-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Qm2wVAjlt9fiRamo8oH+jsHvD3OitV5sgq9DDyJUTLQqU46DzpHZCDmwxLJkIHVJ geydUMwhycPVAa09cbxE6g== 0000930661-97-002584.txt : 19971111 0000930661-97-002584.hdr.sgml : 19971111 ACCESSION NUMBER: 0000930661-97-002584 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971110 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TITAN EXPLORATION INC CENTRAL INDEX KEY: 0001024645 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 752671582 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21843 FILM NUMBER: 97711881 BUSINESS ADDRESS: STREET 1: 500 W TEXAS AVE STREET 2: SUITE 500 CITY: MIDLAND STATE: TX ZIP: 79701 BUSINESS PHONE: 9156826612 MAIL ADDRESS: STREET 1: 500 W TEXAS AVE STREET 2: SUITE 500 CITY: MIDLAND STATE: TX ZIP: 79701 10-Q 1 FORM 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------ FORM 10-Q ------------------------ [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to ----- ----- Commission File Number: 000-21843 TITAN EXPLORATION, INC. (Exact name of Registrant as specified in its charter) DELAWARE 75-2671582 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 500 WEST TEXAS, SUITE 500 MIDLAND, TEXAS 79701 (Address of principal executive offices) (Zip Code) (915) 682-6612 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- As of October 31, 1997, 33,945,798 shares of common stock, par value $.01 per share, of Titan Exploration, Inc. were outstanding. TABLE OF CONTENTS Page ---- Forward Looking Information and Risk Factors...................... 1 PART I -- FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of September 30, 1997 and December 31, 1996..................................... 2 Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 1997 and 1996......... 3 Consolidated Statements of Cash Flows for the Three and Nine Months Ended September 30, 1997 and 1996......... 4 Notes to Consolidated Financial Statements................ 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 8 PART II -- OTHER INFORMATION Item 5. Other Information......................................... 13 Item 6. Exhibits and Reports on Form 8-K.......................... 13 Signatures................................................ 14 -i- TITAN EXPLORATION, INC. FORWARD LOOKING INFORMATION AND RISK FACTORS Titan Exploration, Inc. (the "Company") or its representatives may make forward looking statements, oral or written, including statements in this report's Management's Discussion and Analysis of Financial Condition and Results of Operations, press releases and filings with the Securities and Exchange Commission, regarding estimated future net revenues from oil and natural gas reserves and the present value thereof, planned capital expenditures (including the amount and nature thereof), increases in oil and gas production, the number of wells the Company anticipates drilling through 1998 and the Company's financial position, business strategy and other plans and objectives for future operations. Although the Company believes that the expectations reflected in these forward looking statements are reasonable, there can be no assurance that the actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected effects on its business or operations. Among the factors that could cause actual results to differ materially from the Company's expectations are general economic conditions, inherent uncertainties in interpreting engineering data, operating hazards, delays or cancellations of drilling operations for a variety of reasons, competition, fluctuations in oil and gas prices, government regulations and other factors set forth in the Company's Annual Report on Form 10-K. All subsequent oral and written forward looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these factors. The Company assumes no obligation to update any of these statements. -1- Item 1. Financial Statements TITAN EXPLORATION, INC. Consolidated Balance Sheets (in thousands)
ASSETS September 30, December 31, 1997 1996 ------------- ------------ (unaudited) Current assets: Cash and cash equivalents $ 1,146 $ 6,290 Accounts receivable: Oil and gas 7,766 8,533 Other 2,225 931 Prepaid expenses and other current assets 747 266 -------- -------- Total current assets 11,884 16,020 -------- -------- Property, plant and equipment, at cost: Oil and gas properties, using the successful efforts method of accounting: Proved properties 228,250 194,699 Unproved properties 10,525 987 Accumulated depletion, depreciation and amortization (21,263) (5,624) -------- -------- 217,512 190,062 Other property and equipment, net 921 277 -------- -------- 218,433 190,339 Other assets. net of accumulated amortization of $393 in 1997 and $203 in 1996 721 820 -------- -------- $231,038 $207,179 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities: Trade $5,178 $7,112 Other 4,436 784 -------- -------- Total current liabilities 9,614 7,896 -------- -------- Long-term debt 14,700 6,500 Other liabilities 1,805 1,772 Deferred income tax payable 7,359 3,825 Stockholders' equity: Preferred Stock, $.01 par value, 10,000 shares authorized; none issued and outstanding -- -- Common Stock, $.01 par value, 60,000 shares authorized; 33,945 shares issued and outstanding at September 30, 1997 339 339 Additional paid-in capital 203,433 203,411 Deferred compensation (11,371) (15,161) Retained earnings (deficit) 5,159 (1,403) -------- -------- Total stockholders' equity 197,560 187,186 -------- -------- $231,038 $207,179 ======== ========
See accompanying notes to consolidated financial statements. -2- TITAN EXPLORATION, INC. Consolidated Statements of Operations (in thousands, except per share data) (unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ------------------- -------------------- 1997 1996 1997 1996 ------- ------- -------- ------- Revenues: Oil and gas sales $17,843 $ 3,583 $52,011 $10,237 Other 28 4 99 140 ------- ------- -------- ------- Total revenues 17,871 3,587 52,110 10,377 ------- ------- -------- ------- Expenses: Oil and gas production 4,659 1,348 16,627 4,339 General and administrative 1,294 494 3,637 1,452 Amortization of stock option awards 1,263 192 3,790 576 Exploration and abandonment 586 29 1,342 110 Depletion, depreciation and amortization 5,828 509 15,927 2,269 ------- ------- -------- ------- Total expenses 13,630 2,572 41,323 8,746 ------- ------- -------- ------- Operating income 4,241 1,015 10,787 1,631 ------- ------- -------- ------- Other income (expense): Interest income 37 91 134 336 Interest expense (339) (468) (825) (1,179) ------- ------- -------- ------- Net income before income taxes 3,939 638 10,096 788 Income tax expense 1,379 2,998 3,534 2,998 ------- ------- -------- ------- Net income (loss) $ 2,560 $(2,360) $ 6,562 $(2,210) ======= ======= ======= ======= Net income (loss) per share $ 0.07 $ (0.11) $ 0.18 $ (0.10) ======= ======= ======= ======= Weighted average common shares outstanding 35,763 21,796 35,714 21,780 ======= ======= ======= =======
