Prospectus Supplement
(To Prospectus dated June 8, 1999)
Filed Pursuant to Rule 424(b)(2)
Registration File Nos. 333-62113 and 333-72311
10,015,330 Shares
TITAN EXPLORATION, INC.
Common Stock
(par value $.01 per share)
The Selling Stockholders are offering all of these shares together with related
rights to be issued under our rights plan and will receive all of the proceeds
of this offering. The Selling Stockholders currently own approximately 30.6% of
our Common Stock, and after this offering, will own approximately 4.0% of our
Common Stock if the over-allotment option is not exercised. Our Common Stock is
traded on the Nasdaq National Market under the symbol "TEXP." On July 1, 1999,
the last reported sale price for our Common Stock was $5 3/8 per share.
Investing in the Common Stock involves certain risks. See "Risk Factors"
beginning on page 4 of the accompanying Prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this Prospectus. Any representation to the contrary is
a criminal offense.
- -----------------------------------------------
Proceeds to
Price to Underwriting the Selling
Public Discount Stockholder
- -----------------------------------------------
Per Share $5.250 $0.223 $5.027
- -----------------------------------------------
Total $52,580,483 $2,233,419 $50,347,064
- -----------------------------------------------
The Selling Stockholders have agreed to grant the underwriters the right to
purchase up to an additional 1,502,299 shares of Common Stock to cover over-
allotments.
J.P. Morgan & Co. Petrie Parkman & Co.
July 1, 1999
TABLE OF CONTENTS
Page
----
Prospectus Supplement
Forward Looking Statements................................................. S-2
Prospectus Supplement Summary...............................................S-3
Capitalization..............................................................S-9
Price Range of Common Stock and Dividend Policy.............................S-9
Selling Stockholders.......................................................S-10
Underwriting...............................................................S-11
Legal Opinions.............................................................S-12
Experts....................................................................S-12
Prospectus
About This Prospectus.........................................................2
Where You Can Find More Information...........................................2
Titan.........................................................................3
Use of Proceeds...............................................................3
Risk Factors..................................................................4
Forward Looking Statements....................................................9
Selling Stockholders.........................................................10
Plan of Distribution.........................................................11
Legal Matters................................................................11
Experts......................................................................11
Glossary of Oil and Gas Terms................................................13
FORWARD-LOOKING STATEMENTS
Certain statements contained in or incorporated by reference into this
prospectus supplement and the accompanying prospectus, including, but not
limited to, those regarding our financial position, business strategy and other
plans and objectives for future operations and any other statements which are
not historical facts constitute "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other important
factors that could cause our actual results, performance or achievements, or
industry results, to differ materially from any future results, performance or
achievements expressed or implied by such forward-looking statements. Although
we believe that the expectations reflected in these forward-looking statements
are reasonable, we cannot assure you that the actual results or developments we
anticipate will be realized or, even if substantially realized, that they will
have the expected effects on our business or operations. Among the factors that
could cause actual results to differ materially from our expectations are
inherent uncertainties in interpreting engineering and reserve data, operating
hazards, delays or cancellations of drilling operations for a variety of
reasons, competition, fluctuations and volatility in oil and gas prices, our
ability to successfully integrate the business and operations of acquired
companies, compliance with government and environmental regulations, increases
in our cost of borrowing or inability or unavailability of capital resources to
fund capital expenditures, dependence on key personnel, changes in general
economic conditions and/or in the markets in which we compete or may, from time
to time, compete and other factors including but not limited to those set forth
under "Titan" in the Prospectus Supplement Summary and under "Risk Factors" and
"Titan" in the accompanying Prospectus. These factors expressly qualify all
subsequent oral and written forward-looking statements attributable to us or
persons acting on our behalf. We assume no obligation to update any of these
statements.
You should rely only on the information contained in this document or that to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This Prospectus Supplement, and the accompanying
Prospectus, is not an offer to sell these securities and is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted. You should not assume that the information in this Prospectus
Supplement and the accompanying Prospectus is accurate as of any date other than
the date on the front cover.
In connection with this offering, the underwriters and selling group members (if
any) may engage in passive market making transactions in the Common Stock on the
Nasdaq National Market in accordance with Rule 103 under the Exchange Act. See
"Underwriting."
S-2
PROSPECTUS SUPPLEMENT SUMMARY
This summary highlights certain of the information contained elsewhere in this
Prospectus Supplement and the accompanying Prospectus. This summary is not
complete and does not contain all of the information that you should consider
before investing in our Common Stock. To understand this offering fully, you
should read the entire Prospectus Supplement and the accompanying Prospectus
carefully, including the risk factors and the financial statements and other
information incorporated by reference in this Prospectus Supplement and the
accompanying Prospectus. Certain terms relating to the oil and gas industry are
defined under the caption "Glossary of Oil and Gas Terms" in the accompanying
Prospectus.
Titan
We are an independent energy company engaged in the acquisition, exploitation,
development and exploration of oil and gas properties located in the Permian
Basin of West Texas and southeastern New Mexico and the Brenham Dome area of
south central Texas. Since our inception in March 1995, we have rapidly
increased our reserves and production. As of December 31, 1998, on a pro forma
basis assuming the sales of certain assets that have been completed or are
subject to current purchase agreements, we had proved reserves of 410.7 Bcfe,
with a PV-10 of $203.0 million. On a pro forma basis, we had an average reserve
life of approximately 12 years and, of our proved reserves, 70% were natural
gas, 69% were classified as proved developed and 84% were operated by us.
Competitive Strengths
. Successful Growth Record. We have increased our reserves since our
inception in March 1995 to 410.7 Bcfe at December 31, 1998, on a pro forma
basis, as a result of a series of acquisitions and successes in the
exploitation, development and exploration of our properties. Over this
period, our management has demonstrated our ability to identify and evaluate
potential acquisitions and growth areas and successfully integrate new
properties into our existing portfolio.
. Substantial Exploitation Opportunities. Our oil and gas properties are
located in approximately 90 fields in the Permian Basin and in the downdip
geopressured Austin Chalk Trend in the Brenham Dome area of south central
Texas. These regions are characterized by complex geology with numerous known
producing horizons and provide significant opportunities to increase
reserves, production and ultimate recoveries through development, horizontal
drilling, recompletions, the use of 3-D seismic and other advanced
technologies, as well as secondary and tertiary recovery projects in the
Permian Basin. As of May 31, 1999, we had identified over 400 gross drilling
locations, 50 recompletions and 10 secondary and tertiary recovery projects
on our acreage.
. Numerous Exploratory Drilling Projects. Our extensive exploration
experience emphasizes deep well and horizontal drilling and the use of 3-D
seismic and other advanced technology. Historically, the exploitation and
development of our acquisitions have resulted in exploratory drilling
projects. In addition, through opportunities such as our Paragon joint
venture and our drilling in the Brenham Dome area, we continue to expand our
prospect inventory and have identified numerous exploratory drilling
projects.
. Low Finding and Development Costs. Using our management's experience and
expertise in our core operating areas, we have been able to add reserves
through the exploitation of acquired properties at finding costs
substantially below our per unit acquisition cost. From inception through
December 31, 1998, we made significant acquisitions of 326 Bcfe at an average
finding cost of $0.89 per Mcfe. We have spent approximately $137.8 million
on exploration and on the exploitation and development of our properties,
adding 230 Bcfe of proved reserves at an average finding cost of $0.60 per
Mcfe. As a result, we have acquired, developed and found 556 Bcfe at a total
cost of $427.0 million for an average finding and development cost of $0.77
per Mcfe.
. Financial Flexibility. We have recently strengthened our balance sheet by
disposing of non-strategic assets. As a result, we have reduced our
outstanding principal under our secured credit facility to $75 million at
June 30, 1999 from $145 million at March 31, 1999. Under that facility, we
currently have additional availability of approximately $100 million.
. Long-Lived Reserves. At December 31, 1998, on a pro forma basis, our
properties had an estimated average reserve life of 12 years. As a result of
the long-lived nature of our reserves, management believes that we are less
vulnerable to commodity price and interest rate volatility than our
competition with shorter reserve lives.
. Experienced and Incentivized Management. We believe that our personnel
provides us with a competitive advantage for exploitation and exploration
opportunities in the Permian Basin and other complex producing basins in
North America. Members of our management team have an average of over 28
years experience in the oil and gas industry, including experience in
managing operations significantly larger than those operated by us. This
experience provides us with a significant and diverse knowledge base upon
which to expand our operations. Furthermore, management
S-3
owns approximately 17.2% of our common equity on a fully-diluted basis, which
we believe is important in aligning the interests of management with those of
our investors.
Business Strategy
We seek to increase shareholder value by growing reserves, production and cash
flow. The key elements of our strategy are as follows:
. Identify Acquisition Opportunities. We seek to acquire oil and gas
properties that provide opportunities for (a) the addition of reserves,
production and value through exploitation and development, (b) high
exploration potential and (c) the control of operations. Since inception, we
have made five significant acquisitions and believe that other acquisition
opportunities exist in the Permian Basin and other North American basins. We
have maintained the financial flexibility to pursue additional acquisition
opportunities. We aggressively review a substantial number of possible
acquisitions each year, applying rigorous evaluation standards to each.
. Exploitation of Reserve Base. We believe that there are significant
development and exploitation opportunities in prolific, multi-pay fields
located in our core operating areas, and we have a substantial inventory of
drilling locations. We engage in horizontal and infill drilling activities,
major workovers, recompletions, secondary and tertiary recovery operations,
and other production enhancement techniques in order to increase reserves and
production. In 1999, subject to market conditions and drilling and operating
results, we expect to spend approximately $15.5 million of our capital budget
for developmental drilling activities and $17.2 million for possible and
probable projects.
