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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM 10-Q
-------------------------
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 1998
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 (I.R.S. Employer
of incorporation or Identification No.)
organization
500 W. TEXAS, SUITE 500 79701
MIDLAND, TEXAS (Zip Code)
(Address of principal executive offices)
(915) 498-8600
(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 November 2, 1998, 37,874,675 shares of common stock, par value
$.01 per share of Titan Exploration, Inc. were outstanding.
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TABLE OF CONTENTS
-----------------
Forward Looking Information and Risk Factors................................ 1
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1998 (Unaudited)
and December 31, 1997............................................ 2
Unaudited Consolidated Statements of Operations for the Three and
Nine Months Ended September 30, 1998 and 1997.................... 3
Unaudited Consolidated Statements of Cash Flows for the Three and
Nine Months Ended September 30, 1998 and 1997.................... 4
Notes to Consolidated Financial Statements......................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 9
PART II -- OTHER INFORMATION
Item 3. Legal Proceedings................................................. 18
Item 4. Submission of Matters to a Vote of Security Holders............... 18
Item 5. Other Information................................................. 18
Item 6. Exhibits and Reports on Form 8-K.................................. 19
Signatures........................................................ 20
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, except share data)
September 30, December 31,
ASSETS 1998 1997
-------------- ------------
(unaudited)
Current assets:
Cash and cash equivalents $ 2,088 $ 1,603
Restricted investments -- 2,331
Accounts receivable:
Oil and gas 10,957 13,663
Other 88 2,900
Inventories 1,271 624
Prepaid expenses and other current assets 785 531
--------- --------
Total current assets 15,189 21,652
--------- --------
Property, plant and equipment, at cost:
Oil and gas properties, using the successful efforts method of accounting:
Proved properties 372,220 341,163
Unproved properties 25,213 24,942
Other property and equipment 6,279 2,421
Accumulated depletion, depreciation and amortization (119,658) (94,387)
--------- --------
284,054 274,139
--------- --------
Investments in affiliates and others 56,320 55,900
Other assets, net of accumulated amortization of $582 in 1998 and $413 in 1997 936 892
--------- --------
$ 356,499 $352,583
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities:
Trade $ 8,658 $ 16,983
Accrued interest 443 307
Other 5,312 4,334
--------- --------
Total current liabilities 14,413 21,624
--------- --------
Long-term debt 135,300 85,450
Other liabilities 2,558 2,720
Deferred income tax payable 1,467 10,368
Stockholders' equity:
Preferred Stock, $.01 par value, 10,000,000 shares authorized; none issued
and outstanding -- --
Common Stock, $.01 par value, 60,000,000 shares authorized; 40,474,675 and
40,332,497 shares issued and outstanding at September 30, 1998 and December
31, 1997, respectively 405 403
Additional paid-in capital 278,020 277,500
Treasury stock, at cost; 2,400,000 and 55,000 shares at September 30, 1998
and December 31, 1997, respectively (18,820) (504)
Deferred compensation (6,318) (10,108)
Retained deficit (50,526) (34,870)
--------- --------
Total stockholders' equity 202,761 232,421
--------- --------
Commitments and contingencies (Note 3)
$ 356,499 $352,583
========= ========
See accompanying notes to consolidated financial statements.
2
TITAN EXPLORATION, INC.
Unaudited Consolidated Statements of Operations
(in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------------- --------------------------------------
1998 1997 1998 1997
------------------ ------------------ ------------------ ------------------
Revenues -
Oil and gas sales $ 16,671 $17,932 $ 57,139 $52,100
-------- ------- -------- -------
Expenses:
Oil and gas production 6,111 3,338 21,288 12,601
Production and other taxes 1,263 1,321 4,355 4,026
General and administrative 2,347 1,294 7,672 3,637
Amortization of stock option awards 1,263 1,263 3,790 3,790
Exploration and abandonments 1,876 586 6,077 1,342
Depletion, depreciation and amortization 6,481 5,828 19,456 15,927
Impairment of long-lived assets 5,126 -- 13,143 --
-------- ------- -------- -------
Total expenses 24,467 13,630 75,781 41,323
-------- ------- -------- -------
Operating income (loss) (7,796) 4,302 (18,642) 10,777
-------- ------- -------- -------
Other income (expense):
Interest income 24 37 125 134
Interest expense (2,349) (339) (6,040) (825)
Equity in net loss of affiliates (108) -- (349) --
Other 91 (61) 447 10
-------- ------- -------- -------
Income (loss) before income taxes (10,138) 3,939 (24,459) 10,096
-------- ------- -------- -------
Income tax expense (benefit) (3,706) 1,379 (8,803) 3,534
-------- ------- -------- -------
Net income (loss) $ (6,432) $ 2,560 $(15,656) $ 6,562
======== ======= ======== =======
Net income (loss) per share $ (.17) $ .08 $ (.40) $ .19
======== ======= ======== =======
Net income (loss) per share - assuming
dilution $ (.17) $ .07 $ (.40) $ .18
======== ======= ======== =======
See accompanying notes to consolidated financial statements.