See accompanying notes to consolidated financial statements. -3- TITAN EXPLORATION, INC. Consolidated Statements of Cash Flows (in thousands) (unaudited)
Three Months Ended Nine Months Ended September 30, September 30, --------------------- --------------------- 1997 1996 1997 1996 -------- -------- -------- -------- Cash flows from operating activities: Net income $ 2,560 $ (2,360) $ 6,562 $ (2,210) Adjustments to reconcile net income to net cash provided by operating activities: Depletion, depreciation and amortization 5,828 509 15,927 2,269 Amortization of stock option awards 1,263 192 3,790 576 Dry holes and abandonments - 3 - 21 Deferred income taxes 1,379 2,998 3,534 2,998 Changes in assets and liabilities: Accounts receivable (771) 71 (527) (833) Prepaid expenses and other current assets (262) (21) (481) 28 Accounts payable and accrued liabilities (1,829) 2,200 1,751 2,794 -------- -------- -------- -------- Total adjustments 5,608 5,952 23,994 7,853 -------- -------- -------- -------- Net cash provided by operating activities 8,168 3,592 30,556 5,643 -------- -------- -------- -------- Cash flows from investing activities: Redemption of short-term investment - - - 5,000 Additions to oil and gas properties (12,158) (13,305) (43,089) (17,590) Other (226) (121) (818) (163) -------- -------- -------- -------- Net cash used in investing activities (12,384) (13,426) (43,907) (12,753) -------- -------- -------- -------- Cash flows from financing activities: Proceeds from issuance of long-term debt 24,350 8,000 33,850 8,000 Repayments of long-term debt (19,650) - (25,650) - Capital contributions - 3,700 - 3,700 Proceeds from exercise of employee stock options 7 - 7 - -------- -------- -------- -------- Net cash provided by financing activities 4,707 11,700 8,207 11,700 -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents 491 1,866 (5,144) 4,590 Cash and cash equivalents, beginning or period 655 8,937 6,290 6,213 -------- -------- -------- -------- Cash and cash equivalents, end of period $ 1,146 $ 10,803 $ 1,146 $ 10,803 ======== ======== ======== ========
See accompanying notes to consolidated financial statements. -4- TITAN EXPLORATION, INC. Notes to Consolidated Financial Statements September 30, 1997 and 1996 (unaudited) (1) BASIS OF PRESENTATION In the opinion of management, the unaudited consolidated financial statements of Titan Exploration, Inc. (the "Company") as of September 30, 1997 and for the three and nine months ended September 30, 1997 and 1996 include all adjustments and accruals, consisting only of normal recurring accrual adjustments, which are necessary for a fair presentation of the results for the interim period. These interim results are not necessarily indicative of results for a full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in this Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's 1996 Form 10-K. The Company's predecessor was classified as a partnership for federal income tax purposes. Therefore, no income taxes were paid or accrued prior to its conversion from a limited partnership to a corporation on September 30, 1996. (2) LONG-TERM DEBT On October 31, 1996, the Company entered into a credit agreement (the "Credit Agreement") which established a four year revolving credit facility, up to the maximum amount of $250 million with an initial borrowing base of $165 million. All outstanding amounts are due and payable in full on January 1, 2001. The borrowing base is subject to redetermination annually by the lenders based on certain proved oil and gas reserves and other assets of the Company. Proceeds of the credit facility were utilized to fund the 1996 Acquisition, development of oil and gas reserves and for general corporate requirements. In June 1997, the borrowing base was redetermined by the lenders and reset at $165 million. Effective April 16, 1997, the Company entered into an unsecured credit agreement which established a one year revolving credit facility, up to the maximum amount of $5 million. All outstanding amounts are due and payable in full on or before March 6, 1998. Proceeds of the credit facility are utilized to fund short-term needs (less than thirty days). Outstanding amounts pursuant to the Unsecured Credit Agreement are classified as long-term debt as the Company intends to refinance them on a long-term basis either through continued short-term borrowing or available credit facilities. (3) STOCKHOLDERS' EQUITY In May 1997, the Company announced a plan to repurchase up to $25 million of the Company's common stock. The repurchases will be made periodically, depending on market conditions, and will be funded with cash flow from operations and, as necessary, borrowings under the Credit Agreement. At September 30, 1997, the Company had not repurchased any shares of its common stock. -5- (4) DERIVATIVE FINANCIAL INSTRUMENTS The Company utilizes various swap contracts to hedge the effect of price changes on future oil and gas production. The following table sets forth the future volumes hedged by year and the weighted average price to be received based upon the fixed price of the individual swap contracts outstanding at September 30, 1997:
Oil Gas Volume Volume Price per Year (MBbls) (MMcfs) Mcf/Bbl - --------------------- ------- ------- --------- Oil production: 1997 274 $21.36 Gas production: 1997 2,140 $2.69 1998 4,500 2.40
