UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (Date of earliest event reported): JUNE 30, 1998
THE MERIDIAN RESOURCE CORPORATION
(Exact name of registrant as specified in charter)
001-10671
(Commission File No.)
TEXAS 76-0319553
(State of Incorporation) (I.R.S. Employer
Identification No.)
15995 N. BARKERS LANDING, SUITE 300
HOUSTON, TEXAS 77079
(Address of Principal Executive (Zip Code)
Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (281) 558-8080
================================================================================
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On June 30, 1998, The Meridian Resource Corporation, a Texas corporation
(the "Company"), effected the acquisition of Louisiana Onshore Properties
Inc., a Delaware corporation ("LOPI"), an indirect subsidiary of Shell Oil
Company ("Shell"), through a merger (the "Merger") of a wholly owned
subsidiary of the Company with and into LOPI (the "LOPI Transaction"). The
Merger was effected pursuant to an Agreement and Plan of Merger dated as of
March 27, 1998 (the "Merger Agreement"), by and among the Company, LOPI
Acquisition Corp., a wholly owned Delaware subsidiary of the Company ("TMR
Sub"), Shell Louisiana Onshore Properties Inc., a Delaware corporation
("SLOPI"), and LOPI, a wholly-owned subsidiary of SLOPI. The Company issued
12,082,030 shares of its common stock, $.01 par value (the "Common Stock") and
shares of a new issue of convertible preferred stock of the Company (the
"Preferred Stock") that is convertible into 12,837,428 shares of Common Stock
as consideration in the Merger. The consideration exchanged in the Merger was
based on arms-length negotiations between the parties.
On June 30, 1998, in a transaction separate from the LOPI Transaction, the
Company acquired from Shell Western E&P Inc., an indirect subsidiary of Shell
("SWEPI"), various other oil and gas property interests for a total of $42.5
million in cash, subject to adjustment for production, expenses and other items
since October 1, 1997 (the "SWEPI Acquisition" and with the LOPI Transaction,
the "Shell Transactions"). The SWEPI Acquisition was funded pursuant to
advances under the Company's existing credit facility. The purchase price for
the properties acquired in the SWEPI Acquisition was determined through
arms-length negotiations between the parties.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED.
STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES FOR THE
PROPERTIES ACQUIRED IN THE LOPI TRANSACTION:
Report of Independent Accountants........................ F-1
Statement of Revenues and Direct Operating Expenses for the
years ended December 31, 1997, 1996 and 1995 and the three
months ended March 31, 1998 and 1997...................... F-2
Notes to Statement of Revenues and Direct Operating
Expenses................................................. F-3
Page 2
STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES FOR THE
PROPERTIES ACQUIRED IN THE SWEPI ACQUISITION:
Report of Independent Accountants........................ F-7
Statement of Revenues and Direct Operating Expenses for the
years ended December 31, 1997, 1996 and 1995 and the three
months ended March 31, 1998 and 1997...................... F-8
Notes to Statement of Revenues and Direct Operating
Expenses................................................. F-9
(b) PRO FORMA FINANCIAL INFORMATION.
Unaudited pro forma combined financial statements of The Meridian Resource
Corporation for the periods specified in Article 11 of Regulation S-X are
attached hereto on pages P-1 through P-8.
Page 3
(c) EXHIBITS.
2.1 -- Agreement and Plan of Merger dated as of March 27, 1998, by and among The Meridian
Resource Corporation, LOPI Acquisition Corp., Shell Louisiana Onshore Properties Inc. and
Louisiana Onshore Properties Inc. Incorporated by reference from the Company's Annual
Report on Form 10-K for the year ended December 31, 1997. (Pursuant to S-K Item 601(b)(2),
the Company has not included in the filing Exhibit D (LOPI financial statements), Exhibit
1 (preliminary TMR financial statements) or Schedule I or II (which relate to the
representations and warranties of the parties). The Company agrees to furnish
supplementally any omitted schedule to the Commission upon request.
2.2 -- Purchase and Sale Agreement dated effective October 1, 1997, by and between The Meridian
Resource Corporation and Shell Western E&P Inc. (Pursuant to S-K Item 601(b)(2), the
Company has not included in the filing Exhibits which relate to the representations and
warranties of the parties and certain ancillary documents to the agreement). The Company
agrees to furnish supplementally any omitted schedule to the Commission upon request.
3.1 -- Certificate of Designation for Preferred Stock dated June 30, 1998.
4.1 -- Stock Rights and Restrictions Agreement dated as of June 30, 1998 by and between The
Meridian Resource Corporation and Shell Louisiana Onshore Properties Inc.
4.2 -- Registration Rights Agreement dated June 30, 1998 by and between The Meridian Resource
Corporation and Shell Louisiana Onshore Properties Inc.
10.1 -- Amended and Restated Credit Agreement dated May 22, 1998, among the Company, the several
banks and financial institutions and other entities from time to time parties thereto (the
"Lenders"), The Chase Manhattan Bank, as administrative agent for the Lenders, Bankers
Trust Company, as syndication agent, Chase Securities Inc., as advisor to the Company,
Chase Securities Inc., B. T. Alex. Brown Incorporated, Toronto Dominion (Texas), Inc. and
Credit Lyonnais New York Branch as co-arrangers, and Toronto Dominion (Texas), Inc. and
Credit Lyonnais New York Branch, as co-documentation agents.
10.2 -- Second Amended and Restated Guarantee dated June 30, 1998, between the Guarantors
signatory thereto and The Chase Manhattan Bank, as Administrative Agent for the Lenders.
10.3 -- Amended and Restated Pledge Agreement, dated May 22, 1998, between the Company and The
Chase Manhattan Bank, as Administrative Agent
10.4 First Amendment to Amended and Restated Pledge Agreement dated June 30, 1998
23.1 -- Consent of PricewaterhouseCoopers LLP
99.1 -- Press Release
Page 4
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
THE MERIDIAN RESOURCE CORPORATION
Dated: July 9, 1998
/s/ LLOYD V. DELANO
Lloyd V. DeLano
Vice President
Page 5
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
Louisiana Onshore Properties Inc.
We have audited the accompanying Historical Statement of Revenues and Direct
Operating Expenses of the oil and gas properties (the "Acquisition
Properties") of Louisiana Onshore Properties Inc. for the years ended December
31, 1997, 1996 and 1995. This historical statement is the responsibility of
Louisiana Onshore Properties Inc. Our responsibility is to express an opinion on
this historical statement 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 historical statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
amounts and disclosures in the historical statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the historical
statement. We believe that our audits provide a reasonable basis for our
opinion.
