ITEM 1. BUSINESS
OVERVIEW
Newfield Exploration Company ("Newfield" or the "Company") is an independent oil and gas company engaged in the exploration, development and acquisition of oil and natural gas properties located primarily in the Gulf of Mexico. The Company discovered and acquired its first oil and gas reserves in 1990 and has grown rapidly since that time. At December 31, 1997 the Company had proved reserves of 435.3 Bcfe consisting of 16.3 MMBbls of oil and condensate and 337.5 billion cubic feet ("Bcf") of natural gas. At such date, approximately 78% of the Company's proved reserves were natural gas and approximately 80% were proved developed. Unless otherwise noted, all information in this Form 10-K relating to oil and gas reserves and the estimated future net cash flows attributable thereto are based upon estimates prepared by the Company and are net to the Company's interest. See "Item 2.
ITEM 2. PROPERTIES
Substantially all of the Company's proved properties are located in the federal waters of the Gulf of Mexico. The more significant proved producing properties stretch from the West Delta area offshore Louisiana, south-southeast of New Orleans, to the High Island area offshore Texas, south-southeast of Houston. These properties lie in water depths that range from 45 feet to 480 feet. For 1997, no single field accounted for more that 15% of the Company's net production. As of December 31, 1997, the Company owns interests in 125 leases and 440 wells and operates 95 platforms, 57 of which are considered major platforms. Major platforms are those that have six or more wells or two pieces of production equipment.
The Company's 10 largest properties accounted for approximately 56% of the Company's equivalent proved reserves at December 31, 1997, but no single property held more that 9% of the Company's equivalent proved reserves as of such date, nor did any single property hold more that 11% of the net present value of the proved reserves as of such date.
The Company owns interests in two proved producing properties onshore south Louisiana, in Cameron and Acadia parishes. Additionally, the Company owns unproved acreage in and adjacent to these producing properties and in other coastal parishes in Louisiana.
OIL AND GAS RESERVES
The following table sets forth estimated net proved oil and gas reserves of the Company (all within the United States) and the present value of estimated future pre-tax net cash flows related to such reserves as of December 31, 1997. Unless otherwise noted, all information in this Form 10-K relating to oil and gas reserves and the estimated future net cash flows attributable thereto are based upon estimates prepared by the Company and are net to the Company's interest. The present value of estimated future net cash flows was prepared using constant prices as of the calculation date, discounted at 10% per annum on a pre-tax basis.
Ryder Scott Company, Petroleum Engineers ("Ryder Scott"), has prepared estimates of the Company's proved reserves and future net cash flows therefrom as of December 31, 1993, 1994, 1995, 1996 and 1997. Ryder Scott's estimates of equivalent proved reserves were 97.8%, 106.0%, 100.5%, 96.3% and 102.4%, respectively, of the Company's estimates of proved reserves for the same periods. Ryder Scott's estimates of the present value of future pre-tax net cash flows attributable to the Company's proved reserves were 102.4%, 107.9%, 102.4%, 93.7% and 96.5%, respectively, of the Company's estimates for the same periods.
There are numerous uncertainties inherent in estimating quantities of proved oil and gas reserves and in projecting future rates of production and timing of development expenditures, including many factors beyond the control of the producer. The reserve data set forth herein represents estimates only. Reserve engineering is a subjective process of estimating underground accumulations of oil and gas that cannot be measured in an exact way, and the accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. As a result, estimates made by different engineers often vary from one another. In addition, results of drilling, testing, and production subsequent to the date of an estimate may justify revision of such estimates, and such revisions may be material. Accordingly, reserve estimates are generally different from the quantities of oil and gas that are ultimately recovered. Furthermore, the estimated future net revenues from proved reserves and the present value thereof are based upon certain assumptions, including future prices, production levels and costs, that may not prove correct.
As is generally the case in the Gulf of Mexico, the Company's producing properties are characterized by a high initial production rate, followed by a steep decline in production. As a result, the Company must locate and develop or acquire new oil and gas reserves to replace those being depleted by production. Without successful exploration or acquisition activities, the Company's reserves and revenues will decline rapidly.
