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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
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: 000-21843
TITAN EXPLORATION, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 75-2671582
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 WEST TEXAS, SUITE 500
MIDLAND, TEXAS 79701
(Address of principal executive offices) (Zip Code)
(915) 682-6612
(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
--- ---
As of October 31, 1997, 33,945,798 shares of common stock, par value $.01 per
share, of Titan Exploration, Inc. were outstanding.
TABLE OF CONTENTS
Page
----
Forward Looking Information and Risk Factors...................... 1
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1997 and
December 31, 1996..................................... 2
Consolidated Statements of Operations for the Three and
Nine Months Ended September 30, 1997 and 1996......... 3
Consolidated Statements of Cash Flows for the Three and
Nine Months Ended September 30, 1997 and 1996......... 4
Notes to Consolidated Financial Statements................ 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 8
PART II -- OTHER INFORMATION
Item 5. Other Information......................................... 13
Item 6. Exhibits and Reports on Form 8-K.......................... 13
Signatures................................................ 14
-i-
TITAN EXPLORATION, INC.
FORWARD LOOKING INFORMATION AND RISK FACTORS
Titan Exploration, Inc. (the "Company") or its representatives may make
forward looking statements, oral or written, including statements in this
report's Management's Discussion and Analysis of Financial Condition and Results
of Operations, press releases and filings with the Securities and Exchange
Commission, regarding estimated future net revenues from oil and natural gas
reserves and the present value thereof, planned capital expenditures (including
the amount and nature thereof), increases in oil and gas production, the number
of wells the Company anticipates drilling through 1998 and the Company's
financial position, business strategy and other plans and objectives for future
operations. Although the Company believes that the expectations reflected in
these forward looking statements are reasonable, there can be no assurance that
the actual results or developments anticipated by the Company will be realized
or, even if substantially realized, that they will have the expected effects on
its business or operations. Among the factors that could cause actual results
to differ materially from the Company's expectations are general economic
conditions, inherent uncertainties in interpreting engineering data, operating
hazards, delays or cancellations of drilling operations for a variety of
reasons, competition, fluctuations in oil and gas prices, government regulations
and other factors set forth in the Company's Annual Report on Form 10-K. All
subsequent oral and written forward looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by these factors. The Company assumes no obligation to update any of
these statements.
-1-
Item 1. Financial Statements
TITAN EXPLORATION, INC.
Consolidated Balance Sheets
(in thousands)
ASSETS
September 30, December 31,
1997 1996
------------- ------------
(unaudited)
Current assets:
Cash and cash equivalents $ 1,146 $ 6,290
Accounts receivable:
Oil and gas 7,766 8,533
Other 2,225 931
Prepaid expenses and other current assets 747 266
-------- --------
Total current assets 11,884 16,020
-------- --------
Property, plant and equipment, at cost:
Oil and gas properties, using the successful
efforts method of accounting:
Proved properties 228,250 194,699
Unproved properties 10,525 987
Accumulated depletion, depreciation
and amortization
(21,263) (5,624)
-------- --------
217,512 190,062
Other property and equipment, net 921 277
-------- --------
218,433 190,339
Other assets. net of accumulated amortization
of $393 in 1997 and $203 in 1996 721 820
-------- --------
$231,038 $207,179
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities:
Trade $5,178 $7,112
Other 4,436 784
-------- --------
Total current liabilities 9,614 7,896
-------- --------
Long-term debt 14,700 6,500
Other liabilities 1,805 1,772
Deferred income tax payable 7,359 3,825
Stockholders' equity:
Preferred Stock, $.01 par value,
10,000 shares authorized;
none issued and outstanding -- --
Common Stock, $.01 par value,
60,000 shares authorized;
33,945 shares issued and
outstanding at September 30, 1997 339 339
Additional paid-in capital 203,433 203,411
Deferred compensation (11,371) (15,161)
Retained earnings (deficit) 5,159 (1,403)
-------- --------
Total stockholders' equity 197,560 187,186
-------- --------
$231,038 $207,179
======== ========
See accompanying notes to consolidated financial statements.
