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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-11516
REMINGTON OIL AND GAS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 75-2369148
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
8201 PRESTON ROAD, SUITE 600, DALLAS, TEXAS 75225-6211
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (214) 210-2650
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
COMMON STOCK, $0.01 PAR VALUE PACIFIC EXCHANGE, INC.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE
(TITLE OF CLASS)
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. [ ]
THE AGGREGATE MARKET VALUE OF VOTING STOCK HELD BY NON-AFFILIATES OF
THE REGISTRANT ON MARCH 24, 1999, WAS $71,160,343. ON THAT DATE, THE NUMBER OF
OUTSTANDING SHARES, $0.01 PAR VALUE, WAS 21,453,453.
REGISTRANT'S REGISTRATION STATEMENT FILED ON FORM S-2 EFFECTIVE
DECEMBER 1, 1992 FOR ITS 8 1/4% CONVERTIBLE SUBORDINATED NOTES IS INCORPORATED
BY REFERENCE IN PART IV OF THIS FORM 10-K.
REGISTRANT'S REGISTRATION STATEMENT FILED ON FORM S-4 EFFECTIVE
NOVEMBER 27, 1998, IS INCORPORATED BY REFERENCE IN PART IV OF THIS FORM 10-K.
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FORM 10-K
REMINGTON OIL AND GAS CORPORATION
Table of Contents
PART I........................................................................3
ITEM 1. BUSINESS..........................................................3
ITEM 2. PROPERTIES........................................................5
ITEM 3. LEGAL PROCEEDINGS.................................................8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............8
PART II.......................................................................9
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS...........................................................9
ITEM 6. SELECTED FINANCIAL DATA..........................................10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................11
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................17
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.........................................37
PART III.....................................................................37
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...............37
ITEM 11. EXECUTIVE COMPENSATION...........................................40
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...49
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................50
PART IV......................................................................52
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K..52
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PART I
ITEM 1. BUSINESS.
General
Remington Oil and Gas Corporation began in 1981 as OKC Limited
Partnership. In 1992, we converted the limited partnership to a corporation
named Box Energy Corporation. The company changed its name in December 1997, to
Remington Oil and Gas Corporation. We are incorporated in Delaware, and our
executive offices are located at 8201 Preston Road, Suite 600, Dallas, Texas
75225-6211 (telephone number 214/210-2650). The company employed 20 people on
December 31, 1998.
Long-term Strategy
Our long-term strategy to increase shareholder value involves
increasing our oil and gas reserve base by finding, developing or acquiring
more oil and gas reserves than we produce each year. In addition to adding
reserves, our long-term strategy also includes increasing production each year
through our development drilling operations. It is essential to the success of
the long-term strategy that our finding and development costs be competitive
with our industry peers. It is also important, especially during a period of
low oil and gas prices, that our balance sheet remains strong so that we can
complete our exploration, development and acquisition activity. In 1997, we
replaced 129% of our production and increased our oil and gas reserves by 6% to
10.5 million barrels of oil equivalents. In 1998, we replaced 264% of our
production and increased our reserve base by 3.8 million barrels of oil
equivalents, or 36%. In determining barrels of oil equivalents, we convert gas
reserves or production at a ratio of six Mcf to one barrel.
Operations and Risks Involved in Exploration, Development and Production
Our primary business operation is the exploration, development and
production of oil and gas reserves in the offshore Gulf of Mexico and onshore
Gulf Coast areas. Our geophysical and geological staff identifies prospects in
the core areas primarily by using 3-D technology. We then attempt, along with
various industry partners, to acquire a leasehold interest in properties that
merit further exploration. After acquiring a leasehold interest, the company
drills an exploratory well. Positive results from the exploratory well may lead
to additional exploration or development of the property. In addition, the
company purchases properties with existing oil and gas reserves and production
for further exploration, development or exploitation. Remington sells the oil
and gas production from the properties and reinvests the net cash flow from
operations in its exploration, development and acquisition activities.
Exploration, development and production operations involve a high
degree of risk. Unprofitable efforts may result from drilling dry holes or from
drilling marginally productive wells that do not produce enough oil or gas to
return a profit on the amount invested in a well or property. Although we use
3-D seismic data or other technology to identify and define the parameters of
drilling prospects, there is no guarantee that such technology will lead to
successful results. Much of our success depends upon the abilities and
experience of our management and technical personnel. Additional operating
risks include mechanical failure, title risks, blowouts, environmental
pollution, and personal injury. We maintain general liability insurance and
insurance against blowouts, redrilling, and certain other operating hazards,
including certain pollution risks. An uninsured loss or liability, or a loss
that exceeds the limits of our insurance, could adversely affect our financial
condition.
Operating Agreements
We typically own interests in oil and gas properties subject to joint
operating agreements. Although we have typically been a non-operator, we
anticipate operating many of our properties in the future to maintain control
over timing and amount of capital expenditures. Many of the agreements grant
the operator a lien on our interest to secure payment of our share of expenses.
Competition in the Oil and Gas Industry
Remington faces competition from large integrated oil and gas
companies, independent exploration and production
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companies, private individuals and sponsored drilling programs. We compete for
operational, technical and support staff, options and/or leases on prospective
oil and gas properties, and sales of products from developed properties. Many
of the competitors have significantly more financial, personnel, technological,
and other resources available. In addition, some of the larger integrated
companies may be better able to respond to industry changes including price
fluctuations, oil and gas demands, and governmental regulations.
Markets for Oil and Gas Production
We sell our oil and gas production at posted market prices, spot
market indices, or prices derived from the posted price or index. Purchasers
modify the price for quality, refined product yield, geographical proximity to
refineries, and availability of transportation facilities. Oil and gas prices
fluctuate significantly over time because of changes in supply and demand,
changes in refinery utilization, levels of economic activity throughout the
country, seasonal or extraordinary weather patterns, and political developments
throughout the world.
We use an independent third party to sell a significant portion of our
gas production from the Gulf of Mexico. The revenue from the sale of gas by
this marketing company accounted for approximately 53% of our total gas revenue
in 1998. In addition, we sold approximately 72% of our total oil production to
one company during the year, which accounted for approximately 75% of our total
oil revenues in 1998.
Before July 1998, we sold our gas production from South Pass block 89
under a long-term contract. Effective July 1, 1998, we terminated this contract
and received $49.8 million for the termination. Because of this termination the
average price received for gas produced from this block decreased by $6.55 per
Mcf, which reduced our total gas revenues $3.7 million for the remainder of
1998.
Governmental Regulation of Oil and Gas Operations and Environmental Regulations
The federal government and the various state governments have issued
numerous regulations that affect our oil and gas operations. Current
regulations are constantly reviewed at the same time that new regulations are
being considered and implemented. This regulatory burden upon the oil and gas
industry increases the cost of doing business and consequently affects
profitability. In addition, because we hold federal leases, the federal
government requires us to comply with numerous additional regulations that
focus on government contractors. These regulations also increase the company's
general and administrative costs.
State regulations relate to virtually all aspects of the oil and gas
business including drilling permits, bonds and operation reports. In addition,
many states have regulations relating to pooling of oil and gas properties,
maximum rates of production, and spacing and plugging and abandonment of wells.
Our oil and gas operations are subject to stringent federal, state and
local laws and regulations related to improving or maintaining the quality of
the environment. The most significant environmental regulations include
compliance with federal legislation for the Oil Pollution Act of 1990 and the
Clean Water Act together with their amendments. The cost of compliance with
this federal and state legislation could have a significant impact on our
financial ability to carry out our oil and gas operations. The legislation and
accompanying regulations could impose financial responsibility requirements,
liability features, and operational requirements, which could be onerously
burdensome to satisfy.
The laws that require or address environmental remediation apply
retroactively to previous waste disposal practices. In many cases, these laws
apply regardless of fault, legality of the original activities, or ownership or
control of sites. A company could be subject to severe fines and cleanup costs
if found liable under these laws. We have never been a liable party under these
laws nor have we been named a potentially responsible party for waste disposal
at any site.
Recapitalization of Common Stock and Other Business Information
In December 1998, the holders of both classes of common stock approved
the merger agreement which merged S-Sixteen Holding Company into Remington. As
part of that transaction, Remington's two classes of common stock were
recapitalized into a single class of voting common stock. The primary asset we
acquired in the merger was an undivided interest in the oil pipeline that
transports our oil production from the South Pass area to onshore Louisiana.
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Except for our oil and gas leases with third parties and licenses to
acquire or use seismic data, we have no material patents, licenses, franchises
or concessions that we consider significant to our oil and gas operations. The
nature of our business is such that we do not have any "backlog" of products,
customer orders, or inventory. We have not been a party to any bankruptcy,
reorganization, adjustment or similar proceeding except in the capacity as a
creditor.
ITEM 2. PROPERTIES.
We concentrate our principal operations in two areas, the federal
waters of the Gulf of Mexico and the onshore regions of the Gulf Coast. Net
proved oil and gas reserves at December 31, 1998, as evaluated by Netherland,
Sewell, and Associates, Inc. and Miller and Lents, Ltd., are summarized below
on the following table. The Netherland, Sewell, and Associates report covers
approximately 90% of the total proved reserves. In addition to the information
below, we recommend that you read "Management's Discussion and Analysis of
Financial Condition and Results of Operations" found on pages 11 through 16 and
"Financial Statements and Notes to Consolidated Financial Statements" found on
pages 17 through 36. Note 5 -- Oil and Gas Properties in our Notes to
Consolidated Financial Statements provides detailed information concerning
costs incurred, proved oil and gas reserves and discounted future net revenue
for proved reserves.