Subsequent to September 30, 1997, the Company entered into additional hedge positions for 1997 and 1998 oil production and 1998 gas production. The additional oil swap contract has provided the Company with hedge positions for an additional 61 MBbls of oil at a price of $23.36 per Bbl for the three month period ending December 31, 1997 and 31 MBbls of oil at a price of $23.36 per Bbl for the one month period ending January 31, 1998. This contract may be extended at the counter party's option for an additional six month period at the same price. The additional gas swap contract has provided the Company with a hedge position for an additional 300 MMcfs of gas at the price of $2.12 per Mcf for the month of April 1998. (5) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share". SFAS No. 128 replaced primary earnings per share ("EPS") with a newly defined basic EPS and modifies the computation of diluted EPS. SFAS No. 128 is effective for periods ending after December 15, 1997. The impact of the adoption of SFAS No. 128 on the Company's earnings per share is expected to be immaterial. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" which requires that all items required to be recognized under accounting standards as components of comprehensive income be reported as a part of the basic financial statements. SFAS No. 130 is effective for both interim and annual periods beginning after December 15, 1997. The Company plans to adopt SFAS No. 130 for the period ended March 31, 1998 and does not expect SFAS No. 130 to have a material effect on reported results. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" which establishes standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS No. 131 is effective for financial statements for periods beginning after December 15, 1997 but the statement need not be applied to interim financial statements in the initial year of application. The Company does not expect SFAS No. 131 to materially affect the Company's reporting practices. -6- (6) SUBSEQUENT EVENTS The Company and Offshore Energy Development Corporation, a Delaware corporation ("OEDC"), have entered into an agreement by which the Company will acquire all the outstanding OEDC common stock. OEDC is an independent energy company that focuses on the acquisition, exploration, development and production of natural gas in the Gulf of Mexico and on natural gas gathering, processing and marketing activities. OEDC is listed on the Nasdaq National Market under the symbol "OEDC." Based on estimates of OEDC's outside engineers, OEDC's total proved reserves were 5.5 million BOE at December 31, 1996. The Company will issue approximately 5.5 million shares of the Company's common stock equal to 16.2% of the total Company's common stock currently outstanding. The transaction is subject to various conditions, including approval by stockholders of both companies. Special meetings of the Company and OEDC stockholders have been scheduled for December 12, 1997 to consider the transaction. The Company and Carrollton Resources, L.L.C., a Louisiana limited liability company ("Carrollton"), have entered into an agreement by which the Company will acquire all the outstanding membership interests of Carrollton. Carrollton is a small independent energy company engaged in the exploration, development and acquisition of onshore oil and gas properties located primarily in the Gulf Coast region, making a good fit with OEDC's area of operations. Based on estimates of Carrollton's outside engineers, Carrollton's total proved reserves were 2.8 million BOE at June 30, 1997. The Company will issue approximately 900,000 shares of the Company's common stock equal to 2.7% of the total Company's common stock currently outstanding. The Company anticipates closing the transaction, which is subject to various conditions, in mid-December 1997. On November 7, 1997, the Company and Pioneer Natural Resources Company ("Pioneer") entered into an agreement by which the Company will acquire from Pioneer certain West Texas producing properties. The Company will pay approximately $55 million, subject to adjustments, and anticipates closing the transaction, subject to various conditions, in mid-December 1997. The Company will fund the acquisition with its existing credit facilities. -7- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Titan Exploration, Inc. is an independent energy company engaged in the exploration, development and acquisition of oil and gas properties. The Company's strategy is to grow reserves, production and net income per share through (i) the acquisition of producing properties that provide development and exploratory drilling potential, (ii) the exploitation and development of its reserve base, (iii) the exploration for oil and gas reserves, and (iv) the implementation of a low operating and overhead structure. The Company has grown rapidly through the acquisition and exploitation of oil and gas properties, consummating the acquisition of a concentrated group of Permian Basin producing oil and gas properties from a large independent company for approximately $40.6 million (the "1995 Acquisition") and additional Permian Basin producing properties from a major integrated company for approximately $135.7 million (the "1996 Acquisition"). The Company's growth resulting from acquisitions has impacted its reported financial results in a number of ways. Acquired properties frequently may not have received focused attention prior to sale. After acquisition, certain of these properties require maintenance, workovers, recompletions and other remedial activity not constituting capital expenditures, which initially increase lease operating expenses. The Company may dispose of certain of the properties if it determines they are outside the Company's strategic focus. The increased production and revenue resulting from the rapid growth of the Company has required it to recruit and develop operating, accounting and administrative personnel compatible with its increased size. As a result, the Company anticipates a corresponding increase in its general and administrative expense. The Company believes that with its current inventory of drilling locations and the anticipated additional staff, it will be well positioned to follow a balanced program of exploration and exploitation activities to complement its acquisition efforts. OPERATING DATA The following table sets forth the Company's historical operating data for the periods indicated.