. Pursue Exploration Activities. We have identified an extensive inventory of
exploration opportunities and seek to apply our management's extensive
geological, geophysical and drilling expertise to evaluate and develop these
exploration projects. As part of our exploration strategy, we attempt to
reduce the costs and risks of our exploration activities by, in selected
circumstances, applying 3-D seismic technology and drilling wells with
multiple pay objectives in known producing areas. For selected projects we
will sell interests in our exploration prospects to industry partners, as
demonstrated by the Paragon joint venture that combines the regional and
technical expertise of both participants. Subject to market conditions and
drilling and operating results, we expect to spend approximately $13.5
million of our 1999 capital budget on exploration opportunities and seismic
and leasing activities.
. Capitalize on Advanced Technology. We seek to complement our management's
geological and drilling expertise by capitalizing on the use of advanced
technology to identify, explore and exploit projects. We believe that the
complex geology of certain areas in which we currently operate, such as the
Permian Basin, is characterized by numerous known producing zones and
provides opportunities to apply advanced technology to increase reserves,
production and ultimate recoveries. Using 3-D seismic, horizontal drilling,
secondary and tertiary recovery methods and other sophisticated technologies,
we seek to enhance our drilling success, production rates, the size of our
average discovery and our total economic returns.
. Maintain Low Cost Structure. We have implemented and plan to emphasize a
low overhead and operating cost structure to enhance the profitability and
exploitation potential of our properties. By operating a significant portion
of our reserve base (approximately 84% of our reserves on a pro forma basis),
we believe we are better able to optimize the timing of development and
exploitation of such properties and to manage cost reduction efforts. By
reducing field-level and other costs, we have been able to reduce costs per
Mcfe, including lease operating expenses, production taxes and general and
administrative expenses, from $1.01 per Mcfe in 1998 to $0.85 per Mcfe in the
first quarter of 1999.
Recent Developments
Operating Highlights
Paragon Joint Venture
We have entered into an exploration joint venture agreement with the Permian Gas
Business Unit of Mobil Exploration & Producing U.S. Inc. ("MEPUS"). The
venture, named Paragon, is conducting a proprietary 3-D seismic program covering
approximately 600 square miles in two phases of 300 square miles each in
Culberson and Reeves counties in the Permian Basin of West Texas. Upon
completion, the program should represent one of the largest proprietary
contiguous 3-D seismic acquisition programs conducted within the onshore lower
48 states.
The venture has acquired over 400,000 net acres of leasehold interests to date.
We were substantially carried in the acquisition of the leasehold interest and
own a 50% working interest in the leasehold acreage. Additionally, we were
substantially carried by MEPUS in the acquisition of approximately 300 miles of
seismic data in Phase I of the program. Based upon the initial results of Phase
I, the parties have committed to the Phase II seismic program, which will cover
the remaining 300 square miles. MEPUS will pay approximately 75% of the costs
to acquire this additional 300 miles. We will pay 25% of the costs of the Phase
II seismic program and will own, along with MEPUS, the proprietary 3-D seismic
data over the entire 600 square miles. Based on the current working interest,
we would share equally the costs of all wells drilled
S-4
and subsequent acreage acquired with MEPUS. Once we have recovered our share of
costs paid, MEPUS will share in our revenues until such time as it has recovered
its share of costs. Subsequently, we would share all costs and production
equally with MEPUS.
It is anticipated that the acquisition of all 600 square miles of seismic data
will be completed by mid-2000. We anticipate that drilling activity will
commence during the third quarter of 1999.
Drilling Activity
Our current 1999 capital budget is approximately $46.2 million. Of our total
budget, approximately $15.5 million is allocated to development drilling, $17.2
million to activities on probable and possible locations and $13.5 million to
exploratory, seismic, leasing and other activities.
Permian Basin. During 1999, we are continuing our development of the Cherry
Canyon sands in the Mi Vida field located in Reeves County, Texas. We have
recently completed five wells in the field and, subject to continued successful
drilling in this formation, plan to drill approximately eight additional wells
before the end of 1999. Using 3-D seismic technology, we have also identified
four additional Fusselman locations and plan to drill at least one of these
wells prior to year end.
We intend to drill approximately 20 exploitation wells in the Foster field
located in Ector County, Texas during the remainder of 1999. We also plan an
aggressive drilling program of approximately 30 wells throughout the Gomez,
Evetts, Magutex, Petco, Caprito and Oates fields. In addition to the drilling
in these fields, we intend to drill approximately 30 wells on other projects.
Brenham Dome. We recently completed our third producing well in the Brenham
Dome area, the Dierking No. 1, a dual lateral horizontal well in Austin County,
Texas, which is currently flowing approximately 45 MMcf per day into a sales
line. Initial flow rates are typically significantly higher than the average
flow rate over the life of a well. We have a 22.4% working interest in the
well. In addition, we are currently drilling two wells east and southeast of
the Dierking discovery, each with a 33% working interest. If these wells are
successful, we intend to drill at least two more wells in this area prior to the
end of 1999. We have approximately 25,000 gross (15,000 net) acres in the
Brenham Dome area and continued successful drilling could provide us with as
many as 21 gross additional drilling locations.
Dispositions
In order to redeploy capital to higher return opportunities and acquisitions,
invest in projects that may accelerate our cash flow, eliminate certain
administrative costs and strengthen our balance sheet, in 1998 we approved a
plan to dispose of certain non-strategic assets, including our Gulf of Mexico,
Gulf Coast and certain Permian Basin assets.
In late May 1999, we sold our assets in the Gulf of Mexico for $71.3 million in
cash to Coastal Oil & Gas Corporation. During the period from January 1999
through April 1999, we sold other oil and gas properties for proceeds of
approximately $6 million and currently intend to dispose of other non-strategic
oil and gas properties in the Permian Basin with expected proceeds ranging from
$10 million to $15 million. All proceeds from the dispositions have been or
will be used to reduce our bank debt.
Board Action
On June 10, 1999, our Board of Directors voted to adopt a Rights Agreement
pursuant to which rights to shares of our preferred stock will be distributed as
a dividend, one right per share, to record owners of our common stock as of the
close of business on July 1, 1999. The Rights Agreement was not adopted in
response to any known offers for our outstanding common stock. At the same
time, our Board voted to amend our Bylaws to delete a provision that allowed
holders of 10% of our outstanding common stock to call a special meeting of
stockholders one time a year.
Our Board of Directors also voted to adopt severance agreements pursuant to
which each of our executive officers will receive severance compensation in an
amount equal to three times such officer's current base salary and prior year's
bonus in the event of a change of control. Our Board also voted to (a) extend
the term of options outstanding under our Option Plan and 1996 Incentive Plan,
(b) grant employee stock options for an aggregate of approximately 180,000
shares of Common Stock to our officers and (c) adopt the 1999 Non-Officer
Employee Stock Option Plan, which provides for option grants of up to 200,000
shares.
Russell 2000(R) Index
On June 30, 1999, our Common Stock was removed from the Russell 2000/(R)/ Index.
Because many index funds and other buyers purchase the shares that comprise well
known indices, such as the Russell 2000/(R)/ Index, we cannot assure you that
our removal from this index will not have an adverse effect on our stock price
and trading volume.
S-5
Our executive offices are located at 500 West Texas, Suite 200, Midland, Texas
79701, and our telephone number is (915) 498-8600.
The Offering
Number of shares the
Selling Stockholders are
selling in this offering.............. 10,015,330
Number of shares outstanding.......... 37,680,675 shares.
Proceeds from this offering........... All proceeds from the offering will
be received by the Selling
Stockholders.
NASDAQ Symbol TEXP.
Selling Stockholders
Natural Gas Partners, L.P. ("NGP"), Natural Gas Partners II, L.P. ("NGP II") and
NGP-Louisiana Partners, L.P. are liquidating their holdings in Titan in
accordance with the requirements of their respective limited partnership
agreements. The Selling Stockholders are offering to sell all of their shares of
Titan stock, other than 1,502,299 shares which are allocable to the general
partners of the Selling Stockholders and are subject to an over-allotment option
granted by the Selling Stockholders to the underwriters.
Risk Factors
Prospective investors should carefully consider all of the information set forth
in this prospectus supplement and the accompanying prospectus and, in
particular, should evaluate the specific risk factors set forth under "Risk
Factors" for risks involved with an investment in the shares.
S-6
Summary Consolidated Historical Financial Data
The following tables set forth certain (a) historical financial data, (b) pro
forma financial data reflecting the sales of certain assets that have been
completed or are subject to current purchase agreements and (c) historical and
pro forma reserve and operating data. The historical data should be read in
conjunction with the historical Consolidated Financial Statements and Notes
thereto incorporated by reference herein, and the pro forma data should be read
in conjunction with the Unaudited Pro Forma Combined Financial Statements and
Notes thereto incorporated by reference herein. Neither the historical nor the
pro forma results are necessarily indicative of future results.