The accompanying statement was prepared as described in Note 1 for the purpose
of complying with certain rules and regulations of the Securities and Exchange
Commission (SEC) for inclusion in certain SEC regulatory reports and filings of
The Meridian Resource Corporation and are not intended to be a complete
presentation of the revenues and direct operating expenses of the Acquisition
Properties.
In our opinion, the historical statement referred to in the first paragraph of
this report presents fairly, in all material respects, the revenues and direct
operating expenses of the Acquisition Properties described in Note 1 for the
years ended December 31, 1997, 1996 and 1995, in conformity with generally
accepted accounting principles.
PRICE WATERHOUSE LLP
Houston, Texas
May 12, 1998
F-1
THE LOPI PROPERTIES
HISTORICAL STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES
FOR THE THREE
MONTHS ENDED FOR THE YEAR ENDED
MARCH 31, DECEMBER 31,
-------------------- -------------------------------
1998 1997 1997 1996 1995
--------- --------- --------- --------- ---------
(UNAUDITED)
(IN THOUSANDS)
Revenues:
Oil and condensate.............. $ 7,676 $ 14,238 $ 47,670 $ 63,953 $ 53,580
Gas............................. 6,659 9,597 37,664 28,964 38,621
--------- --------- --------- --------- ---------
Total...................... 14,335 23,835 85,334 92,917 92,201
Direct operating expenses............ 4,638 5,884 23,309 28,724 22,219
--------- --------- --------- --------- ---------
Revenues in excess of direct
operating expenses................. $ 9,697 $ 17,951 $ 62,025 $ 64,193 $ 69,982
========= ========= ========= ========= =========
The accompanying notes are an integral part of this financial statement.
F-2
THE LOPI PROPERTIES
NOTES TO HISTORICAL STATEMENT OF REVENUES AND
DIRECT OPERATING EXPENSES
1. BASIS OF PRESENTATION
In October 1997, Louisiana Onshore Properties Inc. ("LOPI") was formed
and interests in certain oil and gas properties owned by one or more
consolidated subsidiaries of Shell Oil Company were conveyed to LOPI (the "LOPI
Properties"). In December 1997, LOPI signed a Letter of Intent to enter into a
merger agreement with The Meridian Resources Corporation ("TMRC") whereby, if
the transaction closes, LOPI, inclusive of the LOPI Properties, will be acquired
by TMRC in exchange for stock of TMRC. As used herein, "Shell" shall refer to
Shell Oil Company or one or more of its consolidated subsidiaries or a
combination of Shell Oil Company and one or more of its consolidated
subsidiaries, as the context requires.
No segregated accounting records for LOPI existed prior to its formation
and, due to its fully consolidated status with Shell and its pending sale, no
attempt has been made to prepare a balance sheet and income statement for LOPI
as a stand alone entity.
The revenues and direct operating expenses associated with the LOPI
Properties can be derived from the Shell accounting records. Revenues and direct
operating expenses, as set forth in this financial statement, include oil and
gas revenues and associated direct operating expenses related to the net revenue
interest and net working interest, respectively, in the LOPI Properties. Each
owner recognizes revenue and expenses based on its proportionate share of the
related production and costs. The statement includes oil and gas revenues, net
of royalties. Expenses include labor, repairs and maintenance, fuel consumed and
supplies utilized to operate and maintain the wells and related equipment and
facilities, production taxes and ad valorem taxes.
This statement varies from an income statement in that it does not show
certain expenses which were incurred in connection with ownership of the LOPI
Properties -- including general and administrative expenses and income taxes.
These costs were not separately allocated to the LOPI Properties in the Shell
accounting records and any pro forma allocation would be both time consuming and
expensive and would not be a reliable estimate of what these costs would
actually have been had LOPI been operated historically as a stand alone entity.
In addition, these allocations, if made using historical Shell general and
administrative structures and tax burdens, would not produce allocations that
would be indicative of the historical performance of the LOPI Properties had
they been assets of TMRC, due to the greatly varying size, structure, operations
and accounting of the two companies. This statement also does not include
provisions for depreciation, depletion and amortization as such amounts would
not be indiciative of those costs which would be incurred by TMRC upon
allocation of the purchase price.
For the same reason, primarily the lack of segregated or easily obtainable
reliable data on asset values and related liabilities, a balance sheet is not
presented for LOPI.
Pursuant to the terms of the Agreement and Plan of Merger by and among The
Meridian Resource Corporation, LOPI Acqusition Corporation, Shell Louisiana
Onshore Properties Inc. and Louisiana Onshore Properties Inc. dated March 27,
1998, as amended, Shell has agreed to assume all identified and scheduled
existing liabilities related to LOPI.
At the end of the economic life of these fields, certain restoration and
abandonment costs will be incurred by the respective owners of these fields. No
accrual for these costs is included in the direct operating expenses.
The interim financial data for the three months ended March 31, 1998 and
March 31, 1997 is unaudited; however, in the opinion of LOPI, the interim data
includes all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results for the interim periods.
F-3
THE LOPI PROPERTIES
NOTES TO HISTORICAL STATEMENT OF REVENUES AND
DIRECT OPERATING EXPENSES -- (CONTINUED)
2. GAS BALANCING
With respect to gas sales, the entitlement method is used for recording
revenues. Under this approach, revenues are based on the LOPI Properties'
proportionate share of the related production. When sales volumes of the LOPI
Properties exceed the LOPI Properties' entitled share of production, an
over-produced imbalance occurs and a liability is recorded. At December 31,
1997, the LOPI Properties were in a net overproduced position of 390,300 mcf
which is valued at $1,031,559.
3. RELATED PARTY TRANSACTIONS
Affiliates of Shell acquired substantially all of the crude oil and natural
gas production from the LOPI Properties for each of the years in the three year
period ended December 31, 1997. Such sales, which include the net revenue
interest of the LOPI Properties as well as associated royalties, amounted to
$92,587,354, $100,188,481 and $101,744,473 for the years ended December 31,
1997, 1996 and 1995, respectively.
SUPPLEMENTARY OIL AND GAS INFORMATION (UNAUDITED)
PROVED RESERVE ESTIMATES
Oil and gas proved reserves cannot be measured exactly. Reserve estimates
are based on many factors related to reservoir performance which require
evaluations by the engineers interpreting the available data, as well as price
and other economic factors. The reliability of these estimates at any point in
time depends on both the quality and quantity of the technical and economic
data, the production performance of the reservoirs, as well as extensive
engineering judgment. Consequently, reserve estimates are subject to revision as
additional data becomes available during the producing life of a reservoir. When
a commercial reservoir is discovered, proved reserves are initially determined
based on limited data from the first well or wells. Subsequent data may better
define the extent of the reservoir and additional production performance, well
tests and engineering studies will likely improve the reliability of the reserve
estimate. The evolution of technology may also result in the application of
improved recovery techniques such as supplemental or enhanced recovery projects,
or both, which have the potential to increase reserves beyond those envisioned
during the early years of a resevoir's producing life. Revisions to reserves are
based on engineering analysis of individual reservoirs at the field level.