-2-
TITAN EXPLORATION, INC.
Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- --------------------
1997 1996 1997 1996
------- ------- -------- -------
Revenues:
Oil and gas sales $17,843 $ 3,583 $52,011 $10,237
Other 28 4 99 140
------- ------- -------- -------
Total revenues 17,871 3,587 52,110 10,377
------- ------- -------- -------
Expenses:
Oil and gas production 4,659 1,348 16,627 4,339
General and administrative 1,294 494 3,637 1,452
Amortization of stock option awards 1,263 192 3,790 576
Exploration and abandonment 586 29 1,342 110
Depletion, depreciation
and amortization 5,828 509 15,927 2,269
------- ------- -------- -------
Total expenses 13,630 2,572 41,323 8,746
------- ------- -------- -------
Operating income 4,241 1,015 10,787 1,631
------- ------- -------- -------
Other income (expense):
Interest income 37 91 134 336
Interest expense (339) (468) (825) (1,179)
------- ------- -------- -------
Net income before income taxes 3,939 638 10,096 788
Income tax expense 1,379 2,998 3,534 2,998
------- ------- -------- -------
Net income (loss) $ 2,560 $(2,360) $ 6,562 $(2,210)
======= ======= ======= =======
Net income (loss) per share $ 0.07 $ (0.11) $ 0.18 $ (0.10)
======= ======= ======= =======
Weighted average common shares
outstanding 35,763 21,796 35,714 21,780
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
-3-
TITAN EXPLORATION, INC.
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1997 1996 1997 1996
-------- -------- -------- --------
Cash flows from operating activities:
Net income $ 2,560 $ (2,360) $ 6,562 $ (2,210)
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depletion, depreciation and amortization 5,828 509 15,927 2,269
Amortization of stock option awards 1,263 192 3,790 576
Dry holes and abandonments - 3 - 21
Deferred income taxes 1,379 2,998 3,534 2,998
Changes in assets and liabilities:
Accounts receivable (771) 71 (527) (833)
Prepaid expenses and other current assets (262) (21) (481) 28
Accounts payable and accrued liabilities (1,829) 2,200 1,751 2,794
-------- -------- -------- --------
Total adjustments 5,608 5,952 23,994 7,853
-------- -------- -------- --------
Net cash provided by operating
activities 8,168 3,592 30,556 5,643
-------- -------- -------- --------
Cash flows from investing activities:
Redemption of short-term investment - - - 5,000
Additions to oil and gas properties (12,158) (13,305) (43,089) (17,590)
Other (226) (121) (818) (163)
-------- -------- -------- --------
Net cash used in investing activities (12,384) (13,426) (43,907) (12,753)
-------- -------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 24,350 8,000 33,850 8,000
Repayments of long-term debt (19,650) - (25,650) -
Capital contributions - 3,700 - 3,700
Proceeds from exercise of employee
stock options 7 - 7 -
-------- -------- -------- --------
Net cash provided by financing
activities 4,707 11,700 8,207 11,700
-------- -------- -------- --------
Net increase (decrease) in cash and
cash equivalents 491 1,866 (5,144) 4,590
Cash and cash equivalents, beginning or period 655 8,937 6,290 6,213
-------- -------- -------- --------
Cash and cash equivalents, end of period $ 1,146 $ 10,803 $ 1,146 $ 10,803
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
-4-
TITAN EXPLORATION, INC.
Notes to Consolidated Financial Statements
September 30, 1997 and 1996
(unaudited)
(1) BASIS OF PRESENTATION
In the opinion of management, the unaudited consolidated financial
statements of Titan Exploration, Inc. (the "Company") as of September 30, 1997
and for the three and nine months ended September 30, 1997 and 1996 include all
adjustments and accruals, consisting only of normal recurring accrual
adjustments, which are necessary for a fair presentation of the results for the
interim period. These interim results are not necessarily indicative of results
for a full year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted in this Form 10-Q pursuant to the rules and
regulations of the Securities and Exchange Commission. These consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and notes thereto included in the Company's 1996 Form 10-K.