As an operator of domestic oil and gas properties, the Company has filed Department of Energy Form EIA-23, "Annual Survey of Oil and Gas Reserves," as required by Public Law 93-275. There are differences between the reserves as reported on Form EIA-23 and as reported herein. The differences are attributable to the fact that Form EIA-23 requires that an operator report on the total reserves attributable to wells that are operated by it, without regard to ownership (i.e., reserves are reported on a gross operated basis, rather than on a net interest basis).
FINDING COSTS
The following table sets forth certain information regarding the costs associated with finding, acquiring and developing the Company's proved oil and gas reserves:
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(1) Capitalized costs represent all capitalized expenditures of the Company as shown in the following table under the caption "--Development, Exploration and Acquisition Capital Expenditures," excluding interest capitalized.
(2) Capitalized costs in 1997 represent capitalized expenditures of the Company for domestic operations only.
DEVELOPMENT, EXPLORATION AND ACQUISITION CAPITAL EXPENDITURES
The following table sets forth certain information regarding the capitalized costs incurred in the purchase of proved and unproved properties and in development and exploration activities:
DRILLING ACTIVITY
The following table sets forth the drilling activity of the Company for each year of the three-year period ended December 31, 1997:
PRODUCTIVE WELLS
The following table sets forth the number of productive oil and gas wells (all within the United States) in which the Company owned an interest as of December 31, 1997:
ACREAGE DATA
The following table sets forth certain information regarding the Company's developed and undeveloped lease acreage as of December 31, 1997:
Leases covering approximately 9,822 (7,384 net to the Company), 33,072 (20,635 net to the Company), 43,078 (31,945 net to the Company), 19,063 (12,718 net to the Company) and 17,166 (17,166 net to the Company) undeveloped acres are scheduled to expire in 1998, 1999, 2000, 2001 and 2002, respectively.
TITLE TO PROPERTIES
The Company believes it has satisfactory title to all of its producing properties in accordance with standards generally accepted in the oil and gas industry. The Company's properties are subject to customary royalty interests, liens incident to operating agreements, liens for current taxes and other burdens which the Company believes do not materially interfere with the use of or affect the value of such properties. The MMS must approve all transfers of record title or operating rights on leases on the OCS. The MMS approval process can in some cases delay the requested transfer for a significant period of time.
OIL AND GAS TERMS
The definitions set forth below shall apply to the indicated terms as used in this document. All volumes of natural gas referred to herein are stated at the legal pressure base of the state or area where the reserves exist and at 60 degrees Fahrenheit and in most instances are rounded to the nearest major multiple.
Basis risk. The risk associated with the sales point price for oil or gas production varying from the reference (or settlement) price for a particular hedging transaction.
Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein in reference to crude oil or other liquid hydrocarbons.
Bcf. Billion cubic feet.
Bcfe. Billion cubic feet equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids.
Btu. British thermal unit, which is the heat required to raise the temperature of a one-pound mass of water from 58.5 to 59.5 degrees Fahrenheit.
Completion. The installation of permanent equipment for the production of oil or natural gas, or in the case of a dry hole, the reporting of abandonment to the appropriate agency.
Developed acreage. The number of acres that are allocated or assignable to producing wells or wells capable of production.
Development well. A well drilled within the proved area of an oil or natural gas reservoir to the depth of a stratigraphic horizon known to be productive.
Dry hole or well. A well found to be incapable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of such production exceed production expenses and taxes.
Exploratory well. A well drilled to find and produce oil or natural gas reserves not classified as proved, to find a new reservoir in a field previously found to be productive of oil or natural gas in another reservoir or to extend a known reservoir.
Farm-in or farm-out. An agreement whereunder the owner of a working interest in an oil and gas lease assigns the working interest or a portion thereof to another party who desires to drill on the leased acreage. Generally, the assignee is required to drill one or more wells in order to earn its interest in the acreage. The assignor usually retains a royalty or reversionary interest in the lease. The interest received by an assignee is a "farm-in" while the interest transferred by the assignor is a "farm-out."
Field. An area consisting of a single reservoir or multiple reservoirs all grouped on or related to the same individual geological structural feature and/or stratigraphic condition.
Finding costs. Costs associated with acquiring and developing proved oil and gas reserves which are capitalized by the Company pursuant to generally accepted accounting principles.