Year Ended Three Months
December 31, Ended March 31,
-------------------------------------------------- -----------------------------------
Historical Pro Forma Historical Pro Forma
----------------------------------- --------- ---------------------- ---------
1996 1997 1998 1998 1998 1999 1999
--------- --------- --------- --------- --------- ---------- ---------
(dollars in thousands)
Consolidated Statement of
Operations Data:
Revenues:
Oil and gas sales................... $ 23,824 $ 73,827 $ 72,876 $ 59,895 $ 22,107 $ 14,780 $ 12,244
--------- ---------- --------- --------- --------- ---------- ---------
Expenses:
Oil and gas production.............. 7,312 16,298 27,078 19,801 8,060 4,953 3,771
Production and other taxes.......... 1,887 5,548 5,725 5,262 1,619 1,207 1,128
General and administrative.......... 2,270 5,372 9,163 6,948 2,731 2,169 1,808
Amortization of stock
option awards..................... 1,839 5,053 5,055 5,055 1,264 1,263 1,263
Exploration and abandonment......... 184 3,055 17,596 15,485 2,094 2,545 2,316
Depletion, depreciation
and amortization.................. 5,789 19,972 27,090 20,831 6,763 4,826 3,584
Impairment of long-lived
assets............................ -- 68,997 25,666 8,357 -- 25,900 --
Restructuring costs................. -- -- 625 -- -- -- --
--------- ---------- --------- --------- --------- ---------- ---------
Total expenses.................... 19,281 124,295 117,998 81,739 22,531 42,863 13,870
--------- ---------- --------- --------- --------- ---------- ---------
Operating income (loss)............. 4,543 (50,468) (45,122) (21,844) (424) (28,083) (1,626)
Interest expense.................... (2,965) (1,524) (8,648) (2,889) (1,707) (2,551) (1,143)
Other, net.......................... 503 258 1,172 128 86 631 44
Income taxes (expense)
benefit........................... (3,484) 18,267 5,381 5,381 720 -- --
--------- ---------- --------- --------- --------- ---------- ---------
Net loss............................ $ (1,403) $ (33,467) $ (47,217) $ (19,224) $ (1,325) $ (30,003) $ (2,725)
========= ========== ========= ========= ========= ========== =========
Operating and Other Data:
EBITDAX (a)......................... $ 12,923 $ 46,809 $ 31,617 $ 28,012 $ 9,918 $ 6,995 $ 5,581
Capital expenditures................ 150,119 114,377 63,235 14,067 7,548
Net cash provided by
used in) operating
activities........................ 7,710 46,563 18,448 4,681 3,157
Net cash used in
investing activities.............. (144,998) (114,302) (58,413) (11,719) (6,743)
Net cash provided by
financing activities.............. 137,365 63,052 38,972 10,371 4,062
Consolidated Balance Sheet
Data (at end of period):
Cash and cash equivalents........... $ 6,290 $ 1,603 $ 610 $ 4,936 $ 1,086 $ 1,086
Total assets........................ 207,179 $ 352,583 341,022 359,246 311,904 226,909
Total long-term debt,
including current
maturities........................ 6,500 85,450 144,200 101,200 148,300 64,878
Stockholders' equity................ 187,186 232,421 171,354 227,001 142,614 145,315
- ----------------------------------
(a) EBITDAX (as used herein) is calculated by adding interest, income taxes,
depletion, depreciation and amortization, impairment of long-lived assets,
restructuring costs, amortization of stock option awards, exploration and
abandonment costs, and other noncash charges to net income (loss). EBITDAX is
not intended to represent cash flow or any other measure of performance in
accordance with GAAP. EBITDAX is included herein because management believes
that certain investors find it to be a useful analytical tool. Other companies
may calculate EBITDAX differently, and we cannot assure you that such figures
are comparable with similarly-titled figures for such other companies.
S-7
Summary Reserve and Production Data
(Dollars in thousands, except per unit amounts)
Year Ended December 31,
-----------------------------------------------
Historical Pro Forma
---------------------------------- -----------
1996 1997 1998 1998
---------- ---------- ---------- -----------
Estimated Proved Reserves (at December 31)(a):
Oil (MBbls)............................................ 19,456 30,275 23,011 20,276
Gas (MMcf)............................................. 301,378 345,372 331,970 289,025
Natural gas equivalents (MMcfe)........................ 418,114 527,022 470,036 410,681
Percent natural gas....................................... 72% 66% 71% 70%
Percent proved developed.................................. 66% 68% 60% 69%
Product prices (at December 31):
Oil (per Bbl).......................................... $ 25.09 $ 16.11 $ 9.49 $ 9.52
Natural gas (per Mcf).................................. $ 2.70 $ 1.83 $ 1.57 $ 1.51
Future net cash flows (at December 31):
Undiscounted........................................... $952,158 $729,051 $437,137 $380,644
Discounted............................................. 537,366 435,127 242,170 202,952
Average Reserve Life (years)(b)........................... NM 16 11 12
Reserve additions (MMcfe):
Acquisitions........................................... 188,929 86,269 20,415 13,984
Extensions, discoveries and revisions.................. 67,385 56,023 (35,256) (35,846)
-------- -------- -------- --------
Total additions........................................ 256,314 142,292 (14,841) (21,862)
======== ======== ======== ========
Costs incurred:
Acquisitions........................................... $139,912 $125,403 $ 5,398
Exploration and development costs...................... 12,597 47,752 51,979
-------- -------- --------
Total costs incurred................................... $152,509 $173,155 $ 57,377
======== ======== ========
Cumulative all sources unit finding cost (per Mcfe)(c).... -- $ 0.65 $ 0.77
Three Months Ended
Year Ended December 31, March 31,
------------------------------------- ----------------------------------
Historical Pro Forma Historical Pro Forma
------------------------- --------- -------------------- ---------
1996 1997 1998 1998 1998 1999 1999
------- ------- ------- --------- -------- ------- --------
Production:
Oil (MBbls)..................... 714 1,880 2,492 2,206 629 598 521
Gas (MMcf)...................... 5,787 22,104 26,731 21,935 7,326 6,192 5,145
Total (MMcfe)................... 10,071 33,384 41,683 35,171 11,100 9,780 8,271
Average Sales Price Per Unit(d):
Oil (per Bbl)................... $ 19.16 $ 18.67 $ 12.05 $ 12.05 $ 13.65 $ 10.64 $ 10.65
Gas (per Mcf)................... 1.75 1.75 1.60 1.52 1.85 1.36 1.30
Mcfe............................ 2.37 2.21 1.75 1.70 1.99 1.51 1.48
Expenses Per Mcfe:
Production costs, excluding
production taxes.............. $ 0.72 $ 0.48 $ 0.65 $ 0.56 $ 0.73 $ 0.51 $ 0.46
Production and other taxes...... 0.19 0.17 0.14 0.15 0.15 0.12 0.14
General and administrative........ 0.23 0.16 0.22 0.20 0.26 0.22 0.22
Depreciation, depletion and
amortization.................. 0.57 0.60 0.65 0.59 0.61 0.49 0.43
- ----------------------------
(a) The reserve and present value data at December 31, 1996, 1997 and 1998 has
been prepared by Williamson Petroleum Consultants, Inc. ("Williamson"),
independent petroleum engineering consultants, and us. Of our total PV-10,
Williamson evaluated certain properties representing 100%, 90% and 77% of
PV-10 for the years ended December 31, 1996, 1997 and 1998, respectively.
For additional information relating to our oil and gas reserves, see "Risk
Factors--We Face the Risk of Volatility of Oil and Gas Prices and the
Marketability of Our Production" and "--Uncertainty of Reserve Information
and Future Net Revenue Estimates," in the accompanying prospectus.
(b) Average reserve life is calculated by dividing total reserves by our actual
production for the period.
(c) Finding cost is calculated by dividing total cumulative costs incurred by
total cumulative reserve additions.
(d) Reflects results of hedging activities.
S-8
CAPITALIZATION
The following table sets forth as of March 31, 1999, our (a) historical
capitalization and (b) pro forma capitalization reflecting the sales of certain
assets that have been completed or are subject to current purchase agreements.
The table should be read in conjunction with the Consolidated Financial
Statements and Notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" incorporated by reference in the
accompanying prospectus.
March 31, 1999
---------------------
Historical Pro Forma
---------- ---------
(dollars in thousands)
Long-Term Debt (including current maturities):
Existing Credit Agreement......................... $145,000 $ 64,000
Unsecured Credit Agreement......................... 3,300 878
-------- --------
Total long-term debt, including current
maturities........................................ 148,300 64,878
Total stockholders' equity......................... 142,614 145,315
-------- --------
Total capitalization............................... $290,914 $210,193
======== ========
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our common stock is listed on the Nasdaq National Market under the symbol
"TEXP." The following table sets forth, for the periods indicated, the high and
low closing sales price per share for our common stock.
High Low
------------- -------------
Fiscal Year Ended December 31, 1997
First Quarter..................... $ 14 1/8 $ 8 1/8
Second Quarter.................... 12 1/8 7 1/8
Third Quarter..................... 12 1/2 9 1/2
Fourth Quarter.................... 13 1/2 9 1/8
Fiscal Year Ended December 31, 1998
First Quarter..................... $ 9 1/4 $ 7
Second Quarter.................... 9 1/2 7 3/4
Third Quarter..................... 8 3/4 5 1/2
Fourth Quarter.................... 7 1/2 5 1/2
Fiscal Year Ended December 31, 1999
First Quarter..................... $ 7 1/8 $ 4 9/16
Second Quarter.................... 5 13/16 4 15/32
On July 1, 1999, the last reported sales price on the Nasdaq National Market was
$5 3/8 per share. As of April 15, 1999, there were approximately 140 holders of
record and more than 3,000 beneficial owners of record of our common stock.
We have never paid any cash dividends on our common stock, and our Board of
Directors does not currently intend to declare cash dividends on our common
stock. We instead intend to retain our earnings to support the growth of our
business. Any future cash dividends would depend on future earnings, capital
requirements and our financial condition and other factors deemed relevant by
our Board of Directors. Our credit facility currently prohibits the payment of
dividends.
S-9
SELLING STOCKHOLDERS
The following table sets forth the names of the Selling Stockholders, the
aggregate number of shares owned by each Selling Stockholder prior to this
offering, the percentage of our outstanding common stock owned by each such
Selling Stockholder prior to this offering, the aggregate number of shares to be
offered by each Selling Stockholder, the aggregate number of shares to be owned
by each Selling Stockholder after the sale of all shares in this offering and
the percentage of our outstanding common stock that will be owned by each such
Selling Stockholder thereafter, in each case assuming the offering and sale of
all shares covered by this Prospectus, other than the shares subject to the
over-allotment option.
