================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-Q /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____to_____ Commission file number: 0-7062 NOBLE AFFILIATES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Delaware 73-0785597 (STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER) 110 West Broadway Ardmore, Oklahoma 73401 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (580) 223-4110 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Number of shares of common stock outstanding as of August 3, 1999: 56,989,548 ================================================================================

PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS NOBLE AFFILIATES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEET (Dollars in thousands) (Unaudited) June 30, December 31, 1999 1998 ----------- ----------- ASSETS Current Assets: Cash and short-term cash investments.............................. $ 79,547 $ 19,100 Accounts receivable-trade......................................... 95,204 106,513 Materials and supplies inventories................................ 2,482 3,006 Other current assets.............................................. 28,691 59,670 ----------- ----------- Total Current Assets.............................................. 205,924 188,289 ----------- ----------- Property, Plant and Equipment........................................ 2,897,244 2,915,917 Less: accumulated depreciation, depletion and amortization................................ (1,564,907) (1,486,250) ----------- ----------- 1,332,337 1,429,667 ----------- ----------- Investment in Unconsolidated Subsidiary.............................. 49,385 25,061 Other Assets......................................................... 42,909 43,063 ----------- ----------- Total Assets...................................................... $ 1,630,555 $ 1,686,080 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable-trade............................................ $ 83,599 $ 108,538 Other current liabilities......................................... 28,690 28,815 Income taxes-current.............................................. 250 1,813 ----------- ----------- Total Current Liabilities......................................... 112,539 139,166 ----------- ----------- Deferred Income Taxes................................................ 106,868 106,823 ----------- ----------- Other Deferred Credits and Noncurrent Liabilities.................... 53,024 52,868 ----------- ----------- Long-term Debt....................................................... 720,231 745,143 ----------- ----------- Shareholders' Equity: Common stock...................................................... 195,040 195,018 Capital in excess of par value.................................... 360,080 360,008 Retained earnings................................................. 98,191 102,472 ----------- ----------- 653,311 657,498 Less common stock in treasury (at cost, 1,524,900 shares)....................................... (15,418) (15,418) ----------- ----------- Total Shareholders' Equity........................................ 637,893 642,080 ----------- ----------- Total Liabilities and Shareholders' Equity........................ $ 1,630,555 $ 1,686,080 =========== =========== SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS. 2

NOBLE AFFILIATES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS (Dollars in Thousands, Except Per Share Amounts) (Unaudited) Six Months Ended June 30, ------------------------- 1999 1998 ---------- --------- REVENUES: Oil and gas sales and royalties...................................... $ 238,203 $ 328,221 Gathering, marketing and processing.................................. 153,906 149,786 Other income......................................................... 4,393 17,532 ---------- --------- 396,502 495,539 ---------- --------- COSTS AND EXPENSES: Oil and gas operations............................................... 61,111 75,737 Oil and gas exploration.............................................. 17,202 40,742 Gathering, marketing and processing.................................. 144,972 144,493 Depreciation, depletion and amortization............................. 126,682 145,212 Selling, general and administrative.................................. 23,015 25,850 Interest............................................................. 25,723 24,452 Interest capitalized................................................. (2,693) (3,112) ---------- --------- 396,012 453,374 ---------- --------- INCOME BEFORE TAXES...................................................... 490 42,165 INCOME TAX PROVISION..................................................... 212 (1) 16,312 (1) ---------- --------- NET INCOME............................................................... $ 278 $ 25,853 ========== ========= BASIC EARNINGS PER SHARE................................................. $ .00 (2) $ .45 (2) ========== ========= DILUTED EARNINGS PER SHARE............................................... $ .00 (2) $ .45 (2) ========== ========= SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS. 3

NOBLE AFFILIATES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS (Dollars in Thousands, Except Per Share Amounts) (Unaudited) Three Months Ended June 30, ------------------------- 1999 1998 --------- --------- REVENUES: Oil and gas sales and royalties...................................... $ 125,970 $ 161,284 Gathering, marketing and processing.................................. 90,273 70,188 Other income......................................................... 2,347 15,929 --------- --------- 218,590 247,401 --------- --------- COSTS AND EXPENSES: Oil and gas operations............................................... 29,759 36,047 Oil and gas exploration.............................................. 6,962 24,127 Gathering, marketing and processing.................................. 86,469 68,199 Depreciation, depletion and amortization............................. 60,133 74,900 Selling, general and administrative.................................. 11,624 12,789 Interest............................................................. 12,688 12,922 Interest capitalized................................................. (1,570) (1,562) --------- --------- 206,065 227,422 --------- --------- INCOME BEFORE TAXES...................................................... 12,525 19,979 INCOME TAX PROVISION..................................................... 3,346 (1) 7,844 (1) --------- --------- NET INCOME.............................................................. $ 9,179 $ 12,135 ========= ========= BASIC EARNINGS PER SHARE................................................ $ .16 (2) $ .21 (2) ========= ========= DILUTED EARNINGS PER SHARE.............................................. $ .16 (2) $ .21 (2) ========= ========= SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS. 4