The Company's predecessor was classified as a partnership for federal income
tax purposes. Therefore, no income taxes were paid or accrued prior to its
conversion from a limited partnership to a corporation on September 30, 1996.
(2) LONG-TERM DEBT
On October 31, 1996, the Company entered into a credit agreement (the
"Credit Agreement") which established a four year revolving credit facility, up
to the maximum amount of $250 million with an initial borrowing base of $165
million. All outstanding amounts are due and payable in full on January 1,
2001. The borrowing base is subject to redetermination annually by the lenders
based on certain proved oil and gas reserves and other assets of the Company.
Proceeds of the credit facility were utilized to fund the 1996 Acquisition,
development of oil and gas reserves and for general corporate requirements.
In June 1997, the borrowing base was redetermined by the lenders and reset
at $165 million.
Effective April 16, 1997, the Company entered into an unsecured credit
agreement which established a one year revolving credit facility, up to the
maximum amount of $5 million. All outstanding amounts are due and payable in
full on or before March 6, 1998. Proceeds of the credit facility are utilized
to fund short-term needs (less than thirty days). Outstanding amounts pursuant
to the Unsecured Credit Agreement are classified as long-term debt as the
Company intends to refinance them on a long-term basis either through continued
short-term borrowing or available credit facilities.
(3) STOCKHOLDERS' EQUITY
In May 1997, the Company announced a plan to repurchase up to $25 million of
the Company's common stock. The repurchases will be made periodically,
depending on market conditions, and will be funded with cash flow from
operations and, as necessary, borrowings under the Credit Agreement. At
September 30, 1997, the Company had not repurchased any shares of its common
stock.
-5-
(4) DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilizes various swap contracts to hedge the effect of price
changes on future oil and gas production. The following table sets forth the
future volumes hedged by year and the weighted average price to be received
based upon the fixed price of the individual swap contracts outstanding at
September 30, 1997:
Oil Gas
Volume Volume Price per
Year (MBbls) (MMcfs) Mcf/Bbl
- --------------------- ------- ------- ---------
Oil production:
1997 274 $21.36
Gas production:
1997 2,140 $2.69
1998 4,500 2.40
Subsequent to September 30, 1997, the Company entered into additional hedge
positions for 1997 and 1998 oil production and 1998 gas production. The
additional oil swap contract has provided the Company with hedge positions for
an additional 61 MBbls of oil at a price of $23.36 per Bbl for the three month
period ending December 31, 1997 and 31 MBbls of oil at a price of $23.36 per Bbl
for the one month period ending January 31, 1998. This contract may be extended
at the counter party's option for an additional six month period at the same
price. The additional gas swap contract has provided the Company with a hedge
position for an additional 300 MMcfs of gas at the price of $2.12 per Mcf for
the month of April 1998.
(5) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share". SFAS No. 128 replaced primary earnings per share ("EPS") with a
newly defined basic EPS and modifies the computation of diluted EPS. SFAS No.
128 is effective for periods ending after December 15, 1997. The impact of the
adoption of SFAS No. 128 on the Company's earnings per share is expected to be
immaterial.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
which requires that all items required to be recognized under accounting
standards as components of comprehensive income be reported as a part of the
basic financial statements. SFAS No. 130 is effective for both interim and
annual periods beginning after December 15, 1997. The Company plans to adopt
SFAS No. 130 for the period ended March 31, 1998 and does not expect SFAS No.
130 to have a material effect on reported results.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" which establishes standards for reporting
information about operating segments in annual financial statements and requires
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. SFAS No. 131
is effective for financial statements for periods beginning after December 15,
1997 but the statement need not be applied to interim financial statements in
the initial year of application. The Company does not expect SFAS No. 131 to
materially affect the Company's reporting practices.