The quantities of proved oil and gas reserves discussed in this
section include only the amounts which we reasonably expect to recover in the
future from known oil and gas reservoirs under the current economic and
operating conditions. Proved reserves include only quantities that we can
commercially recover using current prices, costs, existing regulatory practices
and technology. Therefore, any changes in future prices, costs, regulations,
technology or other unforeseen factors could significantly increase or decrease
proved reserve estimates.
Net Oil Net Gas Pre-tax
Reserves Reserves Present Value
Barrels Mcf Discounted @10%
-------- -------- ---------------
(In thousands)
Offshore Gulf of Mexico 2,853 47,710 $60,319
Onshore Gulf Coast 2,666 4,999 9,799
----- ------ -------
Total 5,519 52,709 $70,118
===== ====== =======
The table below summarizes our ownership in producing wells at December 31,
1998.
1998 1997 1996
------------------- --------------------- -------------------------
GROSS NET GROSS NET GROSS NET
------- ------- ------- ----- ---------- -----------
Oil Wells
Offshore Gulf of Mexico 22 5.87 17 4.37 18 4.61
Onshore Gulf Coast 52 17.49 12 5.47 10 4.55
------ ----- ----- ----- ----- ----
Total 74 23.36 29 9.84 28 9.16
====== ===== ===== ===== ===== ====
Gas Wells
Gulf of Mexico 41 5.92 10 2.46 9 2.57
Onshore Gulf Coast 80 14.09 78 18.24 3 0.53
------ ----- ----- ----- ----- ----
Total 121 20.01 88 20.70 12 3.10
====== ===== ===== ===== ===== ====
The table below summarizes our lease holding acreage at December 31, 1998.
UNDEVELOPED DEVELOPED
---------------------------------- -----------------------------------
GROSS NET GROSS NET
-------------- --------------- --------------- ----------------
Offshore 92,166 49,088 67,834 15,220
Onshore 80,804 23,650 21,314 4,950
--------- --------- --------- ---------
Total 172,970 72,738 89,148 20,170
========= ========= ========= =========
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Producing Properties
At December 31, 1998, our net pre-tax proved oil and gas reserves, as
valued according to the Securities and Exchange Commission's rules and
regulations were valued at $70.1 million. Our Gulf of Mexico producing
properties accounted for 86% of the discounted present value and 75% of the
total proved reserves. The onshore Gulf Coast producing properties accounted
for 14% of the discounted present value and 25% of the total proved reserves.
In 1998, the company's oil and gas production from the Gulf of Mexico accounted
for 81% of the total volumes, while the onshore Gulf Coast accounted for 19%.
We owned varying working interests in 38 offshore Gulf of Mexico
blocks at December 31, 1998. We currently produce from 11 of these blocks with
new production expected in the second quarter of 1999 from a 1998 gas discovery
at High Island block 86. We plan additional exploratory drilling for some of
our undeveloped offshore acreage in 1999.
At December 31, 1998, we owned 28,550 net acres in the Gulf Coast
areas of which 4,950 net acres were considered producing. Our Gulf Coast area
properties are principally located in Mississippi and Texas. We have a
substantial investment in acreage and seismic data in Nueces County, Texas,
where a 110 square mile, proprietary three-dimensional seismic survey has just
been completed. We plan to drill several exploratory wells in Nueces County
during 1999.
Oil and gas production from 5 offshore Gulf of Mexico blocks and two
onshore Gulf Coast fields accounted for over 90% of our total production.
Production from South Pass blocks 86, 87, 89, and 1 well in West Delta block
128 accounted for 72% of the total oil production and 61% of the total gas
production in 1998. We own a 25% working interest in South Pass blocks 86 and
89, a 33% working interest in South Pass block 87, and a 20% working interest
in the West Delta block 128 well. In 1999, we have additional development and
exploratory drilling planned on South Pass block 87. Marathon Oil Company
operates all four blocks. As a result of our merger with S-Sixteen Holding
Company in December 1998, we acquired CKB Petroleum, Inc. CKB Petroleum owns an
undivided interest in the pipeline that transports our oil production from the
South Pass blocks to Venice Louisiana.
Production from Eugene Island block 135 accounted for 22% of our total
gas production and 4% of our total oil production in 1998. We discovered the
Eugene Island field in 1996. Production from this field commenced in the third
quarter of 1997 from two wells. In 1998, we drilled a third well into a
untested fault block, which discovered hydrocarbons in three additional sands.
We are currently participating in an exploratory well that will test deeper
targets below the producing reservoirs. Enron Oil and Gas Company operates
Eugene Island block 135. We own a 15% working interest in this block.
Significant onshore Gulf Coast fields include our composite 66% owned
Parker Creek Field located in Jones County, Mississippi. In 1998, we drilled
and completed one deep exploratory and one shallow development well in the
field. The Butler #5-5 well, drilled to 13,724 feet confirmed the presence of
the deep Hosston field sands south of the original discovery well. A recently
acquired 3-D seismic survey has identified several offset-drilling locations
for both the deep and shallow producing horizons. We plan to drill additional
wells in this field during 1999. Production from our onshore Texas fields
contributed 8% of our total oil and 14% of our total gas production in 1998.
Our primary producing interests in Texas are located in Hardin, Jaspar and
Lavaca Counties. We plan additional drilling and workover operations on our
Texas properties in 1999.
In early December 1998, we acquired varying working interests in 10
offshore Gulf of Mexico blocks from Union Pacific Resources. Eight of these
blocks are producing and 2 are undeveloped. We have identified additional
development and exploratory opportunities on several of these blocks.
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Drilling Activities
The following is a summary of our exploration and development drilling
activities for the past three years by core area:
1998 1997 1996
----------------------------- ----------------------------- ---------------------------------
GROSS NET GROSS NET GROSS NET
------------- --------------- ------------- --------------- ---------------- ----------------
PROD. DRY PROD. DRY PROD. DRY PROD. DRY PROD. DRY PROD. DRY
------ ----- ------ ------- ------- ----- -------- ------ ------- -------- -------- -------
Exploratory
Gulf of Mexico 3 - .90 - 2 2 .30 .42 4 4 1.15 1.15
Onshore Gulf Coast 9 7 2.72 2.13 1 5 .80 2.56 8 17 2.75 9.40
----- ---- ------ ------ ---- ---- ------ ------ ----- ----- ------ ------
Total 12 7 3.62 2.13 3 7 1.10 2.98 12 21 3.90 10.55
===== ==== ====== ====== ===== ==== ====== ====== ===== ===== ====== ======
Development
Gulf of Mexico - - - - 1 - .25 - - - - -
Onshore Gulf Coast 2 1 .82 .30 4 4 1.58 2.77 1 2 .94 1.87
----- ---- ------ ------ ---- ---- ------ ------ ----- ----- ------ ------
Total 2 1 .82 .30 5 4 1.83 2.77 1 2 .94 1.87
===== ==== ====== ====== ==== ==== ====== ====== ===== ===== ====== ======
We had an interest in 5 wells (1.18 net) in progress at December 31,
1998, 6 wells (2.47 net) in progress at December 31, 1997, and 4 wells (1.49
net) in progress at December 31, 1996.
Other Property and Office Lease
We own several non-contiguous tracts of land covering approximately
7,800 surface acres in Southern Louisiana and Southern Mississippi. Outside
parties lease several of the tracts for farming, grazing, timber, sand and
gravel, camping, hunting and other purposes. Gross revenues from these real
estate properties in 1998 totaled $233,000. We lease approximately 17,000
square feet of office space in Dallas, Texas. An amendment to our lease
extended the term of the lease an additional 10 years from April 1998.
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ITEM 3. LEGAL PROCEEDINGS.
The information required by this Item is incorporated herein by
reference to Item 8. "Financial Statements and Supplementary Data." - Note 10.
Notes to Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On December 23, 1998, we held our annual stockholders' meeting to
elect members to the company's board of directors and ratify the independent
auditors for 1998. Immediately after the annual meeting we held a special
meeting to approve the merger agreement between S-Sixteen Holding Company and
us. The stockholders voted as follows:
ANNUAL MEETING
---------------------------------------------------------------------------------------------------------------
CLASS A COMMON STOCK
--------------------------------
Election of Directors FOR WITHHELD
---------- ----------
Don D. Box 2,160,513 12,300
John E. Goble, Jr. 2,167,013 5,800
William E. Greenwood 2,167,013 5,800
David H. Hawk 2,167,013 5,800
James Arthur Lyle 2,167,013 5,800
David E. Preng 2,167,013 5,800
Thomas W. Rollins 2,167,013 5,800
Alan C. Shapiro 2,167,013 5,800
James A. Watt 2,167,013 5,800
Ratification of Arthur Andersen LLP as independent auditors for 1998 2,160,013 9,200
The members of the board of directors do not serve staggered terms of
office. All directors elected at the meeting were already members of the board
at the time of election. No director serving at the time of the election failed
to retain his seat on the board.