Proved reserves are those quantities which, upon analysis of geological and
engineering data, appear with reasonable certainty to be recoverable in the
future from known oil and gas reservoirs under current prices and costs as of
the date the estimate is made. For major revisions, extensions and discoveries,
proved reserves must also be recoverable under future prices and costs
forecasted by Shell. Proved developed reserves are those reserves which can be
expected to be recovered through existing wells with existing equipment and
operating methods. Proved undeveloped reserves are those reserves which are
expected to be recovered from new wells on undrilled acreage or from existing
wells where a relatively major expenditure is required. Net proved reserves
represent the estimated recoverable volumes after deducting from gross reserves
the portion due land owners or others as royalty or operating interests.
Estimates of proved reserves include and rely upon a production and
development plan and strategy. Shell premises certain expenditures will be made
to produce incremental barrels in the last years of mature fields such as the
LOPI Properties. This represents Shell's philosophy to generally produce all
incremental reserves which can be produced profitabily. If such expenditures are
not made, such volumes will not be produced. Thus, these reserve estimates are
valid only if Shell's operating plan is followed and planned expenditures are
made. In any case, many factors such as unanticipated technical problems or
changes in prices or costs or errors in sound technical judgment made on the
best information available may cause actual production to vary significantly
from estimated reserves.
Net proved reserves represent the estimated recoverable volumes after
deducting from gross proved reserves the portion due land owners or others as
royalty or operating interests.
F-4
THE LOPI PROPERTIES
NOTES TO HISTORICAL STATEMENT OF REVENUES AND
DIRECT OPERATING EXPENSES -- (CONTINUED)
Estimated quantities of net proved oil and natural gas reserves and of
changes in net quantities of proved developed and undeveloped reserves for each
of the period indicated were as follows:
OIL GAS
(MBBLS) (MMCF)
-------- -------
Proved reserves at December 31,
1994............................... 17,496 52,298
Production...................... (3,218) (23,479)
Revision of previous
estimates..................... 2,065 16,069
Purchases of reserves........... 0 0
Extensions, discoveries and
improved recovery............. 274 11,210
-------- -------
Proved reserves at December 31,
1995............................... 16,617 56,098
Production...................... (2,987) (10,993)
Revision of previous
estimates..................... 2,210 (1,035)
Purchases of reserves........... 434 34,388
Extensions, discoveries and
improved recovery............. 1,043 25,414
-------- -------
Proved reserves at December 31,
1996............................... 17,317 103,872
Production...................... (2,443) (14,032)
Revision of previous
estimates..................... (3,694) (12,875)
Purchases of reserves........... 343 63
Extensions, discoveries and
improved recovery............. 788 4,438
-------- -------
Proved reserves at December 31,
1997............................... 12,311 81,466
Proved developed reserves at:
December 31, 1995............... 14,616 52,586
December 31, 1996............... 15,166 98,864
December 31, 1997............... 10,816 76,776
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL
AND GAS RESERVES
The following disclosures concerning the standardized measure of future
cash flows from proved oil and gas reserves are presented in accordance with the
Statement of Financial Accounting Standards No. 69. As prescribed by this
statement, the amounts shown are based on prices and costs at the end of each
period and a 10 percent annual discount factor. Since prices and costs do not
remain static, and no price or cost changes have been considered, the results
are not necessarily indicative of the fair market value of estimated proved
reserves, but they do provide a common benchmark which may enhance the users'
ability to project future cash flows.
Extensive judgments are involved in estimating the timing of production and
the costs that will be incurred throughout the remaining lives of these fields.
Therefore, the results may not be comparable to estimates disclosed by other oil
and gas producers.
F-5
THE LOPI PROPERTIES
NOTES TO HISTORICAL STATEMENT OF REVENUES AND
DIRECT OPERATING EXPENSES -- (CONTINUED)
The standardized measure of discounted future net cash flows related to
proved oil and gas reserves at December 31 (in thousands) was as follows:
1997 1996 1995
---------- ---------- ----------
Future cash flows.................... $ 415,124 $ 822,690 $ 374,947
Future production and development
costs.............................. 180,980 204,916 175,064
---------- ---------- ----------
Future net cash inflows.............. 234,144 617,774 199,883
10% annual discount for estimated
timing of cash flows............... 67,806 180,756 58,778
---------- ---------- ----------
Standardized Measure (before income
taxes) of discounted future net
cash flows......................... $ 166,338 $ 437,018 $ 141,105
========== ========== ==========
The Standardized Measure of discounted future net cash flows is based on
the following oil and gas prices at December 31:
1997 1996 1995
--------- --------- ---------
Oil (per Bbl.)....................... $ 16.34 $ 24.25 $ 18.12
Gas (per Mcf)........................ $ 2.53 $ 3.92 $ 1.85
Crude oil and natural gas price realizations for the LOPI Properties at
March 31, 1998 were $13.34 per Bbl and $2.26 per Mcf, respectively.
The aggregate change in the Standardized Measure of discounted future net
cash flows was a decrease of $270,680,000 in 1997, an increase of $295,913,000
in 1996 and an increase of $49,160,000 in 1995. The principal sources of change
for the years ended December 31 were as follows (in thousands):
1997 1996 1995
---------- ---------- ----------
Sales and transfers of oil and gas
produced, net of production
costs.............................. (62,025) (64,193) (69,982)
Net change in prices and costs....... (195,318) 127,302 56,966
Extensions, discoveries and improved
recovery........................... 11,222 69,544 16,064
Purchases of reserves in place....... 2,282 81,923 0
Development costs incurred during the
period............................. 13,602 24,191 19,651
Revisions of previous reserve
estimates.......................... (41,377) 44,476 31,691
Accretion of discount................ 43,702 14,111 9,195
F-6
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
Shell Western E&P Inc.
We have audited the accompanying Historical Statement of Revenues and Direct
Operating Expenses of the oil and gas properties (the "Acquisition
Properties") of Shell Western E&P Inc. for the years ended December 31, 1997,
1996 and 1995. This historical statement is the responsibility of Shell Western
E&P Inc. Our responsibility is to express an opinion on this historical
statement 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 historical statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
amounts and disclosures in the historical statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the historical
statement. We believe that our audits provide a reasonable basis for our
opinion.