-6-
(6) SUBSEQUENT EVENTS
The Company and Offshore Energy Development Corporation, a Delaware
corporation ("OEDC"), have entered into an agreement by which the Company will
acquire all the outstanding OEDC common stock. OEDC is an independent energy
company that focuses on the acquisition, exploration, development and production
of natural gas in the Gulf of Mexico and on natural gas gathering, processing
and marketing activities. OEDC is listed on the Nasdaq National Market under
the symbol "OEDC." Based on estimates of OEDC's outside engineers, OEDC's total
proved reserves were 5.5 million BOE at December 31, 1996. The Company will
issue approximately 5.5 million shares of the Company's common stock equal to
16.2% of the total Company's common stock currently outstanding. The
transaction is subject to various conditions, including approval by stockholders
of both companies. Special meetings of the Company and OEDC stockholders have
been scheduled for December 12, 1997 to consider the transaction.
The Company and Carrollton Resources, L.L.C., a Louisiana limited liability
company ("Carrollton"), have entered into an agreement by which the Company will
acquire all the outstanding membership interests of Carrollton. Carrollton is a
small independent energy company engaged in the exploration, development and
acquisition of onshore oil and gas properties located primarily in the Gulf
Coast region, making a good fit with OEDC's area of operations. Based on
estimates of Carrollton's outside engineers, Carrollton's total proved reserves
were 2.8 million BOE at June 30, 1997. The Company will issue approximately
900,000 shares of the Company's common stock equal to 2.7% of the total
Company's common stock currently outstanding. The Company anticipates closing
the transaction, which is subject to various conditions, in mid-December 1997.
On November 7, 1997, the Company and Pioneer Natural Resources Company
("Pioneer") entered into an agreement by which the Company will acquire from
Pioneer certain West Texas producing properties. The Company will pay
approximately $55 million, subject to adjustments, and anticipates closing the
transaction, subject to various conditions, in mid-December 1997. The Company
will fund the acquisition with its existing credit facilities.
-7-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Titan Exploration, Inc. is an independent energy company engaged in the
exploration, development and acquisition of oil and gas properties. The
Company's strategy is to grow reserves, production and net income per share
through (i) the acquisition of producing properties that provide development and
exploratory drilling potential, (ii) the exploitation and development of its
reserve base, (iii) the exploration for oil and gas reserves, and (iv) the
implementation of a low operating and overhead structure. The Company has grown
rapidly through the acquisition and exploitation of oil and gas properties,
consummating the acquisition of a concentrated group of Permian Basin producing
oil and gas properties from a large independent company for approximately $40.6
million (the "1995 Acquisition") and additional Permian Basin producing
properties from a major integrated company for approximately $135.7 million (the
"1996 Acquisition").
The Company's growth resulting from acquisitions has impacted its reported
financial results in a number of ways. Acquired properties frequently may not
have received focused attention prior to sale. After acquisition, certain of
these properties require maintenance, workovers, recompletions and other
remedial activity not constituting capital expenditures, which initially
increase lease operating expenses. The Company may dispose of certain of the
properties if it determines they are outside the Company's strategic focus. The
increased production and revenue resulting from the rapid growth of the Company
has required it to recruit and develop operating, accounting and administrative
personnel compatible with its increased size. As a result, the Company
anticipates a corresponding increase in its general and administrative expense.
The Company believes that with its current inventory of drilling locations and
the anticipated additional staff, it will be well positioned to follow a
balanced program of exploration and exploitation activities to complement its
acquisition efforts.
OPERATING DATA
The following table sets forth the Company's historical operating data for
the periods indicated.