SPECIAL MEETING
- ---------------------------------------------------------------------------------------------------------------------------
CLASS A COMMON STOCK CLASS B COMMON STOCK
---------------------------------------- -------------------------------------------
FOR AGAINST ABSTAIN FOR AGAINST ABSTAIN
------------ ---------- ---------- ------------ ----------- ------------
Approval of merger agreement
2,262,728 6,201 2,880 9,307,011 49,256 67,558
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
In December 1998, we issued a new single class of voting common stock
in exchange for the surrender of all of the previously outstanding voting and
non-voting common stock. The new common stock trades on the NASDAQ National
Market System under the symbol ROIL and on the Pacific Exchange under the
symbol REM.P. Prior to this exchange of common stock, our two classes of shares
traded on the NASDAQ National Market System, under the trading symbols ROILA
and ROILB. During the same period, the two classes traded on the Pacific
Exchange under the symbols REMA.P and REMB.P. Before we changed our name to
Remington Oil and Gas Corporation in December 1997, the shares traded on the
NASDAQ National Market System under the symbols BOXXA and BOXXB and on the
Pacific Exchange under the symbols BXCA.P and BXCB.P. The following table sets
forth the high and low last sales price per share as reported by NASDAQ for the
periods indicated.
COMMON STOCK CLASS A COMMON STOCK CLASS B COMMON STOCK
------------------------ ----------------------- -------------------------
HIGH LOW HIGH LOW HIGH LOW
---------- ---------- ---------- --------- ---------- -----------
1999
First Quarter through March 24 4.000 2.375 - - - -
1998
Fourth Quarter 3.188 2.938 5.000 3.000 4.688 2.875
Third Quarter - - 6.750 3.750 5.875 3.375
Second Quarter - - 7.250 5.500 6.750 5.375
First Quarter - - 6.250 5.125 6.375 5.000
1997
Fourth Quarter - - 8.875 5.125 8.125 5.063
Third Quarter - - 9.250 6.500 8.750 6.250
Second Quarter - - 8.750 6.375 7.500 5.813
First Quarter - - 10.500 7.000 9.313 6.625
On March 24, 1999, the last reported sales price was $3.375 per share.
On that date, there were 592 stockholders of record. Our transfer agent
informed us that as of this date there were also 228 stockholders of record of
class A common stock and 500 stockholders of record of class B common stock who
had not yet surrendered their old stock for the new common stock to which they
are entitled. We have not declared or paid any cash dividends during the past
seven years. Dividends are not currently restricted. However, if we pay
dividends in excess of 2% of the market price per share during a calendar
quarter, the conversion price of the 8 1/4% Convertible Subordinated Notes will
be adjusted proportionately. The determination of future cash dividends, if
any, will depend upon, among other things, our financial condition, cash flow
from operating activities, the level of our capital and exploration expenditure
needs, and future business prospects.
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ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial data should be read in conjunction
with our consolidated financial statements and notes to the consolidated
financial statements. In addition, you should also read our "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in Item 7. below.
1998 (1) 1997 (2) 1996 1995 1994
----------- ----------- ---------- ---------- ----------
(In thousands, except prices and per share data)
Financial
Total revenue $ 87,689 $ 61,053 $ 70,210 $ 59,493 $ 59,244
Net income (loss) $ 13,617 $ (26,790) $ (7,662) $ 5,392 $ 9,157
Basic income (loss) per share $ 0.67 $ (1.31) $ (0.37) $ 0.26 $ 0.44
Diluted income (loss) per share $ 0.66 $ (1.31) $ (0.37) $ 0.26 $ 0.44
Total assets $ 130,229 $ 98,515 $ 136,599 $ 145,491 $ 135,041
81/4% convertible subordinated notes $ 38,371 $ 38,371 $ 55,077 $ 55,077 $ 55,077
Other indebtedness $ 3,500 $ 6,000 $ -- $ -- $ --
Stockholders' equity $ 59,699 $ 44,287 $ 74,356 $ 82,047 $ 75,513
Shares outstanding
Common stock 21,247 -- -- -- --
Class A common stock -- 3,219 3,250 3,250 3,250
Class B common stock -- 17,087 17,553 17,553 17,553
--------- --------- --------- --------- ---------
Total shares outstanding 21,247 20,306 20,803 20,803 20,803
========= ========= ========= ========= =========
Net cash flow from operations $ 54,040 $ 27,546 $ 28,955 $ 24,047 $ 27,644
Net cash flow from investing $ (38,149) $ (11,820) $ (47,602) $ (19,899) $ (13,769)
Net cash flow from financing $ (1,425) $ (14,171) $ -- $ -- $ (1,970)
Operational
Average sales prices
Oil (per Bbl) $ 10.99 $ 17.79 $ 20.21 $ 16.64 $ 15.51
Natural Gas (per Mcf) $ 3.22 $ 5.06 $ 5.69 $ 6.89 $ 7.46
Future net revenue - proved reserves (before
tax)
Undiscounted $ 94,824 $ 141,672 $ 227,817 $ 223,896 $ 206,701
Discounted $ 70,118 $ 108,698 $ 189,155 $ 173,388 $ 157,721
Future net revenue - proved reserves (after tax)
Undiscounted $ 86,936 $ 124,828 $ 177,178 $ 173,869 $ 163,633
Discounted $ 63,467 $ 93,838 $ 146,013 $ 133,982 $ 124,490
Proved reserves
Oil (MBbls) 5,519 4,451 3,299 2,938 3,298
Natural gas (Bcf) 52.7 36.5 39.3 51.4 50.3
Average production (net sales volume)
Oil (BOPD) 3,411 3,280 2,555 2,300 1,796
Natural gas (MMcfgd) 17.5 19.5 22.5 16.1 17.2
(1) Financial results for 1998 include $49.8 million in other income from the
termination of our gas sales contract and a $18.0 million charge recorded
for the Phillips Petroleum judgment.
(2) The net loss in 1997 includes a $14.6 million deferred income tax expense
that we recorded when we increased the valuation allowance against the
deferred income tax asset originally recorded in 1992.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion will assist you in understanding our
financial position, liquidity, and results of operations. The information below
should be read in conjunction with the financial statements, and the related
notes to financial statements. Our discussion contains both historical and
forward-looking information. We assess the risks and uncertainties about our
business, long-term strategy, and financial condition before we make any
forward-looking statements, but we can not guarantee that our assessment is
accurate or that our goals and projections can or will be met. Statements
concerning results of future exploration, exploitation, development and
acquisition expenditures as well as expense and reserve levels are
forward-looking statements. We make assumptions about commodity prices,
drilling results, production costs, administrative expenses and interest costs
that we believe are reasonable based on currently available information of
known facts and trends.
LONG-TERM STRATEGY AND BUSINESS DEVELOPMENTS
Our long-term strategy is to increase shareholder value by
economically increasing reserves, production, and cash flow on an annual basis.
At the same time, we believe it is important to maintain a strong balance sheet
by keeping our total debt at a manageable level. We will balance our capital
expenditures, financed primarily by operating cash flow and bank debt, among
exploration, development, and acquisitions. Proved oil and gas reserves at
December 31, 1998, were 5.5 million barrels of oil and 52.7 Bcf of gas compared
to 4.5 million barrels of oil and 36.5 Bcf of gas at December 31, 1997. These
results amount to a 45% increase in gas reserves and a 36% growth in total
barrels of oil equivalents. We replaced 264% of our total 1998 production,
based on barrels of oil equivalent. During the last two years, we have
concentrated on reducing our costs and expenses so as to be in line with our
industry peers. In addition, we have made an effort to end the litigation that
has characterized this company for much of our history.
Since 1982, we have had a long-term contract covering gas sales from
South Pass block 89. The contract was to expire in July 2002. We entered into
the contract with Texas Eastern Transmission Corporation during a time when
natural gas supplies were scarce. Over time as natural gas supplies became more
abundant, we continued to receive the contract price for our gas production
from this block, although such price was by then substantially higher than the
market price. In 1989, Texas Eastern Transmission Corporation sued us alleging
termination of the contract. In 1990 we settled this litigation and received
$69.6 million as part of the settlement. The contract continued to be in
effect, although the settlement reduced the new contract price to approximately
one-half of the original contract price. These prices, however, escalated 10%
each year. For the first six months of 1998, under the contract, we received
$12.38 per Mcf for gas produced from the southern portion of the block and
$6.83 per Mcf for gas produced from the northern portion of the block.
On July 31, 1998, we executed an agreement with Texas Eastern
Transmission Corporation to terminate this gas sales contract. The termination
was effective June 30, 1998, and as of July 1, 1998, we began selling all gas
produced from this block at spot market prices. We received $49.8 million in
cash and agreed to release Texas Eastern from the contract, including the gas
substitution and indemnification rights, as well as related indemnification and
other obligations that had been in effect under the 1990 settlement agreement
between Texas Eastern and us.
During the first six months of 1998, we received approximately $5.8
million more for the gas sold at the long-term contract price compared to the
same gas if sold at spot market prices. During the last six months of 1998, we
calculate that gas revenues were approximately $3.7 million lower than if we
had continued to receive the contract price.
Phillips Petroleum Company owns a net profits interest created in 1977
by a farm-out agreement covering South Pass block 89. Since 1981, Phillips has
brought numerous pieces of litigation against us over the net profits interest.
