (0.18) 1997: Revenues ................... $ 159,573 $ 122,180 $ 120,655 $ 146,959 Operating Profit ........... $ 46,606 $ 17,811 $ 13,456 $ 32,603 Net Income(3) .............. $ 17,254 $ 2,621 $ 3,202 $ 26,053 Earnings per Share: Basic .................... $ 0.27 $ 0.04 $ 0.05 $ 0.41 Diluted(1) ............... $ 0.27 $ 0.04 $ 0.05 $ 0.41
(1) 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. (2) Includes $78 million pre-tax noncash impairment of long-lived assets and $6 million one-time pre-tax compensation charges during the quarter ended September 30, 1998. (3) Includes $12 million pre-tax gain on sale of Canadian oil and gas operations during the quarter ended December 31, 1997. ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK DISCLOSURES ABOUT MARKET RISK Seagull is exposed to market risk, including adverse changes in commodity prices, interest rates and foreign currency exchange rates as discussed below. Commodity Price Risk -- The Company produces, purchases and sells natural gas, crude oil, and NGLs. As a result, the Company's financial results can be significantly affected as these commodity prices fluctuate widely in response to changing market forces. The Company made a limited use of a variety of derivative financial instruments only for non-trading purposes as a 39 42 SEAGULL ENERGY CORPORATION hedging strategy to manage commodity prices associated with oil and gas sales and to reduce the impact of commodity price fluctuations. The Company used the hedge or deferral method of accounting for these instruments and, as a result, gains and losses on commodity derivative financial instruments were generally offset by similar changes in the realized prices of the commodities. As discussed earlier, Seagull effectively closed all derivative financial positions prior to December 31, 1998. Interest Rate Risk -- From time to time, the Company has entered into various financial instruments, such as interest rate swaps and interest rate lock agreements, to manage the impact of changes in interest rates. Currently, Seagull has no open interest rate swap or interest rate lock agreements. Therefore, the Company's exposure to changes in interest rates primarily results from its short-term and long-term debt with both fixed and floating interest rates. The following table presents principal or notional amounts (stated in thousands) and related average interest rates by year of maturity for the Company's debt obligations at December 31, 1998:
1999 2000 2001 2002 2003 Thereafter Total Fair Value ---- ---- ---- ---- ---- ---------- ----- ---------- Notes payable: Variable rate $ 47,800 $ - $ - $ - $ - $ - $ 47,800 $ 47,800 Average interest rate 6.5% - - - - - 6.5% Long-term debt, including current maturities: Variable rate $ - $ - $ - $ - $175,000 $ - $175,000 $175,000 Average interest rate - - - - 5.4% - 5.4% Fixed rate $ 7,147 $ 30,180 $ 9,220 $ 3,265 $ 3,315 $364,230 $417,357 $390,368 Average interest rate 8.1% 5.3% 8.2% 8.3% 8.3% 8.0% 7.6%
Foreign Currency Exchange Rate Risk -- The Company conducts business in several foreign currencies and is subject to foreign currency exchange rate risk on cash flows related to sales, expenses, financing and investing transactions. However, because predominantly all transactions in Seagull's existing foreign operations, other than Tatarstan, are denominated in U.S. dollars, the U.S. dollar is the functional currency for all those operations. Exposure from market rate fluctuations related to activities in Tatarstan is not material. 40 43 SEAGULL ENERGY CORPORATION ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF MANAGEMENT TO SHAREHOLDERS The management of Seagull Energy Corporation is responsible for the preparation and integrity of financial statements and related data in this Annual Report on Form 10-K, 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 auditing staff which reviews the adequacy of the internal accounting controls and compliance with them. Management has considered the recommendations of the internal auditing staff 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 Seagull Energy Corporation as of December 31, 1998 have been audited by KPMG LLP, independent certified public accountants, and their report is included herein. Their audits were 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, the internal auditing staff 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 the internal auditing staff 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/GORDON L. MCCONNELL - ------------------- ---------------------- ---------------------- JAMES T. HACKETT WILLIAM L. TRANSIER GORDON L. MCCONNELL Chairman of the Board, Executive Vice President Vice President and President and Chief and Chief Financial Officer Controller Executive Officer February 15, 1999 41 44 SEAGULL ENERGY CORPORATION INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Seagull Energy Corporation: We have audited the accompanying consolidated balance sheets of Seagull Energy Corporation and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, comprehensive income, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1998. 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 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Seagull Energy Corporation and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998 in conformity with generally accepted accounting principles. /S/ KPMG LLP - ------------ Houston, Texas February 9, 1999 42 45 SEAGULL ENERGY CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in Thousands Except Per Share Data)
Year Ended December 31, --------------------------------------- 1998 1997 1996 --------- --------- --------- Revenues: Oil and gas operations ..................................... $ 332,579 $ 453,648 $ 419,595 Alaska transmission and distribution ....................... 93,592 95,719 97,616 --------- --------- --------- 426,171 549,367 517,211 Costs of Operations: Operations and maintenance ................................. 158,292 165,462 147,294 Alaska transmission and distribution cost of gas sold ...... 41,232 43,684 42,600 Exploration charges ........................................ 59,787 42,085 50,772 Depreciation, depletion and amortization ................... 169,369 171,516 155,669 Impairment of long-lived assets ............................ 77,827 -- -- General and administrative ................................. 17,868 16,144 17,433 --------- --------- --------- 524,375 438,891 413,768 --------- --------- --------- Operating Profit (Loss) ....................................... (98,204) 110,476 103,443 Other (Income) Expense: Interest expense ........................................... 39,184 38,533 44,842 Merger expenses ............................................ -- -- 9,982 Gain on sales of assets, net ............................... (127) (11,311) (1,088) Interest income and other .................................. (3,340) (2,946) (5,149) --------- --------- --------- 35,717 24,276 48,587 --------- --------- --------- Income (Loss) Before Income Taxes and Extraordinary Item ...... (133,921) 86,200 54,856 Income Tax Expense (Benefit) .................................. (38,256) 37,070 25,895 --------- --------- --------- Income (Loss) Before Extraordinary Item ....................... (95,665) 49,130 28,961 Extraordinary Item ............................................ (1,031) -- -- --------- --------- --------- Net Income (Loss) ............................................. $ (96,696) $ 49,130 $ 28,961 ========= ========= ========= Earnings (Loss) Per Share Before Extraordinary Item: Basic ...................................................... $ (1.51) $ 0.78 $ 0.46 ========= ========= ========= Diluted .................................................... $ (1.51) $ 0.77 $ 0.46 ========= ========= ========= Earnings (Loss) Per Share: Basic ...................................................... $ (1.53) $ 0.78 $ 0.46 ========= ========= ========= Diluted .................................................... $ (1.53) $ 0.77 $ 0.46 ========= ========= ========= Weighted Average Number of Common Shares Outstanding: Basic ...................................................... 63,159 63,022 62,584 ========= ========= ========= Diluted .................................................... 63,159 63,791 63,552 ========= ========= =========
See accompanying Notes to Consolidated Financial Statements. 43 46 SEAGULL ENERGY CORPORATION CONSOLIDATED BALANCE SHEETS (Amounts in Thousands Except Share Data)
December 31, ---------------------------- 1998 1997 ----------- ----------- ASSETS Current Assets: Cash and cash equivalents ................................................... $ 25,734 $ 45,654 Accounts receivable, net .................................................... 95,620 147,442 Inventories ................................................................. 15,663 13,635 Prepaid expenses and other .................................................. 15,764 16,240 ----------- ----------- Total Current Assets ...................................................... 152,781 222,971 Property, Plant and Equipment - at cost: Oil and gas properties (successful efforts method) .......................... 1,977,208 1,742,725 Utility plant ............................................................... 254,699 246,670 Other ....................................................................... 69,275 64,288 ----------- ----------- 2,301,182 2,053,683 Accumulated Depreciation, Depletion and Amortization ........................... 1,090,855 908,849 ----------- ----------- 1,210,327 1,144,834 Other Assets ................................................................... 52,982 43,261 ----------- ----------- Total Assets ................................................................... $ 1,416,090 $ 1,411,066 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts and notes payable .................................................. $ 171,642 $ 159,138 Accrued expenses ............................................................ 32,905 47,625 Current maturities of long-term debt ........................................ 7,147 7,097 ----------- ----------- Total Current Liabilities ................................................. 211,694 213,860 Long-Term Debt ................................................................. 582,675 469,017 Other Noncurrent Liabilities ................................................... 51,168 51,168 Deferred Income Taxes .......................................................... -- 14,126 Redeemable Bearer Shares ....................................................... 15,462 15,691 Commitments and Contingencies .................................................. -- -- Shareholders' Equity: Common stock, $.10 par value; authorized 100,000,000 shares; issued 64,387,824 and 63,877,442 shares, respectively ........................... 6,439 6,388 Additional paid-in capital .................................................. 493,914 493,829 Retained earnings ........................................................... 68,239 164,935 Less - note receivable from employee stock ownership plan ................... (2,178) (2,990) Less - treasury stock, at cost; 471,376 and 861,314 shares, respectively .... (8,187) (14,958) Less - notes receivable for stock ........................................... (2,083) -- Less - deferred compensation ................................................ (1,053) -- ----------- ----------- Total Shareholders' Equity ................................................ 555,091 647,204 ----------- ----------- Total Liabilities and Shareholders' Equity ................................. $ 1,416,090 $ 1,411,066 =========== ===========
See accompanying Notes to Consolidated Financial Statements. 44 47 SEAGULL ENERGY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in Thousands)
Year Ended December 31, --------------------------------------- 1998 1997 1996 --------- --------- --------- OPERATING ACTIVITIES: Net income (loss) ........................................................ $ (96,696) $ 49,130 $ 28,961 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation, depletion and amortization .............................. 169,369 171,516 155,669 Impairment of long-lived assets ....................................... 77,827 -- -- Amortization of deferred financing costs .............................. 1,918 2,037 2,969 Deferred income taxes ................................................. (47,465) 9,418 8,701 Dry hole expense ...................................................... 36,760 20,062 23,671 Gain on sales of assets, net .......................................... (127) (11,311) (1,088) Extraordinary item .................................................... 1,031 -- -- Other ................................................................. 4,567 8,735 1,660 --------- --------- --------- 147,184 249,587 220,543 Changes in operating assets and liabilities, net of acquisitions: Decrease in short-term securities ................................... -- -- 5,014 Decrease (increase) in accounts receivable .......................... 54,754 39,211 (53,531) Decrease (increase) in inventories, prepaid expenses and other ................................................ (4,683) (10,797) 9,731 Increase (decrease) in accounts and notes payable ................... (32,893) 9,779 53,281 Increase (decrease) in accrued expenses and other ................... (15,644) (25,031) 23,401 --------- --------- --------- Net Cash Provided By Operating Activities ............................. 148,718 262,749 258,439 INVESTING ACTIVITIES: Capital expenditures ..................................................... (275,297) (275,608) (213,462) Acquisitions of oil and gas properties, net of cash acquired ............. (102,317) (17,665) (90,867) Acquisitions of other assets and liabilities, net of cash acquired .............................................................. (2,381) -- (13,553) Proceeds from sales of property, plant and equipment ..................... 53,008 186,494 10,557 --------- --------- --------- Net Cash Used In Investing Activities ................................. (326,987) (106,779) (307,325) FINANCING ACTIVITIES: Proceeds from debt ....................................................... 553,555 821,097 407,738 Principal payments on debt ............................................... (394,744) (938,554) (368,754) Proceeds from sales of common stock ...................................... 617 7,422 4,401 Purchase of treasury stock ............................................... -- (11,691) -- Premiums paid on debt purchased .......................................... (934) -- -- Other .................................................................... (145) (3,846) (1,051) --------- --------- --------- Net Cash Provided By (Used In) Financing Activities ................... 158,349 (125,572) 42,334 Effect of exchange rate changes on cash .................................. -- (28) 359 --------- --------- --------- Increase (Decrease) In Cash And Cash Equivalents ......................... (19,920) 30,370 (6,193) Cash And Cash Equivalents At Beginning Of Year ........................... 45,654 15,284 21,477 --------- --------- --------- Cash And Cash Equivalents At End Of Year ................................. $ 25,734 $ 45,654 $ 15,284 ========= ========= =========
See accompanying Notes to Consolidated Financial Statements. 45 48 SEAGULL ENERGY CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Amounts in Thousands)
Year Ended December 31, ------------------------------------ 1998 1997 1996 -------- -------- -------- Net Income (Loss) ................................ $(96,696) $ 49,130 $ 28,961 Other Comprehensive Income, Net of Tax: Foreign currency translation adjustment ....... -- (51) (338) -------- -------- -------- Comprehensive Income (Loss) ...................... $(96,696) $ 49,079 $ 28,623 ======== ======== ========
See accompanying Notes to Consolidated Financial Statements. 46 49 SEAGULL ENERGY CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Amounts in Thousands)
1998 1997 1996 --------- --------- --------- COMMON STOCK: Beginning of Year ............................................... $ 6,388 $ 6,307 $ 6,598 Issuance of Common Stock ........................................ 51 81 44 Retirement of Treasury Stock Pursuant to the Global Merger ...... -- -- (335) --------- --------- --------- End of Year ..................................................... $ 6,439 $ 6,388 $ 6,307 ========= ========= ========= ADDITIONAL PAID-IN CAPITAL: Beginning of Year ............................................... $ 493,829 $ 483,118 $ 496,377 Exercise of Employee Stock Options .............................. 2,662 7,341 4,357 Deferred Compensation ........................................... 1,564 -- -- Treasury Stock Contribution to ESOP ............................. (4,310) -- -- Retirement of Treasury Stock Pursuant to the Global Merger ...... -- -- (19,021) Other ........................................................... 169 3,370 1,405 --------- --------- --------- End of Year ..................................................... $ 493,914 $ 493,829 $ 483,118 ========= ========= ========= RETAINED EARNINGS: Beginning of Year ............................................... $ 164,935 $ 115,805 $ 86,844 Net Income (Loss) for the Year .................................. (96,696) 49,130 28,961 --------- --------- --------- End of Year ..................................................... $ 68,239 $ 164,935 $ 115,805 ========= ========= ========= ACCUMULATED OTHER COMPREHENSIVE INCOME: Beginning of Year ............................................... $ -- $ 51 $ 389 Foreign Currency Translation Adjustment, Net of Tax: Loss arising during the year ................................. -- (769) (338) Reclassification adjustment .................................. -- 718 -- --------- --------- --------- End of Year ..................................................... $ -- $ -- $ 51 ========= ========= ========= NOTE RECEIVABLE FROM ESOP: Beginning of Year ............................................... $ (2,990) $ (4,284) $ (4,922) Repayment of Note Receivable .................................... 812 1,294 638 --------- --------- --------- End of Year ..................................................... $ (2,178) $ (2,990) $ (4,284) ========= ========= ========= TREASURY STOCK: Beginning of Year ............................................... $ (14,958) $ (3,267) $ (22,665) Treasury Stock Contribution to ESOP ............................. 6,771 -- -- Purchase of Treasury Stock ...................................... -- (11,691) -- Retirement of Treasury Stock Pursuant to the Global Merger ...... -- -- 19,356 Other ........................................................... -- -- 42 --------- --------- --------- End of Year ..................................................... $ (8,187) $ (14,958) $ (3,267) ========= ========= ========= NOTES RECEIVABLE FOR STOCK: Beginning of Year ............................................... $ -- $ -- $ -- Issuance of Stock for Notes Receivable .......................... (2,083) -- -- --------- --------- --------- End of Year ..................................................... $ (2,083) $ -- $ -- ========= ========= =========
47 50 SEAGULL ENERGY CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED) (Amounts in Thousands)
1998 1997 1996 --------- --------- --------- DEFERRED COMPENSATION: Beginning of Year ............................................... $ -- $ -- $ -- Issuance of Restricted Stock .................................... (1,658) -- -- Amortization of Compensation Expense ............................ 605 -- -- --------- --------- --------- End of Year ..................................................... $ (1,053) $ -- $ -- ========= ========= ========= TOTAL SHAREHOLDERS' EQUITY, END OF YEAR ......................... $ 555,091 $ 647,204 $ 597,730 ========= ========= =========
See accompanying Notes to Consolidated Financial Statements. 48 51 SEAGULL ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION Seagull Energy Corporation (the "Company" or "Seagull") is an international oil and gas company engaged in exploration and development activities in the United States, Egypt, Cote d'Ivoire, Indonesia and the Russian Republic of Tatarstan. It also transports and distributes natural gas in the Anchorage, Alaska metropolitan area. On November 24, 1998, Seagull and Ocean Energy, Inc. ("OEI") executed an Agreement and Plan of Merger. The merger must be approved by the shareholders of both OEI and Seagull and the Alaska Public Utilities Commission ("APUC") which regulates Seagull's operations in the Anchorage, Alaska metropolitan area. If the merger is approved, OEI stockholders would receive one share of Seagull common stock in exchange for each share of OEI common stock that they own. Management expects that the transaction will close during the first quarter of 1999. See Note 18 for additional discussion. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General -- The accompanying consolidated financial statements of Seagull have been prepared according to generally accepted accounting principles and pursuant to the rules and regulations of the Securities and Exchange Commission. These accounting principles require the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. Consolidation -- The accompanying consolidated financial statements include the accounts of Seagull Energy Corporation and its majority-owned entities. All significant intercompany transactions have been eliminated. Regulation -- The Company operates in Alaska through a division of the Company and a wholly owned subsidiary (collectively referred to herein as "ENSTAR Alaska"). ENSTAR Alaska is subject to regulation by the APUC, which has jurisdiction over, among other things, rates, accounting procedures and standards of service. The Company follows Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 71 for ENSTAR Alaska, however the provisions of SFAS No. 71 do not materially impact the Company's operating results. Cash Equivalents -- The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. 49 52 SEAGULL ENERGY CORPORATION Inventories -- Materials and supplies are valued at the lower of average cost or market value (net realizable value). Oil And Gas Properties -- The Company uses the successful efforts method of accounting for its oil and gas operations whereby acquisition costs and exploratory drilling costs related to properties with proved reserves and all development costs including development dry holes are capitalized. Under this method, all costs to acquire mineral interests in oil and gas properties, to acquire production sharing contracts with foreign governments, to drill and equip exploratory wells which find proved reserves and to drill and equip development wells are capitalized. Exploratory charges are capitalized pending determination of whether adequate proved reserves are found. Geological and geophysical costs, delay rentals, technical support and other internal costs related to oil and gas activities are generally accounted for as exploration charges or operations and maintenance expense. Unproved leaseholds with significant acquisition costs are assessed periodically, on a property-by-property basis, and a loss is recognized to the extent, if any, that the cost of the property has been impaired. Unproved leaseholds whose acquisition costs are not individually significant are aggregated, and the portion of such costs estimated to ultimately prove nonproductive, based on experience, are amortized over an average holding period. As unproved leaseholds are determined to be productive, the related costs are transferred to proved leaseholds. Capitalized costs are depleted using the unit-of-production method based upon estimates of proved oil and gas reserves on a depletable unit basis. Estimated costs (net of salvage value) of dismantling and abandoning oil and gas production facilities are computed by the Company's engineers and included when calculating depreciation and depletion using the unit-of-production method. The total estimated future dismantlement and abandonment cost being amortized as of December 31, 1998 was approximately $18 million. The Company performs a review for impairment of proved oil and gas properties on a depletable unit basis when circumstances suggest there is a need for such a review. For each depletable unit determined to be impaired, an impairment loss equal to the difference between the carrying value and the fair value of the depletable unit will be recognized. Fair value, on a depletable unit basis, is estimated to be the present value of expected future cash flows computed by applying estimated future oil and gas prices, as determined by management, to estimated future production of oil and gas reserves over the economic lives of the reserves. Future cash flows are based upon the Company's estimate of proved reserves. In addition, probable and possible reserves are taken into consideration when justified by economic conditions and actual or planned drilling. Pricing assumptions are based on internal forecasts that are prepared considering information from outside consultants and industry analysts. During 1998, the Company recorded impairment charges of approximately $74 million related to its oil and gas properties. The oil and gas asset impairment charges resulted primarily from disappointing well performance, much lower oil and natural gas prices and a lack of any perceived significant near-term improvement in oil prices that has led to a reduction in reserves at three of Seagull's Egyptian concessions, East Zeit, South Hurghada and East Beni Suef. No impairment charges were recorded during 1997 and 1996. 50 53 SEAGULL ENERGY CORPORATION Other Property, Plant And Equipment -- Depreciation of the utility plant, gas gathering pipeline facility, gas processing plant and other property is computed principally using the straight-line method over their estimated useful lives, which vary from 3 to 33 years. Utility plant facilities are subject to APUC regulation. When utility facilities are disposed of or otherwise retired, the original cost of the facilities, plus cost of retirement, less salvage value, is charged to accumulated depreciation. The Company groups and evaluates other property, plant and equipment for impairment based on the ability to identify separate cash flows generated therefrom. During 1998, the Company recorded impairment charges of approximately $4 million related to certain of its pipeline assets. The impairment of the pipeline assets is a result of the Company's decision to dispose of these assets. See Note 6 for additional discussion. No impairment charges were recorded during 1997 and 1996. Maintenance, repairs and renewals are charged to operations and maintenance expense except that renewals which extend the life of the asset are capitalized. Interest cost capitalized as property, plant and equipment amounted to approximately $7 million, $7 million and $3 million in 1998, 1997 and 1996, respectively. Environmental Liabilities -- Environmental expenditures that relate to current or future revenues are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations, and do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when environmental assessments and/or clean-ups are probable, and the costs can be reasonably estimated. Generally, the timing of these accruals coincides with the Company's commitment to a formal plan of action. Treasury Stock -- The Company follows the average cost method of accounting for treasury stock transactions. Revenue Recognition -- The Company records oil and natural gas revenue following the entitlement method of accounting for production, in which any excess amount received above the Company's share is treated as a liability. If less than the Company's entitlement is received, the underproduction is recorded as an asset. ENSTAR Alaska's operating revenues are based on rates authorized by the APUC which are applied to customers' consumption of natural gas. ENSTAR Alaska records unbilled revenue at the end of each accounting period. Derivative Financial Instruments -- The Company entered into a variety of commodity derivative financial instruments (futures, swaps and options contracts) only for non-trading purposes. The Company made a limited use of these derivative financial instruments as a hedging strategy to manage commodity prices associated with oil and gas sales and to reduce the impact of commodity price fluctuations. While commodity derivative financial instruments were intended to reduce the Company's exposure to declines in the market price of oil and natural gas, 51 54 SEAGULL ENERGY CORPORATION the commodity derivative financial instruments may also limit the Company's gain from increases in those market prices. The Company used the hedge or deferral method of accounting for these instruments and, as a result, gains and losses on commodity derivative financial instruments were generally offset by similar changes in the realized prices of the commodities. To qualify as hedges, these instruments must highly correlate to anticipated future production such that the Company's exposure to the effects of price changes was reduced. Income and costs related to these hedging activities were recognized in oil and gas revenues when the commodities were produced. Income and costs on commodity derivative financial instruments that were closed before the hedged production occurs were also deferred until the production month originally hedged. In the event of a loss of correlation between changes in oil and gas reference prices under a commodity derivative financial instrument and actual oil and gas prices, income or costs were recognized currently to the extent the financial instrument has not offset changes in actual oil and gas prices. Any realized income and costs that were deferred at the balance sheet date and any margin accounts for futures contracts were included as net current assets. The Company recorded $1 million, $10 million and $9 million for 1998, 1997 and 1996, respectively, in costs related to equity hedging activities, including costs related to the monetary production payment hedges of approximately $1 million, $3 million and $4 million for 1998, 1997 and 1996, respectively. The Company also recorded hedging costs related to third-party marketing activities of $5 million, $3 million and $0.5 million for 1998, 1997 and 1996, respectively. At December 31, 1998, the fair value of unrealized costs related to the Company's commodity hedging activities related to open contracts was immaterial as substantially all commodity derivative financial positions had been effectively closed. From time to time, the Company has entered into various financial instruments, such as interest rate swap and interest rate lock agreements, to manage the impact of changes in interest rates. To qualify as a hedge, these instruments must highly correlate to anticipated future changes in interest rates such that the Company's exposure to the effects of interest rate changes is reduced. The Company uses the hedge or deferral method of accounting for these instruments and, as a result, gains and losses on these financial instruments are generally offset by similar changes in the realized interest rate. The differential interest to be paid or received is accrued as interest rates change and is recognized over the life of the agreements as a component of interest expense. Currently, Seagull has no open interest rate swap or interest rate lock agreements. Income Taxes -- The Company uses the liability method of accounting for income taxes under which deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as part of the provision for income taxes in the period that includes the enactment date. 52 55 SEAGULL ENERGY CORPORATION Foreign Currency Translation -- The U.S. dollar is the functional currency for all of the Seagull's existing foreign operations, as predominantly all transactions in those operations are denominated in U.S. dollars. Before its sale in October 1997, the Company's Canadian operations used the applicable local currency as the functional currency. Translation from Canadian dollars to U. S. dollars was performed for balance sheet accounts using exchange rates in effect at the balance sheet date and for revenue and expense accounts using primarily a weighted average exchange rate during the period. Adjustments resulting from such translation were included as a separate component of shareholders' equity. Deferred income taxes were not provided on translation adjustments because any unremitted income from Seagull's foreign operations was considered to be permanently invested. Stock-Based Compensation -- The Company accounts for stock-based compensation under the intrinsic value method. Under this method, the Company records no compensation expense for stock options granted when the exercise price of options granted is equal to or greater than the fair market value of Seagull's common stock on the day of grant. Comprehensive Income -- Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." This statement established standards for reporting and display of comprehensive income and its components in the Company's financial statements. Comprehensive income includes all changes in the Company's equity except those resulting from investments by and distributions to owners. The Company's only other comprehensive item relates to foreign currency translation adjustments for its Canadian operations, which were sold in 1997. Concentrations Of Market Risk -- The future results of Seagull's oil and gas operations will be affected by the market prices of oil and natural gas. The availability of a ready market for natural gas, oil and liquid products in the future will depend on numerous factors beyond the control of the Company, including weather, production of other natural gas, crude oil and liquid products, imports, marketing of competitive fuels, proximity and capacity of oil and gas pipelines and other transportation facilities, any oversupply or undersupply of gas, oil and liquid products, the regulatory environment and other regional and political events, none of which can be predicted with certainty. The Company operates in various phases of the oil and natural gas industry with sales to resellers such as pipeline companies and local distribution companies as well as to end-users such as commercial businesses, industrial concerns and residential consumers. The Company's receivables also include amounts due from purchasers of oil and gas production and amounts due from joint venture partners for their respective portions of operating expense and exploration and development costs. The Company believes that no single customer or joint venture partner exposes the Company to significant credit risk. While certain of these customers and joint venture partners are affected by periodic downturns in the economy in general or in their specific segment of the natural gas or oil industry, the Company believes that its level of credit-related losses due to such economic fluctuations has been and will continue to be immaterial to the Company's results of operations in the long term. Trade receivables are generally not collateralized; however, the Company analyzes customers' and joint venture partners' historical 53 56 SEAGULL ENERGY CORPORATION credit positions prior to extending credit. At December 31, 1998 and 1997, Seagull had allowances for doubtful accounts receivable of $1.7 million and $1.2 million, respectively. The Company had one customer, the Egyptian national oil company ("EGPC") with 11% of total revenues during both 1998 and 1997, who accounted for more than 10% of total revenues. The Company has a significant portion of its operations in various geographic areas of the world. The Company's activities in these areas are subject to the usual risks associated with international operations, including political and economic uncertainties, risks of cancellation or unilateral modification of agreements, operating restrictions, currency repatriation restrictions, expropriation, export restrictions, the imposition of new taxes and the increase of existing taxes, inflation, foreign exchange fluctuations and other risks arising out of international government sovereignty over areas in which the operations are conducted. The Company has endeavored to protect itself against political and commercial risks inherent in these operations. There is no certainty that the steps taken by the Company will provide adequate protection. Concentrations Of Credit Risk -- Derivative financial instruments that hedge the price of oil and natural gas and interest rates are generally executed with major financial or commodities trading institutions which expose the Company to acceptable levels of market and credit risks and may at times be concentrated with certain counterparties or groups of counterparties. Although notional amounts are used to express the volume of these contracts, the amounts potentially subject to credit risk, in the event of non-performance by the counterparties, are substantially smaller. The credit worthiness of counterparties is subject to continuing review and full performance is anticipated. Accounting Pronouncements -- In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes standards of accounting for and disclosures of derivative instruments and hedging activities. This statement is effective for fiscal years beginning after June 15, 1999. The Company has not yet determined the impact of this statement on the Company's financial condition or results of operations. 54 57 SEAGULL ENERGY CORPORATION 3. EARNINGS PER SHARE The following table provides a reconciliation between basic and diluted earnings (loss) before extraordinary item per share (stated in thousands except per share data):
