-----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, QFodxa+hAd/tpFJorq0OlJzAcPUX+acYMNj6bHoAqdV/zvTTsJQUJdiqSbCna0Xr CYo7rao6hEtqjFnx2TLsQA== 0001047469-98-031091.txt : 19980814 0001047469-98-031091.hdr.sgml : 19980814 ACCESSION NUMBER: 0001047469-98-031091 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980813 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NOBLE AFFILIATES INC CENTRAL INDEX KEY: 0000072207 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 730785597 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-07964 FILM NUMBER: 98685899 BUSINESS ADDRESS: STREET 1: 110 W BROADWAY STREET 2: P O BOX 1967 CITY: ARDMORE STATE: OK ZIP: 73402-1967 BUSINESS PHONE: 4052234110 MAIL ADDRESS: STREET 1: P O BOX 1967 STREET 2: 110 WEST BROADWAY CITY: ARDMORE STATE: OK ZIP: 73402-1967 10-Q 1 10-Q =============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-Q /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____to_____ Commission file number: 0-7062 NOBLE AFFILIATES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Delaware 73-0785597 (STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER) 110 West Broadway Ardmore, Oklahoma 73401 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (580) 223-4110 (Registrant's telephone number, including area code) 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 ----- ----- Number of shares of common stock outstanding as of August 3, 1998: 56,965,792 =============================================================================== PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS NOBLE AFFILIATES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEET (Dollars in thousands) (Unaudited) June 30, December 31, 1998 1997 ----------- ------------ ASSETS Current Assets: Cash and short-term cash investments........... $ 38,798 $ 55,075 Accounts receivable-trade...................... 148,930 162,667 Materials and supplies inventories............. 4,619 2,805 Other current assets........................... 6,024 15,385 ----------- ----------- Total Current Assets.......................... 198,371 235,932 ----------- ----------- Property, Plant and Equipment................... 3,083,722 2,807,027 Less: accumulated depreciation, depletion and amortization............. (1,375,797) (1,260,601) ----------- ----------- 1,707,925 1,546,426 ----------- ----------- Other Assets.................................... 60,692 70,424 ----------- ----------- Total Assets................................ $ 1,966,988 $ 1,852,782 ----------- ----------- ----------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable-trade........................ $ 180,602 $ 163,563 Other current liabilities..................... 31,780 28,456 Income taxes-current.......................... 650 2,299 ----------- ----------- Total Current Liabilities..................... 213,032 194,318 ----------- ----------- Deferred Income Taxes........................... 154,792 144,083 ----------- ----------- Other Deferred Credits and Noncurrent Liabilities................................... 42,937 56,425 ----------- ----------- Long-term Debt.................................. 720,055 644,967 ----------- ----------- Shareholders' Equity: Common stock.................................. 194,967 194,743 Capital in excess of par value................ 359,714 358,054 Retained earnings............................. 296,909 275,610 ----------- ----------- 851,590 828,407 Less common stock in treasury (at cost, 1,524,900 shares).................. (15,418) (15,418) ----------- ----------- Total Shareholders' Equity................... 836,172 812,989 ----------- ----------- Total Liabilities and Shareholders' Equity... $ 1,966,988 $ 1,852,782 ----------- ----------- ----------- -----------
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS. 2 NOBLE AFFILIATES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS (Dollars in Thousands, Except Per Share Amounts) (Unaudited) Six Months Ended June 30, -------------------------- 1998 1997 ---------- ---------- REVENUES: Oil and gas sales and royalties............. $ 328,221 $ 384,982 Gathering, marketing and processing......... 149,786 167,332 Other income................................ 17,532 6,808 ---------- ---------- 495,539 559,122 ---------- ---------- COSTS AND EXPENSES: Oil and gas exploration..................... 40,742 35,444 Oil and gas operations...................... 75,737 84,482 Gathering, marketing and processing......... 144,493 158,094 Depreciation, depletion and amortization.... 145,212 149,028 Selling, general and administrative......... 25,850 24,853 Interest.................................... 24,452 27,467 Interest capitalized........................ (3,112) (2,049) ---------- ---------- 453,374 477,319 ---------- ---------- INCOME BEFORE TAXES........................... 42,165 81,803 INCOME TAX PROVISION.......................... 16,312 (1) 30,288 (1) ---------- ---------- NET INCOME.................................... $ 25,853 $ 51,515 ---------- ---------- ---------- ---------- BASIC EARNINGS PER SHARE..................... $ .45 (2) $ .91 (2) ---------- ---------- ---------- ---------- DILUTED EARNINGS PER SHARE................... $ .45 (2) $ .90 (2) ---------- ---------- ---------- ----------