NOBLE AFFILIATES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (Dollars in Thousands) (Unaudited) Six Months Ended June 30, -------------------------- 1999 1998 --------- ---------- Cash Flows from Operating Activities: Net income............................................................ $ 278 $ 25,853 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization............................ 126,682 144,991 Amortization of undeveloped lease costs, net........................ 3,105 1,233 Increase (decrease) in other deferred credits....................... 201 (2,780) (Increase) decrease in other assets and other noncash items, net.... 1,139 15,661 Changes in working capital, not including cash: (Increase) decrease in accounts receivable.......................... 11,309 13,737 (Increase) decrease in other current assets and inventories......... 31,565 7,570 Increase (decrease) in accounts payable............................. (24,939) 17,039 Increase (decrease) in other current liabilities.................... (1,689) 1,678 --------- ---------- Net Cash Provided by Operating Activities................................ 147,651 224,982 --------- ---------- Cash Flows From Investing Activities: Capital expenditures.................................................. (35,344) (315,702) Investment in unconsolidated subsidiary............................... (24,324) Proceeds from sale of property, plant and equipment................... 1,928 2,114 --------- ---------- Net Cash Used in Investing Activities ................................... (57,740) (313,588) --------- ---------- Cash Flows From Financing Activities: Exercise of stock options............................................ 94 1,884 Cash dividends....................................................... (4,558) (4,555) Repayment of bank debt............................................... (25,000) Proceeds from bank borrowings........................................ 75,000 --------- ---------- Net Cash Provided by (Used in) Financing Activities ..................... (29,464) 72,329 --------- ---------- Increase (Decrease) in Cash and Short-term Cash Investments.............. 60,447 (16,277) --------- ---------- Cash and Short-term Cash Investments at Beginning of Period.............. 19,100 55,075 --------- ---------- Cash and Short-term Cash Investments at End of Period.................... $ 79,547 $ 38,798 ========= ========== Supplemental Disclosures of Cash Flow Information: Cash paid during the period for: Interest (net of amount capitalized).................................. $ 18,664 $ 22,193 Income taxes ......................................................... $ 2,000 $ 4,276 SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS. 5

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) In the opinion of Noble Affiliates, Inc. (the "Company"), the accompanying unaudited consolidated condensed financial statements contain all adjustments, consisting only of necessary and normal recurring adjustments, necessary to present fairly the Company's financial position as of June 30, 1999 and December 31, 1998, and the results of operations for the three month and six month periods ended June 30, 1999 and 1998, respectively and the cash flows for the six month periods ended June 30, 1999 and 1998. These consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1998. (1) INCOME TAX PROVISION For the six months ended June 30: (In thousands) ----------------------------------- 1999 1998 ---------- --------- Current........................................................... $ (9,354) $ 5,297 Deferred.......................................................... 9,566 11,015 ---------- --------- $ 212 $ 16,312 ========== ========= For the three months ended June 30: (In thousands) ----------------------------------- 1999 1998 ---------- --------- Current........................................................... $ (1,885) $ 1,492 Deferred.......................................................... 5,231 6,352 ---------- --------- $ 3,346 $ 7,844 ========== ========= (2) BASIC EARNINGS PER SHARE AND DILUTED EARNINGS PER SHARE Basic income per share of common stock has been computed on the basis of the weighted average number of shares outstanding during each period. The diluted net income per share of common stock includes the effect of outstanding stock options. The following tables summarize the calculation of basic earnings per share ("EPS") and the diluted EPS components required by Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." For the quarter ending June 30: 1999 1998 --------------------------- ---------------------------- INCOME SHARES INCOME SHARES (IN THOUSANDS, EXCEPT PER SHARE) (NUMERATOR) (DENOMINATOR) (NUMERATOR) (DENOMINATOR) - ------------------------------------------------------------------------------------------------------------------- Net income/shares $9,179 57,168 $12,135 56,958 - ------------------------------------------------------------------------------------------------------------------- BASIC EPS $.16 $.21 Net income/shares $9,179 57,168 $12,135 56,958 Effect of Dilutive Securities - ----------------------------- Stock options 295 613 Adjusted net income/shares $9,179 57,463 $12,135 57,571 - ------------------------------------------------------------------------------------------------------------------- DILUTED EPS $.16 $.21 - ------------------------------------------------------------------------------------------------------------------- 6