Income (Loss) Before Weighted Average Extraordinary Common Shares Per-Share Item Outstanding Amount ------------- ---------------- --------- YEAR ENDED DECEMBER 31, 1998: BASIC LOSS PER SHARE ........................ $(95,665) 63,159 $ (1.51) EFFECT OF DILUTIVE STOCK OPTIONS ............ -- -- ------------- ---------------- DILUTED LOSS PER SHARE ...................... $(95,665) 63,159 $ (1.51) ============= ================ Year Ended December 31, 1997: Basic earnings per share .................... $ 49,130 63,022 $ 0.78 Effect of dilutive stock options ............ -- 769 ------------- ---------------- Diluted earnings per share .................. $ 49,130 63,791 $ 0.77 ============= ================ Year Ended December 31, 1996: Basic earnings per share .................... $ 28,961 62,584 $ 0.46 Effect of dilutive stock options ............ -- 968 ------------- ---------------- Diluted earnings per share .................. $ 28,961 63,552 $ 0.46 ============= ================
At December 31, 1998, options to purchase 5,527,320 shares of common stock were outstanding but not included in the computation of diluted loss per share because the effect of the assumed exercise of these stock options as of the beginning of the year would have an antidilutive effect on the computation of diluted loss per share. These options had exercise prices ranging from $5.89 to $26.38 and expire at various dates through 2008. Options to purchase 1,610,100 and 1,685,500 shares of common stock at $21.13 to $26.38 per share were outstanding during 1997 and 1996, respectively, but were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of the common shares. These options, which expire at various dates from 2003 to 2007, remained outstanding at the end of 1997 and 1996. 4. ONE-TIME COMPENSATION CHARGES During 1998, Seagull recorded general and administrative ("G&A") expenses of approximately $6 million in compensation expenses, related to the retirement of Barry J. Galt and the election of James T. Hackett as the Company's President and Chief Executive Officer. These charges included (i) $1.8 million in supplemental retirement benefits paid to Mr. Galt in 1998; (ii) $2.3 million to be paid to Mr. Galt at various dates through May 2002 representing contractually provided retirement benefits; (iii) $1.3 million representing the vested portion of Mr. Hackett's supplemental retirement plan; and (iv) $0.6 million in phantom stock granted to Mr. Hackett upon his employment. 55 58 SEAGULL ENERGY CORPORATION 5. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Supplemental disclosures of cash flow information (stated in thousands) are as follows:
Year Ended December 31, ------------------------------- 1998 1997 1996 ------- ------- ------- .............................................. Cash paid during the year for: Interest, net of amount capitalized ............. $37,998 $34,947 $44,033 Income taxes .................................... $12,991 $25,684 $12,046
6. ACQUISITION AND DISPOSITION OF ASSETS Acquisition of BRG Interests -- On June 1, 1998, the Company completed the purchase of the stock of BRG Petroleum, Inc. ("BRG"), a closely held private company, and the assets of BRG's limited partnerships and programs for $103 million in cash, excluding cash acquired of $2 million and noncash deferred tax liabilities of $25 million. The Company funded this acquisition through existing credit facilities. The following table presents the unaudited pro forma results (stated in thousands except per share data) of Seagull as though the acquisition of the acquired assets had occurred on January 1, 1997: UNAUDITED PRO FORMA INFORMATION
Year Ended December 31, ---------------------------- 1998 1997 ----------- ----------- Revenues ......................................... $ 434,842 $ 573,559 Net income (loss) ................................ (97,999) 48,115 Basic earnings (loss) per share .................. (1.55) 0.76 Diluted earnings (loss) per share ................ (1.55) 0.75
The unaudited pro forma information does not purport to be indicative of actual results, if the acquisition of the BRG interests had been in effect for the periods indicated, or of future results. Relinquishment of Darag Concession -- The Company's Egyptian assets included a 50%, non-operated working interest in the Darag concession, which is located in the northern portion of the Gulf of Suez. Future plans for this concession have been uncertain as the working interest owners and EGPC have been unable to secure the necessary drilling permits from marine authorities. In the third quarter of 1998, the working interest owners agreed to relinquish the concession to EGPC in exchange for reimbursement of substantially all of their costs incurred in connection with the concession. Seagull's share of the reimbursement is approximately $6 56 59 SEAGULL ENERGY CORPORATION million, with $4 million of this received by December 31, 1998 and the remainder in January 1999. The effect of this reimbursement did not have a material effect on the Company's results of operations. Disposition of Pipeline Assets -- During the third quarter of 1998, the Company decided to liquidate its nonstrategic pipeline assets in late 1998 or early 1999. As a result of this decision, the Company recorded a noncash impairment of pipeline assets of approximately $4 million during the third quarter of 1998 to reduce the asset carrying value to estimated net realizable value. The pipeline assets to be disposed of contributed $3 million, $5 million and $4 million in revenues for the years ended December 31, 1998, 1997 and 1996, respectively, but did not have a material effect on operating profit for any of these periods. These assets have a net book value of approximately $3 million at December 31, 1998. Sale of Canadian Oil and Gas Properties -- On October 6, 1997, Seagull sold its Canadian oil and gas subsidiary, Seagull Energy Canada Ltd. ("Seagull Canada"), to Rio Alto Exploration Ltd. Seagull realized approximately $185 million of net sales proceeds and recognized a pre-tax gain of approximately $12 million in the fourth quarter of 1997. The sales proceeds were used to repay existing long-term debt, including all U.S. and Canadian bank debt, and for general corporate purposes. The Company's Canadian operations contributed approximately $26 million and $34 million in revenue and $6 million and $(5) million in income (loss) before taxes for the years ended December 31, 1997 and 1996, respectively. Merger with Global Natural Resources Inc. -- On October 3, 1996, the shareholders of Seagull and Global Natural Resources Inc. ("Global") approved a merger of a wholly owned subsidiary of Seagull into Global (the "Global Merger"), with each share of Global common stock converted into 0.88 shares of Seagull common stock. The Global Merger was accounted for as a pooling of interests. Purchase of Egyptian Concessions -- In September 1996, Seagull purchased interests in two Egyptian concessions from units of Exxon Corporation for a net purchase price of approximately $74 million in cash financed through additional borrowings under Seagull's revolving credit facility. The transaction was accounted for as a purchase. 7. OTHER NONCURRENT ASSETS Other noncurrent assets (stated in thousands) include the following:
December 31, ------------------- 1998 1997 ------- ------- Oil and gas imbalances ........................... $26,866 $27,428 Deferred tax asset (see Note 14) ................. 12,805 -- Deferred financing costs ......................... 8,151 10,437 Other ............................................ 5,160 5,396 ------- ------- $52,982 $43,261 ======= =======
57 60 SEAGULL ENERGY CORPORATION Oil and Gas Imbalances -- As discussed in Note 2, the Company records oil and gas revenues following the entitlement method of accounting for production. The Company's oil and gas imbalance assets and liabilities (stated in thousands) were as follows:
December 31, ----------------------------------------- 1998 1997 ------------------ ------------------ VOLUME Volume AMOUNT (Bcfe) Amount (Bcfe) ------- ------ ------- ------ ASSETS: Current ........................................................... $ 9,552 5.8 $13,117 6.5 Noncurrent ........................................................ 26,866 16.3 27,428 16.8 ------- ------ ------- ------ $36,418 22.1 $40,545 23.3 ======= ====== ======= ====== LIABILITIES: Current ........................................................... $ 5,919 3.8 $ 8,009 5.5 Noncurrent ........................................................ 14,834 9.4 16,405 10.4 ------- ------ ------- ------ $20,753 13.2 $24,414 15.9 ======= ====== ======= ======
Deferred Financing Costs -- Deferred financing costs represent financing costs incurred in connection with the execution of various debt facilities entered into or securities issued by the Company. These costs are capitalized and amortized to interest expense over the life of the related debt. 8. DEBT Money Market Facilities -- Seagull has money market facilities with three U.S. banks with a combined maximum commitment of $110 million. These facilities bear interest at rates made available by the banks at their discretion and may be canceled at either Seagull's or the banks' discretion. At December 31, 1998 and 1997, the total amounts outstanding under the money market facilities of $48 million and none, respectively, were classified as a current liability and included in accounts and notes payable since it was Seagull's intent to repay these amounts within the following year. 58 61 SEAGULL ENERGY CORPORATION Long-term debt (stated in thousands) for 1998 and 1997 was as follows:
December 31, --------------------- 1998 1997 -------- -------- Revolving credit ...................................... $175,000 $ -- 1997 Senior notes ..................................... 150,000 150,000 1993 Senior notes ..................................... 100,000 100,000 1993 Senior subordinated notes ........................ 100,000 150,000 Monetary production payment ........................... 20,994 25,384 ENSTAR Alaska: Unsecured industrial development bonds ............. 8,360 9,305 Other unsecured notes .............................. 38,003 44,158 -------- -------- 592,357 478,847 Less: Current maturities ............................. 7,147 7,097 Unamortized debt discount ...................... 2,535 2,733 -------- -------- $582,675 $469,017 ======== ========
Revolving Credit -- The Company has a $500 million revolving credit facility ("Revolving Credit Facility"). At December 31, 1998, there was $175 million borrowed under the Revolving Credit Facility and $307 million of the unused commitment was immediately available. The Revolving Credit Facility bears interest, at Seagull's option, at LIBOR or prime rates plus applicable margins, ranging from none to 0.45%, or competitive bid rates. Actual interest rates varied from 5.3% to 6.4% for the year ended December 31, 1998. The Revolving Credit Facility contains certain covenants and restrictive provisions, including limitations on the incurrence of additional debt or liens, the declaration or payment of dividends and the repurchase or redemption of capital stock and the maintenance of certain financial ratios. Under the most restrictive of these provisions, approximately $130 million was available for payment of cash dividends on common stock or to repurchase common stock as of December 31, 1998. 1997 Senior Notes -- In September 1997, Seagull issued $150 million of senior notes (the "1997 Senior Notes") offered at a public offering price of 99.544% of face value. The 1997 Senior Notes have a coupon of 7 1/2% paid semiannually and mature September 15, 2027. The 1997 Senior Notes are not redeemable prior to maturity and are not subject to any sinking fund. The net proceeds of approximately $146 million were used to repay existing debt and for general corporate purposes. The 1997 Senior Notes represent unsecured obligations of the Company and rank pari passu with all other unsecured, unsubordinated obligations of the Company. The 1997 Senior Notes contain conditions and restrictive provisions including, among other things, restrictions on additional indebtedness by the Company and its subsidiaries and entering into sale and leaseback transactions. 1993 Senior and Senior Subordinated Notes -- In July 1993, Seagull sold $100 million of senior notes (the "1993 Senior Notes") and $150 million of senior subordinated notes (the "1993 Senior Subordinated Notes") (collectively the "1993 Notes"). The 1993 Senior Notes bear interest at 7 7/8% per annum, are not redeemable prior to maturity or subject to any sinking fund and mature on August 1, 2003. The 1993 Senior Subordinated Notes bear interest at 8 5/8% per annum, are not subject to any sinking fund 59 62 SEAGULL ENERGY CORPORATION and mature on August 1, 2005. On or after August 1, 2000, the 1993 Senior Subordinated Notes are redeemable at the option of the Company, in whole or in part, at redemption prices declining from 102.59% in 2000 to 100.00% in 2003 and thereafter (expressed as a percentage of principal amount), plus accrued interest to the redemption date. The 1993 Notes were issued at par and interest is paid semiannually. During 1998, the Company repurchased in open-market transactions approximately $50 million in aggregate principal amount of its Senior Subordinated Notes. These purchases were funded using borrowings under the Revolving Credit Facility. In connection with this repurchase, the Company recorded an after-tax extraordinary loss of $1 million, or $0.02 per basic and diluted share, during 1998. The extraordinary item includes a tax benefit of approximately $0.6 million. The 1993 Notes represent unsecured obligations of the Company. The 1993 Senior Notes rank pari passu with senior indebtedness of the Company while the 1993 Senior Subordinated Notes are subordinate in right of payment to all existing and future senior indebtedness of the Company. The 1993 Notes contain conditions and restrictive provisions including, among other things, restrictions on additional indebtedness by the Company and by its subsidiaries, the right of each note holder to have the notes repurchased by the Company at 101% of the principal amount upon a change in control, as well as restrictions on the incurrence of secured debt and entering into sale and leaseback transactions. Monetary Production Payment -- In September 1995, the Company sold certain Internal Revenue Code Section 29 tax credit-bearing properties for approximately $46 million in net proceeds. The transaction was recorded as a monetary production payment for accounting purposes. The investors receive the operating cash flow from the properties, less funds required for working capital purposes, and are expected to recoup their investment plus their required after-tax rate of return by 2000. Seagull's pre-tax effective interest rate is currently estimated to be approximately 4%. ENSTAR Alaska -- All long-term debt of ENSTAR Alaska is issued by a wholly owned subsidiary of Seagull in the form of senior unsecured notes. These senior unsecured notes bear interest at various fixed rates ranging from 7.75% to 8.81% with principal payments due 1999 through 2009. These senior unsecured notes of the subsidiary provide for restrictions on dividends, additional borrowings and purchases, redemptions or retirements of shares of capital stock, other than in stock of the subsidiary. Under the most restrictive provisions of these financing arrangements, ENSTAR Alaska had approximately $14 million available for the making of restricted investments, restricted stock payments and restricted subordinated debt payments as of December 31, 1998. Annual Maturities -- At December 31, 1998, the Company's aggregate annual maturities of long-term debt are $7 million, $30 million, $9 million, $3 million and $178 million for the years 1999, 2000, 2001, 2002 and 2003, respectively. 60 63 SEAGULL ENERGY CORPORATION 9. OTHER NONCURRENT LIABILITIES Other noncurrent liabilities (stated in thousands) include the following:
December 31, ------------------- 1998 1997 ------- ------- Oil and gas imbalances (see Note 7) ........................ $14,834 $16,405 Refundable customer advances for construction .............. 12,978 11,940 Other ...................................................... 23,356 22,823 ------- ------- $51,168 $51,168 ======= =======
Refundable Customer Advances for Construction -- Refundable customer advances for construction represent customer deposits received by ENSTAR Alaska for construction of main extensions refundable either wholly or in part over a period not to exceed 10 years. 10. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value of financial instruments has been determined by the Company using available market information and valuation methodologies described below. Considerable judgment is required in interpreting market data to develop the estimates of fair value. The use of different market assumptions or valuation methodologies may have a material effect on the estimated fair value amounts. The estimated fair values of the Company's financial instruments (stated in thousands) are summarized as follows:
December 31, ------------------------------------------------------ 1998 1997 ------------------------ ------------------------ CARRYING ESTIMATED Carrying Estimated AMOUNT FAIR VALUE Amount Fair Value --------- ---------- --------- ---------- Assets: Cash and cash equivalents .................................... $ 25,734 $ 25,734 $ 45,654 $ 45,654 Liabilities: Refundable customer advances and deposits .................... (15,799) (14,705) (14,725) (11,880) Long-term debt ............................................... (589,822) (565,368) (476,114) (497,382) Redeemable bearer shares ........................................ (15,462) (6,556) (15,691) (6,186) Commodity hedging instruments: In a receivable position ..................................... -- -- -- 278 In a payable position ........................................ -- (34) (287) (1,219)
Cash And Cash Equivalents -- The carrying amount approximates fair value because of the short maturity of these instruments. Refundable Customer Advances And Deposits -- The fair value is based on discounted cash flow analyses utilizing a discount rate of 7.75% and 8.5% at December 31, 1998 and 1997, 61 64 SEAGULL ENERGY CORPORATION respectively, with monthly payments ratably over the estimated period of deposit or advance refunding. Debt -- The fair value of the 1993 Notes, 1997 Senior Notes and ENSTAR Alaska debt is estimated based on quoted market prices for the same or similar issues. The fair value of the monetary production payment is estimated using discounted cash flow analyses utilizing a discount rate of approximately 4% at December 31, 1998 and 1997. The carrying amount of all other debt approximates fair value because these instruments bear interest at rates tied to current market rates. Redeemable Bearer Shares -- The fair value is determined based on the Company's estimate of the number of bearer shares that will be presented for redemption. Commodity Related Transactions -- The fair value of the company's commodity hedging instruments is the estimated amount the Company would receive or pay to settle the applicable commodity hedging instrument at the reporting date, taking into account the difference between New York Mercantile Exchange ("NYMEX") prices or index prices at year-end and the contract price of the commodity hedging instrument. Certain of the Company's commodity hedging instruments, primarily swaps and options, are off balance sheet transactions and, accordingly, no respective carrying amounts for these instruments were included in the accompanying consolidated balance sheets as of December 31, 1998 and 1997. 11. REDEEMABLE BEARER SHARES In 1983, the Company became the successor issuer to Global Natural Resources PLC, a United Kingdom company, pursuant to the terms of a Scheme of Arrangement (the "Arrangement") under Section 206 of the English Companies Act. The effect of the Arrangement was to move the domicile of the parent company to the United States from the United Kingdom. Under the terms of the Arrangement, 24,270,876 common shares of Global were registered in the name of Hambros Trust ("Trust Shares"). The Trust Shares were held for the owners of bearer share warrants issued by Global Natural Resources PLC. The Arrangement provided that Trust Shares not claimed by July 26, 1988 be sold by the Trust and the sale proceeds together with earned interest used to satisfy subsequent claims by the holders of bearer share warrants. Holders of bearer shares were entitled to receive at their election either cash or Global shares on a share-for-share basis until July 1993, and only cash thereafter. In August 1993, Global received approximately $19 million, the remaining cash held by the Trust, in the form of an interest-free loan. The loan is repayable on demand only to the extent necessary to redeem bearer share warrants presented for exchange until July 2008. Each bearer share warrant presented during this period will be redeemed for $6.66. As of December 31, 1998 and 1997, there were 2,384,140 and 2,418,868 outstanding bearer share warrants, respectively. The loan is secured by a letter of credit issued under the Revolving Credit Facility. During 1998 and 1997 there were no drawings under the letter of credit. In July 2008, the obligation of the 62 65 SEAGULL ENERGY CORPORATION Company to holders of bearer share warrants will cease, the interest-free loan will terminate, and any remaining cash will revert to the Company and be accounted for as an increase in additional paid-in capital. 12. SHAREHOLDERS' EQUITY The following table reflects the activity in shares of the Company's common stock and treasury stock during the three years ended December 31, 1998:
Year Ended December 31, -------------------------------------------- 1998 1997 1996 ----------- ----------- ----------- COMMON STOCK OUTSTANDING: Shares at beginning of year ....................................... 63,877,442 63,073,287 65,983,199 Exercise of employee stock options ................................ 375,503 804,155 449,256 Executive incentive compensation .................................. 134,879 -- 3,000 Retirement of treasury stock pursuant to Global Merger ............ -- -- (3,361,185) Other ............................................................. -- -- (983) ----------- ----------- ----------- Shares at end of year ............................................. 64,387,824 63,877,442 63,073,287 =========== =========== =========== TREASURY STOCK OUTSTANDING: Shares at beginning of year ....................................... 861,314 361,314 3,729,823 Acquisition of treasury stock ..................................... -- 500,000 -- Issuance of treasury stock to benefit plans ....................... (389,906) -- (7,324) Retirement of treasury stock pursuant to Global Merger ............ -- -- (3,361,185) Other ............................................................. (32) -- -- ----------- ----------- ----------- Shares at end of year ............................................. 471,376 861,314 361,314 =========== =========== ===========
Preferred Stock -- The Company is authorized to issue 5,000,000 shares of preferred stock, par value $1.00 per share, in one or more series. There were no shares issued or outstanding as of December 31, 1998 and 1997. Preferred Share Purchase Rights -- Seagull has a Share Purchase Rights Plan to protect the Company's shareholders from coercive or unfair takeover tactics. Under this Plan, each outstanding share and each share of common stock subsequently issued has attached to it one Right, exercisable at $30.75, subject to certain adjustments. In December 1997, the Company amended the Share Purchase Rights Plan whereby, in the event a person or group acquires 10% or more of the outstanding common stock, or in the event the Company is acquired in a merger or other business combination or 50% or more of the Company's consolidated assets or earning power is sold, each Right entitles the holder to purchase $30.75 worth of shares of common stock of the Company or of the acquiring company, as the case may be, for half of the then-current, per-share market prices. The Rights, under certain circumstances, are redeemable at the option of Seagull's Board of Directors at a price of $0.01 per Right, within 10 days (subject to extension) following the day on which the acquiring person or group exceeds the 10% threshold. If any person or group acquires 10% or more (but less than 50%) of the Company's outstanding common stock, the 63 66 SEAGULL ENERGY CORPORATION Board may, at its option, issue common stock in exchange for all or part of the outstanding and exercisable Rights (other than Rights owned by such person or group which would become null and void) at an exchange ratio of one share of common stock for each two shares of common stock for which each Right is then exercisable, subject to adjustment. The Rights expire on March 22, 1999. 13. BENEFIT PLANS Stock Option Plans -- The Company currently has various stock option plans. The stock options become exercisable over a three to six year period and all options expire 10 years after the date of grant. At December 31, 1998, approximately two million shares of common stock were available for grant. Information relating to stock options is summarized as follows:
1998 1997 1996 ---------------------- ----------------------- ---------------------- WEIGHTED Weighted Weighted AVERAGE Average Average EXERCISE Exercise Exercise PRICE PER Price Per Price Per SHARES SHARE Shares Share Shares Share ---------- --------- ---------- --------- ---------- --------- Balance outstanding - Beginning of year .................... 4,598,252 $17.63 4,746,792 $16.15 4,501,920 $14.67 Granted ............................ 2,693,103 $13.73 983,200 $19.13 844,000 $21.79 Exercised ......................... (375,503) $ 7.19 (809,764) $ 9.16 (449,256) $ 9.80 Forfeited ......................... (1,388,532) $18.49 (321,976) $21.33 (149,872) $22.36 ---------- ------ ---------- ------ ---------- ------ Balance outstanding - End of year .......................... 5,527,320 $16.22 4,598,252 $17.63 4,746,792 $16.15 ---------- ------ ---------- ------ ---------- ------ Options exercisable - End of year ...................... 2,884,010 $16.17 2,355,972 $14.97 2,417,492 $11.19 ========== ====== ========== ====== ========== ======
The weighted average fair value of stock options granted during 1998, 1997 and 1996 was $6.87, $9.28 and $10.77 per share, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes options-pricing model. The model assumed expected volatility of 50%, 44% and 43%, weighted average risk-free interest rates of 5.2%, 6.3% and 6.5%, for grants in 1998, 1997 and 1996, respectively, and an expected life of three years after the vesting term. As Seagull has not declared dividends since it became a public entity, no dividend yield was used. Actual value realized, if any, is dependent on the future performance of Seagull common stock and overall stock market conditions. There is no assurance the value realized by an optionee will be at or near the value estimated by the Black-Scholes model. 64 67 SEAGULL ENERGY CORPORATION Information relating to stock options outstanding at December 31, 1998 is summarized as follows:
Options Outstanding Options Exercisable ------------------------------------------------------ --------------------------------- Weighted Weighted Number Number Outstanding Average Average Exercisable at Weighted Range of at December 31, Remaining Exercise Price December 31, Average Exercise Exercise Prices 1998 Contractual Life Per Share 1998 Price Per Share - --------------- ------------------ ---------------- -------------- -------------- ----------------- $ 5.89 - $11.25 753,896 2 years $ 8.50 731,680 $ 8.48 $11.26 - $11.75 1,161,196 10 years $ 11.69 200,000 $ 11.69 $11.76 - $16.50 1,132,040 5 years $ 14.04 679,776 $ 13.24 $16.51 - $18.85 1,123,975 8 years $ 18.28 365,600 $ 18.24 $18.86 - $26.38 1,356,213 6 years $ 24.51 906,954 $ 24.74 ------------------ ---------------- ------------- -------------- ----------------- $5.89 - $26.38 5,527,320 6 years $ 16.22 2,884,010 $ 16.17 ================== ================ ============= ============== =================
Substantially all of Seagull's options must be granted at the fair market value of Seagull's common stock on the New York Stock Exchange on the date of grant. The remaining stock options may have an exercise price not less than 50% of the fair market value of Seagull's common stock on the date of grant. All outstanding options were issued at the fair market value of Seagull's common stock. Accordingly as discussed in Note 2 for the years ended December 31, 1998, 1997 and 1996, no compensation expense relating to these options was recognized in the Company's results of operations. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant dates for awards made after December 31, 1994 under those plans, the Company's net income (loss) and earnings (loss) per share would have been restated to the pro forma amounts (stated in thousands except per-share data) indicated below:
Year Ended December 31, -------------------------------------------------- 1998 1997 1996 --------------- -------------- -------------- Net income (loss): As reported........................ $ (96,696) $ 49,130 $ 28,961 Pro forma.......................... (102,351) 44,641 26,429 Earnings (loss) per share: Basic: As reported........................ (1.53) 0.78 0.46 Pro forma.......................... (1.62) 0.71 0.42 Diluted: As reported........................ (1.53) 0.77 0.46 Pro forma.......................... (1.62) 0.70 0.42
Under the provisions of SFAS No. 123, the pro forma disclosures above include only the effects of stock options granted by Seagull subsequent to December 31, 1994. During this initial phase-in period, the pro forma disclosures as required by SFAS No. 123 are not representative of the effects on reported net income for future years as options vest over several years and additional awards are generally made each year. Defined Benefit Plans - The Company has two defined benefit retirement plans which cover ENSTAR Alaska's salaried, clerical and operating employees. Determination of benefits 65 68 SEAGULL ENERGY CORPORATION for the salaried employees is based upon a combination of years of service and final monthly compensation. Benefits for operating and clerical employees are based solely on years of service. The Company's policy is to fund the minimum contributions required by applicable regulations. The net pension costs are included in operations and maintenance expenses. Global sponsored a defined benefit pension plan which covered substantially all of Global's U.S. employees. The plan provided benefits based on the employee's years of service and compensation during the years immediately preceding retirement. During 1997, the Company terminated this defined benefit pension plan and participants were paid the present value of their accrued benefits. Termination of this plan did not have a material effect on Seagull's financial position or results of operations. The following tables (stated in thousands) detail the components of pension income and expense, the funded status of the Company's plans, amounts recognized in the Company's consolidated balance sheets and major assumptions used to determine these projected benefit obligations. Certain assumptions are based on factors, such as interest rates and long-term rates of return on investments, which are subject to change due to forces beyond the Company's control. Changes in the various assumptions utilized could have a significant effect on the amounts reported. 66 69 SEAGULL ENERGY CORPORATION