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS. 3 NOBLE AFFILIATES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS (Dollars in Thousands, Except Per Share Amounts) (Unaudited) Three Months Ended June 30, --------------------------- 1998 1997 ---------- ---------- REVENUES: Oil and gas sales and royalties............... $ 161,284 $ 165,660 Gathering, marketing and processing........... 70,188 67,222 Other income.................................. 15,929 3,785 ---------- ---------- 247,401 236,667 ---------- ---------- COSTS AND EXPENSES: Oil and gas exploration....................... 24,127 15,839 Oil and gas operations........................ 36,047 40,965 Gathering, marketing and processing........... 68,199 63,293 Depreciation, depletion and amortization...... 74,900 71,308 Selling, general and administrative........... 12,789 12,666 Interest...................................... 12,922 13,183 Interest capitalized.......................... (1,562) (1,336) ---------- ---------- 227,422 215,918 ---------- ---------- INCOME BEFORE TAXES............................. 19,979 20,749 INCOME TAX PROVISION............................ 7,844 (1) 7,597(1) ---------- ---------- NET INCOME...................................... $ 12,135 $ 13,152 ---------- ---------- ---------- ---------- BASIC EARNINGS PER SHARE........................ $ .21 (2) $ .23(2) ---------- ---------- ---------- ---------- DILUTED EARNINGS PER SHARE...................... $ .21 (2) $ .23(2) ---------- ---------- ---------- ----------
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS. 4 NOBLE AFFILIATES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (Dollars in Thousands) (Unaudited) Six Months Ended June 30, ------------------------- 1998 1997 ---------- ----------- Cash Flows from Operating Activities: Net income $ 25,853 $ 51,515 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization............................ 144,991 149,028 Amortization of undeveloped lease costs, net........................ 1,233 1,799 Increase (decrease) in other deferred credits....................... (2,780) 27,428 (Increase) decrease in other assets and other noncash items, net.... 15,661 814 Changes in working capital, not including cash: (Increase) decrease in accounts receivable.......................... 13,737 65,319 (Increase) decrease in other current assets and inventories......... 7,570 3,846 Increase (decrease) in accounts payable............................. 17,039 6,255 Increase (decrease) in other current liabilities.................... 1,678 (56,356) --------- --------- Net Cash Provided by Operating Activities................................ 224,982 249,648 --------- --------- Cash Flows From Investing Activities: Capital expenditures.................................................. (315,702) (129,400) Proceeds from sale of property, plant and equipment................... 2,114 10,575 --------- --------- Net Cash Used in Investing Activities .................................. (313,588) (118,825) --------- --------- Cash Flows From Financing Activities: Exercise of stock options............................................. 1,884 1,891 Cash dividends........................................................ (4,555) (4,549) Repayment of bank debt................................................ (389,000) Proceeds from issuance of senior debt................................. 245,127 Proceeds from bank borrowings......................................... 75,000 --------- --------- Net Cash Provided by (Used in) Financing Activities .................... 72,329 (146,531) --------- --------- Increase (Decrease) in Cash and Short-term Cash Investments............. (16,277) (15,708) --------- --------- Cash and Short-term Cash Investments at Beginning of Period............. 55,075 94,768 --------- --------- Cash and Short-term Cash Investments at End of Period................... $ 38,798 $ 79,060 --------- --------- --------- --------- Supplemental Disclosures of Cash Flow Information: Cash paid during the period for: Interest (net of amount capitalized).................................. $ 22,193 $ 28,156 Income taxes ......................................................... $ 4,276 $ 11,750
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS. 5 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) In the opinion of Noble Affiliates, Inc. (the "Company"), the accompanying unaudited consolidated condensed financial statements contain all adjustments, consisting only of necessary and normal recurring adjustments, necessary to present fairly the Company's financial position as of June 30, 1998 and December 31, 1997, and the results of operations for the three month and six month periods ended June 30, 1998 and 1997, respectively and the cash flows for the six month periods ended June 30, 1998 and 1997. These consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and the notes thereto incorporated in the Company's annual report on Form 10-K for the year ended December 31, 1997. (1) INCOME TAX PROVISION For the six months ended June 30:
(In thousands) ------------------------------ 1998 1997 ------- ------- Current........................................................... $ 5,297 $12,289 Deferred.......................................................... 11,015 17,999 ------- ------- $16,312 $30,288 ------- ------- ------- -------
For the three months ended June 30:
(In thousands) ------------------------------ 1998 1997 ------- ------- Current........................................................... $ 1,492 $ 3,032 Deferred.......................................................... 6,352 4,565 ------- ------- $ 7,844 $ 7,597 ------- ------- ------- -------
(2) BASIC EARNINGS PER SHARE AND DILUTED EARNINGS PER SHARE The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings per Share" in February 1997. The Company adopted the disclosure requirements of SFAS No. 128 during 1997 and restated all previously presented financial statements in conformity with SFAS No. 128. Basic earnings per share of common stock was computed using the weighted average number of shares of common stock outstanding during each period. The diluted net income per share of common stock includes the effect of outstanding stock options. The following tables summarize the calculation of basic earnings per share ("EPS") and diluted EPS for the quarter ending June 30:
1998 1997 -------------------------- --------------------------- INCOME SHARES INCOME SHARES (IN THOUSANDS, EXCEPT PER SHARE) (NUMERATOR) (DENOMINATOR) (NUMERATOR) (DENOMINATOR) - ------------------------------------------------------------------------------------------------------------------- Net income/shares $12,135 56,958 $13,152 56,869 - ------------------------------------------------------------------------------------------------------------------- BASIC EPS $.21 $.23 - ------------------------------------------------------------------------------------------------------------------- Net income/shares $12,135 56,958 $13,152 56,869 Effect of Dilutive Securities Stock options 613 519 Adjusted net income/shares $12,135 57,571 $13,152 57,388 - ------------------------------------------------------------------------------------------------------------------- DILUTED EPS $.21 $.23 - -------------------------------------------------------------------------------------------------------------------
6 For the six months ending June 30:
1998 1997 -------------------------- --------------------------- INCOME SHARES INCOME SHARES (IN THOUSANDS, EXCEPT PER SHARE) (NUMERATOR) (DENOMINATOR) (NUMERATOR) (DENOMINATOR) - ------------------------------------------------------------------------------------------------------------------- Net income/shares $25,853 56,936 $51,515 56,855 - ------------------------------------------------------------------------------------------------------------------- BASIC EPS $.45 $.91 - ------------------------------------------------------------------------------------------------------------------- Net income/shares $25,853 56,936 $51,515 56,855 Effect of Dilutive Securities - ----------------------------- Stock options 520 601 Adjusted net income/shares $25,853 57,456 $51,515 57,456 - ------------------------------------------------------------------------------------------------------------------- DILUTED EPS $.45 $.90 - -------------------------------------------------------------------------------------------------------------------
(3) RESTATEMENT TO CONFORM TO CURRENT YEAR PRESENTATION Certain reclassifications have been made to the 1997 consolidated financial statements to conform to the 1998 presentation. (4) TRADING AND HEDGING ACTIVITIES The Company, through its subsidiaries, from time to time, uses various hedging arrangements in connection with anticipated crude oil and natural gas sales of its production to minimize the impact of product price fluctuations. Such arrangements include fixed price hedges, costless collars, swaps, options and other contractual arrangements. Hedging gains and losses, as applicable, related to the Company's oil and gas production are recorded in oil and gas sales and royalties. The Company had no natural gas or crude oil hedging contracts related to its production in the second quarter of 1998. In addition to the hedging arrangements pertaining to the Company's production as described above, Noble Gas Marketing ("NGM"), a wholly owned subsidiary of the Company, employs various hedging arrangements in connection with its purchases and sales of third party production to lock in profits or limit exposure to gas price risk. Most of the purchases made by NGM are on an index basis; however, purchasers in the markets in which NGM sells often require fixed or NYMEX related pricing. NGM may use a hedge to convert the fixed or NYMEX sale to an index basis thereby determining the