For the six months ending June 30: 1999 1998 --------------------------- ---------------------------- INCOME SHARES INCOME SHARES (IN THOUSANDS, EXCEPT PER SHARE) (NUMERATOR) (DENOMINATOR) (NUMERATOR) (DENOMINATOR) - ------------------------------------------------------------------------------------------------------------------- Net income/shares $278 56,982 $25,853 56,936 - ------------------------------------------------------------------------------------------------------------------- BASIC EPS $.00 $.45 Net income/shares $278 56,982 $25,853 56,936 Effect of Dilutive Securities - ----------------------------- Stock options 339 520 Adjusted net income/shares $278 57,321 $25,853 57,456 - ------------------------------------------------------------------------------------------------------------------- DILUTED EPS $.00 $.45 - ------------------------------------------------------------------------------------------------------------------- (3) MINERALS MANAGEMENT SERVICE CLAIMS Samedan Oil Corporation ("Samedan"), a wholly owned subsidiary of the Company, has from time to time settled various claims against parties which failed to fulfill their contractual obligation to Samedan to purchase gas at fixed prices greater than market or pursuant to take-or-pay provisions. The Company's policy, which is consistent with general industry practice, is that amounts received in such settlements ("settlement payments") do not represent payment for gas produced and, therefore, are not subject to royalty payments. Property owners, including governmental authorities and private parties, have in recent years asserted claims against Samedan and other oil and gas companies for royalties on settlement payments. Samedan participated, in a joint effort with other energy companies and the Independent Petroleum Association of America ("IPAA"), in a test case which challenged the determination by the U.S. Minerals Management Service ("MMS") that royalties were payable to the government on certain settlement payments received by Samedan and the other plaintiffs (the "MMS Lawsuit"). The District Court for the District of Columbia (the "D.C. District Court") entered a judgment against Samedan in the amount of $20,000. In 1996, the Court of Appeals for the District of Columbia Circuit reversed the judgment against Samedan. In subsequent proceedings in the D.C. District Court consistent with the appellate court decision, on July 25, 1997, the court enjoined the MMS from taking action to collect from Samedan royalties on non-recoupable settlement payments (the "MMS Injunction"). The MMS had until April 14, 1998 to appeal the MMS Injunction and elected not to do so. Based upon the MMS Injunction, the Company in June 1998 recorded $13.7 million as other income which represented the amount of the reserve that the Company had established pending the outcome of the MMS Lawsuit. Samedan may be the subject of future legal actions by property owners claiming royalties on other settlement payments received by Samedan. There can be no assurance that Samedan will prevail in any such action. The Company is unable to estimate the possible amount of loss, if any, associated with this contingency. (4) TRADING AND HEDGING ACTIVITIES The Company, through its subsidiaries, from time to time, uses various hedging arrangements in connection with anticipated crude oil and natural gas sales of its production to minimize the impact of product price fluctuations. Such arrangements include fixed price hedges, costless collars, swaps, options and other contractual arrangements. Hedging gains and losses, as applicable, related to the Company's oil and gas production are recorded in oil and gas sales and royalties. The Company had no natural gas or crude oil hedging contracts related to its production for the three and six months ended June 30, 1999 and 1998. In addition to the hedging arrangements pertaining to the Company's production as described above, Noble Gas Marketing ("NGM"), a wholly owned subsidiary of the Company, employs various hedging arrangements in connection with its purchases and sales of third party production to lock in profits or limit exposure to gas price risk. Most of the purchases made by NGM are on an index basis; however, purchasers in the markets in which NGM sells often require fixed or NYMEX related pricing. NGM may use a hedge to convert the fixed or NYMEX sale to an index basis thereby determining the margin and minimizing the risk of price volatility. During the second quarter of 1999, NGM had hedging transactions with broker-dealers that represented approximately 476,000 MMBTU's of gas per day. Hedges for July 1999 through October 2000 range from 25,000 7

