1
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-K
----------------
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO_____________
COMMISSION FILE NUMBER: 000-21843
TITAN EXPLORATION, INC.
(Exact name of Registrant as Specified in its Charter)
DELAWARE 75-2671582
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 WEST TEXAS, SUITE 500
MIDLAND, TEXAS 79701
(Address of principal executive offices) (Zip Code)
(915) 682-6612
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
--------------------------------------------- ------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of March 14, 1997, the Registrant had outstanding 33,941,513 shares
of Common Stock. The aggregate market value of the Common Stock held by non-
affiliates of the Registrant, based upon the closing sale price of the Common
Stock on March 14, 1997, as reported on the Nasdaq National Market, was
approximately $199,411,953.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the Registrant's 1997
Annual Meeting of Stockholders to be held on May 28, 1997, are incorporated by
reference in Part III of this Form 10-K. Such definitive proxy statement will
be filed with the Securities and Exchange Commission not later than 120 days
subsequent to December 31, 1996.
================================================================================
2
TABLE OF CONTENTS
PAGE
----
Forward Looking Information and Risk Factors . . . . . . . . . . . . . . . 1
PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . 12
Item 4. Submission of Matters to a Vote of Security Holders . . . . 13
Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . 13
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . 14
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . 16
Item 8. Financial Statements and Supplementary Data . . . . . . . . 21
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . . 21
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . 21
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . 21
Item 12. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . . . . . 21
Item 13. Certain Relationships and Related Party Transaction . . . . 22
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 10-K . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Glossary of Oil and Gas Terms . . . . . . . . . . . . . . . . . . . . . . 26
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Index to Consolidated Financial Statements . . . . . . . . . . . . . . . . F-1
-i-
3
TITAN EXPLORATION, INC.
1996 ANNUAL REPORT ON FORM 10-K
FORWARD LOOKING INFORMATION AND RISK FACTORS
Titan Exploration, Inc. (the "Company") or its representatives may make
forward looking statements, oral or written, including statements in this
report's Management's Discussion and Analysis of Financial Condition and
Results of Operations, press releases and filings with the SEC, regarding
estimated future net revenues from oil and natural gas reserves and the present
value thereof, planned capital expenditures (including the amount and nature
thereof), increases in oil and gas production, the number of wells the Company
anticipates drilling through 1998 and the Company's financial position,
business strategy and other plans and objectives for future operations.
Although the Company believes that the expectations reflected in these forward
looking statements are reasonable, there can be no assurance that the actual
results or developments anticipated by the Company will be realized or, even if
substantially realized, that they will have the expected effects on its
business or operations. Among the factors that could cause actual results to
differ materially from the Company's expectations are general economic
conditions, inherent uncertainties in interpreting engineering data, operating
hazards, delays or cancellations of drilling operations for a variety of
reasons, competition, fluctuations in oil and gas prices, government
regulations and other factors set forth among the risk factors noted below or
in the description of the Company's business in Item 1 of this report. All
subsequent oral and written forward looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by these factors. The Company assumes no obligation to update any of
these statements.
Volatility of Oil and Gas Prices. The Company's revenues, operating
results and future rate of growth are highly dependent upon the prices received
for the Company's oil and gas. Historically, the markets for oil and gas have
been volatile and may continue to be volatile in the future. Revenues
generated from the oil and gas operations of the Company will be highly
dependent on the future prices of oil and gas. Various factors beyond the
control of the Company will affect prices of oil and gas, including but not
limited to the worldwide and domestic supplies of oil and gas, the ability of
the members of the Organization of Petroleum Exporting Countries 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. On
March 15, 1997, the posted price for West Texas Intermediate Crude was $19.25
per Bbl, as posted by the Company's major purchaser. On December 31, 1996, the
posted price for West Texas Intermediate Crude was $23.39 per Bbl, as posted by
the Company's major purchaser. The Company is unable to predict the long-term
effects of these and other conditions on the prices of oil. Moreover, it is
possible that prices for any oil the Company produces will be lower than
current prices received by the Company. Historically, the market for natural
gas has been volatile and is likely to continue to be volatile in the future.
Prices for natural gas are subject to wide fluctuation in response to market
uncertainty, changes in supply and demand and a variety of additional factors,
all of which are beyond the Company's control. On March 15, 1997, estimated
natural gas prices received by the Company at the wellhead averaged $1.17 per
Mcf. On December 31, 1996, natural gas prices received by the Company at the
wellhead averaged $2.83 per Mcf. Lower oil and gas prices may reduce the
amount of oil and gas the Company can produce economically. Any significant
decline in the price of oil or gas would adversely affect the Company's
revenues and operating income and may require a reduction in the carrying value
of the Company's oil and gas properties.
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 the Company's control.
The reserve information set forth in this report represents estimates only.
Although the Company believes such estimates to be reasonable, reserve
estimates are imprecise and should be expected to change as additional
information becomes available.
-1-
4
Estimates of oil and gas reserves, by necessity, are projections based
on 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. Moreover,
there can be no assurance that the Company's reserves will ultimately be
produced or that the Company's proved undeveloped reserves will be developed
within the periods anticipated. Any significant variance in the assumptions
could materially affect the estimated quantity and value of the Company's
reserves. Actual production, revenues and expenditures with respect to the
Company's reserves will likely vary from estimates, and such variances may be
material.
The PV-10 referred to in this report should not be construed as the
current market value of the estimated oil and gas reserves attributable to the
Company's properties. In accordance with applicable requirements, the
estimated discounted future net cash flows from proved reserves are generally
based on prices and costs as of the date of the estimate, whereas actual future
prices and costs may be materially higher or lower. Actual future net cash
flows also will be affected by factors such as the amount and timing of actual
production, supply and demand for oil and gas, curtailments or increases in
consumption by gas purchasers and changes in governmental regulations or
taxation. The timing of actual future net cash flows from proved reserves, and
thus their actual present value, will be affected by the timing of both the
production and the incurrence of expenses in connection with development and
production of oil and gas properties. In addition, the 10% discount factor,
which is required to be used to calculate 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
the Company or the oil and gas industry in general.
Limited Operating History; Rapid Growth. The Company, which began
operations in March 1995, has a brief operating history upon which the
Company's stockholders may base their evaluation of the Company's performance.
As a result of its brief operating history and rapid growth, the operating
results from the Company's historical periods are not readily comparable and
may not be indicative of future results. There can be no assurance that the
Company will continue to experience growth in, or maintain its current level
of, revenues, oil and gas reserves or production.
The Company's rapid growth has placed significant demands on its
administrative, operational and financial resources. Any future growth of the
Company's oil and gas reserves, production and operations would place
significant further demands on the Company's financial, operational and
administrative resources. The Company's future performance and profitability
will depend in part on its ability to successfully integrate the administrative
and financial functions of acquired properties into the Company's operations,
to hire additional personnel and to implement necessary enhancements to its
management systems to respond to changes in its business. There can be no
assurance that the Company will be successful in these efforts. The inability
of the Company to integrate acquired properties, to hire additional personnel
or to enhance its management systems could have a material adverse effect on
the Company's results of operations.
-2-
5
Substantial Capital Requirements. The Company makes, and will continue
to make, substantial capital expenditures for the exploration, development,
acquisition and production of its oil and gas reserves. The Company intends to
finance such capital expenditures primarily with funds provided by operations
and borrowings under its $250 million Credit Agreement, which currently has a
borrowing base of $165 million. In 1995 the Company spent approximately $40.6
million on its first large property acquisition, and, in 1996, approximately
$135.7 million on its second large property acquisition. The Company's direct
capital expenditures for oil and gas producing activities, excluding property
acquisitions, were $12.6 million for the year ended December 31, 1996 and $2.0
million for the nine months ended December 31, 1995.
If revenues decrease as a result of lower oil or gas prices or
otherwise, the Company may have limited ability to expend the capital necessary
to replace its reserves or to maintain production at current levels, resulting
in a decrease in production over time. If the Company's cash flow from
operations and availability under the Credit Agreement are not sufficient to
satisfy its capital expenditure requirements, there can be no assurance that
additional debt or equity financing will be available to meet these
requirements.
Reserve Replacement Risk. The Company's future success depends upon its
ability to find, develop or acquire additional oil and gas reserves that are
economically recoverable. The proved reserves of the Company will generally
decline as reserves are depleted, except to the extent that the Company
conducts successful exploration or development activities or acquires
properties containing proved reserves, or both. In order to increase reserves
and production, the Company must continue its development and exploration
drilling and recompletion programs or undertake other replacement activities.
The Company's current strategy includes increasing its reserve base through
acquisitions of producing properties, continued exploitation of its existing
properties and exploration of new and existing properties. There can be no
assurance, however, that the Company's planned development and exploration
projects and acquisition activities will result in significant additional
reserves or that the Company will have continuing success drilling productive
wells at low finding and development costs. Furthermore, while the Company's
revenues may increase if prevailing oil and gas prices increase significantly,
the Company's finding costs for additional reserves could also increase.
Acquisition Risks. The Company's rapid growth since its inception in
March 1995 has been largely the result of acquisitions of producing properties.
The Company expects to continue to evaluate and pursue acquisition
opportunities available on terms management considers favorable to the Company.
The successful acquisition of producing properties requires an assessment of
recoverable reserves, future oil and gas prices, operating costs, potential
environmental and other liabilities and other factors beyond the Company's
control. This assessment is necessarily inexact and its accuracy is inherently
uncertain. In connection with such an assessment, the Company performs a
review of the subject properties it believes to be 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 when an inspection
is undertaken. The Company generally assumes preclosing liabilities, including
environmental liabilities, and generally acquires interests in the properties
on an "as is" basis. With respect to its acquisitions to date, the Company has
no material commitments for capital expenditures to comply with existing
environmental requirements. There can be no assurance that the Company's
acquisitions will be successful. Any unsuccessful acquisition could have a
material adverse effect on the Company.
Risk of Hedging Activities. The Company's use of energy swap
arrangements to reduce its sensitivity to oil and gas price volatility is
subject to a number of risks. If the Company's reserves are not produced at
the rates estimated by the Company due to inaccuracies in the reserve
estimation process, operational difficulties or regulatory limitations, the
Company would be required to satisfy obligations it 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 its own
production. Further, the terms under which the Company enters 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 used by the Company and actual results experienced could materially
adversely affect the Company's
-3-
6
anticipated profit margins and its ability to manage the risk associated with
fluctuations in oil and gas prices. Additionally, fixed price sales and
hedging contracts limit the benefits the Company 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 the Company.
As of December 31, 1996, none of the Company's production was subject to
hedging contracts.
Marketability of Production. The marketability of the Company's
production depends in part upon the availability, proximity and capacity of
natural gas gathering systems, pipelines and processing facilities. Most of
the Company's natural gas is delivered through gas gathering systems and gas
pipelines that are not owned by the Company. 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
the Company's ability to produce and market its oil and gas. Any dramatic
change in market factors could have a material adverse effect on the Company.
Dependance on Key Personnel. The Company's success has been and will
continue to be highly dependent on Jack Hightower, its 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 the Company's operations.
The Company maintains a $3.0 million key man life insurance policy on the life
of Mr. Hightower, but no other senior management personnel. In addition, as a
result of the 1996 Acquisition and since December 31, 1996, the Company has
employed 12 additional employees and currently plans to employ approximately 5
new employees and will face competition for such personnel from other
companies. There can be no assurance that the Company will be successful in
hiring or retaining key personnel. The Company's failure to hire additional
personnel or retain its key personnel could have a material adverse effect on
the Company.
-4-
7
PART I
ITEM 1. BUSINESS
OVERVIEW
The Company is an independent energy company engaged in the exploration,
development and acquisition of oil and gas properties. Since its inception in
March 1995, the Company has experienced significant growth in reserves,
production and cash flow by acquiring and exploiting producing properties
primarily in the Permian Basin of west Texas and southeastern New Mexico.
In December 1996, the Company completed an initial public offering of
14,391,500 shares of Common Stock of the Company at $11.00 per share, resulting
in net proceeds of $147.2 million. The shares are traded on the Nasdaq
National Market under the symbol "TEXP." The proceeds were used to repay bank
debt.
In December 1995, the Company acquired a concentrated group of Permian
Basin producing oil and gas properties from a large independent company for
approximately $40.6 million (the "1995 Acquisition"). On October 31, 1996, the
Company acquired additional Permian Basin producing properties from a major
integrated company for approximately $135.7 million (the "1996 Acquisition").
As of December 31, 1996, the Company had estimated net proved reserves of
approximately 19.5 MMBbls of oil and 301.4 Bcf of natural gas, or an aggregate
of 69.7 MMBOE with a PV-10 of $537.4 million. Approximately 66% of these
reserves were classified as proved developed. The Company acquired, explored
for and developed its reserves for an average reserve replacement cost of
approximately $2.75 per BOE through December 31, 1996.
The Company prefers to acquire properties over which it can exercise
operating control. The Company operated 458 gross wells (390 net wells) at
December 31, 1996, and these operated properties represented approximately 68%
of its proved developed producing PV-10 and 78% of the Company's PV-10
attributable to proved reserves at December 31, 1996. The Company's emphasis
on controlling the operation of its properties enables the Company to better
manage expenses, capital allocation and other aspects of development and
exploration.
The Company's oil and gas properties are located in approximately 60
fields in the Permian Basin. Approximately 67% of the Company's PV-10 of total
proved reserves is concentrated in 12 principal fields located in this region.
The region 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.
The Company's strategy is to grow reserves, production and net income
per share through (i) the acquisition of producing properties that provide
development and exploratory drilling potential, (ii) the exploitation and
development of its reserve base, (iii) the exploration for oil and gas reserves
and (iv) the implementation of a low operating and overhead cost structure.
The Company was formed in 1996 for the purpose of becoming the holding
company for Titan Resources, L.P. pursuant to the terms of an exchange
agreement dated September 30, 1996. The partnership was formed in March 1995
and grew primarily through acquisitions of oil and gas properties and the
exploitation of those properties. Under the exchange agreement, effective
September 30, 1996, (i) the limited partners of the partnership transferred all
their limited partnership interests to the Company in exchange for an aggregate
of 19,318,199 shares of Common Stock, and (ii) the shareholders of Titan
Resources I, Inc., a Texas corporation that is the general partner of the
partnership, transferred all the issued and outstanding stock of that
corporation to the Company in exchange for an aggregate of 231,814 shares of
Common Stock. These transactions are referred to as the "Conversion." As a
result of the Conversion, Titan Exploration, Inc. owns, directly or indirectly,
all the partnership interests in the partnership
-5-
8
and conducts its active business operations through the partnership.
References to the "Company" are to Titan Exploration, Inc. and its predecessors
and subsidiaries, including the partnership.
The Company is incorporated in the State of Delaware, its principal
executive offices are located at 500 West Texas, Suite 500, Midland, Texas
79701, and its telephone number is 915/682-6612.
ACQUISITIONS
The Company regularly pursues and evaluates acquisition opportunities
(including opportunities to acquire oil and gas properties or related assets or
entities owning oil and gas properties or related assets and opportunities to
engage in mergers, consolidations or other business combinations with entities
owning oil and gas properties or related assets) and at any given time may be
in various stages of evaluating these opportunities. These stages may take the
form of internal financial and oil and gas property analysis, preliminary due
diligence, the submission of an indication of interest, preliminary
negotiations, negotiation of a letter of intent, or negotiation of a definitive
agreement. While the Company is currently evaluating a number of potential
acquisition opportunities (some of which would be material in size to the
Company), it has not signed a letter of intent with respect to any material
acquisition and currently has no assurance of completing any particular
material acquisition or of entering into negotiations with respect to any
particular material acquisition.
OIL AND GAS MARKETING AND MAJOR CUSTOMERS
The revenues generated by the Company's operations are highly dependent
upon the prices of, and demand for, oil and gas. The price received by the
Company for its oil and gas production depends on numerous factors beyond the
Company's control, including seasonality, the condition of the United States
economy, particularly the manufacturing sector, foreign imports, political
conditions in other oil-producing and gas-producing countries, the actions of
OPEC and domestic government regulation, legislation and policies. Decreases
in the prices of oil and natural gas could have an adverse effect on the
carrying value of the Company's proved reserves and the Company's revenues,
profitability and cash flow. Although the Company is not currently
experiencing any significant involuntary curtailment of its oil or gas
production, market, economic and regulatory factors may in the future
materially affect the Company's ability to sell its oil or gas production.