3
TITAN EXPLORATION, INC.
Unaudited Consolidated Statements of Cash Flows
(in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- --------
Cash flows from operating activities:
Net income (loss) $ (6,432) $ 2,560 $(15,656) $ 6,562
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depletion, depreciation and amortization 6,481 5,828 19,456 15,927
Impairment of long-lived assets 5,126 -- 13,143 --
Amortization of stock option awards 1,263 1,263 3,790 3,790
Exploration and abandonments 974 -- 3,506 --
Equity in net loss of affiliates 108 -- 349 --
Loss (gain) on sale of assets (4) -- 7 --
Deferred income taxes (3,706) 1,379 (8,803) 3,534
Other items 83 -- 282 --
Changes in assets and liabilities:
Accounts receivable (79) (771) 4,044 (527)
Prepaid expenses and other current assets 282 (262) (909) (481)
Other assets (21) -- (39) --
Accounts payable and accrued liabilities 784 (1,829) (6,062) 1,751
-------- -------- -------- --------
Total adjustments 11,291 5,608 28,764 23,994
-------- -------- -------- --------
Net cash provided by operating activities 4,859 8,168 13,108 30,556
-------- -------- -------- --------
Cash flows from investing activities:
Redemption of restricted investment -- -- 2,331 --
Investing in oil and gas properties (18,698) (12,158) (42,709) (43,089)
Additions to other property and equipment (163) (744) (3,858) (744)
Capital contribution in equity investments (368) -- (931) --
Other investing activities 1,381 518 1,396 (74)
-------- -------- -------- --------
Net cash used in investing activities (17,848) (12,384) (43,771) (43,907)
-------- -------- -------- --------
Cash flows from financing activities:
Proceeds from debt 22,300 4,700 51,200 8,200
Payments of debt -- -- (1,350) --
Exercise of stock options 209 7 424 7
Purchase of treasury stock (7,986) -- (18,316) --
Other financing activities (576) -- (810) --
-------- -------- -------- --------
Net cash provided by financing activities 13,947 4,707 31,148 8,207
-------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents 958 491 485 (5,144)
Cash and cash equivalents, beginning of period 1,130 655 1,603 6,290
-------- -------- -------- --------
Cash and cash equivalents, end of period $ 2,088 $ 1,146 $ 2,088 $ 1,146
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
4
TITAN EXPLORATION, INC.
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
(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, 1998
and for the three and nine months ended September 30, 1998 and 1997 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 1997 Form 10-K.
Preparation of the accompanying consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Reclassifications
Certain reclassifications have been made to the 1997 amounts to conform to
the 1998 presentations.
(2) DEBT
Line of Credit
On October 31, 1996, the Company entered into a credit agreement, as
amended (the "Credit Agreement"), with The Chase Manhattan Bank, N.A. which
establishes a four year revolving credit facility, up to the maximum amount of
$250 million subject to a borrowing base. All amounts outstanding are due and
payable in full by January 1, 2001. The borrowing base, which was $200 million
at September 30, 1998, is subject to redetermination semiannually by the lenders
based on certain proved oil and gas reserves and other assets of the Company
with the next redetermination date scheduled for April 1999. At September 30,
1998, the Company was not in compliance with certain coverage tests required by
its Credit Agreement. The Company obtained amendments to the Credit Agreement
that adequately resolve the events of non-compliance. At September 30, 1998, the
outstanding principal balance was $130.5 million and the amount available to
borrow was approximately $69.4 million.
Unsecured Credit Agreement
In April 1997, the Company entered into a credit agreement, as amended (the
"Unsecured Credit Agreement"), with Chase Bank of Texas, N.A. (the "Bank"), an
affiliate of The Chase Manhattan Bank, N.A., which establishes a revolving
credit facility, up to the maximum of $5 million. All outstanding amounts
pursuant to the Unsecured Credit Agreement are due and payable in full on or
before December 31, 1999. 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 at the Bank's cost of funds plus
1% per annum. At September 30, 1998, the outstanding principal balance was $4.8
million.
5
(3) COMMITMENTS AND CONTINGENCIES
Litigation
The following is a brief description of certain litigation to which the
Company is subject, as a result of assuming the obligations of Offshore Energy
Development Corporation ("OEDC"). The Company believes it has meritorious
defenses to the claims and intends to vigorously defend against such claims.
The Company does not believe that it has a probable and estimable loss with
respect to any such litigation in excess of currently provided reserves, if any.