Since the inception of the farm-out, we have paid Phillips Petroleum Company
$100.8 million related to the net profits interest and overriding royalty. We
have tried numerous times to settle the latest litigation equitably, but so
far, have been unsuccessful in our settlement attempts. Our goal is to settle
or dispose of this litigation in a manner that would discourage any future
litigation. However, we will vigorously defend ourselves against all litigation
that Phillips Petroleum Company brings against us. We believe, and the
Louisiana court has ruled, that under the farm-out agreement Phillips can look
only to actual production for determination of its net profits interest.
In this latest litigation, Phillips contends that pursuant to its 33%
net profits interest in South Pass block 89, it was entitled to receive an
overriding royalty for months in which "net profits" were not achieved; that an
excessive oil transportation fee was being charged to the net profits account;
and that the entire $69.6 million cash payment that had been
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received by OKC Limited Partnership (our predecessor) from the 1990 settlement
of previous litigation between Texas Eastern and us, should have been credited
to the net profits account instead of the $5.8 million that was credited. On
the latter claim, Phillips seeks to receive in excess of $21.5 million, while
on the first two claims Phillips alleges aggregate damages of several million
dollars. In addition, Phillips, under the Louisiana Mineral Code, is seeking
double damages and cancellation of the farm-out agreement that created the net
profits interest. We denied Phillips' claims and defended ourselves during a
non-jury trial in April 1997. At trial we asserted a counterclaim that Phillips
had breached a settlement agreement regarding previous litigation, and we
sought to recover damages in excess of $10.0 million.
In August 1998, the trial court ruled in the litigation. In its
ruling, the court awarded Phillips $1.6 million plus interest for its
overriding royalty claim and $9.3 million plus interest for its claim on the
1990 settlement. The trial court dismissed Phillips' claim of excessive
transportation charges and its claims for double damages and lease
cancellation. The trial court also dismissed our counterclaim. In October 1998,
the trial court finalized its judgment. The judgment, including interest, was
$18.0 million. We have filed notice of our intent to appeal certain adverse
portions of the judgment. The trial court has required that we post a bond in
order to prevent Phillips from executing on the judgment pending appeal. The
amount of the bond is $18.0 million, $9.0 million of which is collateralized by
cash and a letter of credit. During the pendency of the appeal, simple interest
will continue to accrue on the $10.9 million judgment. Phillips has also filed
notice to appeal. In connection with the judgment, and in accordance with
Statement of Financial Accounting Standards No. 5 entitled "Accounting for
Contingencies," we recorded $18.0 million as an expense in the third quarter of
1998.
In connection with the proceeds from the termination of the Texas
Eastern gas sales contract, we filed a declaratory judgment action against
Phillips in federal district court in Dallas, Texas. In the action we asked the
court to declare that none of the $49.8 million we received from the contract
termination is owed to Phillips under the farm-out agreement. In existing
litigation in Collin County, Texas, addressing the same issues that have been
adjudicated by the Louisiana court, Phillips has filed a counterclaim asserting
that the proceeds of the termination agreement should be credited to the net
profits account. In response to Phillips counterclaim, we have filed an amended
petition seeking a declaratory judgment that the termination proceeds need not
be credited to the net profits account. We agreed to dismiss our federal action,
and the Collin County action is stayed pending resolution of the Louisiana
appeal. Certain possible outcomes of our current litigation with Phillips
Petroleum Company could have a material adverse effect on Remington.
In June 1998, we entered into a merger agreement with S-Sixteen
Holding Company, which was approved by the stockholders on December 23, 1998.
One of the subsidiaries we acquired in the merger, CKB Petroleum, Inc., owns an
undivided interest in the pipeline that transports our oil production from four
of our offshore properties to Venice, Louisiana. We anticipate that the
acquisition of CKB Petroleum, Inc. will have a positive effect on our future
net income and cash flow from operations. In addition, we issued a new single
class of voting common stock in exchange for the surrender of all of the
previously outstanding voting and non-voting common stock. Holders of the class
A (voting) common stock received 1.15 shares of the new common stock for each
share of class A common stock owned. Holders of class B (non-voting) common
stock received 1 share of the new common stock for each share of class B common
stock owned.
NEW ACCOUNTING STANDARDS
New accounting standards include Statements of Financial Accounting
Standards No. 133 entitled "Accounting for Derivative Instruments and Hedging
Activities." The provisions of Statement No. 133, which require companies to
recognize all derivatives as either assets or liabilities and measure those
instruments at their fair value, will not have a material effect on our
financial statements or related disclosures.
LIQUIDITY AND CAPITAL RESOURCES
Our balance sheet liquidity increased significantly during the third
quarter of 1998 after we received $49.8 million from the termination of our gas
contract with Texas Eastern. During the fourth quarter of 1998 we reinvested
$7.5 million in an acquisition of 10 offshore Gulf of Mexico blocks and paid
down our bank line of credit by $6.2 million. In addition, because of the
merger agreement and the exchange of our common stock, we were required to
offer to purchase any tendered 8 1/4% Convertible Subordinated Notes. Of the
$38.4 million outstanding at December 31, 1998, we were required to purchase
$32.4 million on February 25, 1999. We refinanced $24.0 million of the purchase
with a long-term bank line of credit and used cash to purchase the remaining
$8.4 million of the tendered notes. At December 31, 1998, we reclassified the
portion of the convertible notes that we purchased with cash as a current
liability. Primarily because of the acquisition,
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payment on the bank line of credit, and the reclassification of the 8 1/4%
Convertible Subordinated Notes, our current liabilities exceeded our current
assets by $1.2 million and the current ratio was .96 to 1. At December 31,
1997, current assets exceeded current liabilities by $3.0 million and the
current ratio was approximately 1.2 to 1.
Cash flow from operations for 1998 increased $26.5 million, or 96%,
compared to 1997. The increase relates to the cash received from the
termination of the gas contract. Without the proceeds from the termination of
the gas contract, cash flow from operations would have decreased by $20.8
million, or 76%. This decrease resulted from lower total oil prices and lower
gas revenue from South Pass block 89 and the increase in restricted cash used
as collateral for the appeal bond in the Phillips litigation. The average oil
prices for 1998 were $10.99 per barrel compared to $17.79 per barrel during
1997. The lower oil prices caused oil revenues to be $8.1 million lower in
1998. This reduction was somewhat offset by an increase of 48,000 barrels sold.
In addition, gas sales revenue from South Pass block 89 decreased $15.1 million
during 1998. The decrease in gas revenue from South Pass block 89 resulted
primarily from lower gas production for the first six months of 1998 and both
lower production and lower gas prices during the last six months of 1998. If
the gas production during the third and fourth quarters of 1998 from South Pass
block 89 had been sold at the former contract price, gas revenues would have
been approximately $3.7 million higher than was actually received.
The decline in oil prices has a negative impact on total revenues, net
income, and cash flow from operations. In addition, the termination of the
long-term gas contract also has a negative impact on our gas sales, net income,
and cash flow from operations. However, because of recent acquisitions and
completed and planned development drilling in 1998 and 1999, we project a 30%
increase in total production for 1999 as compared to 1998. Based on this
increase, our current projections indicate that we can finance the majority of
our planned capital expenditures through our cash flow from operations. Our
projections consider the current depressed oil and gas prices. We also have
$5.4 million available on our bank line of credit.
We expect to continue to make significant capital expenditures over
the next several years as part of our long-term growth strategy. The primary
source of funding the capital expenditures will be net cash flow from
operations and additional bank debt. We have budgeted $25.5 million for capital
expenditures in 1999. While we have projected this amount for capital
expenditures, we can delay or cancel the drilling of wells included in the
current capital expenditure budget. Our capital expenditure budget for 1999,
includes drilling 21 exploratory wells and 3 development wells. In the Gulf of
Mexico, we are currently drilling a development well in South Pass block 87, an
exploratory well in Eugene Island block 135, and connecting the High Island
block 86 well to a production platform. We also have plans for additional
drilling on High Island block 86 and Galveston block 333. During the first
quarter of 1999, we completed a sidetrack of well A-3 on Main Pass block 262.
This well did not encounter commercial oil or gas reserves. We completed the
Berryman Unit well in Nueces, County, Texas during the first quarter of 1999,
which tested at 10,000 Mcf per day and 318 barrels of oil per day. This well is
now waiting for a pipeline connection. We are currently participating in an
additional exploratory well located 10 miles south of this discovery well. In
addition we have planned additional exploratory wells from 3-D defined
prospects in South Texas.
At December 31, 1998, we had a revolving line of credit established
with a bank. The line of credit had a borrowing base of $15.0 million and an
expiration date of March 1, 2000. Our oil and gas properties were the
collateral for this line of credit. At December 31, 1998, we had an outstanding
balance of $3.5 million and had issued letters of credit totaling $250,000
against this line of credit. In February 1999, we replaced the existing line of
credit with a new line of credit from a different bank. The new line of credit
with a borrowing base of $32.0 million expires in 2003. We pledged our oil and
gas properties as collateral for the new line of credit. On February 24, 1999,
we borrowed $24.5 million on this line of credit and used the majority of the
proceeds to buy a portion of the convertible notes. The bank will review the
borrowing base semi-annually and may increase or decrease the borrowing base
relative to the redetermined estimate of proved oil and gas reserves.