For the year ended December 31, 1996, sales to Enron Corp., and its
subsidiaries and affiliates, were approximately 43% of the Company's oil and
gas revenues. Certain of these sales were based on six month contracts for
crude oil and month-to-month spot sales for natural gas.
Due to the availability of other markets and pipeline connections, the
Company does not believe that the loss of any single crude oil or gas customer
would have a material adverse effect on the Company's results of operations.
COMPETITION
The oil and gas industry is highly competitive. The Company encounters
competition from other oil and gas companies in all areas of its operations,
including the acquisition of producing properties. The Company's competitors
include major integrated oil and gas companies and numerous independent oil and
gas companies, individuals and drilling and income programs. Many of its
competitors are large, well established companies with substantially larger
operating staffs and greater capital resources than the Company and which, in
many instances, have been engaged in the energy business for a much longer time
than the Company. Such companies may be able to pay more for productive oil
and gas properties and exploratory prospects and to define, evaluate, bid for
and purchase a greater number of properties and prospects than the Company's
financial or human resources permit. The Company's ability to acquire
additional properties and to discover reserves in the future will be dependent
upon its ability to evaluate and select suitable properties and to consummate
transactions in a highly competitive environment.
-6-
9
OPERATING HAZARDS AND UNINSURED RISKS
Drilling activities are subject to many risks, including the risk that
no commercially productive reservoirs will be encountered. There can be no
assurance that new wells drilled by the Company will be productive or that the
Company will recover all or any portion of its investment. Drilling for oil
and gas may involve unprofitable efforts, not only from dry wells, but from
wells that are productive but do not produce sufficient net revenues to return
a profit after drilling, operating and other costs. The cost of drilling,
completing and operating wells is often uncertain. The Company's drilling
operations may be curtailed, delayed or canceled as a result of numerous
factors, many of which are beyond the Company's control, including title
problems, weather conditions, mechanical problems, compliance with governmental
requirements and shortages or delays in the delivery of equipment and services.
The Company's future drilling activities may not be successful and, if
unsuccessful, such failure may have a material adverse effect on the Company's
future results of operations and financial condition.
In addition, the Company's use of 3-D seismic requires greater pre-
drilling expenditures than traditional drilling strategies. Although the
Company believes that its use of 3-D seismic will increase the probability of
success of its exploratory wells and should reduce average finding costs
through the elimination of prospects that might otherwise be drilled solely on
the basis of 2-D seismic data and other traditional methods, unsuccessful wells
are likely to occur. There can be no assurance that the Company's drilling
program will be successful or that unsuccessful drilling efforts will not have
a material adverse effect on the Company. Although the Company has identified
numerous potential drilling locations, there can be no assurance that they will
ever be drilled or that oil or gas will be produced from them.
The Company's operations are subject to hazards and risks inherent in
drilling for and producing and transporting oil and gas, such as fires, natural
disasters, explosions, encountering formations with abnormal pressures,
blowouts, cratering, pipeline ruptures and spills, any of which can result in
the loss of hydrocarbons, environmental pollution, personal injury claims and
other damage to properties of the Company and others.
The Company expects to drill a number of deep vertical and horizontal
wells in the future. The Company's deep and/or horizontal drilling activities
involve greater risk of mechanical problems than other drilling operations.
These wells may be significantly more expensive to drill than those drilled to
date.
The Company maintains insurance against some, but not all, of the risks
described above. The Company may elect to self-insure in circumstances in
which management believes that the cost of insurance, although available, is
excessive relative to the risks presented. The occurrence of an event that is
not covered, or not fully covered, by insurance could have a material adverse
effect on the Company's financial condition and results of operations.
EMPLOYEES
As of December 31, 1996, the Company had 30 full-time employees, none of
whom is represented by any labor union. Included in the total were 25
corporate employees located in the Company's office in Midland, Texas, eight of
whom are involved in the management of the Company. The Company considers its
relations with its employees to be good.
OTHER FACILITIES
The Company currently leases approximately 44,270 square feet of office
space in Midland, Texas, where its principal offices are located. This office
lease is with an affiliate of Jack Hightower. The Company's principal offices
are leased through March 15, 2002.
TITLE TO PROPERTIES
The Company received title opinions relating to properties representing
80% of the PV-10 of the 1995 Acquisition and 90% of the PV-10 of the 1996
Acquisition. The Company's land department and contract land professionals
have reviewed title records of substantially all its producing properties. The
title investigation
-7-
10
performed by the Company prior to acquiring undeveloped properties is thorough
but less rigorous than that conducted prior to drilling, consistent with
industry standards. The Company believes it has satisfactory title to all of
its producing properties in accordance with standards generally accepted in the
oil and gas industry. The Company's properties are subject to customary
royalty interests, liens incident to operating agreements, liens for current
taxes and other burdens which the Company believes do not materially interfere
with the use of or affect the value of such properties. The Company's Credit
Agreement is secured by a first lien on properties that represented at least
80% of the value of the Company's proved oil and gas properties (based on PV-10
as of December 31, 1996). Presently, the Company keeps in force its leaseholds
for 65% of its net acreage by virtue of production on that acreage in paying
quantities. The remaining acreage is held by lease rentals and similar
provisions and requires production in paying quantities prior to expiration of
various time periods to avoid lease termination.
GOVERNMENTAL REGULATION
The Company's oil and gas exploration, production and related operations
are subject to extensive rules and regulations promulgated by federal and state
agencies. Failure to comply with such rules and regulations can result in
substantial penalties. The regulatory burden on the oil and gas industry
increases the Company's cost of doing business and affects its profitability.
Although the Company believes it is in substantial compliance with all
applicable laws and regulations, because such rules and regulations are
frequently amended or reinterpreted, the Company is unable to predict the
future cost or impact of complying with such laws. Significant expenditures
may be required to comply with governmental laws and regulations and may have a
material adverse effect on the Company's financial condition and results of
operations.
The State of Texas and many other states require permits for drilling
operations, drilling bonds and reports concerning operations and impose other
requirements relating to the exploration and production of oil and gas. Such
states also have statutes or regulations addressing conservation matters,
including provisions for the unitization or pooling of oil and gas properties,
the establishment of maximum rates of production from wells, and the regulation
of spacing, plugging and abandonment of such wells.
The Federal Energy Regulatory Commission ("FERC") regulates interstate
natural gas transportation rates and service conditions, which affect the
marketing of gas produced by the Company, as well as the revenues received by
the Company for sales of such production. Since the mid-1980s, FERC has issued
a series of orders, culminating in Order Nos. 636, 636-A and 636-B ("Order
636"), that have significantly altered the marketing and transportation of gas.
Order 636 mandates a fundamental restructuring of interstate pipeline sales and
transportation service, including the unbundling by interstate pipelines of the
sale, transportation, storage and other components of the city-gate sales
services such pipelines previously performed. One of FERC's purposes in
issuing the orders is to increase competition within all phases of the gas
industry. Order 636 and subsequent FERC orders on rehearing have been appealed
and are pending judicial review. Because these orders may be modified as a
result of the appeals, it is difficult to predict the ultimate impact of the
orders on the Company and its gas marketing efforts. Generally, Order 636 has
eliminated or substantially reduced the interstate pipelines' traditional role
as wholesalers of natural gas, and has substantially increased competition and
volatility in natural gas markets.
The price the Company receives from the sale of oil and natural gas
liquids is affected by the cost of transporting products to market. Effective
January 1, 1995, FERC implemented regulations establishing an indexing system
for transportation rates for oil pipelines, which, generally, would index such
rates to inflation, subject to certain conditions and limitations. The Company
is not able to predict with certainty the effect, if any, of these regulations
on its operations. However, the regulations may increase transportation costs
or reduce wellhead prices for oil and natural gas liquids.
ENVIRONMENTAL MATTERS
The Company's operations and properties are subject to extensive and
changing federal, state and local laws and regulations relating to
environmental protection, including the generation, storage, handling,
emission, transportation and discharge of materials into the environment, and
relating to safety and health. The recent trend
-8-
11
in environmental legislation and regulation generally is toward stricter
standards, and this trend will likely continue. These laws and regulations may
require the acquisition of a permit or other authorization before construction
or drilling commences and for certain other activities; limit or prohibit
construction, drilling and other activities on certain lands lying within
wilderness and other protected areas; and impose substantial liabilities for
pollution resulting from the Company's operations. The permits required for
various of the Company's operations are subject to revocation, modification and
renewal by issuing authorities. Governmental authorities have the power to
enforce compliance with their regulations, and violations are subject to fines
or injunction, or both. In the opinion of management, the Company is in
substantial compliance with current applicable environmental laws and
regulations, and the Company has no material commitments for capital
expenditures to comply with existing environmental requirements. Nevertheless,
changes in existing environmental laws and regulations or in interpretations
thereof could have a significant impact on the Company, as well as the oil and
gas industry in general. CERCLA and comparable state statutes impose strict,
joint and several liability on owners and operators of sites and on persons who
disposed of or arranged for the disposal of "hazardous substances" found at
such sites. It is not uncommon for neighboring landowners and other third
parties to file claims for personal injury and property damage allegedly caused
by the hazardous substances released into the environment. RCRA and comparable
state statutes govern the disposal of "solid waste" and "hazardous waste" and
authorize the imposition of substantial fines and penalties for noncompliance.
Although CERCLA currently excludes petroleum from its definition of "hazardous
substance," state laws affecting the Company's operations impose clean-up
liability relating to petroleum and petroleum related products. In addition,
although RCRA classifies certain oil field wastes as "nonhazardous," such
exploration and production wastes could be reclassified as hazardous wastes
thereby making such wastes subject to more stringent handling and disposal
requirements.
Federal regulations require certain owners or operators of facilities
that store or otherwise handle oil, such as the Company, to prepare and
implement spill prevention, control countermeasure and response plans relating
to the possible discharge of oil into surface waters. The Oil Pollution Act of
1990, as amended ("OPA"), contains numerous requirements relating to the
prevention of and response to oil spills into waters of the United States. For
onshore facilities that may affect waters of the United States, the OPA
requires an operator to demonstrate $10 million in financial responsibility,
and for offshore facilities the financial responsibility requirement is at
least $35 million. Regulations are currently being developed under federal and
state laws concerning oil pollution prevention and other matters that may
impose additional regulatory burdens on the Company. In addition, the Clean
Water Act and analogous state laws require permits to be obtained to authorize
discharge into surface waters or to construct facilities in wetland areas.
With respect to certain of its operations, the Company is required to maintain
such permits or meet general permit requirements. The EPA recently adopted
regulations concerning discharges of storm water runoff. This program requires
covered facilities to obtain individual permits, participate in a group or seek
coverage under an EPA general permit. The Company believes that it will be
able to obtain, or be included under, such permits, where necessary, and to
make minor modifications to existing facilities and operations that would not
have a material effect on the Company.
The implementation of new, or the modification of existing, laws or
regulations could have a material adverse effect on the Company. The discharge
of oil, gas or other pollutants into the air, soil or water may give rise to
significant liabilities on the part of the Company to the government and third
parties and may require the Company to incur substantial costs of remediation.
Moreover, the Company has agreed to indemnify sellers of producing properties
purchased by the Company in the 1995 Acquisition and the 1996 Acquisition
against environmental claims associated with such properties. No assurance can
be given 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 Company's results of operations and
financial condition or that material indemnity claims will not arise against
the Company with respect to properties acquired by the Company.
The Company has acquired leasehold interests in numerous properties that
for many years have produced oil and gas. Although the previous owners of
these interests may have used operating and disposal practices that were
standard in the industry at the time, hydrocarbons or other wastes may have
been disposed of or released on or under the properties. In addition, some of
the Company's properties are operated by third parties over whom the Company
has no control. Notwithstanding the Company's lack of control over properties
operated by others, the
-9-
12
failure of the operator to comply with applicable environmental regulations
may, in certain circumstances, adversely impact the Company.
ABANDONMENT COSTS
The Company is responsible for payment of plugging and abandonment costs
on the oil and gas properties pro rata to its working interest. Based on its
experience, the Company anticipates that the ultimate aggregate salvage value
of lease and well equipment located on its properties will exceed the costs of
abandoning such properties. There can be no assurance, however, that the
Company will be successful in avoiding additional expenses in connection with
the abandonment of any of its properties. In addition, abandonment costs and
their timing may change due to many factors including actual production
results, inflation rates and changes in environmental laws and regulations.
ITEM 2. PROPERTIES
OIL AND NATURAL GAS RESERVES
The following table summarizes the estimates of the Company's historical
net proved reserves as of December 31, 1996 and December 31, 1995, and the
present values attributable to these reserves at such dates. The reserve and
present value data of the Company as of December 31, 1996 were prepared by
Williamson Petroleum Consultants, Inc. The reserve and present value data as
of December 31, 1995 were prepared by the Company.
AS OF DECEMBER 31,
-----------------------
1996 1995
----------- -----------
(dollars in thousands)
ESTIMATED PROVED RESERVES:
Oil (MBbls) . . . . . . . . . . . . . . . . . . 19,456 6,146
Gas (MMcf) . . . . . . . . . . . . . . . . . . 301,378 134,995
MBOE (6 Mcf per Bbl) . . . . . . . . . . . . . 69,686 28,645
Proved developed reserves as a percentage of proved
reserves . . . . . . . . . . . . . . . . . . . . . 66% 47%
PV-10(1) . . . . . . . . . . . . . . . . . . . . . . $537,366 $89,753
Standardized Measure of Discounted Future Net Cash
Flows(2) . . . . . . . . . . . . . . . . . . . . . . $387,863 $66,352
- ---------------------
(1) The present value of future net revenue attributable to the Company's
reserves was prepared using prices in effect at the end of the
respective periods presented, discounted at 10% per annum on a pre-tax
basis. These amounts reflect the effects of the Company's hedging
activities.
(2) The Standardized Measure of Discounted Future Net Cash Flows prepared by
the Company represents the present value of future net revenues after
income taxes discounted at 10%. These amounts reflect the effects of
the Company's hedging activities.
In accordance with applicable requirements of the Commission, estimates
of the Company's proved reserves and future net revenues are made using sales
prices estimated to be in effect as of the date of such reserve estimates and
are held constant throughout the life of the properties (except to the extent a
contract specifically provides for escalation). The average prices for the
Company's reserves as of December 31, 1996 were $25.09 per Bbl of oil and $2.70
per Mcf of natural gas, compared to average prices for the Company's reserves
as of December 31, 1995 of $17.66 per Bbl of oil and $1.38 per Mcf of natural
gas.
Estimated quantities of proved reserves and future net revenues
therefrom are affected by natural gas prices, which have fluctuated widely in
recent years. There are numerous uncertainties inherent in estimating oil and
gas reserves and their estimated values, including many factors beyond the
control of the producer. The reserve data
-10-
13
set forth in this report represents only estimates. Reservoir engineering is a
subjective process of estimating underground accumulations of oil and gas that
cannot be measured in an exact manner. The accuracy of any reserve estimate is
a function of the quality of available data and of engineering and geological
interpretation and judgment. As a result, estimates of different engineers,
including those used by the Company, may vary. In addition, estimates of
reserves are subject to revision based upon actual production, results of
future development and exploration activities, prevailing oil and gas prices,
operating costs and other factors, which revisions may be material.
Accordingly, reserve estimates are often different from the quantities of oil
and gas that are ultimately recovered and are highly dependent upon the
accuracy of the assumptions upon which they are based. The Company's estimated
proved reserves have not been filed with or included in reports to any federal
agency.
Estimates with respect to proved reserves that may be developed and
produced in the future are often based upon volumetric calculations and upon
analogy to similar types of reserves rather than actual production history.
Estimates based on these methods are generally less reliable than those based
on actual production history. Subsequent evaluation of the same reserves based
upon production history will result in variations, which may be substantial, in
the estimated reserves.
PRODUCTIVE WELLS AND ACREAGE
Productive Wells
The following table sets forth the Company's productive wells as of
December 31, 1996:
ACTUAL
----------------------
GROSS NET
---------- ----------
Oil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,351 444
Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 274 75
---------- ----------
Total Productive Wells . . . . . . . . . . . . . . . . . 1,625 519
========== ==========
Productive wells consist of producing wells and wells capable of
production, including gas wells awaiting pipeline connections. Wells that are
completed in more than one producing horizon are counted as one well. Of the
gross wells reported above, nine had multiple completions.