If such loss becomes probable and estimable, the amount of any recorded
liability could have a material adverse effect on the Company's (i) results of
operations for the period in which such liability is recorded, (ii) consolidated
financial position as a whole and (iii) liquidity and capital resources.
However, the Company does not expect that any such liability will have a
material adverse effect on its consolidated financial position as a whole or on
its liquidity or capital resources. Due to the uncertainties inherent in
litigation, no assurance can be given to the ultimate outcome of these matters.
OEDC and certain of its officers and directors, as well as Natural Gas
Partners, L.P. ("NGP"), the managing underwriters of OEDC's initial public
offering and an analyst from each of the managing underwriters, have been named
as defendants in a suit styled Eric Baron and Edward C. Allen, On behalf of
Themselves and all Others Similarly Situated, v. David B. Strassner, Douglas H.
Kiesewetter, David R. Albin, Natural Gas Partners, L.P., David Garcia, John J.
Myers, Offshore Energy Development Corporation, Morgan Keegan & Company, Inc.
and Principal Securities Inc., which was filed October 20, 1997, in the Texas
State District Court of Harris County, Texas 270th Judicial District. The
defendants removed plaintiffs' claims to federal court in the United States
Southern District of Texas. Plaintiffs motion to have the case remanded to the
state court was granted by the federal judge in April 1998. The suit seeks
class certification on behalf of certain holders of common stock of OEDC,
excluding the defendants and holders related to or affiliated with the
defendants. The state court has denied class certification at this time, in
deference to a parallel federal court action, which is described below. The
state court suit alleges generally that the defendants wrongfully made false or
misleading statements or omissions relating to OEDC's business and prospects in
the course of OEDC's initial public offering and subsequent thereto. The state
court suit seeks rescission of sales of common stock of OEDC and unspecified
monetary damages, including punitive damages.
OEDC and certain of its officers and directors, as well as NGP, have also
been named defendants in a suit styled John W. Robertson, et al. v. David B.
Strassner, Douglas H. Kiesewetter, David R. Albin, Natural Gas Partners, L.P.
and Offshore Energy Development Corporation, which was filed February 6, 1998,
in the United States Southern District of Texas, Houston Division. This suit
mirrors the allegations of the foregoing matter, but adds request for relief
under federal securities laws. It, too, seeks certification of a class of
certain purchasers of common stock of OEDC. The suit seeks compensatory
damages, including rescissory damages, where applicable.
The Company is involved in other various claims and legal actions arising
in the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
Letters of Credit
At September 30, 1998, the Company had outstanding letters of credit of
$144,000, which were issued through the Credit Agreement.
6
(4) COMMON STOCK
In May 1997, the Company announced a plan to repurchase up to $25 million
of the Companys 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, 1998 and December 31, 1997, the Company had purchased 2,400,000
and 55,000 shares of its common stock for approximately $18,820,000 and
$504,000, respectively.
(5) NET INCOME (LOSS) PER COMMON SHARE
The following table sets forth the computation of basic and diluted net
income (loss) per common share:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- --------------------
1998 1997 1998 1997
------- ------- -------- -------
(in thousands, except per share data)
Numerator:
Net income (loss) and numerator for basic and
diluted net income (loss) per common share -
income available to common stockholders $(6,432) $ 2,560 $(15,656) $ 6,562
------- ------- -------- -------
Denominator:
Denominator for basic net income (loss) per common
share - weighted average common shares 38,252 33,943 39,109 33,942
Effect of dilutive securities - employee stock
options -- 1,958 -- 1,860
------- ------- -------- -------
Denominator for diluted net income (loss) per
common share - adjusted weighted average common
shares and assumed conversions 38,252 35,901 39,109 35,802
======= ======= ======== =======
Basic net income (loss) per common share $ (.17) $ .08 $ (.40) $ .19
======= ======= ======== =======
Diluted net income (loss) per common share $ (.17) $ .07 $ (.40) $ .18
======= ======= ======== =======
Employee stock options to purchase 3,809,109, 0, 3,809,109 and 169,500
shares of common stock were outstanding during the three and nine months ended
September 30, 1998 and 1997, respectively, but were not included in the
computation of diluted net income (loss) per common share because either (i) the
employee stock options' exercise price was greater than the average market price
of the common stock of the Company or (ii) the Company had a loss from
continuing operations and, therefore, the effect would be antidilutive.