Shares Beneficially Owned Shares Beneficially Owned
Prior to Offering After Offering
--------------------------- -----------------------------
Number of Number of Shares Number of
Selling Stockholders Shares Percent (1) Being Offered Shares (2) Percent (1)
- -------------------------------------- ------------ ------------- ---------------- ---------- -----------
Natural Gas Partners, L.P. (3)(6)
777 Main Street, Suite 2250
Fort Worth, Texas 76102 6,159,366 16.35% 5,155,726 1,003,640 2.66%
Natural Gas Partners II, L.P.(4)
777 Main Street, Suite 2250
Fort Worth, Texas 76102 5,000,777 13.27% 4,575,121 425,656 1.13%
NGP Louisiana Partners, L.P. (5)(6)
777 Main Street, Suite 2250
Fort Worth, Texas 76102 357,486 * 284,483 73,003 *
---------- ----- ---------- --------- ----
Total ............................ 11,517,629 30.57% 10,015,330 1,502,299 3.99%
========== ===== ========== ========= ====
____________________
*Represents beneficial ownership of less than 1% of the outstanding shares of
Common Stock.
(1) Based on 37,680,675 shares of Common Stock issued and outstanding as of June
30, 1999.
(2) These shares are allocable to the interests of the general partners of the
Selling Stockholders and will be sold only pursuant to an over-allotment
option granted to the underwriters by the Selling Stockholders.
(3) 1,391,959 of the shares being offered were acquired from us pursuant to the
Amended and Restated Merger Agreement among Titan, Offshore Energy
Development Corporation and our wholly-owned subsidiaries. We are
registering such shares pursuant to certain registration requirements
contained in a registration rights agreement entered into pursuant to such
merger agreements to permit secondary trading of the acquired shares. See
"Plan of Distribution." 4,767,407 of the shares being offered were acquired
from us in a private placement that was completed in April 1995.
(4) These shares were acquired from us in a private placement that was completed
in April 1995.
(5) The shares being offered were acquired from us pursuant to the Carrollton
Merger Agreement. We are registering the shares received pursuant to the
Carrollton Merger Agreement pursuant to certain registration requirements
contained in a registration rights agreement entered into pursuant to such
merger agreements to permit secondary trading of the acquired shares.
(6) Natural Gas Partners, L.P. ("NGP") is the sole limited partner of NGP-
Louisiana Partners, L.P. ("NGP-Louisiana") and owns a 95.07% economic
interest in NGP-Louisiana. A corporation serves as the general partner and
owns the remaining 4.93% of NGP-Louisiana.
Each of the Selling Stockholders is offering to sell its shares in Titan in
accordance with its obligations to its limited partners under the limited
partnership agreement governing such Selling Stockholder. The Selling
Stockholders will sell 1,502,299 of the shares allocable to the general partners
pursuant to the respective limited partnership agreements only pursuant to the
exercise of an overallotment option in this offering; otherwise such shares will
be distributed to the general partners on or after the proceeds of the sale of
the shares sold pursuant hereto are distributed to the limited partners of the
Selling Stockholders.
S-10
UNDERWRITING
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date of this Prospectus Supplement, the underwriters, J.P.
Morgan Securities Inc. and Petrie Parkman & Co., Inc., have severally agreed to
purchase, and the Selling Stockholders have agreed to sell to them, the
respective number of shares of Common Stock set forth opposite their names
below.
Underwriters Number of Shares
- ------------ ----------------
J.P. Morgan Securities Inc. .............................. 6,509,965
Petrie Parkman & Co., Inc. .............................. 3,505,365
----------------
Total ............................................... 10,015,330
================
The underwriting agreement provides that the obligations of the several
underwriters to purchase shares of Common Stock are subject to the approval of
certain legal matters by counsel and to certain other conditions. Under the
terms and conditions of the underwriting agreement, the underwriters are
obligated to take and pay for all such shares of common stock, if any are taken.
The underwriters propose initially to offer the shares of common stock directly
to the public at the public offering price set forth on the cover page of this
prospectus and to certain dealers at such price less a concession not in excess
of $0.133 per share. The underwriters may allow, and such dealers may re-allow,
a concession not in excess of $0.100 per share to certain other dealers.
Following this offering of the Common Stock, the offering price and other
selling terms may be changed from time to time by the underwriters.
Pursuant to the underwriting agreement, the Selling Stockholders have granted to
the underwriters an option, exercisable for 30 days from the date hereof, to
purchase up to 1,502,299 additional shares of Common Stock, on the same terms
and conditions as set forth on the cover page hereof. If such option is
exercised in full, the total price to the public, underwriting discounts and
commissions, and proceeds to the Selling Stockholders will be $60,467,552,
$2,568,431 and $57,899,121. The underwriters may exercise such option solely to
cover over-allotments, if any, made in connection with the sale of shares of
Common Stock offered hereby. To the extent such option is exercised, each of
the underwriters will have a commitment, subject to certain conditions, to
purchase approximately the same percentage of such additional shares as the
number of shares of Common Stock to be purchased by it as shown in the table
above bears to the total number shares of Common Stock initially offered hereby.
Titan Exploration and certain of the stockholders, officers and directors of
Titan Exploration have agreed that during the period beginning from the date of
this Prospectus Supplement and continuing to and including the date 90 days
after the date of this Prospectus Supplement they will not (1) offer, pledge,
announce the intention to sell, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of, directly or
indirectly, any shares of Common Stock or any securities of Titan Exploration
which are substantially similar to the Common Stock, including but not limited
to any securities that are convertible into or exercisable or exchangeable for,
or that represent the right to receive Common Stock or any such substantially
similar securities or (2) enter into any swap, option, future, forward or other
agreement that transfers, in whole or in part, the economic consequences of
ownership of Common Stock or any securities substantially similar to the Common
Stock (other than pursuant to employee stock option plans existing on, or upon
the conversion or exchange of convertible or exchangeable securities outstanding
as of, the date of this prospectus supplement), without the prior written
consent of J.P. Morgan Securities Inc.
It is estimated that the total expenses of this offering, excluding underwriting
discounts, will be approximately $200,000. The Selling Stockholders may be
responsible for a portion of such expenses.
Titan Exploration and the Selling Stockholders have agreed to indemnify the
underwriters against certain liabilities, losses and expenses, including
liabilities under the Securities Act, or to contribute to payments that the
underwriters may be required to make in respect thereof.
In connection with this offering, the underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of Common Stock.
Specifically, the underwriters may over-allot in connection with the offering,
S-11
creating a syndicate short position. In addition, the underwriters may bid for,
and purchase, shares of Common Stock in the open market to cover syndicate short
positions or to stabilize the price of Common Stock. Finally, the underwriting
syndicate may reclaim selling concessions allowed for distributing the Common
Stock in the offering, if the syndicate repurchases previously distributed
Common Stock in syndicate covering transactions, in stabilization transactions
or otherwise. Any of these activities may stabilize or maintain the market
price of the Common Stock above independent market levels. The underwriters are
not required to engage in these activities, and may end any of these activities
at any time.
Petrie Parkman & Co., Inc. has provided investment banking advice to Titan
Exploration from time to time for which it has received customary compensation.
Certain of the Underwriters and selling group members (if any) that currently
act as market makers for the Common Stock may engage in "passive market making"
in the Common Stock on Nasdaq in accordance with Rule 103 of Regulation M under
the Securities Exchange Act of 1934. Rule 103 permits, upon the satisfaction of
certain conditions, underwriters and selling group members participating in a
distribution that are also Nasdaq market makers in the security being
distributed to engage in limited market making transactions during the period
when Rule 101 of Regulation M would otherwise prohibit such activity. Rule 103
prohibits underwriters and selling group members engaged in passive market
making generally from entering a bid or effecting a purchase at a price that
exceeds the highest bid for those securities displayed on Nasdaq by a market
maker that is not participating in the distribution or at a time when a
stabilization bid is in effect. Under Rule 103, each underwriter or selling
group member engaged in passive market making is subject to a daily net purchase
limitation equal to the greater of (a) 30% of such entity's average daily
trading volume during the two full consecutive calendar months immediately
preceding the date of the filing of the registration statement under the
Securities Act pertaining to the security to be distributed and (b) 200 shares.
Passive market making may stabilize the market price of the Common Stock at a
level above that which might otherwise prevail and, if commenced, may be
discontinued at any time.
LEGAL OPINIONS
The legality of the Common Stock offered hereby will be passed upon for us by
Thompson & Knight, P.C., Dallas, Texas. Certain matters will be passed upon for
the underwriters by Davis Polk & Wardell, New York, New York.
EXPERTS
The consolidated financial statements of Titan Exploration, Inc. as of December
31, 1998 and 1997 and for each of the years in the three-year period ended
December 31, 1998 and the statements of revenues and direct operating expenses
for the 1996 Acquisition for the years ended December 31, 1995, 1994, and 1993,
have been incorporated herein by reference in reliance upon the report of KPMG
LLP, independent certified public accountants, and upon the authority of said
firm as experts in accounting and auditing.
Certain estimates of oil and gas reserves included and incorporated by reference
herein were based upon engineering evaluations prepared by Williamson Petroleum
Consultants, Inc., independent engineers. Of the Company's total PV-10,
Williamson evaluated certain properties representing 100%, 90% and 77% of PV-10
for the years ended December 31, 1996, 1997 and 1998, respectively. Such
estimates are included or incorporated herein in reliance on the authority of
such firm as experts in such matters.
S-12
PROSPECTUS
11,517,629 Shares
TITAN EXPLORATION, INC.
500 West Texas, Suite 200
Midland, Texas 79701
(915) 498-8600
Common Stock
--------------------
Certain stockholders of Titan Exploration, Inc. are offering up to
11,517,629 shares of Titan common stock under this prospectus.
Two of the selling stockholders obtained 9,768,184 of their shares of Titan
common stock in private placements completed prior to Titan's initial public
offering in December 1996. In addition, one such stockholder, along with an
affiliate, obtained 1,749,445 shares of Titan common stock on December 12, 1997
by virtue of Titan's acquisition of Offshore Energy Development Corporation and
Carrollton Resources, L.L.C. Except as described in the discussion of SELLING
STOCKHOLDERS, the selling stockholders expect to sell all of their shares.
The selling stockholders may offer their Titan common stock through public
or private transactions, on or off the Nasdaq Stock Market's National Market
(the "Nasdaq"), at prevailing market prices, or at privately negotiated prices.