December 31, ----------------------- 1998 1997 -------- -------- Change in benefit obligation: Benefit obligation at beginning of year .................................... $ 13,623 $ 17,994 Service cost ............................................................... 535 479 Interest cost .............................................................. 933 1,211 Actuarial gain ............................................................. 453 407 Benefits paid .............................................................. (388) (654) Settlements ................................................................ -- (5,814) -------- -------- Benefit obligation at end of year .......................................... $ 15,156 $ 13,623 ======== ======== Benefit obligation at end of year: Plans with benefit obligation in excess of assets .......................... $ -- $ 9,069 Plans with assets in excess of benefit obligation .......................... 15,156 4,554 -------- -------- $ 15,156 $ 13,623 ======== ======== Change in plan assets: Fair value of plan assets at beginning of year ............................. $ 13,859 $ 16,453 Actual return on plan assets ............................................... 3,241 3,355 Employer contribution ...................................................... -- 520 Benefits paid .............................................................. (388) (655) Settlements ................................................................ -- (5,814) -------- -------- Fair value of plan assets at end of year ................................... 16,712 $ 13,859 ======== ======== Fair value of plan assets at end of year: Plans with benefit obligation in excess of assets .......................... $ -- $ 8,548 Plans with assets in excess of benefit obligation .......................... 16,712 5,311 -------- -------- $ 16,712 $ 13,859 ======== ======== Funded status .................................................................. $ 1,556 $ 236 Unamortized prior service cost ................................................. 70 80 Unrecognized net (gain) loss ................................................... (2,731) (1,045) Unrecognized net obligation arising out of the initial application of SFAS No. 87, amortized over 15 years to 18 years ................................. 225 309 -------- -------- Accrued pension cost ........................................................... $ (880) $ (420) ======== ======== Weighted average rate assumptions: Discount rate .............................................................. 6.75% 7% Rate of increase in future compensation .................................... 3% 3% Expected long-term rate of return on plan assets ........................... 8% 8%
Year Ended December 31, --------------------------------- 1998 1997 1996 ------- ------- ------- Components of net pension cost: Service cost-benefits earned during the period ......... $ 535 $ 479 $ 1,025 Interest cost on projected benefit obligation .......... 932 900 1,212 Expected return on plan assets ......................... (1,104) (837) (1,633) Net amortization and deferral .......................... 96 96 863 ------- ------- ------- Net periodic pension cost .................................. $ 459 $ 638 $ 1,467 ======= ======= =======
67 70 SEAGULL ENERGY CORPORATION Employee Stock Ownership Plan -- On November 15, 1989, the Company formed the Seagull Employee Stock Ownership Plan (the "ESOP") for the benefit of the non-Alaskan employees of the Company. The ESOP borrowed from the Company $8 million at an interest rate of 10 percent per annum to be repaid in twelve equal annual installments of principal and interest. The ESOP used the borrowed funds and the 1989 contributions from the Company to purchase 948,150 shares of Common Stock at $8.438 per share from Seagull's treasury. The purchase price was based upon the closing price of the Common Stock on the New York Stock Exchange on the date the ESOP was formed. The promissory note has been and will be funded entirely by contributions from Seagull. Such contributions, included in operations and maintenance expenses and administrative expenses, were approximately $0.8 million, $1.3 million and $0.6 million in 1998, 1997 and 1996, respectively. In 1997, the Company increased its contributions to the ESOP to reflect an allocation to participants equal to approximately 10.5% of the eligible participants' annual compensation. To meet this goal in 1998, the Company contributed 389,906 shares of treasury stock to the ESOP and recorded additional expense of $2.5 million. Other Benefit Plans -- The Company has various other benefit plans, primarily in the form of profit sharing and thrift plans. Collectively, Company contributions to these plans were approximately $4 million in 1998 and $3 million in both 1997 and 1996 and were included in operations and maintenance expenses and general and administrative expenses. 14. INCOME TAXES The income (loss) before income taxes and the components of income tax expense (benefit) for each of the years ended December 31, 1998, 1997 and 1996 (stated in thousands) were as follows:
Year Ended December 31, --------------------------------------- 1998 1997 1996 --------- --------- --------- Income (loss) before income taxes and extraordinary item: Domestic ..................................................... $ (41,555) $ 43,530 $ 38,200 Foreign ...................................................... (92,366) 42,670 16,656 --------- --------- --------- $(133,921) $ 86,200 $ 54,856 ========= ========= ========= Current income tax expense (benefit): Federal ...................................................... $ 508 $ 3,503 $ (643) Foreign ...................................................... 9,476 22,899 17,737 State ........................................................ (775) 1,250 100 --------- --------- --------- Total current .............................................. 9,209 27,652 17,194 Deferred income tax expense (benefit): Federal ...................................................... (41,446) 5,787 7,605 Foreign ...................................................... (4,091) 3,893 815 State ........................................................ (1,928) (262) 281 --------- --------- --------- Total deferred ............................................. (47,465) 9,418 8,701 --------- --------- --------- Income tax expense (benefit) .................................... $ (38,256) $ 37,070 $ 25,895 ========= ========= =========
68 71 SEAGULL ENERGY CORPORATION In addition to the income tax expense (benefit) detailed above, the Company had income tax benefits, related to the tax effect of compensation expense, of none, $3 million and $1 million for each of the years ended December 31, 1998, 1997 and 1996, respectively, which were recorded in additional paid-in capital. Income tax expense (benefit) for each of the years ended December 31, 1998, 1997 and 1996 (stated in thousands) was different than the amount computed using the federal statutory rate (35%) for the following reasons:
Year Ended December 31, ------------------------------------ 1998 1997 1996 -------- -------- -------- Amount computed using the statutory rate ............................. $(46,872) $ 30,170 $ 19,200 Increase (reduction) in taxes resulting from: Utilization of Internal Revenue Code Section 29 credits ........... -- (81) (171) State income taxes, net of federal income tax benefits ............ (1,757) 642 248 Taxation of foreign operations, net of federal income tax benefits ........................................................ 2,139 6,209 13,613 Increase (decrease) in deferred tax asset valuation allowance ..... 7,380 -- (8,430) Other ............................................................. 854 130 1,435 -------- -------- -------- Income tax expense (benefit) ......................................... $(38,256) $ 37,070 $ 25,895 ======== ======== ========
The increase in the valuation allowance for the year ended December 31, 1998 of $7.4 million includes approximately $1.2 million for investment tax credit carryforwards that will expire in the years 1999 and 2000, while the remaining increase is related to net operating losses. Both increases are due to management's belief that, due to events occurring in the year of change, it is more likely than not that such deferred tax assets will not be realized. The net decrease in the valuation allowance for the year ended December 31, 1996 of approximately $8 million included $6 million related to the utilization in 1996 of net operating losses. The remaining change for 1996 is related to management's belief that, due to events occurring in the year of change, it is more likely than not such deferred tax assets, for which a valuation allowance had previously been established, will be realized. The significant components of deferred income tax expense (benefit) attributable to income from continuing operations for the years ended December 31, 1998, 1997 and 1996 (stated in thousands) were as follows:
Year Ended December 31, ----------------------------------- 1998 1997 1996 -------- -------- -------- Deferred tax expense (benefit) exclusive of the effects of other components listed below .................................... $(54,845) $ 9,418 $ 17,131 Increase (decrease) in deferred tax asset valuation allowance ........ 7,380 -- (8,430) -------- -------- -------- $(47,465) $ 9,418 $ 8,701 ======== ======== ========
69 72 SEAGULL ENERGY CORPORATION The tax effects of temporary differences that gave rise to significant portions of the deferred tax liabilities and deferred tax assets as of December 31, 1998, 1997 and 1996 (stated in thousands) were as follows:
Year Ended December 31, ------------------------------------ 1998 1997 1996 -------- -------- -------- Deferred tax liabilities: Property, plant and equipment, due to differences in depreciation, depletion and amortization ........................ $ 45,886 $ 49,815 $ 66,242 Other ............................................................. -- 456 583 -------- -------- -------- Deferred tax liabilities ............................................. 45,886 50,271 66,825 -------- -------- -------- Deferred tax assets: Minimum tax credit carryforwards .................................. (16,035) (16,352) (15,972) Investment tax credit carryforwards (expiring in 1999 and 2000) ........................................................... (1,168) (1,462) (1,851) Net operating loss carryforwards .................................. (38,594) -- (1,727) Capital loss carryback ............................................ (1,097) (2,847) -- Deferred compensation/retirement related items .................... (5,775) (5,390) (5,464) Contingent considerations ......................................... (1,081) (4,897) (5,018) Notes receivable .................................................. -- (5,262) (6,209) Other ............................................................. (5,485) (4,364) (3,636) -------- -------- -------- Deferred tax assets .................................................. (69,235) (40,574) (39,877) Less - valuation allowance ........................................... 7,380 -- -- -------- -------- -------- Net deferred tax assets .............................................. (61,855) (40,574) (39,877) Less - reclassification to current deferred .......................... 3,164 4,429 4,073 -------- -------- -------- Non-current deferred tax assets ...................................... (58,691) (36,145) (35,804) -------- -------- -------- Net non-current deferred tax liabilities (assets) .................... $(12,805) $ 14,126 $ 31,021 ======== ======== ========
70 73 SEAGULL ENERGY CORPORATION 15. BUSINESS SEGMENTS Information on the Company's operations by business segment (stated in thousands) is summarized as follows:
Year Ended December 31, --------------------------------------------- 1998 1997 1996 ----------- ----------- ----------- REVENUES: Oil and gas operations ............................. $ 332,579 $ 453,648 $ 419,595 Alaska transmission and distribution ............... 93,592 95,719 97,616 ----------- ----------- ----------- $ 426,171 $ 549,367 $ 517,211 =========== =========== =========== OPERATING PROFIT (LOSS): Oil and gas operations ............................. $ (99,544) $ 106,983 $ 97,192 Alaska transmission and distribution ............... 23,143 22,588 25,781 Corporate .......................................... (21,803) (19,095) (19,530) ----------- ----------- ----------- $ (98,204) $ 110,476 $ 103,443 =========== =========== =========== DEPRECIATION, DEPLETION AND AMORTIZATION: Oil and gas operations ............................. $ 156,905 $ 160,197 $ 145,382 Alaska transmission and distribution ............... 8,529 8,368 8,190 Corporate .......................................... 3,935 2,951 2,097 ----------- ----------- ----------- $ 169,369 $ 171,516 $ 155,669 =========== =========== =========== TOTAL ASSETS: Oil and gas operations ............................. $ 1,181,720 $ 1,161,108 $ 1,267,481 Alaska transmission and distribution ............... 191,024 184,422 189,867 Corporate .......................................... 43,346 65,536 57,715 ----------- ----------- ----------- $ 1,416,090 $ 1,411,066 $ 1,515,063 =========== =========== =========== CAPITAL EXPENDITURES: Oil and gas operations: Leasehold ........................................ $ 40,718 $ 23,141 $ 12,986 Exploration ...................................... 83,526 95,681 77,774 Development ...................................... 132,331 137,806 108,763 ----------- ----------- ----------- 256,575 256,628 199,523 Other oil and gas operations ..................... 788 885 228 ----------- ----------- ----------- Total oil and gas operations ....................... 257,363 257,513 199,751 Alaska transmission and distribution ............... 9,626 9,607 9,287 Corporate .......................................... 8,308 8,488 4,424 ----------- ----------- ----------- $ 275,297 $ 275,608 $ 213,462 =========== =========== =========== ACQUISITIONS, NET OF CASH ACQUIRED: Acquisitions of oil and gas properties ............. $ 126,895 $ 17,665 $ 90,867 Acquisitions of other assets and liabilities ....... 2,381 -- 13,553 ----------- ----------- ----------- $ 129,276 $ 17,665 $ 104,420 =========== =========== ===========
71 74 SEAGULL ENERGY CORPORATION 16. COMMITMENTS AND CONTINGENCIES Lease Commitments -- The Company leases certain office space and equipment under operating lease arrangements which contain renewal options and escalation clauses. Future minimum rental payments under these leases range between $3 million and $4 million in each of the years 1999-2003, and total $6 million for all subsequent years. Total rental expense under operating leases was approximately $4 million in 1998 and $3 million in 1997 and 1996. Royalty Litigation -- Increasingly, royalty owners under oil and gas leases are challenging valuation methodology and post-production deductions used by producers. These cases have arisen because oil and gas producers such as Seagull have begun to provide services that had previously been provided by the interstate gas pipelines prior to the "unbundling" of gas services. For example, in 1996, Seagull was sued in Anne K. Barnaby, et al. v. Seagull Mid-South Inc. This case is pending in state court of Latimer County, Oklahoma. The plaintiffs sought a state-wide class certification in this case which was denied by the court in April 1998. In October 1998, the plaintiffs filed a motion to again seek class certification which Seagull timely objected to. In this case, the plaintiffs seek additional royalties based upon the alleged deduction by Seagull of post-production costs, such as those related to gathering, compression, dehydration and treating. In addition, the plaintiffs have questioned the sales price used by Seagull as a basis for calculating royalties to the extent that sales were made to Seagull's gas marketing subsidiary. While Seagull intends to vigorously defend this case, the Company cannot predict the outcome of these matters. Comstock Mill Site -- On February 21, 1996, the United States Department of Interior Bureau of Land Management ("BLM") sent a letter to Houston Oil & Minerals Corporation ("HO&M"), a wholly owned subsidiary of Seagull, requesting HO&M to prepare and submit a plan for sampling and analyzing groundwater at a former mining operation located near Virginia City, Nevada (the "Comstock Mill Site"). The basis for the BLM's request was the alleged operation of the Comstock Mill Site by HO&M between 1978 and 1982. Pursuant to an indemnity provision in the stock purchase agreement by which Seagull acquired HO&M in 1988 (the "HO&M Purchase Agreement"), Seagull tendered the BLM's letter to Tenneco Inc. ("Tenneco") with a demand for indemnity and notified the BLM that Tenneco would respond to the BLM letter on behalf of HO&M. The BLM has also indicated that Tenneco and HO&M might be required to address cyanide contamination of groundwater at the Comstock Mill Site by separate action of the Nevada Division of Environmental Protection. Seagull believes that any liability associated with the Comstock Mill Site is the responsibility of Tenneco or its successors in liability pursuant to the HO&M Purchase Agreement. Other -- The Company is a party to other ongoing litigation in the normal course of business. Management regularly analyzes current information and, as necessary, provides accruals for probable liabilities on the eventual disposition of these matters. While the outcome of lawsuits or other proceedings against the Company cannot be predicted with certainty, management believes that the effect on its financial condition, results of operations and cash flows, if any, will not be material. 72 75 SEAGULL ENERGY CORPORATION 17. SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED) CAPITALIZED COSTS RELATING TO OIL AND GAS PRODUCING ACTIVITIES (AMOUNTS IN THOUSANDS)
United Cote States Egypt d'Ivoire Tatarstan Other Total ---------- ---------- ---------- ----------- ---------- ---------- AT DECEMBER 31, 1998: PROVED .............................. $1,556,757 $ 240,897 $ 48,358 $ 25,745 $ 3,962 $1,875,719 UNPROVED ............................ 84,890 16,599 -- -- -- 101,489 ---------- ---------- ---------- ---------- ---------- ---------- 1,641,647 257,496 48,358 25,745 3,962 1,977,208 ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION ........ 790,208 128,249 22,997 12,338 3,173 956,965 ---------- ---------- ---------- ---------- ---------- ---------- $ 851,439 $ 129,247 $ 25,361 $ 13,407 $ 789 $1,020,243 ========== ========== ========== ========== ========== ========== At December 31, 1997: Proved .............................. $1,421,004 $ 174,702 $ 45,343 $ 22,500 $ 3,962 $1,667,511 Unproved ............................ 52,449 22,101 664 -- -- 75,214 ---------- ---------- ---------- ---------- ---------- ---------- 1,473,453 196,803 46,007 22,500 3,962 1,742,725 Accumulated depreciation, depletion and amortization ........ 732,627 28,769 15,835 8,810 3,042 789,083 ---------- ---------- ---------- ---------- ---------- ---------- $ 740,826 $ 168,034 $ 30,172 $ 13,690 $ 920 $ 953,642 ========== ========== ========== ========== ========== ==========
COSTS INCURRED IN OIL AND GAS PROPERTY ACQUISITION, EXPLORATION AND DEVELOPMENT ACTIVITIES (AMOUNTS IN THOUSANDS)
United Cote States Egypt d'Ivoire Tatarstan Other Total -------- -------- -------- --------- -------- -------- YEAR ENDED DECEMBER 31, 1998: ACQUISITION COSTS: PROVED .............................. $126,739 $ -- $ -- $ -- $ -- $126,739 UNPROVED ............................ 29,986 10,880 8 -- -- 40,874 EXPLORATION COSTS ...................... 55,588 25,355 2,573 -- 10 83,526 DEVELOPMENT COSTS ...................... 84,726 42,966 995 3,644 -- 132,331 -------- -------- -------- -------- -------- -------- $297,039 $ 79,201 $ 3,576 $ 3,644 $ 10 $383,470 ======== ======== ======== ======== ======== ======== Year ended December 31, 1997: Acquisition costs: Proved .............................. $ 7,382 $ 4,542 $ -- $ -- $ 54 $ 11,978 Unproved ............................ 21,886 6,285 53 -- 604 28,828 Exploration costs ...................... 51,058 38,086 3,357 181 2,999 95,681 Development costs ...................... 68,059 43,900 10,801 5,297 9,749 137,806 -------- -------- -------- -------- -------- -------- $148,385 $ 92,813 $ 14,211 $ 5,478 $ 13,406 $274,293 ======== ======== ======== ======== ======== ======== Year ended December 31, 1996: Acquisition costs: Proved ............................. $ 29,102 $ 56,051 $ -- $ -- $ 1,000 $ 86,153 Unproved ........................... 10,371 5,584 782 -- 963 17,700 Exploration costs ...................... 64,066 6,934 2,823 -- 3,951 77,774 Development costs ...................... 65,309 25,176 3,255 4,031 10,992 108,763 -------- -------- -------- -------- -------- -------- $168,848 $ 93,745 $ 6,860 $ 4,031 $ 16,906 $290,390 ======== ======== ======== ======== ======== ========
73 76 SEAGULL ENERGY CORPORATION RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES (AMOUNTS IN THOUSANDS)(1)
United Cote States Egypt d'Ivoire Tatarstan Other(2) Total --------- --------- --------- ---------- --------- --------- YEAR ENDED DECEMBER 31, 1998: REVENUES ............................ $ 233,989 $ 48,155 $ 8,709 $ 11,475 $ 7,593 $ 309,921 OPERATING EXPENSE(3) ................ 76,403 17,461 2,728 11,995 1,839 110,426 EXPLORATION CHARGES ................. 43,309 11,139 1,813 339 3,187 59,787 DD&A(4) ............................. 112,339 31,215 7,895 3,738 136 155,323 IMPAIRMENT OF OIL AND GAS ASSETS ......................... -- 73,629 -- -- -- 73,629 INCOME TAX EXPENSE (BENEFIT)(5) ....................... 678 (21,708) (1,304) (2,133) 3,408 (21,059) --------- --------- --------- --------- --------- --------- RESULTS OF ACTIVITIES ............... $ 1,260 $ (63,581) $ (2,423) $ (2,464) $ (977) $ (68,185) ========= ========= ========= ========= ========= ========= Year Ended December 31, 1997: Revenues ............................ $ 290,337 $ 61,772 $ 15,995 $ 21,558 $ 39,657 $ 429,319 Operating expense(3) ................ 75,692 11,701 3,864 13,994 10,462 115,713 Exploration charges ................. 31,259 2,553 3,218 (48) 5,103 42,085 DD&A(4) ............................. 116,257 21,615 9,641 3,093 7,999 158,605 Income tax expense(5) ............... 23,495 11,763 2,474 811 11,745 50,288 --------- --------- --------- --------- --------- --------- Results of activities ............... $ 43,634 $ 14,140 $ (3,202) $ 3,708 $ 4,348 $ 62,628 ========= ========= ========= ========= ========= ========= Year Ended December 31, 1996: Revenues ............................ $ 282,508 $ 28,126 $ 12,798 $ 15,626 $ 49,956 $ 389,014 Operating expense(3) ................ 68,409 5,806 2,673 11,364 13,906 102,158 Exploration charges ................. 36,098 2,725 5,401 (133) 6,681 50,772 DD&A(4) ............................. 110,989 7,416 4,151 2,830 18,123 143,509 Income tax expense(5) ............... 23,047 5,579 2,158 541 10,274 41,599 --------- --------- --------- --------- --------- --------- Results of activities ............... $ 43,965 $ 6,600 $ (1,585) $ 1,024 $ 972 $ 50,976 ========= ========= ========= ========= ========= =========
(1) Excludes revenues and expenses associated with pipeline and marketing activities, interest expense and general corporate expenses. Revenues and expenses associated with pipeline and marketing activities are directly related to Oil and Gas Operations with regard to segment reporting as defined in SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, but are not part of Disclosures about Oil and Gas Producing Activities as defined by SFAS No. 69. (2) Includes the Company's Canadian oil and gas operations, which were sold in October 1997. (3) Operating expense represents cost incurred to operate and maintain wells and related equipment and facilities. These costs include, among other things, repairs and maintenance, labor, materials, supplies, property taxes, insurance, severance taxes, transportation costs and all overhead expenses directly related to oil and gas producing activities. (4) DD&A represents depreciation, depletion and amortization. (5) Income tax expense (benefit) is calculated by applying the statutory tax rate to operating profit, then adjusting for any applicable permanent tax differences or tax credits and allowances. 74 77 SEAGULL ENERGY CORPORATION RESERVE QUANTITY INFORMATION
United Cote States Egypt d'Ivoire Tatarstan Other(2) Total --------- -------- -------- --------- --------- -------- PROVED RESERVES (MBOE): JANUARY 1, 1998 ....................... 148,549 35,301 5,351 16,455 11,294 216,950 REVISIONS OF PREVIOUS ESTIMATES ..... (5,577) (5,106) 281 (1,929) 873 (11,458) EXTENSIONS AND DISCOVERIES .......... 15,356 1,830 165 -- -- 17,351 PURCHASES OF RESERVES IN PLACE ...... 17,600 -- -- -- -- 17,600 SALES OF RESERVES IN PLACE .......... (10,006) -- -- -- -- (10,006) PRODUCTION .......................... (19,171) (4,053) (878) (1,496) (549) (26,147) -------- -------- -------- -------- -------- -------- DECEMBER 31, 1998 (1) .................. 146,751 27,972 4,919 13,030 11,618 204,290 ======== ======== ======== ======== ======== ======== January 1, 1997 ....................... 155,847 25,965 5,132 16,338 54,675 257,957 Revisions of previous estimates ..... (1,744) 3,752 978 (3,155) 8,914 8,745 Extensions and discoveries .......... 14,150 7,796 219 4,784 11,105 38,054 Purchases of reserves in place ...... 1,157 1,171 -- -- -- 2,328 Sales of reserves in place .......... (666) -- -- -- (60,189) (60,855) Production .......................... (20,195) (3,383) (978) (1,512) (3,211) (29,279) -------- -------- -------- -------- -------- -------- December 31, 1997 (1)................... 148,549 35,301 5,351 16,455 11,294 216,950 ======== ======== ======== ======== ======== ======== January 1, 1996 ....................... 153,794 8,151 6,521 15,570 59,116 243,152 Revisions of previous estimates ..... 4,021 386 (900) 651 (3,231) 927 Extensions and discoveries .......... 12,769 1,798 263 1,234 5,261 21,325 Purchases of reserves in place ...... 6,217 16,935 -- -- 288 23,440 Sales of reserves in place .......... (20) -- -- -- (2,075) (2,095) Production .......................... (20,934) (1,305) (752) (1,117) (4,684) (28,792) -------- -------- -------- -------- -------- -------- December 31, 1996 (1)................... 155,847 25,965 5,132 16,338 54,675 257,957 ======== ======== ======== ======== ======== ======== PROVED DEVELOPED RESERVES (MBOE): DECEMBER 31, 1998 ................... 123,907 16,534 3,572 10,170 8,748 162,931 December 31, 1997 ................... 126,439 20,706 4,004 10,919 11,294 173,362 December 31, 1996 ................... 127,871 14,502 3,092 10,806 46,678 202,949
(1) At December 31, 1998, 1997 and 1996, approximately 11,558 MBOE, 12,963 MBOE and 14,072 MBOE, respectively, were dedicated to the monetary production payment. (2) Other primarily includes Seagull's interests in Indonesia. For 1997 and 1996, other also includes the Canadian oil and gas operations, which were sold in October 1997. The reserve volumes presented are estimates only and should not be construed as being exact quantities. These reserves may or may not be recovered and may increase or decrease as a result of future operations of the Company and changes in economic conditions. 75 78 SEAGULL ENERGY CORPORATION RESERVE QUANTITY INFORMATION
United Cote States Egypt d'Ivoire Tatarstan Other(2) Total ---------- ---------- ---------- ---------- ---------- ---------- PROVED OIL RESERVES (MBBL): JANUARY 1, 1998 ............................. 18,541 35,003 1,212 16,455 1,074 72,285 REVISIONS OF PREVIOUS ESTIMATES .......... (3,401) (5,248) 114 (1,929) 279 (10,185) EXTENSION AND DISCOVERIES ................ 886 1,828 131 -- -- 2,845 PURCHASES OF RESERVES IN PLACE ........... 1,734 -- -- -- -- 1,734 SALES OF RESERVES IN PLACE ............... (1,832) -- -- -- -- (1,832) PRODUCTION ............................... (1,834) (4,002) (360) (1,496) (72) (7,764) ---------- ---------- ---------- ---------- ---------- ---------- DECEMBER 31, 1998 (1) ....................... 14,094 27,581 1,097 13,030 1,281 57,083 ========== ========== ========== ========== ========== ========== January 1, 1997 ............................. 19,885 25,724 1,525 16,338 4,850 68,322 Revisions of previous estimates .......... (487) 3,708 263 (3,155) 2,142 2,471 Extension and discoveries ................ 754 7,783 27 4,784 969 14,317 Purchases of reserves in place ........... 204 1,171 -- -- -- 1,375 Sales of reserves in place ............... (52) -- -- -- (6,588) (6,640) Production ............................... (1,763) (3,383) (603) (1,512) (299) (7,560) ---------- ---------- ---------- ---------- ---------- ---------- December 31, 1997 (1) ....................... 18,541 35,003 1,212 16,455 1,074 72,285 ========== ========== ========== ========== ========== ========== January 1, 1996 ............................. 20,163 7,918 3,010 15,570 4,820 51,481 Revisions of previous estimates .......... (800) 384 (1,038) 651 (24) (827) Extension and discoveries ................ 1,656 1,792 64 1,234 916 5,662 Purchases of reserves in place ........... 429 16,935 -- -- 21 17,385 Sales of reserves in place ............... (2) -- -- -- (471) (473) Production ............................... (1,561) (1,305) (511) (1,117) (412) (4,906) ---------- ---------- ---------- ---------- ---------- ---------- December 31, 1996 (1) ....................... 19,885 25,724 1,525 16,338 4,850 68,322 ========== ========== ========== ========== ========== ========== PROVED DEVELOPED OIL RESERVES (MBBL): DECEMBER 31, 1998 ........................ 10,810 16,252 761 10,170 1,052 39,045 December 31, 1997 ........................ 14,406 20,452 866 10,919 1,074 47,717 December 31, 1996 ........................ 12,855 14,336 1,035 10,806 3,849 42,881 PROVED GAS RESERVES (MMCF): JANUARY 1, 1998 ............................. 780,046 1,786 24,835 -- 61,324 867,991 REVISIONS OF PREVIOUS ESTIMATES .......... (13,052) 854 997 -- 3,563 (7,638) EXTENSION AND DISCOVERIES ................ 86,821 6 206 -- -- 87,033 PURCHASES OF RESERVES IN PLACE ........... 95,195 -- -- -- -- 95,195 SALES OF RESERVES IN PLACE ............... (49,044) -- -- -- -- (49,044) PRODUCTION ............................... (104,022) (301) (3,106) -- (2,867) (110,296) ---------- ---------- ---------- ---------- ---------- ---------- DECEMBER 31, 1998 (1) ....................... 795,944 2,345 22,932 -- 62,020 883,241 ========== ========== ========== ========== ========== ========== January 1, 1997 ............................. 815,781 1,447 21,644 -- 298,961 1,137,833 Revisions of previous estimates .......... (7,548) 256 4,287 -- 40,630 37,625 Extension and discoveries ................ 80,372 83 1,149 -- 60,817 142,421 Purchases of reserves in place ........... 5,717 -- -- -- -- 5,717 Sales of reserves in place ............... (3,681) -- -- -- (321,609) (325,290) Production ............................... (110,595) -- (2,245) -- (17,475) (130,315) ---------- ---------- ---------- ---------- ---------- ---------- December 31, 1997 (1) ....................... 780,046 1,786 24,835 -- 61,324 867,991 ========== ========== ========== ========== ========== ========== January 1, 1996 ............................. 801,797 1,399 21,066 -- 325,784 1,150,046 Revisions of previous estimates .......... 28,925 13 828 -- (19,240) 10,526 Extension and discoveries ................ 66,678 35 1,195 -- 26,071 93,979 Purchases of reserves in place ........... 34,729 -- -- -- 1,603 36,332 Sales of reserves in place ............... (110) -- -- -- (9,625) (9,735) Production ............................... (116,238) -- (1,445) -- (25,632) (143,315) ---------- ---------- ---------- ---------- ---------- ---------- December 31, 1996 (1) ....................... 815,781 1,447 21,644 -- 298,961 1,137,833 ========== ========== ========== ========== ========== ========== PROVED DEVELOPED GAS RESERVES (MMCF): DECEMBER 31, 1998 ........................ 678,579 1,693 16,868 -- 46,175 743,315 December 31, 1997 ........................ 672,195 1,522 18,826 -- 61,324 753,867 December 31, 1996 ........................ 690,095 993 12,344 -- 256,976 960,408
(1) Year-end reserves include 1,888, 2,079 and 2,248 Mbbl of oil and 58,019, 65,306 and 70,914 MMcf of gas dedicated to the monetary production payment for 1998, 1997 and 1996, respectively. (2) Other primarily includes Seagull's interests in Indonesia. For 1997 and 1996, other also includes the Canadian oil and gas operations, which were sold in October 1997. 76 79 SEAGULL ENERGY CORPORATION The Company's standardized measure of discounted future net cash flows as of December 31, 1998 and 1997 and changes therein for each of the years 1998, 1997 and 1996 are provided based on the present value of future net revenues from proved oil and gas reserves estimated by independent petroleum engineers in accordance with guidelines established by the Securities and Exchange Commission. These estimates were computed by applying appropriate year-end prices for oil and gas to estimated future production of proved oil and gas reserves over the economic lives of the reserves and assuming continuation of existing operating conditions. Year-end 1998 calculations were made using prices of $9.06 per Bbl and $2.03 per Mcf for oil and gas, respectively. The Company's average realized prices for the year ended December 31, 1998 were $10.93 per Bbl and $2.04 per Mcf for oil and gas, respectively. Seagull's average prices for the month ended January 31, 1999 were $9.63 per Bbl and $1.79 per Mcf for oil and gas, respectively. Because the disclosure requirements are standardized, significant changes can occur in these estimates based upon oil and gas prices in effect at year-end. The following estimates should not be viewed as an estimate of fair market value. Income taxes are computed by applying the statutory income tax rate in the jurisdiction to the net cash inflows relating to proved oil and gas reserves less the tax bases of the properties involved and giving effect to appropriate net operating loss carryforwards, tax credits and allowances relating to such properties. STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS (AMOUNTS IN THOUSANDS)
United Cote States Egypt d'Ivoire Tatarstan Other Total ----------- ----------- ----------- ------------ ----------- ----------- DECEMBER 31, 1998: FUTURE CASH INFLOWS .................. $ 1,752,651 $ 282,058 $ 45,255 $ 90,691 $ 118,953 $ 2,289,608 FUTURE DEVELOPMENT COSTS ............. (149,431) (45,733) (6,475) (8,491) -- (210,130) FUTURE PRODUCTION COSTS .............. (524,808) (121,427) (16,608) (54,341) (43,007) (760,191) ----------- ----------- ----------- ----------- ----------- ----------- FUTURE NET CASH FLOWS BEFORE INCOME TAXES ....................... 1,078,412 114,898 22,172 27,859 75,946 1,319,287 10% ANNUAL DISCOUNT .................. (452,171) (31,647) (5,505) (13,119) (40,665) (543,107) ----------- ----------- ----------- ----------- ----------- ----------- DISCOUNTED FUTURE NET CASH FLOWS BEFORE INCOME TAXES .......... 626,241 83,251 16,667 14,740 35,281 776,180 DISCOUNTED INCOME TAXES .............. (51,235) (6,650) (131) (2,346) (21,704) (82,066) ----------- ----------- ----------- ----------- ----------- ----------- STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS .............................. $ 575,006 $ 76,601 $ 16,536 $ 12,394 $ 13,577 $ 694,114 =========== =========== =========== =========== =========== =========== December 31, 1997: Future cash inflows .................. $ 2,174,296 $ 576,178 $ 67,976 $ 227,401 $ 169,394 $ 3,215,245 Future development costs ............. (140,603) (122,066) (6,661) (33,395) -- (302,725) Future production costs .............. (552,878) (156,970) (19,048) (103,453) (40,248) (872,597) ----------- ----------- ----------- ----------- ----------- ----------- Future net cash flows before income taxes ....................... 1,480,815 297,142 42,267 90,553 129,146 2,039,923 10% annual discount .................. (606,449) (93,567) (11,239) (42,846) (66,459) (820,560) ----------- ----------- ----------- ----------- ----------- ----------- Discounted future net cash flows before income taxes ................ 874,366 203,575 31,028 47,707 62,687 1,219,363 Discounted income taxes .............. (165,620) (70,935) (8,028) (12,664) (29,673) (286,920) ----------- ----------- ----------- ----------- ----------- ----------- Standardized measure of discounted future net cash flows ... $ 708,746 $ 132,640 $ 23,000 $ 35,043 $ 33,014 $ 932,443 =========== =========== =========== =========== =========== ===========
77 80 SEAGULL ENERGY CORPORATION PRINCIPAL SOURCES OF CHANGE IN THE STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS (AMOUNTS IN THOUSANDS)