7
(6) DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilizes various swap contracts and other financial instruments
to hedge the effect of price changes on future gas production. The following
table sets forth the future volumes hedged by year and the range of prices to be
received based upon the fixed price of the commodity price collars and other
financial instruments outstanding as of September 30, 1998:
Gas
Volume Price per
Year (MMcf) Mcf
---- ------ ---
Gas commodity price collars:
1998 3,864 $1.81 to $3.10
1999 11,134 $1.81 to $3.10
2000 1,365 $1.98 to $2.33
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company is an independent energy company engaged in the exploitation,
development, exploration and acquisition of oil and gas properties. The
Company's strategy is to grow reserves, production and net income per share
through (i) the exploitation and development of its reserve base, (ii) the
acquisition of producing properties that provide significant development and
exploratory drilling potential, (iii) the exploration for oil and gas reserves,
(iv) capitalization on advanced technology to identify, explore and exploit
projects, (v) financial flexibility, and (vi) a low overhead and operating cost
structure. The Company has grown rapidly through the acquisition and
exploitation of oil and gas properties, consummating the 1995 Acquisition for a
purchase price of approximately $41.0 million, the 1996 Acquisition for
approximately $136.0 million and the Pioneer Acquisition, in 1997, for
approximately $55.8 million. In addition, in December 1997, the Company issued
5,486,734 shares and 899,965 shares of the Company's common stock in connection
with the Offshore Energy Development Corporation ("OEDC") acquisition and the
Carrollton Resources, L.L.C. ("Carrollton") acquisition, respectively.
The Company's growth from acquisitions has impacted its financial results in
a number of ways. Acquired properties may not have received focused attention
prior to sale. After acquisition, certain of these properties required
extensive maintenance, workovers, recompletions and other remedial activity that
while not constituting capital expenditures may initially increase lease
operating expenses. The Company may dispose of certain of the properties it
determines 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 has incurred
increases in its general and administrative expense levels. The Company
believes that with its current inventory of drilling locations and the
additional staff it will be well positioned to follow a more balanced program of
exploration and exploitation activities to complement its acquisition efforts.
The Company uses the successful efforts method of accounting for its oil and
gas producing activities. Costs to acquire mineral interests in oil and gas
properties, to drill and equip exploratory wells that result in proved reserves,
and to drill and equip development wells are capitalized. Costs to drill
exploratory wells that do not result in proved reserves, and geological and
geophysical costs are expensed. Costs of significant nonproducing properties,
wells in the process of being drilled and significant development projects are
excluded from depletion until such time as the related project is developed and
proved reserves are established or impairment is determined.
IMPACT OF CRUDE OIL PRICES
During the nine months ended September 30, 1998, the posted price of West
Texas intermediate crude oil (the "West Texas Crude Oil Price") ranged from
$15.75 to $9.00 per barrel. These low prices are thought to be caused primarily
by an oversupply of crude oil inventory created, in part, by an unusually warm
winter in the United States and Europe, the apparent unwillingness of OPEC
countries to abide by their respective crude oil production quotas and a
possible decline in demand in certain Asian markets.
If the West Texas Crude Oil Price worsens or persists for a protracted
period, it would adversely affect the Company's revenues, net income and cash
flows from operations. Also, if these prices maintain their present level for
an extended time period or decline further the Company may delay or postpone
certain of its capital projects.
If the posted price for West Texas Crude Oil Price remains at current levels
or continues to decline, the Company would expect that it may be required to
record an impairment to its oil and gas properties in 1998. The extent of an
impairment, if any, cannot be determined.
RECENT DEVELOPMENTS
The Company has drilled the Vermillion Block 253 #A-1 well, in the Gulf of
Mexico, to a depth of approximately 11,035' and is preparing to run a production
liner. Mud log shows supported by open hole logs and sidewall cores indicate
potential oil and gas zones from multiple pay intervals. Although the Company
is
9
enthusiastic about these shows and the potential of this well, production
testing and additional drilling is necessary before the Company can accurately
determine the effect on future cash flows and reserves. The Company is the
operator and has a 50% working interest in this Block.
The Company drilled the Vermillion Block 252 #F-4 and has completed the well
as a dual flowing well. The gas condensate completion has been completed and the
well is flowing approximately 1,025 barrels of condensate per day and 1.3 Mmcf
of gas per day. The oil zone is awaiting pipeline construction to an adjacent
platform and oil production is expected to commence during the first quarter of
1999. The Company is the operator of the block and owns a 41.25% working
interest.
The Eller #1 has been completed in the deep, downdip overpressured Austin
Chalk and is expected to commence production by mid-November 1998. The Company
owns a 33% working interest in this non-operated well and plans additional
drilling on other joint venture acreage in the area in the near future.
The Habanero #1, the Company's first Webb County, Texas, well, is currently
flowing at a rate of approximately 600 Mcf per day, of which the Company has a
50% working interest. The rate and pressure are down from an initial rate of
approximately 2.5 Mmcf per day and significantly higher flowing tubing
pressures. The Company is currently considering additional testing to determine
whether stimulation might achieve greater production levels. While the Company
is disappointed in the initial results of this first well on its 190,000 acres,
the presence of natural gas coupled with good reservoir quality supports
additional drilling activities. The Company will spud its second Webb County
well, which it has a 100% working interest, during November 1998 to further test
the acreage.