The accompanying statement was prepared as described in Note 1 for the purpose
of complying with certain rules and regulations of the Securities and Exchange
Commission (SEC) for inclusion in certain SEC regulatory reports and filings of
The Meridian Resource Corporation and are not intended to be a complete
presentation of the revenues and direct operating expenses of the Acquisition
Properties.
In our opinion, the historical statement referred to in the first paragraph of
this report presents fairly, in all material respects, the revenues and direct
operating expenses of the Acquisition Properties described in Note 1 for the
years ended December 31, 1997, 1996 and 1995, in conformity with generally
accepted accounting principles.
PRICE WATERHOUSE LLP
Houston, Texas
May 12, 1998
F-7
THE SWEPI PROPERTIES
HISTORICAL STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES
FOR THE THREE
MONTHS ENDED FOR THE YEAR ENDED
MARCH 31, DECEMBER 31,
-------------------- -------------------------------
1998 1997 1997 1996 1995
--------- --------- --------- --------- ---------
(UNAUDITED)
(IN THOUSANDS)
Revenues:
Oil and condensate.............. $ 112 $ 457 $ 3,573 $ 4,614 $ 3,569
Gas............................. 2,692 4,262 12,121 14,026 10,624
--------- --------- --------- --------- ---------
Total...................... 2,804 4,719 15,694 18,640 14,193
Direct operating expenses............ 291 391 1,979 4,456 3,364
--------- --------- --------- --------- ---------
Revenues in excess of direct
operating expenses................. $ 2,513 $ 4,328 $ 13,715 $ 14,184 $ 10,829
========= ========= ========= ========= =========
The accompanying notes are an integral part of this financial statement.
F-8
THE SWEPI PROPERTIES
NOTES TO HISTORICAL STATEMENT OF REVENUES AND
DIRECT OPERATING EXPENSES
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. BASIS OF PRESENTATION
In December 1997, Shell Western E&P, Inc. (the "Company") signed a letter
of intent to sell the Company's interest in Gibson-Humphreys and Turtle Bayou
(the "SWEPI Properties") to The Meridian Resources Corporation ("TMRC") for
$42.5 million.
No segregated accounting records for the SWEPI Properties exist as the
SWEPI Properties are fully consolidated with Shell Oil Company and no attempt
has been made to prepare a balance sheet and income statement for the SWEPI
Properties similar to a stand alone entity. As used herein, "Shell" shall
refer to Shell Oil Company or one or more of its consolidated subsidiaries or a
combination of Shell Oil Company and one or more of its consolidated
subsidiaries, as the context requires.
The revenues and direct operating expenses associated with the SWEPI
Properties can be derived from the Shell accounting records. Revenues and direct
operating expenses, as set forth in this financial statement, include oil and
gas revenues and associated direct operating expenses related to the net revenue
interest and net working interest, respectively, in the SWEPI Properties. Each
owner recognizes revenue and expenses based on its proportionate share of the
related production and costs. The statement includes oil and gas revenues, net
of royalties. Expenses include labor, repairs and maintenance, fuel consumed and
supplies utilized to operate and maintain the wells and related equipment and
facilities, production taxes and ad valorem taxes.
This statement varies from an income statement in that it does not show
certain expenses which are incurred in connection with ownership of the SWEPI
Properties -- most notably general and administrative expenses and income taxes.
These costs were not separately allocated to the SWEPI Properties in the Shell
accounting records and any pro forma allocation would be both time consuming and
expensive and would not be a reliable estimate of what these costs would
actually have been had the SWEPI Properties been operated historically as a
stand alone entity. In addition, these allocations, if made using historical
Shell general and administrative structures and tax burdens, would not produce
allocations that would be indicative of the historical performance of the SWEPI
Properties had they been assets of TMRC, due to the greatly varying size,
structure, operations and accounting of the two companies. This statement also
does not include provisions for depreciation, depletion and amortization as such
amounts would not be indicative of those costs which would be incurred by TMRC
upon allocation of the purchase price.
For the same reason, primarily the lack of segregated or easily obtainable
reliable data on asset values and related liabilities, a balance sheet is not
presented for the SWEPI Properties.
At the end of the economic life of these fields, certain restoration and
abandonment costs will be incurred by the respective owners of these fields. No
accrual for these costs is included in the direct operating expenses.
The interim financial data for the three months ended March 31, 1998 and
March 31, 1997 is unaudited; however, in the opinion of the Company, the interim
data includes all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results for the interim periods.
2. GAS BALANCING
With respect to gas sales, the entitlement method is used for recording
revenues. Under this approach, revenues are based on the SWEPI Properties'
proportionate share of the related production. When sales volumes of the SWEPI
Properties exceed the Company's entitled share of production, an over-produced
F-9
THE SWEPI PROPERTIES
NOTES TO HISTORICAL STATEMENT OF REVENUES AND
DIRECT OPERATING EXPENSES -- (CONTINUED)
imbalance occurs and a liability is recorded. At December 31, 1997, the SWEPI
Properties were in a net overproduced position of 695,526 mcf which is valued at
$1,739,837.
3. RELATED PARTY TRANSACTIONS
Affiliates of Shell acquired substantially all of the crude oil and natural
gas production from the SWEPI Properties for each of the years in the three year
period ended December 31, 1997. Such sales, which include the net revenue
interest of the SWEPI Properties as well as associated royalties, amounted to
$12,660,277, $18,752,521 and $12,927,216 for the years ended December 31, 1997,
1996 and 1995, respectively.
SUPPLEMENTARY OIL AND GAS INFORMATION (UNAUDITED)
PROVED RESERVE ESTIMATES
Oil and gas proved reserves cannot be measured exactly. Reserve estimates
are based on many factors related to reservoir performance which require
evaluations by the engineers interpreting the available data, as well as price
and other economic factors. The reliability of these estimates at any point in
time depends on both the quality and quantity of the technical and economic
data, the production performance of the reservoirs, as well as extensive
engineering judgment. Consequently, reserve estimates are subject to revision as
additional data becomes available during the producing life of a reservoir. When
a commercial reservoir is discovered, proved reserves are initially determined
based on limited data from the first well or wells. Subsequent data may better
define the extent of the reservoir and additional production performance, well
tests and engineering studies will likely improve the reliability of the reserve
estimate. The evolution of technology may also result in the application of
improved recovery techniques such as supplemental or enhanced recovery projects,
or both, which have the potential to increase reserves beyond those envisioned
during the early years of a reservoir's producing life. Revisions to reserves
are based on engineering analysis of individual reservoirs at the field level.