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ----------------------
1997 1996 1997 1996
---------- -------- --------- --------
Production:
Oil (MBbls) 501 132 1,396 388
Gas (MMcf) 5,639 1,027 15,938 2,725
Total (MBOE) 1,441 303 4,052 842
Average Sales Price Per Unit (1):
Oil (per Bbl) $ 17.48 $ 17.42 $ 18.64 $ 17.25
Gas (per Mcf) 1.61 1.25 1.63 1.30
BOE 12.38 11.83 12.84 12.16
Expenses Per BOE:
Production costs, including
production taxes $ 3.23 $ 4.45 $ 4.10 $ 5.15
General and administrative 0.90 1.63 0.90 1.72
Depletion, depreciation and
amortization 4.04 1.68 3.93 2.69
- ---------------------------------
(1) Reflects results of hedging activities.
-8
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1996
Oil and Gas Revenues. Revenues from oil and gas operations totaled $17.8
million for the three months ended September 30, 1997 compared to $3.6 million
for the three months ended September 30, 1996. The increase is primarily
attributable to the 1996 Acquisition, the increase in the average price received
for gas, and continued exploitation of the Company's proved properties. Of
total oil and gas revenues for the three months ended September 30, 1997,
revenues of $12.3 million (69%) are attributable to the properties acquired in
the 1996 Acquisition. The average gas price received increased 29% from $1.25
per Mcf for the three months ended September 30, 1996 compared to $1.61 per Mcf
for the three months ended September 30, 1997.
Production Costs. Oil and gas production costs, including production taxes,
were $4.7 million ($3.23 per BOE) for the three months ended September 30, 1997
compared to $1.3 million ($4.45 per BOE) for the three months ended September
30, 1996. The increase in the absolute amount of production costs was primarily
attributable to production costs associated with the properties acquired in the
1996 Acquisition which totaled $2.6 million ($2.67 per BOE) for the three months
ended September 30, 1997
Depletion, Depreciation and Amortization Expense. Depletion, depreciation and
amortization expense was $5.8 million ($4.04 per BOE) for the three months ended
September 30, 1997 compared to $510,000 ($1.68 per BOE) for the three months
ended September 30, 1996. The increase per BOE is due to higher amortization
rates on the properties acquired in the 1996 Acquisition compared to the
Company's other properties.
General and Administrative Expense. General and administrative expense was $1.3
million ($.90 per BOE) for the three months ended September 30, 1997 compared to
$494,000 ($1.63 per BOE) for the three months ended September 30, 1996. The
increase in the absolute amount is due to the additional general and
administrative expenses which are necessary to administer the properties
acquired in the 1996 Acquisition. The 45% decrease in general and
administrative expenses per BOE for 1997 as compared to 1996 is due to the
spreading of the Company's general and administrative expenses over a larger
production base and to the Company's efforts to maintain a low overhead
structure.
Interest Expense. Interest expense was $339,000 for the three months ended
September 30, 1997 compared to $468,000 for the three months ended September 30,
1996. The 28% decrease is primarily due to the application of proceeds from the
initial offering of common stock to the indebtedness incurred by the Company to
fund the 1995 Acquisition and 1996 Acquisition.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1996
Oil and Gas Revenues. Revenues from oil and gas operations totaled $52.0
million for the nine months ended September 30, 1997 compared to $10.2 million
for the nine months ended September 30, 1996. The increase is primarily
attributable to the 1996 Acquisition, the increase in the average price received
for both oil and gas, and continued exploitation of the Company's proved
properties. Of total oil and gas revenues for the nine months ended September
30, 1997, revenues of $36.5 million (70%) are attributable to the properties
acquired in the 1996 Acquisition. The average oil price received increased 8%
from $17.25 to $18.64 per Bbl and the average gas price received increased 25%
from $1.30 per Mcf for the nine months ended September 30, 1996 compared to
$1.63 per Mcf for the nine months ended September 30, 1997.
Production Costs. Oil and gas production costs, including production taxes,
were $16.6 million ($4.10 per BOE) for the nine months ended September 30, 1997
compared to $4.3 million ($5.15 per BOE) for the nine months ended September 30,
1996. The increase in the absolute amount of production costs was primarily
attributable to production costs associated with the properties acquired in the
1996 Acquisition which totaled $10.2 million ($3.65 per BOE) for the nine months
ended September 30, 1997
-9-
Depletion, Depreciation and Amortization Expense. Depletion, depreciation and
amortization expense was $15.9 million ($3.93 per BOE) for the nine months ended
September 30, 1997 compared to $2.3 million ($2.69 per BOE) for the nine months
ended September 30, 1996. The increase per BOE is due to higher amortization
rates on the properties acquired in the 1996 Acquisition compared to the
Company's other properties.