Gross acres or gross wells. The total acres or wells, as the case may be, in which a working interest is owned.
Liquids. Crude oil, condensate and natural gas liquids.
MBbls. One thousand barrels of crude oil or other liquid hydrocarbons.
MBbls/d. One thousand barrels of crude oil or other liquid hydrocarbons per day.
Mcf. One thousand cubic feet.
Mcf/d. One thousand cubic feet per day.
Mcfe. One thousand cubic feet equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids.
MMS. Mineral Management Service of the United States Department of the Interior.
MMBbls. One million barrels of crude oil or other liquid hydrocarbons.
MMbtu. One million Btus
MMcf. One million cubic feet.
MMcf/d. One million cubic feet per day.
MMcfe. One million cubic feet equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids.
Net acres or net wells. The sum of the fractional working interests owned in gross acres or gross wells, as the case may be.
Present value. When used with respect to oil and natural gas reserves, the estimated value of future gross revenues (estimated in accordance with the requirements of the Securities and Exchange Commission) to be generated from the production of proved reserves, net of estimated production and future development costs, using prices and costs in effect as of the date indicated, without giving effect to non-property related expenses such as general and administrative expenses, debt service and future income tax expenses or to depreciation, depletion and amortization, discounted using an annual discount rate of 10%.
Productive well. A well that is found to be capable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of such production exceed production expenses and taxes.
Proved developed producing reserves. Proved developed reserves that are expected to recovered from completion intervals currently open in existing wells and capable of production to market.
Proved developed reserves. Proved reserves that can be expected to be recovered from existing wells with existing equipment and operating methods.
Proved developed nonproducing reserves. Proved developed reserves expected to be recovered from zones behind casing in existing wells.
Proved reserves. The estimated quantities of crude oil, natural gas and natural gas liquids that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions.
Proved undeveloped location. A site on which a development well can be drilled consistent with spacing rules for purposes of recovering proved undeveloped reserves.
Proved undeveloped reserves. Proved reserves that are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required for recompletion.
Recompletion. The completion for production of an existing well bore in another formation from that in which the well has been previously completed.
Reservoir. A porous and permeable underground formation containing a natural accumulation of producible oil and/or natural gas that is confined by impermeable rock or water barriers and is individual and separate from other reservoirs.
Royalty interest. An interest in an oil and natural gas property entitling the owner to a share of oil or natural gas production free of costs of production.
Undeveloped acreage. Lease acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and natural gas regardless of whether such acreage contains proved reserves.
Working interest. The operating interest that gives the owner the right to drill, produce and conduct operating activities on the property and share of production.
Workover. Operations on a producing well to restore or increase production.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company has been named as a defendant in certain lawsuits arising in the ordinary course of business. While the outcome of these lawsuits cannot be predicted with certainty, management does not expect these matters to have a material adverse effect on the financial position, cash flows and results of operations of the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information regarding the names and ages (as of February 20, 1998) of and positions held by each of the Company's executive officers. The Company's executive officers serve at the discretion of the Board of Directors.
Each of the executive officers has held the position set forth opposite his name for the past five years except as follows:
David A. Trice has served as Vice President - Finance and International since July 1997. Prior to joining the Company, he served as President, Chief Executive Officer and Director of Huffco Group, Inc. since late 1991.
Terry W. Rathert has served as Vice President - Planning and Administration and Secretary since July 1997. From 1992 to July 1997, he served as Vice President, Chief Financial Officer and Secretary of the Company.
David F. Schaible has served as Vice President - Acquisitions & Development since February 1995. From 1992 to 1995, he served as Manager-Acquisitions & Development of the Company.
William D. Schneider has served as Vice President - International Exploration since January 1998. From 1992 to his promotion, he served as Manager-Exploration of the Company.
Elliot Pew has served as Vice President - Exploration since January 1998. Prior to joining the Company, he served as Senior Vice President of Louis Dreyfus Natural Gas Company's Gulf Coast Region and prior to Louis Dreyfus' merger with American Exploration Company in October 1997 , as Senior Vice President of Exploration for American Exploration from March 1997 to the date of such merger. From 1992 to March 1997, Mr. Pew was Vice President of Exploration for American Exploration.