The Company is currently targeting assets, which it believes to be non-
strategic in its West Texas, Gulf Coast and Gulf of Mexico regions for
disposition. The dispositions of properties would allow the Company to (a)
reduce its long-term debt, (b) redeploy capital to higher return projects or
acquisitions and (c) eliminate certain administrative costs.
The Company recently reduced its staff in its Gulf Coast and Gulf of Mexico
regions as part of integrating the December 1997 OEDC and Carrollton
acquisitions and as part of its plans to divest non-strategic assets in these
regions. The Company believes it will further reduce its administrative costs
in these regions upon completion of the dispositions. However, the full impact
of these cost reductions may not be visible until the first or second quarter of
1999.
YEAR 2000 ISSUES
The Company is working to resolve the potential impact of the "Year 2000
Issue" on the ability of the Company's information technology systems and
embedded technology to accurately process information that may be date-
sensitive. Any of the Company's software programs or embedded technology that
recognize a date using "00" as the year 1900 rather than the year 2000 could
result in system failures or miscalculations causing disruptions of operations.
The Company has reviewed the effect of the Year 2000 Issue relating to its
information systems. Upgrades or replacement of the Company's software and
hardware, if necessary, to be year 2000 compliant is underway. The Company
plans, once it believes its systems are year 2000 compliant, to test its systems
in the first half of 1999. The Company has determined that the Year 2000 Issue
directly related to its information systems will not have a material impact on
its business, operations or its financial position.
The Company has begun communications with its significant suppliers and
purchasers to determine if those parties have appropriate plans to remedy Year
2000 Issue when their systems interface with the Company's systems or may
otherwise impact the operations of the Company. However, the Company cannot
determine what effect, if any, the Year 2000 Issue affecting its vendors,
customers, other businesses and the numerous local, state, federal and other
U.S. and foreign governmental entities with which it conducts business or by
which it is
10
regulated, governed or taxed will have on its business or financial position. If
these outside parties fail to become year 2000 compliant it could result in an
interruption of the Company's business.
The Company does not have a formal contingency plan. If unforeseen problems
are encountered that relate to the Year 2000 Issue, possible solutions will be
evaluated and the most efficient will be enacted.
The costs of the Company's Year 2000 evaluation and modifications and the
date on which the Company plans to complete the Year 2000 evaluations and
modifications are based on estimates, which were derived utilizing numerous
assumptions of future events including the continued availability of certain
resources, third-party modification plans and other factors. However, there can
be no assurance that these estimates will be achieved. Actual results could
differ materially from the projections. Specific factors that might cause a
material change include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct all relevant
computer programs and microprocessors, and similar uncertainties.
11
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,
------------------------------------ ------------------------------------
1998 1997 1998 1997
------- ------ ------- -------
Production:
Oil (MBbls) 618 501 1,877 1,396
Gas (MMcf) 6,392 5,639 20,516 15,938
Total (MMcfe) 10,100 8,645 31,778 24,314
Average Sales Prices Per Unit (excluding
effects of hedging activities):
Oil (Bbl) $ 11.70 $17.29 $ 12.31 $ 18.64
Gas (Mcf) $ 1.40 $ 1.61 $ 1.52 $ 1.63
Total (Mcfe) $ 1.60 $ 2.06 $ 1.65 $ 2.14
Average Sales Prices Per Unit (including
effects of hedging activities):
Oil (Bbl) $ 11.70 $17.48 $ 12.42 $ 18.64
Gas (Mcf) $ 1.48 $ 1.61 $ 1.65 $ 1.63
Total (Mcfe) $ 1.65 $ 2.06 $ 1.80 $ 2.14
Expenses Per Mcfe:
Production costs, excluding production
and other taxes $ .61 $ .39 $ .67 $ .52
Production and other taxes $ .13 $ .15 $ .14 $ .16
General and administrative $ .23 $ .15 $ .24 $ .15
Depletion, depreciation and amortization $ .64 $ .67 $ .61 $ .66
12
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1997
Oil and Gas Revenues. Revenues from oil and gas operations totaled $16.7
million for the three months ended September 30, 1998 compared to $17.9 million
for the three months ended September 30, 1997. The decrease is primarily
attributable to a significant decrease in commodity prices, partially offset by
an increase in production attributable to the acquisitions made in December
1997 and continued exploitation of the Company's oil and gas properties. Of
total oil and gas revenues for the three months ended September 30, 1998,
revenues of approximately $4.4 million are attributable to the acquisitions made
in December 1997. The average oil price received decreased 33% from $17.48 to
$11.70 per Bbl and the average gas price received decreased 8% from $1.61 to
$1.48 per Mcf for the three months ended September 30, 1997 compared to the
three months ended September 30, 1998. During the three months ended
September 30, 1998 and 1997, oil and gas revenues included approximately
$496,000 and $93,000 associated with hedging activities, respectively.