General and Administrative Expense. General and administrative expense was $3.6
million ($.90 per BOE) for the nine months ended September 30, 1997 compared to
$1.5 million ($1.72 per BOE) for the nine months ended September 30, 1996. The
increase in the absolute amount is due to the additional general and
administrative expenses which are necessary to administer the properties
acquired in the 1996 Acquisition. The 48% decrease in general and
administrative expenses per BOE for 1997 as compared to 1996 is due to the
spreading of the Company's general and administrative expenses over a larger
production base and to the Company's efforts to maintain a low overhead
structure.
Interest Expense. Interest expense was $825,000 for the nine months ended
September 30, 1997 compared to $1.2 million for the nine months ended September
30, 1996. The 31% decrease is primarily due to the application of proceeds from
the initial offering of common stock to the indebtedness incurred by the Company
to fund the 1995 Acquisition and 1996 Acquisition.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of capital have been its initial
capitalization, private equity sales, bank financing, cash flow from operations
and the Company's initial public offering. The 1995 Acquisition was funded with
cash from the Company's initial capitalization, additional private equity sales
and bank financing. The 1996 Acquisition was principally funded with bank
financing, which was repaid with the proceeds from the Company's initial public
offering.
On November 7, 1997, the Company and Pioneer Natural Resources Company
("Pioneer") entered into an agreement by which the Company will acquire from
Pioneer certain West Texas producing properties. The Company will pay
approximately $55 million, subject to adjustments, and anticipates closing the
transaction, subject to various conditions, in mid-December 1997. The Company
will fund the acquisition with its existing credit facilities.
The Company requires capital primarily for the exploration, development and
acquisition of oil and gas properties, the repayment of indebtedness and general
working capital needs.
Capital Expenditures. Apart from the Company's expenditure for its planned
acquisition from Pioneer, the Company budgeted for 1997 approximately $27
million for the drilling and recompletion of approximately 26 oil and gas wells
and 45 workover projects on its proved properties and approximately $25.2
million for expenditures for geological and geophysical costs, drilling costs
and lease acquisition costs on its unproved properties.
Cash expenditures for additions to oil and gas properties were $43.1 million
for the nine months ended September 30, 1997. This includes $10.0 million for
the acquisition of oil and gas leases and $33.1 million for development and
exploratory drilling.
Capital Resources. The Company's primary capital resources are net cash
provided by operating activities and $153.5 million availability under the
Company's Credit Agreement.
The Company's acquisition from Pioneer, funded under these facilities, will
reduce availability by approximately $55 million, subject to adjustment of the
purchase price under the Company's agreement with Pioneer.
Net Cash Provided by Operating Activities. Net cash provided by operating
activities, before changes in operating assets and liabilities, was $29.8
million for the nine months ended September 30, 1997 compared to $3.7 million
for the nine months ended September 30, 1996. The increase was primarily
attributable to the cash flow generated by the 1996 Acquisition and from
continued exploitation of the Company's proved properties.
-10-
Credit Agreement. The Credit Agreement established a four year revolving credit
facility, up to the maximum amount of $250 million, subject to a borrowing base
to be determined annually by the lenders based on certain proved oil and gas
reserves and other assets of the Company. Initially, the borrowing base was
established at $165 million. To the extent that the borrowing base is less than
the aggregate principal amount of all outstanding loans and letters of credit
under the Credit Agreement, such deficiency must be cured by the Company ratably
within 180 days, by either prepaying a portion of the outstanding amounts under
the Credit Agreement or pledging additional collateral to the lenders. A
portion of the credit facility is available for the issuance of up to $15.0
million of letters of credit, of which $250,000 was outstanding at September 30,
1997.