Acreage Data
Undeveloped acreage includes leased acres on which wells have not been
drilled or completed to a point that would permit the production of commercial
quantities of oil and gas, regardless of whether or not such acreage contains
proved reserves. A gross acre is an acre in which an interest is owned. A net
acre is deemed to exist when the sum of fractional ownership interests in gross
acres equals one. The number of net acres is the sum of the fractional
interests owned in gross acres expressed as whole numbers and fractions
thereof. The following table sets forth the approximate developed and
undeveloped acreage in which the Company held a leasehold mineral or other
interest at December 31, 1996.
DEVELOPED ACRES UNDEVELOPED ACRES TOTAL ACRES
----------------------- ---------------------- -----------------------
GROSS NET GROSS NET GROSS NET
---------- ---------- ---------- --------- ---------- ----------
Total . . . . . 149,725 52,381 50,995 28,488 200,720 80,869
-11-
14
DRILLING ACTIVITIES
The following table sets forth the drilling activity of the Company on
its properties for the year ended December 31, 1996 and for the period from
March 31, 1995 (inception) through December 31, 1995.
YEAR ENDED PERIOD ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
-------------------------------- -----------------------------
GROSS NET GROSS NET
--------------- -------------- -------------- ------------
Exploratory Wells
Productive . . . . . . . . . - - 1 0.5
Nonproductive . . . . . . . . 1 0.2 2 1.3
----- ----- ----- -----
Total . . . . . . . . 1 0.2 3 1.8
===== ===== ===== =====
Development Wells
Productive . . . . . . . . . 7 3.9 - -
Nonproductive . . . . . . . . 1 0.2 - -
----- ----- ----- -----
Total . . . . . . . . 8 4.1 - -
===== ===== ===== =====
NET PRODUCTION, UNIT PRICES AND COSTS
The following table presents certain information with respect to oil and
gas production prices and costs attributable to all oil and gas property
interests owned by the Company for the year ended December 31, 1996 and for the
period from March 31, 1995 (inception) through December 31, 1995.
YEAR ENDED PERIOD ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
--------------------------- ---------------------------
Production
Oil (MBbls) . . . . . . . . . . . . . . 714 30
Gas (MMcf) . . . . . . . . . . . . . . 5,787 245
Total (MBOE) . . . . . . . . . . . . . 1,679 71
Average sales price (1):
Oil (per Bbl) . . . . . . . . . . . . . $ 19.16 $ 16.80
Gas (per Mcf) . . . . . . . . . . . . . 1.75 .97
Per BOE . . . . . . . . . . . . . . . . 14.19 10.46
Production costs, including production taxes
(per BOE) (2) . . . . . . . . . . . . . $ 5.48 $ 4.28
General and administrative costs (per BOE) . . $ 1.35 $ 21.77
Depletion, depreciation and amortization
expenses (per BOE) . . . . . . . . . . $ 3.45 $ 4.21
- ---------------------
(1) Reflects results of hedging activities.
(2) Includes approximately $1.31 per BOE of production costs primarily
attributable to necessary rework operations on the 1995 Acquisition and
the 1996 Acquisition.
ITEM 3. LEGAL PROCEEDINGS
The Company presently is not a party to any legal proceedings.
-12-
15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's security holders
between December 16, 1996, the effective date of the Company's initial public
offering, and December 31, 1996.
EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to Instruction 3 to Item 401(b) of the Regulation S-K and
General Instruction G(3) to Form 10-K, the following information is included in
Part I of this report.
The following table sets forth certain information concerning the
executive officers of the Company as of December 31, 1996:
NAME AGE POSITION
---- --- --------
Jack D. Hightower . . . . . . . 48 President and Chief Executive Officer
George G. Staley . . . . . . . 62 Executive Vice President, Exploration
Rodney L. Woodard . . . . . . . 41 Vice President, Engineering
Thomas H. Moore . . . . . . . . 52 Vice President, Business Development
Dan P. Colwell . . . . . . . . 52 Vice President, Land
William K. White . . . . . . . 54 Vice President, Finance and Chief Financial Officer
John L. Benfatti . . . . . . . 51 Vice President, Accounting and Controller
Susan D. Rowland . . . . . . . 36 Vice President, Corporate Administration and Secretary
Set forth below is a description of the backgrounds of each executive
officer of the Company, including employment history for at least the last five
years.
Jack D. Hightower has served as President, Chief Executive Officer and
Chairman of the Board of Directors of the Company since he founded the Company
in March 1995. Prior to forming the Company, from 1986 to January 1996, Mr.
Hightower served as Chairman of the Board and Chief Executive Officer of United
Oil Services, Inc., a complete oil field service company serving customers in
the Permian Basin. From 1978 to 1995, Mr. Hightower served as Chairman of the
Board and President of Amber Energy, Inc., a company formed to identify oil and
gas exploration prospects. From 1991 to 1994, Mr. Hightower served as Chairman
of the Board, Chief Executive Officer and President of Enertex, Inc., which
served as the operator of record for several oil and gas properties involving
Mr. Hightower and other nonoperators, including Selma International Investment
Limited. Since 1990, Mr. Hightower has served on the Board of Directors of
Texas Commerce Bank, N.A., Midland.
George G. Staley has served as Executive Vice President, Exploration and
Director of the Company since its formation. From 1975 until 1995, Mr. Staley
served as President and Chief Executive Officer of Staley Gas Co., Inc. and
Staley Operating Co., which are oil and gas exploration and operating
companies.
Rodney L. Woodard has served as Vice President, Engineering for the
Company since its formation. From 1985 to 1995, Mr. Woodard served as Vice
President of Selma International Investment Limited.
Thomas H. Moore has served as Vice President, Business Development of
the Company since its formation. From 1992 to 1995, Mr. Moore served as
Managing Partner of Magnum Energy Corporation, L.L.C. From 1991 until 1992,
Mr. Moore served as Executive Vice President -- Exploration and Production,
Chief Operating Officer and Director of Clayton Williams Energy, Inc. From
1985 to 1991, Mr. Moore served as President, Chief Operating Officer and
Director of Clayton W. Williams, Jr. Inc.
-13-
16
Dan P. Colwell has served as Vice President, Land for the Company since
its formation. From 1993 to 1995, Mr. Colwell served as Vice President of Land
for Enertex, Inc. Mr. Colwell was employed by ARCO as Director of Business
Development from 1991 to 1993 and Area Land Manager from 1987 to 1991.
William K. White has served as Vice President, Finance and Chief
Financial Officer of the Company since September 1996. From 1994 to September
1996, Mr. White was Senior Vice President of the Energy Investment Group of
Trust Company of The West. From 1991 to 1994, Mr. White was President of the
Odessa Associates, a private firm engaged in the practice of providing
financial consulting services to the oil and gas industry.
John L. Benfatti has served as Vice President, Accounting and Controller
of the Company since its formation. From 1980 to 1995, Mr. Benfatti served as
Controller and Treasurer of Staley Gas Co., Inc.
Susan D. Rowland has served as Vice President, Corporate Administration
and Secretary of the Company since its formation. From 1986 to 1996, Ms.
Rowland served as a corporate officer and administrative manager of a number of
companies, including Amber Energy, Inc., Enertex, Inc., Haley Properties, Inc.
and United Oil Services, Inc.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock has been publicly traded on the Nasdaq
National Market under the symbol "TEXP" since the Company's initial public
offering effective December 16, 1996. The high and low closing sales prices of
the Common Stock as reported by the Nasdaq National Market from December 16,
1996 to December 31, 1996 were $12.75 and $11.25, respectively.
As of March 14, 1997, the Company estimates that there were more than
400 stockholders (including brokerage firms and other nominees) of the
Company's Common Stock.
No dividends have been declared or paid on the Company's Common Stock to
date. The Company intends to retain all future earnings for the development of
its business.
-14-
17
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's consolidated financial
statements and related notes included in "Item 8. Consolidated Financial
Statements and Supplementary Data."
PERIOD
MARCH 31,
1995 (DATE OF
INCEPTION)
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1996 1995 (4)
---------------- -------------------
(in thousands, except per share
amounts and operating data)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Operating revenues . . . . . . . . . . . . . . . . $ 23,824 $ 743
Other revenues . . . . . . . . . . . . . . . . . . 144 242
---------------- -------------------
Total revenues . . . . . . . . . . . . . . 23,968 985
---------------- -------------------
Expenses:
Oil and gas production . . . . . . . . . . . . . . 9,199 304
General and administrative . . . . . . . . . . . . 2,270 1,546
Amortization of stock option awards . . . . . . . 1,839 576
Exploration and abandonment . . . . . . . . . . . 184 490
Depletion, depreciation and amortization . . . . . 5,789 299
Interest . . . . . . . . . . . . . . . . . . . . . 2,965 97
Other . . . . . . . . . . . . . . . . . . . . . . (359) (796)
---------------- -------------------
Total expenses . . . . . . . . . . . . . . 21,887 2,516
---------------- -------------------
Net income (loss) before income taxes . . . . . . 2,081 (1,531)
Income tax expense . . . . . . . . . . . . . . . . 3,484 -
---------------- --------------------
Net loss . . . . . . . . . . . . . . . . . . . . . (1,403) (1,531)
Net loss per share . . . . . . . . . . . . . . . . (.07) (.11)
Weighted average shares outstanding . . . . . . . 20,140 14,066
CONSOLIDATED STATEMENT OF CASH FLOWS DATA:
Net cash provided by (used in):
Operating activities . . . . . . . . . . . . . . . $ 7,710 $ (1,805)
Investing activities . . . . . . . . . . . . . . . (144,998) (47,522)
Financing activities . . . . . . . . . . . . . . . 137,365 55,540
OTHER CONSOLIDATED FINANCIAL DATA:
Capital expenditures . . . . . . . . . . . . . . . . . . $ 150,119 $ 43,770
EBITDAX (1) . . . . . . . . . . . . . . . . . . . . . . . 12,858 (69)
-15-
18
PERIOD
MARCH 31,
1995 (DATE OF
INCEPTION)
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1996 1995 (4)
---------------- --------------------
(in thousands, except per share
amounts and operating data)
CONSOLIDATED OPERATING DATA:
Production:
Oil (MBbls) . . . . . . . . . . . . . . . . . . . . . . . 714 30
Gas (MMcf) . . . . . . . . . . . . . . . . . . . . . . . 5,787 245
Total (MBOE) . . . . . . . . . . . . . . . . . . . . . . 1,679 71
Average Sales Prices Per Unit (2):
Oil (per Bbl) . . . . . . . . . . . . . . . . . . . . . . $ 19.16 $ 16.80
Gas (per Mcf) . . . . . . . . . . . . . . . . . . . . . . 1.75 .97
BOE . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.19 10.46
Expenses per BOE:
Production costs, including production taxes (3) . . . . $ 5.48 $ 4.28
General and administrative . . . . . . . . . . . . . . . 1.35 21.77
Depletion, depreciation, and amortization . . . . . . . . 3.45 4.21
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents . . . . . . . . . . . . . . . . $ 6,290 $ 6,213
Working capital . . . . . . . . . . . . . . . . . . . . . 8,124 11,946
Oil and gas assets, net . . . . . . . . . . . . . . . . . 190,062 42,861
Total assets . . . . . . . . . . . . . . . . . . . . . . 207,179 57,487
Total debt . . . . . . . . . . . . . . . . . . . . . . . 6,500 20,000
Stockholders' equity and predecessor capital . . . . . . 187,186 34,585
- --------------
(1) EBITDAX is presented because of its wide acceptance as a financial
indicator of a company's ability to service or incur debt. EBITDAX (as
used herein) is calculated by adding interest, income taxes, depletion,
depreciation, and amortization, amortization of stock option awards, and
exploration and abandonment costs to net income (loss). Interest
includes interest expense accrued and amortization of deferred financing
costs. EBITDAX should not be considered as an alternative to earnings
(loss), or operating earnings (loss), as defined by generally accepted
accounting principles, as an indicator of the Company's financial
performance, as an alternative to cash flow as a measure of liquidity or
as being comparable to other similarly titled measures of other
companies.
(2) Reflects results of hedging activities. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations."
(3) Includes approximately $1.31 per BOE of production costs primarily
attributable to necessary rework operations on the 1995 Acquisition and
the 1996 Acquisition.
(4) Certain reclassifications have been made to the 1995 amounts to conform
to the 1996 presentation.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Titan is an independent energy company engaged in the exploration,
development and acquisition of oil and gas properties. The Company's strategy
is to grow reserves, production and net income per share through (i) the
acquisition of producing properties that provide significant development and
exploratory drilling potential, (ii) the exploitation and development of its
reserve base, (iii) the exploration for oil and gas reserves, and (iv) the
-16-
19
implementation of a low operating and overhead structure. The Company has
grown rapidly through the acquisition and exploitation of oil and gas
properties, consummating the 1995 Acquisition for a purchase price of
approximately $40.6 million and the 1996 Acquisition for approximately $135.7
million.
The Company's growth resulting from acquisitions has impacted its
reported financial results in a number of ways. Acquired properties frequently
may not have received focused attention prior to sale. After acquisition,
certain of these properties require maintenance, workovers, recompletions and
other remedial activity not constituting capital expenditures, which initially
increase lease operating expenses. The Company may dispose of certain of the
properties if it determines they are outside the Company's strategic focus.
The increased production and revenue resulting from the rapid growth of the
Company has required it to recruit and develop operating, accounting and
administrative personnel compatible with its increased size. As a result, the
Company anticipates a corresponding increase in its general and administrative
expense. The Company believes that with its current inventory of drilling
locations and the anticipated additional staff it will be well positioned to
follow a more balanced program of exploration and exploitation activities to
complement its acquisition efforts.
Titan uses the successful efforts method of accounting for its oil and
gas producing activities. Costs to acquire mineral interests in oil and gas
properties, to drill and equip exploratory wells that result in proved
reserves, and to drill and equip development wells are capitalized. Costs to
drill exploratory wells that do not result in proved reserves, and geological
and geophysical costs are expensed. Costs of significant nonproducing
properties, wells in the process of being drilled and significant development
projects are excluded from depletion until such time as the related project is
developed and proved reserves are established or impairment is determined.
The Company's predecessor was classified as a partnership for federal
income tax purposes. Therefore, no income taxes were paid by the Company prior
to the Conversion. Future tax amounts, if any, will be dependent upon several
factors, including, but not limited to, the Company's results of operations.
RESULTS OF OPERATIONS
The financial statements of the Company, which began operations on March
31, 1995, include the results of the year ended December 31, 1996 and the nine
months ended December 31, 1995. As a result of the Company's limited operating
history and rapid growth, its financial statements are not readily comparable
and may not be indicative of future results.
Year Ended December 31, 1996
For the year ended December 31, 1996, the Company's revenues from the
sale of oil and gas (excluding the effects of hedging activities) were $15.1
million and $11.1 million, respectively. Of total gross oil and gas revenues,
$16.2 million and $9.5 million are attributable to the 1995 Acquisition and the
1996 Acquisition, respectively. During the year, the Company produced 714
MBbls of oil, (514 MBbls attributable to the 1995 Acquisition and 186 MBbls
attributable to the 1996 Acquisition) and 5,787 Mmcf of gas (3,401 Mmcf
attributable to the 1995 Acquisition and 2,124 Mmcf attributable to the 1996
Acquisition), with total oil and gas production of 1,679 MBOE. The revenues
and production are primarily attributable to the 1995 acquisition since the
1996 Acquisition did not close until October 31, 1996.
As a result of hedging activities in the year ended December 31, 1996,
oil revenues were reduced $1.5 million ($2.10 per Bbl) and gas revenues were
reduced $995,000 ($.17 per Mcf) for a total reduction of $2,495,000.
Oil and gas production costs, including production taxes, were $9.2
million ($5.48 per BOE) for the year ended December 31, 1996. These costs
included $2.2 million ($1.31 per BOE) of rework expenses of which $945,000 were
attributable to the 1995 Acquisition and $1.2 million were attributable to the
1996 Acquisition.
Exploration and abandonment costs were $184,000 for the year ended
December 31, 1996.