margin and minimizing the risk of price volatility. During the second quarter of 1998, NGM had hedging transactions with broker-dealers that represented approximately 653,000 MMBTU's of gas per day. Hedges for July 1998 through October 2000, which range from 20,000 MMBTU's to 726,000 MMBTU's of gas per day for future physical transactions, were not closed at June 30, 1998. During the second quarter of 1997, NGM had hedging transactions with broker-dealers that represented approximately 454,182 MMBTU's of gas per day. NGM records hedging gains or losses relating to fixed term sales as gathering, marketing and processing revenues in the periods in which the related contract is completed. The FASB issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" in June 1998. The Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company formally document, designate and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. A company may also implement the Statement as of the beginning of any fiscal quarter after the Statement's issuance (that is, fiscal quarters beginning 7 June 16, 1998 and thereafter). SFAS No. 133 cannot be applied retroactively. SFAS No. 133 must be applied to (a) derivative instruments and (b) certain derivative instruments embedded in hybrid contracts that were issued, acquired, or substantively modified after December 31, 1997 (and, at the Company's election, before January 1, 1998). The Company has not yet quantified the impact of adopting SFAS No. 133 and has not determined the timing or method of adoption of SFAS No. 133. (5) MINERALS MANAGEMENT SERVICE CLAIMS Samedan Oil Corporation ("Samedan"), a wholly owned subsidiary of the Company, has from time to time settled various claims against parties which failed to fulfill their contractual obligation to Samedan to purchase gas at fixed prices greater than market or pursuant to take-or-pay provisions. The Company's policy, which is consistent with general industry practice, is that amounts received in such settlements ("settlement payments") do not represent payment for gas produced and, therefore, are not subject to royalty payments. Property owners, including governmental authorities and private parties, have in recent years asserted claims against Samedan and other oil and gas companies for royalties on settlement payments. Samedan participated, in a joint effort with other energy companies and the Independent Petroleum Association of America ("IPAA"), in a test case which challenged the determination by the U.S. Minerals Management Service ("MMS") that royalties were payable to the government on certain settlement payments received by Samedan and the other plaintiffs (the "MMS Lawsuit"). The District Court for the District of Columbia (the "D.C. District Court") entered a judgment against Samedan in the amount of $20,000. In 1996, the Court of Appeals for the District of Columbia Circuit reversed the judgment against Samedan. In subsequent proceedings in the D.C. District Court consistent with the appellate court decision, on July 25, 1997, the court enjoined the MMS from taking action to collect from Samedan royalties on non-recoupable settlement payments (the "MMS Injunction"). The MMS had until April 14, 1998 to appeal the MMS Injunction and elected not to do so. Based upon the MMS Injunction, the Company in June 1998 recorded $13.7 million as other income which represented the amount of the reserve that the Company had established pending the outcome of the MMS Lawsuit. Samedan may be the subject of future legal actions by property owners claiming royalties on other settlement payments received by Samedan. There can be no assurance that Samedan will prevail in any such action. The Company is unable to estimate the possible amount of loss, if any, associated with this contingency. (6) METHANOL PLANT Through the recently formed Atlantic Methanol Production Company ("AMPC"), Samedan is participating, with a 50 percent expense interest, in a joint venture with CMS Energy Corporation to construct a methanol plant on Bioko Island in Equatorial Guinea. The plant will use the gas from Samedan's 31 percent owned Alba field as feedstock. The plant is being designed to utilize approximately 115 MMCF of gas per day. The gas will be priced at approximately $.25 per MMBTU. On January 29, 1998, AMPC awarded a contract to Raytheon Engineers and Constructors to build the methanol plant. The plant is estimated to cost $317,000,000 and is being designed to produce 2,500 metric tons of methanol per day, which equates to approximately 20,000 BBLS per day. The construction contract stipulates that the first commercial production of methanol should be achieved by January 2001. Current marketing plans are to enter into long-term contracts with methanol users in the United States and Europe. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS This report on Form 10-Q includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact included in this Form 10-Q, including, without limitation, 8 statements contained under "Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding the Company's financial position, business strategy, plans and objectives of management of the Company for future operations and industry conditions, are forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the Company's expectations ("Cautionary Statements") include without limitation future production levels, future prices and demand for oil and gas, results of future exploration and development activities, future operating and development costs, the effect of existing and future laws and governmental regulations (including those pertaining to the environment) and the political and economic climate of the United States and the foreign countries in which the Company operates from time to time, as discussed in this quarterly report on Form 10-Q and the other documents of the Company filed with the Securities and Exchange Commission (the "Commission"). All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the Cautionary Statements. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities decreased to $225.0 million in the six months ended June 30, 1998 from $249.6 million in the same period of 1997. Cash and short-term cash investments decreased from $55.1 million at December 31, 1997 to $38.8 million at June 30, 1998. Such decreases in cash are primarily the result of declining oil prices. The Company has expended approximately $315.7 million of its $451.0 million 1998 capital budget through June 30, 1998. The Company's 1998 capital budget includes approximately $48.4 million for potential acquisitions of producing properties. The Company continues to evaluate possible strategic acquisitions and believes it is positioned to access external sources of funding should it be necessary or desirable in connection with an acquisition. The Company's current ratio (current assets divided by current liabilities) was .93 at June 30, 1998 compared with 1.21 at December 31, 1997. The Company follows an entitlements method of accounting for its gas imbalances. The Company's estimated gas imbalance receivables were $18.5 million at June 30, 1998 and December 31, 1997. Estimated gas imbalance liabilities were $20.9 million at June 30, 1998 and $21.6 million at December 31, 1997. These imbalances are valued at the amount which is expected to be received or paid to settle the imbalances. The settlement of the imbalances can occur either over the life or at the end of the life of a well, on a volume basis or by cash settlement. The Company does not expect that a significant portion of the settlements will occur in any one year. Thus, the Company believes the settlement of gas imbalances will not have a material impact on its liquidity. RESULTS OF OPERATIONS For the second quarter of 1998, the Company recorded net income of $12.1 million, or $.21 per share, compared to net income of $13.2 million, or $.23 per share, in the second quarter of 1997. During the first six months of 1998, the Company recorded net income of $25.9 million, or $.45 per share, compared to net income of $51.5 million, or $.91 per share, in the first six months of 1997. Gas sales for the Company, excluding third party sales by Noble Gas Marketing ("NGM"), a wholly owned subsidiary of the Company, increased 16 percent for the three months and decreased four percent for the six months ended June 30, 1998. The increase in sales for the second quarter is primarily due to a 14 percent increase in the average gas price and a one percent increase in average daily production, compared to the same quarter in 1997. For the six months ended June 30, 1998, gas sales decreased four percent primarily due to a four percent decrease in the average gas price, compared with the six months ended June 30, 1997. Oil sales for the Company, excluding third party sales by Noble Trading, Inc. ("NTI"), a wholly owned subsidiary of the Company, decreased 33 percent and 34 percent, respectively, for the three months and six months ended June 30, 1998, as compared with the same periods in 1997. The primary reasons for the decreased sales were due to a 31 percent and 32 percent decrease, respectively, in average oil price for the three months and six months ended June 30, 1998, as compared to the same periods in 1997. The average daily production decreased two percent for the three months and six months ended June 30, 1998, as compared with the same periods in 1997. 