YEAR 2000 ISSUE
The year 2000 issue relates to computer programs written with two
digits defining a year rather than four. Computer programs that have
date-sensitive software may recognize a date using "00" as the year 1900
instead of 2000 or not at all. This inability to recognize or properly treat
the year 2000 may cause a breakdown of both information technology and
non-information technology systems and cause these systems to process critical
financial and operational information incorrectly. We have assessed and
continue to assess the year 2000 issue and its impact on us, our partners,
suppliers, vendors and customers. The year 2000 issue has a potential impact on
us in several areas including, among others, the ability to be paid for our
oil and gas production, the operations of the producing properties in which we
hold an interest, the ability to pay our
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vendors and suppliers, and the management of our financial assets including
cash and securities held with financial institutions.
We currently receive payment for the majority of our oil and gas
production from two sources. While these two sources are currently studying the
year 2000 issue in order to develop systems to prevent problems in payment
processing, they have informed us that manual backup systems exist so that even
in the event that the computer software fails, such failure would not result in
a material delay in our receiving payment for oil and gas production.
During the first quarter of 1999, we operated one of our oil and gas
properties. The property was not commercial therefore we have not developed
contingency plans relating to the year 2000 issue concerning the operation of
this property. We do not believe that any problem relating to the year 2000
issue on this property will have a material impact on our operations. The
operators of our other properties are, however, studying the year 2000 issue in
connection with both the information technology and non-information technology
aspects of operating the oil and gas properties. These operators have informed
us that they will develop systems sufficient to address any problems that may
arise. In addition the operators have informed us that manual back-up systems
exist in the event the computer software fails to adequately address any
problems. If, in the future, we act as operator on any other oil or gas
property, we anticipate that we will provide for adequate systems to address
any year 2000 issue.
We continue to assess our current oil and gas accounting system and
network operating software to determine if they are year 2000 compliant. The
company that provides our oil and gas accounting software has informed us that
that the system is year 2000 compliant. In June 1999, we will assess our
network system and individual computers and make any repairs or upgrades as
required at that time. In the event that the network operating system fails due
to a year 2000 problem, we believe that our accounting system can operate on a
stand-alone basis. We do not believe that the year 2000 issue will materially
affect our ability to pay our vendors and suppliers or track our assets in the
custody of financial institutions. We do not believe that the cost of our
preparations or upgrades for any year 2000 issues or problems will be material.
RESULTS OF OPERATIONS
Net income for 1998 was $13.6 million or $0.67 per share ($0.66
diluted income per share) compared to a net loss for 1997 of $26.8 million or
$1.31 per share. The increase in net income resulted primarily from the
termination of the gas contract with Texas Eastern in July 1998. Lower oil and
gas prices, reductions of gas production at South Pass block 89, and the
Phillips Petroleum judgment partially offset the income from the termination of
the gas contract.
The following table discloses the net oil and gas sales
volumes, average sales prices and average lifting costs for each of the three
years ended December 31, 1998, 1997, and 1996. The table is an integral part of
the following discussion of results of operations for the periods 1998 compared
to 1997 and 1997 compared to 1996.
% INCREASE % INCREASE
1998 (DECREASE) 1997 (DECREASE) 1996
------------ --------------- ------------- -------------- ------------
Net sales volumes:
Oil (MBbls) 1,245 4 % 1,197 28 % 933
Natural gas (MMcf) 6,383 (10)% 7,116 (13)% 8,219
Average sales price:
Oil (per Bbl) $ 10.99 (38)% $ 17.79 (12)% $ 20.21
Natural gas (per Mcf) $ 3.22 (36)% $ 5.06 (11)% $ 5.69
Average lifting costs (per BOE) $ 2.54 51 % $ 1.68 1 % $ 1.66
1998 compared to 1997
Oil revenue for 1998, decreased $7.6 million because of a $6.80, or
38%, decrease in prices, partially offset by a 48,000-barrel, or 4%, increase
in oil production. The lower prices alone caused oil revenue to be $8.1 million
lower. Oil production increased primarily because of additional oil production
from the Parker Creek property in Mississippi and the West Buna Property in
South Texas.
Gas revenue for 1998 was $15.4 million, or 43%, lower than 1997,
primarily due to the lower production from South Pass block 89 in 1998 compared
to the prior year. In 1998, production from this block was 1.4 Bcf lower than
in 1997
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causing a decrease in gas revenue of approximately $11.6 million. The average
gas price decrease, from $5.06 to $3.22 resulted primarily from the termination
of the gas sales contract on South Pass block 89. We sold gas from South Pass
block 89 at an average price of $8.54 per Mcf in 1997 compared to $6.20 in
1998. Gas production from properties other than South Pass block 89 increased
630,000 Mcf, or 15%, primarily from Eugene Island block 135 in the Gulf of
Mexico.
Other income increased primarily because of the $49.8 million received
from the termination of the gas sales contract. Operating costs increased
during 1998 compared to 1997 because the number of our producing properties has
increased significantly. Net profits expense decreased in 1998 because of the
decreased revenues credited to the net profits account on South Pass block89.
Exploration expense increased $943,000, or 11%, primarily due to
increased expenditures for 3-D seismic data. Dry hole expense, which is
included in exploration expense, included $3.3 million for costs accumulated on
the Main Pass block 262 well A-3 at December 31, 1998. This well was determined
to be non-commercial during the first quarter of 1999. Depreciation, depletion
and amortization decreased by $4.3 million, or 18%, because of an increase in
proved oil and gas reserves on producing properties. The impairment expense
recorded in 1998 includes $2.5 million for impairment on South Pass block89
platform B that was recorded in the third quarter of 1998 due to the
termination of the gas sales contract.
In connection with the August 1998 judgment issued in our litigation
with Phillips Petroleum Company, and in accordance with Statement of Financial
Accounting Standards No. 5 entitled "Accounting for Contingencies," we recorded
an $18.0 million expense in August 1998. This amount includes the damage award
by the trial court and the estimated interest on the award.
We reduced general and administrative expense by 25% in 1998 compared
to 1997. The decrease in general and administrative expense was primarily from
reduced salaries and payroll expense, rent expense, and professional services
fees. Legal expenses decreased because of the reduction in expense associated
with defending the Phillips Petroleum Company litigation and the settlement of
other litigation.
Reorganization expense for 1997 includes payments to employees under
employee severance agreements and legal fees or other charges that relate to or
were paid because of the purchase of S-Sixteen Holding Company (formerly Box
Brothers Holding Company) by Mr. J. R. Simplot in August 1997. We recorded the
following as reorganization costs: employee severance payments $3.6 million,
Thomas D. Box severance and legal claims and fees $1.2 million, Mr. Simplot and
Mr. James Arthur Lyle $2.0 million for legal claims and fees, and other
associated expenses $300,000.
Interest expense is 19% lower for 1998 because of our purchase of
$16.7 million of the outstanding 8 1/4% Convertible Subordinated Notes in
October 1997. In 1997, we recorded a valuation allowance against the entire
deferred tax benefit, and reflected the amount in the income statement as
deferred income tax expense. In 1998, we were able to use those tax benefits to
the extent that our effective federal income tax rate for 1998 is only about
5%. The income tax expense for 1998 includes alternative minimum tax expense of
$433,000 as a current income tax expense.
1997 Compared to 1996
We incurred a net loss for 1997 of $26.8 million or $1.31 per share
compared to the prior year loss of $7.6 million or $0.37 per share. The net
loss for 1997 included non-cash charges totaling $18.9 million or $0.94 per
share. The charges included deferred income tax expense of $14.6 million or
$0.73 per share, impairment charges from marginal oil and gas properties of
$3.9 million or $0.19 per share, and accelerated amortization of debt-issue
costs of $416,000 or $0.02 per share, caused by the early retirement of a
portion of our 8 1/4% Convertible Subordinated Notes in October 1997. In
addition, during 1997, we incurred reorganization costs totaling $7.1 million,
or $0.34 per share, and legal costs and expenses totaling $2.5 million, or
$0.12 per share.
Total revenues were $ 61.1 million for the year ended December 31,
1997, compared to $70.2 million for the year ended December 31, 1996. Gas sales
revenue decreased $10.7 million, or 23%, for 1997 compared to 1996. Lower gas
production caused the decrease but was partially offset by higher average
prices of 6% for spot gas sales and 10% for gas sales under the South Pass gas
sales contract. The increase in average prices added $1.3 million to gas sales
revenue. Gas production from South Pass block 89 platform B decreased 1.4 Bcf
during 1997 as production from Well B-20 experienced anticipated declines. The
decrease in gas production from platform B caused gas revenues to decrease by
$14.2 million. Natural gas production from our South Texas properties increased
379,000 Mcf during 1997 but was more than offset by
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lower net natural gas production from other offshore properties.
An increase in oil production partially offset by lower oil prices
resulted in a net increase in oil sales revenue of $2.4 million, or 13%, for
the year ended December 31, 1997 as compared to the prior year. Oil production
increased by 264,000 barrels which increased oil sales revenue by $4.8 million.
However, a decrease of $2.44 in average oil prices caused oil sales revenue to
be $2.4 million lower. A net increase in oil production came from all areas of
operation but the most significant increases came from the Parker Creek field
in Mississippi and South Pass blocks 86 and 87 in the Gulf of Mexico.
Our 1997 interest income decreased because we sold our marketable
securities in October 1997 and used most of the proceeds to purchase $16.7
million of our outstanding 8 1/4% Convertible Subordinated Notes. Other income
was lower because of lower oil trading income and losses on the sale of assets,
primarily artwork.