Proved reserves are those quantities which, upon analysis of geological and
engineering data, appear with reasonable certainty to be recoverable in the
future from known oil and gas reservoirs under current prices and costs as of
the date the estimate is made. For major revisions, extensions and discoveries,
proved reserves must also be recoverable under future prices and costs
forecasted by Shell. Proved developed reserves are those reserves which can be
expected to be recovered through existing wells with existing equipment and
operating methods. Proved undeveloped reserves are those reserves which are
expected to be recovered from new wells on undrilled acreage or from existing
wells where a relatively major expenditure is required. Net proved reserves
represent the estimated recoverable volumes after deducting from gross proved
reserves the portion due land owners or others as royalty or operating
interests.
Estimates of proved reserves include and rely upon a production and
development plan and strategy. Shell premises certain expenditures will be made
to produce incremental barrels in the last years of mature fields such as the
SWEPI Properties. This represents Shell's philosophy to generally produce all
incremental reserves which can be produced profitably. If such expenditures are
not made, such volumes will not be produced. Thus, these reserve estimates are
valid only if Shell's operating plan is followed and planned expenditures are
made. In any case, many factors such as unanticipated technical problems or
changes in prices or costs or errors in sound technical judgement made on the
best information available may cause actual production to vary significantly
from estimated reserves.
F-10
THE SWEPI PROPERTIES
NOTES TO HISTORICAL STATEMENT OF REVENUES AND
DIRECT OPERATING EXPENSES -- (CONTINUED)
Estimated quantities of net proved oil and natural gas reserves and of
changes in net quantities of proved developed and undeveloped reserves for each
of the periods indicated were as follows:
OIL GAS
(MBBLS) (MMCF)
------- ---------
Proved reserves at December 31,
1994............................... 953 69,684
Production...................... (101) (7,633)
Revision of previous
estimates..................... 101 1,856
Extensions, discoveries and
improved recovery............. 0 0
------- ---------
Proved reserves at December 31,
1995............................... 953 63,907
Production...................... (111) (6,677)
Revision of previous
estimates..................... (15) (2,490)
Extensions, discoveries and
improved recovery............. 33 2,803
------- ---------
Proved reserves at December 31,
1996............................... 860 57,543
Production...................... (69) (4,620)
Revision of previous
estimates..................... 38 (31,665)
Extensions, discoveries and
improved recovery............. 0 1,777
------- ---------
Proved reserves at December 31,
1997............................... 829 23,035
Proved developed reserves at:
December 31, 1995............... 953 63,907
December 31, 1996............... 860 57,542
December 31, 1997............... 829 23,035
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED
OIL AND GAS RESERVES
The following disclosures concerning the standardized measure of future
cash flows from proved oil and gas reserves are presented in accordance with the
Statement of Financial Accounting Standards No. 69. As prescribed by this
statement, the amounts shown are based on prices and costs at the end of each
period and a 10 percent annual discount factor. Since prices and costs do not
remain static, and no price or cost changes have been considered, the results
are not necessarily indicative of the fair market value of estimated proved
reserves, but they do provide a common benchmark which may enhance the users'
ability to project future cash flows.
Extensive judgments are involved in estimating the timing of production and
the costs that will be incurred throughout the remaining lives of these fields.
Therefore, the results may not be comparable to estimates disclosed by other oil
and gas producers.
1997 1996 1995
--------- ---------- ----------
Future cash inflows.................. $ 73,736 $ 238,447 $ 136,939
Future production and development
costs.............................. 18,069 30,223 28,648
--------- ---------- ----------
Future net cash inflows.............. 55,667 208,224 108,291
10% annual discount for estimated
timing of cash flows............... 15,223 82,280 36,592
--------- ---------- ----------
Standardized measure (before income
taxes) of discounted future net
cash flows......................... $ 40,444 $ 125,944 $ 71,699
========= ========== ==========
F-11
THE SWEPI PROPERTIES
NOTES TO HISTORICAL STATEMENT OF REVENUES AND
DIRECT OPERATING EXPENSES -- (CONTINUED)
The Standardized Measure of discounted future net cash flows is based on
the following oil and gas prices at December 31:
1997 1996 1995
--------- --------- ---------
Oil (per Bbl)........................ $ 16.61 $ 23.65 $ 18.27
Gas (per Mcf)........................ $ 2.62 $ 4.05 $ 1.85
Crude oil and natural gas price realizations for the SWEPI Properties at
March 31, 1998 were $12.59 per Bbl and $2.31 per Mcf, respectively.
The aggregate change in the Standardized Measure of discounted future net
cash flows was a decrease of $85,500,000 in 1997, an increase of $52,245,000 in
1996 and an increase of $10,561,000 in 1995. The principal sources of change for
the years ended December 31 were as follows (in thousands):
1997 1996 1995
---------- ---------- ----------
Sales and transfers of oil and gas
produced, net of production
costs.............................. (13,715) (14,184) (10,829)
Net change in prices and costs....... (52,021) 80,031 454
Extensions, discoveries and improved
recovery........................... 2,294 7,041 0
Purchases of reserves in place....... 0 0 0
Development costs incurred during the
period............................. 3,584 5,510 11,094
Revisions of previous reserve
estimates.......................... (41,245) (15,588) 4,337
Accretion of discount................ 12,594 7,170 6,414
F-12
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The LOPI Transaction was consummated on June 30, 1998. The SWEPI
Acquisition was consummated immediately after the consummation of the LOPI
Transaction. The Unaudited Pro Forma Statements of Operations for the year ended
December 31, 1997 and the three months ended March 31, 1998 give effect to the
LOPI Transaction and the SWEPI Acquisition as if each had occurred on January 1,
1997 and January 1, 1998, respectively, and the Unaudited Pro Forma Balance
Sheet gives effect to the LOPI Transaction and SWEPI Acquisition as if each had
occurred on March 31, 1998.
The Unaudited Pro Forma Statements of Operations and Unaudited Pro Forma
Balance Sheet should be read in conjunction with the notes thereto and the
historical financial statements of the Company and the statements of revenues
and direct operating expenses of the Shell Properties and the notes thereto
included elsewhere in this Proxy Statement.
The pro forma adjustments to give effect to the various events described
above are based upon currently available information and upon certain
assumptions that management of the Company believes are reasonable. The LOPI
Transaction and the SWEPI Acquisition will be accounted for by the Company under
the purchase method of accounting, and the assets and liabilities of LOPI and
the oil and gas property interests and other assets acquired in the SWEPI
Acquisition will be recorded at their estimated fair market values at the date
of their respective acquisitions. The adjustments included in the Unaudited Pro
Forma Statements of Operations and in the Unaudited Pro Forma Balance Sheet
reflect the Company's preliminary determination of these and other necessary
adjustments based upon available information. There can be no assurance that the
actual adjustments will not vary significantly from the estimated adjustments
reflected in the Unaudited Pro Forma Statements of Operations and Unaudited Pro
Forma Balance Sheet.