9 NGM markets most of the Company's natural gas as well as certain third party gas. NGM sells gas directly to end-users, gas marketers, industrial users, interstate and intrastate pipelines, and local distribution companies. NTI markets a portion of the Company's oil as well as certain third party oil. The Company records all NGM's and NTI's sales as gathering, marketing and processing revenues and expenses. All intercompany sales and expenses have been eliminated. For the second quarter of 1998, revenues and expenses from combined NGM and NTI third party sales totaled $70.2 million and $68.2 million, respectively, for a gross margin of $2.0 million. In comparison, combined NGM and NTI third party sales and expenses of $67.2 million and $63.3 million, respectively, resulted in a gross margin of $3.9 million for the second quarter of 1997. For the six months ended June 30, 1998, combined NGM and NTI revenues and expenses from third party sales totaled $149.8 million and $144.5 million, respectively, for a gross margin of $5.3 million. In comparison, combined NGM and NTI third party sales and expenses of $167.3 million and $158.1 million, respectively, resulted in a gross margin of $9.2 million for the same period in 1997. The Company, from time to time, uses various hedging arrangements in connection with anticipated crude oil and natural gas sales of its own production and third party production purchased and sold by NGM to minimize the impact of product price fluctuations. Such arrangements include fixed price hedges, costless collars and other contractual arrangements. Although these hedging arrangements expose the Company to credit risk, the Company monitors the creditworthiness of its counterparties, which generally are major institutions, and believes that losses from nonperformance are unlikely to occur. The Company had no natural gas or crude oil hedging contracts related to its production in the second quarter of 1998. NGM employs various hedging arrangements in connection with its purchases and sales of third party production to lock in profits or limit exposure to gas price risk. Most of the purchases made by NGM are on an index basis; however, purchasers in the markets in which NGM sells often require fixed or NYMEX related pricing. NGM may use a hedge to convert the fixed or NYMEX sale to an index basis thereby determining the margin and minimizing the risk of price volatility. During the second quarter of 1998, NGM had hedging transactions with broker-dealers that represented approximately 653,000 MMBTU's of gas per day. Hedges for July 1998 through October 2000, which range from 20,000 MMBTU's to 726,000 MMBTU's of gas per day for future physical transactions, were not closed at June 30, 1998. During the second quarter of 1997, NGM had hedging transactions with broker-dealers that represented approximately 454,182 MMBTU's of gas per day. Certain selected oil and gas operating statistics follow:
For the three months For the six months ended June 30, ended June 30, ---------------------- ----------------------- 1998 1997 1998 1997 -------- -------- -------- -------- Oil revenues (in thousands) $ 40,110 $ 59,692 $ 85,165 $128,989 Average daily oil production - BBLS 37,690 38,434 38,113 39,015 Average oil price per BBL $ 11.98 $ 17.46 $ 12.68 $ 18.71 Gas revenue (in thousands) $118,065 $101,793 $235,541 $246,428 Average daily gas production - MCFS 572,436 566,852 585,685 589,393 Average gas price per MCF $ 2.31 $ 2.03 $ 2.27 $ 2.37 BBLS - BARRELS MCFS - THOUSAND CUBIC FEET
Oil and gas exploration expense increased $8.3 million and $5.3 million, respectively, for the three months and six months ended June 30, 1998, as compared to the same periods in 1997. These increases are primarily attributable to increases of $5.1 million and $2.8 million, respectively, in abandoned assets, compared with the same periods in 1997. 10 Oil and gas operations expense decreased $4.9 million and $8.7 million, respectively, for the three months and six months ended June 30, 1998 compared to the same periods in 1997. These decreases are due primarily to decreased lease operations expenses of $3.6 million and $5.9 million, respectively, for the three months and six months ended June 30, 1998 compared to the same periods in 1997. Depreciation, depletion and amortization (DD&A) expense increased five percent and decreased three percent, respectively, for the three months and six months ended June 30, 1998 compared to the same periods in 1997. The unit rate of DD&A per barrel of oil equivalent (BOE), converting gas to oil on the basis of 6 MCF per barrel, was $5.91 for the first six months of 1998, as compared to $6.00 for the same period of 1997. The decrease in the unit rate per BOE is due to 1997 year-end reserve revisions on certain properties as a result of lower production performance, which revisions were recognized last year and thus lowered the depreciable basis beginning in 1998. The Company has recorded, through charges to DD&A, a reserve for estimated future liabilities related to dismantlement and reclamation costs for offshore facilities. Approximately $5.6 million and $11.6 million, respectively, was charged to DD&A for the three months and six months ended June 30, 1998 for these estimated future liabilities. This reserve is based on the best estimates of Company engineers of such costs to be incurred in future years. Interest expense decreased $.3 million and $3.0 million for the three months and six months ended June 30, 1998, as compared to the same periods in 1997. This decrease resulted from the decreased debt associated with the EDC Acquisition. Interest capitalized increased $.2 million and $1.1 