Production Costs. Oil and gas production costs, including production and other
taxes, were $7.4 million ($.74 per Mcfe) for the three months ended September
30, 1998 compared to $4.7 million ($.54 per Mcfe) for the three months ended
September 30, 1997. The increase in production costs was primarily attributable
to production costs associated with the properties from the acquisitions made in
December 1997, which were approximately $2.2 million ($1.01 per Mcfe).
Initially, recently acquired properties generally incur significant rework
expenses, which are costs incurred to perform required maintenance, workovers
and other remedial activities. The properties acquired in the Pioneer
Acquisition were primarily oil in nature and generally have a higher per unit
operating cost as compared to gas properties. The Company expects as it
integrates the acquired properties into its structure that the per unit
operating costs should be reduced.
Depletion, Depreciation and Amortization Expense. Depletion, depreciation and
amortization expense was $6.5 million for the three months ended September 30,
1998 ($.64 per Mcfe) compared to $5.8 million ($.67 per Mcfe) for the three
months ended September 30, 1997. The 4% decrease per Mcfe is primarily due to
the effects of the impairment taken in the fourth quarter of 1997, offset by the
higher finding cost per Mcfe of the properties acquired in the 1997 acquisitions
as compared to previous acquisitions. Included for the three months ended
September 30, 1998 and 1997 is approximately $.03 per Mcfe and $.01 per Mcfe of
depreciation and amortization associated with other property and equipment and
other assets, respectively.
Impairment of Long-Lived Assets. In the fourth quarter of 1997, the Company
recorded an impairment related to its long-lived assets of approximately $69
million, which was primarily related to significantly depressed commodity
prices. In the third quarter of 1998, the Company recorded an impairment,
unrelated to commodity price levels, of its long-lived assets of approximately
$5.1 million. The impairment is primarily related to the loss of proved
reserves from lower than expected development drilling results on wells in two
fields in the Company's Gulf Coast region.
General and Administrative Expense. General and administrative expense was $2.3
million ($.23 per Mcfe) for the three months ended September 30, 1998 compared
to $1.3 million ($.15 per Mcfe) for the three months ended September 30, 1997.
The increase is due to increased staff costs associated with the Company's 1997
growth and the additional staff of the acquired OEDC and Carrollton entities.
The Company plans to reduce annualized general and administrative costs as it
integrates the acquisitions and achieves economies of scale.
Exploration and Abandonment Expense. Exploration and abandonment expense
increased to $1.9 million for the three months ended September 30, 1998 from
$586,000 for the three months ended September 30, 1997. The increase is
primarily related to the Company's increased exploration activities.
Equity in Net Loss of Affiliates. The equity in net loss of affiliates is
attributable to the Company's ownership in Dauphin Island Gathering Partners
("DIGP") and Mobile Bay Processing Partners ("MBPP") obtained in the OEDC
acquisition. Included in the equity in net loss is approximately $158,000 of
amortization of the Company's cost basis in excess of the underlying historical
net assets of DIGP.
13
Interest Expense. Interest expense was $2.3 million for the three months ended
September 30, 1998 compared to $339,000 for the three months ended September 30,
1997. This increase is primarily due to an increase in the Company's average
outstanding debt. In 1997, average outstanding debt was low due to the recently
completed common stock offering in December 1996. In 1998, the average
outstanding debt increased over the comparable 1997 period, due primarily to the
Pioneer Acquisition in December 1997, the purchase of treasury stock, the
Company's capital program and the assumption of $15.8 million in debt associated
with the OEDC and Carrollton acquisitions.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1997
Oil and Gas Revenues. Revenues from oil and gas operations totaled $57.1
million for the nine months ended September 30, 1998 compared to $52.1 million
for the nine months ended September 30, 1997. The increase is primarily
attributable to the increase in production as a result of the acquisitions made
in December 1997 and continued exploitation of the Company's oil and properties,
offset by a significant decrease in the average price received for oil. Of
total oil and gas revenues for the nine months ended September 30, 1998,
revenues of $13.8 million are attributable to the acquisitions made in December
1997. The average oil price received decreased 33% from $18.64 to $12.42 per
Bbl and the average gas price received increased 1% from $1.65 to $1.63 per Mcf
for the nine months ended September 30, 1997 compared to the nine months ended
September 30, 1998, respectively. During the nine months ended September 30,
1998 and 1997, oil and gas revenues included approximately $2.8 million and
$93,000 associated with hedging activities, respectively.