The unaudited pro forma combined financial information does not purport to
be indicative of the financial position or results of operations that would
actually have occurred if both the LOPI Transaction and the SWEPI Acquisition
had occurred as presented in such statements or that may be obtained in the
future. In addition, future results may vary significantly from the results
reflected in such statements due to general economic conditions, oil and gas
commodity prices, the Company's ability to successfully integrate the operations
acquired in the recent merger with Cairn and in the Shell Transactions and
several other factors beyond the Company's control as more fully described in
the Company's Annual Report on Form 10-K for the year ended December 31, 1998.
P-1
PRO FORMA BALANCE SHEET
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
AS OF
MARCH 31, PRO FORMA
1998 AS OF
--------- PRO FORMA MARCH 31,
TMRC ADJUSTMENTS 1998
--------- ------------ ----------
ASSETS
CURRENT ASSETS: $ (42,500)(A)
Cash and cash equivalents....... $ 6,532 42,500(B) $ 6,532
Accounts receivable............. 12,051 -- 12,051
Due from affiliates............. 3,256 -- 3,256
Prepaid expenses and other...... 791 -- 791
--------- ------------ ----------
Total current assets....... 22,630 -- 22,630
--------- ------------ ----------
PROPERTY AND EQUIPMENT:
Oil and natural gas properties..... 433,103 329,090(A) 762,193
Land............................... 478 -- 478
Equipment.......................... 4,864 -- 4,864
--------- ------------ ----------
438,445 329,090 767,535
Less accumulated depletion and
depreciation.................... (192,256) (125,049)(C) (317,305)
--------- ------------ ----------
246,189 204,041 450,230
OTHER ASSETS, net.................. 842 -- 842
--------- ------------ ----------
$ 269,661 $ 204,041 $473,702
========= ============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................ $ 7,845 -- $ 7,845
Revenue and royalties payable... 4,543 -- 4,543
Accrued liabilities............. 21,149 -- 21,149
Current maturities of long-term
debt.......................... 122 -- 122
--------- ------------ ----------
Total current
liabilities................ 33,659 -- 33,659
--------- ------------ ----------
LONG-TERM DEBT..................... 124,951 $ 42,500(B) 167,451
OTHER LIABILITIES.................. -- 2,771(A) 2,771
COMMITMENTS AND CONTINGENCIES...... -- -- --
DEFERRED TAX LIABILITIES........... -- 52,702(A) 20,282
(32,420) (C)
LITIGATION LIABILITIES............. 6,205 -- 6,205
STOCKHOLDERS' EQUITY:
Preferred stock................. -- 135,000(A) 135,000
Common stock.................... 337 121(A) 458
Additional paid-in capital...... 172,164 95,996(A) 268,160
Accumulated earnings
(deficit)..................... (67,033) (92,629) (159,662)
Unamortized deferred
compensation.................. (321) -- (321)
--------- ------------ ----------
105,147 138,488 243,635
Treasury stock.................. (301) -- (301)
--------- ------------ ----------
Total stockholders'
equity..................... 104,846 138,488 243,334
--------- ------------ ----------
$ 269,661 $ 204,041 $473,702
========= ============ ==========
P-2
PRO FORMA STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA
THREE MONTHS ENDED MARCH 31, 1998 THREE MONTHS
---------------------------------- PRO ENDED
LOPI SWEPI FORMA MARCH 31,
TMRC PROPERTIES PROPERTIES ADJUSTMENTS 1998
-------- ---------- ---------- ----------- ------------
REVENUES:
Oil and natural gas............. $ 11,766 $ 14,335 $ 2,804 -- $ 28,905
Interest and other.............. 131 -- -- -- 131
-------- ---------- ---------- ----------- ------------
11,897 14,335 2,804 -- 29,036
COSTS AND EXPENSES:
Oil and natural gas operating... 1,978 4,638 291 -- 6,907
Depletion and depreciation...... 6,259 -- -- $ 18,058(D) 24,317
General and administrative...... 1,977 -- -- -- (E) 1,977
Interest........................ 2,332 -- -- 790(F) 3,122
Impairment of long-lived
assets........................ 40,278 -- -- 106,991(C) 147,269
-------- ---------- ---------- ----------- ------------
52,824 4,638 291 125,839 183,592
-------- ---------- ---------- ----------- ------------
INCOME (LOSS) BEFORE INCOME TAXES.... (40,927) 9,697 2,513 (125,839) (154,556)
NET TAX EXPENSE (BENEFIT)............ -- -- -- (32,420)(C) (32,420)
-------- ---------- ---------- ----------- ------------
NET INCOME (LOSS).................... (40,927) 9,697 2,513 (93,419) (122,136)
DIVIDEND REQUIREMENT ON PREFERRED
STOCK.............................. -- -- -- (1,350)(G) (1,350)
-------- ---------- ---------- ----------- ------------
NET INCOME (LOSS) APPLICABLE TO
COMMON SHAREHOLDERS................ $(40,927) $ 9,697 $ 2,513 $ (94,769)(E) $ (123,486)
======== ========== ========== =========== ============
NET INCOME (LOSS) PER SHARE:
Basic........................... $ (1.22) (E) $ (2.71)
======== ============
Diluted......................... $ (1.22) (E) $ (2.71)
======== ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES:
Outstanding..................... 33,451 12,082(A) 45,533
======== =========== ============
Assuming dilution............... 33,451 12,082(H) 45,533
======== =========== ============
P-3
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, 1997 PRO FORMA
------------------------------------- PRO YEAR ENDED
LOPI SWEPI FORMA DECEMBER 31,
TMRC PROPERTIES PROPERTIES ADJUSTMENTS 1997
---------- ---------- ---------- ----------- ------------
REVENUES:
Oil and natural gas............. $ 57,640 $ 85,334 $ 15,694 -- $ 158,668
Interest and other.............. 693 -- -- -- 693
---------- ---------- ---------- ----------- ------------
58,333 85,334 15,694 -- 159,361
---------- ---------- ---------- ----------- ------------
COSTS AND EXPENSES:
Oil and natural gas operating... 7,845 23,309 1,979 -- 33,133
Depletion and depreciation...... 26,337 -- -- $ 59,554(D) 85,891
General and administrative...... 7,192 -- -- -- (E) 7,192
Interest........................ 5,149 -- -- 3,161(F) 8,310
Impairment of long-lived
assets........................ 24,141 -- -- 62,309(C) 86,450
Merger expenses................. 9,998 -- -- -- 9,998
Litigation expenses and loss
provision..................... 6,205 -- -- -- 6,205