million, respectively, for the three months and six months ended June 30, 1998, as compared to the same periods in 1997. This increase resulted from construction projects for various properties located in the Gulf of Mexico. FUTURE TRENDS Samedan Oil Corporation ("Samedan"), a wholly owned subsidiary of the Company, has from time to time settled various claims against parties which failed to fulfill their contractual obligation to Samedan to purchase gas at fixed prices greater than market or pursuant to take-or-pay provisions. The Company's policy, which is consistent with general industry practice, is that amounts received in such settlements ("settlement payments") do not represent payment for gas produced and, therefore, are not subject to royalty payments. Property owners, including governmental authorities and private parties, have in recent years asserted claims against Samedan and other oil and gas companies for royalties on settlement payments. Samedan participated, in a joint effort with other energy companies and the Independent Petroleum Association of America ("IPAA"), in a test case which challenged the determination by the U.S. Minerals Management Service ("MMS") that royalties were payable to the government on certain settlement payments received by Samedan and the other plaintiffs (the "MMS Lawsuit"). The District Court for the District of Columbia (the "D.C. District Court") entered a judgment against Samedan in the amount of $20,000. In 1996, the Court of Appeals for the District of Columbia Circuit reversed the judgment against Samedan. In subsequent proceedings in the D.C. District Court consistent with the appellate court decision, on July 25, 1997, the court enjoined the MMS from taking action to collect from Samedan royalties on non-recoupable settlement payments (the "MMS Injunction"). The MMS had until April 14, 1998 to appeal the MMS Injunction and elected not to do so. Based upon the MMS Injunction, the Company in June 1998 recorded $13.7 million as other income which represented the amount of the reserve that the Company had established pending the outcome of the MMS Lawsuit. Samedan may be the subject of future legal actions by property owners claiming royalties on other settlement payments received by Samedan. There can be no assurance that Samedan will prevail in any such action. The Company is unable to estimate the possible amount of loss, if any, associated with this contingency. Management believes the Company is well positioned with its balanced reserves of oil and gas to take advantage of future price increases that may occur. However, the uncertainty of oil and gas prices continues to affect the domestic oil and gas industry. Due to the volatility of oil and gas prices, the Company, from time to time, uses hedging and plans to do so in the future as a means of controlling its exposure to price changes. The Company cannot predict the extent to which its revenues will be affected by inflation, government regulation or changing prices. 11 The Company is working to resolve the potential impact of the year 2000 on the ability of the Company's computerized information systems to accurately process information that may be date-sensitive. Any of the Company's programs that recognize a date using "00" as the year 1900 rather than the year 2000 could result in errors or system failures. The Company utilizes a number of computer programs across its entire operation. The Company has not completed its assessment, but currently believes that costs of addressing this issue will not have a material adverse impact on the Company's financial position. However, if the Company and third parties upon which it relies are unable to address this issue in a timely manner, it could result in a material financial risk to the Company. In order to assure that this does not occur, the Company plans to devote all resources required to resolve any significant year 2000 issues in a timely manner. 12 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The information required by this Item 6 (a) is set forth in the Index to Exhibits accompanying this quarterly report and is incorporated herein by reference. (b) The Company did not file any reports on Form 8-K during the three months ended June 30, 1998. 13 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NOBLE AFFILIATES, INC. (Registrant) Date August 13, 1998 /s/ WM. D. DICKSON ----------------------- ------------------------------------------- WM. D. DICKSON Senior Vice President-Finance and Treasurer (Principal Financial Officer and Authorized Signatory) 14 INDEX TO EXHIBITS
Sequentially Exhibit Numbered Number Exhibit Page - ------- ------------------------------- ----------------- 27.1 Financial Data Schedule
EX-27.1 2 EXHIBIT 27.1
5 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 38,798 0 148,930 0 4,619 198,371 3,083,722 1,375,797 1,966,988 202,827 720,055 0 0 194,967 618,246 1,966,988 328,221 495,539 0 428,922 0 0 24,452 42,165 16,312 25,853 0 0 0 25,853 .45 .45
-----END PRIVACY-ENHANCED MESSAGE-----