General and administrative expenses were $2.3 million ($1.35 per BOE)
for the year ended December 31, 1996.
-17-
20
For the year ended December 31, 1996, depletion, depreciation and
amortization expense was $5.8 million ($3.45 per BOE). This represents a full
year of depletion, depreciation and amortization relating to production for the
1995 Acquisition and two months of depletion, depreciation and amortization
relating to production for the 1996 Acquisition.
Interest expense was $2,965,000 for the year ended December 31, 1996.
The interest expense was attributable to bank financing incurred to fund the
1995 Acquisition and the 1996 Acquisition.
Nine Months Ended December 31, 1995
For the nine months ended December 31, 1995, the Company's revenues from
the sale of oil and gas were $504,000 and $239,000, respectively. During the
period, the Company produced 30 MBbls of oil and 245 MMcf of gas, for a total
production of 71 MBOE. The revenues and production are primarily attributable
to the 1995 Acquisition which was consummated December 11, 1995.
Oil and gas production costs, including production taxes, were $304,000
($4.28 per BOE) for the nine months ended December 31, 1995.
Exploration and abandonment costs were $490,000 for the nine months
ended December 31, 1995.
General and administrative expenses were $1.5 million ($21.77 per BOE)
for the nine months ended December 31, 1995.
For the nine months ended December 31, 1995, depletion, depreciation and
amortization expense was $299,000 ($4.21 per BOE).
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of capital have been its initial
capitalization, private equity sales, bank financing, cash flow from operations
and the Company's initial public offering. The 1995 Acquisition was funded
with cash from the Company's initial capitalization, additional private equity
sales and bank financing. The 1996 Acquisition was principally funded with
bank financing, which was repaid with the proceeds from the Company's initial
public offering.
Credit Agreement. The Credit Agreement establishes a four year
revolving credit facility, up to the maximum amount of $250 million, subject to
a borrowing base to be determined annually by the lenders based on certain
proved oil and gas reserves and other assets of the Company. Initially, the
borrowing base is established at $165 million. To the extent that the
borrowing base is less than the aggregate principal amount of all outstanding
loans and letters of credit under the Credit Agreement, such deficiency must be
cured by the Company ratably within 180 days, by either prepaying a portion of
the outstanding amounts under the Credit Agreement or pledging additional
collateral to the lenders. A portion of the credit facility is available for
the issuance of up to $15.0 million of letters of credit, of which $300,000 was
outstanding at December 31, 1996. The Company borrowed $154.5 million of the
$165 million available under the Credit Agreement at the closing of the 1996
Acquisition. The Company used the net proceeds from its initial public
offering to repay indebtedness under the Credit Agreement and $6.5 million
remained outstanding at December 31, 1996.
All outstanding amounts under the Credit Agreement are due and payable
in full on January 1, 2001.
At the Company's option, borrowings under the Credit Agreement bear
interest at either the "Base Rate" (i.e., the higher of the applicable prime
commercial lending rate, or the federal funds rate plus .5% per annum) or the
Eurodollar rate, plus 1% to 1.50% per annum, depending on the level of the
Company's aggregate outstanding borrowings. In addition, the Company is
committed to pay quarterly in arrears a fee of .30% to .375% of the unused
borrowing base.
The Credit Agreement contains certain covenants and restrictions that
are customary in the oil and gas industry. In addition, the line of credit is
secured by a first lien on properties that represented at least 80% of the
-18-
21
value of the Company's proved oil and gas properties as of December 31, 1996
based on PV-10. See Note 4 of Notes to Consolidated Financial Statements.
Cash Flow Analysis
Net Cash Provided by (Used in) Cash Flow Analysis Operating Activities.
For the year ended December 31, 1996, net cash provided by operating activities
increased to $7.7 million due primarily to the 1995 Acquisition and 1996
Acquisition and the cash flow therefrom. For the nine months ended December
31, 1995, net cash used in operations was $1.8 million primarily due to
initiation of the Company's operations.
Net Cash Used in Investing Activities. Net cash used in investing
activities for the year ended December 31, 1996 was $145.0 million, which was
the result of the redemption of $5.0 million in short-term investments,
additions to oil and gas properties of $15.4 million, additions of $200,000 to
other property and equipment, and $134.4 million related to the 1996
Acquisition. For the nine months ended December 31, 1995, net cash used in
investing activities was $47.5 million of which $39.9 million was primarily
attributable to the 1995 Acquisition. An additional $3.8 million was expended
in other acquisition, exploration and development activities, along with the
purchase of a $5.0 million short-term investment.
Net Cash Provided by Financing Activities. For the year ended December
31, 1996, net cash provided by financing activities was $137.4 million, which
included $162.5 million of proceeds from the issuance of long-term debt, $176.0
million in repayment of long-term debt, $147.2 million of net proceeds from the
initial public offering of common stock reduced by direct costs of the
offering, and $3.7 million of capital contributions. Net cash provided by
financing activities was $55.5 million for the nine months ended December 31,
1995. This included $20.0 million of proceeds from the issuance of long-term
debt and $35.5 million of capital contributions.
Capital Expenditures
The Company requires capital primarily for the exploration, development
and acquisition of oil and gas properties, the repayment of indebtedness and
general working capital needs.
The following table sets forth costs incurred by the Company in its
exploration, development and acquisition activities during the periods
indicated.
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------- ------------------
(IN THOUSANDS)
Development costs . . . . . . . . . . . . . . . . . . . . . . . . $ 12,468 $ 1,580
Exploration costs . . . . . . . . . . . . . . . . . . . . . . . . 129 448
Acquisition costs:
Unproved properties . . . . . . . . . . . . . . . . . . . . . 802 1,040
Proved properties . . . . . . . . . . . . . . . . . . . . . . 139,110 40,873
-------- -------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . $152,509 $43,941
======== =======
Through 1997, the Company expects to spend (i) approximately $27.4
million to drill 26 proved locations and rework 42 proven locations on
Company-operated properties, (ii) approximately $6.6 million to drill 38
unproven locations on Company-operated properties and non-operated properties,
and (iii) approximately $18.2 million to acquire additional acreage and seismic
and drill approximately eight exploratory locations on Company-owned
properties. The final determination with respect to the drilling of any well,
including those currently budgeted, will depend on a number of factors,
including (i) the results of exploration efforts and the review and analysis of
the seismic data, (ii) the availability of sufficient capital resources by the
Company and other participants for drilling prospects, (iii) economic and
industry conditions at the time of drilling, including prevailing and
anticipated prices for natural gas and oil and the availability of drilling
rigs and crews, (iv) the financial resources and results of the Company, and
(v) the availability of leases on reasonable terms and permitting for the
potential drilling location. There can be no assurance that the budgeted wells
will, if drilled, encounter reservoirs of commercial quantities of natural gas
or oil.
-19-
22
While the Company regularly engages in discussions relating to potential
acquisitions of oil and gas properties, the Company has no present agreement,
commitment or understanding with respect to any such acquisition, other than
the acquisition of oil and gas properties and interests in its normal course of
business. Any future acquisitions may require additional financing and will be
dependent upon financing arrangements available at the time.
Due to the Company's active acquisition and drilling programs, the
Company has experienced and expects to continue to experience substantial
working capital requirements. While the Company believes that cash flow from
operations and borrowings under the Credit Agreement should be sufficient for
the Company's operating and capital expenditure requirements in 1997 based on
current conditions, additional financing may be required in the future to fund
the Company's acquisition and drilling programs.
OTHER MATTERS
Stock Options and Compensation Expense
In connection with the Conversion, the Company issued options to
purchase 3,631,350 shares of Common Stock to certain of its officers and
employees in substitution for options issued by Titan Resources, L.P. Of the
options issued by the partnership approximately 93% were issued on March 31,
1995, the date of inception, and approximately 7% were issued as of September
1, 1996. The options issued by the Company have an exercise price of $2.08 per
share. Options to purchase 803,576 shares of Common Stock are currently vested
and an additional 1,190,841, 1,209,966 and 426,967 shares will vest on March 31
of each of 1997, 1998 and 1999, respectively. Based in part on selling prices
of interests in the partnership in December 1995 and September 1996, the
Company expected to record a noncash compensation expense of approximately
$421,000 per month for a period of 39 months beginning in the fourth quarter of
1996 to reflect the estimated value of the revised option plan on September 30,
1996. Noncash compensation expense recorded for the year ended December 31,
1996 was $1,839,000.
Hedging Activities
The Company uses swap agreements in an attempt to reduce the risk of
fluctuating oil and gas prices and interest rates. In November and December
1995, the Company entered into four master agreements for energy price and
other swap transactions with each of Enron Capital & Trade Resources Corp.
("ECTRC") (an affiliate of Joint Energy Development Investments Limited
Partnership ("JEDI"), an owner of approximately 5% of the outstanding Common
Stock), First Union National Bank of North Carolina (a lender to the Company
under the Credit Agreement and an affiliate of First Union Corporation, an
owner of approximately 4.9% of the outstanding Common Stock), Chemical Bank and
Texas Commerce Bank National Association (a lender to the Company and an
affiliate of Chemical Bank). The Company has entered into energy price swap
arrangements from time to time under these master agreements. Settlement of
gains or losses on these energy swap transactions was generally based on the
difference between the contract price and a formula using New York Mercantile
Exchange ("NYMEX") related prices and was reported as a component of oil and
gas revenues as the associated production occurs. The Company entered into
hedging transactions with respect to a substantial portion of its estimated
production through December 1996, excluding the production attributable to the
1996 Acquisition. The Company continues to evaluate whether to enter into
additional hedging transactions for 1997 and future years. See "Risk
Factors--Risk of Hedging Activities."
Natural Gas Balancing
It is customary in the natural gas industry for various working interest
partners to produce more or less than their entitlement share of natural gas
from time to time. The Company's net overproduced position at December 31,
1996 was 243,365 Mcf. Under terms of typical natural gas balancing agreements,
the underproduced party can take a certain percentage, typically 25% to 50% of
the overproduced party's entitled share of gas sales in future months, to
eliminate such imbalances. During the make-up period, the overproduced party's
cash flow will be adversely affected. The Company recognizes revenue and
imbalance obligations under the entitlements method of accounting, which means
that the Company recognizes the revenue to which it is entitled and records a
liability with respect to the value of the overproduced gas.
-20-
23
Environmental and Other Laws and Regulations
The Company's business is subject to certain 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 environmental and
safety matters. Many of these laws and regulations have become more stringent
in recent years, often imposing greater liability on a larger number of
potentially responsible parties. Although the Company believes it is in
substantial compliance with all applicable laws and regulations, the
requirements imposed by such laws and regulations are frequently changed and
subject to interpretation, and the Company is unable to predict the ultimate
cost of compliance with these requirements or their effect on its operations.
The Company has no material commitments for capital expenditures to comply with
existing environmental requirements.
Nevertheless, changes in existing environmental laws or in
interpretations thereof could have a significant impact on the operating costs
of the Company, as well as the oil and gas industry in general. See "Risk
Factors--Compliance with Environmental Regulations," "Business and
Properties--Environmental Matters" and "Business and Properties--Abandonment
Costs."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements required by this item
are included on the pages immediately following the Index to Consolidated
Financial Statements appearing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to
information under the caption "Proposal 1 -- Election of Directors" and to the
information under the caption "Compliance with Section 16(a) of the Securities
Exchange Act of 1934" in the Company's definitive Proxy Statement (the "1997
Proxy Statement") for its annual meeting of stockholders to be held on May 28,
1997. The 1997 Proxy Statement will be filed with the Securities and Exchange
Commission (the "Commission") not later than 120 days subsequent to December
31, 1996.
Pursuant to Item 401(b) of Regulation S-K, the information required by
this item with respect to executive officers of the Company is set forth in
Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by
reference to the 1997 Proxy Statement, which will be filed with the Commission
not later than 120 days subsequent to December 31, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by
reference to the 1997 Proxy Statement, which will be filed with the Commission
not later than 120 days subsequent to December 31, 1996.
-21-
24
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTION
The information required by this item is incorporated herein by
reference to the 1997 Proxy Statement, which will be filed with the Commission
not later than 120 days subsequent to December 31, 1996.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K
(a) 1. Consolidated Financial Statements:
See Index to Consolidated Financial Statements on page F-1.
2. Financial Statement Schedules:
See Index to Consolidated Financial Statements on page F-1.
3. Exhibits: The following documents are filed as exhibits to this
report:
Exhibit
Number Description of Document
------ -----------------------
2.1 -- Exchange Agreement and Plan of Reorganization (filed as
Exhibit 2.1 to the Company's Registration Statement on Form
S-1, Registration No. 333-14029, and incorporated herein by
reference).
3.1 -- Certificate of Incorporation (filed as Exhibit 3.1 to the
Company's Registration Statement on Form S-1, Registration
No. 333-14029, and incorporated herein by reference).
3.1.1 -- Certificate of Amendment of Certificate of Incorporation
(filed as Exhibit 3.1.1 to the Company's Registration
Statement on Form S-1, Registration No. 333-14029, and
incorporated herein by reference).
3.2 -- Bylaws (filed as Exhibit 3.2 to the Company's
Registration Statement on Form S-1, Registration No.
333-14029, and incorporated herein by reference).
10.1 -- Agreement of Limited Partnership, dated March 31, 1995,
between Titan Resources I, Inc., as general partner, and
Natural Gas Partners, L.P., Natural Gas Partners II, L.P. and
Jack Hightower, as limited partners (filed as Exhibit
10.1 to the Company's Registration Statement on Form S-1,
Registration No. 333-14029, and incorporated herein by
reference).
10.1.1 -- Amendment No. 1 to the Agreement of Limited Partnership of
Titan Resources, L.P., dated December 11, 1995, by and
among Titan Resources I, Inc., as the general partner, and
a Majority Interest of the Limited Partners (filed as
Exhibit 10.1.1 to the Company's Registration Statement on
Form S-1, Registration No. 333-14029, and incorporated
herein by reference).
10.1.2 -- Amendment No. 2 to the Agreement of Limited Partnership of
Titan Resources, L.P., dated September 27, 1996, by and
among Titan Resources I, Inc., as the general partner, and
a Majority Interest of the Limited Partners (filed as
Exhibit 10.1.2 to the Company's Registration Statement on
Form S-1, Registration No. 333-14029, and incorporated herein
by reference).
10.1.3 -- Amendment No. 3 to the Agreement of Limited Partnership of
Titan Resources, L.P., dated September 30, 1996, by and
among Titan Resources I, Inc., as the general partner, and
a Majority Interest of the Limited Partners (filed as
Exhibit 10.1.3 to the Company's Registration Statement on
Form S-1, Registration No. 333-14029, and incorporated
herein by reference).
-22-
25
Exhibit
Number Description of Document
------ -----------------------
10.2 -- Amended and Restated Voting and Shareholders Agreement,
dated December 11, 1995, by and among Titan Resources I,
Inc., Jack Hightower, Natural Gas Partners, L.P., Natural
Gas Partners II, L.P., Joint Energy Development
Investments Limited Partnership and First Union Corporation
(filed as Exhibit 10.2 to the Company's Registration
Statement on Form S-1, Registration No. 333-14029, and
incorporated herein by reference).
10.3 -- Amended and Restated Registration Rights Agreement, dated
September 30, 1996, by and among Titan Exploration, Inc.,
Jack Hightower, Natural Gas Partners, L.P., Natural Gas
Partners II, L.P., Joint Energy Development
Investments Limited Partnership, First Union Corporation
and Selma International Investment Limited (filed as
Exhibit 10.3 to the Company's Registration Statement on
Form S-1, Registration No. 333-14029, and incorporated herein
by reference).
10.4 -- Financial Advisory Services Contract, dated March 31,
1995, by and between Titan Resources, L.P. and Natural
Gas Partners, L.P. and Natural Gas Partners II, L.P. (filed
as Exhibit 10.4 to the Company's Registration Statement on
Form S-1, Registration No. 333- 14029, and incorporated
herein by reference).
10.4.1 -- First Amendment to Financial Advisory Services Contract,
dated December 11, 1995, between Titan Resources, L.P.,
Natural Gas Partners, L.P. and Natural Gas Partners II, L.P.
(filed as Exhibit 10.4.1 to the Company's Registration
Statement on Form S-1, Registration No. 333-14029, and
incorporated herein by reference).