Three Months Ended Nine Months Ended September 30, September 30, -------------------- ---------------------- 1997 1996 1997 1996 ---------- -------- --------- -------- Production: Oil (MBbls) 501 132 1,396 388 Gas (MMcf) 5,639 1,027 15,938 2,725 Total (MBOE) 1,441 303 4,052 842 Average Sales Price Per Unit (1): Oil (per Bbl) $ 17.48 $ 17.42 $ 18.64 $ 17.25 Gas (per Mcf) 1.61 1.25 1.63 1.30 BOE 12.38 11.83 12.84 12.16 Expenses Per BOE: Production costs, including production taxes $ 3.23 $ 4.45 $ 4.10 $ 5.15 General and administrative 0.90 1.63 0.90 1.72 Depletion, depreciation and amortization 4.04 1.68 3.93 2.69
- --------------------------------- (1) Reflects results of hedging activities. -8 RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1996 Oil and Gas Revenues. Revenues from oil and gas operations totaled $17.8 million for the three months ended September 30, 1997 compared to $3.6 million for the three months ended September 30, 1996. The increase is primarily attributable to the 1996 Acquisition, the increase in the average price received for gas, and continued exploitation of the Company's proved properties. Of total oil and gas revenues for the three months ended September 30, 1997, revenues of $12.3 million (69%) are attributable to the properties acquired in the 1996 Acquisition. The average gas price received increased 29% from $1.25 per Mcf for the three months ended September 30, 1996 compared to $1.61 per Mcf for the three months ended September 30, 1997. Production Costs. Oil and gas production costs, including production taxes, were $4.7 million ($3.23 per BOE) for the three months ended September 30, 1997 compared to $1.3 million ($4.45 per BOE) for the three months ended September 30, 1996. The increase in the absolute amount of production costs was primarily attributable to production costs associated with the properties acquired in the 1996 Acquisition which totaled $2.6 million ($2.67 per BOE) for the three months ended September 30, 1997 Depletion, Depreciation and Amortization Expense. Depletion, depreciation and amortization expense was $5.8 million ($4.04 per BOE) for the three months ended September 30, 1997 compared to $510,000 ($1.68 per BOE) for the three months ended September 30, 1996. The increase per BOE is due to higher amortization rates on the properties acquired in the 1996 Acquisition compared to the Company's other properties. General and Administrative Expense. General and administrative expense was $1.3 million ($.90 per BOE) for the three months ended September 30, 1997 compared to $494,000 ($1.63 per BOE) for the three months ended September 30, 1996. The increase in the absolute amount is due to the additional general and administrative expenses which are necessary to administer the properties acquired in the 1996 Acquisition. The 45% decrease in general and administrative expenses per BOE for 1997 as compared to 1996 is due to the spreading of the Company's general and administrative expenses over a larger production base and to the Company's efforts to maintain a low overhead structure. Interest Expense. Interest expense was $339,000 for the three months ended September 30, 1997 compared to $468,000 for the three months ended September 30, 1996. The 28% decrease is primarily due to the application of proceeds from the initial offering of common stock to the indebtedness incurred by the Company to fund the 1995 Acquisition and 1996 Acquisition. NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996 Oil and Gas Revenues. Revenues from oil and gas operations totaled $52.0 million for the nine months ended September 30, 1997 compared to $10.2 million for the nine months ended September 30, 1996. The increase is primarily attributable to the 1996 Acquisition, the increase in the average price received for both oil and gas, and continued exploitation of the Company's proved properties. Of total oil and gas revenues for the nine months ended September 30, 1997, revenues of $36.5 million (70%) are attributable to the properties acquired in the 1996 Acquisition. The average oil price received increased 8% from $17.25 to $18.64 per Bbl and the average gas price received increased 25% from $1.30 per Mcf for the nine months ended September 30, 1996 compared to $1.63 per Mcf for the nine months ended September 30, 1997. Production Costs. Oil and gas production costs, including production taxes, were $16.6 million ($4.10 per BOE) for the nine months ended September 30, 1997 compared to $4.3 million ($5.15 per BOE) for the nine months ended September 30, 1996. The increase in the absolute amount of production costs was primarily attributable to production costs associated with the properties acquired in the 1996 Acquisition which totaled $10.2 million ($3.65 per BOE) for the nine months ended September 30, 1997 -9- Depletion, Depreciation and Amortization Expense. Depletion, depreciation and amortization expense was $15.9 million ($3.93 per BOE) for the nine months ended September 30, 1997 compared to $2.3 million ($2.69 per BOE) for the nine months ended September 30, 1996. The increase per BOE is due to higher amortization rates on the properties acquired in the 1996 Acquisition compared to the Company's other properties. General and Administrative Expense. General and administrative expense was $3.6 million ($.90 per BOE) for the nine months ended September 30, 1997 compared to $1.5 million ($1.72 per BOE) for the nine months ended September 30, 1996. The increase in the absolute amount is due to the additional general and administrative expenses which are necessary to administer the properties acquired in the 1996 Acquisition. The 48% decrease in general and administrative expenses per BOE for 1997 as compared to 1996 is due to the spreading of the Company's general and administrative expenses over a larger production base and to the Company's efforts to maintain a low overhead structure. Interest Expense. Interest expense was $825,000 for the nine months ended September 30, 1997 compared to $1.2 million for the nine months ended September 30, 1996. The 31% decrease is primarily due to the application of proceeds from the initial offering of common stock to the indebtedness incurred by the Company to fund the 1995 Acquisition and 1996 Acquisition. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of capital have been its initial capitalization, private equity sales, bank financing, cash flow from operations and the Company's initial public offering. The 1995 Acquisition was funded with cash from the Company's initial capitalization, additional private equity sales and bank financing. The 1996 Acquisition was principally funded with bank financing, which was repaid with the proceeds from the Company's initial public offering. On November 7, 1997, the Company and Pioneer Natural Resources Company ("Pioneer") entered into an agreement by which the Company will acquire from Pioneer certain West Texas producing properties. The Company will pay approximately $55 million, subject to adjustments, and anticipates closing the transaction, subject to various conditions, in mid-December 1997. The Company will fund the acquisition with its existing credit facilities. The Company requires capital primarily for the exploration, development and acquisition of oil and gas properties, the repayment of indebtedness and general working capital needs. Capital Expenditures. Apart from the Company's expenditure for its planned acquisition from Pioneer, the Company budgeted for 1997 approximately $27 million for the drilling and recompletion of approximately 26 oil and gas wells and 45 workover projects on its proved properties and approximately $25.2 million for expenditures for geological and geophysical costs, drilling costs and lease acquisition costs on its unproved properties. Cash expenditures for additions to oil and gas properties were $43.1 million for the nine months ended September 30, 1997. This includes $10.0 million for the acquisition of oil and gas leases and $33.1 million for development and exploratory drilling. Capital Resources. The Company's primary capital resources are net cash provided by operating activities and $153.5 million availability under the Company's Credit Agreement. The Company's acquisition from Pioneer, funded under these facilities, will reduce availability by approximately $55 million, subject to adjustment of the purchase price under the Company's agreement with Pioneer. Net Cash Provided by Operating Activities. Net cash provided by operating activities, before changes in operating assets and liabilities, was $29.8 million for the nine months ended September 30, 1997 compared to $3.7 million for the nine months ended September 30, 1996. The increase was primarily attributable to the cash flow generated by the 1996 Acquisition and from continued exploitation of the Company's proved properties. -10- Credit Agreement. The Credit Agreement established a four year revolving credit facility, up to the maximum amount of $250 million, subject to a borrowing base to be determined annually by the lenders based on certain proved oil and gas reserves and other assets of the Company. Initially, the borrowing base was established at $165 million. To the extent that the borrowing base is less than the aggregate principal amount of all outstanding loans and letters of credit under the Credit Agreement, such deficiency must be cured by the Company ratably within 180 days, by either prepaying a portion of the outstanding amounts under the Credit Agreement or pledging additional collateral to the lenders. A portion of the credit facility is available for the issuance of up to $15.0 million of letters of credit, of which $250,000 was outstanding at September 30, 1997. In June 1997, the borrowing base was redetermined by the lenders and reset at $165 million. The Company's outstanding long-term debt under the Credit Agreement was $11.5 million at September 30, 1997. All outstanding amounts under the Credit Agreement are due and payable in full on January 1, 2001. At the Company's option, borrowings under the Credit Agreement bear interest at either the "Base Rate" (i.e., the higher of the applicable prime commercial lending rate, or the federal funds rate plus .5% per annum) or the Eurodollar rate, plus 1% to 1.50% per annum, depending on the level of the Company's aggregate outstanding borrowings. In addition, the Company is committed to pay quarterly in arrears a fee of .30% to .375% of the unused borrowing base. The Credit Agreement contains certain covenants and restrictions that are customary in the oil and gas industry. In addition, the line of credit is secured by substantially all of the Company's oil and gas properties. Liquidity and Working Capital. At September 30, 1997, the Company had $1.1 million of cash and cash equivalents as compared to $6.3 million at December 31, 1996. The Company's ratio of current assets to current liabilities was 1.24 at September 30, 1997 compared to 2.03 at December 31, 1996. Due principally to a reduction in cash as a result of an intentional change in the way the Company manages its operating accounts, the Company's working capital decreased $5.8 million from $8.1 million at December 31, 1996 to $2.3 million at September 30, 1997. The Company expects working capital to increase during the remainder of 1997 due to anticipated lower levels of capital expenditures during the remainder of 1997. Unsecured Credit Agreement. Effective April 16, 1997, the Company entered into a credit agreement (the "Unsecured Credit Agreement") with Texas