Production Costs. Oil and gas production costs, including production and other
taxes, were $25.6 million ($.81 per Mcfe) for the nine months ended September
30, 1998 compared to $16.6 million ($.68 per Mcfe) for the nine months ended
September 30, 1997. The increase in production costs was primarily attributable
to production costs associated with the properties from the acquisitions made in
December 1997, which were approximately $10.0 million ($1.49 per Mcfe).
Initially, recently acquired properties generally incur significant rework
expenses, which are costs incurred to perform required maintenance, workovers
and other remedial activities. The properties acquired in the Pioneer
Acquisition were primarily oil in nature and generally have a higher per unit
operating cost as compared to gas properties. The Company expects as it
integrates the acquired properties into its structure that the per unit
operating costs should be reduced.
Depletion, Depreciation and Amortization Expense. Depletion, depreciation and
amortization expense was $19.5 million ($.61 per Mcfe) for the nine months ended
September 30, 1998 compared to $15.9 million ($.66 per Mcfe) for the nine months
ended September 30, 1997. The 7.6% decrease per Mcfe is primarily due to the
effects of the impairment taken in the fourth quarter of 1997, offset by the
higher finding cost per Mcfe of the properties acquired in the 1997 acquisitions
as compared to previous acquisitions. Included for the nine months ended
September 30, 1998 and 1997 is approximately $.02 per Mcfe and $.01 per Mcfe of
depreciation and amortization associated with other property and equipment and
other assets, respectively.
Impairment of Long-Lived Assets. In the fourth quarter of 1997, the Company
recorded an impairment related to its long-lived assets of approximately $69
million, which was primarily related to significantly depressed commodity
prices. In the second and third quarters of 1998, the Company recorded
impairments, unrelated to commodity price levels, of its long-lived assets of
approximately $13.1 million. This impairment is primarily related to (a) a $3.6
million impairment resulting from the loss of offshore proved reserves
attributable to downhole mechanical problems encountered during a rework
operation and (b) a $9.5 million impairment resulting from the loss of proved
reserves from lower than expected development drilling results on wells
primarily in the Gulf Coast region.
General and Administrative Expense. General and administrative expense was $7.7
million ($.24 per Mcfe) for the nine months ended September 30, 1998 compared to
$3.6 million ($.15 per Mcfe) for the nine months ended September 30, 1997. The
increase is due to increased staff costs associated with the Company's 1997
growth and the additional staff of the acquired OEDC and Carrollton entities.
The Company plans to reduce annualized general and administrative costs as it
integrates the acquisitions and achieves economies of scale.
14
Exploration and Abandonment Expense. Exploration and abandonment expense
increased to $6.1 million for the nine months ended September 30, 1998 from $1.3
million for the nine months ended September 30, 1997. The increase is primarily
related to the Company's increased exploration activities
Equity in Net Loss of Affiliates. The equity in net loss of affiliates is
attributable to the Company's ownership in DIGP and MBPP as a result of the OEDC
acquisition. Included in the equity in net loss is approximately $474,000 of
amortization of the Company's cost basis in excess of the underlying historical
net assets of DIGP.
Interest Expense. Interest expense was $6.0 million for the nine months ended
September 30, 1998 compared to $825,000 for the nine months ended September 30,
1997. This increase is primarily due to an increase in the average outstanding
debt. In 1997, average outstanding debt was low due to the recently completed
common stock offering in December 1996. In 1998, the average outstanding debt
increased over the comparable 1997 period, due primarily to the Pioneer
Acquisition in December 1997, the purchase of treasury stock, the Company's
capital program and the assumption of $15.8 million in debt associated with the
OEDC and Carrollton acquisitions.
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 Company requires capital
primarily for the exploration, development, exploitation and acquisition of oil
and gas properties, the repayment of indebtedness and general working capital
needs.
Net Cash Provided by Operating Activities. Net cash provided by operating
activities, before changes in operating assets and liabilities, was $3.9 and
$16.1 million for the three and nine months ended September 30, 1998 compared to
$11.0 and $29.8 million for the three and nine months ended September 30, 1997.
The decrease was primarily attributable to the decrease in oil prices realized
during 1998 and an increase in general and administrative, production,
exploration and interest costs, offset by an increase in net revenues from the
acquisitions completed in 1997.