The selling stockholders can utilize broker-dealers to facilitate these
transactions. To the extent required, the specific shares to be sold, the terms
of the offering, including price, the names of any agent, dealer or underwriter,
and any applicable commission, discount or other compensation with respect to a
particular sale will be set forth in an accompanying prospectus supplement.
Titan's common stock is listed on the Nasdaq under the symbol "TEXP." On
June 7, 1999, the last reported sale price of the Titan common stock on the
Nasdaq was $4/15/32/ per share.
Investing in the Titan common stock involves certain risks. See "Risk
Factors" beginning on page 4.
-----------------------
The Titan shares of common stock offered or sold under this prospectus have
not been approved by the Securities and Exchange Commission or any state
securities commission, nor have these organizations determined that this
prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
-----------------------
The date of this prospectus is June 8, 1999.
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with the
SEC. This prospectus provides you with a general description of the securities
being offered. You should read this prospectus together with additional
information described under the heading WHERE YOU CAN FIND MORE INFORMATION and
any information contained in an accompanying prospectus supplement.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any document we file at the
SEC's public reference rooms at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the SEC's Regional Offices at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511, and
at 7 World Trade Center, Suite 1300, New York, New York 10048. Our SEC filings
are also available to the public over the Internet at the SEC's web site at
http://www.sec.gov. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms.
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
an important part of this prospectus, and information that we file later with
the SEC will automatically update and supersede this information. We
incorporate by reference the documents listed below and any future filings made
with the SEC under Sections 13(a), 13(c), 14, or 15(d) of the Securities
Exchange Act of 1934 until we sell all of the securities.
. The Financial Statements for our 1996 acquisition of Permian Basin oil and
gas properties included in our Registration Statement on Form S-4 filed on
November 14, 1997 (Registration No. 333-40215).
. Annual Report on Form 10-K for the year ended December 31, 1998.
. Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.
. Current Report on Form 8-K dated May 20, 1999. This filing includes the
unaudited pro forma combined financial statements of the Company which
primarily reflect the effects of the disposition of certain assets.
. Form 8-A dated December 9, 1996 containing a description of the Common
Stock.
You may request a copy of these filings at no cost by writing or
telephoning us at the following address:
Titan Exploration, Inc.
Attn: William K. White Vice President, Finance and Chief Financial
Officer
500 West Texas, Suite 200
Midland, TX 79701
(915) 498-8600
You should rely only on the information incorporated by reference or
provided in this prospectus or contained in an accompanying prospectus
supplement. We have not authorized anyone else to provide you with different
information. We are not making an offer of these securities in any state where
the offer is not permitted. You should not assume that the information in this
prospectus is accurate as of any date other than the date on the front of this
document.
2
TITAN
Titan Exploration, Inc. is an independent energy company engaged in the
exploitation, development, exploration and acquisition of oil and gas properties
currently located in the Permian Basin of West Texas and southeastern New Mexico
and central Texas. Since our inception in March 1995, we have increased our
reserves, production and cash flow through (a) the acquisition of producing
properties that provide exploitation, development and exploration potential and
(b) the development and exploration of our properties.
Our strategy is to grow reserves, production and net income per share
through:
. acquisition of producing properties that provide significant development
and exploratory drilling potential,
. exploitation and development of our reserve base,
. exploration for oil and gas reserves,
. capitalization on advanced technology to identify, explore and exploit
projects,
. financial flexibility, and
. a low overhead and operating cost structure.
As of December 31, 1998, our estimated net proved reserves were
approximately 23.0 MMBbls of oil and 332.0 Bcf of natural gas, or an aggregate
of 470.0 Bcfe with a PV-10 of $242.2 million. Approximately 60% of these
reserves were classified as proved developed. As of December 31, 1998, on a pro
forma basis, assuming the disposition of assets that have closed or are subject
to current purchase agreements, our estimated net proved reserves would have
been approximately 20.3 MMBbls of oil and 289.0 Bcf of gas, or an aggregate of
410.7 Bcfe with a PV-10 of $203.0 million. Approximately 69% of these reserves
were classified as proved developed on a pro forma basis. We acquired, explored
for and developed our reserves for an average reserve replacement cost of
approximately $.77 per Mcfe from our inception through December 31,1998.
We prefer to acquire properties over which we can exercise operating
control. As of December 31, 1998, we operated 825 gross productive wells (740
net productive wells) and these operated properties represented approximately
84% of proved developed PV-10 and 83% of our PV-10 attributable to proved
reserves as of such date. We believe our emphasis on controlling the operation
of properties enables us to better manage expenses, capital allocation and other
aspects of development and exploration.
Our proved oil and gas properties are principally located in approximately
90 fields in the Permian Basin and in central and south Texas. Approximately
75% of our PV-10 of total proved reserves is concentrated in 16 principal fields
located in the Permian Basin. The Permian Basin is characterized by complex
geology with numerous known producing horizons and provides significant
opportunities to increase reserves, production and ultimate recoveries through
development, exploratory and horizontal drilling, recompletions, secondary and
tertiary recovery methods, and use of 3-D seismic and other advanced
technologies.
USE OF PROCEEDS
All net proceeds from the sale of the Titan shares will go to the
stockholders who offer and sell their shares. Accordingly, we will not receive
any proceeds from sales of the Titan shares.
3
RISK FACTORS
In addition to the other information contained or incorporated by reference
in this prospectus, you should carefully consider the risks that we have
highlighted in the next section.
We Face the Risk of Volatility of Oil and Gas Prices and the Marketability of
Our Production
Our revenues, operating results and future rate of growth are highly
dependent upon the prices we receive for our oil and gas. Historically, the
markets for oil and gas have been volatile and may continue to be volatile in
the future. Various factors which are beyond our control will affect prices of
oil and gas, such as:
. the worldwide and domestic supplies of oil and gas,
. the ability of the members of the Organization of Petroleum Exporting
Countries ("OPEC") to agree to and maintain oil price and production
controls,
. political instability or armed conflict in oil-producing regions,
. the price and level of foreign imports,
. the level of consumer demand,
. the price and availability of alternative fuels,
. the availability of pipeline capacity,
. weather conditions,
. domestic and foreign governmental regulations and taxes, and
. the overall economic environment.
We are unable to predict the long-term effects of these and other
conditions on the prices of oil. Lower oil and gas prices may reduce the amount
of oil and gas we produce economically, which may adversely affect our revenues
and operating income and may require a reduction in the carrying value of our
oil and gas properties. We make substantially all of our sales of oil and gas
in the spot market or pursuant to contracts based on spot market prices and not
pursuant to long-term fixed price contracts. We try to reduce price risk by
entering into hedging transactions with respect to a portion of our expected
future production. We cannot assure you, however, that such hedging
transactions will reduce risk or mitigate the effect of any substantial or
extended decline in oil or natural gas prices.
The marketability of our production depends in part upon the availability,
proximity and capacity of natural gas gathering systems, pipelines and
processing facilities. Most of our natural gas is delivered through gas
gathering systems and gas pipelines that we do not own. Federal and state
regulation of oil and gas production and transportation, tax and energy
policies, changes in supply and demand and general economic conditions all could
adversely affect our ability to produce and market our oil and gas. Any
dramatic change in market factors could have a material adverse effect on our
business, financial condition and results of operations.
Our Business Requires Substantial Capital Expenditures
We make, and will continue to make, substantial capital expenditures for
the exploration, development, acquisition and production of our oil and gas
reserves. We intend to finance these capital expenditures primarily with funds
provided by operations, the incurrence of debt, the issuance of equity and the
sale of non-core assets. Our direct capital expenditures for oil and gas
producing activities were $52.0 million, $47.8 million and $12.6 million for the
years ended December 31, 1998, 1997 and 1996, respectively, and $4.3 million for
the three months ended March 31, 1999. If revenues decrease as a result of
lower oil or gas prices or otherwise, we may have limited ability to expend the
capital necessary to replace our reserves or to maintain production at current
levels, resulting in a decrease in production over time. If our cash flow from
operations and
4
availability under our credit agreement are not sufficient to satisfy our
capital expenditure requirements, we cannot assure you that we will be able to
obtain additional debt or equity financing to meet these requirements.
Uncertainty of Reserve Information and Future Net Revenue Estimates
There are numerous uncertainties inherent in estimating quantities of
proved reserves and their values, including many factors beyond our control.
The reserve information contained in this prospectus and our other filings with
the SEC represents estimates only. Although we believe such estimates are
reasonable, reserve estimates are imprecise and you should expect them to change
as additional information becomes available.
Estimates of oil and gas reserves, by necessity, are projections based on
the evaluation of available geological, geophysical, economic and engineering
data, and there are uncertainties inherent in the interpretation of such data as
well as the projection of future rates of production and the timing of
development expenditures. Reserve engineering is a subjective process of
estimating underground accumulations of oil and gas that are difficult to
measure. The accuracy of any reserve estimate is a function of the quality of
available data, engineering and geological interpretation and judgment.
Estimates of economically recoverable oil and gas reserves and of future net
cash flows necessarily depend upon a number of variable factors and assumptions,
such as historical production from the area compared with production from other
producing areas, the assumed effects of regulations by governmental agencies and
assumptions concerning future oil and gas prices, future operating costs,
severance and excise taxes, development costs and workover and remedial costs,
all of which may in fact vary considerably from actual results. For these
reasons, estimates of the economically recoverable quantities of oil and gas
attributable to any particular group of properties, classifications of such
reserves based on risk of recovery and estimates of the future net cash flows
expected therefrom may vary substantially from those estimated in this
prospectus and our other filings with the SEC. Moreover, we cannot assure you
that our reserves will ultimately be produced or that our proved undeveloped
reserves, the recovery of which requires significant capital expenditures and
successful drilling operations, will be developed within the periods
anticipated. Any significant variance in the assumptions could materially
affect the estimated quantity and value of our reserves. Actual production,
revenues and expenditures with respect to our reserves will likely vary from
estimates, and such variances may be material.