In June 1997, the borrowing base was redetermined by the lenders and reset
at $165 million. The Company's outstanding long-term debt under the Credit
Agreement was $11.5 million at September 30, 1997.
All outstanding amounts under the Credit Agreement are due and payable in
full on January 1, 2001.
At the Company's option, borrowings under the Credit Agreement bear interest
at either the "Base Rate" (i.e., the higher of the applicable prime commercial
lending rate, or the federal funds rate plus .5% per annum) or the Eurodollar
rate, plus 1% to 1.50% per annum, depending on the level of the Company's
aggregate outstanding borrowings. In addition, the Company is committed to pay
quarterly in arrears a fee of .30% to .375% of the unused borrowing base.
The Credit Agreement contains certain covenants and restrictions that are
customary in the oil and gas industry. In addition, the line of credit is
secured by substantially all of the Company's oil and gas properties.
Liquidity and Working Capital. At September 30, 1997, the Company had $1.1
million of cash and cash equivalents as compared to $6.3 million at December 31,
1996. The Company's ratio of current assets to current liabilities was 1.24 at
September 30, 1997 compared to 2.03 at December 31, 1996. Due principally to a
reduction in cash as a result of an intentional change in the way the Company
manages its operating accounts, the Company's working capital decreased $5.8
million from $8.1 million at December 31, 1996 to $2.3 million at September 30,
1997. The Company expects working capital to increase during the remainder of
1997 due to anticipated lower levels of capital expenditures during the
remainder of 1997.
Unsecured Credit Agreement. Effective April 16, 1997, the Company entered into
a credit agreement (the "Unsecured Credit Agreement") with Texas Commerce Bank
National Association (the "Bank"), an affiliate of Chase Securities, Inc., which
establishes a one year revolving credit facility, up to the maximum of $5
million. While all outstanding amounts are due and payable in full on or before
March 6, 1998, the Company considers amounts outstanding pursuant to the
Unsecured Credit Agreement as long-term as all amounts are repaid from available
funds under the Credit Agreement. Proceeds of the Unsecured Credit Agreement
are utilized to fund short-term needs (less than thirty days). The Company's
outstanding debt under the Unsecured Credit Agreement was $3.2 million at
September 30, 1997.
The interest rate of each loan under the Unsecured Credit Agreement is at a
rate determined by agreement between the Company and the Bank. The rate shall
not exceed the maximum interest rate permitted under applicable laws. Interest
rates generally are comparable with Eurodollar rates plus 1% per annum.
OTHER MATTERS
HEDGING ACTIVITIES
The Company uses swap agreements in an attempt to reduce the risk of fluctuating
oil and gas prices.
Crude Oil. The Company reports average oil prices per Bbl including the net
effect of the oil hedges. During the three and nine months ended September 30,
1997, the Company reported average oil prices of $17.48 and $18.64 per Bbl,
respectively, while realizing average prices, excluding hedging results, of
$17.29 and $18.57 per Bbl, respectively. The Company recorded net increases to
oil revenues of $93,000 ($ .19 per Bbl) and $93,000 ($ .07 per Bbl) for the
three and nine months ended September 30, 1997, respectively, as a result of its
commodity hedges.
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During the three and nine months ended September 30, 1996, the Company
reported average oil prices of $17.42 and $17.25 per Bbl, respectively, while
realizing average prices, excluding hedging results, of $19.86 and $19.57 per
Bbl, respectively. The Company recorded net decreases to oil revenues of
$322,000 ($2.44 per Bbl) and $899,000 ($2.32 per Bbl) for the three and nine
months ended September 30, 1996, respectively, as a result of its commodity
hedges.
Natural Gas. The Company reports average gas prices per Mcf including the net
effect of gas hedges. During the three and nine months ended September 30, 1997,
none of the Company's gas production was subject to hedging contracts.