Operating and transportation expenses increased as a result of new
operating properties and an increase in oil production from the South Pass
area. Net profits expense decreased as a result of the lower natural gas sales
revenues from South Pass block 89. In addition, exploration expenses decreased
significantly because of lower dry hole costs. In 1996, we drilled three high
cost dry exploration wells totaling $10.6 million in the Gulf of Mexico.
Depreciation, depletion and amortization expenses increased because of
new properties becoming productive. Marginal production as well as lower oil
prices caused us to record impairment charges against some of the oil and
natural gas properties. A large decrease in production during the last quarter
of 1997 from Main Pass block 262, located in the Gulf of Mexico, caused us to
record a $1.9 million impairment charge to write down 100% of the remaining
well costs.
General and administrative expenses decreased by 18% during 1997 when
compared to 1996. Salaries and other employment related expenses during 1997
decreased $706,000 as the number of employees decreased from 41 at December 31,
1996 to 15 at December 31, 1997. Other areas of significant savings were
professional fees and investor relations' expenses. Legal fees decreased by
$1.1 million as we settled outstanding litigation and concluded the trial
proceedings in the Phillips litigation.
Reorganization expense for the year includes payments to employees
under the employee severance agreements and legal fees or other charges.
Reorganization costs accrued or paid are as follows: employee severance
payments $3.6 million, Thomas D. Box severance, legal claims and fees $1.2
million, Mr. Simplot and Mr. Lyle $2.0 million, and other associated expenses
$300,000.
Interest and financing expenses increased 8% during 1997 when compared
to 1996. The increase results from an increase on our line of credit and a
non-cash charge for deferred offering costs on the 8 1/4% Convertible
Subordinated Notes in October 1997. We used the line of credit to provide a
portion of the funds to purchase some onshore Gulf Coast properties.
In 1997 we increased the valuation allowance against the entire
deferred tax asset and recorded a deferred income tax expense. Our actual 1997
results and future projections were significantly different than anticipated in
our 1996 and prior projections. The difference resulted from a significant drop
in commodity prices, the unusual and unforeseen reorganization expenses
incurred in the last half of 1997, and a downward revision in our proved gas
reserves as of January 1, 1998, on South Pass block 89. We believe that future
drilling results, planned capital expenditures and other future transactions
could allow us to realize substantial benefits from the net operating loss
carryforwards and the other book-tax attributes underlying the deferred income
tax asset. However, the requirement of a greater than 50% probability (more
likely than not) of occurrence does not allow us to use much of this
information in projecting future taxable income.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our market risk sensitive instrument at December 31, 1998, is a
revolving line of credit from a bank. At December 31, 1998, the unpaid
principal balance under the line was $3.5 million. The interest rate on this
debt is sensitive to market fluctuations, however we do not believe that
significant fluctuations in the market interest have a material effect on our
consolidated financial position, results of operations, or cash flow from
operations.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Financial Statements
Report of Independent Accountants 18
Consolidated Balance Sheets as of December 31, 1998 and 1997 19
Consolidated Statements of Income and Comprehensive Income for 1998, 1997 and 1996 20
Consolidated Statements of Stockholders' Equity for 1998, 1997 and 1996 21
Consolidated Statements of Cash Flow for 1998, 1997 and 1996 22
Notes to Consolidated Financial Statements 23
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REPORT OF INDEPENDENT ACCOUNTANTS
To The Stockholders and Board of Directors of
Remington Oil and Gas Corporation
We have audited the accompanying consolidated balance sheets of
Remington Oil and Gas Corporation ("the Company"), a Delaware corporation, as
of December 31, 1998 and 1997 and the related consolidated statements of income
and comprehensive income, stockholders' equity and cash flows for each of the
three years in the 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 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
Remington Oil and Gas Corporation as of December 31, 1998 and 1997 and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998 in conformity with generally accepted accounting
principles.
Dallas, Texas
March 23, 1999 ARTHUR ANDERSEN LLP
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REMINGTON OIL AND GAS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
FOR YEARS ENDED
DECEMBER 31,
--------------------------
ASSETS 1998 1997
-------- -------
CURRENT ASSETS
Cash and cash equivalents $ 19,018 $ 4,552
Restricted cash and cash equivalents 8,750 --
Accounts receivable - oil and natural gas 2,400 5,725
Accounts receivable - other 812 268
Note receivable - S-Sixteen Holding Company -- 6,192
Prepaid expenses and other current assets 1,871 2,118
--------- ---------
TOTAL CURRENT ASSETS 32,851 18,855
--------- ---------
PROPERTIES
Oil and natural gas properties (successful-efforts method) 260,649 220,481
Other properties 2,706 2,800
Accumulated depreciation, depletion and amortization (167,053) (144,548)
--------- ---------
TOTAL PROPERTIES 96,302 78,733
--------- ---------
OTHER ASSETS
Long-term accounts receivable - related party 299 --
Deferred charges (net of accumulated amortization) 777 927
--------- ---------
TOTAL OTHER ASSETS 1,076 927
--------- ---------
TOTAL ASSETS $ 130,229 $ 98,515
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 6,923 $ 8,694
Accrued interest payable 264 264
Accrued transportation payable - related party -- 305
Phillips judgment payable 18,165 --
Net Profits expense payable 77 594
Short-term notes payable and current portion of long-term notes payable 8,651 6,000
--------- ---------
TOTAL CURRENT LIABILITIES 34,080 15,857
--------- ---------
OTHER LIABILITIES
Minority interest in subsidiaries 87 --
Long-term accounts payable 2,913 --
Notes payable 3,500 --
Convertible subordinated notes payable 29,950 38,371
--------- ---------
TOTAL OTHER LIABILITIES 36,450 38,371
--------- ---------
TOTAL LIABILITIES 70,530 54,228
--------- ---------
COMMITMENTS AND CONTINGENCIES (NOTE 10)
STOCKHOLDERS' EQUITY
Common stock, $1.00 par value
Class A (Voting) - 15,000,000 shares authorized; 3,250,110 shares issued -- 3,250
Class B (Non-Voting) - 30,000,000 shares authorized; 17,553,010 shares issued -- 17,553
Common stock $0.01 par value; 100,000,000 shares authorized;
21,453,453 issued and 21,247,478 outstanding 213 --
Additional paid-in capital 44,117 25,197
Treasury stock, at cost, 31,100 shares class A, and 465,600 class B in 1997 -- (3,465)
Retained earnings 15,369 1,752
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 59,699 44,287
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 130,229 $ 98,515
========= =========
See accompanying Notes to Consolidated Financial Statements.
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REMINGTON OIL AND GAS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED
DECEMBER 31,
-----------------------------------------
1998 1997 1996
-------- -------- ---------
REVENUES
Oil sales $ 13,677 $ 21,292 $ 18,849
Gas sales 20,579 36,012 46,757
Interest income 1,582 1,998 2,273
Gain (loss) on sale of investment -- (125) (73)
Other income 51,851 1,876 2,404
-------- -------- ---------
TOTAL REVENUES 87,689 61,053 70,210
-------- -------- ---------
COSTS AND EXPENSES
Operating costs and expenses 5,861 4,015 3,825
Transportation expense 2,654 2,851 2,491
Net profits interest expense 3,600 8,341 11,479
Exploration expenses 9,497 8,554 20,805
Depreciation, depletion and amortization 19,964 24,298 22,349
Impairment of oil and natural gas properties 4,154 3,953 451
General and administrative 4,782 6,344 7,731
Legal expense 552 2,509 3,657
Phillips judgment 17,950 -- --
Reorganization expense -- 7,072 1,959
Interest and financing expense 4,302 5,283 4,895
-------- -------- ---------
TOTAL COSTS AND EXPENSE 73,316 73,220 79,642
-------- -------- ---------
Income (loss) before taxes 14,373 (12,167) (9,432)
Income tax expense (benefit) 756 14,623 (1,770)
-------- -------- ---------
NET INCOME (LOSS) 13,617 (26,790) (7,662)
-------- -------- ---------
OTHER COMPREHENSIVE INCOME (LOSS) (NET OF TAXES)
Unrealized gain (loss) on marketable securities - available
for sale -- 186 (29)
-------- -------- ---------
TOTAL OTHER COMPREHENSIVE INCOME (LOSS) (NET OF TAXES) -- 186 (29)
-------- -------- ---------
COMPREHENSIVE INCOME (LOSS) $ 13,617 $(26,604) $ (7,691)
======== ======== =========
BASIC INCOME (LOSS) PER SHARE $ 0.67 $ (1.31) $ (0.37)
======== ======== =========
DILUTED INCOME (LOSS) PER SHARE $ 0.66 $ (1.31) $ (0.37)
======== ======== =========
BASIC COMPREHENSIVE INCOME (LOSS) PER SHARE $ 0.67 $ (1.30) $ (0.37)
======== ======== =========
DILUTED COMPREHENSIVE INCOME (LOSS) PER SHARE $ 0.66 $ (1.30) $ (0.37)
======== ======== =========
See accompanying Notes to Consolidated Financial Statements.