Approximately 40% of our total proved reserves on December 31, 1998 were
undeveloped, which are by their nature less certain. Recovery of these reserves
will require significant capital expenditures and successful drilling
operations. The reserve data set forth in our estimates assumes that we will
expend substantial capital to develop these reserves. Although we have prepared
our cost and reserve estimates attributable to our oil and gas reserves in
accordance with industry standards, we cannot assure you that the estimated
costs are accurate, that development will occur as scheduled or that the results
will be as estimated.
In addition, you should not construe the PV-10 referred to in this
prospectus to be the current market value of the estimated oil and gas reserves
attributable to our properties. In accordance with applicable requirements, we
generally base the estimated discounted future net cash flows from proved
reserves on prices and costs as of the date of the estimate, whereas actual
future prices and costs may be materially higher or lower. The amount and
timing of actual production, supply and demand for oil and gas, curtailments or
increases in consumption by gas purchasers, changes in governmental regulations
or taxation and other factors will also affect actual future net cash flows.
The timing of both the production and the incurrence of expenses in connection
with development and production of oil and gas properties will affect the timing
of actual future net cash flows from proved reserves, and thus also affect their
actual present value. In addition, the 10% discount factor, which the SEC
requires us to use in our calculation of the discounted future net cash flows
for reporting purposes, is not necessarily the most appropriate discount factor
based on interest rates in effect from time to time and risks associated with us
or the oil and gas industry in general.
Reserve Replacement Risk
Our future success depends upon our ability to find, develop or acquire
additional oil and gas reserves that are economically recoverable. Our proved
reserves will generally decline as a result of continued production, except to
the extent that we conduct successful exploration or development activities or
acquire properties containing proved reserves, or both. In order to increase
reserves and production, we must continue our development and exploration
drilling and recompletion programs or undertake other replacement activities.
Exploratory drilling and, to a lesser extent, development drilling involve
a high degree of risk that we will not obtain commercial production or that our
production will be insufficient to recover drilling and completion costs. We
cannot state the
5
costs of drilling, completing and operating wells with certainty. Numerous
factors, including title problems, weather conditions, compliance with
governmental requirements and shortages or delays in the delivery of equipment
may curtail, delay or cancel our drilling operations. Furthermore, there is no
guarantee that we will recognize a profit on the investment or that we will
recover our drilling, completion and operations cost upon the completion of a
well.
There are certain risks associated with secondary recovery operations,
especially the use of waterflooding techniques. Part of our inventory of
development prospects consists of waterflood projects. Waterflooding involves
significant capital expenditures and uncertainty as to the total amount of
secondary reserves that we can recover. In waterflood operations, there is
generally a delay between the initiation of water injection into a formation
containing hydrocarbons and any resulting increase in production. The operating
cost per unit of production of waterflood projects is generally higher during
the initial phases of such projects due to the purchase of injection water and
related costs, as well as during the later stages of the life of the project as
production declines. The degree of success, if any, of any secondary recovery
program depends on a large number of factors, including the porosity of the
formation, the technique used and the location of injector wells.
Our current strategy includes increasing our reserve base through
acquisitions of producing properties, continued exploitation of our existing
properties and exploration of new and existing properties. We cannot assure
you, however, that our planned development and exploration projects and
acquisition activities will result in significant additional reserves or that we
will have continuing success drilling productive wells at low finding and
development costs. Furthermore, while our revenues may increase if prevailing
oil and gas prices increase significantly, our finding costs for additional
reserves could also increase.
Acquisition Risks
We expect to continue to evaluate and pursue acquisition opportunities
available on terms that our management considers favorable to us. The
successful acquisition of producing properties involves an assessment of
recoverable reserves, future oil and gas prices, operating costs, potential
environmental and other liabilities and other factors beyond our control. This
assessment is necessarily inexact and its accuracy is inherently uncertain. In
connection with such an assessment of the subject properties, we perform a
review that we believe is generally consistent with industry practices. This
review, however, will not reveal all existing or potential problems, nor will it
permit a buyer to become sufficiently familiar with the properties to assess
fully their deficiencies and capabilities. Inspections may not be performed on
every well, and structural and environmental problems are not necessarily
observable even upon inspection. We generally assume preclosing liabilities,
including environmental liabilities, and generally acquire interests in the
properties on an "as is" basis. With respect to our acquisitions to date, we
have no material commitments for capital expenditures to comply with existing
environmental requirements. In addition, volatile oil and gas prices make it
difficult to estimate the value of producing properties for acquisition and
often cause disruption in the market for oil and gas producing properties, as
buyers and sellers have difficulty agreeing on such value. Price volatility
also makes it difficult to budget for and project the return on acquisitions and
development and exploration projects. We cannot assure you that our
acquisitions will be successful. Any unsuccessful acquisition could have a
material adverse effect on us.
We Have a Limited Operating History and Have Grown Rapidly
We began operations in March 1995, and our brief operating history includes
four years of net losses and rapid growth. As a result, our historical results
are not readily comparable to and may not be indicative of future results. We
cannot assure you that we will continue to experience growth in, or maintain our
current level of, revenues, oil and gas reserves or production. Future tax
amounts, if any, will depend on several factors, including, but not limited to,
our results of operations.
Our rapid growth has placed significant demands on our administrative,
operational and financial resources. Any future growth of our oil and gas
reserves, production and operations would place significant further demands on
our financial, operational and administrative resources. Our future performance
and profitability will depend in part on our ability to successfully integrate
the administrative and financial functions of acquired properties and companies
into our operations, to hire additional personnel and to implement necessary
enhancements to our management systems to respond to changes in our business.
We cannot assure you that we will be successful in these efforts. Our inability
to integrate acquired properties and companies, to hire additional personnel or
to enhance our management systems could have a material adverse effect on our
results of operations.
6
Our Use of Leverage Limits Operational Flexibility
We have certain debt obligations that may affect our operations, including:
. our need to dedicate a substantial portion of our cash flow from
operations to the payment of interest on our indebtedness which prevents
these funds from being available for other purposes;
. the covenants contained in our credit facility limit our ability to borrow
additional funds or to dispose of assets and may affect our flexibility in
planning for, and reacting to, changes in business conditions; and
. our potential inability to obtain additional financing in the future for
working capital, capital expenditures, acquisitions, general corporate
purposes or other purposes.
Moreover, future acquisition or development activities may require us to alter
our capitalization significantly. These changes in capitalization may
significantly alter our leverage structure. Our ability to meet our debt
service obligations and to reduce our total indebtedness will depend on our
future performance, which will be subject to general economic conditions and to
financial, business and other factors affecting our operations, many of which
are beyond our control. We cannot assure you that economic conditions and
financial, business and other factors will not adversely affect our future
performance.
Drilling and Operating Risks; Uninsured Risks
Drilling activities are subject to many risks, including well blow outs,
cratering, uncontrollable flows of oil, natural gas or well fluids, fires,
formations with abnormal pressures, pollution, releases of toxic gases and other
environmental hazards and risks, any of which could result in substantial losses
to us. In addition, we incur the risk that we will not encounter any
commercially productive reservoirs through our drilling operations. We cannot
assure you that the new wells we drill will be productive or that we will
recover all or any portion of our investment in wells drilled. Drilling for oil
and gas may involve unprofitable efforts, not only from dry wells, but from
wells that are productive but do not produce net reserves to return a profit
after drilling, operating and other costs. The cost of drilling, completing and
operating wells is often uncertain. Numerous factors, many of which are beyond
our control, including economic conditions, mechanical problems, title problems,
weather conditions, compliance with governmental requirements and shortages and
delays in the delivery of equipment and services may curtail, delay or cancel
our drilling operations. In accordance with industry practices, we maintain
insurance against some, but not all, of these risks. We cannot assure you that
any of our insurance will be adequate to cover losses or liabilities.
Our Hedging Activities May Not Adequately Offset Risks We Face
Our use of energy swap arrangements and financial futures to reduce our
sensitivity to oil and gas price volatility is subject to a number of risks. If
we do not produce reserves at the rates we estimated due to inaccuracies in the
reserve estimation process, operational difficulties or regulatory limitations,
we would be required to satisfy obligations we may have under fixed price sales
and hedging contracts on potentially unfavorable terms without the ability to
hedge that risk through sales of comparable quantities of our own production.
Further, the terms under which we enter into fixed price sales and hedging
contracts are based on assumptions and estimates of numerous factors such as
cost of production and pipeline and other transportation costs to delivery
points. Substantial variations between the assumptions and estimates we used
and actual results we experience could materially adversely affect our
anticipated profit margins and our ability to manage the risk associated with
fluctuations in oil and gas prices. Additionally, fixed price sales and hedging
contracts limit the benefits we will realize if actual prices rise above the
contract prices. In addition, fixed price sales and hedging contracts are
subject to the risk that the counter-party may prove unable or unwilling to
perform its obligations under such contracts. Any significant nonperformance
could have a material adverse financial effect on us. As of March 31, 1999,
7,593,000 and 1,365,000 MMbtu of our 1999 and 2000 production, respectively,
were subject to hedging contracts.
We Are Subject to Extensive Government Regulations
Our business is subject to federal, state and local laws and regulations
relating to the exploration for, and the development, production and
transportation of, oil and gas, as well as safety matters that change from time
to time in response to economic or political conditions. Although we believe we
are in substantial compliance with all applicable laws and regulations, the
requirements imposed by such laws and regulations change frequently, and these
laws and regulations are subject to interpretation. Consequently, we are unable
to predict the ultimate cost of compliance with these requirements or
7
their effect on our operations. We may have to expend a significant amount of
resources to comply with government laws and regulations, and these expenditures
may have a material adverse effect on our business, financial condition and
results of operations.