During the three and nine months ended September 30, 1996, the Company
reported average gas prices of $1.25 and $1.30 per Mcf, respectively, while
realizing average prices, excluding hedging results, of $1.46 and $1.50 per Mcf,
respectively. The Company recorded net decreases to gas revenues of $214,000 ($
.21 per Mcf) and $553,000 ($ .20 per Mcf) for the three and nine months ended
September 30, 1996, respectively, as a result of its commodity hedges.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share". SFAS No. 128 replaced primary earnings per share ("EPS") with a
newly defined basic EPS and modifies the computation of diluted EPS. SFAS No.
128 is effective for periods ending after December 15, 1997. The impact of the
adoption of SFAS No. 128 on the Company's earnings per share is expected to be
immaterial.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
which requires that all items required to be recognized under accounting
standards as components of comprehensive income be reported as a part of the
basic financial statements. SFAS No. 130 is effective for both interim and
annual periods beginning after December 15, 1997. The Company plans to adopt
SFAS No. 130 for the period ended March 31, 1998 and does not expect SFAS No.
130 to have a material effect on reported results.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" which establishes standards for reporting
information about operating segments in annual financial statements and requires
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. SFAS No. 131
is effective for financial statements for periods beginning after December 15,
1997 but the statement need not be applied to interim financial statements in
the initial year of application. The Company does not expect SFAS No. 131 to
materially affect the Company's reporting practices.
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PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
The Company and Offshore Energy Development Corporation, a Delaware
corporation ("OEDC"), have entered into an agreement by which the Company will
acquire all the outstanding OEDC common stock. OEDC is an independent energy
company that focuses on the acquisition, exploration, development and production
of natural gas in the Gulf of Mexico and on natural gas gathering, processing
and marketing activities. OEDC is listed on the Nasdaq National Market under
the symbol "OEDC." Based on estimates of OEDC's outside engineers, OEDC's total
proved reserves were 5.5 million BOE at December 31, 1996. The Company will
issue approximately 5.5 million shares of the Company's common stock equal to
16.2% of the total Company's common stock currently outstanding. The
transaction is subject to various conditions, including approval by stockholders
of both companies. Special meetings of the Company and OEDC stockholders have
been scheduled for December 12, 1997 to consider the transaction.
The Company and Carrollton Resources, L.L.C., a Louisiana limited liability
company ("Carrollton"), have entered into an agreement by which the Company will
acquire all the outstanding membership interests of Carrollton. Carrollton is a
small independent energy company engaged in the exploration, development and
acquisition of onshore oil and gas properties located primarily in the Gulf
Coast region, making a good fit with OEDC's area of operations. Based on
estimates of Carrollton's outside engineers, Carrollton's total proved reserves
were 2.8 million BOE at June 30, 1997. The Company will issue approximately
900,000 shares of the Company's common stock equal to 2.7% of the total
Company's common stock currently outstanding. The Company anticipates closing
the transaction, which is subject to various conditions, in mid-December 1997.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.13.3 Second Amendment to Amended and Restated Credit Agreement, dated
August 12, 1997, effective as of April 1, 1997, by and among
Titan Resources, L.P., The Chase Manhattan Bank, as
Administrative Agent, and Financial Institutions now or
hereafter parties thereto.
27 Financial Data Schedule.
(b) Reports Submitted on Form 8-K:
None.
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SIGNATURE
---------
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 thereunto duly authorized.
TITAN EXPLORATION, INC.
By: /s/ Jack Hightower
-----------------------------------------
Jack Hightower
President and Chief Executive Officer
By: /s/ William K. White
------------------------------------------
William K. White
Vice President and Chief Financial Officer
Date: November 7, 1997
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EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
10.13.3 Second Amendment to Amended and Restated Credit
Agreement, dated August 12, 1997, effective as of April
1, 1997, by and among Titan Resources, L.P., The Chase
Manhattan Bank, as Administrative Agent, and Financial
Institutions now or hereafter parties thereto.
27 Financial Data Schedule