10.5 -- Employment Agreement, dated September 30, 1996, by and
between Titan Exploration, Inc., Titan Resources I, Inc.
and Jack Hightower (filed as Exhibit 10.5 to the
Company's Registration Statement on Form S-1, Registration
No. 333-14029, and incorporated herein by reference).
10.6.1 -- Form of Confidentiality and Non-compete Agreement among
Titan Resources, L.P., Titan Resources I, Inc. and certain
of the Registrant's executive officers (filed as Exhibit
10.6.1 to the Company's Registration Statement on Form
S-1, Registration No. 333-14029, and incorporated herein by
reference).
10.6.2 -- Form of Confidentiality and Non-compete Agreement among the
Registrant, Titan Resources I, Inc. and certain of the
Registrant's executive officers (filed as Exhibit 10.6.2 to
the Company's Registration Statement on Form S-1,
Registration No. 333-14029, and incorporated herein by
reference).
10.7 -- Titan Resources, L.P. Option Plan (filed as Exhibit 10.7
to the Company's Registration Statement on Form S-1,
Registration No. 333-14029, and incorporated herein by
reference).
10.7.1 -- Form of Option Agreement (A Option) (filed as Exhibit 10.7.1
to the Company's Registration Statement on Form S-1,
Registration No. 333-14029, and incorporated herein by
reference).
10.7.2 -- Form of Option Agreement (B Option) (filed as Exhibit 10.7.2
to the Company's Registration Statement on Form S-1,
Registration No. 333-14029, and incorporated herein by
reference).
10.7.3 -- Form of Option Agreement (C Option) (filed as Exhibit 10.7.3
to the Company's Registration Statement on Form S-1,
Registration No. 333-14029, and incorporated herein by
reference).
10.7.4 -- Form of Option Agreement (D Option) (filed as Exhibit 10.7.4
to the Company's Registration Statement on Form S-1,
Registration No. 333-14029, and incorporated herein by
reference).
10.8 -- Titan Exploration, Inc., Option Plan (filed as Exhibit 10.8
to the Company's Registration Statement on Form S-1,
Registration No. 333-14029, and incorporated herein by
reference).
10.8.1 -- Form of Option Agreement (A Option) (filed as Exhibit 10.8.1
to the Company's Registration Statement on Form S-1,
Registration No. 333-14029, and incorporated herein by
reference).
10.8.2 -- Form of Option Agreement (B Option) (filed as Exhibit 10.8.2
to the Company's Registration Statement on Form S-1,
Registration No. 333-14029, and incorporated herein by
reference).
10.8.3 -- Form of Option Agreement (C Option) (filed as Exhibit 10.8.3
to the Company's Registration Statement on Form S-1,
Registration No. 333-14029, and incorporated herein by
reference).
-23-
26
Exhibit
Number Description of Document
------ -----------------------
10.8.4 -- Form of Option Agreement (D Option) (filed as Exhibit 10.8.4
to the Company's Registration Statement on Form S-1,
Registration No. 333-14029, and incorporated herein by
reference).
10.9 -- 1996 Incentive Plan (filed as Exhibit 10.9 to the Company's
Registration Statement on Form S-1, Registration No.
333-14029, and incorporated herein by reference).
10.10 -- Stock and Unit Purchase Agreement, dated December 11,
1995, by and among Joint Energy Development Investments
Limited Partnership, Titan Resources I, Inc. and Titan
Resources, L.P. (filed as Exhibit 10.10 to the
Company's Registration Statement on Form S-1,
Registration No. 333-14029, and incorporated herein by
reference).
10.10.1 -- Designation Agreement, dated December 11, 1995, by and
between Titan Resources, L.P. and Joint Energy Development
Investments Limited Partnership (filed as Exhibit 10.10.1 to
the Company's Registration Statement on Form S-1,
Registration No. 333-14029, and incorporated herein by
reference).
10.11 -- Stock and Unit Purchase Agreement, dated December 11,
1995, by and among First Union Corporation, Titan
Resources I, Inc. and Titan Resources, L.P. (filed as
Exhibit 10.11 to the Company's Registration Statement on
Form S-1, Registration No. 333-14029, and incorporated
herein by reference).
10.11.1 -- Designation Agreement, dated December 11, 1995, by and
between Titan Resources, L.P. and First Union Corporation
(filed as Exhibit 10.11.1 to the Company's Registration
Statement on Form S-1, Registration No. 333-14029, and
incorporated herein by reference).
10.12 -- Advisory Services Contract, dated December 11, 1995, between
Titan Resources, L.P. and ECT Securities Corp. (filed as
Exhibit 10.12 to the Company's Registration Statement on
Form S-1, Registration No. 333-14029, and incorporated herein
by reference).
10.13 -- Amended and Restated Credit Agreement, dated October 31,
1996, among Titan Resources, L.P. and Texas Commerce Bank
National Association, as Agent, and Financial Institutions
now or hereafter parties hereto (filed as Exhibit 10.13 to
the Company's Registration Statement on Form S-1,
Registration No. 333-14029, and incorporated herein by
reference).
10.14 -- Agreement of Sale and Purchase, dated April 19, 1995,
between Enertex, Inc. and Titan Resources, L.P. (filed as
Exhibit 10.14 to the Company's Registration Statement on
Form S-1, Registration No. 333-14029, and incorporated herein
by reference).
10.15 -- Agreement of Sale and Purchase, dated April 19, 1995,
between Staley Gas Co., Inc. and Titan Resources, L.P.
(filed as Exhibit 10.15 to the Company's Registration
Statement on Form S-1, Registration No. 333-14029, and
incorporated herein by reference).
10.16 -- Administrative Services Contract, dated March 31, 1995,
between Staley Operating Co. and Titan Resources, L.P.
(filed as Exhibit 10.16 to the Company's Registration
Statement on Form S-1, Registration No. 333-14029, and
incorporated herein by reference).
10.17 -- Services Agreement, dated April 1, 1995, between Titan
Resources I, Inc. and Titan Resources, L.P. (filed as
Exhibit 10.17 to the Company's Registration Statement on
Form S-1, Registration No. 333-14029, and incorporated herein
by reference).
10.18 -- Office Lease, dated January 8, 1996, between Fasken Center,
Ltd. and Titan Resources, L.P. (filed as Exhibit 10.18 to
the Company's Registration Statement on Form S-1,
Registration No. 333-14029, and incorporated herein by
reference).
10.19 -- Purchase and Sale Agreement, dated October 12, 1995, by
and between Anadarko Petroleum Corporation and Titan
Resources, L.P. (filed as Exhibit 10.19 to the
Company's Registration Statement on Form S-1, Registration
No. 333-14029, and incorporated herein by reference).
10.20 -- Amendment No. 1 to Purchase and Sale Agreement, dated
December 11, 1995, by and between Anadarko Petroleum
Corporation and Titan Resources, L.P. (filed as Exhibit
10.20 to the Company's Registration Statement on Form S-1,
Registration No. 333-14029, and incorporated herein by
reference).
-24-
27
Exhibit
Number Description of Document
------ -----------------------
10.21 -- Purchase and Sale Agreement, dated July 12, 1996, by and
between Mobil Producing Texas & New Mexico Inc. and Titan
Resources, L.P. (filed as Exhibit 10.21 to the Company's
Registration Statement on Form S-1, Registration No.
333-14029, and incorporated herein by reference).
10.22 -- Unit Purchase and Exchange Agreement, dated September 27,
1996, by and between Selma International Investment
Limited and Titan Resources, L.P. (filed as Exhibit 10.22
to the Company's Registration Statement on Form S-1,
Registration No. 333-14029, and incorporated herein by
reference).
10.23 -- Form of Indemnity Agreement between the Registrant and
each of its executive officers (filed as Exhibit 10.23 to
the Company's Registration Statement on Form S-1,
Registration No. 333-14029, and incorporated herein by
reference).
10.24 -- Advisory Director Agreement, dated September 30, 1996, by
and between Titan Exploration, Inc. and Joint Energy
Development Investments Limited Partnership (filed as
Exhibit 10.24 to the Company's Registration Statement on
Form S-1, Registration No. 333-14029, and incorporated
herein by reference).
21 -- Subsidiaries of the Registrant (filed as Exhibit 21 to
the Company's Registration Statement on Form S-1,
Registration No. 333-14029, and incorporated herein by
reference).
27 -- Financial Data Schedule.
(b) No reports on Form 8-K were filed during the last quarter of the period
covered by this Annual Report on Form 10-K.
-25-
28
GLOSSARY OF OIL AND GAS TERMS
The following are abbreviations and definitions of terms commonly used
in the oil and gas industry and this report. Unless otherwise indicated in
this report, 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.
"Bcf" means billion cubic feet of natural gas.
"BOE" means barrels of oil equivalent.
"Completion" means the installation of permanent equipment for the
production of oil or gas.
"Development well" means a well drilled within the proved area of an oil
or gas reservoir to the depth of a stratigraphic horizon known to be
productive.
"Exploratory well" means a well drilled to find and produce oil or gas
in an unproved area, to find a new reservoir in a field previously found to be
productive of oil or gas in another reservoir, or to extend a known reservoir.
"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.
"MMBbls" means millions of barrels of oil.
"MMBOE" means millions of barrels of oil equivalent on a 6:1 basis.
"MMcf" means million cubic feet of natural gas.
"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.
"Net production" means production that is owned by the Company less
royalties and production due others.
"Oil" means crude oil or condensate.
"Operator" means the individual or company responsible for the
exploration, development, and production of an oil or gas well or lease.
"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
-26-
29
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 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.
"3-D seismic" means seismic data that are acquired and processed to
yield a three-dimensional picture of the subsurface.
"Tertiary recovery" means enhanced recovery methods for the production
of oil or gas. Enhanced recovery of crude oil requires a means for displacing
oil from the reservoir rock, modifying the properties of the fluids in the
reservoir and/or the reservoir rock to cause movement of oil in an efficient
manner, and providing the energy and drive mechanism to force its flow to a
production well. The Company injects chemicals or energy as required
-27-
30
for displacement and for the control of flow rate and flow pattern in the
reservoir, and a fluid drive is provided to force the oil toward a production
well.
"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.
-28-
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, hereunder duly authorized, as of March 27,
1997.
TITAN EXPLORATION, INC.
Registrant
By: /s/ Jack Hightower
-----------------------------------
Jack Hightower
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below as of March 27, 1997, by the following
persons on behalf of the Registrant and in the capacity indicated.
/s/ JACK HIGHTOWER
- ----------------------------------------
Jack Hightower
President, Chief Executive Officer and
Chairman of the Board
/s/ GEORGE G. STALEY
- ----------------------------------------
George G. Staley
Executive Vice President, Exploration
and Director
/s/ WILLIAM K. WHITE
- ----------------------------------------
William K. White
Vice President, Finance and Chief
Financial Officer
/s/ DAVID R. ALBIN
- ----------------------------------------
David R. Albin
Director
/s/ KENNETH A. HERSH
- ----------------------------------------
Kenneth A. Hersh
Director
/s/ WILLIAM J. VAUGHN, JR.
- ----------------------------------------
William J. Vaughn, Jr.
Director
-29-
32
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Consolidated Financial Statements of Titan Exploration, Inc.
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 1996 and December 31, 1995 F-3
Consolidated Statements of Operations for the year ended December 31, 1996
and the period March 31, 1995 (date of inception) through December 31, 1995 F-4
Consolidated Statements of Stockholder's Equity and Predecessor Capital for the
year ended December 31, 1996 and the period March 31, 1995 (date of inception)
through December 31, 1995 F-5
Consolidated Statements of Cash Flows for the year ended December 31, 1996
and the period March 31, 1995 (date of inception) through December 31, 1995 F-6
Notes to Consolidated Financial Statements F-7
All schedules are omitted, as the required information is inapplicable or the
information is presented in the financial statements or related notes.
F-1
33
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Titan Exploration, Inc.
We have audited the consolidated financial statements of Titan Exploration,
Inc. (the "Company") as listed in the accompanying index. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Titan Exploration,
Inc. as of December 31, 1996 and December 31, 1995, and the results of its
operations and its cash flows for the year ended December 31, 1996 and the
period from March 31, 1995 (date of inception) through December 31, 1995, in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Midland, Texas
March 12, 1997
F-2
34
TITAN EXPLORATION, INC.
Consolidated Balance Sheets
(in thousands, except share data)
December 31,
----------------------
ASSETS 1996 1995
---------- --------
Current assets:
Cash and cash equivalents $ 6,290 $ 6,213
Short-term investment - certificate of deposit -- 5,000
Accounts receivable:
Oil and gas 8,533 996
Other 931 1,554
Prepaid expenses and other current assets 266 121
--------- ---------
Total current assets 16,020 13,884
--------- ---------
Property, plant and equipment, at cost:
Oil and gas properties, using the successful efforts method of accounting:
Proved properties 194,699 42,887
Unproved properties 987 190
Accumulated depletion, depreciation and amortization (5,624) (216)
--------- ---------
190,062 42,861
Other property and equipment, net 277 96
--------- ---------
190,339 42,957
Other assets, net of accumulated amortization of $203 in 1996 and $78 in 1995 820 646
--------- ---------
$ 207,179 $ 57,487
LIABILITIES AND STOCKHOLDERS' EQUITY AND PREDECESSOR CAPITAL
Current liabilities:
Accounts payable and accrued liabilities:
Trade $ 7,112 $ 1,766
Accrued interest -- 97
Other 784 75
--------- ---------
Total current liabilities 7,896 1,938
--------- ---------
Long-term debt 6,500 20,000
Other liabilities 1,772 964
Deferred income tax payable 3,825 --
Stockholders' equity and predecessor capital:
Predecessor capital -- 37,081
Preferred Stock, $.01 par value, 10,000,000 shares authorized; none issued
and outstanding
Common Stock, $.01 par value, 60,000,000 shares authorized; 33,941,513
shares issued and outstanding at December 31, 1996 339 --
Additional paid-in capital 203,411 --
Deferred compensation (15,161) (2,496)
Retained earnings (deficit) (1,403) --
--------- ---------
Total stockholders' equity and predecessor capital 187,186 34,585
--------- ---------
$ 207,179 $ 57,487
========= =========
See accompanying notes to consolidated financial statements.
F-3
35
TITAN EXPLORATION, INC.
Consolidated Statements of Operations
(in thousands, except share and per share data)
Period
March 31, 1995
(date of inception)
Year ended through
December 31, December 31,
1996 1995
------------ ------------
Revenues:
Oil and gas sales $ 23,824 $ 743
Management fees - affiliate 144 242
------------ ------------
Total revenues 23,968 985
Expenses:
Oil and gas production 9,199 304
General and administrative 2,270 1,546
Amortization of stock option awards 1,839 576
Exploration and abandonment 184 490
Depletion, depreciation and amortization 5,789 299
------------ ------------
Total expenses 19,281 3,215
------------ ------------
Operating income (loss) 4,687 (2,230)
------------ ------------
Other income (expense):
Interest income 424 699
Interest expense (2,965) (97)
Gain (loss) on sale of assets (65) 244
Loss on commodity derivative contracts -- (147)
------------ ------------
Net income (loss) before federal income taxes 2,081 (1,531)
------------ ------------
Income tax expense 3,484 --
------------ ------------
Net loss $ (1,403) $ (1,531)
============ ============
Net loss per share $ (.07) $ (.11)
============ ============
Weighted average common shares outstanding 20,139,829 14,066,215
============ ============
See accompanying notes to consolidated financial statements.
F-4
36
TITAN EXPLORATION, INC.
Consolidated Statements of Stockholders' Equity and Predecessor Capital
(in thousands)
Additional Retained Total
Predecessor Common Paid-in Deferred Earnings Stockholders'
Capital Stock Capital Compensation (Deficit) Equity
------- ----- ------- ------------ --------- ------
Balance at March 31, 1995 $ -- $ -- $ -- $ -- $ -- $ --
Capital contributions 35,540 -- -- -- -- 35,540
Deferred compensation 3,072 -- -- (2,496) -- 576
Net loss (1,531) -- -- -- -- (1,531)
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1995 37,081 -- -- (2,496) -- 34,585
Sale of interest in predecessor 5,000 -- -- -- -- 5,000
September 30, 1996 stock plan -- -- 14,504 (14,504) -- --
Common stock issued -- 144 147,021 -- -- 147,165
Deferred compensation -- -- -- 1,839 -- 1,839
Net loss -- -- -- -- (1,403) (1,403)
Transfer of predecessor
capital and issuance of common
stock pursuant to the Offering (42,081) 195 41,886 -- -- --
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1996 $ -- $ 339 $ 203,411 $ (15,161) $ (1,403) $ 187,186
========= ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements.