Compliance with Environmental Regulations
Our operations are subject to complex and constantly changing environmental
laws and regulations adopted by federal, state and local governmental
authorities. The implementation of new, or the modification of existing, laws
or regulations could have a material adverse effect on our business, financial
condition and results of operations. The discharge of oil, gas or other
pollutants into the air, soil or water may give rise to significant liability on
our part to the government and third parties and may require us to incur
substantial costs of remediation. Moreover, we have agreed to indemnify sellers
of producing properties purchased in each of our substantial acquisitions
against environmental claims associated with these properties. We cannot assure
you that existing environmental laws or regulations, as currently interpreted or
reinterpreted in the future, or future laws or regulations will not materially
adversely affect the results of our operations or our financial condition or
that material indemnity claims will not arise against us with respect to
properties we acquired.
Competition in Our Industry is Intense
We operate in the highly competitive areas of oil and gas exploration,
development, acquisition and production with other companies, many of which have
substantially larger financial resources, staffs and facilities. In seeking to
acquire desirable producing properties or new leases for future exploration and
in marketing our oil and gas production, we face intense competition from both
major and independent oil and gas companies. Many of these competitors have
financial and other resources substantially in excess of those available to us.
This highly competitive environment could have a material adverse effect on us.
We Depend on Certain Key Personnel
Our success has been and will continue to be highly dependent on Jack
Hightower, our Chairman of the Board and Chief Executive Officer, and a limited
number of other senior management personnel. Loss of the services of Mr.
Hightower or any of those other individuals could have a material adverse effect
on our operations. We maintain a $3.0 million key man life insurance policy on
the life of Mr. Hightower, but no other senior management personnel. In
addition, we have 76 employees at June 1, 1999. We cannot assure you that we
will be successful in retaining key personnel. Our failure to hire additional
personnel, if necessary, or retain our key personnel could have a material
adverse effect on our business, financial condition and results of operations.
We Are Currently Controlled by Certain Existing Stockholders
Our directors, executive officers and principal stockholders, and certain
of our affiliates, beneficially own approximately 65.9% of our outstanding
common stock on a fully-diluted basis (38.0% assuming the sale of the Titan
shares relating to this prospectus). Accordingly, these stockholders, as a
group, are currently able to control the outcome of stockholder votes, including
votes concerning the election of directors, the adoption or amendment of
provisions in our Amended Certificate of Incorporation or Bylaws and the
approval of mergers and other significant corporate transactions. Following the
sale of the Titan shares relating to this prospectus, such stockholders will
still retain significant influence over such matters. The existence of these
levels of ownership concentrated in a few persons makes it unlikely that any
other holder of common stock will be able to affect our management or direction.
These factors may also have the effect of delaying or preventing a change in our
management or voting control.
Anti-Takeover Provisions
Delaware law includes a number of provisions that may have the effect of
delaying or deterring a change in the control of our management and encouraging
persons considering unsolicited tender offers or other unilateral takeover
proposals to negotiate with our Board of Directors rather than pursue non-
negotiated takeover attempts. These provisions may make it more difficult for
our stockholders to benefit from certain transactions which are opposed by the
incumbent Board of Directors.
8
Year 2000 Compliance
Many computer software systems, as well as certain hardware and equipment
using date-sensitive data, were structured to use a two-digit date field meaning
that they may not be able to properly recognize dates in the year 2000. We are
addressing this issue through a process that entails evaluation of our critical
software and, to the extent possible, our hardware and equipment to identify and
assess Year 2000 issues and to remediate, replace or establish alternative
procedures addressing non-Year 2000 compliant systems, hardware and equipment.
We have substantially completed an inventory of our systems and equipment,
including computer systems and business applications. Based upon this review,
we currently believe that all of our critical software and computer hardware
systems are either Year 2000 compliant or will be within the next three months.
We are continuing to inventory our equipment and facilities to determine if they
contain embedded date-sensitive technology. If problems are discovered,
remediation, replacement or alternative procedures for non-compliant equipment
and facilities will be undertaken on a business priority basis. This process
will continue and, depending upon the equipment and facilities, is scheduled for
completion during the first three quarters of 1999.
As of March 31, 1999, we have not incurred any material amount of expense
related to our Year 2000 compliance efforts. These costs are currently being
expensed as they are incurred. However, in certain instances, we may determine
that replacing existing equipment may be more efficient, particularly where
additional functionality is available. These replacements may be capitalized
and therefore would reduce the estimated 1999 expenses associated with the Year
2000 issue. We currently expect total out-of-pocket costs to become Year 2000
compliant to be less than $100,000. We currently expect that such costs will
not have a material adverse effect on our financial condition, operations or
liquidity.
The foregoing timetable and assessment of costs to become Year 2000
compliant reflect our management's current best estimates. These estimates are
based on many assumptions, including assumptions about the cost, availability
and ability of resources to locate, remediate and modify affected systems,
equipment and facilities. Based upon our activities to date, we do not
currently believe that these factors will cause results to differ significantly
from those estimated. However, we cannot reasonably estimate the potential
impact on its financial condition and operations if key third parties including,
among others, suppliers, contractors, joint venture partners, financial
institutions, customers and governments do not become Year 2000 compliant on a
timely basis. We are contacting many of these third parties to determine
whether they will be able to resolve in a timely fashion their Year 2000 issues
as they may affect our business.
In the event that we are unable to complete the remediation or replacement
of our critical systems, facilities and equipment, establish alternative
procedures in a timely manner, or if those with whom we conduct business are
unsuccessful in implementing timely solutions, Year 2000 issues could have a
material adverse effect on our liquidity and results of operations. At this
time, the potential effect in the event we and/or third parties are unable to
timely resolve Year 2000 problems is not determinable; however, we currently
believe that we will be able to resolve our own Year 2000 issues in a timely
manner.
FORWARD-LOOKING STATEMENTS
Certain statements contained in or incorporated by reference into this
prospectus, including, but not limited to, those regarding our financial
position, business strategy and other plans and objectives for future operations
and any other statements which are not historical facts constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements involve known and unknown
risks, uncertainties and other important factors that could cause our actual
results, performance or achievements, or industry results, to differ materially
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Although we believe that the expectations
reflected in these forward-looking statements are reasonable, we cannot assure
you that the actual results or developments we anticipate will be realized or,
even if substantially realized, that they will have the expected effects on our
business or operations. Among the factors that could cause actual results to
differ materially from our expectations are inherent uncertainties in
interpreting engineering and reserve data, operating hazards, delays or
cancellations of drilling operations for a variety of reasons, competition,
fluctuations and volatility in oil and gas prices, our ability to successfully
integrate the business and operations of acquired companies, compliance with
government and environmental regulations, increases in our cost of borrowing or
inability or unavailability of capital resources to fund capital expenditures,
dependence on key personnel, changes in general economic conditions and/or in
the markets in which we compete or may, from time to time, compete and other
factors including but not limited to those set forth in "Risk Factors" or in
"Titan." These factors expressly qualify all subsequent oral and written
forward-looking statements attributable to us or persons acting on our behalf.
We assume no obligation to update any of these statements.
9
SELLING STOCKHOLDERS
The following table sets forth the names of the selling stockholders, the
aggregate number of shares owned by each selling stockholder prior to this
offering, the percentage of our outstanding common stock owned by each such
selling stockholder prior to this offering, the aggregate number of shares to be
offered by each selling stockholder, the aggregate number of shares to be owned
by each selling stockholder after the sale of all shares in this offering and
the percentage of our outstanding common stock that will be owned by each such
selling stockholder thereafter, in each case assuming the offering and sale of
all shares covered by this prospectus.
Shares Beneficially Owned Shares Beneficially Owned
Prior to Offering After Offering
---------------------------- ----------------------------
Number of
Number of Shares Number of
Selling Stockholders Shares Percent (1) Being Offered(2) Shares Percent(1)
- --------------------------------- ---------- ---------- --------------- --------- ---------
Natural Gas Partners, L.P. (3)(6)
777 Main Street, Suite 2250
Fort Worth, Texas 76102 6,159,366 16.24% 6,159,366 -- --
Natural Gas Partners II, L.P.(4)
777 Main Street, Suite 2250
Fort Worth, Texas 76102 5,000,777 13.18% 5,000,777 -- --
NGP Louisiana Partners, L.P. (5)(6)
777 Main Street, Suite 2250
Fort Worth, Texas 76102 357,486 * 357,486 -- --
---------- ---------- --------------- --------- ---------
Total ......................... 11,517,629 30.36% 11,517,629 -- --
========== ========== =============== ========= =========
____________________
*Represents beneficial ownership of less than 1% of the outstanding shares of
Common Stock.
(1) Based on 37,934,675 shares of Common Stock issued and outstanding as of May
28, 1999.
(2) An indeterminate number of the shares being offered by each selling
stockholder is allocable to the interests of the general partners of
Natural Gas Partners, L.P. and Natural Gas Partners II, L.P.
(3) 1,391,959 of the shares being offered were acquired from us pursuant to the
Amended and Restated Merger Agreement among Titan, Offshore Energy
Development Corporation and our wholly-owned subsidiaries. We are
registering such shares pursuant to certain registration requirements
contained in a registration rights agreement entered into pursuant to such
merger agreements to permit secondary trading of the acquired shares. See
"Plan of Distribution." 4,767,407 of the shares being offered were
acquired from us in a private placement that was completed in April 1995.
(4) These shares were acquired from us in a private placement that was
completed in April 1995.
(5) The shares being offered were acquired from us pursuant to the Carrollton
Merger Agreement. We are registering the shares received pursuant to the
Carrollton Merger Agreement pursuant to certain registration requirements
contained in a registration rights agreement entered into pursuant to such
merger agreements to permit secondary trading of the acquired shares. See
"Plan of Distribution."
(6) Natural Gas Partners, L.P. ("NGP") is the sole limited partner of NGP-
Louisiana Partners, L.P. ("NGP-Louisiana") and owns a 95.07% economic
interest in NGP-Louisiana. A corporation serves as the general partner and
owns the remaining 4.93% of NGP-Louisiana.