Year Ended December 31, --------------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Beginning of Year .................................................. $ 932,443 $ 1,544,522 $ 861,351 Revisions of previous quantity estimates less related costs ..... (43,458) 58,132 3,825 Extensions and discoveries less related costs ................... 80,455 196,358 209,860 Purchases of reserves in place .................................. 65,392 12,082 219,510 Sales of reserves in place ...................................... (52,745) (212,125) (6,593) Net changes in future prices and production costs ............... (453,468) (811,501) 785,928 Development costs incurred during the period .................... 132,331 137,806 108,763 Sales of oil and gas produced, net of production costs .......... (199,495) (313,606) (299,702) Accretion of discount ........................................... 121,936 213,787 110,396 Net changes in income taxes ..................................... 204,854 306,428 (350,738) Changes in production, timing and other ......................... (94,131) (199,440) (98,078) ----------- ----------- ----------- (238,329) (612,079) 683,171 ----------- ----------- ----------- End of Year ........................................................ $ 694,114 $ 932,443 $ 1,544,522 =========== =========== ===========
18. SUBSEQUENT EVENT As discussed in Note 1, in November 1998, Seagull and OEI executed an Agreement and Plan of Merger. Seagull and OEI will each hold a shareholder's meeting where the respective shareholders will vote to approve or disapprove the merger of Seagull and OEI. The merger will be accounted for under the "purchase" method of accounting. Because OEI stockholders will own a majority of the combined company common stock, the accounting treatment of the merger will reflect OEI acquiring Seagull in a purchase business combination. Under this method of accounting, the combined company's historical results for periods prior to the merger will be the same as OEI's historical results. The following table presents the unaudited pro forma results (stated in thousands except per share data) of Seagull and Ocean Energy as though the merger had occurred on January 1, 1997 and to reflect New Ocean's operations utilizing the full cost method of accounting for oil and gas activities: UNAUDITED PRO FORMA INFORMATION
Year Ended December 31, -------------------------------- 1998 1997 ------------- ------------- Revenues ........................................................ $ 958,101 $ 1,099,797 Net income (loss) before extraordinary item ..................... (380,306) 145,729 Basic earnings (loss) per share before extraordinary item ....... (2.32) 0.93 Diluted earnings (loss) per share before extraordinary item ..... (2.32) 0.91
The unaudited pro forma information does not purport to be indicative of actual results, if the merger had been in effect for the periods indicated, or of future results. 78 81 SEAGULL ENERGY CORPORATION ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Incorporated herein by reference to "Election of Directors" included in the Proxy Statement for the Company's Annual Meeting of Shareholders to be held in May 1999 (the "Proxy Statement"). See also "Executive Officers of the Company" included in Part I of this Annual Report on Form 10-K, which is incorporated by reference herein. ITEM 11. EXECUTIVE COMPENSATION Incorporated herein by reference to "Executive Compensation--Summary Compensation Table," "--Compensation Arrangements," "--Option Exercises and Fiscal Year-End Values," "--Option Grants," "--Executive Supplemental Retirement Plan," "--ENSTAR Natural Gas Company Supplemental Executive Retirement Plan" and "--ENSTAR Natural Gas Company Retirement Plan"; and "Election of Directors--Compensation of Directors" included in the Proxy Statement. Notwithstanding any provision in this Annual Report on Form 10-K to the contrary, under no circumstances are the "Compensation Committee Report" or the information under the heading "Shareholder Return Performance Presentation" incorporated herein for any purpose. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated herein by reference to "Principal Shareholders" and "Election of Directors--Security Ownership of Directors and Management" included in the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated herein by reference to "Election of Directors--Certain Transactions" included in the Proxy Statement. 79 82 SEAGULL ENERGY CORPORATION PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 2. SCHEDULES: All schedules have been omitted because the required information is insignificant or not applicable. 3. EXHIBITS: 3.1 Articles of Incorporation of the Company, as amended, and that certain Statement of Resolution Establishing Series of Shares of Series B Junior Participating Preferred Stock of Seagull Energy Corporation filed March 21, 1989 with the Secretary of State of the State of Texas (incorporated by reference to Exhibit 3.1 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). 3.2 Bylaws of the Company, as amended through March 7, 1997 (incorporated by reference to Exhibit 4.9 to Form S-3 filed with the Securities and Exchange Commission on September 18, 1997). 4.1 $500,000,000 Revolving Credit and Competitive Bid Facility among Seagull Energy Corporation, The Chase Manhattan Bank, Morgan Guaranty Trust Company of New York, NationsBank of Texas, N.A., and The Other Banks Signatory Thereto, dated December 27, 1997 (incorporated by reference to Exhibit 4.1 to Annual Report on Form 10-K for the year ended December 31, 1997). 4.2 Senior Indenture dated as of July 15, 1993 by and between the Company and The Bank of New York, as Trustee (incorporated by reference to Exhibit 4.1 to Quarterly Report on Form 10-Q for the quarter ended March 31, 1998). 4.3 Senior Subordinated Indenture dated as of July 15, 1993 by and between the Company and The Bank of New York, as Trustee (incorporated by reference to Exhibit 4.2 to Quarterly Report on Form 10-Q for the quarter ended March 31, 1998). 4.4 Senior Indenture among the Company and The Bank of New York, as Trustee, and Specimen of 7 1/2% Senior Notes due September 15, 2027 (incorporated by reference to Exhibit 4.4 to Annual Report on Form 10-K for the year ended December 31, 1997). 4.5 Terms Agreement and the resolutions of adoption by the Chairman of the Board of Directors related to Exhibit 4.4 (incorporated by reference to Exhibit 2.3 to Current Report on Form 8-K filed with the Securities and Exchange Commission on October 17, 1997). 4.6 Note Agreement dated May 14, 1992 by and among Alaska Pipeline Company and each of the purchasers thereto (including forms of notes and other exhibits thereto) and Inducement Agreement of even date therewith by and among Seagull and Aid Association for Lutherans, The Equitable Life Assurance Society of the United States, Equitable Variable Life Insurance Company, Provident Life & Accident Insurance Company and Teachers Insurance & Annuity Association of America (including exhibits thereto) (incorporated by reference to Exhibit 4.1 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1997). 80 83 SEAGULL ENERGY CORPORATION 4.7 Trust Agreement dated as of September 1, 1995 for the Seagull Series 1995 Trust (the Trust Agreement is incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1995; the Guaranty by Seagull Energy Corporation in favor of the Seagull Series 1995 Trust is incorporated by reference to Exhibit 10.2 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). 4.8 Amended and Restated Rights Agreement dated March 17, 1989, as amended effective June 13, 1992, and amended and restated as of December 12, 1997, between the Company and BankBoston, N.A. (as successor to NCNB Texas National Bank), including Form of Statement of Resolution Establishing the Series B Junior Participating Preferred Stock, the Form of Right Certificate and Form of Summary of Rights to Purchase Preferred Shares (the Agreement is incorporated by reference to Exhibit 2 to Current Report on Form 8-K dated December 15, 1997; Amendment No. 1 dated November 24, 1998 is incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K filed on December 1, 1998). # 10.1 Seagull Energy Corporation 1998 Executive Incentive Plan (incorporated by reference to Exhibit 10.2 to Quarterly Report on Form 10-Q for the quarter ended March 31, 1998). # 10.2 Seagull Energy Corporation 1981 Stock Option Plan (Restated), including forms of agreements, as amended (incorporated by reference to Exhibit 10.3 to Quarterly Report on Form 10-Q for the quarter ended March 31, 1998). # 10.3 Seagull Energy Corporation 1983 Stock Option Plan (Restated), including forms of agreements, as amended (plan is incorporated by reference to Exhibit 10.4 to Quarterly Report on Form 10-Q for the quarter ended March 31, 1998). # 10.4 Seagull Energy Corporation 1986 Stock Option Plan (Restated), including forms of agreements, as amended (incorporated by reference to Exhibit 10.5 to Quarterly Report on Form 10-Q for the quarter ended March 31, 1998). # 10.5 Seagull Energy Corporation 1990 Stock Option Plan, including forms of agreements, as amended (incorporated by reference to Exhibit 10.22 to Annual Report on Form 10-K for the year ended December 31, 1995; Form of Amendment to Stock Option Agreement(s) is incorporated by reference to Exhibit 10.7 to Annual Report on Form 10-K for the year ended December 31, 1996). # 10.6 Global Natural Resources Inc. 1989 Key Employees Stock Option Plan (the Plan is incorporated by reference to Exhibit 4.1 to Registration Statement No. 33-31537 of Global Natural Resources Inc.; the Form of Stock Option Agreement is incorporated by reference to Exhibit 4.2 to Registration Statement No. 33-31537 of Global Natural Resources Inc.; Form of Amendment to Stock Option Agreement(s) is incorporated by reference to Exhibit 10.8 to Annual Report on Form 10-K for the year ended December 31, 1996). # 10.7 Global Natural Resources Inc. 1992 Stock Option Plan (the Plan is incorporated by reference to Exhibit 10.47 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 1992 of Global Natural Resources Inc. (Registration No. 1-8674); the Form of Stock Option Agreement is incorporated by reference to Exhibit 10.48 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 1992 of Global Natural Resources Inc. (Registration No. 1-8674); Form of Amendment to Stock Option Agreement(s) is incorporated by reference to Exhibit 10.9 to Annual Report on Form 10-K for the year ended December 31, 1996). # 10.8 Seagull Energy Corporation 1993 Nonemployee Directors' Stock Option Plan, including forms of agreements, as amended (incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1997). 81 84 SEAGULL ENERGY CORPORATION # 10.9 Seagull Energy Corporation 1993 Stock Option Plan, as amended (incorporated by reference to Exhibit 10.3 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1997). # 10.10 1995 Omnibus Stock Plan (the Plan is incorporated by reference to Exhibit 10.3 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1995; Form of Amendment to Stock Option Agreement(s) is incorporated by reference to Exhibit 10.12 to Annual Report on Form 10-K for the year ended December 31, 1996). # 10.11 1998 Omnibus Stock Plan (incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). # 10.12 Seagull Energy Corporation Management Stability Plan (the Plan is incorporated by reference to Exhibit 10.35 to Annual Report on Form 10-K for the year ended December 31, 1994; the First Amendment is incorporated by reference to Exhibit 10.13 to Annual Report on Form 10-K for the year ended December 31, 1996; the Second and Third Amendments are incorporated by reference to Exhibit 10.4 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1998; the Fourth Amendment is filed herewith). # 10.13 Outside Directors Deferred Fee Plan of the Company, as amended and restated (incorporated by reference to Exhibit 10.2 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1996; the Third Amendment is incorporated by reference to Exhibit 10.5 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1998). # 10.14 Employment Agreement by and between the Company and James T. Hackett (incorporated by reference to Exhibit 10.6 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1998). # 10.15 Executive Supplemental Retirement Plan Membership Agreement by and between the Company and James T. Hackett (incorporated by reference to Exhibit 10.7 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1998). # 10.16 Severance Agreement between the Company and James T. Hackett (incorporated by reference to Exhibit 10.8 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1998). # 10.17 Employment and Consulting Agreement by and between the Company and Barry J. Galt (incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1998). # 10.18 Executive Supplemental Retirement Plan Membership Agreement between the Company and Barry J. Galt dated as of February 3, 1986, as amended (incorporated by reference to Exhibit 10.2 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1996). # 10.19 Restricted Stock Agreement made and entered into as of March 17, 1995 between Seagull Energy Corporation and Barry J. Galt (incorporated by reference to Exhibit 10.32 to Annual Report on Form 10-K for the year ended December 31, 1994). # 10.20 Severance Agreement, including Amendment and Second Amendment to Severance Agreement, between the Company and Barry J. Galt (incorporated by reference to Exhibit 10.2 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1998). # 10.21 Seagull Energy Corporation Executive Supplemental Retirement Plan, as amended (incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended 82 85 SEAGULL ENERGY CORPORATION September 30, 1996; the Third Amendment is incorporated by reference to Exhibit 10.11 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1998). # 10.22 Seagull Energy Corporation Supplemental Benefit Plan, as amended, including the First Amendment thereto (incorporated by reference to Exhibit 10.11 to Annual Report on Form 10-K for the year ended December 31, 1995; the Third Amendment is incorporated by reference to Exhibit 10.12 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1998; the Fourth Amendment is incorporated herein). # 10.23 Form of Severance Agreement, including Form of Amendment and Second Amendment to Severance Agreement, between the Company and Richard F. Barnes and William L. Transier (incorporated by reference to Exhibit 10.3 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1998). # 10.24 Severance Agreement, including Amendment and Second Amendment to Severance Agreement, between the Company and Gerald R. Colley (incorporated by reference to Exhibit 10.9 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1998). # 10.25 Severance Agreement, including Amendment and Second Amendment to Severance Agreement, between the Company and Carl B. King (incorporated by reference to Exhibit 10.10 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1998). # 10.26 Consulting Agreement between Robert Vagt and Seagull Energy Corporation (incorporated by reference to Exhibit 10.9 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1997; First Amendment is filed herewith). 10.27 Royalty Incentive Plan, as amended (incorporated by reference to Exhibit 1.4 to the Annual Report on Form 20-F for the year ended December 31, 1981 of the U.K. Company). 10.28 Share Sale Agreement, dated as of September 11, 1997, by and between Seagull Energy Canada Holding Company, Seagull Energy Corporation and Rio Alto Exploration Ltd. (incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K dated September 11, 1997). 10.29 Purchase and Sale Agreement, dated as of March 30, 1998, by and between Seagull Energy Corporation and the shareholders of BRG Petroleum, Inc. (incorporated by reference to Exhibit 10.6 to Quarterly Report on Form 10-Q for the quarter ended March 31, 1998). 10.30 Agreement and Plan of Merger, dated as of November 24, 1998 among Seagull and OEI, including amendments (Agreement and Plan of Merger is incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K filed on December 1, 1998; Amendment No. 1 is incorporated by reference to Exhibit 2.2 to the Company's Registration Statement on Form S-4 (Reg. No. 333-68679) filed with the SEC on December 10, 1998). 10.31 Promissory Note between John D. Schiller, Jr. and Seagull. 10.32 Promissory Note between William L. Transier and Seagull. 10.33 Promissory Note between Barry J. Galt and Seagull. 21 Subsidiaries of Seagull Energy Corporation. 23.1 Consent of KPMG LLP. 23.2 Consent of Ryder Scott Company, independent petroleum engineers. 83 86 SEAGULL ENERGY CORPORATION 23.3 Consent of DeGolyer and MacNaughton, independent petroleum engineers. 23.4 Consent of Netherland, Sewell and Associates, Inc., independent petroleum engineers. 27.1 Financial Data Schedule. - ---------- # Identifies management contracts and compensatory plans or arrangements. (b) REPORTS ON FORM 8-K The Company filed a Current Report on Form 8-K, dated December 1, 1998, with respect to its Agreement and Plan of Merger with OEI. 84 87 SEAGULL ENERGY CORPORATION 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. SEAGULL ENERGY CORPORATION Date: February 16, 1999 By: /s/ James T. Hackett ------------------------------------- James T. Hackett, Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. By: /s/ James T. Hackett By: /s/ Milton Carroll ----------------------------------------------- ------------------------------------------ James T. Hackett, Chairman of the Board, Milton Carroll, Director President, Chief Executive Officer and Director (Principal Executive Officer) Date: February 16, 1999 Date: February 16, 1999 By: /s/ Thomas H. Cruikshank ------------------------------------------ By: /s/ William L. Transier Thomas H. Cruikshank, Director ----------------------------------------------- William L. Transier, Executive Vice President Date: February 16, 1999 and Chief Financial Officer (Principal Financial Officer) By: /s/ Peter J. Fluor Date: February 16, 1999 ------------------------------------------ Peter J. Fluor, Director By: /s/ Barry J. Galt Date: February 16, 1999 ----------------------------------------------- Barry J. Galt, Vice Chairman of the Board And Director By: /s/ Dee S. Osborne ------------------------------------------ Date: February 16, 1999 Dee S. Osborne, Director Date: February 16, 1999 By: /s/ Gordon L. McConnell ----------------------------------------------- Gordon L. McConnell, Vice President and By: /s/ Sidney R. Petersen Controller (Principal Accounting Officer) ------------------------------------------ Sidney R. Petersen, Director Date: February 16, 1999 Date: February 16, 1999 By: /s/ J. Evans Attwell ----------------------------------------------- By: /s/ Sam F. Segnar J. Evans Attwell, Director ------------------------------------------ Sam F. Segnar, Director Date: February 16, 1999 Date: February 16, 1999 By: /s/ Richard J. Burgess ----------------------------------------------- By: /s/ Robert F. Vagt Richard J. Burgess, Director ------------------------------------------ Robert F. Vagt, Director Date: February 16, 1999 Date: February 16, 1999 By: /s/ R. A. Walker ------------------------------------------ R. A. Walker, Director Date: February 16, 1999
85 88 INDEX TO EXHIBITS Exhibit No. Description ------- ----------- 3.1 Articles of Incorporation of the Company, as amended, and that certain Statement of Resolution Establishing Series of Shares of Series B Junior Participating Preferred Stock of Seagull Energy Corporation filed March 21, 1989 with the Secretary of State of the State of Texas (incorporated by reference to Exhibit 3.1 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). 3.2 Bylaws of the Company, as amended through March 7, 1997 (incorporated by reference to Exhibit 4.9 to Form S-3 filed with the Securities and Exchange Commission on September 18, 1997). 4.1 $500,000,000 Revolving Credit and Competitive Bid Facility among Seagull Energy Corporation, The Chase Manhattan Bank, Morgan Guaranty Trust Company of New York, NationsBank of Texas, N.A., and The Other Banks Signatory Thereto, dated December 27, 1997 (incorporated by reference to Exhibit 4.1 to Annual Report on Form 10-K for the year ended December 31, 1997). 4.2 Senior Indenture dated as of July 15, 1993 by and between the Company and The Bank of New York, as Trustee (incorporated by reference to Exhibit 4.1 to Quarterly Report on Form 10-Q for the quarter ended March 31, 1998). 4.3 Senior Subordinated Indenture dated as of July 15, 1993 by and between the Company and The Bank of New York, as Trustee (incorporated by reference to Exhibit 4.2 to Quarterly Report on Form 10-Q for the quarter ended March 31, 1998). 4.4 Senior Indenture among the Company and The Bank of New York, as Trustee, and Specimen of 7 1/2% Senior Notes due September 15, 2027 (incorporated by reference to Exhibit 4.4 to Annual Report on Form 10-K for the year ended December 31, 1997). 4.5 Terms Agreement and the resolutions of adoption by the Chairman of the Board of Directors related to Exhibit 4.4 (incorporated by reference to Exhibit 2.3 to Current Report on Form 8-K filed with the Securities and Exchange Commission on October 17, 1997). 4.6 Note Agreement dated May 14, 1992 by and among Alaska Pipeline Company and each of the purchasers thereto (including forms of notes and other exhibits thereto) and Inducement Agreement of even date therewith by and among Seagull and Aid Association for Lutherans, The Equitable Life Assurance Society of the United States, Equitable Variable Life Insurance Company, Provident Life & Accident Insurance Company and Teachers Insurance & Annuity Association of America (including exhibits thereto) (incorporated by reference to Exhibit 4.1 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1997). 89 4.7 Trust Agreement dated as of September 1, 1995 for the Seagull Series 1995 Trust (the Trust Agreement is incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1995; the Guaranty by Seagull Energy Corporation in favor of the Seagull Series 1995 Trust is incorporated by reference to Exhibit 10.2 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). 4.8 Amended and Restated Rights Agreement dated March 17, 1989, as amended effective June 13, 1992, and amended and restated as of December 12, 1997, between the Company and BankBoston, N.A. (as successor to NCNB Texas National Bank), including Form of Statement of Resolution Establishing the Series B Junior Participating Preferred Stock, the Form of Right Certificate and Form of Summary of Rights to Purchase Preferred Shares (the Agreement is incorporated by reference to Exhibit 2 to Current Report on Form 8-K dated December 15, 1997; Amendment No. 1 dated November 24, 1998 is incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K filed on December 1, 1998). # 10.1 Seagull Energy Corporation 1998 Executive Incentive Plan (incorporated by reference to Exhibit 10.2 to Quarterly Report on Form 10-Q for the quarter ended March 31, 1998). # 10.2 Seagull Energy Corporation 1981 Stock Option Plan (Restated), including forms of agreements, as amended (incorporated by reference to Exhibit 10.3 to Quarterly Report on Form 10-Q for the quarter ended March 31, 1998). # 10.3 Seagull Energy Corporation 1983 Stock Option Plan (Restated), including forms of agreements, as amended (plan is incorporated by reference to Exhibit 10.4 to Quarterly Report on Form 10-Q for the quarter ended March 31, 1998). # 10.4 Seagull Energy Corporation 1986 Stock Option Plan (Restated), including forms of agreements, as amended (incorporated by reference to Exhibit 10.5 to Quarterly Report on Form 10-Q for the quarter ended March 31, 1998). # 10.5 Seagull Energy Corporation 1990 Stock Option Plan, including forms of agreements, as amended (incorporated by reference to Exhibit 10.22 to Annual Report on Form 10-K for the year ended December 31, 1995; Form of Amendment to Stock Option Agreement(s) is incorporated by reference to Exhibit 10.7 to Annual Report on Form 10-K for the year ended December 31, 1996). # 10.6 Global Natural Resources Inc. 1989 Key Employees Stock Option Plan (the Plan is incorporated by reference to Exhibit 4.1 to Registration Statement No. 33-31537 of Global Natural Resources Inc.; the Form of Stock Option Agreement is incorporated by reference to Exhibit 4.2 to Registration Statement No. 33-31537 of Global Natural Resources Inc.; Form of Amendment to Stock Option Agreement(s) is incorporated by reference to Exhibit 10.8 to Annual Report on Form 10-K for the year ended December 31, 1996). # 10.7 Global Natural Resources Inc. 1992 Stock Option Plan (the Plan is incorporated by reference to Exhibit 10.47 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 1992 of Global Natural Resources Inc. (Registration No. 1-8674); the Form of Stock Option Agreement is incorporated by reference to Exhibit 10.48 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 1992 of Global Natural Resources Inc. (Registration No. 1-8674); Form of Amendment to Stock Option Agreement(s) is incorporated by reference to Exhibit 10.9 to Annual Report on Form 10-K for the year ended December 31, 1996). # 10.8 Seagull Energy Corporation 1993 Nonemployee Directors' Stock Option Plan, including forms of agreements, as amended (incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1997). 90 # 10.9 Seagull Energy Corporation 1993 Stock Option Plan, as amended (incorporated by reference to Exhibit 10.3 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1997). # 10.10 1995 Omnibus Stock Plan (the Plan is incorporated by reference to Exhibit 10.3 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1995; Form of Amendment to Stock Option Agreement(s) is incorporated by reference to Exhibit 10.12 to Annual Report on Form 10-K for the year ended December 31, 1996). # 10.11 1998 Omnibus Stock Plan (incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). # 10.12 Seagull Energy Corporation Management Stability Plan (the Plan is incorporated by reference to Exhibit 10.35 to Annual Report on Form 10-K for the year ended December 31, 1994; the First Amendment is incorporated by reference to Exhibit 10.13 to Annual Report on Form 10-K for the year ended December 31, 1996; the Second and Third Amendments are incorporated by reference to Exhibit 10.4 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1998; the Fourth Amendment is filed herewith). # 10.13 Outside Directors Deferred Fee Plan of the Company, as amended and restated (incorporated by reference to Exhibit 10.2 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1996; the Third Amendment is incorporated by reference to Exhibit 10.5 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1998). # 10.14 Employment Agreement by and between the Company and James T. Hackett (incorporated by reference to Exhibit 10.6 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1998). # 10.15 Executive Supplemental Retirement Plan Membership Agreement by and between the Company and James T. Hackett (incorporated by reference to Exhibit 10.7 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1998). # 10.16 Severance Agreement between the Company and James T. Hackett (incorporated by reference to Exhibit 10.8 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1998). # 10.17 Employment and Consulting Agreement by and between the Company and Barry J. Galt (incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1998). # 10.18 Executive Supplemental Retirement Plan Membership Agreement between the Company and Barry J. Galt dated as of February 3, 1986, as amended (incorporated by reference to Exhibit 10.2 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1996). # 10.19 Restricted Stock Agreement made and entered into as of March 17, 1995 between Seagull Energy Corporation and Barry J. Galt (incorporated by reference to Exhibit 10.32 to Annual Report on Form 10-K for the year ended December 31, 1994). # 10.20 Severance Agreement, including Amendment and Second Amendment to Severance Agreement, between the Company and Barry J. Galt (incorporated by reference to Exhibit 10.2 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1998). # 10.21 Seagull Energy Corporation Executive Supplemental Retirement Plan, as amended (incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended 91 September 30, 1996; the Third Amendment is incorporated by reference to Exhibit 10.11 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1998). # 10.22 Seagull Energy Corporation Supplemental Benefit Plan, as amended, including the First Amendment thereto (incorporated by reference to Exhibit 10.11 to Annual Report on Form 10-K for the year ended December 31, 1995; the Third Amendment is incorporated by reference to Exhibit 10.12 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1998; the Fourth Amendment is incorporated herein). # 10.23 Form of Severance Agreement, including Form of Amendment and Second Amendment to Severance Agreement, between the Company and Richard F. Barnes and William L. Transier (incorporated by reference to Exhibit 10.3 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1998). # 10.24 Severance Agreement, including Amendment and Second Amendment to Severance Agreement, between the Company and Gerald R. Colley (incorporated by reference to Exhibit 10.9 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1998). # 10.25 Severance Agreement, including Amendment and Second Amendment to Severance Agreement, between the Company and Carl B. King (incorporated by reference to Exhibit 10.10 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1998). # 10.26 Consulting Agreement between Robert Vagt and Seagull Energy Corporation (incorporated by reference to Exhibit 10.9 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1997; First Amendment is filed herewith). 10.27 Royalty Incentive Plan, as amended (incorporated by reference to Exhibit 1.4 to the Annual Report on Form 20-F for the year ended December 31, 1981 of the U.K. Company). 10.28 Share Sale Agreement, dated as of September 11, 1997, by and between Seagull Energy Canada Holding Company, Seagull Energy Corporation and Rio Alto Exploration Ltd. (incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K dated September 11, 1997). 10.29 Purchase and Sale Agreement, dated as of March 30, 1998, by and between Seagull Energy Corporation and the shareholders of BRG Petroleum, Inc. (incorporated by reference to Exhibit 10.6 to Quarterly Report on Form 10-Q for the quarter ended March 31, 1998). 10.30 Agreement and Plan of Merger, dated as of November 24, 1998 among Seagull and OEI, including amendments (Agreement and Plan of Merger is incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K filed on December 1, 1998; Amendment No. 1 is incorporated by reference to Exhibit 2.2 to the Company's Registration Statement on Form S-4 (Reg. No. 333-68679) filed with the SEC on December 10, 1998). 10.31 Promissory Note between John D. Schiller, Jr. and Seagull. 10.32 Promissory Note between William L. Transier and Seagull. 10.33 Promissory Note between Barry J. Galt and Seagull. 21 Subsidiaries of Seagull Energy Corporation. 23.1 Consent of KPMG LLP. 23.2 Consent of Ryder Scott Company, independent petroleum engineers. 92 23.3 Consent of DeGolyer and MacNaughton, independent petroleum engineers. 23.4 Consent of Netherland, Sewell and Associates, Inc., independent petroleum engineers. 27.1 Financial Data Schedule. - ---------- # Identifies management contracts and compensatory plans or arrangements. EX-10.12 2 4TH AMEND. TO MANAGEMENT STABILITY PLAN 1 EXHIBIT 10.12 FOURTH AMENDMENT TO SEAGULL ENERGY CORPORATION MANAGEMENT STABILITY PLAN WHEREAS, SEAGULL ENERGY CORPORATION (the "COMPANY") has heretofore adopted and currently maintains the SEAGULL ENERGY CORPORATION MANAGEMENT STABILITY PLAN (the "PLAN"); and WHEREAS, the Company desires to amend the Plan in certain respects; NOW, THEREFORE, the Plan is hereby amended as follows, effective as of January 1, 1999: 1. The following sentence shall be added to Section 2.3 of the Plan: "Notwithstanding the foregoing, in the event that salary continuation or severance payments are payable by the Employer to a Covered Employee for any reason other than under this Plan ("Other Severance Payments"), including, but not limited to, under any other Employer plan, policy or agreement, other than a "plan" within the meaning of section 3(3) of the Employee Retirement Income Security Act of 1974, as amended, or as a result of the application of the Worker Adjustment and Retraining Notification Act, 29 U.S.C. Section 2101 et. seq. (the "WARN Act"), or an election by the Employer to make payments in lieu of notice as if the WARN Act applied, whether or not it does so apply, to an Involuntary Termination of a Covered Employee, no severance payments shall be payable as provided in Sections 2.1(a) or (b) to such Covered Employee except to the extent such severance payments exceed the aggregate amount of Other Severance Payments payable to such Covered Employee." 2. Other than with respect to the transactions contemplated by the Agreement and Plan of Merger between Seagull Energy Corporation and Ocean Energy, Inc. (dated as of November 24, 1998), which, if consummated, shall constitute a "Change of Control" for all purposes under the Plan following which severance benefits shall be payable as provided herein, the Plan shall be, and is hereby, terminated. 3. As amended hereby, the Plan is specifically ratified and reaffirmed. 2 EXECUTED this 26th day of January, 1999. SEAGULL ENERGY CORPORATION BY: /s/ WILLIAM L. TRANSIER ----------------------------------- NAME: William L. Transier ------------------------------ TITLE: Executive Vice President and Chief Financial Officer ----------------------------- -2- EX-10.22 3 SUPPLEMENTAL BENEFIT PLAN, AS AMENDED 1 EXHIBIT 10.22 FOURTH AMENDMENT TO SEAGULL ENERGY CORPORATION SUPPLEMENTAL BENEFIT PLAN WHEREAS, SEAGULL ENERGY CORPORATION (the "Company") has heretofore adopted the SEAGULL ENERGY CORPORATION SUPPLEMENTAL BENEFIT PLAN (the "Plan"); and WHEREAS, the Company desires to amend the Plan; NOW, THEREFORE, the Plan shall be amended as follows, effective as of January 1, 1999: 1. Section 2.3 of the Plan shall be deleted and the following shall be substituted therefor: "2.3 BONUS DEFERRAL ELECTION. Any Participant may elect to defer receipt of an integral percentage of from 1% to 100% of his Bonus for any calendar year under this Plan. A Participant's election to defer receipt of a percentage of his Bonus under this Plan shall be made prior to January 1 of the calendar year during which such Bonus is paid and shall be irrevocable for such calendar year. The reduction of a Participant's Bonus pursuant to this election shall be effected at the time such Bonus is paid." 2. The following sentence shall be added to Section 3.1 of the Plan: "Each Participant's Deferred Compensation Account shall be divided into subaccounts to reflect such Participant's deferrals of Compensation or Bonus under the Plan for any Plan Year." 3. Section 3.4(b) of the Plan shall be deleted and the following shall be substituted therefor: "(b) ALTERNATIVE INVESTMENT IN STOCK UNITS. (1) In lieu of having his Accounts credited with interest equivalents pursuant to Paragraph (a) above, a Participant may elect in accordance with the provisions of Paragraph (c) below to have the value of all or a portion of his Accounts determined as if they had been credited with a number of shares of stock (the "Phantom Stock") equal to the number of shares of common stock of the Company which could have been purchased with such amounts on the date of such election and, for amounts which are subsequently credited to the Participant's Accounts, on the date such amounts are so credited, based upon the average of the closing prices of the common stock of the Company on the twenty trading days preceding such date. 2 (2) As of the last day of each calendar quarter and as of any other date which the Committee shall determine, the Committee shall redetermine the value of the portion of each Participant's Accounts credited with Phantom Stock based upon the increase or decrease in the value of the common stock of the Company during such quarter; for the purpose of such redetermination, one share of Phantom Stock shall be deemed to be the equivalent of one share of common stock of the Company. Further, the portion of each Participant's Accounts credited with such Phantom Stock shall be credited with the amount of any cash dividends paid with respect to the common stock of the Company during such quarter in accordance with Paragraph (b)(1) above. (3) If, and whenever, the Company shall effect a subdivision or consolidation of the common stock of the Company or the payment of a stock dividend on the common stock of the Company (including, without limitation, the two-for-one stock split proposed to be effected with a record date of May 21, 1993), (i) in the event of an increase in the number of outstanding shares of the common stock of the Company, the number of shares of Phantom Stock credited to each Participant's Accounts shall be proportionately increased and (ii) in the event of an reduction in the number of outstanding shares of the common stock of the Company, the number of shares of Phantom Stock credited to each Participant's Accounts shall be proportionately reduced. 