20
21
REMINGTON OIL AND GAS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
COMMON STOCK
------------------------------------ VALUATION
CLASS A CLASS B COMMON ADDITIONAL ALLOWANCE
$1.00 PAR $1.00 PAR $0.01 PAR PAID IN RETAINED TREASURY MARKETABLE
VALUE VALUE VALUE CAPITAL EARNINGS STOCK SECURITIES
---------- --------- --------- ---------- -------- -------- ----------
Balance December 31, 1995 $ 3,250 $ 17,553 $ -- $ 25,197 $ 36,204 $ -- $ (157)
Net income (7,662)
Unrealized (loss) (net of income taxes) (29)
-------- -------- -------- -------- -------- -------- --------
Balance December 31, 1996 3,250 17,553 -- 25,197 28,542 -- (186)
-------- -------- -------- -------- -------- -------- --------
Net income (loss) (26,790)
Purchase of Treasury stock (3,465)
Unrealized gain (net of income taxes) 186
-------- -------- -------- -------- -------- -------- --------
Balance December 31, 1997 3,250 17,553 -- 25,197 1,752 (3,465) --
-------- -------- -------- -------- -------- -------- --------
Net income (loss) -- 13,617
Common stock issued 27 156
Treasury stock issued 305
Merger and exchange of common stock (3,250) (17,580) 213 18,764 3,160
-------- -------- -------- -------- -------- -------- --------
Balance December 31, 1998 $ -- $ -- $ 213 $ 44,117 $ 15,369 $ -- $ --
======== ======== ======== ======== ======== ======== ========
See accompanying Notes to Consolidated Financial Statements.
21
22
REMINGTON OIL AND GAS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
-------- -------- ---------
CASH FLOW PROVIDED BY OPERATIONS
NET INCOME (LOSS) $ 13,617 $(26,790) $ (7,662)
Adjustments to reconcile net income
Depreciation, depletion and amortization 19,964 24,298 22,349
Impairment of oil and natural gas properties 4,154 3,953 451
Amortization of deferred charges 254 658 262
Amortization of premium on marketable securities -- 27 27
Deferred income tax (benefit) expense 323 14,623 (1,696)
Dry hole costs 5,222 5,319 17,638
Stock issued to directors and employees for compensation 488 -- --
Loss (gain) on sale of properties (111) 367 (20)
Changes in working capital
(Increase) in deferred charges (104) -- --
Decrease in accounts receivable 3,133 2,556 105
Decrease (increase) in prepaid expenses and other current assets 296 (157) (1,298)
Increase (decrease) in accounts payable and accrued expenses 15,554 2,692 (1,201)
(Increase) in restricted cash (8,750) -- --
-------- -------- --------
NET CASH FLOW PROVIDED BY OPERATIONS 54,040 27,546 28,955
-------- -------- --------
CASH FROM INVESTING ACTIVITIES
Payments for capital expenditures (40,155) (39,144) (39,798)
Cash acquired in merger with S-Sixteen Holding Company and Subsidiaries 79 -- --
Sales and maturities of marketable securities -- 33,411 19,127
Investment in marketable securities -- (597) (27,191)
Notes receivable - S-Sixteen Holding Company -- (7,250) --
Principal repayments - S-Sixteen Holding Company 1,432 1,058 --
Proceeds from property sales 495 702 260
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (38,149) (11,820) (47,602)
-------- -------- --------
CASH FROM FINANCING ACTIVITIES
Proceeds from notes payable and long-term accounts receivable 7,813 7,000 --
Payments on notes payable (7,400) (1,000) --
Repurchase common stock -- (3,465) --
Issuance costs for exchange of common stock (1,838) -- --
Principal payments on Convertible Subordinated Notes -- (16,706) --
-------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (1,425) (14,171) --
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 14,466 1,555 (18,647)
Cash and cash equivalents at beginning of period 4,552 2,997 21,644
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 19,018 $ 4,552 $ 2,997
======== ======== ========
Cash paid for interest $ 3,879 $ 5,398 $ 4,907
======== ======== ========
Cash paid for taxes $ 433 $ -- $ --
======== ======== ========
See accompanying Notes to Consolidated Financial Statements.
22
23
Remington Oil and Gas Corporation
Notes to Consolidated Financial Statements
NOTE 1 -- DESCRIPTION OF THE COMPANY AND BASIS OF PRESENTATION
Remington Oil and Gas Corporation, formerly Box Energy Corporation, is
an independent oil and gas exploration and production company incorporated in
Delaware. We have working interest ownership rights in properties in the
offshore Gulf of Mexico and onshore Gulf Coast.
Management prepares the financial statements in conformity with
generally accepted accounting principles. This requires estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reported periods. Some of the more significant estimates
include oil and gas reserves, useful lives of assets, impairment of oil and gas
properties, and future dismantlement and restoration liabilities. Actual
results could differ from those estimates. We make certain reclassifications to
prior year financial statements in order to conform to the current year
presentation.
NOTE 2 -- CONSOLIDATION OF SUBSIDIARIES
On December 28, 1998, we acquired all of the assets of S-Sixteen
Holding Company including its five subsidiaries. The subsidiaries acquired
include CKB Petroleum, Inc., CKB & Associates, Inc., Box Brothers Realty
Investments Company, CB Farms, Inc., and Box Resources, Inc. Remington issued
579,757 shares of common stock, a warrant to purchase up to 300,000 additional
shares of common stock and canceled the note receivable from S-Sixteen Holding
Company for the acquisition. Remington's total investment in the transaction
was $8.5 million. The effect of the acquisition was not material to the
combined consolidated financial statements. We eliminated all inter-company
transactions and account balances for the period of consolidation. Before the
merger, S-Sixteen Holding Company owned approximately 57% of Remington's voting
common stock. The primary operating subsidiary, CKB Petroleum, Inc., owns an
undivided interest in a pipeline that transports oil from our South Pass
blocks, offshore Gulf of Mexico, to Venice Louisiana. We paid transportation
costs to CKB Petroleum, Inc. totaling $3.0 million in 1998, $3.2 million in
1997 and $2.8 million in 1996.
NOTE 3 -- CASH, CASH EQUIVALENTS AND RESTRICTED CASH
Cash equivalents consist of liquid investments that mature within
three months or less when purchased. Our cash equivalents include investment
grade commercial paper and money market funds invested in United States
government securities. We record cash equivalents at cost, which approximates
their market value at the balance sheet date.
As part of the appeal of the Phillips litigation, more fully discussed
in the note about net profits expense, we transferred $8.8 million to a surety
company as collateral for the suspensive appeal bond. That amount is presented
as restricted cash and cash equivalents on the balance sheet.
NOTE 4 -- NOTE RECEIVABLE FROM S-SIXTEEN HOLDING COMPANY
In April 1997, Remington lent S-Sixteen Holding Company $7.3 million.
S-Sixteen Holding Company repaid $1.4 million of the principal balance of the
note receivable in 1998 and $1.1 million in 1997. The remaining $4.8 million
balance of the note receivable was effectively canceled in December 1998 when
the two companies merged. Remington received $527,000 in interest income in
1998 and $437,000 in interest income in 1997 from S-Sixteen Holding Company on
the note receivable. The interest rate was equal to the prime rate of Texas
Commerce Bank National Association plus 1% until the sixth month when the rate
escalated monthly by 0.1% over the previous month's rate.
NOTE 5 -- OIL AND GAS PROPERTIES, ACCOUNTING METHODS, COSTS, PROVED RESERVES
AND VALUE BASED INFORMATION
Remington uses the successful-efforts method to account for oil and
gas exploration and development expenditures. Under this method, we record the
expenditures for leasehold acquisitions, tangible equipment, and
23
24
Remington Oil and Gas Corporation
Notes to Consolidated Financial Statements
intangible drilling costs for an individual oil and gas property as an asset.
In addition, if the construction cost of an offshore platform is significant,
we record an allocated portion of the interest expense incurred during the
construction period as part of the oil and gas property cost. The following
table summarizes the oil and gas properties, all of which are located in the
United States.
AT DECEMBER 31,
-------------------------------------------------------------------------------
1998 1997
----------------------------------- --------------------------------------
PROVED UNPROVED TOTAL PROVED UNPROVED TOTAL
---------- ---------- -------- ---------- ---------- ----------
(IN THOUSANDS)
Onshore $ 31,704 $ 5,861 $ 37,565 $ 26,401 $ 5,194 $ 31,595
Offshore 210,631 12,453 223,084 185,325 3,561 188,886
--------- --------- --------- --------- --------- ---------
Total 242,335 18,314 260,649 211,726 8,755 220,481
Accumulated depreciation,
depletion and amortization (165,414) -- (165,414) (139,781) -- (139,781)
--------- --------- --------- --------- --------- ---------
Net oil and gas properties $ 76,921 $ 18,314 $ 95,235 $ 71,945 $ 8,755 $ 80,700
========= ========= ========= ========= ========= =========
We accumulate the expenditures incurred in drilling exploratory wells
as work in process until we determine whether the well has encountered
commercial oil and gas reserves. If the well has encountered commercial
reserves, we transfer the accumulated cost to oil and gas properties;
otherwise, we charge the accumulated cost to dry hole expense. We record
expenditures for geological, geophysical or other prospecting costs as
exploration expenses on the income statement when incurred. The following table
presents a summary of our oil and gas expenditures during the last three years.