Commerce Bank National Association (the "Bank"), an affiliate of Chase Securities, Inc., which establishes a one year revolving credit facility, up to the maximum of $5 million. While all outstanding amounts are due and payable in full on or before March 6, 1998, the Company considers amounts outstanding pursuant to the Unsecured Credit Agreement as long-term as all amounts are repaid from available funds under the Credit Agreement. Proceeds of the Unsecured Credit Agreement are utilized to fund short-term needs (less than thirty days). The Company's outstanding debt under the Unsecured Credit Agreement was $3.2 million at September 30, 1997. The interest rate of each loan under the Unsecured Credit Agreement is at a rate determined by agreement between the Company and the Bank. The rate shall not exceed the maximum interest rate permitted under applicable laws. Interest rates generally are comparable with Eurodollar rates plus 1% per annum. OTHER MATTERS HEDGING ACTIVITIES The Company uses swap agreements in an attempt to reduce the risk of fluctuating oil and gas prices. Crude Oil. The Company reports average oil prices per Bbl including the net effect of the oil hedges. During the three and nine months ended September 30, 1997, the Company reported average oil prices of $17.48 and $18.64 per Bbl, respectively, while realizing average prices, excluding hedging results, of $17.29 and $18.57 per Bbl, respectively. The Company recorded net increases to oil revenues of $93,000 ($ .19 per Bbl) and $93,000 ($ .07 per Bbl) for the three and nine months ended September 30, 1997, respectively, as a result of its commodity hedges. -11- During the three and nine months ended September 30, 1996, the Company reported average oil prices of $17.42 and $17.25 per Bbl, respectively, while realizing average prices, excluding hedging results, of $19.86 and $19.57 per Bbl, respectively. The Company recorded net decreases to oil revenues of $322,000 ($2.44 per Bbl) and $899,000 ($2.32 per Bbl) for the three and nine months ended September 30, 1996, respectively, as a result of its commodity hedges. Natural Gas. The Company reports average gas prices per Mcf including the net effect of gas hedges. During the three and nine months ended September 30, 1997, none of the Company's gas production was subject to hedging contracts. During the three and nine months ended September 30, 1996, the Company reported average gas prices of $1.25 and $1.30 per Mcf, respectively, while realizing average prices, excluding hedging results, of $1.46 and $1.50 per Mcf, respectively. The Company recorded net decreases to gas revenues of $214,000 ($ .21 per Mcf) and $553,000 ($ .20 per Mcf) for the three and nine months ended September 30, 1996, respectively, as a result of its commodity hedges. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share". SFAS No. 128 replaced primary earnings per share ("EPS") with a newly defined basic EPS and modifies the computation of diluted EPS. SFAS No. 128 is effective for periods ending after December 15, 1997. The impact of the adoption of SFAS No. 128 on the Company's earnings per share is expected to be immaterial. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" which requires that all items required to be recognized under accounting standards as components of comprehensive income be reported as a part of the basic financial statements. SFAS No. 130 is effective for both interim and annual periods beginning after December 15, 1997. The Company plans to adopt SFAS No. 130 for the period ended March 31, 1998 and does not expect SFAS No. 130 to have a material effect on reported results. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" which establishes standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS No. 131 is effective for financial statements for periods beginning after December 15, 1997 but the statement need not be applied to interim financial statements in the initial year of application. The Company does not expect SFAS No. 131 to materially affect the Company's reporting practices. -12- PART II - OTHER INFORMATION ITEM 5. OTHER INFORMATION The Company and Offshore Energy Development Corporation, a Delaware corporation ("OEDC"), have entered into an agreement by which the Company will acquire all the outstanding OEDC common stock. OEDC is an independent energy company that focuses on the acquisition, exploration, development and production of natural gas in the Gulf of Mexico and on natural gas gathering, processing and marketing activities. OEDC is listed on the Nasdaq National Market under the symbol "OEDC." Based on estimates of OEDC's outside engineers, OEDC's total proved reserves were 5.5 million BOE at December 31, 1996. The Company will issue approximately 5.5 million shares of the Company's common stock equal to 16.2% of the total Company's common stock currently outstanding. The transaction is subject to various conditions, including approval by stockholders of both companies. Special meetings of the Company and OEDC stockholders have been scheduled for December 12, 1997 to consider the transaction. The Company and Carrollton Resources, L.L.C., a Louisiana limited liability company ("Carrollton"), have entered into an agreement by which the Company will acquire all the outstanding membership interests of Carrollton. Carrollton is a small independent energy company engaged in the exploration, development and acquisition of onshore oil and gas properties located primarily in the Gulf Coast region, making a good fit with OEDC's area of operations. Based on estimates of Carrollton's outside engineers, Carrollton's total proved reserves were 2.8 million BOE at June 30, 1997. The Company will issue approximately 900,000 shares of the Company's common stock equal to 2.7% of the total Company's common stock currently outstanding. The Company anticipates closing the transaction, which is subject to various conditions, in mid-December 1997. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.13.3 Second Amendment to Amended and Restated Credit Agreement, dated August 12, 1997, effective as of April 1, 1997, by and among Titan Resources, L.P., The Chase Manhattan Bank, as Administrative Agent, and Financial Institutions now or hereafter parties thereto. 27 Financial Data Schedule. (b) Reports Submitted on Form 8-K: None. -13- SIGNATURE --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TITAN EXPLORATION, INC. By: /s/ Jack Hightower ----------------------------------------- Jack Hightower President and Chief Executive Officer By: /s/ William K. White ------------------------------------------ William K. White Vice President and Chief Financial Officer Date: November 7, 1997 -14- EXHIBIT INDEX Exhibit No. Description - ------- ----------- 10.13.3 Second Amendment to Amended and Restated Credit Agreement, dated August 12, 1997, effective as of April 1, 1997, by and among Titan Resources, L.P., The Chase Manhattan Bank, as Administrative Agent, and Financial Institutions now or hereafter parties thereto. 27 Financial Data Schedule EX-10.13 2 AMENDED AND RESTATED CREDIT AGREEMENT EXHIBIT 10.13.3 SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT BY AND AMONG TITAN RESOURCES, L.P., as Company, THE CHASE MANHATTAN BANK, as Administrative Agent, FIRST UNION NATIONAL BANK OF NORTH CAROLINA, as Documentation Agent MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Syndication Agent, and THE LENDERS SIGNATORY HERETO Dated August 12, 1997, Effective as of April 1, 1997 SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT This SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (this "Second Amendment") dated August 12, 1997, effective, however, as of the 1st day of April, 1997 (the "Effective Date"), is by and among TITAN RESOURCES, L.P., a Texas limited partnership (the ("Company"); THE CHASE MANHATTAN BANK, individually, as the Issuing Bank and as Administrative Agent (in such capacity, the "Administrative Agent"); FIRST UNION NATIONAL BANK OF NORTH CAROLINA, individually and as Documentation Agent (in such capacity, the "Documentation Agent"); MORGAN GUARANTY TRUST COMPANY OF NEW YORK, individually and as Syndication Agent (in such capacity, the "Syndication Agent"); and each of the lenders that is a signatory hereto or which becomes a signatory hereto and to the Credit Agreement (hereinafter defined) as provided in Section 8.07 of the Credit Agreement (individually, together with its successors and assigns, "Lender" and collectively, "Lenders"). W I T N E S S E T H: WHEREAS, the Company, the Administrative Agent, the Documentation Agent, the Syndication Agent and Lenders are parties to that certain Amended and Restated Credit Agreement dated as of October 31, 1996 (as amended by First Amendment to Amended and Restated Credit Agreement dated as of May 12, 1997, the "Credit Agreement"), pursuant to which Lenders agreed to make loans to and extensions of credit on behalf of the Company; and WHEREAS, the Company, the Administrative Agent, the Documentation Agent, the Syndication Agent and Lenders desire to amend the Current Ratio covenant contained in Section 5.03(o) of the Credit Agreement in the particulars hereinafter provided; NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto agree as follows: ARTICLE I. DEFINITIONS Section 1.01 Terms Defined Above. As used in this Second Amendment, each of the terms "Administrative Agent," "Company," "Credit Agreement," "Documentation Agent," "Lender," "Lenders," "Second Amendment," and "Syndication Agent" shall have the meaning assigned to such term hereinabove. Section 1.02 Terms Defined in Credit Agreement. Each term defined in the Credit Agreement and used herein without definition shall have the meaning assigned to such term in the Credit Agreement, unless expressly provided to the contrary. Section 1.03 Other Definitional Provisions. (a) The words "hereby," "herein," "hereinafter," "hereof," "hereto" and "hereunder" when used in this Second Amendment shall refer to this Second Amendment as a whole and not to any particular Article, Section, subsection or provision of this Second Amendment. (b) Section, subsection and Exhibit references herein are to such Sections, subsections and Exhibits to this Second Amendment unless otherwise specified. ARTICLE II. AMENDMENTS TO CREDIT AGREEMENT The Company, the Administrative Agent, the Documentation Agent, the Syndication Agent and Lenders agree that the Credit Agreement is hereby amended, effective as of the Effective Date, in the following particulars. Section 2.01 Amendments to Definitions. The term "Agreement," as defined in the Credit Agreement, is hereby amended to mean the Credit Agreement, as amended and supplemented by this Second Amendment and as the same may from time to time be further amended or supplemented. Section 2.02 Amendment to Section 5.03(o) Current Ratio. Section 5.03(o) of the Credit Agreement is hereby amended in its entirety to read as follows: "(o) Current Ratio. The Company will not permit its ratio of (i) consolidated current assets to (ii) consolidated current liabilities (excluding current maturities of the Notes) to be less than 1.0 to 1.0 at any time. As used in this Section 5.03(o) "current assets" shall mean the aggregate of (i) all assets of a Person which under GAAP would be classified as current assets, and (ii) the Designated Borrowing Base, less the Aggregate Credit Exposure, and "current liabilities" shall mean all liabilities of a Person which under GAAP would be classified as current liabilities." ARTICLE III. MISCELLANEOUS Section 3.01 Adoption, Ratification