4. Section 3.4(c) of the Plan shall be deleted and the following shall be substituted therefor: "(c) CREDITING ELECTION. Prior to the first day of any calendar quarter, a Participant may elect to have all or a portion of his Accounts credited with Phantom Stock pursuant to Paragraph (b) above for such quarter. Any such election shall be effective until revoked by the Participant. If a Participant revokes an election made pursuant to this Paragraph with respect all or a portion of his Accounts as of the first day of any calendar quarter, such Participant's Accounts shall be credited with the value of the corresponding number of shares of Phantom Stock credited to his Accounts with respect to as of the last day of the prior calendar quarter, based upon the average of the closing prices of common stock of the Company on the twenty trading days preceding such date. If a Participant fails to make any election under this Paragraph, his Accounts shall be credited with interest equivalents pursuant to Paragraph (a) above." 5. Article V of the Plan shall be deleted and the following shall be substituted therefor: -2- 3 "ARTICLE V FORM AND TIMING OF BENEFITS 5.1 PAYMENT OF BONUS DEFERRALS. Subject to the provisions of Section 5.2, a Participant may elect to have all or a portion of Bonus amounts credited to his Deferred Compensation Account during Plan Years beginning on or after January 1, 1999 paid in annual installment payments for a specified term commencing prior to the date such amounts would otherwise be payable pursuant to Section 5.2. Any such elections regarding the payment of Bonus amounts credited to a Participant's Deferred Compensation Account during a Plan Year shall be irrevocable once made. In the absence of an election by a Participant with respect to the payment of Bonus amounts credited to his Deferred Compensation Account during a Plan Year, such amounts shall be paid in accordance with Section 5.2. If a Participant elects to have Bonus amounts credited to a Participant's Deferred Compensation Account during a Plan Year paid in annual installments, the value of such Bonus amounts shall be determined as of the last day of the month preceding the time which he has elected to commence receiving such payments and each subsequent interval thereafter, and an amount equal to the then value of such Bonus amounts, including any interest equivalents and the value of any shares of Phantom Stock credited thereto, with the value of such Phantom Stock based upon the average of the closing prices of common stock of the Company on the twenty trading days preceding such date, multiplied by a fraction, the numerator of which is one and the denominator of which is the remaining number of payments which the Participant elected, shall be paid to such Participant. A Participant's Deferred Compensation Account shall be debited for any amounts paid pursuant to this Section 5.1. If a Participant's employment or consulting relationship with the Company terminates prior to payment of all annual installments elected by such Participant pursuant to this Section 5.1, the remaining Bonus amounts shall be paid in accordance with Section 5.2. 5.2 PAYMENT OF BENEFITS. Upon the termination of a Participant's employment or, if later, the termination of a Participant's consulting relationship with the Company, the amounts credited to his Accounts under Plan shall be paid to him (or his beneficiary) in a lump sum in cash as soon as practicable following such termination. Notwithstanding the preceding sentence, in the event of a change of control that is not approved, recommended and supported by at least two-thirds of the Directors that were also Directors prior to the occurrence of any such change of control in actions taken prior to, and with respect to, such change of control, each Participant's benefit under this Plan shall be paid to him (or his beneficiary) in a lump sum in cash as soon as practicable, but no later than thirty days following the date on which such change of control occurs. If a Participant has elected to have all or a portion of his Accounts credited with Phantom Stock pursuant to Section 3.4(c), the Participant shall be paid an amount equal to the value of his Accounts as of the -3- 4 last day of the calendar month preceding his termination or the change of control as described in the preceding sentence, with the value of such Phantom Stock based upon the average of the closing prices of common stock of the Company on the twenty trading days preceding such date. If a Participant's termination occurs by reason of death, his benefit under this Plan shall be paid to the same recipient or recipients as are paid his benefits under the Thrift Plan." 6. As amended hereby, the Plan is specifically ratified and reaffirmed. EXECUTED this 26th day of January, 1999. SEAGULL ENERGY CORPORATION BY: /s/ JACK M. ROBERTSON --------------------------- NAME: Jack M. Robertson ---------------------- TITLE: Vice President, Human Resources --------------------- -4- EX-10.26 4 CONSULTING AGREEMENT - ROBERT VAGT 1 EXHIBIT 10.26 AMENDMENT TO CONSULTING AGREEMENT WHEREAS, SEAGULL ENERGY CORPORATION ("Seagull") and ROBERT F. VAGT ("Vagt") have heretofore entered into a Consulting Agreement (the "Agreement"), which was effective as of July 1, 1997; and WHEREAS, Seagull and Vagt desire to amend the Agreement in order to reflect the continuation of the consulting relationship between Seagull and Vagt; NOW, THEREFORE, Seagull and Vagt agree that the Agreement shall be amended as follows, effective as of January 1, 1999: 1. Paragraphs 2(a), (b) and (c) of the Agreement shall be deleted and the following shall be substituted therefor: "(a) During the term of this Agreement, Seagull shall pay Vagt on the first day of each calendar quarter (or as soon as administratively feasible thereafter), a fee to be determined based upon the following schedule:
QUARTER BEGINNING QUARTERLY FEE ----------------- ------------- July 1, 1997 $50,000 October 1, 1997 $50,000 January 1, 1998 $25,000 April 1, 1998 $25,000 July 1, 1998 $25,000 October 1, 1998 $25,000 January 1, 1999 $25,000 April 1, 1999 $25,000 July 1, 1999 $25,000 October 1, 1999 $25,000 January 1, 2000 $25,000 April 1, 2000 $25,000
(b) The Nonstatutory Stock Option Agreement dated July 9, 1992, between Global Natural Resources Inc. and Vagt shall be amended pursuant to the amendment attached hereto as Exhibit B to provide that the option granted thereunder shall be fully exercisable until June 30, 2001. (c) The Nonstatutory Stock Option Agreement dated January 23, 1997, between Seagull and Vagt shall be amended pursuant to the amendment attached hereto as Exhibit B to provide that the option granted thereunder shall be fully exercisable until June 30, 2001." 2 1. The first sentence of Paragraph 3 of the Agreement shall be deleted and the following shall be substituted therefor: 2. "Seagull agrees to retain the services of Vagt for a term of three years beginning on the Effective Date of this Agreement; provided, however, that the parties hereto may terminate Vagt's services prior to the end of such term pursuant to Paragraphs (a) or (b) below." 1. As amended hereby, the Agreement is specifically ratified and reaffirmed. 2. 3. IN WITNESS WHEREOF, Seagull has caused this Agreement to be duly executed by one of its officers thereunto duly authorized and Vagt has executed this Agreement, effective as of January 1, 1999. 4. 5. SEAGULL ENERGY CORPORATION 6. 7. 8. BY: /s/ WILLIAM L. TRANSIER ---------------------------------- NAME: William L. Transier ----------------------------- TITLE: Executive VP and CFO ---------------------------- /s/ ROBERT F. VAGT ------------------------------------- ROBERT F. VAGT EX-10.31 5 PROMISSORY NOTE - JOHN D. SCHILLER, JR. 1 EXHIBIT 10.31 PROMISSORY NOTE U.S. $486,220.00 Houston, Texas December 17, 1998 John D. Schiller, Jr. ("Maker"), whose address is 4523 Elmstone Court, Kingwood, Texas 77345, for value received, promises to pay to the order of SEAGULL ENERGY CORPORATION, a Texas corporation ("Payee"), at its headquarters at 1700 First City Tower, 1001 Fannin Street, Houston, Texas 77002, the principal sum of FOUR HUNDRED EIGHTY-SIX THOUSAND TWO HUNDRED TWENTY and 00/100s U.S. DOLLARS (U.S. $486,220.00), together with interest thereon at the rate of four and four-fifths percent (4.8%) per annum (but in no event to exceed the maximum rate of interest allowed by law), payable as hereinafter provided. THIS NOTE is due and payable in full on December 17, 2002, including all accrued interest thereon; provided, however, that to the extent that any of the shares of Payee's common stock, par value $0.10 per share ("Common Stock") acquired by Maker pursuant to the Expiring Option (as defined below) or any of the securities, property or other rights received by Maker in respect of such shares or as a dividend or distribution thereon are sold, transferred or otherwise disposed of by Maker (which sales, transfers or dispositions shall be subject to the provisions of the Security Agreement described below), then Maker shall, within five business days after each such sale, transfer or disposition, prepay the principal and accrued interest then owing under this Note to the extent of the amount of cash proceeds (net of brokerage commissions and any tax liability of Maker as a result of such sale) resulting therefrom. ALL SUMS paid hereon (whether at maturity or pursuant to any mandatory or voluntary prepayment) shall apply first to the satisfaction of accrued interest and the balance to the unpaid principal. All past due principal and interest on this Note shall bear interest at the maximum rate permitted by law from maturity until paid. All sums called for, payable or to be paid hereunder shall be paid in lawful money of the United States of America which at the time of payment is legal tender for the payment of public and private debts therein. MAKER AGREES to use the proceeds from the loan evidenced hereby solely for the purposes of exercising his option to purchase Seventy-Seven Thousand Twenty-Five (77,025) shares of Common Stock pursuant to the option that expires December 18, 1998 (the "Expiring Option"), and to pay any applicable taxes imposed on Maker by reason of the exercise of the Expiring Option. The Expiring Option is a non-statutory stock option granted to Maker on December 17, 1998, under the Seagull Energy Corporation 1998 Omnibus Stock Plan, covering 77,025 shares at an exercise price of $6.3125. The Seagull Energy Corporation 1998 Omnibus Stock Plan was approved by the shareholders of Payee on May 13, 1998. MAKER HEREBY waives presentment and demand for payment, notice of intent to accelerate maturity, notice of acceleration of maturity, protest or notice of protest and non-payment, bringing of suit (Page 1 of 3 Pages) 2 U.S. $486,220.00 Houston, Texas December 17, 1998 and diligence in taking any action to collect any sums owing hereunder and in proceeding against any of the rights and properties securing payment hereof, and agrees that its liability on this Note shall not be affected by any release of or change in any security for the payment of this Note. IN THE EVENT of (i) a default in the payment of any installment of either principal or interest as provided for herein or in the performance of any agreement or covenant contained in any instrument securing payment hereof or (ii) the voluntary termination of Maker's employment with Payee or the involuntary termination of Maker's employment with Payee for cause, then, without the giving of any notice of any kind, the holder of this Note shall have the right and option, to declare the unpaid balance of principal and accrued interest on this Note at once due and payable and to foreclose or require foreclosure of any and all liens securing payment hereof, and to exercise any and all other rights and remedies it may have. Failure to exercise this option upon any default or event as described above shall not constitute a waiver of the right to exercise it in the event of any such subsequent default or event. IN ADDITION to the mandatory prepayment obligations described above, Maker reserves the option of prepaying the principal of this note, in whole or in part, at any time after the date hereof without penalty. Accrued and unpaid interest with respect to such principal amount prepaid is due and payable on the date of such prepayment. IN THE EVENT of Maker's death or disability or an "involuntary termination" subsequent to a "change in control," a portion of the original principal amount of this Note may be forgiven and a schedule for repayment of this Note may be established all in accordance with and pursuant to the terms of the Equity Ownership Plan as adopted by the Compensation Committee of the Board of Directors of Payee, as modified or amended by such Committee from time to time (the "EOP"). For purposes of this paragraph, the terms "involuntary termination" and "change in control" shall have the meanings given such terms in that certain Severance Agreement between Maker and Payee in effect as of the date of this Note. The terms and provisions of the EOP are hereby incorporated into this Note by reference. IN ADDITION to any loan forgiveness made in connection with the events described above, the original principal amount of this Note may be further forgiven in accordance with and pursuant to the terms of the EOP based on Maker's continued employment with Payee from the date of this Note and on Payee's performance expressed by the relative ranking of Payee's "total shareholder return" for any applicable period as ranked against the "total shareholder return" of the other members of the "peer group" established for such purpose as set forth in the EOP. For purposes of this paragraph, the terms "total shareholder return" and "peer group" have the meanings ascribed to such terms as set forth in the EOP. THIS NOTE is issued in connection with the terms of EOP, and is entitled to the benefits and security afforded by a Security Agreement dated as of December 17, 1998, between Maker and Payee (the "Security Agreement"). (Page 2 of 3 Pages) 3 U.S. $486,220.00 Houston, Texas December 17, 1998 THIS NOTE is and shall be construed and governed under the laws of the State of Texas. IT IS EXPRESSLY stipulated and agreed to be the intent of Maker and Payee to at all times comply with the usury and other laws applicable to this Note and the Security Agreement and any subsequent revisions, repeals, or judicial interpretations thereof, to the extent any of the same are applicable hereto. If such laws are ever revised, repealed, or judicially interpreted so as to render usurious any amount called for under this Note or under the Security Agreement, or contracted for, charged, or received with respect to the indebtedness evidenced by this Note, or if Payee's exercise of the option herein contained to accelerate the maturity of this Note or if any prepayment by Maker results in Maker having paid any interest in excess of that permitted by law, then it is Maker's and Payee's express intent that all excess amounts theretofore collected by Payee be credited on the principal balance of this Note (or, if the Note has been paid in full, refunded to Maker), and the provisions of this Note and the Security Agreement immediately be deemed reformed and the amounts thereafter collectable hereunder and thereunder reduced, without the necessity of the execution of any new document, so as to comply with the then applicable law, but so as to permit the recovery of the fullest amount otherwise called for hereunder and thereunder. AT MATURITY, HOWEVER SUCH MATURITY COMES ABOUT, SUBJECT TO THE TERMS AND CONDITIONS OF THE EOP, MAKER MUST REPAY THE ENTIRE OUTSTANDING PRINCIPAL AMOUNT AND ALL UNPAID INTEREST ACCRUED UNDER THIS NOTE. PAYEE IS UNDER NO OBLIGATION TO REFINANCE OR RENEW THIS NOTE AT THAT TIME. MAKER, THEREFORE, WILL BE REQUIRED TO MAKE PAYMENT OUT OF OTHER ASSETS THAT MAKER MAY OWN OR WILL HAVE TO FIND ANOTHER LENDER WILLING TO LEND MAKER THE FUNDS TO MAKE THE PAYMENT ON THIS NOTE. ----------------------------------------- JOHN D. SCHILLER, JR. (Page 3 of 3 Pages) 4 SECURITY AGREEMENT (Common Stock of Seagull Energy Corporation) Executed by JOHN D. SCHILLER, JR. in favor of SEAGULL ENERGY CORPORATION dated as of December 17, 1998 5 SECURITY AGREEMENT Common Stock of Seagull Energy Corporation THIS SECURITY AGREEMENT (this "Agreement") is made as of December 17, 1998, by JOHN D. SCHILLER, JR., a natural person, who resides at 4523 Elmstone Court, Kingwood, Texas 77345 ("Pledgor") in favor of SEAGULL ENERGY CORPORATION, a Texas corporation, with offices at 1700 First City Tower, 1001 Fannin Street, Houston, Texas 77002 ("Secured Party"). A. WHEREAS, Secured Party has granted Pledgor an option to purchase 77,025 shares of the common stock of Secured Party that expires as of December 18, 1998 (the "Expiring Option"), in connection with Secured Party's Equity Ownership Program adopted by the Compensation Committee of the Board of Directors of Secured Party (such program, as may from time to time be amended or supplemented, being hereinafter called the "EOP"). B. WHEREAS, Pledgor has elected to purchase shares of the common stock of Secured Party pursuant to the Expiring Option described above. C. WHEREAS, Secured Party has provided a loan to Pledgor for the purchase price of the common stock of Secured Party to be purchased by Pledgor pursuant to the Expiring Option. D. WHEREAS, Secured Party has conditioned its obligations to provide such loan to Pledgor upon the execution and delivery by Pledgor of this Agreement, and Pledgor has agreed to enter into this Agreement. C. THEREFORE, in order to comply with the terms and conditions of the EOP, to secure the Obligations as hereinafter defined, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Pledgor hereby agrees with Secured Party as follows: Section 1. Pledge. Pledgor hereby pledges, assigns and grants to Secured Party a security interest in and right of set-off against the assets referred to in Section 2 (the "Collateral") to secure the prompt payment and performance of the "Obligations" (as herein defined) and the performance by Pledgor of this Agreement. Section 2. Collateral. The Collateral consists of the following types or items of property: (A) The following securities: Seventy-Seven Thousand Twenty-Five (77,025) shares of the Common Stock of Seagull Energy Corporation ("Seagull Common Stock") represented by Certificate No. _______________________ as delivered herewith and each such share having a par value of $0.10. (B) (i) the certificates or instruments, if any, representing such securities, (ii) all dividends (cash, stock or otherwise), cash, securities, instruments, rights to subscribe, purchase or sell and all other rights and property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such securities, (iii) all replacements, additions to and substitutions for any of the property referred to in this Section 2, including, without limitation, claims against third parties and including without limitation pursuant to any merger, conversion, share exchange, recapitalization or 6 other transaction, and (iv) the proceeds, interest, profits and other income of or on any of the property referred to in this Section 2. It is expressly contemplated that additional securities or other property may from time to time be pledged, assigned or granted to Secured Party as additional security for the Obligations, and the term "Collateral" as used herein shall be deemed for all purposes hereof to include all such additional securities and property, together with all other property of the types described above related thereto. Section 3. Transfer of Collateral. All certificates or instruments representing or evidencing the Pledged Securities shall be delivered to and held pursuant hereto by Secured Party or a person or entity designated by Secured Party and shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment in blank. Section 4. Certain Definitions. As used in this Agreement, the following terms shall have the following meanings, unless the context otherwise requires: "Agreement" means this Security Agreement, as the same may from time to time be amended or supplemented. "Code" means the Uniform Commercial Code as presently in effect in the State of Texas, Business and Commerce Code, Chapters 1 through 9. Unless otherwise indicated by the context herein, all uncapitalized terms (or terms that are otherwise uncapitalized in this Agreement but are capitalized at the beginning of a sentence) which are defined in the Code shall have their respective meanings as used in Chapters 8 and 9 of the Code. "Event of Default" means any event specified in Section 15. "Highest Lawful Rate" means the maximum rate of nonusurious interest allowed from time to time by applicable law. "Obligations" means the promissory note of Pledgor dated December 17, 1998, payable to the order of Seagull Energy Corporation in the principal amount of Four Hundred Eighty-Six Thousand Two Hundred Twenty and 00/100 Dollars ($486,220.00), and any and all renewals, extensions for any period, rearrangements or enlargements. The Obligations shall also include all interest and any other sums payable by Pledgor to Secured Party in connection with the execution, administration or enforcement of Secured Party's rights and remedies hereunder or any other agreement with Pledgor. "Pledged Securities" means all of the securities and other property (whether or not the same constitutes a "security" under the Code) referred to in Section 2 and all additional securities (as that term is defined in the Code), if any, constituting Collateral under this Agreement. Section 5. Representations. In order to induce Secured Party to accept this Agreement, Pledgor represents and warrants to Secured Party (which representations and warranties will survive the creation and payment of the Obligations) that: -2- 7 (A) Ownership of Collateral; Encumbrances; Valid and Binding Agreement. Pledgor is the legal and beneficial owner of the Collateral free and clear of any adverse claim, lien, security interest, option or other charge or encumbrance except for the security interest created by this Agreement, and Pledgor has full right, power and authority to pledge, assign and grant a security interest in the Collateral to Secured Party. This Agreement and the Obligations constitute legal, valid and binding obligations of Pledgor enforceable against Pledgor in accordance with their respective terms. The execution, delivery and performance of this Agreement or the Obligations will not violate the terms of any contract, agreement, law, regulation, order, injunction, judgment, decree or writ to which Pledgor is subject and do not require the consent or approval of any other person or entity. (B) The pledge of Pledged Securities pursuant to this Agreement creates a valid and perfected first priority security interest in the Collateral, enforceable against Pledgor and all third parties and securing payment of the Obligations. Section 6. Covenants and Agreement. Pledgor will at all times comply with the covenants and agreements contained in this Section 6, from the date hereof and for so long as any part of the Obligations are outstanding. (A) Sale, Disposition or Encumbrance of Collateral. Pledgor will not in any way encumber any of the Collateral (or permit or suffer any of the Collateral to be encumbered) or sell, pledge, assign, lend or otherwise dispose of or transfer any of the Collateral to or in favor of any person or entity other than Secured Party. Notwithstanding the foregoing, Pledgor may sell shares of Seagull Energy Corporation Common Stock that constitute Pledged Securities in open market brokerage transactions for cash but only if and to the extent that the cash proceeds (net of brokerage commissions and any tax liability of Pledgor as a result of such sale) are used to satisfy the mandatory prepayment obligations in accordance with the terms of the promissory note comprising the Obligations and any applicable terms of the EOP. (B) Dividends, Distributions, Merger and Recapitalizations. Any and all dividends and interest paid in respect of the Collateral (as well as any other cash, securities, properties, rights or other assets constituting Collateral) shall be, and shall be forthwith delivered to Secured Party to hold as, Collateral and shall, if received by Pledgor, be received in trust for the benefit of Secured Party, be segregated from the other property or funds of Pledgor, and be forthwith delivered to Secured Party as Collateral in the same form as so received (with any necessary endorsement). (C) Payment of Taxes and Liens. Pledgor will pay prior to delinquency all taxes, charges, liens and assessments against the Collateral. (D) Further Assurances; Stock Powers. Upon the request of Secured Party, Pledgor shall (at Pledgor's expense) execute and deliver all such documents, including, without limitation, all documents necessary to comply with federal regulations relating to margin lending against securities, assignments, certificates, instruments, securities, financing statements, notifications to financial intermediaries or other third parties or other documents and give further assurances and do all other acts and things as Secured Party may reasonably request to perfect Secured Party's interest in the Collateral or to protect, enforce or otherwise effect Secured Party's rights and remedies hereunder. Pledgor shall also furnish -3- 8 to Secured Party such stock powers and other instruments as may be required by Secured Party to assure the transferability of the Collateral when and as often as may be requested by Secured Party. (E) Voting and Other Consensual Rights. Except to the extent otherwise provided in Section 18(D), Pledgor shall be entitled to exercise any and all voting and other consensual rights pertaining to the Collateral or any part thereof for any purpose not inconsistent with the terms of this Agreement; provided however, that Pledgor shall not exercise or refrain from exercising any such right if such action would have a material adverse effect on the value of the Collateral or any part thereof, and, provided, further, that upon request of Secured Party at any time or from time to time, Pledgor shall give Secured Party prompt written notice of the manner in which Pledgor has exercised, or the reasons for refraining from exercising, any such right. (F) Performance of Obligations. Pledgor will promptly and properly perform all of his obligations under this Agreement and any other agreement or contract of any kind now or hereafter existing as security for or in connection with the payment of the Obligations. Section 7. Non-judicial Enforcement. Secured Party may enforce its rights with respect to the Collateral without prior judicial process or judicial hearing, and to the extent permitted by law Pledgor expressly waives any and all legal rights which might otherwise require Secured Party to enforce its rights with respect to the Collateral by judicial process. Section 8. Attorney-in-Fact. Pledgor hereby irrevocably appoints Secured Party as Pledgor's attorney-in-fact, with full authority in the place and stead of Pledgor and in the name of Pledgor or otherwise, from time to time in Secured Party's discretion, but at Pledgor's cost and expense and without notice to Pledgor, to take any action and to execute any assignment, certificate, financing statement, stock power, notification, document or instrument which Secured Party may deem necessary or advisable to accomplish the purposes of this Agreement, including, without limitation, to receive, endorse and collect all instruments made payable to Pledgor representing any dividend, interest payment or other distribution in respect of the Collateral or any part thereof and to give full discharge for the same. Section 9. Discharge Encumbrances. Secured Party may, at its option, discharge any taxes, liens, security interests or other encumbrances at any time levied or placed on the Collateral. Pledgor agrees to reimburse Secured Party upon demand for any payment so made, plus interest thereon from the date of Secured Party's demand at the Highest Lawful Rate. Section 10. Transfer of Collateral. Secured Party may transfer any or all of the Obligations, and upon any such transfer Secured Party may transfer its interest in any or all of the Collateral and shall be fully discharged thereafter from all liability therefor. Any transferee of the Collateral shall be vested with all rights, powers and remedies of Secured Party hereunder. Section 11. Cumulative and Other Rights. The rights, powers and remedies of Secured Party hereunder are in addition to all rights, powers and remedies given by law or in equity. The exercise by Secured Party of any one or more of the rights, powers and remedies herein shall not be construed as a waiver of any other rights, powers and remedies, including, without limitation, any other rights of set-off. -4- 9 Section 12. Disclaimer of Certain Duties. (A) The powers conferred upon Secured Party by this Agreement are to protect its interest in the Collateral and shall not impose any duty upon Secured Party to exercise any such powers. Pledgor hereby agrees that Secured Party shall not be liable for, nor shall the indebtedness evidenced by the Obligations be diminished by, Secured Party's commercially reasonable delay or failure to collect upon, foreclose, sell, take possession of or otherwise obtain value for the Collateral. (B) Secured Party shall be under no duty whatsoever to make or give any presentment, notice of dishonor, protest, demand for performance, notice of non-performance, notice of intent to accelerate, notice of acceleration, or other notice or demand in connection with any Collateral or the Obligations, or to take any steps necessary to preserve any rights against any Obligor or other person or entity. Pledgor waives any right of marshaling in respect of any and all Collateral, and waives any right to require Secured Party to proceed against any Obligor or other person or entity or enforce any other remedy which Secured Party now has or may hereafter have against any Obligor or other person or entity. Section 13. Waiver of Notice; Demand and Presentment. Pledgor hereby waives any demand, notice of default, notice of acceleration of the maturity of the Obligations, notice of intention to accelerate the maturity of the Obligations, presentment, protest and notice of dishonor as to any action taken by Secured Party in connection with this Agreement, or any instrument or document. Section 14. Custody and Preservation of the Collateral. Secured Party shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in its possession if the Collateral is accorded treatment substantially equal to that which comparable secured parties accord comparable collateral, it being understood and agreed, however, that Secured Party shall not have responsibility for (i) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relative to any Collateral, whether or not Secured Party has or is deemed to have knowledge of such matters, or (ii) taking any necessary steps to preserve rights against persons or entities with respect to any Collateral. Section 15. Events of Default. Any of the following events shall constitute an Event of Default under this Agreement: (A) Payments - Pledgor defaults in any payment due and owing pursuant to the Obligations; (B) Representations and Warranties - any representation or warranty made by Pledgor to Secured Party proves to have been incorrect in any material respect as of the date thereof; (C) Covenants - material default is made by Pledgor in the performance of any covenant or agreement contained in this Agreement or in any of the Obligations or in any other document now or hereafter executed in connection with or as security for the Obligations; (D) Insolvency, etc. - Pledgor shall: (i) become insolvent, (ii) have a custodian, receiver or agent appointed or authorized to take charge of his properties, (iii) make an assignment for the benefit -5- 10 of creditors or call a meeting of creditors for the composition of debts, or (iv) be subject to the commencement of any proceeding in bankruptcy or under other insolvency laws; (E) Defaults on Other Obligations - (i) default by Pledgor in any payment of principal of or interest on any other indebtedness, guaranty or other obligation (whether to Secured Party or others) beyond any period of grace provided with respect thereto, or (ii) any material default by Pledgor in the performance of any other agreement, term or condition if the effect of such default is to cause such obligation to become due on demand or before its stated maturity or to permit the holder(s) of such obligation or the trustee(s) under any such agreement or instrument to cause such obligation to become due on demand or prior to its stated maturity, whether or not such default or failure to perform should be waived by the holder(s) of such obligation or such trustee(s); or (F) Defaults Under the EOP - Pledgor shall fail to comply with or defaults is made with respect to the terms and conditions of the EOP regarding the Obligations or the Pledged Securities. Section 16. Remedies. Upon the occurrence and during the continuance of any Event of Default, subject to the terms and provisions of the EOP, Secured Party may take any or all of the following actions without notice (except where expressly required below or as otherwise required by law) or demand to Pledgor: (A) Declare all or part of the indebtedness pursuant to the Obligations immediately due and payable and enforce payment of the same by Pledgor. (B) Sell or otherwise dispose of any or all of the Collateral in any commercially reasonable manner as Secured Party may elect, pursuant to the provisions