Each of the selling stockholders is offering to sell its shares in Titan in
accordance with its obligations to its limited partners under the limited
partnership agreement governing such selling stockholder. A portion of the
Titan shares owned by Natural Gas Partners, L.P. and Natural Gas Partners II,
L.P., as listed in the above table, is allocable to the interest of the general
partner of each of these partnerships. The number of shares attributable to the
interests, which could range from under 5% to 20% of the shares, subject to this
prospectus, cannot be specifically calculated until final disposition of the
Titan shares. The general partners will sell the shares allocable to them
pursuant to the prospectus only pursuant to an overallotment option in an
underwritten offering; otherwise such shares will be distributed to the general
partners on or after the proceeds of the sale of the shares sold pursuant hereto
are distributed to the limited partners of the selling stockholders.
10
PLAN OF DISTRIBUTION
The Titan common stock may be sold from time to time by the selling
stockholders, subject to certain restrictions. All sales may be made by the
selling stockholders on the Nasdaq National Market, in privately negotiated
transactions or otherwise. The selling stockholders may sell their shares at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices at negotiated prices or at fixed prices. The common
stock may be sold by one or more of the following methods:
. A block trade in which the broker or dealer so engaged will attempt to
sell the common stock as agent, but may position and resell a portion of a
block as principal to facilitate the transaction;
. An underwritten public offering;
. Sales to a broker or dealer as principal, and resale by such broker or
dealer, for its account pursuant to this prospectus;
. Ordinary brokerage transactions and transactions in which the broker
solicits purchasers; and
. Privately negotiated transactions.
The selling stockholders may effect such transactions by selling the common
stock through or to brokers or dealers, and such brokers or dealers may receive
compensation in the form of discounts or commissions from the selling
stockholders, and may receive commissions from the purchasers of the common
stock for whom they may act as agent. At the time a particular offer of shares
is made, to the extent required, a prospectus supplement will be distributed
that will set forth the specific shares to be sold and the terms of the
offering, including the name or names of any underwriters or dealer-agents, any
discounts, commissions and other items constituting compensation from the
selling stockholders and any discounts, commissions or concessions allowed or
reallowed or paid to dealers.
Any of the shares covered by this prospectus which qualifies for sale
pursuant to Rule 144 or Rule 145 under the Securities Act of 1933 may be sold
under that rule rather than pursuant to this prospectus.
We cannot assure you that the selling stockholders will sell any or all of
the common stock offered by them hereunder.
We will pay all fees and expenses incident to the preparation and filing of
the Registration Statement and this prospectus, including legal and accounting
fees and expenses and any printing expenses other than any underwriting
discounts, any selling commissions payable in respect of sales of the common
stock, all of which will be paid by the selling stockholders. We will receive no
part of the proceeds from sales of the common stock. We intend to keep the
Registration Statement effective until the earlier of such time as the amount of
common stock held by the selling stockholders represents less than 10% of the
initial number amount of common stock and December 31, 1999.
The selling stockholders and any broker-dealer acting in connection with
the sale of the common stock offered hereby may be deemed to be "underwriters"
within the meaning of the Securities Act of 1933, in which event any discounts,
concessions or commissions received by them, which are not expected to exceed
those customary in the types of transactions involved, or any profit on resales
of the common stock by them, may be deemed to be underwriting commissions or
discounts under the Securities Act of 1933.
LEGAL MATTERS
The validity of the Common Stock offered hereby has been passed upon by
Thompson & Knight, P.C.
EXPERTS
The consolidated financial statements of Titan Exploration, Inc. as of
December 31, 1998 and 1997 and for each of the years in the three-year period
ended December 31, 1998 and the statements of revenues and direct operating
expenses for the 1996 Acquisition for the years ended December 31, 1995, 1994,
and 1993, have been incorporated herein by reference in reliance upon the report
of KPMG LLP, independent certified public accountants, and upon the authority of
said firm as experts in accounting and auditing.
11
Certain estimates of oil and gas reserves included and incorporated by
reference herein were based upon engineering evaluations prepared by Williamson
Petroleum Consultants, Inc., independent engineers. Of the Company's total PV-
10, Williamson evaluated certain properties representing 100%, 90% and 77% of
PV-10 for the years ended December 31, 1996, 1997 and 1998, respectively. Such
estimates are included or incorporated herein in reliance on the authority of
such firm as experts in such matters.
12
GLOSSARY OF OIL AND GAS TERMS
The following are abbreviations and definitions of terms commonly used in
the oil and gas industry and in this prospectus. Unless otherwise indicated in
this prospectus, natural gas volumes are stated at the legal pressure base of
the state or area in which the reserves are located and at 60 degrees Fahrenheit
and in most instances are rounded to the nearest major multiple. BOEs are
determined using the ratio of six Mcf of natural gas to one Bbl of oil.
"Bbl" means a barrel of 42 U.S. gallons of oil.
"Bcfe" means billion cubic feet equivalent, determined using the ratio of
six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas
liquids.
"BOE" means barrels of oil equivalent.
"Btu" means the measure of the amount of heat required to raise the
temperature of one pound of water one degree Fahrenheit.
"Completion" means the installation of permanent equipment for the
production of oil or gas.
"Gross," when used with respect to acres or wells, refers to the total
acres or wells in which the Company has a working interest.
"MBbls" means thousands of barrels of oil.
"Mcf" means thousand cubic feet of natural gas.
"Mcfe" means 1,000 cubic feet equivalent, determined using the ratio of six
Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids.
"MMbtu" means one million Btu's.
"MMcf" means million cubic feet of natural gas.
"MMcfe" means million cubic feet equivalent, determined using the ratio of
six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas
liquids.
"Net," when used with respect to acres or wells, refers to gross acres of
wells multiplied, in each case, by the percentage working interest owned by the
Company.
"Oil" means crude oil or condensate.
"Present Value of Future Revenues" or "PV-10" means the pretax present
value of estimated future revenues to be generated from the production of proved
reserves calculated in accordance with SEC guidelines, net of estimated
production and future development costs, using prices and costs as of the date
of estimation without future escalation, without giving effect to non-property
related expenses such as general and administrative expenses, debt service and
depreciation, depletion and amortization, and discounted using an annual
discount rate of 10%.
"Proved developed reserves" means reserves that can be expected to be
recovered through existing wells with existing equipment and operating methods.
Additional oil and gas expected to be obtained through the application of fluid
injection or other improved recovery techniques for supplementing the natural
forces and mechanisms of primary recovery will be included as "proved developed
reserves" only after testing by a pilot project or after the operation of an
installed program has confirmed through production response that increased
recovery will be achieved.
"Proved reserves" means the estimated quantities of crude oil, natural gas,
and natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions, i.e., prices and costs as of
the date the estimate is made. Prices include
13
consideration of changes in existing prices provided only by contractual
arrangements, but not on escalations based upon future conditions.
i. Reservoirs are considered proved if economic producibility is
supported by either actual production or conclusive formation test. The area of
a reservoir considered proved includes (A) that portion delineated by drilling
and defined by gas-oil and/or oil-water contacts, if any; and (B) the
immediately adjoining portions not yet drilled, but which can be reasonably
judged as economically productive on the basis of available geological and
engineering data. In the absence of information on fluid contacts, the lowest
known structural occurrence of hydrocarbons controls the lower proved limit of
the reservoir.
ii. Reserves which can be produced economically through application of
improved recovery techniques (such as fluid injection) are included in the
"proved" classification when successful testing by a pilot project, or the
operation of an installed program in the reservoir, provides support for the
engineering analysis on which the project or program was based.
iii. Estimates of proved reserves do not include the following: (A) oil
that may become available from known reservoirs but is classified separately as
"indicated additional reserves"; (B) crude oil, natural gas, and natural gas
liquids, the recovery of which is subject to reasonable doubt because of
uncertainty as to geology, reservoir characteristics, or economic factors; (C)
crude oil, natural gas, and natural gas liquids that may occur in undrilled
prospects; and (D) crude oil, natural gas, and natural gas liquids that may be
recovered from oil shales, coal, gilsonite and other such sources.
"Proved undeveloped reserves" means reserves that are expected to be
recovered from new wells on undrilled acreage, or from existing wells where a
relatively major expenditure is required for recompletion. Reserves on
undrilled acreage shall be limited to those drilling units offsetting productive
units that are reasonably certain of production when drilled. Proved reserves
for other undrilled units can be claimed only where it can be demonstrated with
certainty that there is continuity of production from the existing productive
formation. Under no circumstances should estimates for proved undeveloped
reserves be attributable to any acreage for which an application of fluid
injection or other improved recovery technique is contemplated, unless such
techniques have been proved effective by actual tests in the area and in the
same reservoir.
"Recompletion" means the completion for production of an existing well bore
in another formation from that in which the well has been previously completed.
"Reserves" means proved reserves.
"Royalty" means an interest in an oil and gas lease that gives the owner of
the interest the right to receive a portion of the production from the leased
acreage (or of the proceeds of the sale thereof), but generally does not require
the owner to pay any portion of the costs of drilling or operating the wells on
the leased acreage. Royalties may be either landowner's royalties, which are
reserved by the owner of the leased acreage at the time the lease is granted, or
overriding royalties, which are usually reserved by an owner of the leasehold in
connection with a transfer to a subsequent owner.
"Working interest" means an interest in an oil and gas lease that gives the
owner of the interest the right to drill for and produce oil and gas on the
leased acreage and requires the owner to pay a share of the costs of drilling
and production operations. The share of production to which a working interest
owner is entitled will always be smaller than the share of costs that the
working interest owner is required to bear, with the balance of the production
accruing to the owners of royalties. For example, the owner of a 100% working
interest in a lease burdened only by a landowner's royalty of 12.5% would be
required to pay 100% of the costs of a well but would be entitled to retain
87.5% of the production.
"Workover" means operations on a producing well to restore or increase
production.
14
TITAN EXPLORATION, INC.