and Confirmation of Credit Agreement. Each of the Company, the Administrative Agent, the Documentation Agent, the Syndication Agent and Lenders does hereby adopt, ratify and confirm the Credit Agreement, as amended hereby, and acknowledges and agrees that the Credit Agreement, as amended hereby, is and remains in full force and effect. Section 3.02 Successors and Assigns. This Second Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted pursuant to the Credit Agreement. Section 3.03 Counterparts. This Second Amendment may be executed by one or more of the parties hereto in any number of separate counterparts, and all of such counterparts taken together shall be deemed to constitute one and the same instrument and shall be enforceable as of the Effective Date upon the execution of one or more counterparts hereof by the Company, the Administrative Agent, the Documentation Agent, the Syndication Agent and Lenders. In this regard, each of the parties hereto acknowledges that a counterpart of this Second Amendment containing a set of counterpart execution pages reflecting the execution of each party hereto shall be sufficient to reflect the execution of this Second Amendment by each necessary party hereto and shall constitute one instrument. Section 3.04 Number and Gender. Whenever the context requires, reference herein made to the single number shall be understood to include the plural; and likewise, the plural shall be understood to include the singular. Words denoting sex shall be construed to include the masculine, feminine and neuter, when such construction is appropriate; and specific enumeration shall not exclude the general but shall be construed as cumulative. Definitions of terms defined in the singular or plural shall be equally applicable to the plural or singular, as the case may be, unless otherwise indicated. Section 3.05 Entire Agreement. This Second Amendment constitutes the entire agreement among the parties hereto with respect to the subject hereof. All prior understandings, statements and agreements, whether written or oral, relating to the subject hereof are superseded by this Second Amendment. Section 3.06 Invalidity. In the event that any one or more of the provisions contained in this Second Amendment shall for any reason be held invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Second Amendment. Section 3.07 Titles of Articles, Sections and Subsections. All titles or headings to Articles, Sections, subsections or other divisions of this Second Amendment or the exhibits hereto, if any, are only for the convenience of the parties and shall not be construed to have any effect or meaning with respect to the other content of such Articles, Sections, subsections, other divisions or exhibits, such other content being controlling as the agreement among the parties hereto. Section 3.08 Governing Law. This Second Amendment shall be deemed to be a contract made under and shall be governed by and construed in accordance with the internal laws of the State of New York. This Second Amendment, the Credit Agreement, as supplemented and amended hereby, the Notes, and the other Security Instruments represent the final agreement between the parties and may not be contradicted by evidence of prior, contemporaneous, or subsequent oral agreements of the parties. There are no unwritten oral agreements between the parties. IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to be duly executed and delivered by their proper and duly authorized officers as of the Effective Date. BORROWER: TITAN RESOURCES, L.P., a Texas limited partnership By: Titan Resources I, Inc., its General Partner By: /s/ Jack Hightower ---------------------------- Name: Jack Hightower -------------------------- Title: President, CEO ------------------------- AGENT AND LENDERS: THE CHASE MANHATTAN BANK, Individually as Issuing Bank and as Administrative Agent By: /s/ Mary Jo Woodford ---------------------------------- Name: Mary Jo Woodford -------------------------------- Title: Vice President ------------------------------- FIRST UNION NATIONAL BANK, Individualy and as Documentation Agent By: /s/ Michael J. Kolosowsky ---------------------------------- Name: Michael J. Kolosowsky -------------------------------- Title: Vice President ------------------------------- MORGAN GUARANTY TRUST COMPANY OF NEW YORK, Individually and as Syndication Agent By: /s/ John Kowalczuk --------------------------- Name: John Kowalczuk -------------------------- Title: Vice President -------------------------- CREDIT LYONNAIS NEW YORK BRANCH By: /s/ Pascal Poupelle --------------------------- Name: Pascal Poupelle -------------------------- Title: Executive Vice President -------------------------- BANK ONE, TEXAS, N.A. By: /s/ Wm. Mark Cramer --------------------------- Name: Wm. Mark Cramer ------------------------- Title: Vice President -------------------------- BANQUE PARIBAS By: /s/ Brian Malone --------------------------- Name: Brian Malone -------------------------- Title: Vice President -------------------------- By: /s/ Barton D. Schouest --------------------------- Name: Barton D. Schouest ------------------------- Title: Managing Director ------------------------- UNION BANK OF CALIFORNIA, N.A. By: /s/ Tony R. Weber --------------------------- Name: Tony R. Weber -------------------------- Title: Vice President ------------------------- By: /s/ Randall Osterbert --------------------------- Name: Randall Osterbert ------------------------- Title: Vice President ------------------------- EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 1,146 0 9,991 0 0 11,884 239,696 21,263 231,038 9,614 0 0 0 339 197,221 231,038 52,110 52,110 0 41,323 (134) 0 825 10,096 3,534 6,562 0 0 0 6,562 .18 0
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