MMBTU's to 536,000 MMBTU's of gas per day for future physical transactions, were not closed at June 30, 1999. During the second quarter of 1998, NGM had hedging transactions with broker-dealers that represented approximately 653,000 MMBTU's of gas per day. For the six months ended June 30, 1999, NGM had hedging transactions that represented approximately 601,000 MMBTU's of gas per day, compared to 718,000 MMBTU's of gas per day for the same period in 1998. NGM records hedging gains or losses relating to fixed term sales as gathering, marketing and processing revenues in the periods in which the related contract is completed. In December 1998 the Emerging Issues Task Force ("EITF") released their consensus on EITF 98-10 "Accounting for Energy Trading and Risk Management Activities." This statement requires that contracts for the purchase and sale of energy commodities which are entered into for the purpose of speculating on market movements or otherwise generating gains from market price differences be recorded at their market value, as of the balance sheet date, with any corresponding gains or losses recorded as income from operations. The effect of adopting this statement was not material. The Financial Accounting Standards Board, ("FASB"), issued Statement of Financial Accounting Standards, ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities" in June 1998. The Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company formally document, designate and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. A company may also implement the Statement as of the beginning of any fiscal quarter after the Statement's issuance (that is, fiscal quarters beginning June 16, 1998 and thereafter). SFAS No. 133 cannot be applied retroactively. SFAS No. 133 must be applied to (a) derivative instruments and (b) certain derivative instruments embedded in hybrid contracts that were issued, acquired, or substantively modified after December 31, 1997 (and, at the Company's election, before January 1, 1998). The Company plans to adopt this statement as of January 1, 2001 and estimates there will be no material financial impact as a result of adoption of SFAS No. 133. (5) METHANOL PLANT Samedan, through an unconsolidated subsidiary, Atlantic Methanol Production Company ("AMPCO"), is participating, with a 45 percent expense interest and a five percent carried interest for the Equatorial Guinea Government, in a joint venture with CMS Energy Corporation to construct a methanol plant on Bioko Island in Equatorial Guinea. The plant will use the gas from Samedan's 31 percent owned Alba field as feedstock. The plant is being designed to utilize approximately 115 MMCF of gas per day. The gas sold by Samedan to AMPCO will be priced at approximately $.25 per MMBTU. On January 29, 1998, AMPCO awarded a contract to Raytheon Engineers and Constructors to build the methanol plant. The turnkey plant construction cost is $322.5 million, which is a $9 million increase over the original contract due to job change orders, and is being designed to produce 2,500 metric tons of methanol per day, which equates to approximately 20,000 BBLS per day. The construction contract stipulates that the first commercial production of methanol should be achieved by the first quarter of 2001. Current marketing plans are to enter into long-term contracts with methanol users in the United States and Europe. The Company is currently funding its share of the construction costs related to the methanol plant with cash flow from current operations and is evaluating alternative methods for funding the balance of its obligation related to the construction project. (6) FINANCIAL INSTRUMENTS On June 17, 1999, the Company entered into a new $100 million 364 day credit agreement with certain commercial lending institutions. The agreement was made to help fund the Company's methanol plant construction project in Equatorial Guinea. There is no balance outstanding on this agreement which is based upon a Eurodollar rate plus 37.5 to 87.5 basis points depending upon the percentage of utilization. 8

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS This report on Form 10-Q includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact included in this Form 10-Q, including, without limitation, statements contained under "Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding the Company's financial position, business strategy, plans and objectives of management of the Company for future operations and industry conditions, are forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the Company's expectations ("Cautionary Statements") include without limitation future production levels, future prices and demand for oil and gas, results of future exploration and development activities, future operating and development costs, the effect of existing and future laws and governmental regulations (including those pertaining to the environment) and the political and economic climate of the United States and the foreign countries in which the Company operates from time to time, as discussed in this quarterly report on Form 10-Q and the other documents of the Company filed with the Securities and Exchange Commission (the "Commission"). All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the Cautionary Statements. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities decreased to $147.7 million in the six months ended June 30, 1999 from $225.0 million in the same period of 1998. Cash and short-term cash investments increased from $19.1 million at December 31, 1998 to $79.5 million at June 30, 1999. Such increases in cash are primarily the result of an increase in the oil and gas commodity prices during the second quarter 1999 as compared to the first quarter 1999. Long-term debt decreased $24.9 million from December 31, 1998 to $725.0 million at June 30, 1999. At year end 1998 the Company had $300 million outstanding on its $300 million credit facility. During the second quarter of 1999, $25 million was repaid under this credit facility. On June 17, 1999, the Company entered into a new $100 million 364 day credit agreement with certain commercial lending institutions. The agreement was made to help fund the Company's methanol plant construction project in Equatorial Guinea. There is no balance outstanding on this agreement which is based upon a Eurodollar rate plus 37.5 to 87.5 basis points depending upon the percentage of utilization. The Company has expended approximately $59.7 million of its $234.3 million 1999 capital budget through June 30, 1999. The Company expects to fund its remaining 1999 capital budget from cash flows from operations. The Company continues to evaluate possible strategic acquisitions and believes it is positioned to access external sources of funding should it be necessary or desirable in connection with an acquisition. Samedan, through an unconsolidated subsidiary, Atlantic Methanol Production Company ("AMPCO"), is participating, with a 45 percent expense interest and a five percent carried interest for the Equatorial Guinea Government, in a joint venture with CMS Energy Corporation to construct a methanol plant on Bioko Island in Equatorial Guinea. The plant will use the gas from Samedan's 31 percent owned Alba field as feedstock. The plant is being designed to utilize approximately 115 MMCF of gas per day. The gas will be priced at approximately $.25 per MMBTU. On January 29, 1998, AMPCO awarded a contract to Raytheon Engineers and Constructors to build the methanol plant. The turnkey plant construction cost is $322.5 million, which is a $9 million increase over the original contract due to job change orders, and is being designed to produce 2,500 metric tons of methanol per day, which equates to approximately 20,000 BBLS per day. The construction contract stipulates that the first commercial production of methanol should be achieved by the first quarter of 2001. Current marketing plans are to enter into long-term contracts with methanol users in the United States and Europe. 9