C. William Austin has served as Legal Counsel and Assistant Secretary since March 1994. From 1989 to March 1994, Mr. Austin was employed as a staff attorney for Energy Service Company, Inc., an international contract drilling and marine service company headquartered in Dallas, Texas.
James P. Ulm, II has served as Treasurer of the Company since June 1995. From 1989 to June 1995, Mr. Ulm was employed in managerial positions, most recently as Treasurer, by American Exploration Company, an independent oil and gas company headquartered in Houston, Texas.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company is listed on the New York Stock Exchange under the symbol "NFX." The following table sets forth, for the periods indicated, the high and low sales price per share for the Common Stock.
On December 1, 1996 the Company's Board of Directors effected a two-for-one split of its outstanding Common Stock to stockholders of record on December 16, 1996. All share amounts above have been restated to retroactively reflect the stock split.
On February 20, 1998 the last reported sale price on the New York Stock Exchange Composite Tape was $23 1/8 per share.
As of February 20, 1998 there were approximately 298 holders of record of the Common Stock of the Company.
The Company has not in the past, and does not intend to pay cash dividends on its Common Stock in the foreseeable future. The Company currently intends to retain earnings, if any, for the future operation and development of its business. In addition, the payment of dividends is restricted by the terms of the Company's credit facility. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Item 8. Financial Statements and Supplementary Data."
In May 1997, in connection with the acquisition of the assets of Huffco International, L.L.C. ("Huffco"), the Company sold an aggregate of 272,600 shares of Common Stock to two principals of Huffco for a cash purchase price of $5,477,569.88. The offer and sale of these shares were not registered pursuant to Section 5 on the Securities Act of 1933, as amended (the "Securities Act"), in reliance upon Section 4(2) of the Securities Act.
On October 9, 1997, the Company issued $125,000,000 principal amount of its 7.45% Senior Notes due 2007 to qualified institutional buyers in the United States and to non-U.S. persons. The underwriters for the note offering were Goldman, Sachs & Co., Chase Securities Inc., Donaldson, Lufkin & Jenrette Securities Corporation and Jefferies & Company, Inc. The offering price of the notes was 99.694% of the principal amount, with an underwriting discount of 1.5% of the principal amount. The offering and sale of the notes were not registered pursuant to Section 5 of the Securities Act in reliance upon Rule 144A and Regulation S under the Securities Act.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
For information concerning this item, see page 14 of the Newfield Exploration Company Annual Report to Stockholders for the year ended December 31, 1997 (the "Annual Report") as filed with the Securities and Exchange Commission as Exhibit 13.1 to this Form 10-K, which information is incorporated herein by reference.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For information concerning this item, see pages 15 through 23 of the Annual Report, which information is incorporated herein by reference.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For information concerning this item, see pages 24 through 47 of the Annual Report, which information is incorporated herein by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
For information concerning Item 10
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS:
The following financial statements of the Company and the report of management and the Company's independent accountants thereon are included on pages 24 through 47 of the Annual Report, and are incorporated herein by reference:
Management Report on Financial Statements
Report of Independent Accountants
Consolidated Balance Sheet as of the fiscal years ended December 31, 1997 and 1996
Consolidated Statement of Income for the three years in the period ended December 31, 1997
Consolidated Statement of Stockholders' Equity for the three years in the period ended December 31, 1997
Consolidated Statement of Cash Flows for the three years in the period ended December 31, 1997
Notes to the Consolidated Financial Statements
2. EXHIBITS
* Filed herewith. + Identifies management contracts and compensatory plans or arrangements.
(b) REPORTS ON FORM 8-K
On October 1, 1997, the Company filed a Current Report on Form 8-K, dated September 30, 1997, reporting the offering of $125 million of senior notes due October 2007.
On October 20, 1997, the Company filed a Current Report on Form 8-K dated October 15, 1997, reporting the placement, through a Rule 144A private placement, of $125 million in senior notes due October 2007.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Houston, State of Texas, on the 23rd day of February, 1998.
NEWFIELD EXPLORATION COMPANY
By: /s/ Joe B. Foster ------------------------- Joe B. Foster Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
INDEX TO EXHIBITS
* Filed herewith. + Identifies management contracts and compensatory plans or arrangements.