---------- ---------- ---------- ----------- ------------
86,867 23,309 1,979 125,024 237,179
---------- ---------- ---------- ----------- ------------
INCOME (LOSS) BEFORE INCOME TAXES.... (28,534) 62,025 13,715 (125,024) (77,818)
NET TAX EXPENSE (BENEFIT)............ 7 -- -- (27,207)(C) (27,200)
---------- ---------- ---------- ----------- ------------
NET INCOME (LOSS).................... (28,541) 62,025 13,715 (97,817) (50,618)
DIVIDEND REQUIREMENT ON PREFERRED
STOCK.............................. -- -- -- (5,400)(G) (5,400)
---------- ---------- ---------- ----------- ------------
NET INCOME (LOSS) APPLICABLE TO
COMMON SHAREHOLDERS................ $ (28,541) $ 62,025 $ 13,715 $ (103,217)(E) $ (56,018)
========== ========== ========== =========== ============
NET INCOME (LOSS) PER SHARE:
Basic........................... $ (0.85) (E) $ (1.23)
========== ============
Diluted......................... $ (0.85) (E) $ (1.23)
========== ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES:
Outstanding..................... 33,383 12,082(A) 45,465
========== =========== ============
Assuming dilution............... 33,383 12,082(H) 45,465
========== =========== ============
P-4
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
(A) To record the purchase price of $329.1 million in connection with the
merger with LOPI and the acquisition of the SWEPI Properties, consisting of ($
in millions, except per share and stated value data):
$42.5 Cash
135.0 Issuance of Preferred Stock ($135 million stated value)
96.1 Issuance of 12,082,030 shares of Common Stock at $7.96 per share
2.8 Assumption of certain liabilities
52.7 Deferred income taxes related to acquired properties
- ---------
$329.1
=========
Note: The $7.96 per share value of Common Stock is based on the
average closing price of the Common Stock on the NYSE several
days before and after execution of the LOPI Agreement.
(B) To record $42.5 million of additional borrowings to finance the cash
consideration paid for the SWEPI Properties.
(C) To record adjustment relating to the impairment charge and deferred
income taxes related to the Shell Properties.
(D) To adjust depreciation and depletion expense related to the
acquisition of the Shell Properties.
(E) The unaudited pro forma statements of operations do not include any
adjustments relating to additional general and administrative expenses that
would have been incurred by the Company during the year ended December 31, 1997
and the three months ended March 31, 1998, had the Shell Transactions been
consummated on January 1, 1997. The Company currently estimates that general and
administrative expenses will increase annually by approximately $3.5 million to
$4.0 million following consummation of the Shell Transactions.
(F) To record interest on additional borrowings of $42.5 million to
finance the cash consideration paid for the SWEPI Properties.
(G) To accrue a 4% dividend on the $135 million stated value of the
Preferred Stock.
(H) Since the unaudited pro forma statements of operations indicate a net
loss, conversion of the Preferred Stock is deemed to be antidilutive and is not
considered in the earnings per share calculation. In the event the Company would
have had pro forma net income, the Common Stock to be issued upon conversion of
the Preferred Stock would have been included in the calculation of diluted
earnings per share and would have resulted in a significant reduction in pro
forma diluted earnings per share and pro forma basic earnings per share.
P-5
PRO FORMA COMBINED SUPPLEMENTAL OIL AND GAS RESERVE AND STANDARDIZED MEASURE
INFORMATION
The following is a summary of pro forma quantities of proved reserves
prepared by adjusting historical quantities for the effects of the merger with
LOPI and the acquisition of the SWEPI Properties.
PRO FORMA
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED
------------------------------ PRO FORMA DECEMBER 31,
TMRC LOPI SWEPI ADJUSTMENTS(1) 1997
-------- -------- -------- -------------- ------------
Pro Forma Estimated Quantities of
Proved Reserves
Oil (MBbls)
BALANCE AT DECEMBER 31, 1996......... 9,416 17,317 860 -- 27,593
Production......................... (914) (2,443) (69) -- (3,426)
Revisions of previous estimates.... (761) (3,694) 38 -- (4,417)
Purchase of reserves............... -- 343 -- -- 343
Extensions, discoveries and
improved recovery............... 1,990 788 -- -- 2,778
Pro forma adjustment............... -- -- -- (4,309) (4,309)
-------- -------- -------- -------------- ------------
BALANCE AT DECEMBER 31, 1997......... 9,731 12,311 829 (4,309) 18,562
Natural Gas (MMcf)
BALANCE AT DECEMBER 31, 1996......... 107,406 103,872 57,543 -- 268,821
Production......................... (14,603) (14,032) (4,620) -- (33,255)
Revisions of previous estimates.... (13,862) (12,875) (31,665) -- (58,402)
Purchase of reserves............... -- 63 -- -- 63
Extensions, discoveries and
improved recovery............... 31,844 4,438 1,777 -- 38,059
Pro forma adjustment............... -- -- -- (20,952) (20,952)
-------- -------- -------- -------------- ------------
BALANCE AT DECEMBER 31, 1997......... 110,785 81,466 23,035 (20,952) 194,334
Pro Forma Estimated Quantities of
Proved Developed Reserves
Oil (MBbls)........................ 5,305 10,816 829 (4,506) 12,444
Natural Gas (MMcf)................. 81,500 76,776 23,035 (30,854) 150,456
- ------------
(1) See footnote (1) on page P-8.
P-6
The following is a summary of pro forma standardized measure of discounted
future net cash flows related to the Company's pro forma proved oil, natural gas
and natural gas liquids reserves and includes the effects of the merger with
LOPI and the acquisition of the SWEPI Properties. The additions to proved
reserves from new discoveries and extension could vary significantly from year
to year. Additionally, the impact of changes to reflect current prices and costs
of reserves proved in prior years could be significant. Accordingly, the
information presented below should neither be viewed as an estimate of the fair
value of the Company's oil and natural gas properties following the Shell
Transactions nor should it be considered indicative of any trends.