The Company is currently funding its share of the construction costs related to the methanol plant with cash flow from current operations and is evaluating alternative methods for funding the balance of its obligation related to the construction project. The Company's current ratio (current assets divided by current liabilities) was 1.83 at June 30, 1999 compared with 1.35 at December 31, 1998. The Company follows an entitlements method of accounting for its gas imbalances. The Company's estimated gas imbalance receivables were $18.8 million at June 30, 1999 and $19.1 million at December 31, 1998. Estimated gas imbalance liabilities were $14.4 million at June 30, 1999 and $14.8 million at December 31, 1998. These imbalances are valued at the amount which is expected to be received or paid to settle the imbalances. The settlement of the imbalances can occur either over the life or at the end of the life of a well, on a volume basis or by cash settlement. The Company does not expect that a significant portion of the settlements will occur in any one year. Thus, the Company believes the settlement of gas imbalances will not have a material impact on its liquidity. RESULTS OF OPERATIONS For the second quarter of 1999, the Company recorded net income of $9.2 million, or $.16 per share, compared to net income of $12.1 million, or $.21 per share, in the second quarter of 1998. During the first six months of 1999, the Company recorded net income of $278 thousand, or less than one cent per share, compared to net income of $25.9 million, or $.45 per share, in the first six months of 1998. Gas sales for the Company, excluding third party sales by Noble Gas Marketing ("NGM"), a wholly owned subsidiary of the Company, decreased 29 percent and 31 percent, respectively, for the three months and six months ended June 30, 1999, as compared with the same periods in 1998. The decrease in sales for the second quarter is primarily due to a seven percent decrease in the average gas price and a 23 percent decrease in average daily production, compared to the same quarter in 1998. For the six months ended June 30, 1999 average daily production decreased 18 percent coupled with a 15 percent decrease in the average gas price, compared with the six months ended June 30, 1998. Oil sales for the Company, excluding third party sales by Noble Trading, Inc. ("NTI"), a wholly owned subsidiary of the Company, decreased one percent and 19 percent, respectively, for the three months and six months ended June 30, 1999, as compared with the same periods in 1998. The primary reasons for the decreased sales for the three months ended June 30, 1999 were a 20 percent decrease in average daily production, offset by a 23 percent increase in the average oil price. For the six months ended June 30, 1999, average daily production decreased 17 percent coupled with a three percent decrease in the average oil price. NGM markets most of the Company's natural gas as well as certain third party gas. NGM sells gas directly to end-users, gas marketers, industrial users, interstate and intrastate pipelines, and local distribution companies. NTI markets a portion of the Company's oil as well as certain third party oil. The Company records all NGM's and NTI's sales as gathering, marketing and processing revenues and expenses. All intercompany sales and expenses have been eliminated. For the second quarter of 1999, revenues and expenses from combined NGM and NTI third party sales totaled $90.3 million and $86.5 million, respectively, for a gross margin of $3.8 million. In comparison, combined NGM and NTI third party sales and expenses of $70.2 million and $68.2 million, respectively, resulted in a gross margin of $2.0 million for the second quarter of 1998. For the six months ended June 30, 1999, combined NGM and NTI revenues and expenses from third party sales totaled $153.9 million and $145.0 million, respectively, for a gross margin of $8.9 million. In comparison, combined NGM and NTI third party sales and expenses of $149.8 million and $144.5 million, respectively, resulted in a gross margin of $5.3 million for the same period in 1998. The Company, from time to time, uses various hedging arrangements in connection with anticipated crude oil and natural gas sales of its own production and third party production purchased and sold by NGM to minimize the impact of product price fluctuations. Such arrangements include fixed price hedges, costless collars and other contractual arrangements. Although these hedging arrangements expose the Company to credit risk, the Company monitors the creditworthiness of its counterparties, which generally are major institutions, and believes that losses from nonperformance are unlikely to occur. The Company had no natural gas or crude oil hedging contracts related to its production for the three and six months ended June 30, 1999 and 1998. 10