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
-------- -------- --------
(UNAUDITED, IN THOUSANDS)
Unproved acquisition costs $ 11,160 $ 5,793 -
Proved acquisition costs $ 5,353 $ 12,545 $ 5,548
Exploration costs $ 23,279 $ 13,767 $ 27,811
Development costs $ 4,318 $ 9,975 $ 9,359
Capitalized interest expense - - -
We amortize the capitalized cost of each oil and gas property using
the units-of-production method. To calculate the cost per unit we divide the
leasehold costs by total proved reserves and the costs for wells, platforms and
other equipment by proved developed reserves. Oil and gas reserves that do not
require significant additional cost to access the reserves, such as a new well
or major sidetrack, are classified as proved developed. We then multiply the
cost per unit by the actual production and record the result to depreciation,
depletion and amortization expense. Gas reserves are converted at a ratio of 6
Mcf to 1 barrel. We depreciate our costs in the pipeline owned by CKB
Petroleum, Inc. over its estimated useful life of 10 years.
Future dismantlement, restoration and abandonment costs include the
estimated costs to dismantle, restore and abandon our offshore platforms, wells
and related facilities. As of December 31, 1998, the total estimated future
liability is $4.2 million. We record the liability over the life of the
property using the units-of-production method and record the expense as a
component of depreciation, depletion and amortization expense. The accrued
liability at December 31, 1997 and 1996 was $3.1 million and $2.5 million,
respectively.
We review a property for impairment if there is a large decrease in
oil and gas reserves or production on the property, or if a dry hole is drilled
on or near the property. In addition, significant decreases in oil and gas
prices may also indicate that a property has become impaired. If the net book
value of a property is greater than the estimated undiscounted future net cash
flow before income taxes from the same property, the property is impaired. The
undiscounted future net cash flow may include risk adjusted probable and
possible oil and natural gas reserves in addition to the estimated proved
reserves. In addition, we may use escalated prices in projecting future oil and
gas revenue. For our 1998 projection of future oil and gas revenue, we
estimated oil prices to be $13.00 per barrel and gas prices to be $2.10 per
MMBtu in 1999. We escalated oil prices by $2.00 per barrel through 2001 and
then by 3% to a
24
25
Remington Oil and Gas Corporation
Notes to Consolidated Financial Statements
maximum of $25.00 per barrel. We escalated gas prices by 3% to a maximum of
$3.50 per MMBtu. We adjusted the above oil and gas prices for location
differentials. These prices, consistent with forecasts by others in the
industry, were applied to the reserve estimates prepared by our independent
reserve engineers. The impairment expense is equal to the difference between
the net book value and the fair value of the asset. We estimate fair value by
discounting, at an appropriate rate, the future net cash flows from the
property.
In 1998 we recognized impairment expense totaling $4.2 million. This
expense in 1998 included $2.5 million from South Pass block 89 because of the
reduction in estimated undiscounted future net cash flow caused by the
termination of the long-term gas sales contract for that property. In 1997 we
recorded $4.0 million for impairment expense, and in 1996 we recorded $451,000.
The remaining impairment expense for 1998 and the impairment expense for 1997
and 1996 primarily resulted from inadequate oil and gas reserves or a
significant decrease in oil and gas production from the specific property.
The estimates of oil and gas reserves were prepared by the independent
engineering and consulting firms of Netherland, Sewell & Associates, Inc. and
Miller and Lents, Ltd. for 1998 and 1997, and by Netherland, Sewell &
Associates, Inc. for 1996. The Netherland, Sewell, and Associates, Inc. report
covers approximately 90% of the total proved oil and gas reserves in 1998. The
determination of these reserves is a complex and interpretative process that is
subject to continued revision as additional information becomes available. In
many cases, a relatively accurate determination of reserves may not be possible
for several years due to the time necessary for development drilling, testing
and studies of the reservoirs.
The quantities of proved oil and gas reserves presented below include
only the amounts which we reasonably expect to recover in the future from known
oil and gas reservoirs under the current economic and operating conditions.
Proved reserves include only quantities that we can commercially recover using
current prices, costs, existing regulatory practices and technology. Therefore,
any changes in future prices, costs, regulations, technology or other
unforeseen factors could significantly increase or decrease proved reserve
estimates. The following table presents our net ownership interest in proved
oil and gas reserves.
AT DECEMBER 31,
------------------------------------------------------------------------------
1998 1997 1996
------------------------------------------------------------------------------
OIL GAS OIL GAS OIL GAS
MBbls (1) MMcf MBbls (1) MMcf MBbls MMcf
--------------------------------------- --------------------------------------
(UNAUDITED, IN THOUSANDS)
Beginning of period 4,451 36,543 3,299 39,332 2,938 51,373
Revisions of previous estimates 850 6,533 330 (6,004) 709 (8,162)
Extensions, discoveries and other 1,311 10,958 1,046 4,115 585 4,340
Purchased reserves 152 5,058 973 6,216 - -
Production (1,245) (6,383) (1,197) (7,116) (933) (8,219)
---------- --------- --------- --------- --------- ---------
End of period 5,519 52,709 4,451 36,543 3,299 39,332
========== ========= ========= ========= ========= =========
Proved developed reserves
Beginning of period 3,208 27,259 2,541 28,323 2,282 33,521
End of period 3,605 33,680 3,208 27,259 2,541 28,323
- -----------------------------------------
(1) Includes natural gas liquids
The proved developed and undeveloped reserves and standardized measure
of discounted future net cash flows associated with South Pass block 89 are
burdened by a 33% net profits interest. The reserves included in the above
table include our full net ownership interest without any reduction for the net
profit interest. We treat the net profit interest as an operating expense
rather than a reduction in proved reserves. Please see Note 14 - Net Profits
Expense for a more detailed discussion about the net profit interest.
The following tables represent value-based information about our
proved oil and gas reserves. The standardized measure of discounted future net
cash flows result from the application of specific criteria applicable to the
value-based disclosures of all oil and gas reserves in the industry. Due to the
imprecise nature of estimating oil and gas reserve
25
26
Remington Oil and Gas Corporation
Notes to Consolidated Financial Statements
quantities and the uncertainty of future economic conditions, we can not make
any representation about interpretations that may be made or what degree of
reliance that may be placed on this method of evaluating proved oil and gas
reserves.
We compute future cash revenue by multiplying the year-end commodity
prices or contractual pricing if applicable, by the proved oil and gas
reserves. Future production and development costs include the estimated costs
to produce or develop the proved reserves based primarily on historical costs.
We calculated the future net profits expense by multiplying the net profit
percentage to the future revenue less production and development costs on South
Pass block 89. Future income tax expense was determined by applying the current
tax rate to the future net cash flow from all properties. Finally, we
discounted the future net cash flow, after tax, by 10% per year to arrive at
the standardized measure of discounted future net cash flows presented below.
AT DECEMBER 31,
--------------------------------------
1998 1997 1996
-------- -------- --------
(UNAUDITED, IN THOUSANDS)
Oil and natural gas revenues $ 160,416 $ 226,262 $ 326,498
Production costs (31,474) (31,702) (26,971)
Development costs (30,665) (23,954) (17,756)
Net Profits expense (3,453) (28,933) (53,955)
Income tax expense (7,888) (16,845) (50,638)
--------- --------- ---------
Net cash flow 86,936 124,828 177,178
10% annual discount (23,469) (30,990) (31,165)
--------- --------- ---------
Standardized measure of discounted future net cash flow $ 63,467 $ 93,838 $ 146,013
========= ========= =========
The following table summarizes the principal sources of change in the
standardized measure of discounted future net cash flows from year to year. In
July of this year, we terminated our gas sales contract that covered gas
production on South Pass block 89. The standardized measure of discounted
future net cash flows in the prior years included future revenue based on the
long-term contract price.
AT DECEMBER 31
--------------------------------------
1998 1997 1996
-------- -------- --------
(UNAUDITED, IN THOUSANDS)
Standardized measure of discounted cash flows at beginning of year $ 93,838 $ 146,013 $ 133,982
Sales and transfers of oil and natural gas produced, net of production
costs and net profits expense (24,796) (42,097) (47,810)
Net changes in prices and production costs (77,769) (61,134) 37,764
Net changes in estimated development costs 1,274 (5,130) (1,332)
Net changes in estimated net profits expense 17,624 14,029 1,750
Net changes in income tax expense 8,208 28,283 (3,736)
Extensions, discoveries and improved recovery less related costs 11,625 9,171 16,060
Purchases of proved oil and natural gas reserves 5,050 13,865 --
Development costs incurred during the year 4,318 9,975 9,359
Revisions of previous quantity estimates 18,673 (21,306) (10,747)
Other changes (3,962) (12,432) (2,675)
Accretion of discount 9,384 14,601 13,398
--------- --------- ---------
Standardized measure of discounted future net cash flows end of year $ 63,467 $ 93,838 $ 146,013
========= ========= =========
NOTE 6 -- OTHER PROPERTIES
Other properties include improvements on the leased office space and
office computers and equipment. The company depreciates these assets using the
straight-line method over their estimated useful lives that range from 3 to 12
years.
26
27
Remington Oil and Gas Corporation
Notes to Consolidated Financial Statements
NOTE 7 - OTHER ASSETS
Long-term accounts receivable - related party reflects CKB Petroleum's
claims under Collateral Assignment Split Dollar Insurance Agreements among CKB
Petroleum and Don D. Box (an officer and director) and two of his brothers.
Deferred charges include the costs, net of amortization, incurred when
we issued the 8 1/4% Convertible Subordinated Notes in 1992. We amortize the
debt issuance costs on a straight-line basis over the 10-year term of the notes
and charge the amortized amount to interest and financing costs. In October
199