of the Code and other applicable law, including, without limitation, sell, in one or more sales and in one or more parcels, or otherwise dispose of any or all of the Collateral in any commercially reasonable manner as Secured Party may elect, in a public or private transaction, at any location as deemed reasonable by Secured Party either for cash or credit or for future delivery at such price as Secured Party may deem fair, and (unless prohibited by the Code, as adopted in any applicable jurisdiction) Secured Party may be the purchaser of any or all Collateral so sold and may apply upon the purchase price therefor any Obligations secured hereby. Any such sale or transfer by Secured Party either to itself or to any other person or entity shall be absolutely free from any claim or right by Pledgor, including any equity or right of redemption, stay or appraisal which Pledgor has or may have under any rule of law, regulation or statute now existing or hereafter adopted. Upon any such sale or transfer, Secured Party shall have the right to deliver, assign and transfer to the purchaser or transferee thereof the Collateral so sold or transferred. If Secured Party deems it advisable to do so, it may restrict the bidders or purchasers of any such sale or transfer to persons or entities who will represent and agree that they are purchasing the Collateral for their own account and not with the view to the distribution or resale of any of the Collateral. Secured Party may, at its discretion, provide for a public sale, and any such public sale shall be held at such time or times within ordinary business hours and at such place or places as Secured Party may fix in the notice of such sale. Secured Party shall not be obligated to make any sale pursuant to any such notice. Secured Party may, without notice or publication, adjourn any public or private sale by announcement at any time and place fixed for such sale, and such sale may be made at any time or place to which the same may be so adjourned. In the event any sale or transfer hereunder is not completed or is defective in the reasonable opinion of Secured Party, such sale or transfer shall not exhaust the rights of Secured Party hereunder, -6- 11 and Secured Party shall have the right to cause one or more subsequent sales or transfers to be made hereunder. If only part of the Collateral is sold or transferred such that the Obligations remain outstanding (in whole or in part), Secured Party's rights and remedies hereunder shall not be exhausted, waived or modified, and Secured Party is specifically empowered to make one or more successive sales or transfers until all the Collateral shall be sold or transferred and all the Obligations are paid. In the event that Secured Party elects not to sell the Collateral, Secured Party retains its rights to dispose of or utilize the Collateral or any part or parts thereof in any manner authorized or permitted by law or in equity, and to apply the proceeds of the same towards payment of the Obligations. Each and every method of disposition of the Collateral described in this subsection or in subsection (D) shall constitute disposition in a commercially reasonable manner. (C) Apply proceeds of the disposition of the Collateral to the Obligations in any manner elected by Secured Party and permitted by the Code or otherwise permitted by law or in equity. (D) Appoint any person or entity as agent to perform any act or acts necessary or incident to any sale or transfer by Secured Party of the Collateral. (E) Exercise all other rights and remedies permitted by law or in equity. Section 17. Liability for Deficiency. Except as may be set forth in the EOP with respect to the death or disability of Pledgor, if any sale or other disposition of Collateral by Secured Party or any other action of Secured Party hereunder results in reduction of the Obligations, such action will not release Pledgor from its liability to Secured Party for any unpaid Obligations, together with interest thereon, and the same shall be immediately due and payable to Secured Party at Secured Party's address set forth in the opening paragraph hereof. Section 18. Pledged Securities. Upon the occurrence and during the continuance of an Event of Default: (A) All rights of Pledgor to receive the dividends and interest payments which it would otherwise be authorized to receive and retain pursuant to Section 6(E) shall cease, and all such rights shall thereupon become vested in Secured Party who shall thereupon have the sole right to receive and hold as Collateral such dividends and interest payments, but Secured Party shall have no duty to receive and hold such dividends and interest payments and shall not be responsible for any failure to do so or delay in so doing. (B) All dividends and interest payments which are received by Pledgor contrary to the provisions of this Section 18 shall be received in trust for the benefit of Secured Party, shall be segregated from other funds of Pledgor and shall be forthwith paid over to Secured Party as Collateral in the same form as so received (with any necessary indorsement). (C) Secured Party may exercise any and all rights of conversion, exchange, subscription or any other rights, privileges or options pertaining to any of the Pledged Securities as if it were the absolute owner thereof, including without limitation, the right to exchange at its discretion, any and all of the Pledged Securities upon the merger, consolidation, reorganization, recapitalization or other readjustment of any issuer of such Pledged Securities or upon the exercise by any such issuer or Secured -7- 12 Party of any right, privilege or option pertaining to any of the Pledged Securities, and in connection therewith, to deposit and deliver any and all of the Pledged Securities with any committee, depositary, transfer agent, registrar or other designated agency upon such terms and conditions as it may determine, all without liability except to account for property actually received by it, but Secured Party shall have no duty to exercise any of the aforesaid rights, privileges or options and shall not be responsible for any failure to do so or delay in so doing. (D) If the issuer of any Pledged Securities is the subject of bankruptcy, insolvency, receivership, custodianship or other proceedings under the supervision of any court or governmental agency or instrumentality, then all rights of Pledgor to exercise the voting and other consensual rights which Pledgor would otherwise be entitled to exercise pursuant to Section 6(E) with respect to the Pledged Securities issued by such issuer shall cease, and all such rights shall thereupon become vested in Secured Party who shall thereupon have the sole right to exercise such voting and other consensual rights, but Secured Party shall have no duty to exercise any such voting or other consensual rights and shall not be responsible for any failure to do so or delay in so doing. Section 19. Reasonable Notice. If any applicable provision of any law requires Secured Party to give reasonable notice of any sale or disposition or other action, Pledgor hereby agrees that five days' prior written notice shall constitute reasonable notice thereof. Section 20. Notices. Any notice required or permitted to be given under or in connection with this Agreement shall be in writing and shall be mailed by first class or express mail, postage prepaid, or sent by telecopy or other similar form of rapid written transmission or personally delivered to the receiving party. All such communications shall be mailed, sent or delivered at the address respectively indicated in the opening paragraph hereof or at such other address as either party may have furnished the other party in writing. Any communication so addressed and mailed shall be deemed to be given when so mailed, any notice so sent by rapid written transmission shall be deemed to be given when receipt of such transmission is acknowledged by the receiving operator or equipment, and any communication so delivered in person shall be deemed to be given when receipted for or actually received by Pledgor or Secured Party, as the case may be. Section 21. Amendments and Waivers. Secured Party's acceptance of partial or delinquent payments or any forbearance, failure or delay by Secured Party in exercising any right, power or remedy hereunder shall not be deemed a waiver of any obligation of Pledgor, or of any right, power or remedy of Secured Party; and no partial exercise of any right, power or remedy shall preclude any other or further exercise thereof. Secured Party may remedy any Event of Default hereunder or in connection with the Obligations without waiving the Event of Default so remedied. Pledgor hereby agrees that if Secured Party agrees to a waiver of any provision hereunder, or an exchange of or release of the Collateral, or the addition or release of any obligor or other person or entity, any such action shall not constitute a waiver of any of Secured Party's other rights or of Pledgor's obligations hereunder. This Agreement may be amended only by an instrument in writing executed jointly by Pledgor and Secured Party. Section 22. Interest. It is the intention of the parties hereto to conform strictly to usury laws applicable to Secured Party. Accordingly, if the transactions contemplated hereby would be usurious under applicable state or federal law, then, notwithstanding anything to the contrary in this Agreement or in any other agreement entered into in connection with or as security for the Obligations, it is agreed as follows: -8- 13 (i) the aggregate of all consideration which constitutes interest under law applicable to Secured Party that is contracted for, taken, reserved, charged or received under the Obligations, this Agreement or under any of such other agreements or otherwise in connection with the Obligations shall under no circumstances exceed the maximum amount allowed by such applicable law, (ii) in the event that the maturity of the Obligations is accelerated for any reason, or in the event of any required or permitted prepayment, then such consideration that constitutes interest under law applicable to Secured Party may never include more than such maximum amount, and (iii) excess interest, if any, provided for in this Agreement or otherwise shall be canceled automatically and, if theretofore paid, shall be credited by Secured Party on the principal amount of the Obligations (or, to the extent that the principal amount of the Obligations shall have been or would thereby be paid in full, refunded by Secured Party to Pledgor). The right to accelerate the maturity of the Obligations does not include the right to accelerate any interest which has not otherwise accrued on the date of such acceleration, and Secured Party does not intend to, and will not, collect any unearned interest in the event of acceleration. All sums paid or agreed to be paid to Secured Party for the use, forbearance or detention of sums included in the initial Obligations shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the full term of the Obligations until payment in full so that the rate or amount of interest on account of the initial Obligations does not exceed the applicable usury ceiling, if any. To the extent that Article 5069-1.04 of the Texas Revised Civil Statutes is relevant to Secured Party for the purpose of determining the Highest Lawful Rate, Secured Party hereby elects to determine the applicable rate ceiling under such Article by the indicated (weekly) rate ceiling from time to time in effect, subject to Secured Party's right subsequently to change such method in accordance with applicable law. Section 23. Governing Law; Jurisdiction. This Agreement and the security interest granted hereby shall be construed in accordance with and governed by the laws of the State of Texas, without giving effect to principles of conflict of laws (except to the extent that the laws of any other jurisdiction govern the perfection and priority of the security interests granted hereby). Pledgor consents to and submits to in personam jurisdiction and venue in the state district and county courts of the county wherein Secured Party's offices are located at the address specified in the opening paragraph hereof, and in the Federal District Courts of the district wherein such offices of Secured Party are located. This submission to jurisdiction is nonexclusive and does not preclude Secured Party from obtaining jurisdiction over Pledgor or the Collateral in any court otherwise having jurisdiction. Section 24. Subrogation. Until all indebtedness in connection with the Obligations shall have been paid in full, Pledgor shall have no right to subrogation or to enforce any remedy or participate in any Collateral or security whatsoever now or hereafter held by Secured Party. Section 25. Continuing Security Agreement. (A) This Agreement shall constitute a continuing security agreement, and all representations and warranties, covenants and agreements shall, as applicable, apply to all future as well as existing transactions. Provisions of this Agreement, unless by their terms exclusive, shall be in addition to other agreements between the parties. (B) Except as may be expressly applicable pursuant to Section 9.505 of the Code, no action taken or omission to act by Secured Party hereunder, including, without limitation, any exercise of voting or consensual rights pursuant to Section 6(D) or any other action taken or inaction pursuant to -9- 14 Section 16, shall be deemed to constitute a retention of the Collateral in satisfaction of the Obligations or otherwise to be in full satisfaction of the Obligations, and the Obligations shall remain in full force and effect, until Secured Party shall have applied payments (including, without limitation, collections from Collateral) towards the Obligations in the full amount then outstanding or until such subsequent time as is hereinafter provided in subsection (C) below. (C) To the extent that any payments on the Obligations or proceeds of the Collateral are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, debtor in possession, receiver or other person or entity under any bankruptcy law, common law or equitable cause, then to such extent the Obligations so satisfied shall be revived and continue as if such payment or proceeds had not been received by Secured Party, and Secured Party's security interests, rights, powers and remedies hereunder shall continue in full force and effect. In such event, this Agreement shall be automatically reinstated if it shall theretofore have been terminated pursuant to Section 28. Section 26. Redelivery of Collateral. If any sale or transfer of Collateral by Secured Party results in full satisfaction of the Obligations, and after such sale or transfer and discharge there remains a surplus of proceeds, Secured Party will deliver to Pledgor such excess proceeds in a commercially reasonable time; provided, however, that Secured Party shall not be liable for any interest, cost or expense in connection with any reasonable delay in delivering such proceeds to Pledgor. Section 27. Custody and Preservation of the Collateral. Secured Party shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in its possession if the Collateral is accorded treatment substantially equal to that which comparable secured parties accord comparable collateral, it being understood and agreed, however, that Secured Party shall not have responsibility for (i) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relative to any Collateral, whether or not Secured Party has or is deemed to have knowledge of such matters, or (ii) taking any necessary steps to preserve rights against persons or entities with respect to any Collateral. Section 28. Termination. The grant of a security interest hereunder and all of Secured Party's rights, powers and remedies in connection therewith shall remain in full force and effect until Secured Party has (i) retransferred and delivered all Collateral in its possession to Pledgor, (ii) executed a registration of release with respect to all Pledged Securities, if any, as to which Secured Party held a registered pledge; and (iii) executed a written release or termination statement and reassigned to Pledgor without recourse or warranty any remaining Collateral and all rights conveyed hereby. Upon the complete payment of the Obligations, the compliance by Pledgor with all covenants and agreements hereof and the compliance by Pledgor of the terms and conditions of the EOP, Secured Party, at the written request of Pledgor, will release, reassign and transfer the Collateral to Pledgor and declare this Agreement to be of no further force or effect. Notwithstanding the foregoing, the provisions of subsection 25(C) shall survive the termination of this Agreement. -10- 15 IN WITNESS WHEREOF, Pledgor has signed this Agreement as of the date first written above. PLEDGOR: ----------------------------------------- JOHN D. SCHILLER, JR. -11- EX-10.32 6 PROMISSORY NOTE - WILLIAM L. TRANSIER 1 EXHIBIT 10.32 PROMISSORY NOTE U.S. $384,948.00 Houston, Texas December 17, 1998 William L. Transier ("Maker"), whose address is 2423 Locke Lane, Houston, Texas 77019, for value received, promises to pay to the order of SEAGULL ENERGY CORPORATION, a Texas corporation ("Payee"), at its headquarters at 1700 First City Tower, 1001 Fannin Street, Houston, Texas 77002, the principal sum of THREE HUNDRED EIGHTY-FOUR THOUSAND NINE HUNDRED FORTY-EIGHT and 00/100s U.S. DOLLARS (U.S. $384,948.00), together with interest thereon at the rate of four and four-fifths percent (4.8%) per annum (but in no event to exceed the maximum rate of interest allowed by law), payable as hereinafter provided. THIS NOTE is due and payable in full on December 17, 2002, including all accrued interest thereon; provided, however, that to the extent that any of the shares of Payee's common stock, par value $0.10 per share ("Common Stock") acquired by Maker pursuant to the Expiring Option (as defined below) or any of the securities, property or other rights received by Maker in respect of such shares or as a dividend or distribution thereon are sold, transferred or otherwise disposed of by Maker (which sales, transfers or dispositions shall be subject to the provisions of the Security Agreement described below), then Maker shall, within five business days after each such sale, transfer or disposition, prepay the principal and accrued interest then owing under this Note to the extent of the amount of cash proceeds (net of brokerage commissions and any tax liability of Maker as a result of such sale) resulting therefrom. ALL SUMS paid hereon (whether at maturity or pursuant to any mandatory or voluntary prepayment) shall apply first to the satisfaction of accrued interest and the balance to the unpaid principal. All past due principal and interest on this Note shall bear interest at the maximum rate permitted by law from maturity until paid. All sums called for, payable or to be paid hereunder shall be paid in lawful money of the United States of America which at the time of payment is legal tender for the payment of public and private debts therein. MAKER AGREES to use the proceeds from the loan evidenced hereby solely for the purposes of exercising his option to purchase Sixty Thousand Nine Hundred Eighty-Two (60,982) shares of Common Stock pursuant to the option that expires December 18, 1998 (the "Expiring Option"), and to pay any applicable taxes imposed on Maker by reason of the exercise of the Expiring Option. The Expiring Option is a non-statutory stock option granted to Maker on December 17, 1998, under the Seagull Energy Corporation 1998 Omnibus Stock Plan, covering 60,982 shares at an exercise price of $6.3125. The Seagull Energy Corporation 1998 Omnibus Stock Plan was approved by the shareholders of Payee on May 13, 1998. MAKER HEREBY waives presentment and demand for payment, notice of intent to accelerate maturity, notice of acceleration of maturity, protest or notice of protest and non-payment, bringing of suit (Page 1 of 3 Pages) 2 U.S. $384,948.00 Houston, Texas December 17, 1998 and diligence in taking any action to collect any sums owing hereunder and in proceeding against any of the rights and properties securing payment hereof, and agrees that its liability on this Note shall not be affected by any release of or change in any security for the payment of this Note. IN THE EVENT of (i) a default in the payment of any installment of either principal or interest as provided for herein or in the performance of any agreement or covenant contained in any instrument securing payment hereof or (ii) the voluntary termination of Maker's employment with Payee or the involuntary termination of Maker's employment with Payee for cause, then, without the giving of any notice of any kind, the holder of this Note shall have the right and option, to declare the unpaid balance of principal and accrued interest on this Note at once due and payable and to foreclose or require foreclosure of any and all liens securing payment hereof, and to exercise any and all other rights and remedies it may have. Failure to exercise this option upon any default or event as described above shall not constitute a waiver of the right to exercise it in the event of any such subsequent default or event. IN ADDITION to the mandatory prepayment obligations described above, Maker reserves the option of prepaying the principal of this note, in whole or in part, at any time after the date hereof without penalty. Accrued and unpaid interest with respect to such principal amount prepaid is due and payable on the date of such prepayment. IN THE EVENT of Maker's death or disability or an "involuntary termination" subsequent to a "change in control," a portion of the original principal amount of this Note may be forgiven and a schedule for repayment of this Note may be established all in accordance with and pursuant to the terms of the Equity Ownership Plan as adopted by the Compensation Committee of the Board of Directors of Payee, as modified or amended by such Committee from time to time (the "EOP"). For purposes of this paragraph, the terms "involuntary termination" and "change in control" shall have the meanings given such terms in that certain Severance Agreement between Maker and Payee in effect as of the date of this Note. The terms and provisions of the EOP are hereby incorporated into this Note by reference. IN ADDITION to any loan forgiveness made in connection with the events described above, the original principal amount of this Note may be further forgiven in accordance with and pursuant to the terms of the EOP based on Maker's continued employment with Payee from the date of this Note and on Payee's performance expressed by the relative ranking of Payee's "total shareholder return" for any applicable period as ranked against the "total shareholder return" of the other members of the "peer group" established for such purpose as set forth in the EOP. For purposes of this paragraph, the terms "total shareholder return" and "peer group" have the meanings ascribed to such terms as set forth in the EOP. THIS NOTE is issued in connection with the terms of EOP, and is entitled to the benefits and security afforded by a Security Agreement dated as of December 17, 1998, between Maker and Payee (the "Security Agreement"). (Page 2 of 3 Pages) 3 U.S. $384,948.00 Houston, Texas December 17, 1998 THIS NOTE is and shall be construed and governed under the laws of the State of Texas. IT IS EXPRESSLY stipulated and agreed to be the intent of Maker and Payee to at all times comply with the usury and other laws applicable to this Note and the Security Agreement and any subsequent revisions, repeals, or judicial interpretations thereof, to the extent any of the same are applicable hereto. If such laws are ever revised, repealed, or judicially interpreted so as to render usurious any amount called for under this Note or under the Security Agreement, or contracted for, charged, or received with respect to the indebtedness evidenced by this Note, or if Payee's exercise of the option herein contained to accelerate the maturity of this Note or if any prepayment by Maker results in Maker having paid any interest in excess of that permitted by law, then it is Maker's and Payee's express intent that all excess amounts theretofore collected by Payee be credited on the principal balance of this Note (or, if the Note has been paid in full, refunded to Maker), and the provisions of this Note and the Security Agreement immediately be deemed reformed and the amounts thereafter collectable hereunder and thereunder reduced, without the necessity of the execution of any new document, so as to comply with the then applicable law, but so as to permit the recovery of the fullest amount otherwise called for hereunder and thereunder. AT MATURITY, HOWEVER SUCH MATURITY COMES ABOUT, SUBJECT TO THE TERMS AND CONDITIONS OF THE EOP, MAKER MUST REPAY THE ENTIRE OUTSTANDING PRINCIPAL AMOUNT AND ALL UNPAID INTEREST ACCRUED UNDER THIS NOTE. PAYEE IS UNDER NO OBLIGATION TO REFINANCE OR RENEW THIS NOTE AT THAT TIME. MAKER, THEREFORE, WILL BE REQUIRED TO MAKE PAYMENT OUT OF OTHER ASSETS THAT MAKER MAY OWN OR WILL HAVE TO FIND ANOTHER LENDER WILLING TO LEND MAKER THE FUNDS TO MAKE THE PAYMENT ON THIS NOTE. ------------------------------- WILLIAM L. TRANSIER (Page 3 of 3 Pages) 4 SECURITY AGREEMENT (Common Stock of Seagull Energy Corporation) Executed by WILLIAM L. TRANSIER in favor of SEAGULL ENERGY CORPORATION dated as of December 17, 1998 5 SECURITY AGREEMENT Common Stock of Seagull Energy Corporation THIS SECURITY AGREEMENT (this "Agreement") is made as of December 17, 1998, by WILLIAM L. TRANSIER, a natural person, who resides at 2423 Locke Lane, Houston, Texas 77019 ("Pledgor") in favor of SEAGULL ENERGY CORPORATION, a Texas corporation, with offices at 1700 First City Tower, 1001 Fannin Street, Houston, Texas 77002 ("Secured Party"). A. WHEREAS, Secured Party has granted Pledgor an option to purchase 60,982 shares of the common stock of Secured Party that expires as of December 18, 1998 (the "Expiring Option"), in connection with Secured Party's Equity Ownership Program adopted by the Compensation Committee of the Board of Directors of Secured Party (such program, as may from time to time be amended or supplemented, being hereinafter called the "EOP"). B. WHEREAS, Pledgor has elected to purchase shares of the common stock of Secured Party pursuant to the Expiring Option described above. C. WHEREAS, Secured Party has provided a loan to Pledgor for the purchase price of the common stock of Secured Party to be purchased by Pledgor pursuant to the Expiring Option. D. WHEREAS, Secured Party has conditioned its obligations to provide such loan to Pledgor upon the execution and delivery by Pledgor of this Agreement, and Pledgor has agreed to enter into this Agreement. C. THEREFORE, in order to comply with the terms and conditions of the EOP, to secure the Obligations as hereinafter defined, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Pledgor hereby agrees with Secured Party as follows: Section 1. Pledge. Pledgor hereby pledges, assigns and grants to Secured Party a security interest in and right of set-off against the assets referred to in Section 2 (the "Collateral") to secure the prompt payment and performance of the "Obligations" (as herein defined) and the performance by Pledgor of this Agreement. Section 2. Collateral. The Collateral consists of the following types or items of property: (A) The following securities: Sixty Thousand Nine Hundred Eighty-Two (60,982) shares of the Common Stock of Seagull Energy Corporation ("Seagull Common Stock") represented by Certificate No. _____________________ as delivered herewith and each such share having a par value of $0.10. (B) (i) the certificates or instruments, if any, representing such securities, (ii) all dividends (cash, stock or otherwise), cash, securities, instruments, rights to subscribe, purchase or sell and all other rights and property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such securities, (iii) all replacements, additions to and substitutions for any of the property referred to in this Section 2, including, without limitation, claims against third parties and including without limitation pursuant to any merger, conversion, share exchange, recapitalization or 6 other transaction, and (iv) the proceeds, interest, profits and other income of or on any of the property referred to in this Section 2. It is expressly contemplated that additional securities or other property may from time to time be pledged, assigned or granted to Secured Party as additional security for the Obligations, and the term "Collateral" as used herein shall be deemed for all purposes hereof to include all such additional securities and property, together with all other property of the types described above related thereto. Section 3. Transfer of Collateral. All certificates or instruments representing or evidencing the Pledged Securities shall be delivered to and held pursuant hereto by Secured Party or a person or entity designated by Secured Party and shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment in blank. Section 4. Certain Definitions. As used in this Agreement, the following terms shall have the following meanings, unless the context otherwise requires: "Agreement" means this Security Agreement, as the same may from time to time be amended or supplemented. "Code" means the Uniform Commercial Code as presently in effect in the State of Texas, Business and Commerce Code, Chapters 1 through 9. Unless otherwise indicated by the context herein, all uncapitalized terms (or terms that are otherwise uncapitalized in this Agreement but are capitalized at the beginning of a sentence) which are defined in the Code shall have their respective meanings as used in Chapters 8 and 9 of the Code. "Event of Default" means any event specified in Section 15. "Highest Lawful Rate" means the maximum rate of nonusurious interest allowed from time to time by applicable law. "Obligations" means the promissory note of Pledgor dated December 17, 1998, payable to the order of Seagull Energy Corporation in the principal amount of Three Hundred Eighty-Four Thousand Nine Hundred Forty-Eight and 00/100 Dollars ($384,948.00), and any and all renewals, extensions for any period, rearrangements or enlargements. The Obligations shall also include all interest and any other sums payable by Pledgor to Secured Party in connection with the execution, administration or enforcement of Secured Party's rights and remedies hereunder or any other agreement with Pledgor. "Pledged Securities" means all of the securities and other property (whether or not the same constitutes a "security" under the Code) referred to in Section 2 and all additional securities (as that term is defined in the Code), if any, constituting Collateral under this Agreement. Section 5. Representations. In order to induce Secured Party to accept this Agreement, Pledgor represents and warrants to Secured Party (which representations and warranties will survive the creation and payment of the Obligations) that: - 2 - 7 (A) Ownership of Collateral; Encumbrances; Valid and Binding Agreement. Pledgor is the legal and beneficial owner of the Collateral free and clear of any adverse claim, lien, security interest, option or other charge or encumbrance except for the security interest created by this Agreement, and Pledgor has full right, power and authority to pledge, assign and grant a security interest in the Collateral to Secured Party. This Agreement and the Obligations constitute legal, valid and binding obligations of Pledgor enforceable against Pledgor in accordance with their respective terms. The execution, delivery and performance of this Agreement or the Obligations will not violate the terms of any contract, agreement, law, regulation, order, injunction, judgment, decree or writ to which Pledgor is subject and do not require the consent or approval of any other person or entity. (B) The pledge of Pledged Securities pursuant to this Agreement creates a valid and perfected first priority security interest in the Collateral, enforceable against Pledgor and all third parties and securing payment of the Obligations. Section 6. Covenants and Agreement. Pledgor will at all times comply with the covenants and agreements contained in this Section 6, from the date hereof and for so long as any part of the Obligations are outstanding. (A) Sale, Disposition or Encumbrance of Collateral. Pledgor will not in any way encumber any of the Collateral (or permit or suffer any of the Collateral to be encumbered) or sell, pledge, assign, lend or otherwise dispose of or transfer any of the Collateral to or in favor of any person or entity other than Secured Party. Notwithstanding the foregoing, Pledgor may sell shares of Seagull Energy Corporation Common Stock that constitute Pledged Securities in open market brokerage transactions for cash but only if and to the extent that the cash proceeds (net of brokerage commissions and any tax liability of Pledgor as a result of such sale) are used to satisfy the mandatory prepayment obligations in accordance with the terms of the promissory note comprising the Obligations and any applicable terms of the EOP. (B) Dividends, Distributions, Merger and Recapitalizations. Any and all dividends and interest paid in respect of the Collateral (as well as any other cash, securities, properties, rights or other assets constituting Collateral) shall be, and shall be forthwith delivered to Secured Party to hold as, Collateral and shall, if received by Pledgor, be received in trust for the benefit of Secured Party, be segregated from the other property or funds of Pledgor, and be forthwith delivered to Secured Party as Collateral in the same form as so received (with any necessary endorsement). (C) Payment of Taxes and Liens. Pledgor will pay prior to delinquency all taxes, charges, liens and assessments against the Collateral. (D) Further Assurances; Stock Powers. Upon the request of Secured Party, Pledgor shall (at Pledgor's expense) execute and deliver all such documents, including, without limitation, all documents necessary to comply with federal regulations relating to margin lending against securities, assignments, certificates, instruments, securities, financing statements, notifications to financial intermediaries or other third parties or other documents and give further assurances and do all other acts and things as Secured Party may reasonably request to perfect Secured Party's interest in the Collateral or to protect, enforce or otherwise effect Secured Party's rights and remedies hereunder. Pledgor shall also furnish - 3 - 8 to Secured Party such stock powers and other instruments as may be required by Secured Party to assure the transferability of the Collateral when and as often as may be requested by Secured Party. (E) Voting and Other Consensual Rights. Except to the extent otherwise provided in Section 18(D), Pledgor shall be entitled to exercise any and all voting and other consensual rights pertaining to the Collateral or any part thereof for any purpose not inconsistent with the terms of this Agreement; provided however, that Pledgor shall not exercise or refrain from exercising any such right if such action would have a material adverse effect on the value of the Collateral or any part thereof, and, provided, further, that upon request of Secured Party at any time or from time to time, Pledgor shall give