In December 1998 the Emerging Issues Task Force ("EITF") released their consensus on EITF 98-10 "Accounting for Energy Trading and Risk Management Activities." This statement requires that contracts for the purchase and sale of energy commodities which are entered into for the purpose of speculating on market movements or otherwise generating gains from market price differences be recorded at their market value, as of the balance sheet date, with any corresponding gains or losses recorded as income from operations. The effect of adopting this statement was not material. The Company is exposed to market risk in the normal course of its business operations. Management believes that the Company is well positioned with its mix of oil and gas reserves to take advantage of future price increases that may occur. However, the uncertainty of oil and gas prices continues to impact the domestic oil and gas industry. Due to the volatility of oil and gas prices, the Company, from time to time, has used derivative hedging and may do so in the future as a means of controlling its exposure to price changes. The Company had no natural gas or crude oil hedging contracts related to its production for the three and six months ended June 30, 1999 and 1998. NGM, from time to time, employs hedging arrangements in connection with its purchases and sales of production. While most of NGM's purchases are made for an index-based price, NGM's customers often require prices that are either fixed or related to NYMEX. In order to establish a fixed margin and mitigate the risk of price volatility, NGM may convert a fixed or NYMEX sale to an index-based sales price (such as by purchasing an index-based futures contract obligating NGM for delivery of production). Due to the size of such transactions and certain restraints imposed by contract and by Company guidelines, as of June 30, 1999 the Company had no material market risk exposure from NGM's hedging activity. During the second quarter of 1999, NGM had hedging transactions with broker-dealers that represented approximately 476,000 MMBTU's of gas per day. Hedges for July 1999 through October 2000, which range from 25,000 MMBTU's to 536,000 MMBTU's of gas per day for future physical transactions, were not closed at June 30, 1999. During the second quarter of 1998, NGM had hedging transactions with broker-dealers that represented approximately 653,000 MMBTU's of gas per day. For the six months ended June 30, 1999, NGM had hedging transactions that represented approximately 601,000 MMBTU's of gas per day, compared to 718,000 MMBTU's of gas per day for the same period in 1998. Certain selected oil and gas operating statistics follow: For the three months For the six months ended June 30, ended June 30, ------------------------- ----------------------- 1999 1998 1999 1998 ------------ --------- --------- ----------- Oil revenues (in thousands).............. $ 39,539 $ 40,110 $ 68,609 $ 85,165 Average daily oil production - BBLS...... 29,998 37,690 31,694 38,113 Average oil price per BBL................ $ 14.77 $ 11.98 $ 12.24 $ 12.68 Gas revenue (in thousands)............... $ 83,693 $ 118,065 $ 162,967 $ 235,541 Average daily gas production - MCF....... 439,372 572,436 479,715 585,685 Average gas price per MCF................ $ 2.14 $ 2.31 $ 1.94 $ 2.27 BBLS - BARRELS MCF - THOUSAND CUBIC FEET Oil and gas exploration expense decreased $17.2 million and $23.5 million, respectively, for the three months and six months ended June 30, 1999, as compared to the same periods in 1998. These decreases are primarily attributable to decreases of $4.4 million and $3.1 million, respectively, in abandoned assets expense, plus decreases of $12.3 million and $14.0 million, respectively, in dry hole expense, compared with the same periods in 1998. Also, seismic expense decreased $6.9 million, for the six months ended June 30, 1999, compared to the same period in 1998. Oil and gas operations expense decreased $6.3 million and $14.6 million, respectively, for the three months and six months ended June 30, 1999 compared to the same periods in 1998. These decreases are due primarily to decreased lease operations expenses of $5.5 million and $12.3 million, respectively, for the three months and six months ended June 30, 1999, compared to the same periods in 1998. 11