Capital Expenditures. For 1998, the Company budgeted to spend (i) approximately
$25.1 million to drill proved undeveloped properties, (ii) approximately $3.6
million on probable projects, (iii) approximately $9.6 million to explore
unproven locations, (iv) approximately $15.3 million on development projects
following successful exploration efforts, (v) approximately $10.4 million to
acquire additional acreage and seismic, (vi) $16.0 million to fund development
of pipeline and processing project investments and (vii) $3.8 million on other
items. The final determination with respect to the drilling of any well,
including those currently budgeted, will depend on a number of factors,
including (i) the results of exploration efforts and the review and analysis of
the seismic data, (ii) the availability of sufficient capital resources by the
Company and other participants for drilling prospects, (iii) economic and
industry conditions at the time of drilling, including prevailing and
anticipated prices for natural gas and oil and the availability and costs of
drilling rigs and crews, (iv) the financial resources and results of the
Company, and (v) the availability of leases on reasonable terms and permitting
for the potential drilling location. There can be no assurance that the
budgeted wells will encounter, if drilled, recompleted or worked over,
reservoirs of commercial quantities of natural gas or oil. Through September
30, 1998, the Company has spent less than 56% of its annual budget. At the
present time, the Company expects that it will not spend all of its 1998 budget
primarily as a result of deferring some of its exploration and production
projects (mainly oil) and the $16 million pipeline and processing project
investments due to uncertainties over future commodity price levels.
While the Company regularly engages in discussions relating to potential
acquisitions of oil and gas properties, the Company has no present agreement,
commitment or understanding with respect to any such acquisition, other than the
acquisition of oil and gas properties and interests in its normal course of
business. Any future acquisitions may require additional financing and will be
dependent upon available financing which may be required in the future to fund
the Company's acquisition and drilling programs.
Cash expenditures for investing in oil and gas properties were $18.7 and
$42.7 million for the three and nine months ended September 30, 1998. This
includes $3.2 million for the acquisition of developed and
15
undeveloped properties and $39.5 million for development and exploratory costs
for the nine months ended September 30, 1998.
Capital Resources. The Company's primary capital resources are net cash
provided by operating activities and borrowings under the Credit Agreement.
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 redetermined semi-annually by the lenders based on certain proved oil and
gas reserves and other assets of the Company. The borrowing base at September
30, 1998 was $200 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 $144,000 was outstanding at September 30,
1998. All outstanding amounts under the Credit Agreement are due and payable in
full on January 1, 2001. The Company's outstanding long-term debt under the
Credit Agreement was $130.5 million on September 30, 1998.
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, 1998, the Company had $2.1
million of cash and cash equivalents as compared to $1.6 million at December 31,
1997. The Company's ratio of current assets to current liabilities was 1.05 at
September 30, 1998, compared to 1.00 at December 31, 1997. The Company's
working capital increased $748,000 from $28,000 at December 31, 1997 to $776,000
at September 30, 1998. The Company maintains low cash levels for cash
management purposes.
Unsecured Credit Agreement. In April 1997, the Company entered into a credit
agreement (the "Unsecured Credit Agreement") with Chase Bank of Texas, N.A. (the
"Bank"), which establishes a revolving credit facility, up to the maximum of
$5.0 million. All outstanding amounts pursuant to the Unsecured Credit
Agreement are due and payable in full on or before December 31, 1999. Proceeds
of the Unsecured Credit Agreement are utilized to fund short-term needs (less
than thirty days). The Company owed $4.8 million under the Unsecured Credit
Agreement at September 30, 1998.
The interest rate of amounts outstanding 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 the Bank's cost of funds plus 1% per annum.
16
OTHER MATTERS
Hedging Activities
The Company uses swap agreements and other financial instruments in an
attempt to reduce the risk of fluctuating oil and gas prices and interest rates.
The Company is party to various agreements with numerous counterparties for
purposes of utilizing financial instruments, of which the Company assesses the
creditworthiness of its counterparties. Among other counterparties, the Company
has utilized Enron Capital & Trade Resources Corp. (an affiliate of a
significant stockholder of the Company) as a counterparty. Settlement of gains
or losses on the hedging transactions are generally based on the difference
between the contract price and a formula using New York Mercantile Exchange
("NYMEX") or other major indices related prices and is reported as a component
of oil and gas revenues as the associated production occurs. The Company, at
September 30, 1998, had entered into hedging transactions with respect to
approximately 3,864, 11,134 and 1,365 MMcfe of its 1998, 1999 and 2000,
estimated production, respectively.
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (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.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" which establishes standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. It establishes conditions
under which a derivative may be designated as a hedge, and establishes standards
for reporting changes in the fair value of a derivative. SFAS No. 133 is
required to be implemented for the first quarter of the fiscal year ended 2000.
Early adoption is permitted. The Company has not evaluated the effects of
implementing SFAS No. 133.
17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No significant changes in legal proceedings. See Note 3 of notes to
consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Lease Amendment to the Lease Agreement dated April 4, 1997
between Fasken Center, LTD. and Titan Exploration, Inc.
10.2 Titan Matching Plan, effective as of September 1, 1998.
10.3 Amended and Restated Titan 401(k) Plan, effective as of
September 1, 1998. (filed as Exhibit 4.1 to the Company's
Registration Statement on Form S-8, Registration No. 333-
62115, and incorporated herein by reference).
27 Financial Data Schedule
(b) Reports Submitted on Form 8-K:
None.
19
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 13, 1998
20