PRO FORMA
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED
-------------------------------- PRO FORMA DECEMBER 31,
TMRC LOPI SWEPI ADJUSTMENTS(1) 1997
--------- --------- -------- --------------- ------------
(IN THOUSANDS)
Pro Forma Standardized Measure of
Discounted Future Net Cash Flows
Future cash flows.................... $ 451,157 $ 415,124 $ 73,736 $ (97,928) $842,089
Future production and development
costs.............................. (109,381) (180,980) (18,069) 85,501 (222,929)
--------- --------- -------- --------------- ------------
Future net cash flows................ 341,776 234,144 55,667 (12,427) 619,160
Discount to present value at 10%
percent annual rate................ (127,859) (67,806) (15,223) 10,397 (200,491)
--------- --------- -------- --------------- ------------
Standardized measure (before income
taxes) of future net cash flows.... $ 213,917 $ 166,338 $ 40,444 $ (2,030) $418,669
========= ========= ======== =============== ============
Pro Forma Changes in Standardized
Measure of Discounted Future Net
Cash Flows
BALANCE AT BEGINNING OF
PERIOD............................. $ 394,507 $ 437,018 $125,944 $ -- $957,469
Sale of oil and natural gas, net of
production costs................ (49,796) (62,025) (13,715) -- (125,536)
Changes in prices and production
costs........................... (165,406) (195,318) (52,021) -- (412,745)
Purchases of reserves in place..... -- 2,282 -- -- 2,282
Revisions of previous quantity
estimates....................... (28,574) (41,377) (41,245) -- (111,196)
Current year discoveries, extension
and improved recovery........... 50,274 11,222 2,294 -- 63,790
Changes in estimated future
development costs............... (3,564) -- -- -- (3,564)
Development cost incurred during
the period...................... 27,666 13,602 3,584 -- 44,852
Accretion of discount.............. 39,451 43,702 12,594 -- 95,747
Changes in production rates
(timing) and other.............. (50,641) (42,768) 3,009 -- (90,400)
Pro forma adjustment............... -- -- -- (2,030) (2,030)
--------- --------- -------- --------------- ------------
Net change......................... (180,590) (270,680) (85,500) (2,030) (538,800)
--------- --------- -------- --------------- ------------
BALANCE AT END OF PERIOD........... $ 213,917 $ 166,338 $ 40,444 $ (2,030) $418,669
========= ========= ======== =============== ============
(FOOTNOTES ON FOLLOWING PAGE)
P-7
- ------------
(1) The differences in the estimated proved reserves of the Shell Properties, as
reflected in the Statements of Revenues and Direct Operating Expenses for
each of the LOPI Properties and the SWEPI Properties (the "Shell Financial
Statements") and as estimated by T. J. Smith (the Company's independent
reservoir engineers for the LOPI and SWEPI Properties) relate to, among
other factors, differences between Shell and the Company in depletion and
development strategies and related expenditures for proved developed
reserves. Other reserve differences relate to differing assumptions as to
decline curves, volumetric analysis and other engineering judgments inherent
in the reserve estimating process.
The reserve estimates reflected in the Shell Financial Statements assume
$199 million in future production and development costs for the Shell
Properties while T. J. Smith's estimates assume only $114 million of such
costs will be expended by the Company for such properties. Approximately
one-half of the difference in estimated future production and development
costs relates to (i) differences in the amount of expenditures for proved
developed non-producing reserves, which may be produced from existing wells
but require additional expenditures for recompletion efforts and related
operating expenses, and (ii) differences in estimated production costs
related to reserves that T.J. Smith's estimates do not assume will be
produced. Shell's expenditure estimates include amounts that, absent the
Shell Transactions, it anticipated making for future production and
development of these reserves. Because of the Company's higher cost of
capital and focus on larger exploration prospects, the Company does not
currently plan to make such expenditures and produce such reserves. Rather,
the Company currently intends to concentrate its expenditures with respect
to the Shell Properties on an accelerated exploration and development
program that is focused on the unproved properties that the Company believes
provide higher potential ultimate returns than the lower risk and lower
volume proved developed properties. The remaining difference in estimated
expenditures relates primarily to differences in estimated plugging and
abandonment costs that will be incurred at the conclusion of operation of
these fields due to differing assumptions between Shell and the Company on
the plan of abandonment or disposition of the properties prior to
abandonment.
P-8
INDEX TO EXHIBITS
Number Exhibit
- ------------------------ ------------------------------------------------------------------------------------------
2.1 -- Agreement and Plan of Merger dated as of March 27, 1998, by and among The Meridian
Resource Corporation, LOPI Acquisition Corp., Shell Louisiana Onshore Properties Inc. and
Louisiana Onshore Properties Inc. Incorporated by reference from the Company's Annual
Report on Form 10-K for the year ended December 31, 1997. (Pursuant to S-K Item 601(b)(2),
the Company has not included in the filing Exhibit D (LOPI financial statements), Exhibit
1 (preliminary TMR financial statements) or Schedule I or II (which relate to the
representations and warranties of the parties). The Company agrees to furnish
supplementally any omitted schedule to the Commission upon request.
2.2 -- Purchase and Sale Agreement dated effective October 1, 1997, by and between The Meridian
Resource Corporation and Shell Western E&P Inc. (Pursuant to S-K Item 601(b)(2), the
Company has not included in the filing Exhibits which relate to the representations and
warranties of the parties and certain ancillary documents to the agreement). The Company
agrees to furnish supplementally any omitted schedule to the Commission upon request.
3.1 -- Certificate of Designation for Preferred Stock dated June 30, 1998.
4.1 -- Stock Rights and Restrictions Agreement dated as of June 30, 1998 by and between The
Meridian Resource Corporation and Shell Louisiana Onshore Properties Inc.
4.2 -- Registration Rights Agreement dated June 30, 1998 by and between The Meridian Resource
Corporation and Shell Louisiana Onshore Properties Inc.
10.1 -- Amended and Restated Credit Agreement dated May 22, 1998, among the Company, the several
banks and financial institutions and other entities from time to time parties thereto (the
"Lenders"), The Chase Manhattan Bank, as administrative agent for the Lenders, Bankers
Trust Company, as syndication agent, Chase Securities Inc., as advisor to the Company,
Chase Securities Inc., B. T. Alex. Brown Incorporated, Toronto Dominion (Texas), Inc. and
Credit Lyonnais New York Branch as co-arrangers, and Toronto Dominion (Texas), Inc. and
Credit Lyonnais New York Branch, as co-documentation agents.
10.2 -- Second Amended and Restated Guarantee dated June 30, 1998, between the Guarantors
signatory thereto and The Chase Manhattan Bank, as Administrative Agent for the Lenders.
10.3 -- Amended and Restated Pledge Agreement, dated May 22, 1998, between the Company and The
Chase Manhattan Bank, as Administrative Agent
10.4 First Amendment to Amended and Restated Pledge Agreement dated June 30, 1998
23.1 -- Consent of PricewaterhouseCoopers LLP
99.1 -- Press Release