Secured Party prompt written notice of the manner in which Pledgor has exercised, or the reasons for refraining from exercising, any such right. (F) Performance of Obligations. Pledgor will promptly and properly perform all of his obligations under this Agreement and any other agreement or contract of any kind now or hereafter existing as security for or in connection with the payment of the Obligations. Section 7. Non-judicial Enforcement. Secured Party may enforce its rights with respect to the Collateral without prior judicial process or judicial hearing, and to the extent permitted by law Pledgor expressly waives any and all legal rights which might otherwise require Secured Party to enforce its rights with respect to the Collateral by judicial process. Section 8. Attorney-in-Fact. Pledgor hereby irrevocably appoints Secured Party as Pledgor's attorney-in-fact, with full authority in the place and stead of Pledgor and in the name of Pledgor or otherwise, from time to time in Secured Party's discretion, but at Pledgor's cost and expense and without notice to Pledgor, to take any action and to execute any assignment, certificate, financing statement, stock power, notification, document or instrument which Secured Party may deem necessary or advisable to accomplish the purposes of this Agreement, including, without limitation, to receive, endorse and collect all instruments made payable to Pledgor representing any dividend, interest payment or other distribution in respect of the Collateral or any part thereof and to give full discharge for the same. Section 9. Discharge Encumbrances. Secured Party may, at its option, discharge any taxes, liens, security interests or other encumbrances at any time levied or placed on the Collateral. Pledgor agrees to reimburse Secured Party upon demand for any payment so made, plus interest thereon from the date of Secured Party's demand at the Highest Lawful Rate. Section 10. Transfer of Collateral. Secured Party may transfer any or all of the Obligations, and upon any such transfer Secured Party may transfer its interest in any or all of the Collateral and shall be fully discharged thereafter from all liability therefor. Any transferee of the Collateral shall be vested with all rights, powers and remedies of Secured Party hereunder. Section 11. Cumulative and Other Rights. The rights, powers and remedies of Secured Party hereunder are in addition to all rights, powers and remedies given by law or in equity. The exercise by Secured Party of any one or more of the rights, powers and remedies herein shall not be construed as a waiver of any other rights, powers and remedies, including, without limitation, any other rights of set-off. - 4 - 9 Section 12. Disclaimer of Certain Duties. (A) The powers conferred upon Secured Party by this Agreement are to protect its interest in the Collateral and shall not impose any duty upon Secured Party to exercise any such powers. Pledgor hereby agrees that Secured Party shall not be liable for, nor shall the indebtedness evidenced by the Obligations be diminished by, Secured Party's commercially reasonable delay or failure to collect upon, foreclose, sell, take possession of or otherwise obtain value for the Collateral. (B) Secured Party shall be under no duty whatsoever to make or give any presentment, notice of dishonor, protest, demand for performance, notice of non-performance, notice of intent to accelerate, notice of acceleration, or other notice or demand in connection with any Collateral or the Obligations, or to take any steps necessary to preserve any rights against any Obligor or other person or entity. Pledgor waives any right of marshaling in respect of any and all Collateral, and waives any right to require Secured Party to proceed against any Obligor or other person or entity or enforce any other remedy which Secured Party now has or may hereafter have against any Obligor or other person or entity. Section 13. Waiver of Notice; Demand and Presentment. Pledgor hereby waives any demand, notice of default, notice of acceleration of the maturity of the Obligations, notice of intention to accelerate the maturity of the Obligations, presentment, protest and notice of dishonor as to any action taken by Secured Party in connection with this Agreement, or any instrument or document. Section 14. Custody and Preservation of the Collateral. Secured Party shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in its possession if the Collateral is accorded treatment substantially equal to that which comparable secured parties accord comparable collateral, it being understood and agreed, however, that Secured Party shall not have responsibility for (i) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relative to any Collateral, whether or not Secured Party has or is deemed to have knowledge of such matters, or (ii) taking any necessary steps to preserve rights against persons or entities with respect to any Collateral. Section 15. Events of Default. Any of the following events shall constitute an Event of Default under this Agreement: (A) Payments - Pledgor defaults in any payment due and owing pursuant to the Obligations; (B) Representations and Warranties - any representation or warranty made by Pledgor to Secured Party proves to have been incorrect in any material respect as of the date thereof; (C) Covenants - material default is made by Pledgor in the performance of any covenant or agreement contained in this Agreement or in any of the Obligations or in any other document now or hereafter executed in connection with or as security for the Obligations; (D) Insolvency, etc. - Pledgor shall: (i) become insolvent, (ii) have a custodian, receiver or agent appointed or authorized to take charge of his properties, (iii) make an assignment for the benefit - 5 - 10 of creditors or call a meeting of creditors for the composition of debts, or (iv) be subject to the commencement of any proceeding in bankruptcy or under other insolvency laws; (E) Defaults on Other Obligations - (i) default by Pledgor in any payment of principal of or interest on any other indebtedness, guaranty or other obligation (whether to Secured Party or others) beyond any period of grace provided with respect thereto, or (ii) any material default by Pledgor in the performance of any other agreement, term or condition if the effect of such default is to cause such obligation to become due on demand or before its stated maturity or to permit the holder(s) of such obligation or the trustee(s) under any such agreement or instrument to cause such obligation to become due on demand or prior to its stated maturity, whether or not such default or failure to perform should be waived by the holder(s) of such obligation or such trustee(s); or (F) Defaults Under the EOP - Pledgor shall fail to comply with or defaults is made with respect to the terms and conditions of the EOP regarding the Obligations or the Pledged Securities. Section 16. Remedies. Upon the occurrence and during the continuance of any Event of Default, subject to the terms and provisions of the EOP, Secured Party may take any or all of the following actions without notice (except where expressly required below or as otherwise required by law) or demand to Pledgor: (A) Declare all or part of the indebtedness pursuant to the Obligations immediately due and payable and enforce payment of the same by Pledgor. (B) Sell or otherwise dispose of any or all of the Collateral in any commercially reasonable manner as Secured Party may elect, pursuant to the provisions of the Code and other applicable law, including, without limitation, sell, in one or more sales and in one or more parcels, or otherwise dispose of any or all of the Collateral in any commercially reasonable manner as Secured Party may elect, in a public or private transaction, at any location as deemed reasonable by Secured Party either for cash or credit or for future delivery at such price as Secured Party may deem fair, and (unless prohibited by the Code, as adopted in any applicable jurisdiction) Secured Party may be the purchaser of any or all Collateral so sold and may apply upon the purchase price therefor any Obligations secured hereby. Any such sale or transfer by Secured Party either to itself or to any other person or entity shall be absolutely free from any claim or right by Pledgor, including any equity or right of redemption, stay or appraisal which Pledgor has or may have under any rule of law, regulation or statute now existing or hereafter adopted. Upon any such sale or transfer, Secured Party shall have the right to deliver, assign and transfer to the purchaser or transferee thereof the Collateral so sold or transferred. If Secured Party deems it advisable to do so, it may restrict the bidders or purchasers of any such sale or transfer to persons or entities who will represent and agree that they are purchasing the Collateral for their own account and not with the view to the distribution or resale of any of the Collateral. Secured Party may, at its discretion, provide for a public sale, and any such public sale shall be held at such time or times within ordinary business hours and at such place or places as Secured Party may fix in the notice of such sale. Secured Party shall not be obligated to make any sale pursuant to any such notice. Secured Party may, without notice or publication, adjourn any public or private sale by announcement at any time and place fixed for such sale, and such sale may be made at any time or place to which the same may be so adjourned. In the event any sale or transfer hereunder is not completed or is defective in the reasonable opinion of Secured Party, such sale or transfer shall not exhaust the rights of Secured Party hereunder, - 6 - 11 and Secured Party shall have the right to cause one or more subsequent sales or transfers to be made hereunder. If only part of the Collateral is sold or transferred such that the Obligations remain outstanding (in whole or in part), Secured Party's rights and remedies hereunder shall not be exhausted, waived or modified, and Secured Party is specifically empowered to make one or more successive sales or transfers until all the Collateral shall be sold or transferred and all the Obligations are paid. In the event that Secured Party elects not to sell the Collateral, Secured Party retains its rights to dispose of or utilize the Collateral or any part or parts thereof in any manner authorized or permitted by law or in equity, and to apply the proceeds of the same towards payment of the Obligations. Each and every method of disposition of the Collateral described in this subsection or in subsection (D) shall constitute disposition in a commercially reasonable manner. (C) Apply proceeds of the disposition of the Collateral to the Obligations in any manner elected by Secured Party and permitted by the Code or otherwise permitted by law or in equity. (D) Appoint any person or entity as agent to perform any act or acts necessary or incident to any sale or transfer by Secured Party of the Collateral. (E) Exercise all other rights and remedies permitted by law or in equity. Section 17. Liability for Deficiency. Except as may be set forth in the EOP with respect to the death or disability of Pledgor, if any sale or other disposition of Collateral by Secured Party or any other action of Secured Party hereunder results in reduction of the Obligations, such action will not release Pledgor from its liability to Secured Party for any unpaid Obligations, together with interest thereon, and the same shall be immediately due and payable to Secured Party at Secured Party's address set forth in the opening paragraph hereof. Section 18. Pledged Securities. Upon the occurrence and during the continuance of an Event of Default: (A) All rights of Pledgor to receive the dividends and interest payments which it would otherwise be authorized to receive and retain pursuant to Section 6(E) shall cease, and all such rights shall thereupon become vested in Secured Party who shall thereupon have the sole right to receive and hold as Collateral such dividends and interest payments, but Secured Party shall have no duty to receive and hold such dividends and interest payments and shall not be responsible for any failure to do so or delay in so doing. (B) All dividends and interest payments which are received by Pledgor contrary to the provisions of this Section 18 shall be received in trust for the benefit of Secured Party, shall be segregated from other funds of Pledgor and shall be forthwith paid over to Secured Party as Collateral in the same form as so received (with any necessary indorsement). (C) Secured Party may exercise any and all rights of conversion, exchange, subscription or any other rights, privileges or options pertaining to any of the Pledged Securities as if it were the absolute owner thereof, including without limitation, the right to exchange at its discretion, any and all of the Pledged Securities upon the merger, consolidation, reorganization, recapitalization or other readjustment of any issuer of such Pledged Securities or upon the exercise by any such issuer or Secured - 7 - 12 Party of any right, privilege or option pertaining to any of the Pledged Securities, and in connection therewith, to deposit and deliver any and all of the Pledged Securities with any committee, depositary, transfer agent, registrar or other designated agency upon such terms and conditions as it may determine, all without liability except to account for property actually received by it, but Secured Party shall have no duty to exercise any of the aforesaid rights, privileges or options and shall not be responsible for any failure to do so or delay in so doing. (D) If the issuer of any Pledged Securities is the subject of bankruptcy, insolvency, receivership, custodianship or other proceedings under the supervision of any court or governmental agency or instrumentality, then all rights of Pledgor to exercise the voting and other consensual rights which Pledgor would otherwise be entitled to exercise pursuant to Section 6(E) with respect to the Pledged Securities issued by such issuer shall cease, and all such rights shall thereupon become vested in Secured Party who shall thereupon have the sole right to exercise such voting and other consensual rights, but Secured Party shall have no duty to exercise any such voting or other consensual rights and shall not be responsible for any failure to do so or delay in so doing. Section 19. Reasonable Notice. If any applicable provision of any law requires Secured Party to give reasonable notice of any sale or disposition or other action, Pledgor hereby agrees that five days' prior written notice shall constitute reasonable notice thereof. Section 20. Notices. Any notice required or permitted to be given under or in connection with this Agreement shall be in writing and shall be mailed by first class or express mail, postage prepaid, or sent by telecopy or other similar form of rapid written transmission or personally delivered to the receiving party. All such communications shall be mailed, sent or delivered at the address respectively indicated in the opening paragraph hereof or at such other address as either party may have furnished the other party in writing. Any communication so addressed and mailed shall be deemed to be given when so mailed, any notice so sent by rapid written transmission shall be deemed to be given when receipt of such transmission is acknowledged by the receiving operator or equipment, and any communication so delivered in person shall be deemed to be given when receipted for or actually received by Pledgor or Secured Party, as the case may be. Section 21. Amendments and Waivers. Secured Party's acceptance of partial or delinquent payments or any forbearance, failure or delay by Secured Party in exercising any right, power or remedy hereunder shall not be deemed a waiver of any obligation of Pledgor, or of any right, power or remedy of Secured Party; and no partial exercise of any right, power or remedy shall preclude any other or further exercise thereof. Secured Party may remedy any Event of Default hereunder or in connection with the Obligations without waiving the Event of Default so remedied. Pledgor hereby agrees that if Secured Party agrees to a waiver of any provision hereunder, or an exchange of or release of the Collateral, or the addition or release of any obligor or other person or entity, any such action shall not constitute a waiver of any of Secured Party's other rights or of Pledgor's obligations hereunder. This Agreement may be amended only by an instrument in writing executed jointly by Pledgor and Secured Party. Section 22. Interest. It is the intention of the parties hereto to conform strictly to usury laws applicable to Secured Party. Accordingly, if the transactions contemplated hereby would be usurious under applicable state or federal law, then, notwithstanding anything to the contrary in this Agreement or in any other agreement entered into in connection with or as security for the Obligations, it is agreed as follows: - 8 - 13 (i) the aggregate of all consideration which constitutes interest under law applicable to Secured Party that is contracted for, taken, reserved, charged or received under the Obligations, this Agreement or under any of such other agreements or otherwise in connection with the Obligations shall under no circumstances exceed the maximum amount allowed by such applicable law, (ii) in the event that the maturity of the Obligations is accelerated for any reason, or in the event of any required or permitted prepayment, then such consideration that constitutes interest under law applicable to Secured Party may never include more than such maximum amount, and (iii) excess interest, if any, provided for in this Agreement or otherwise shall be canceled automatically and, if theretofore paid, shall be credited by Secured Party on the principal amount of the Obligations (or, to the extent that the principal amount of the Obligations shall have been or would thereby be paid in full, refunded by Secured Party to Pledgor). The right to accelerate the maturity of the Obligations does not include the right to accelerate any interest which has not otherwise accrued on the date of such acceleration, and Secured Party does not intend to, and will not, collect any unearned interest in the event of acceleration. All sums paid or agreed to be paid to Secured Party for the use, forbearance or detention of sums included in the initial Obligations shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the full term of the Obligations until payment in full so that the rate or amount of interest on account of the initial Obligations does not exceed the applicable usury ceiling, if any. To the extent that Article 5069-1.04 of the Texas Revised Civil Statutes is relevant to Secured Party for the purpose of determining the Highest Lawful Rate, Secured Party hereby elects to determine the applicable rate ceiling under such Article by the indicated (weekly) rate ceiling from time to time in effect, subject to Secured Party's right subsequently to change such method in accordance with applicable law. Section 23. Governing Law; Jurisdiction. This Agreement and the security interest granted hereby shall be construed in accordance with and governed by the laws of the State of Texas, without giving effect to principles of conflict of laws (except to the extent that the laws of any other jurisdiction govern the perfection and priority of the security interests granted hereby). Pledgor consents to and submits to in personam jurisdiction and venue in the state district and county courts of the county wherein Secured Party's offices are located at the address specified in the opening paragraph hereof, and in the Federal District Courts of the district wherein such offices of Secured Party are located. This submission to jurisdiction is nonexclusive and does not preclude Secured Party from obtaining jurisdiction over Pledgor or the Collateral in any court otherwise having jurisdiction. Section 24. Subrogation. Until all indebtedness in connection with the Obligations shall have been paid in full, Pledgor shall have no right to subrogation or to enforce any remedy or participate in any Collateral or security whatsoever now or hereafter held by Secured Party. Section 25. Continuing Security Agreement. (A) This Agreement shall constitute a continuing security agreement, and all representations and warranties, covenants and agreements shall, as applicable, apply to all future as well as existing transactions. Provisions of this Agreement, unless by their terms exclusive, shall be in addition to other agreements between the parties. (B) Except as may be expressly applicable pursuant to Section 9.505 of the Code, no action taken or omission to act by Secured Party hereunder, including, without limitation, any exercise of voting or consensual rights pursuant to Section 6(D) or any other action taken or inaction pursuant to - 9 - 14 Section 16, shall be deemed to constitute a retention of the Collateral in satisfaction of the Obligations or otherwise to be in full satisfaction of the Obligations, and the Obligations shall remain in full force and effect, until Secured Party shall have applied payments (including, without limitation, collections from Collateral) towards the Obligations in the full amount then outstanding or until such subsequent time as is hereinafter provided in subsection (C) below. (C) To the extent that any payments on the Obligations or proceeds of the Collateral are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, debtor in possession, receiver or other person or entity under any bankruptcy law, common law or equitable cause, then to such extent the Obligations so satisfied shall be revived and continue as if such payment or proceeds had not been received by Secured Party, and Secured Party's security interests, rights, powers and remedies hereunder shall continue in full force and effect. In such event, this Agreement shall be automatically reinstated if it shall theretofore have been terminated pursuant to Section 28. Section 26. Redelivery of Collateral. If any sale or transfer of Collateral by Secured Party results in full satisfaction of the Obligations, and after such sale or transfer and discharge there remains a surplus of proceeds, Secured Party will deliver to Pledgor such excess proceeds in a commercially reasonable time; provided, however, that Secured Party shall not be liable for any interest, cost or expense in connection with any reasonable delay in delivering such proceeds to Pledgor. Section 27. Custody and Preservation of the Collateral. Secured Party shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in its possession if the Collateral is accorded treatment substantially equal to that which comparable secured parties accord comparable collateral, it being understood and agreed, however, that Secured Party shall not have responsibility for (i) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relative to any Collateral, whether or not Secured Party has or is deemed to have knowledge of such matters, or (ii) taking any necessary steps to preserve rights against persons or entities with respect to any Collateral. Section 28. Termination. The grant of a security interest hereunder and all of Secured Party's rights, powers and remedies in connection therewith shall remain in full force and effect until Secured Party has (i) retransferred and delivered all Collateral in its possession to Pledgor, (ii) executed a registration of release with respect to all Pledged Securities, if any, as to which Secured Party held a registered pledge; and (iii) executed a written release or termination statement and reassigned to Pledgor without recourse or warranty any remaining Collateral and all rights conveyed hereby. Upon the complete payment of the Obligations, the compliance by Pledgor with all covenants and agreements hereof and the compliance by Pledgor of the terms and conditions of the EOP, Secured Party, at the written request of Pledgor, will release, reassign and transfer the Collateral to Pledgor and declare this Agreement to be of no further force or effect. Notwithstanding the foregoing, the provisions of subsection 25(C) shall survive the termination of this Agreement. - 10 - 15 IN WITNESS WHEREOF, Pledgor has signed this Agreement as of the date first written above. PLEDGOR: -------------------------------- WILLIAM L. TRANSIER - 11 - EX-10.33 7 PROMISSORY NOTE - BARRY J. GALT 1 EXHIBIT 10.33 PROMISSORY NOTE U.S. $1,409,040.00 Houston, Texas September 2, 1998 BARRY J. GALT ("Maker"), whose address is 1811 Kirby Drive, Houston, Texas 77019, for value received, promises to pay to the order of SEAGULL ENERGY CORPORATION, a Texas corporation ("Payee"), at its headquarters at 1700 First City Tower, 1001 Fannin Street, Houston, Texas 77002, the principal sum of ONE MILLION FOUR HUNDRED NINE THOUSAND FORTY and 00/100s U.S. DOLLARS (U.S. $1,409,040.00), together with interest thereon at the rate of six and one-half percent (6.50%) per annum (but in no event to exceed the maximum rate of interest allowed by law), payable as hereinafter provided. THIS NOTE is due and payable in full on May 31, 2002, including all accrued interest thereon; provided, however, that to the extent that any of the shares of Payee's common stock, par value $0.10 per share ("Common Stock") acquired by Maker pursuant to the Expiring Option (as defined below) or any of the securities, property or other rights received by Maker in respect of such shares or as a dividend or distribution thereon are sold, transferred or otherwise disposed of by Maker (which sales, transfers or dispositions shall be subject to the provisions of the Security Agreement described below), then Maker shall, within five business days after each such sale, transfer or disposition, prepay the principal and accrued interest then owing under this Note to the extent of the amount of cash proceeds (net of brokerage commissions and any tax liability of Maker as a result of such sale) resulting therefrom. ALL SUMS paid hereon (whether at maturity or pursuant to any mandatory or voluntary prepayment) shall apply first to the satisfaction of accrued interest and the balance to the unpaid principal. All past due principal and interest on this Note shall bear interest at the maximum rate permitted by law from maturity until paid. All sums called for, payable or to be paid hereunder shall be paid in lawful money of the United States of America which at the time of payment is legal tender for the payment of public and private debts therein. MAKER AGREES to use the proceeds from the loan evidenced hereby solely for the purposes of exercising his option to purchase 192,000 shares of Common Stock that expires September 20, 1998 (the "Expiring Option") and to pay any applicable taxes imposed on Maker by reason of the exercise of the Expiring Option. The Expiring Option is a nonqualified stock option granted to Maker on September 20,1988, under the Seagull Energy Corporation 1986 Stock Option Plan (Restated), originally covering 365,740 shares (which option was previously exercised by Maker against 173,740 shares of Common Stock; and there are 192,000 shares of Common Stock for which the options is remaining) at a post-split exercise price of $6.3125. The Seagull Energy Corporation 1986 Stock Option Plan was approved by the shareholders of Payee on May 12, 1986. MAKER HEREBY waives presentment and demand for payment, notice of intent to accelerate maturity, notice of acceleration of maturity, protest or notice of protest and non-payment, bringing of suit (Page 1 of 3 Pages) 2 U.S. $__________ Houston, Texas [September] _, 1998 and diligence in taking any action to collect any sums owing hereunder and in proceeding against any of the rights and properties securing payment hereof, and agrees that its liability on this Note shall not be affected by any release of or change in any security for the payment of this Note. IN THE EVENT of a default in the payment of any installment of either principal or interest as provided for herein, or in the performance of any agreement or covenant contained in any instrument securing payment hereof, without the giving of any notice of any kind, the holder of this Note shall have the right and option, to declare the unpaid balance of principal and accrued interest on this Note at once due and payable and to foreclose or require foreclosure of any and all liens securing payment hereof, and to exercise any and all other rights and remedies it may have. Failure to exercise this option upon any default shall not constitute a waiver of the right to exercise it in the event of any subsequent default. IN ADDITION to the mandatory prepayment obligations described above, Maker reserves the option of prepaying the principal of this note, in whole or in part, at any time after the date hereof without penalty. Accrued and unpaid interest with respect to such principal amount prepaid is due and payable on the date of such prepayment. THIS NOTE is issued in connection with the terms of that certain Employment and Consulting Agreement effective as of August 24, 1998, by and among Maker and Payee and is entitled to the benefits and security afforded by a Security Agreement dated as of September 2, 1998 between Maker and Payee (the "Security Agreement"). THIS NOTE is and shall be construed and governed under the laws of the State of Texas. IT IS EXPRESSLY stipulated and agreed to be the intent of Maker and Payee to at all times comply with the usury and other laws applicable to this Note and the Security Agreement and any subsequent revisions, repeals, or judicial interpretations thereof, to the extent any of the same are applicable hereto. If such laws are ever revised, repealed, or judicially interpreted so as to render usurious any amount called for under this Note or under the Security Agreement, or contracted for, charged, or received with respect to the indebtedness evidenced by this Note, or if Payee's exercise of the option herein contained to accelerate the maturity of this Note or if any prepayment by Maker results in Maker having paid any interest in excess of that permitted by law, then it is Maker's and Payee's express intent that all excess amounts theretofore collected by Payee be credited on the principal balance of this Note (or, if the Note has been paid in full, refunded to Maker), and the provisions of this Note and the Security Agreement immediately be deemed reformed and the amounts thereafter collectable hereunder and thereunder reduced, without the necessity of the execution of any new document, so as to comply with the then applicable law, but so as to permit the recovery of the fullest amount otherwise called for hereunder and thereunder. AT MATURITY, HOWEVER SUCH MATURITY COMES ABOUT, MAKER MUST REPAY THE ENTIRE OUTSTANDING PRINCIPAL AMOUNT AND ALL UNPAID INTEREST ACCRUED UNDER THIS NOTE. PAYEE IS (Page 2 of 3 Pages) 3 U.S. $__________ Houston, Texas [September] _, 1998 UNDER NO OBLIGATION TO REFINANCE OR RENEW THIS NOTE AT THAT TIME. MAKER, THEREFORE, WILL BE REQUIRED TO MAKE PAYMENT OUT OF OTHER ASSETS THAT MAKER MAY OWN OR WILL HAVE TO FIND ANOTHER LENDER WILLING TO LEND MAKER THE FUNDS TO MAKE THE PAYMENT ON THIS NOTE. ------------------------------- BARRY J. GALT (Page 3 of 3 Pages) 4 SECURITY AGREEMENT (Common Stock of Seagull Energy Corporation) Executed by BARRY J. GALT in favor of SEAGULL ENERGY CORPORATION dated as of September 2, 1998 5 SECURITY AGREEMENT Common Stock of Seagull Energy Corporation THIS SECURITY AGREEMENT (this "Agreement") is made as of September 2, 1998, by BARRY J. GALT, a natural person, who resides at 1811 Kirby Drive, Houston, Texas 77019 ("Pledgor") in favor of SEAGULL ENERGY CORPORATION, a Texas corporation, with offices at 1700 First City Tower, 1001 Fannin Street, Houston, Texas 77002 ("Secured Party"). A. WHEREAS, Pledgor and Secured Party executed an Employment and Consulting Agreement effective as of August 24, 1998 (such agreement, as may from time to time be amended or supplemented, being hereinafter called the "EC Agreement"). B. WHEREAS, Secured Party has conditioned its obligations under the EC Agreement upon the execution and delivery by Pledgor of this Agreement, and Pledgor has agreed to enter into this Agreement. C. THEREFORE, in order to comply with the terms and conditions of the EC Agreement, to secure the Obligations as hereinafter defined, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Pledgor hereby agrees with Secured Party as follows: Section 1. Pledge. Pledgor hereby pledges, assigns and grants to Secured Party a security interest in and right of set-off against the assets referred to in Section 2 (the "Collateral") to secure the prompt payment and performance of the "Obligations" (as herein defined) and the performance by Pledgor of this Agreement. Section 2. Collateral. The Collateral consists of the following types or items of property: (A) The following securities: One Hundred Ninety-Two Thousand (192,000) shares of the Common Stock of Seagull Energy Corporation ("Seagull Common Stock") represented by Certificate No. S75133 as delivered herewith and each such share having a par value of $0.10. (B) (i) the certificates or instruments, if any, representing such securities, (ii) all dividends (cash, stock or otherwise), cash, securities, instruments, rights to subscribe, purchase or sell and all other rights and property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such securities, (iii) all replacements, additions to and substitutions for any of the property referred to in this Section 2, including, without limitation, claims against third parties and including without limitation pursuant to any merger, conversion, share exchange, recapitalization or other transaction, and (iv) the proceeds, interest, profits and other income of or on any of the property referred to in this Section 2. It is expressly contemplated that additional securities or other property may from time to time be pledged, assigned or granted to Secured Party as additional security for the Obligations, and the term "Collateral" as used herein shall be deemed for all purposes hereof to include all such additional securities and property, together with all other property of the types described above related thereto. - 1 - 6 Section 3. Transfer of Collateral. All certificates or instruments representing or evidencing the Pledged Securities shall be delivered to and held pursuant hereto by Secured Party or a person or entity designated by Secured Party and shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment in blank. Section 4. Certain Definitions. As used in this Agreement, the following terms shall have the following meanings, unless the context otherwise requires: "Agreement" means this Security Agreement, as the same may from time to time be amended or supplemented. "Code" means the Uniform Commercial Code as presently in effect in the State of Texas, Business and Commerce Code, Chapters 1 through 9. Unless otherwise indicated by the context herein, all uncapitalized terms (or terms that are otherwise uncapitalized in this Agreement but are capitalized at the beginning of a sentence) which are defined in the Code shall have their respective meanings as used in Chapters 8 and 9 of the Code. "Event of Default" means any event specified in Section 15. "Highest Lawful Rate" means the maximum rate of nonusurious interest allowed from time to time by applicable