Depreciation, depletion and amortization ("DD&A") expense decreased 20 percent and 13 percent, respectively, for the three months and six months ended June 30, 1999 compared to the same periods in 1998. The unit rate of DD&A per barrel of oil equivalent ("BOE"), converting gas to oil on the basis of 6 MCF per barrel, was $6.27 for the first six months of 1999, as compared to $5.91 for the same period of 1998. The Company has recorded, through charges to DD&A, a reserve for estimated future liabilities related to dismantlement and reclamation costs for offshore facilities. This reserve is based on the best estimates of Company engineers of such costs to be incurred in future years. Interest expense increased $1.3 million for the six months ended June 30, 1999, as compared to the same period in 1998. This increase resulted from a higher average outstanding debt of $748.0 million, compared to $696.0 million, offset by a lower average interest rate on the debt, for the six month period ended June 30, 1999, compared to the same period in 1998. Interest capitalized decreased $.4 million for the six months ended June 30, 1999, as compared to the same period in 1998. This decrease resulted from fewer construction projects for various properties located in the Gulf of Mexico. FUTURE TRENDS Samedan Oil Corporation ("Samedan"), a wholly owned subsidiary of the Company, has from time to time settled various claims against parties which failed to fulfill their contractual obligation to Samedan to purchase gas at fixed prices greater than market or pursuant to take-or-pay provisions. The Company's policy, which is consistent with general industry practice, is that amounts received in such settlements ("settlement payments") do not represent payment for gas produced and, therefore, are not subject to royalty payments. Property owners, including governmental authorities and private parties, have in recent years asserted claims against Samedan and other oil and gas companies for royalties on settlement payments. Samedan participated, in a joint effort with other energy companies and the Independent Petroleum Association of America ("IPAA"), in a test case which challenged the determination by the U.S. Minerals Management Service ("MMS") that royalties were payable to the government on certain settlement payments received by Samedan and the other plaintiffs (the "MMS Lawsuit"). The District Court for the District of Columbia (the "D.C. District Court") entered a judgment against Samedan in the amount of $20,000. In 1996, the Court of Appeals for the District of Columbia Circuit reversed the judgment against Samedan. In subsequent proceedings in the D.C. District Court consistent with the appellate court decision, on July 25, 1997, the court enjoined the MMS from taking action to collect from Samedan royalties on non-recoupable settlement payments (the "MMS Injunction"). The MMS had until April 14, 1998 to appeal the MMS Injunction and elected not to do so. Based upon the MMS Injunction, the Company in June 1998 recorded $13.7 million as other income which represented the amount of the reserve that the Company had established pending the outcome of the MMS Lawsuit. Samedan may be the subject of future legal actions by property owners claiming royalties on other settlement payments received by Samedan. There can be no assurance that Samedan will prevail in any such action. The Company is unable to estimate the possible amount of loss, if any, associated with this contingency. The Company is currently funding its share of the construction costs related to the methanol plant in Equatorial Guinea with cash flow from current operations and is evaluating alternative methods for funding the balance of its obligations related to the construction project. (See "-Liquidity and Capital Resources"). Management believes the Company is well positioned with its balanced reserves of oil and gas to take advantage of future price increases that may occur. However, the uncertainty of oil and gas prices continues to affect the domestic oil and gas industry. Due to the volatility of oil and gas prices, the Company, from time to time, uses hedging and plans to do so in the future as a means of controlling its exposure to price changes. The Company cannot predict the extent to which its revenues will be affected by inflation, government regulation or changing prices. YEAR 2000 ISSUE The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Computer equipment and software and devices with embedded technology that are time-sensitive may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system 12

failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The Company has undertaken various initiatives intended to ensure that its computer equipment and software will function properly with respect to dates in the year 2000 and thereafter. For this purpose, the term "computer equipment and software" includes systems that are commonly thought of as information technology ("IT") systems, including accounting, data processing, telephone/PBX systems, and other miscellaneous systems, as well as systems that are not commonly thought of as IT systems, such as field operations equipment, alarm systems, sprinkler systems, fax machines, or other miscellaneous systems. Both IT and non-IT systems may contain imbedded technology, which complicates the Company's Year 2000 identification, assessment, remediation, and testing efforts. In addition, in the ordinary course of replacing computer equipment and software, the Company attempts to obtain replacements that it believes are Year 2000 compliant. Utilizing internal resources to identify and assess needed Year 2000 remediation, the Company currently anticipates that its Year 2000 identification, assessment, remediation, and testing efforts, which began in January 1998, will be completed by September 30, 1999, and that such efforts will be completed prior to any currently anticipated impact on its computer equipment and software. The Company estimates that as of June 30, 1999, it had completed approximately 95% of the initiatives that it believes will be necessary to fully address potential Year 2000 issues relating to its computer equipment and software. The projects comprising the remaining 5% of the initiatives are in process and expected to be completed by September 30, 1999. Percent Year 2000 Initiative Time Frame Complete - ------------------------------------------------------------------------------------------------------ Identification and assessment of IT systems March 31, 1999 100% (Company and subsidiaries) Identification and assessment of critical non-IT systems September 30, 1999 75% (Company and subsidiaries) Remediation and testing of IT and non-IT systems of December 31, 1998 100% subsidiaries other than Samedan and subsidiaries Remediation and testing of IT and non-IT systems of September 30, 1999 95% Samedan and subsidiaries Remediation and testing of Company's central IT June 30, 1999 100% and non-IT systems Replacement and testing of third party software September 30, 1999 90% Identification and assessment of field equipment used in oil and gas producing operations September 30, 1999 50% Remediation and testing of field equipment September 30, 1999 50% The Company mailed letters in May 1999 to its significant vendors and service providers and has verbally communicated with many strategic customers to determine the extent to which interfaces with such entities are vulnerable to Year 2000 issues and whether the products and services purchased from or by such entities are Year 2000 compliant. The Company estimates that as of June 30, 1999, it had received 40% of the Year 2000 attestation certificates from vendors, service providers and strategic customers. A second solicitation for Year 2000 verification is scheduled for August 1999. The Company is funding its Year 2000 efforts primarily with internal resources and does not anticipate making any expenditures in connection therewith except for the purchase of third party software that it otherwise would not have purchased or would have purchased at a later date. Although the Company does not separately track its internal costs related to Year 2000 efforts, which include compensation of employees working on Year 2000 projects, it believes that such costs will not exceed $75,000, of which approximately $70,000 had been incurred as of June 30, 1999. The Company estimates that these internal and external costs will represent less than five percent of total IT-related costs for 1998 and 1999 and that none of the Company's IT initiatives that are not related to the Year 2000 issue will be materially delayed or impacted by Year 2000 efforts. The Company presently believes that the Year 2000 issue will not pose significant operational problems for the Company. However, if all Year 2000 issues are not properly identified, or assessment, remediation, and testing are not effected timely, there can be no assurance that the Year 2000 issue will not materially adversely impact the 13