F-5
37
TITAN EXPLORATION, INC.
Consolidated Statements of Cash Flows
(in thousands)
Period
March 31, 1995
(date of inception)
Year ended through
December 31, December 31,
1996 1995
--------- ---------
Cash flows from operating activities:
Net loss $ (1,403) $ (1,531)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depletion, depreciation and amortization 5,789 299
Amortization of stock option awards 1,839 576
Dry holes and abandonments 21 434
(Gain) loss on sale of assets 65 (244)
Deferred income taxes 3,484 --
Changes in assets and liabilities:
Increase in accounts receivable (7,311) (2,153)
Increase in prepaid expenses and other current assets (145) (121)
Increase in other assets (516) (724)
Increase in accounts payable and accrued liabilities 5,887 1,659
--------- ---------
Total adjustments 9,113 (274)
--------- ---------
Net cash provided by (used in) operating activities 7,710 (1,805)
--------- ---------
Cash flows from investing activities:
Purchase of short-term investment -- (5,000)
Redemption of short-term investment 5,000 --
Acquisition of oil and gas properties (134,413) (39,881)
Additions to oil and gas properties (15,488) (3,788)
Additions to other property and equipment (218) (101)
Proceeds from sale of nonproducing oil and gas properties,
net of commissions paid 121 1,248
--------- ---------
Net cash used in investing activities (144,998) (47,522)
--------- ---------
Cash flows from financing activities:
Proceeds from the issuance of long-term debt 162,500 28,000
Payments of long-term debt (176,000) (8,000)
Capital contributions 3,700 35,540
Proceeds from initial common stock offering 148,376 --
Direct costs of initial common stock offering (1,211) --
--------- ---------
Net cash provided by financing activities 137,365 55,540
--------- ---------
Net increase in cash and cash equivalents 77 6,213
Cash and cash equivalents, beginning of period 6,213 --
--------- ---------
Cash and cash equivalents, end of period $ 6,290 $ 6,213
========= =========
See accompanying notes to consolidated financial statements.
F-6
38
TITAN EXPLORATION, INC.
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
(1) ORGANIZATION AND NATURE OF OPERATIONS
Titan Exploration, Inc. (the "Company") a Delaware corporation, was
organized on September 27, 1996 and began operations on September 30, 1996 with
the combination, pursuant to the terms of an Exchange Agreement and Plan of
Reorganization (the "Exchange Agreement"), of Titan Resources I, Inc. (the
"General Partner"), a Texas corporation, and Titan Resources, L.P. (the
"Partnership"). Under the exchange agreement, the limited partners of the
Partnership transferred all of their limited partnership interests to the
Company in exchange for 19,318,199 shares of common stock, and the shareholders
of the General Partner transferred all of the issued and outstanding stock of
that corporation to the Company in exchange for an aggregate of 231,814 shares
of common stock. These transactions are referred to as the "Conversion."
Prior to the Conversion, the Company had no issued or outstanding shares
of common stock and there was no public market for the General Partner's common
stock. All shares of the Company currently outstanding were issued in the
Conversion to the shareholders of the General Partner or to the limited
partners of the Partnership. The combination of the Company, the General
Partner and the Partnership is treated as a combination of entities under
common control because of the 100% commonality of control between the Company
subsequent to the Conversion and the Partnership prior to the Conversion. All
partners of the Partnership were party to the exchange of shares in the
Conversion. Consequently, the accompanying consolidated financial statements
have given effect to the Conversion as if it were a pooling of interests.
Revenues and costs arising from transactions between the two predecessor
entities (the General Partner and the Partnership) have been eliminated. The
following table sets forth revenues and net income with respect to the two
predecessor entities (in thousands):
Period
March 31, 1995
(date of inception)
Year ended through
December 31, December 31,
1996 1995
------------ -------------------
Revenues:
General Partner $ -- $ 680
Partnership 23,968 985
Intercompany eliminations -- (680)
------- -------
$23,968 $ 985
======= =======
Net income (loss):
General Partner $ (66) $ (9)
Partnership 1,502 (1,522)
The Company (2,839) --
------- -------
$(1,403) $(1,531)
======= =======
(Continued)
F-7
39
TITAN EXPLORATION, INC.
Notes to Consolidated Financial Statements
The Company is an independent energy company engaged in the exploration,
development and acquisition of oil and gas properties. Since its inception in
March 1995, the Company has experienced significant growth, primarily through
the acquisition of oil and gas properties and the exploitation of these
properties in the Permian Basin region of west Texas and southeastern New
Mexico.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries, each of which is wholly owned, since their formation (See
Note 1). All material intercompany accounts and transactions have been
eliminated in the consolidation.
Use of Estimates in the Preparation of Financial Statements
Preparation of the accompanying consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
demand deposits, money market accounts and certificates of deposit purchased
with an original maturity of three months or less to be cash equivalents.
Inventories
Inventories consist of lease and well equipment not currently being used
in production and are accounted for at the lower of cost (first-in, first-out)
or market.
Oil and Gas Properties
The Company utilizes the successful efforts method of accounting for its
oil and gas properties. Under this method of accounting, all costs associated
with productive wells and nonproductive development wells are capitalized.
Exploration costs are capitalized pending determination of whether proved
reserves have been found. If no proved reserves are found, previously
capitalized exploration costs are charged to expense.
Costs of significant nonproducing properties, wells in the process of
being drilled and development projects are excluded from depletion until such
time as the related project is developed and proved reserves are established or
impairment is determined. The Company capitalizes interest on expenditures for
significant development projects until such time as significant operations
commence.
Capitalized costs of individual properties abandoned or retired are
charged to accumulated depletion, depreciation and amortization. Sales
proceeds from sales of individual properties are credited to property costs.
No gain or loss is recognized until the entire amortization base is sold or
abandoned.
(Continued)
F-8
40
TITAN EXPLORATION, INC.
Notes to Consolidated Financial Statements
Other property and equipment are recorded at cost. Major renewals and
betterments are capitalized while the costs of repairs and maintenance are
charged to operating expenses in the period incurred. With respect to
dispositions of assets other than oil and gas properties, the cost of assets
retired or otherwise disposed of, and the applicable accumulated depreciation
are removed from the accounts, and the resulting gains or losses, if any, are
reflected in operations.
Depletion, Depreciation and Amortization
Provision for depletion of oil and gas properties is calculated using the
unit-of-production method on the basis of an aggregation of properties with a
common geologic structural feature or stratigraphic condition, typically a
field or reservoir. In addition, estimated costs of future dismantlement,
restoration and abandonment, if any, are accrued as a part of depletion,
depreciation and amortization expense on a unit of production basis; actual
costs are charged to the accrual. Other property and equipment is depreciated
using the straight-line method over the estimated useful lives of the assets.
Organization costs are amortized over five years, while loan costs are
amortized over the life of the related loan.
Impairment of Long-Lived Assets
The Company follows the provisions of Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of ("FAS 121"). Consequently, the Company
reviews its long-lived assets to be held and used, including oil and gas
properties accounted for under the successful efforts method of accounting,
whenever events or circumstances indicate that the carrying value of those
assets may not be recoverable. An impairment loss is indicated if the sum of
the expected future cash flows, on a depletable unit basis, is less than the
carrying amount of such assets. In this circumstance, the Company recognizes
an impairment loss for the amount by which the carrying amount of the asset
exceeds the fair value of the asset. No impairment was determined to exist
during the year ended December 31, 1996 or the period March 31, 1995 (date of
inception) through December 31, 1995.
The Company accounts for long-lived assets to be disposed of at the lower
of their carrying amount or fair value less cost to sell once management has
committed to a plan to dispose of the assets.
Earnings per Share
Primary net income (loss) per share is computed based on the weighted
average number of shares of common stock and common stock equivalents
outstanding during the period. Common stock equivalent shares arising from
stock options are computed using the treasury stock method. There were no
potentially dilutive securities, other than common stock equivalents.
Consequently, primary and fully diluted earnings per share do not differ. For
the periods prior to the Offering, the weighted average shares outstanding
attributable to predecessor capital are the shares issued to the predecessor
members upon Conversion.
Income Taxes
The Company follows the provisions of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("FAS 109"). Under the asset and liability
method of FAS 109, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary
(Continued)
F-9
41
TITAN EXPLORATION, INC.
Notes to Consolidated Financial Statements
differences are expected to be recovered or settled. Under FAS 109, the effect
on deferred tax assets and liabilities of a change in tax rate is recognized in
income in the period that includes the enactment date.
Upon Conversion, the Company recorded the tax effect of the differences
between the book and tax basis of its assets and liabilities as a deferred tax
liability and a corresponding charge to deferred income tax expense.
Environmental
The Company is subject to extensive federal, state and local environmental
laws and regulations. These laws, which are constantly changing, regulate the
discharge of materials into the environment and may require the Company to
remove or mitigate the environmental effects of the disposal or release of
petroleum or chemical substances at various sites. Environmental expenditures
are expensed or capitalized depending on their future economic benefit.
Expenditures that relate to an existing condition caused by past operations and
that have no future economic benefits are expensed. Liabilities for
expenditures of a noncapital nature are recorded when environmental assessment
and/or remediation is probable, and the costs can be reasonably estimated.
Revenue Recognition
The Company uses the sales method of accounting for crude oil revenues.
Under this method, revenues are recognized based on actual volumes of oil sold
to purchasers.
The Company uses the entitlements method of accounting for natural gas
revenues. Under this method, revenues are recognized based on the Company's
proportionate share of actual sales of natural gas. Natural gas revenues would
not have been significantly altered in any period had the sales method of
recognizing natural gas revenues been utilized. The Company has a net
liability of approximately $508,000 and $964,000 associated with gas balancing
recorded in other liabilities at December 31, 1996 and December 31, 1995,
respectively.
Stock-based Compensation
The Company accounts for employee stock-based compensation using the
intrinsic value method prescribed by Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25"). Accordingly, the
Company has only adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS
123"). See Note 10 for the pro forma disclosures of compensation expense
determined under the fair-value provisions of FAS 123.
Commodity Hedging
The financial instruments that the Company accounts for as hedging
contracts must meet the following criteria: the underlying asset or liability
must expose the Company to price or interest rate risk that is not offset in
another asset or liability, the hedging contract must reduce that price or
interest rate risk at the inception of the contract and throughout the contract
period, and the instrument must be designated as a hedge. In order to qualify
as a hedge, there must be clear correlation between changes in the fair value
of the financial instrument and the fair value of the underlying asset or
liability such that changes in the market value of the financial instrument
will be offset by the effect of price or interest rate changes on the exposed
items.
The Company periodically enters into commodity derivative contracts
(swaps) in order to hedge the effect of price changes on commodities the
Company produces and sells. Gains and losses on contracts that are designed to
(Continued)
F-10
42
TITAN EXPLORATION, INC.
Notes to Consolidated Financial Statements
hedge commodities are included in income recognized from the sale of those
commodities. Gains and losses on derivative contracts which do not qualify as
hedges are recognized in each period based on the market value of the related
instrument. At December 31, 1996, the Company was not subject to any commodity
derivative contracts.
Interest Rate Swap Agreements
The Company enters into interest rate swap agreements to effectively
convert a portion of its floating-rate borrowings into fixed rate obligations.
The interest rate differential to be received or paid is recognized over the
lives of the agreements as an adjustment to interest expense. At December 31,
1996, the Company was not subject to any interest rate swap agreements.
Reclassifications
Certain reclassifications have been made to the 1995 amounts to conform to
the 1996 presentation.
(3) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, short-term investments,
other current assets, accounts receivable, accounts payable, and accrued
liabilities approximates fair value because of the short maturity of these
instruments.
The carrying amount of long-term debt approximates fair value because the
Company's current borrowing rate does not materially differ from market rates
for similar bank borrowings.
The fair market values of commodity derivative instruments are estimated
based upon the current market price of the respective commodities at the date
of valuation. It represents the amount which the Company would be required to
pay or able to receive based upon the differential between a fixed and a
variable commodity price as specified in the hedge contracts. At December 31,
1995, the Company would have been required to pay approximately $606,000 to
terminate the existing contracts. There were not any commodity derivatives in
effect at December 31, 1996.
The fair values of interest rate swap agreements are obtained from bank
quotes. This value represents the estimated amount the Company would pay to
terminate the agreement, taking into consideration current interest rates. The
Company estimates that, at December 31, 1995, the Company would have been
required to pay approximately $17,000 to terminate the existing interest rate
swap agreement. The interest rate swap agreement matured on December 23, 1996,
consequently, no interest rate swap agreements were in effect at December 31,
1996.
(Continued)
F-11
43
TITAN EXPLORATION, INC.
Notes to Consolidated Financial Statements
(4) LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
December 31,
----------------------
1996 1995
------- -------
1996 Line of credit $ 6,500 $ --
1995 Line of credit -- 20,000
------- -------
$ 6,500 $20,000
======= =======
1996 Line of Credit
On October 31, 1996, the Company entered into a new credit agreement (the
"Credit Agreement") with Chase Securities, Inc., an affiliate of the Company's
current lender, which establishes a two year revolving credit facility, up to
the maximum amount of $250 million with an initial borrowing base of $165
million, followed by a five-year term loan requiring all payments to be made by
January 1, 2001. The borrowing base is subject to redetermination semiannually
by the lenders based on certain proved oil and gas reserves and other assets of
the Company with the next redetermination date scheduled for April 1, 1997.
Proceeds of the credit facility were utilized to fund the 1996 Acquisition,
development of oil and gas reserves, and for general corporate requirements.
The credit agreement, which is secured by the Company's proved oil and gas
reserves, is subject to mandatory prepayments. To the extent that the
borrowing base is less than the aggregate principal amount of all outstanding
loans and letters of credit under the Credit Agreement, such deficiency must be
cured by the Company within 180 days, by either prepaying a portion of the
outstanding amounts or pledging additional collateral. Commitment fees are due
quarterly and range from .300% to .375% per annum on the difference between the
commitment and the average daily amount outstanding.
At the Company's option, borrowings under the Credit Agreement bear
interest at either (i) the "Base Rate" (i.e. the higher of the agent's prime
commercial lending rate, or the federal funds rate plus 0.5% per annum), or
(ii) the Eurodollar rate plus a margin ranging from 1% to 1.50% per annum,
which margin increases as the level of the Company's aggregate outstanding
borrowings under the Credit Agreement increases. The interest rate in effect
at December 31, 1996 was the prime rate of 8.25%.
The credit agreement contains various restrictive covenants and compliance
requirements, which include (1) limiting the incurrence of additional
indebtedness, (2) restrictions as to merger, sale or transfer of assets and
transactions with affiliates without the lenders' consent, and (3) prohibition
of any return of capital payments or distributions to any of its partners other
than for taxes due as a result of their partnership interest.
1995 Line of Credit
On December 11, 1995, the Company entered into a credit agreement with
Texas Commerce Bank. The note provided for a two-year revolving line of credit
of $100,000,000 with an initial borrowing base of $35,000,000. The loan
documents governing the Credit Agreement contained certain covenants and
restrictions that are customary in the oil and gas industry relating to the
Company's operations. The 1995 line of credit was paid in full on December 20,
1996.
(Continued)
F-12
44
TITAN EXPLORATION, INC.
Notes to Consolidated Financial Statements
The Company was party to an interest rate swap agreement entered into on
December 21, 1995. The effect of this agreement was to provide the Company
with a fixed interest rate of 6.72% on $10,000,000 of its revolving line of
credit through December 23, 1996.
Maturities of long-term debt are as follows (in thousands):
1996 $ 0
1997 0
1998 0
1999 0
2000 0
Thereafter 6,500
(5) ACQUISITIONS OF OIL AND GAS PROPERTIES
On October 31, 1996, the Company completed the acquisition of certain oil
and gas properties from a major integrated company (the "1996 Acquisition").