law. "Obligations" means the promissory note of Pledgor dated September 2, 1998, payable to the order of Seagull Energy Corporation in the principal amount of One Million Four Hundred Nine Thousand Forty and 00/100 Dollars ($1,409,040), and any and all renewals, extensions for any period, rearrangements or enlargements. The Obligations shall also include all interest and any other sums payable by Pledgor to Secured Party in connection with the execution, administration or enforcement of Secured Party's rights and remedies hereunder or any other agreement with Pledgor. "Pledged Securities" means all of the securities and other property (whether or not the same constitutes a "security" under the Code) referred to in Section 2 and all additional securities (as that term is defined in the Code), if any, constituting Collateral under this Agreement. Section 5. Representations. In order to induce Secured Party to accept this Agreement, Pledgor represents and warrants to Secured Party (which representations and warranties will survive the creation and payment of the Obligations) that: (A) Ownership of Collateral; Encumbrances; Valid and Binding Agreement. Pledgor is the legal and beneficial owner of the Collateral free and clear of any adverse claim, lien, security interest, option or other charge or encumbrance except for the security interest created by this Agreement, and Pledgor has full right, power and authority to pledge, assign and grant a security interest in the Collateral to Secured Party. This Agreement and the Obligations constitute legal, valid and binding obligations of Pledgor enforceable against Pledgor in accordance with their respective terms. The execution, delivery and performance of this Agreement or the Obligations will not violate the terms of any contract, agreement, law, regulation, order, injunction, judgment, decree or writ to which Pledgor is subject and do not require the consent or approval of any other person or entity. - 2 - 7 (B) The pledge of Pledged Securities pursuant to this Agreement creates a valid and perfected first priority security interest in the Collateral, enforceable against Pledgor and all third parties and securing payment of the Obligations. Section 6. Covenants and Agreement. Pledgor will at all times comply with the covenants and agreements contained in this Section 6, from the date hereof and for so long as any part of the Obligations are outstanding. (A) Sale, Disposition or Encumbrance of Collateral. Pledgor will not in any way encumber any of the Collateral (or permit or suffer any of the Collateral to be encumbered) or sell, pledge, assign, lend or otherwise dispose of or transfer any of the Collateral to or in favor of any person or entity other than Secured Party. Notwithstanding the foregoing, Pledgor may sell shares of Seagull Energy Corporation Common Stock that constitute Pledged Securities in open market brokerage transactions for cash but only if and to the extent that the cash proceeds (net of brokerage commissions and any tax liability of Pledgor as a result of such sale) are used to satisfy the mandatory prepayment obligations in accordance with the terms of the promissory note comprising the Obligations. (B) Dividends, Distributions, Merger and Recapitalizations. Any and all dividends and interest paid in respect of the Collateral (as well as any other cash, securities, properties, rights or other assets constituting Collateral) shall be, and shall be forthwith delivered to Secured Party to hold as, Collateral and shall, if received by Pledgor, be received in trust for the benefit of Secured Party, be segregated from the other property or funds of Pledgor, and be forthwith delivered to Secured Party as Collateral in the same form as so received (with any necessary endorsement). (C) Payment of Taxes and Liens. Pledgor will pay prior to delinquency all taxes, charges, liens and assessments against the Collateral. (D) Further Assurances; Stock Powers. Upon the request of Secured Party, Pledgor shall (at Pledgor's expense) execute and deliver all such documents, including, without limitation, all documents necessary to comply with federal regulations relating to margin lending against securities, assignments, certificates, instruments, securities, financing statements, notifications to financial intermediaries or other third parties or other documents and give further assurances and do all other acts and things as Secured Party may reasonably request to perfect Secured Party's interest in the Collateral or to protect, enforce or otherwise effect Secured Party's rights and remedies hereunder. Pledgor shall also furnish to Secured Party such stock powers and other instruments as may be required by Secured Party to assure the transferability of the Collateral when and as often as may be requested by Secured Party. (E) Voting and Other Consensual Rights. Except to the extent otherwise provided in Section 18(D), Pledgor shall be entitled to exercise any and all voting and other consensual rights pertaining to the Collateral or any part thereof for any purpose not inconsistent with the terms of this Agreement; provided however, that Pledgor shall not exercise or refrain from exercising any such right if such action would have a material adverse effect on the value of the Collateral or any part thereof, and, provided, further, that upon request of Secured Party at any time or from time to time, Pledgor shall give Secured Party prompt written notice of the manner in which Pledgor has exercised, or the reasons for refraining from exercising, any such right. - 3 - 8 (F) Performance of Obligations. Pledgor will promptly and properly perform all of his obligations under this Agreement and any other agreement or contract of any kind now or hereafter existing as security for or in connection with the payment of the Obligations. Section 7. Non-judicial Enforcement. Secured Party may enforce its rights with respect to the Collateral without prior judicial process or judicial hearing, and to the extent permitted by law Pledgor expressly waives any and all legal rights which might otherwise require Secured Party to enforce its rights with respect to the Collateral by judicial process. Section 8. Attorney-in-Fact. Pledgor hereby irrevocably appoints Secured Party as Pledgor's attorney-in-fact, with full authority in the place and stead of Pledgor and in the name of Pledgor or otherwise, from time to time in Secured Party's discretion, but at Pledgor's cost and expense and without notice to Pledgor, to take any action and to execute any assignment, certificate, financing statement, stock power, notification, document or instrument which Secured Party may deem necessary or advisable to accomplish the purposes of this Agreement, including, without limitation, to receive, endorse and collect all instruments made payable to Pledgor representing any dividend, interest payment or other distribution in respect of the Collateral or any part thereof and to give full discharge for the same. Section 9. Discharge Encumbrances. Secured Party may, at its option, discharge any taxes, liens, security interests or other encumbrances at any time levied or placed on the Collateral. Pledgor agrees to reimburse Secured Party upon demand for any payment so made, plus interest thereon from the date of Secured Party's demand at the Highest Lawful Rate. Section 10. Transfer of Collateral. Secured Party may transfer any or all of the Obligations, and upon any such transfer Secured Party may transfer its interest in any or all of the Collateral and shall be fully discharged thereafter from all liability therefor. Any transferee of the Collateral shall be vested with all rights, powers and remedies of Secured Party hereunder. Section 11. Cumulative and Other Rights. The rights, powers and remedies of Secured Party hereunder are in addition to all rights, powers and remedies given by law or in equity. The exercise by Secured Party of any one or more of the rights, powers and remedies herein shall not be construed as a waiver of any other rights, powers and remedies, including, without limitation, any other rights of set-off. Section 12. Disclaimer of Certain Duties. (A) The powers conferred upon Secured Party by this Agreement are to protect its interest in the Collateral and shall not impose any duty upon Secured Party to exercise any such powers. Pledgor hereby agrees that Secured Party shall not be liable for, nor shall the indebtedness evidenced by the Obligations be diminished by, Secured Party's commercially reasonable delay or failure to collect upon, foreclose, sell, take possession of or otherwise obtain value for the Collateral. (B) Secured Party shall be under no duty whatsoever to make or give any presentment, notice of dishonor, protest, demand for performance, notice of non-performance, notice of intent to accelerate, notice of acceleration, or other notice or demand in connection with any Collateral or the Obligations, or to take any steps necessary to preserve any rights against any Obligor or other person or entity. Pledgor waives any right of marshaling in respect of any and all Collateral, and waives any right to - 4 - 9 require Secured Party to proceed against any Obligor or other person or entity or enforce any other remedy which Secured Party now has or may hereafter have against any Obligor or other person or entity. Section 13. Waiver of Notice; Demand and Presentment. Pledgor hereby waives any demand, notice of default, notice of acceleration of the maturity of the Obligations, notice of intention to accelerate the maturity of the Obligations, presentment, protest and notice of dishonor as to any action taken by Secured Party in connection with this Agreement, or any instrument or document. Section 14. Custody and Preservation of the Collateral. Secured Party shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in its possession if the Collateral is accorded treatment substantially equal to that which comparable secured parties accord comparable collateral, it being understood and agreed, however, that Secured Party shall not have responsibility for (i) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relative to any Collateral, whether or not Secured Party has or is deemed to have knowledge of such matters, or (ii) taking any necessary steps to preserve rights against persons or entities with respect to any Collateral. Section 15. Events of Default. Any of the following events shall constitute an Event of Default under this Agreement: (A) Payments - Pledgor defaults in any payment due and owing pursuant to the Obligations; (B) Representations and Warranties - any representation or warranty made by Pledgor to Secured Party proves to have been incorrect in any material respect as of the date thereof; (C) Covenants - material default is made by Pledgor in the performance of any covenant or agreement contained in this Agreement or in any of the Obligations or in any other document now or hereafter executed in connection with or as security for the Obligations; (D) Insolvency, etc. - Pledgor shall: (i) become insolvent, (ii) have a custodian, receiver or agent appointed or authorized to take charge of his properties, (iii) make an assignment for the benefit of creditors or call a meeting of creditors for the composition of debts, or (iv) be subject to the commencement of any proceeding in bankruptcy or under other insolvency laws; or (E) Defaults on Other Obligations - (i) default by Pledgor in any payment of principal of or interest on any other indebtedness, guaranty or other obligation (whether to Secured Party or others) beyond any period of grace provided with respect thereto, or (ii) any material default by Pledgor in the performance of any other agreement, term or condition if the effect of such default is to cause such obligation to become due on demand or before its stated maturity or to permit the holder(s) of such obligation or the trustee(s) under any such agreement or instrument to cause such obligation to become due on demand or prior to its stated maturity, whether or not such default or failure to perform should be waived by the holder(s) of such obligation or such trustee(s). - 5 - 10 Section 16. Remedies. Upon the occurrence and during the continuance of any Event of Default, Secured Party may take any or all of the following actions without notice (except where expressly required below or as otherwise required by law) or demand to Pledgor: (A) Declare all or part of the indebtedness pursuant to the Obligations immediately due and payable and enforce payment of the same by Pledgor. (B) Sell or otherwise dispose of any or all of the Collateral in any commercially reasonable manner as Secured Party may elect, pursuant to the provisions of the Code and other applicable law, including, without limitation, sell, in one or more sales and in one or more parcels, or otherwise dispose of any or all of the Collateral in any commercially reasonable manner as Secured Party may elect, in a public or private transaction, at any location as deemed reasonable by Secured Party either for cash or credit or for future delivery at such price as Secured Party may deem fair, and (unless prohibited by the Code, as adopted in any applicable jurisdiction) Secured Party may be the purchaser of any or all Collateral so sold and may apply upon the purchase price therefor any Obligations secured hereby. Any such sale or transfer by Secured Party either to itself or to any other person or entity shall be absolutely free from any claim or right by Pledgor, including any equity or right of redemption, stay or appraisal which Pledgor has or may have under any rule of law, regulation or statute now existing or hereafter adopted. Upon any such sale or transfer, Secured Party shall have the right to deliver, assign and transfer to the purchaser or transferee thereof the Collateral so sold or transferred. If Secured Party deems it advisable to do so, it may restrict the bidders or purchasers of any such sale or transfer to persons or entities who will represent and agree that they are purchasing the Collateral for their own account and not with the view to the distribution or resale of any of the Collateral. Secured Party may, at its discretion, provide for a public sale, and any such public sale shall be held at such time or times within ordinary business hours and at such place or places as Secured Party may fix in the notice of such sale. Secured Party shall not be obligated to make any sale pursuant to any such notice. Secured Party may, without notice or publication, adjourn any public or private sale by announcement at any time and place fixed for such sale, and such sale may be made at any time or place to which the same may be so adjourned. In the event any sale or transfer hereunder is not completed or is defective in the reasonable opinion of Secured Party, such sale or transfer shall not exhaust the rights of Secured Party hereunder, and Secured Party shall have the right to cause one or more subsequent sales or transfers to be made hereunder. If only part of the Collateral is sold or transferred such that the Obligations remain outstanding (in whole or in part), Secured Party's rights and remedies hereunder shall not be exhausted, waived or modified, and Secured Party is specifically empowered to make one or more successive sales or transfers until all the Collateral shall be sold or transferred and all the Obligations are paid. In the event that Secured Party elects not to sell the Collateral, Secured Party retains its rights to dispose of or utilize the Collateral or any part or parts thereof in any manner authorized or permitted by law or in equity, and to apply the proceeds of the same towards payment of the Obligations. Each and every method of disposition of the Collateral described in this subsection or in subsection (D) shall constitute disposition in a commercially reasonable manner. (C) Apply proceeds of the disposition of the Collateral to the Obligations in any manner elected by Secured Party and permitted by the Code or otherwise permitted by law or in equity. (D) Appoint any person or entity as agent to perform any act or acts necessary or incident to any sale or transfer by Secured Party of the Collateral. - 6 - 11 (E) Exercise all other rights and remedies permitted by law or in equity. Section 17. Liability for Deficiency. If any sale or other disposition of Collateral by Secured Party or any other action of Secured Party hereunder results in reduction of the Obligations, such action will not release Pledgor from its liability to Secured Party for any unpaid Obligations, together with interest thereon, and the same shall be immediately due and payable to Secured Party at Secured Party's address set forth in the opening paragraph hereof. Section 18. Pledged Securities. Upon the occurrence and during the continuance of an Event of Default: (A) All rights of Pledgor to receive the dividends and interest payments which it would otherwise be authorized to receive and retain pursuant to Section 6(E) shall cease, and all such rights shall thereupon become vested in Secured Party who shall thereupon have the sole right to receive and hold as Collateral such dividends and interest payments, but Secured Party shall have no duty to receive and hold such dividends and interest payments and shall not be responsible for any failure to do so or delay in so doing. (B) All dividends and interest payments which are received by Pledgor contrary to the provisions of this Section 18 shall be received in trust for the benefit of Secured Party, shall be segregated from other funds of Pledgor and shall be forthwith paid over to Secured Party as Collateral in the same form as so received (with any necessary indorsement). (C) Secured Party may exercise any and all rights of conversion, exchange, subscription or any other rights, privileges or options pertaining to any of the Pledged Securities as if it were the absolute owner thereof, including without limitation, the right to exchange at its discretion, any and all of the Pledged Securities upon the merger, consolidation, reorganization, recapitalization or other readjustment of any issuer of such Pledged Securities or upon the exercise by any such issuer or Secured Party of any right, privilege or option pertaining to any of the Pledged Securities, and in connection therewith, to deposit and deliver any and all of the Pledged Securities with any committee, depositary, transfer agent, registrar or other designated agency upon such terms and conditions as it may determine, all without liability except to account for property actually received by it, but Secured Party shall have no duty to exercise any of the aforesaid rights, privileges or options and shall not be responsible for any failure to do so or delay in so doing. (D) If the issuer of any Pledged Securities is the subject of bankruptcy, insolvency, receivership, custodianship or other proceedings under the supervision of any court or governmental agency or instrumentality, then all rights of Pledgor to exercise the voting and other consensual rights which Pledgor would otherwise be entitled to exercise pursuant to Section 6(E) with respect to the Pledged Securities issued by such issuer shall cease, and all such rights shall thereupon become vested in Secured Party who shall thereupon have the sole right to exercise such voting and other consensual rights, but Secured Party shall have no duty to exercise any such voting or other consensual rights and shall not be responsible for any failure to do so or delay in so doing. - 7 - 12 Section 19. Reasonable Notice. If any applicable provision of any law requires Secured Party to give reasonable notice of any sale or disposition or other action, Pledgor hereby agrees that five days' prior written notice shall constitute reasonable notice thereof. Section 20. Notices. Any notice required or permitted to be given under or in connection with this Agreement shall be in writing and shall be mailed by first class or express mail, postage prepaid, or sent by telecopy or other similar form of rapid written transmission or personally delivered to the receiving party. All such communications shall be mailed, sent or delivered at the address respectively indicated in the opening paragraph hereof or at such other address as either party may have furnished the other party in writing. Any communication so addressed and mailed shall be deemed to be given when so mailed, any notice so sent by rapid written transmission shall be deemed to be given when receipt of such transmission is acknowledged by the receiving operator or equipment, and any communication so delivered in person shall be deemed to be given when receipted for or actually received by Pledgor or Secured Party, as the case may be. Section 21. Amendments and Waivers. Secured Party's acceptance of partial or delinquent payments or any forbearance, failure or delay by Secured Party in exercising any right, power or remedy hereunder shall not be deemed a waiver of any obligation of Pledgor, or of any right, power or remedy of Secured Party; and no partial exercise of any right, power or remedy shall preclude any other or further exercise thereof. Secured Party may remedy any Event of Default hereunder or in connection with the Obligations without waiving the Event of Default so remedied. Pledgor hereby agrees that if Secured Party agrees to a waiver of any provision hereunder, or an exchange of or release of the Collateral, or the addition or release of any obligor or other person or entity, any such action shall not constitute a waiver of any of Secured Party's other rights or of Pledgor's obligations hereunder. This Agreement may be amended only by an instrument in writing executed jointly by Pledgor and Secured Party. Section 22. Interest. It is the intention of the parties hereto to conform strictly to usury laws applicable to Secured Party. Accordingly, if the transactions contemplated hereby would be usurious under applicable state or federal law, then, notwithstanding anything to the contrary in this Agreement or in any other agreement entered into in connection with or as security for the Obligations, it is agreed as follows: (i) the aggregate of all consideration which constitutes interest under law applicable to Secured Party that is contracted for, taken, reserved, charged or received under the Obligations, this Agreement or under any of such other agreements or otherwise in connection with the Obligations shall under no circumstances exceed the maximum amount allowed by such applicable law, (ii) in the event that the maturity of the Obligations is accelerated for any reason, or in the event of any required or permitted prepayment, then such consideration that constitutes interest under law applicable to Secured Party may never include more than such maximum amount, and (iii) excess interest, if any, provided for in this Agreement or otherwise shall be canceled automatically and, if theretofore paid, shall be credited by Secured Party on the principal amount of the Obligations (or, to the extent that the principal amount of the Obligations shall have been or would thereby be paid in full, refunded by Secured Party to Pledgor). The right to accelerate the maturity of the Obligations does not include the right to accelerate any interest which has not otherwise accrued on the date of such acceleration, and Secured Party does not intend to, and will not, collect any unearned interest in the event of acceleration. All sums paid or agreed to be paid to Secured Party for the use, forbearance or detention of sums included in the initial Obligations shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the full term of the Obligations until payment in full so that the rate or amount of interest on account of the initial Obligations does not exceed the applicable - 8 - 13 usury ceiling, if any. To the extent that Article 5069-1.04 of the Texas Revised Civil Statutes is relevant to Secured Party for the purpose of determining the Highest Lawful Rate, Secured Party hereby elects to determine the applicable rate ceiling under such Article by the indicated (weekly) rate ceiling from time to time in effect, subject to Secured Party's right subsequently to change such method in accordance with applicable law. Section 23. Governing Law; Jurisdiction. This Agreement and the security interest granted hereby shall be construed in accordance with and governed by the laws of the State of Texas, without giving effect to principles of conflict of laws (except to the extent that the laws of any other jurisdiction govern the perfection and priority of the security interests granted hereby). Pledgor consents to and submits to in personam jurisdiction and venue in the state district and county courts of the county wherein Secured Party's offices are located at the address specified in the opening paragraph hereof, and in the Federal District Courts of the district wherein such offices of Secured Party are located. This submission to jurisdiction is nonexclusive and does not preclude Secured Party from obtaining jurisdiction over Pledgor or the Collateral in any court otherwise having jurisdiction. Section 24. Subrogation. Until all indebtedness in connection with the Obligations shall have been paid in full, Pledgor shall have no right to subrogation or to enforce any remedy or participate in any Collateral or security whatsoever now or hereafter held by Secured Party. Section 25. Continuing Security Agreement. (A) This Agreement shall constitute a continuing security agreement, and all representations and warranties, covenants and agreements shall, as applicable, apply to all future as well as existing transactions. Provisions of this Agreement, unless by their terms exclusive, shall be in addition to other agreements between the parties. (B) Except as may be expressly applicable pursuant to Section 9.505 of the Code, no action taken or omission to act by Secured Party hereunder, including, without limitation, any exercise of voting or consensual rights pursuant to Section 6(D) or any other action taken or inaction pursuant to Section 16, shall be deemed to constitute a retention of the Collateral in satisfaction of the Obligations or otherwise to be in full satisfaction of the Obligations, and the Obligations shall remain in full force and effect, until Secured Party shall have applied payments (including, without limitation, collections from Collateral) towards the Obligations in the full amount then outstanding or until such subsequent time as is hereinafter provided in subsection (C) below. (C) To the extent that any payments on the Obligations or proceeds of the Collateral are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, debtor in possession, receiver or other person or entity under any bankruptcy law, common law or equitable cause, then to such extent the Obligations so satisfied shall be revived and continue as if such payment or proceeds had not been received by Secured Party, and Secured Party's security interests, rights, powers and remedies hereunder shall continue in full force and effect. In such event, this Agreement shall be automatically reinstated if it shall theretofore have been terminated pursuant to. Section 26. Redelivery of Collateral. If any sale or transfer of Collateral by Secured Party results in full satisfaction of the Obligations, and after such sale or transfer and discharge there remains a surplus of - 9 - 14 proceeds, Secured Party will deliver to Pledgor such excess proceeds in a commercially reasonable time; provided, however, that Secured Party shall not be liable for any interest, cost or expense in connection with any reasonable delay in delivering such proceeds to Pledgor. Section 27. Custody and Preservation of the Collateral. Secured Party shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in its possession if the Collateral is accorded treatment substantially equal to that which comparable secured parties accord comparable collateral, it being understood and agreed, however, that Secured Party shall not have responsibility for (i) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relative to any Collateral, whether or not Secured Party has or is deemed to have knowledge of such matters, or (ii) taking any necessary steps to preserve rights against persons or entities with respect to any Collateral. Section 28. Termination. The grant of a security interest hereunder and all of Secured Party's rights, powers and remedies in connection therewith shall remain in full force and effect until Secured Party has (i) retransferred and delivered all Collateral in its possession to Pledgor, (ii) executed a registration of release with respect to all Pledged Securities, if any, as to which Secured Party held a registered pledge; and (iii) executed a written release or termination statement and reassigned to Pledgor without recourse or warranty any remaining Collateral and all rights conveyed hereby. Upon the complete payment of the Obligations and the compliance by Pledgor with all covenants and agreements hereof, Secured Party, at the written request of Pledgor, will release, reassign and transfer the Collateral to Pledgor and declare this Agreement to be of no further force or effect. Notwithstanding the foregoing, the provisions of subsection 25(C) shall survive the termination of this Agreement. PLEDGOR: -------------------------------- BARRY J. GALT - 10 - EX-21 8 SUBSIDIARIES OF SEAGULL ENERGY CORPORATION 1 EXHIBIT 21 SUBSIDIARIES The Company was incorporated in Texas in 1973. The following is a listing of significant subsidiaries of the Company as of February 15, 1999:
% Voting Securities Jurisdiction of or Beneficial Incorporation Interest Owned Name of Subsidiary Or Organization by the Company - ----------------------------------------------------------------------------------------------------------------- Alaska Pipeline Company Alaska 100% Global Natural Resources Corporation of Nevada Nevada 100% Global Natural Resources Inc. New Jersey 100% Seagull (Cote d'Ivoire) CI-104 Ltd. Cayman Islands 100% Seagull (Cote d'Ivoire) CI-12 Ltd. Cayman Islands 100% Seagull (Cote d'Ivoire) Ltd. Cayman Islands 100% Seagull (Egypt) Darag, Ltd. Cayman Islands 100% Seagull (Egypt) East Beni Suef, Ltd. Cayman Islands 100% Seagull (Egypt) Ltd. Cayman Islands 100% Seagull East Zeit Petroleum Ltd. Cayman Islands 100% Seagull Energy E&P Inc. Delaware 100% Seagull Energy International Inc. Delaware 100% Seagull Field Services Company Texas 100% Seagull International Holdings Ltd. Cayman Islands 100% Seagull Marketing Services, Inc. Texas 100% Seagull Pipeline & Marketing Company Delaware 100% Seagull Pipeline Company Delaware 100% Seagull Power Services Inc. Delaware 100% Seagull Products Pipeline Corporation Texas 100% Seagull South Hurghada Petroleum Ltd. Cayman Islands 100% Seagull WAG Petroleum Ltd. Cayman Islands 100% Texneft Inc. Texas 100%
EX-23.1 9 CONSENT OF LPMG LLP 1 SEAGULL ENERGY CORPORATION EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS The Board of Directors Seagull Energy Corporation: We consent to the incorporation by reference in the following Registration Statements of Seagull Energy Corporation of our report dated February 9, 1999, relating to the consolidated balance sheets of Seagull Energy Corporation and Subsidiaries as of December 31, 1998 and 1997 and the related consolidated statements of operations, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1998, which report appears or is incorporated by reference in the December 31, 1998 Annual Report on Form 10-K of Seagull Energy Corporation. a. Form S-8, Seagull Thrift Plan (2-72014). b. Form S-8, Seagull Energy Corporation 1981 Non-Qualified and Incentive Stock Option Plan (2-80834). c. Form S-8, ENSTAR Natural Gas Company Thrift Plan (33-14463). d. Forms S-8 and S-3, Seagull Energy Corporation 1983 Stock Option Plan (2-93087). e. Forms S-8 and S-3, Seagull Energy Corporation 1986 Stock Option Plan (33-22475). f. Form S-8, Seagull Energy Corporation 1990 Stock Option Plan (33-43483). g. Form S-8, Seagull Energy Corporation 1993 Stock Option Plan (33-50643). h. Form S-8, Seagull Energy Corporation 1993 Nonemployee Directors' Stock Option Plan (33-50645). i. Form S-3, $350,000,000 Debt Securities of Seagull Energy Corporation (33-65118). j. Form S-3, ENSTAR Alaska Group of Common Stock of Seagull Energy Corporation (33-53729). k. Form S-8, Seagull Energy Corporation 1995 Omnibus Stock Plan (33-64041). l. Form S-3, $300,000,000 Debt Securities, Preferred Stock, Depositary Shares, Common Stock or Securities Warrants of Seagull Energy Corporation (33-64051). m. Form S-8, Global Natural Resources In. 1989 Key Employees Stock Option Plan and 1992 Stock Option Plan (333-13393). n. Form S-8, 1998 Omnibus Stock Plan (333-71375). /s/ KPMG LLP Houston, Texas February 15, 1999 EX-23.2 10 CONSENT OF RYDER SCOTT COMPANY 1 SEAGULL ENERGY CORPORATION EXHIBIT 23.2 CONSENT OF INDEPENDENT PETROLEUM ENGINEERS We hereby consent to the use of our name in the Annual Report on Form 10-K of Seagull Energy Corporation and Subsidiaries (the "Company") for the year ended December 31, 1998, and the incorporation by reference thereof into the Company's registration statements on Form S-8 (Nos. 2-72014, 2-80834, 33-14463, 33-43483, 33-50643, 33-50645, 33-64041, 333-13393 and 333-71375), Forms S-8 and S-3 (Nos. 2-93087 and 33-22475), Form S-3 (Nos. 33-53729, 33-65118, 33-64051 and 333-34841) and Form S-4 (No. 333-68679). /s/ Ryder Scott Company Petroleum Engineers RYDER SCOTT COMPANY PETROLEUM ENGINEERS Houston, Texas February 12, 1999 EX-23.3 11 CONSENT OF DEGOLYER AND MACNAUGHTON 1 SEAGULL ENERGY CORPORATION EXHIBIT 23.3 CONSENT of INDEPENDENT PETROLEUM ENGINEERS We hereby consent to the use of our name under the heading "Oil and Gas Operations" of Item 1 in the Annual Report on Form 10-K (the Form 10-K) for the year ended December 31, 1998, of Seagull Energy Corporation and Subsidiaries (the Company) and the incorporation by reference of the Form 10-K into the Company's registration statements on Form S-8 (Nos. 2-72014, 2-80834, 33-14463, 33-43483, 33-50643, 33-50645, 33-64041, 333-13393 and 333-71375), Forms S-8 and S-3 (Nos. 2-93087 and 33-22475), Form S-3 (Nos. 33-53729, 33-65118, 33-64051 and 333-34841) and Form S-4 (No. 333-68679). /s/ DeGolyer and MacNaughton DeGOLYER AND MacNAUGHTON Dallas, Texas February 12, 1999 EX-23.4 12 CONSENT OF NETHERLAND, SEWELL AND ASSOCIATES, INC. 1 SEAGULL ENERGY CORPORATION EXHIBIT 23.4 CONSENT OF INDEPENDENT PETROLEUM ENGINEERS We hereby consent to the references to Netherland, Sewell & Associates, Inc. in the Annual Report on Form 10-K of Seagull Energy Corporation and Subsidiaries (the "Company") for the year ended December 31, 1998, and the incorporation by reference thereof into the Company's registration statements on Form S-8 (Nos. 2-72014, 2-80834, 33-14463, 33-43483, 33-50643, 33-50645, 33-64041, 333-13393 and 333-71375), Forms S-8 and S-3 (Nos. 2-93087 and 33-22475), Form S-3 (Nos. 33-53729, 33-65118, 33-64051 and 333-34841) and Form S-4 (No. 333-68679) NETHERLAND, SEWELL & ASSOCIATES, INC. By: /s/ Danny D, Simmons Danny D, Simmons Senior Vice President Houston, Texas February 10, 1999 EX-27.1 13 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1998 DEC-31-1998 25,734 0 95,620 0 15,663 152,781 2,301,182 1,090,855 1,416,090 211,694 582,675 0 0 6,439 548,652 1,416,090 426,171 426,171 41,232 506,507 (3,467) 0 39,184 (133,921) (38,256) (95,665) 0 (1,031) 0 (96,696) (1.53) (1.53)
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