Company's results of operations or adversely affect the Company's relationships with customers, vendors, or others. Additionally, there can be no assurance that the Year 2000 issues of other entities will not have a material adverse impact on the Company's systems or results of operations. The costs of the Company's Year 2000 identification, assessment, remediation, and testing efforts and the dates on which the Company believes it will complete such efforts are based upon management's estimates, which were derived using numerous assumptions regarding future events, including the continued availability of certain resources, third-party remediation plans and other factors. There can be no assurance that these estimates will prove to be accurate, and actual results could differ materially from those currently anticipated. Specific factors that could cause such material differences include, but are not limited to, the availability and cost of personnel trained in Year 2000 issues, the ability to identify, assess, remediate, and test all relevant computer codes and imbedded technology, and similar uncertainties. In addition, variability of definitions of "compliance with Year 2000" may lead to claims on the Company, the impact of which is not currently estimable. No assurance can be given that the aggregate cost of defending and resolving such claims, if any, will not materially adversely affect the Company's results of operations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk in the normal course of its business operations. Management believes that the Company is well positioned with its mix of oil and gas reserves to take advantage of future price increases that may occur. However, the uncertainty of oil and gas prices continues to impact the domestic oil and gas industry. Due to the volatility of oil and gas prices, the Company, from time to time, has used derivative hedging and may do so in the future as a means of controlling its exposure to price changes. During the first half of 1999, the Company had no oil or gas hedging transactions for its production. NGM, from time to time, employs hedging arrangements in connection with its purchases and sales of production. While most of NGM's purchases are made for an index-based price, NGM's customers often require prices that are either fixed or related to NYMEX. In order to establish a fixed margin and mitigate the risk of price volatility, NGM may convert a fixed or NYMEX sale to an index-based sales price (such as by purchasing an index-based futures contract obligating NGM for delivery of production). Due to the size of such transactions and certain restraints imposed by contract and by Company guidelines, as of June 30, 1999 the Company had no material market risk exposure from NGM's hedging activity. The Company has a $300 million credit agreement (see 1998 Annual Report - Note 3 - Debt, to the Consolidated Financial Statements) which exposes the Company to the risk of earnings or cash flow loss due to changes in market interest rates. At June 30, 1999, there was $275 million outstanding under the credit facility with a maturity date of December 24, 2002. The interest rate charged, which is based upon a Eurodollar rate plus 35 basis points, was 6.2 percent at June 30, 1999. On June 17, 1999, the Company entered into a $100 million 364 day credit agreement. There is no balance outstanding on this agreement which is based upon the Eurodollar rate plus 37.5 to 87.5 basis points depending upon the percentage of utilization. All other Company long-term debt is fixed-rate and, therefore, does not expose the Company to the risk of earnings or cash flow loss due to changes in market interest rates. The Company does not invest in foreign currency derivatives. The U.S. dollar is considered the primary currency for each of the Company's international operations. Transactions that are completed in a foreign currency are translated into U.S. dollars and recorded in the financial statements. Translation gains or losses were not material in any of the periods presented and the Company does not believe it is currently exposed to any material risk of loss on this basis. Such gains or losses are included in other expense on the income statement. However, certain sales transactions are concluded in foreign currencies and the Company therefore is exposed to potential risk of loss based on fluctuation in exchange rates from time to time. 14

PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The information required by this Item 6 (a) is set forth in the Index to Exhibits accompanying this quarterly report and is incorporated herein by reference. (b) The Company did not file any reports on Form 8-K during the three months ended June 30, 1999. 15

SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NOBLE AFFILIATES, INC. (Registrant) Date August 13, 1999 /s/ JAMES L. McELVANY ------------------------------- ------------------------------------ JAMES L. McELVANY Vice President-Finance and Treasurer (Principal Financial Officer and Authorized Signatory) 16

INDEX TO EXHIBITS Sequentially Exhibit Numbered Number Exhibit Page - -------- ------------------------------- -------------------- 27.1 Financial Data Schedule

  

5 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 79,547 0 95,204 0 2,482 205,924 2,897,244 1,564,907 1,630,555 112,539 720,231 0 0 195,040 442,854 1,630,555 238,203 396,502 0 370,289 0 0 25,723 490 212 278 0 0 0 278 .005 .005