The Company funded the acquisition from the 1996 Line of Credit agreement
described in Note 4. The total consideration paid for the properties was
$134,413,066. The acquisition of these oil and gas properties, accounted for
using the purchase method, resulted in the following noncash investing
activities:
Recorded amount of assets acquired, including
receivables of $300,187 $ 135,983,556
Liabilities assumed (1,570,490)
-------------
Cash paid $ 134,413,066
=============
Included in receivables assumed is a $300,187 long-term receivable
recorded as a purchase price adjustment related to the 1996 Acquisition for a
gas imbalance. It is shown net of other gas imbalance liabilities in the
financial statements. Liabilities assumed are amounts recorded as purchase
price adjustments related to the 1996 Acquisition for potential environmental
remediation.
On December 11, 1995, the Company completed the acquisition of certain oil
and gas properties from a large independent oil and gas company (the "1995
Acquisition"). The Company funded the acquisition from the 1995 Line of
Credit agreement described in Note 4. The total consideration paid for the
properties was $39,881,094. The acquisition of these oil and gas properties,
accounted for using the purchase method, resulted in the following noncash
investing activities:
Recorded amount of assets acquired, including receivables
of $396,719 $ 40,992,065
Liabilities assumed (1,110,971)
------------
Cash paid $ 39,881,094
============
Included in liabilities assumed is a $963,898 long-term liability recorded
as a purchase price adjustment related to the 1995 Acquisition for a gas
imbalance liability.
(Continued)
F-13
45
TITAN EXPLORATION, INC.
Notes to Consolidated Financial Statements
Pro Forma Results of Operations (Unaudited)
The following table reflects the pro forma results of operations for the
years ended December 31, 1996 and 1995 as though the 1995 and the 1996
Acquisition had occurred as of January 1, 1995 and as if the Conversion had
taken place on January 1, 1995. The pro forma amounts are not necessarily
indicative of the results that may be reported in the future (in thousands).
Year ended
December 31,
------------------------
1996 1995
-------- --------
Revenues $ 60,130 $ 49,591
Net income (loss) 1,695 (459)
Net income (loss) per share .08 (0.03)
(6) STATEMENTS OF CASH FLOWS
Interest expense of $3,062,656 was paid as of December 31, 1996. No
interest was paid in 1995.
During 1996, a $1,300,000 noncash contribution of interests in oil and gas
properties was made in exchange for interest in the Company. Also at December
31, 1996, a $341,250 noncash property addition was recorded as a purchase price
adjustment related to the Conversion.
(7) COMMON STOCK OFFERING
On December 16, 1996, the Company completed an initial public offering of
14,391,500 shares of common stock at a price of $11.00 per share. Proceeds
received, net of related expenses, were approximately $148,376,365.
(8) INCOME TAXES
Upon Conversion, the Company became a tax paying entity for U.S. Federal
income tax purposes. At that date, the book basis of the Company's assets and
liabilities exceeded the tax basis by approximately $16,934,000, resulting in a
deferred tax liability of approximately $2,998,000. Income tax provision for
the year ended December 31, 1996 is as follows (in thousands):
Deferred income tax expense at statutory rate on income of $1,293,000
since incorporation $ 486
Deferred income tax expense to record difference between book and tax
basis of assets upon Conversion 2,998
------
$3,484
======
(Continued)
F-14
46
TITAN EXPLORATION, INC.
Notes to Consolidated Financial Statements
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1996 are as follows (in thousands):
Deferred tax assets:
Net operating loss $1,458
Compensation, principally due to accrual for financial reporting
purposes 644
------
Total gross deferred tax assets 2,102
------
Deferred tax liabilities:
Oil and gas properties, principally due to differences in basis,
depletion, and the deduction of intangible drilling costs for tax
purposes 5,927
------
Total gross deferred tax liabilities 5,927
------
Net deferred tax liability $3,825
======
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax assets will not be realized. Based on
expectations for the future and the availability of certain tax planning
strategies that would generate taxable income to realize the net tax benefits,
if implemented, management has determined that taxable income of the Company
will more likely than not be sufficient to fully utilize available
carryforwards prior to their ultimate expiration.
At December 31, 1996, the Company has net operating loss carryforwards
("NOLs") for U.S. federal income tax purposes of approximately $4.2 million,
which are available to offset future regular taxable income, if any. The
carryforwards expire December 31, 2011.
(9) RELATED PARTY TRANSACTIONS
For the year ended December 31, 1996, the Company received $144,167 for
administrative services from a related party. During 1995 revenue received was
$241,563.
Financial advisory service fees of $185,854 were paid to two shareholders
during 1996. For the period March 31, 1995 (date of inception) through
December 31, 1996, $428,958 were paid to two shareholders and two affiliates of
shareholders.
Director's fees of $10,000 and $20,833 were paid during 1996 and 1995,
respectively.
The Company has recorded in other assets approximately $425,000 of
organization costs which were paid to related parties for consulting and
advisory fees. These costs are being amortized over a period of five years.
Certain properties that were owned or controlled by certain shareholders
were acquired by the Company for $21,708 and $1,142,000 in 1996 and 1995,
respectively, which approximates the predecessor cost of the properties.
(Continued)
F-15
47
TITAN EXPLORATION, INC.
Notes to Consolidated Financial Statements
The Company entered into a three-year noncancellable operating lease with
an entity controlled by an officer of the General Partner for office facilities
on January 1, 1996.
Future minimum lease commitments under the lease at December 31, 1996 are
as follows:
1997 $110,625
1998 110,625
1999 --
Lease expense paid through December 31, 1996 was $110,625. Due to
expansion of office facilities, the current lease agreement is under
renegotiation. The new agreement is expected to be executed in April 1997.
The Company was party to two financial advisory service contracts with a
shareholder and an affiliate of a shareholder. These contracts require
consolidated annual payments of $185,000 per year to be paid by the Company
until any one of the following events occur:
(i) the date of dissolution of the Company;
(ii) the first date on which the respective shareholder no
longer owns at least 35% of the outstanding shares of common stock
of the Company;
(iii) the first date on which the Company or its successors
complete an equity offering to the public, or
(iv) written notice by the respective party of their election to
terminate the contracts with the Company.
These contracts were terminated on December 16, 1996 pursuant to (iii)
above.
The Company regularly uses certain aircraft owned by an affiliate. The
Company is billed for any use of such aircraft by Company personnel. Payments
made for the use of such aircraft were $17,348 for the year ended December 31,
1996 and $4,140 for the period ended March 31, 1995 (date of inception) through
December 31, 1995.
The President, Chief Executive Officer and Chairman of the Board of the
Company, and certain of his affiliates have a common ownership interest in an
oil and gas property that is operated by the Company and, in accordance with a
standard industry operating agreement, make payments to the Company of
leasehold costs and lease operating and supervision charges. These payments
were approximately $229,332 for the year ended December 31, 1996 and $12,000
for period March 31, 1995 (date of inception) through December 31, 1995.
Revenue received in connection with these oil and gas properties was $6,868 for
the year ended December 31, 1996. These interests were owned by the Chief
Executive Officer and his affiliates prior to the formation of the Company on
March 31, 1995.
(Continued)
F-16
48
TITAN EXPLORATION, INC.
Notes to Consolidated Financial Statements
(10) COMPANY OPTION PLANS
Initial Stock Option Plan
During 1995, the Titan Resources, L.P. established a unit option plan (the
"Plan") for certain officers and key employees of the Partnership and the
General Partner. The Plan provided for the issuance of 5,460,000 options in
four separate series with an initial exercise price of $1 which was to be
increased 10% per annum from the initial plan adoption date of March 31, 1995.
Option A series, covering 3,624,706 units, was to vest at a rate of one-third
of the options at each of the dates of March 31, 1996, 1997 and 1998; Option
B, C, and D series were to vest on the dates that the Board determines that the
current value of partnership units had increased by a factor of 3, 4, and 5,
respectively, or on the date that such per unit amounts of cash or other assets
have been or are authorized to be distributed to the Partners. Option B, C,
and D series cover 582,282, 611,037, and 641,975 units, respectively. As of
December 31, 1995, 5,093,616 unit options had been awarded and none were vested
or exercised.
Based on the price of equity interests sold at December 11, 1995, the
Company recorded deferred compensation for the expected value of the options,
amortized over the period from March 31, 1995 through March 31, 1998.
Revised Stock Option Plan
On September 30, 1996, upon the consolidation of Titan Exploration, Inc.,
the Plan was replaced by a new stock option plan the ("Stock Plan"). The Stock
Plan provides for the issuance of 3,631,350 options to acquire common stock of
the Company, in four separate series with a fixed exercise price of $2.08.
Option A series, covering 2,410,728 shares of common stock, was to vest at a
rate of one-third of the options at each of the dates of March 31, 1996, 1997
and 1998; Option B, C, and D series cover 387,265, 406,390, and 426,967 shares
of common stock, respectively and vest over a period through March 31, 1999.
Deferred compensation was recorded based on the value of the Company's common
stock on September 30, 1996, and will be amortized to expense over a 39 month
period. Deferred compensation of approximately $17,576,000 (before reduction
by amounts previously amortized to expense under the Plan, as described above)
was recorded at September 30, 1996. At December 31, 1996, unamortized deferred
compensation was $15,160,371.
1996 Incentive Plan
The Board of Directors and the stockholders of the Company approved the
adoption of the Company's 1996 Incentive Plan (the "1996 Incentive Plan") as of
October 1, 1996. The purpose of the 1996 Incentive Plan is to reward selected
officers and key employees of the Company and others who have been or may be in
a position to benefit the Company, compensate them for making significant
contributions to the success of the Company and provide them with a proprietary
interest in the growth and performance of the Company.
Participants in the 1996 Incentive Plan are selected by the Board of
Directors or such committee of the Board as is designated by the Board to
administer the 1996 Incentive Plan (the Compensation Committee of the Board of
Directors) from among those who hold positions of responsibility with the
Company and whose performance, in the judgment of the Compensation Committee,
can have a significant effect on the success of the Company. An aggregate of
850,000 shares of Common Stock have been authorized and reserved for issuance
pursuant to the 1996 Incentive Plan. At December 31, 1996, options have been
granted to a participant under the
(Continued)
F-17
49
TITAN EXPLORATION, INC.
Notes to Consolidated Financial Statements
1996 Incentive Plan to purchase a total of 85,000 shares of Common Stock at an
exercise price of $11 per share. These options vest ratably on each of the
first through fourth anniversaries of the grant date.
Subject to the provisions of the 1996 Incentive Plan, the Compensation
Committee will be authorized to determine the type or types of awards made to
each participant and the terms, conditions and limitations applicable to each
award. In addition, the Compensation Committee will have the exclusive power
to interpret the 1996 Incentive Plan and to adopt such rules and regulations as
it may deem necessary or appropriate in keeping with the objectives of the 1996
Incentive Plan.
Pursuant to the 1996 Incentive Plan, participants will be eligible to
receive awards consisting of (i) stock options, (ii) stock appreciation rights,
(iii) stock, (iv) restricted stock, (v) cash or (vi) any combination of the
foregoing. Stock options may be either incentive stock options within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended, or
nonqualified stock options.
The Company applies APB 25 and related interpretations in accounting for
its stock option plans. If compensation expense for the stock option plans
had been determined consistent with Statement of Financial Accounting
Standards 123, "Accounting for Stock-Based Compensation ("FAS 123"), the
Company's net loss and net loss per share would have been adjusted to the pro
forma amounts indicated below:
For the year ended
December 31,
-------------------------------------
1996 1995
----------- ----------
(in thousands, except per share amounts)
Net loss $(1,744) $(1,454)
Net loss per share (0.09) (0.10)
The pro forma net loss and pro forma net loss per share amounts noted
above are not likely to be representative of the pro forma amounts to be
reported in future years. The pro forma amounts for 1996 and 1995 reflect the
initial phase-in of FAS 123, and as a result, do not reflect any compensation
expense for options granted prior to 1995. Pro forma adjustments in future
years will include compensation expense associated with the options granted in
1996 and 1995 plus compensation expense associated with any options awarded in
future years. As a result, such pro forma compensation expense is likely to
be higher than the levels experienced in 1996 and 1995.
Under FAS 123, the fair value of each stock option grant is estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions used for grants in 1996 and 1995:
1996 1995
----- -----
Risk-free interest rate 6.15% 6.00%
Expected life 3.0 4.5
Expected volatility 52% 52%
Expected dividend yield -- --
(Continued)
F-18
50
TITAN EXPLORATION, INC.
Notes to Consolidated Financial Statements
A summary of the Company's stock option plans as of December 31, 1996 and
1995, and changes during the years ended on those dates is presented below:
Period
March 31, 1995
(date of inception)
For the year ended through
December 31, 1996 December 31, 1995
---------------------- ----------------------
Weighted Weighted
Number Average Number Average
of Shares Price of Shares Price
----------- --------- ---------- ----------
Stock options:
Outstanding at beginning of year 3,387,674 $1.50
Options granted - initial plan 243,676 $1.50
Options canceled (3,631,350) $1.50
Options granted 3,716,350 $2.28 3,387,674 $1.50
---------- ----------
Outstanding at end of year 3,716,350 3,387,674
========== ==========
Exercisable at end of year -- --
========== ==========
Weighted average fair value of
options granted during the year $ 5.27 $ 0.75
========== ==========
The following table summarizes information about the Company's stock
options outstanding at December 31, 1996:
Options Outstanding
---------------------------------------------------
Number Weighted Average Weighted
Outstanding at Remaining Average
December 31, 1996 Contractual Life Exercise Price
----------------- ---------------- --------------
3,631,350 51 months $ 2.08
85,000 51 months $11.00
-----------------
3,716,350
=================
(11) 401(K) PLAN
The Company has established a qualified cash or deferred arrangement under
IRS code section 401(k) covering substantially all employees. Under the plan,
the employees have an option to make elective contributions of a portion of
their eligible compensation, not to exceed specified annual limitations, to the
plan and the Company has an option to match a portion of the employee's
contribution. The Company has made matching contributions to the plan totaling
$23,034 and $8,199 in 1996 and 1995, respectively.
(Continued)
F-19
51
TITAN EXPLORATION, INC.
Notes to Consolidated Financial Statements
(12) MAJOR CUSTOMERS
The following purchasers accounted for 10% or more of the Company's oil
and gas sales for the year ended December 31, 1996 and the period March 31,
1995 (date of inception) through December 31, 1995.
1996 1995
---- ----
Purchaser A 43.06% --
(13) OIL AND GAS EXPENDITURES
The following table reflects costs incurred in oil and gas property
acquisition, exploration and development activities:
Period
March 31, 1995
(date of inception)
Year ended through
December 31, December 31,
1996 1995
------------ -------------------
(in thousands)
Property acquisition costs:
Proved $139,110 $40,873
Unproved 802 1,040
Exploration 129 448
Development 12,468 1,580
------------ -------------------
$152,509 $43,941
============ ===================
(14) SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (UNAUDITED)
The estimates of proved oil and gas reserves, which are located
principally in the United States, were prepared by the Company as of December
31, 1995, and Williamson Petroleum Consultants as of December 31, 1996.
Reserves were estimated in accordance with guidelines established by the SEC
and FASB which require that reserve estimates be prepared under existing
economic and operating conditions with no provision for price and cost
escalations except by contractual arrangements. The Company has presented the
reserve estimates utilizing an oil price of $25.09 per Bbl and a gas price of
$2.70 per Mcf as of December 31, 1996, and an oil price of $17.66 per Bbl and a
gas price of $1.38 per Mcf as of December 31, 1995.
Oil and Gas Producing Activities
Oil and gas reserve quantity estimates are subject to numerous
uncertainties inherent in the estimation of quantities of proved reserves and
in the projection of future rates of production and the timing of development
expenditures. The accuracy of such estimates is a function of the quality of
available data and of engineering and geological interpretation and judgment.
Results of subsequent drilling, testing and production may cause either upward
or downward revision of previous estimates. Further, the volumes considered to
be commercially
(Continued)
F-20
52
TITAN EXPLORATION, INC.
Notes to Consolidated Financial Statements
recoverable fluctuate with changes in prices and operating costs. The Company
emphasizes that reserve estimates are inherently imprecise and that estimates
of new discoveries are more imprecise than those of currently producing oil and
gas properties. Accordingly, these estimates are expected to change as
additional information becomes available in the future.
Oil and Natural
Condensate (MBbls) Gas (MMcf)
------------------ ----------
Total Proved Reserves:
Balance, March 31, 1995 -- --
Extensions and discoveries 108 33,724
Purchases of minerals-in-place 6,068 101,516
Production (30) (245)
-------- --------
Balance, December 31, 1995 6,146 134,995
Purchases of minerals-in-place 704 264
Revision of previous estimates 101 47,031
Production (388) (2,725)
-------- --------
Balance, September 30, 1996 6,563 179,565
Purchases of minerals-in-place 12,510 109,381
Revision of previous estimates 709 15,494
Production (326) (3,062)
-------- --------
Balance, December 31, 1996 19,456 301,378
======== ========
Proved Developed Reserves:
March 31, 1995 -- --
December 31, 1995 5,945 45,470
September 30, 1996 6,252 54,119
December 31, 1996 16,024 180,161
Standardized Measure of Discounted Future Net Cash Flows Relating to
Proved Oil and Gas Reserves
The standardized measure of discounted future net cash flows is computed
by applying year-end prices of oil and gas (with consideration of price changes
only to the extent provided by contractual arrangements) to the estimated
future production of proved oil and gas reserves, less estimated future
expenditures (based on period-end costs) to be incurred in developing and
producing the proved reserves, less estimated future income tax expenses (based
on period-end statutory tax rates, with consideration of future tax rates
already legislated) to be incurred on pretax net cash flows less tax basis of
the properties and available credits, and assuming continuation of existing
economic conditions. The estimated future net cash flows are then discounted
using a rate of 10% per year to reflect the estimated timing of the future cash
flows.
(Continued)
F-21
53
TITAN EXPLORATION, INC.
Notes to Consolidated Financial Statements
Discounted future cash flow estimates like those shown below are not
intended to represent estimates of the fair value of oil and gas properties.
Estimates of fair value should also consider probable reserves, anticipated
future oil and gas prices, interest rates, changes in development and
production costs and risks associated with future production. Because of these
and other considerations, any estimate of fair value is necessarily subjective
and imprecise.
Period
March 31, 1995
(date of inception)
Year ended through
December 31, December 31,
1996 1995
------------ -------------------
Future:
Cash inflows $ 1,300,863 $ 270,965
Production and development costs (348,705) (95,490)
Future income taxes (264,904) (45,754)
----------- -----------
Future net cash flows 687,254 129,721
10% annual discount for estimated timing of cash flows (299,391) (63,369)
----------- -----------
Standardized measure of discounted net cash flows $ 387,863 $ 66,352
=========== ===========
Changes in Standardized Measure of Discounted Future Net Cash Flows From
Proved Reserves
Period
March 31, 1995
(date of inception)
Year ended through
December 31, December 31,
1996 1995
------------ ----------
(in thousands)
Standardized measure, beginning of period $ 66,352 $ --
Extensions and discoveries and improved recovery,
net of future production and development costs -- 18,087
Accretion of discount 6,635 --
Net change in sales prices, net of production, costs 83,823 --
Net change in income taxes (126,102) (23,401)
Purchase of minerals-in-place 298,867 71,561
Revision of quantity estimates and revenues added
by development drilling 70,755 --
Sales, net of production costs (14,624) (439)
Other 2,157 544
--------- ---------
Standardized measure, end of period $ 387,863 $ 66,352
========= =========
(Continued)
F-22
54
TITAN EXPLORATION, INC.
Notes to Consolidated Financial Statements
(15) SELECTED QUARTERLY FINANCIAL RESULTS (UNAUDITED)
Quarter
----------------------------------------------
First Second Third Fourth
---------- ---------- ---------- ----------
(in thousands, except per share data)
1996
Total revenues $ 3,304 $3,487 $3,586 $13,591
Total expenses 4,354 4,185 4,048 12,784
Net income (loss) (1,050) (698) (462) 807
Net income (loss) per share (.06) (.04) (.02) .04
1995
Total revenues -- -- 173 812
Total expenses -- -- 93 2,423
Net income (loss) -- -- 80 (1,611)
Net income (loss) per share -- -- .01 (.11)
F-23
55
EXHIBIT INDEX
Exhibit
Number Description of Document
------ -----------------------
2.1 -- Exchange Agreement and Plan of Reorganization (filed as
Exhibit 2.1 to the Company's Registration Statement on Form
S-1, Registration No. 333-14029, and incorporated herein by
reference).
3.1 -- Certificate of Incorporation (filed as Exhibit 3.1 to the
Company's Registration Statement on Form S-1, Registration
No. 333-14029, and incorporated herein by reference).
3.1.1 -- Certificate of Amendment of Certificate of Incorporation
(filed as Exhibit 3.1.1 to the Company's Registration
Statement on Form S-1, Registration No. 333-14029, and
incorporated herein by reference).
3.2 -- Bylaws (filed as Exhibit 3.2 to the Company's
Registration Statement on Form S-1, Registration No.
333-14029, and incorporated herein by reference).
10.1 -- Agreement of Limited Partnership, dated March 31, 1995,
between Titan Resources I, Inc., as general partner, and
Natural Gas Partners, L.P., Natural Gas Partners II, L.P. and
Jack Hightower, as limited partners (filed as Exhibit
10.1 to the Company's Registration Statement on Form S-1,
Registration No. 333-14029, and incorporated herein by
reference).
10.1.1 -- Amendment No. 1 to the Agreement of Limited Partnership of
Titan Resources, L.P., dated December 11, 1995, by and
among Titan Resources I, Inc., as the general partner, and
a Majority Interest of the Limited Partners (filed as
Exhibit 10.1.1 to the Company's Registration Statement on
Form S-1, Registration No. 333-14029, and incorporated
herein by reference).
10.1.2 -- Amendment No. 2 to the Agreement of Limited Partnership of
Titan Resources, L.P., dated September 27, 1996, by and
among Titan Resources I, Inc., as the general partner, and
a Majority Interest of the Limited Partners (filed as
Exhibit 10.1.2 to the Company's Registration Statement on
Form S-1, Registration No. 333-14029, and incorporated herein
by reference).
10.1.3 -- Amendment No. 3 to the Agreement of Limited Partnership of
Titan Resources, L.P., dated September 30, 1996, by and
among Titan Resources I, Inc., as the general partner, and
a Majority Interest of the Limited Partners (filed as
Exhibit 10.1.3 to the Company's Registration Statement on
Form S-1, Registration No. 333-14029, and incorporated
herein by reference).
56
Exhibit
Number Description of Document
------ -----------------------
10.2 -- Amended and Restated Voting and Shareholders Agreement,
dated December 11, 1995, by and among Titan Resources I,
Inc., Jack Hightower, Natural Gas Partners, L.P., Natural
Gas Partners II, L.P., Joint Energy Development
Investments Limited Partnership and First Union Corporation
(filed as Exhibit 10.2 to the Company's Registration
Statement on Form S-1, Registration No. 333-14029, and
incorporated herein by reference).
10.3 -- Amended and Restated Registration Rights Agreement, dated
September 30, 1996, by and among Titan Exploration, Inc.,
Jack Hightower, Natural Gas Partners, L.P., Natural Gas
Partners II, L.P., Joint Energy Development
Investments Limited Partnership, First Union Corporation
and Selma International Investment Limited (filed as
Exhibit 10.3 to the Company's Registration Statement on
Form S-1, Registration No. 333-14029, and incorporated herein
by reference).
10.4 -- Financial Advisory Services Contract, dated March 31,
1995, by and between Titan Resources, L.P. and Natural
Gas Partners, L.P. and Natural Gas Partners II, L.P. (filed
as Exhibit 10.4 to the Company's Registration Statement on
Form S-1, Registration No. 333- 14029, and incorporated
herein by reference).
10.4.1 -- First Amendment to Financial Advisory Services Contract,
dated December 11, 1995, between Titan Resources, L.P.,
Natural Gas Partners, L.P. and Natural Gas Partners II, L.P.
(filed as Exhibit 10.4.1 to the Company's Registration
Statement on Form S-1, Registration No. 333-14029, and
incorporated herein by reference).
10.5 -- Employment Agreement, dated September 30, 1996, by and
between Titan Exploration, Inc., Titan Resources I, Inc.
and Jack Hightower (filed as Exhibit 10.5 to the
Company's Registration Statement on Form S-1, Registration
No. 333-14029, and incorporated herein by reference).
10.6.1 -- Form of Confidentiality and Non-compete Agreement among
Titan Resources, L.P., Titan Resources I, Inc. and certain
of the Registrant's executive officers (filed as Exhibit
10.6.1 to the Company's Registration Statement on Form
S-1, Registration No. 333-14029, and incorporated herein by
reference).
10.6.2 -- Form of Confidentiality and Non-compete Agreement among the
Registrant, Titan Resources I, Inc. and certain of the
Registrant's executive officers (filed as Exhibit 10.6.2 to
the Company's Registration Statement on Form S-1,
Registration No. 333-14029, and incorporated herein by
reference).
10.7 -- Titan Resources, L.P. Option Plan (filed as Exhibit 10.7
to the Company's Registration Statement on Form S-1,
Registration No. 333-14029, and incorporated herein by
reference).
10.7.1 -- Form of Option Agreement (A Option) (filed as Exhibit 10.7.1
to the Company's Registration Statement on Form S-1,
Registration No. 333-14029, and incorporated herein by
reference).
10.7.2 -- Form of Option Agreement (B Option) (filed as Exhibit 10.7.2
to the Company's Registration Statement on Form S-1,
Registration No. 333-14029, and incorporated herein by
reference).
10.7.3 -- Form of Option Agreement (C Option) (filed as Exhibit 10.7.3
to the Company's Registration Statement on Form S-1,
Registration No. 333-14029, and incorporated herein by
reference).
10.7.4 -- Form of Option Agreement (D Option) (filed as Exhibit 10.7.4
to the Company's Registration Statement on Form S-1,
Registration No. 333-14029, and incorporated herein by
reference).
10.8 -- Titan Exploration, Inc., Option Plan (filed as Exhibit 10.8
to the Company's Registration Statement on Form S-1,
Registration No. 333-14029, and incorporated herein by
reference).
10.8.1 -- Form of Option Agreement (A Option) (filed as Exhibit 10.8.1
to the Company's Registration Statement on Form S-1,
Registration No. 333-14029, and incorporated herein by
reference).
10.8.2 -- Form of Option Agreement (B Option) (filed as Exhibit 10.8.2
to the Company's Registration Statement on Form S-1,
Registration No. 333-14029, and incorporated herein by
reference).
10.8.3 -- Form of Option Agreement (C Option) (filed as Exhibit 10.8.3
to the Company's Registration Statement on Form S-1,
Registration No. 333-14029, and incorporated herein by
reference).
57
Exhibit
Number Description of Document
------ -----------------------
10.8.4 -- Form of Option Agreement (D Option) (filed as Exhibit 10.8.4
to the Company's Registration Statement on Form S-1,
Registration No. 333-14029, and incorporated herein by
reference).
10.9 -- 1996 Incentive Plan (filed as Exhibit 10.9 to the Company's
Registration Statement on Form S-1, Registration No.
333-14029, and incorporated herein by reference).
10.10 -- Stock and Unit Purchase Agreement, dated December 11,
1995, by and among Joint Energy Development Investments
Limited Partnership, Titan Resources I, Inc. and Titan
Resources, L.P. (filed as Exhibit 10.10 to the
Company's Registration Statement on Form S-1,
Registration No. 333-14029, and incorporated herein by
reference).
10.10.1 -- Designation Agreement, dated December 11, 1995, by and
between Titan Resources, L.P. and Joint Energy Development
Investments Limited Partnership (filed as Exhibit 10.10.1 to
the Company's Registration Statement on Form S-1,
Registration No. 333-14029, and incorporated herein by
reference).
10.11 -- Stock and Unit Purchase Agreement, dated December 11,
1995, by and among First Union Corporation, Titan
Resources I, Inc. and Titan Resources, L.P. (filed as
Exhibit 10.11 to the Company's Registration Statement on
Form S-1, Registration No. 333-14029, and incorporated
herein by reference).
10.11.1 -- Designation Agreement, dated December 11, 1995, by and
between Titan Resources, L.P. and First Union Corporation
(filed as Exhibit 10.11.1 to the Company's Registration
Statement on Form S-1, Registration No. 333-14029, and
incorporated herein by reference).
10.12 -- Advisory Services Contract, dated December 11, 1995, between
Titan Resources, L.P. and ECT Securities Corp. (filed as
Exhibit 10.12 to the Company's Registration Statement on
Form S-1, Registration No. 333-14029, and incorporated herein
by reference).
10.13 -- Amended and Restated Credit Agreement, dated October 31,
1996, among Titan Resources, L.P. and Texas Commerce Bank
National Association, as Agent, and Financial Institutions
now or hereafter parties hereto (filed as Exhibit 10.13 to
the Company's Registration Statement on Form S-1,
Registration No. 333-14029, and incorporated herein by
reference).
10.14 -- Agreement of Sale and Purchase, dated April 19, 1995,
between Enertex, Inc. and Titan Resources, L.P. (filed as
Exhibit 10.14 to the Company's Registration Statement on
Form S-1, Registration No. 333-14029, and incorporated herein
by reference).
10.15 -- Agreement of Sale and Purchase, dated April 19, 1995,
between Staley Gas Co., Inc. and Titan Resources, L.P.
(filed as Exhibit 10.15 to the Company's Registration
Statement on Form S-1, Registration No. 333-14029, and
incorporated herein by reference).
10.16 -- Administrative Services Contract, dated March 31, 1995,
between Staley Operating Co. and Titan Resources, L.P.
(filed as Exhibit 10.16 to the Company's Registration
Statement on Form S-1, Registration No. 333-14029, and
incorporated herein by reference).
10.17 -- Services Agreement, dated April 1, 1995, between Titan
Resources I, Inc. and Titan Resources, L.P. (filed as
Exhibit 10.17 to the Company's Registration Statement on
Form S-1, Registration No. 333-14029, and incorporated herein
by reference).
10.18 -- Office Lease, dated January 8, 1996, between Fasken Center,
Ltd. and Titan Resources, L.P. (filed as Exhibit 10.18 to
the Company's Registration Statement on Form S-1,
Registration No. 333-14029, and incorporated herein by
reference).
10.19 -- Purchase and Sale Agreement, dated October 12, 1995, by
and between Anadarko Petroleum Corporation and Titan
Resources, L.P. (filed as Exhibit 10.19 to the
Company's Registration Statement on Form S-1, Registration
No. 333-14029, and incorporated herein by reference).
10.20 -- Amendment No. 1 to Purchase and Sale Agreement, dated
December 11, 1995, by and between Anadarko Petroleum
Corporation and Titan Resources, L.P. (filed as Exhibit
10.20 to the Company's Registration Statement on Form S-1,
Registration No. 333-14029, and incorporated herein by
reference).
58
INDEX TO EXHIBITS
Exhibit
Number
------
10.21 -- Purchase and Sale Agreement, dated July 12, 1996, by and
between Mobil Producing Texas & New Mexico Inc. and Titan
Resources, L.P. (filed as Exhibit 10.21 to the Company's
Registration Statement on Form S-1, Registration No.
333-14029, and incorporated herein by reference).
10.22 -- Unit Purchase and Exchange Agreement, dated September 27,
1996, by and between Selma International Investment
Limited and Titan Resources, L.P. (filed as Exhibit 10.22
to the Company's Registration Statement on Form S-1,
Registration No. 333-14029, and incorporated herein by
reference).
10.23 -- Form of Indemnity Agreement between the Registrant and
each of its executive officers (filed as Exhibit 10.23 to
the Company's Registration Statement on Form S-1,
Registration No. 333-14029, and incorporated herein by
reference).
10.24 -- Advisory Director Agreement, dated September 30, 1996, by
and between Titan Exploration, Inc. and Joint Energy
Development Investments Limited Partnership (filed as
Exhibit 10.24 to the Company's Registration Statement on
Form S-1, Registration No. 333-14029, and incorporated
herein by reference).
21 -- Subsidiaries of the Registrant (filed as Exhibit 21 to
the Company's Registration Statement on Form S-1,
Registration No. 333-14029, and incorporated herein by
reference).
27 -- Financial Data Schedule.