-----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, IlH4JcSwhPRXh3ybn0Qd8wII+QZuEboAfLT/9fo+AWpiEYVbHY7zcsh5f+GqNjPe iUEGaU+UMCtdhZK4qGqU+A== 0000930661-98-001133.txt : 19980515 0000930661-98-001133.hdr.sgml : 19980515 ACCESSION NUMBER: 0000930661-98-001133 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980514 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 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21843 FILM NUMBER: 98619430 BUSINESS ADDRESS: STREET 1: 500 W TEXAS AVE STREET 2: STE 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 March 31, 1998 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _____ to _____ Commission File Number: 000-21843 TITAN EXPLORATION, INC. (Exact name of Registrant as specified in its charter) DELAWARE 75-2671582 (State or other jurisdiction (I.R.S. Employer of incorporation or Identification No.) organization 500 W. TEXAS, SUITE 500 79701 MIDLAND, TEXAS (Zip Code) (Address of principal executive offices) (915) 498-8600 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- As of May 1, 1998, 39,222,292 shares of common stock, par value $.01 per share of Titan Exploration, Inc. were outstanding. - -------------------------------------------------------------------------------- ================================================================================ TABLE OF CONTENTS ----------------- Forward Looking Information and Risk Factors.................................................... 1 PART I -- FINANCIAL INFORMATION Item 1. Financial Statements -------------------- Consolidated Balance Sheets as of March 31, 1998 (Unaudited) and December 31, 1997..... 2 Unaudited Consolidated Statements of Operations for the three months ended March 31, 1998 and 1997........................................................... 3 Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 1998 and 1997........................................................... 4 Unaudited Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 1998 and 1997..................................................... 5 Notes to Consolidated Financial Statements............................................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 9 PART II -- OTHER INFORMATION Item 5. Other Information...................................................................... 14 Item 6. Exhibits and Reports on Form 8-K....................................................... 14 Signatures............................................................................. 15
TITAN EXPLORATION, INC. FORWARD LOOKING INFORMATION AND RISK FACTORS Titan Exploration, Inc. (the "Company") or its representatives may make forward looking statements, oral or written, including statements in this report's Management's Discussion and Analysis of Financial Condition and Results of Operations, press releases and filings with the Securities and Exchange Commission, regarding estimated future net revenues from oil and natural gas reserves and the present value thereof, planned capital expenditures (including the amount and nature thereof), increases in oil and gas production, the number of wells the Company anticipates drilling through 1998 and the Company's financial position, business strategy and other plans and objectives for future operations. Although the Company believes that the expectations reflected in these forward looking statements are reasonable, there can be no assurance that the actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected effects on its business or operations. Among the factors that could cause actual results to differ materially from the Company's expectations are general economic conditions, inherent uncertainties in interpreting engineering data, operating hazards, delays or cancellations of drilling operations for a variety of reasons, competition, fluctuations in oil and gas prices, government regulations and other factors set forth in the Company's Annual Report on Form 10-K. All subsequent oral and written forward looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these factors. The Company assumes no obligation to update any of these statements. 1 Item 1. FINANCIAL STATEMENTS TITAN EXPLORATION, INC. Consolidated Balance Sheets (in thousands, except share data)
March 31, December 31, ASSETS 1998 1997 ------------------ ------------------ (unaudited) Current assets: Cash and cash equivalents $ 4,936 $ 1,603 Restricted investments - 2,331 Accounts receivable: Oil and gas 14,317 13,663 Other 518 2,900 Inventories 1,214 624 Prepaid expenses and other current assets 1,380 531 --------- -------- Total current assets 22,365 21,652 --------- -------- Property, plant and equipment, at cost: Oil and gas properties, using the successful efforts method of accounting: Proved properties 348,887 341,163 Unproved properties 25,297 24,942 Other property and equipment 5,822 2,421 Accumulated depletion, depreciation and amortization (100,073) (94,387) --------- -------- 279,933 274,139 --------- -------- Investments in affiliates and others 55,829 55,900 Other assets, net of accumulated amortization of $468 in 1998 and $413 in 1997 1,119 892 --------- -------- $ 359,246 $352,583 ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities: Trade $ 12,554 $ 16,983 Accrued interest 350 307 Other 5,691 4,334 --------- -------- Total current liabilities 18,595 21,624 --------- -------- Long-term debt 101,200 85,450 Other liabilities 2,805 2,720 Deferred income tax payable 9,645 10,368 Stockholders' equity: Preferred Stock, $.01 par value, 10,000,000 shares authorized; none issued and outstanding Common Stock, $.01 par value, 60,000,000 shares authorized; 40,339,675 and 40,332,497 shares issued and outstanding at March 31, 1998 and December 31, 1997, respectively 403 403 Additional paid-in capital 277,517 277,500 Treasury stock, at cost; 690,000 and 55,000 shares at March 31, 1998 and December 31, 1997, respectively (5,880) (504) Deferred compensation (8,844) (10,108) Retained deficit (36,195) (34,870) --------- -------- Total stockholders' equity 227,001 232,421 --------- -------- Commitments and contingencies (Note 3) $ 359,246 $352,583 ========= ========
See accompanying notes to consolidated financial statements. 2 TITAN EXPLORATION, INC. Unaudited Consolidated Statements of Operations (in thousands, except per share data)
Three Months Ended March 31, ------------------------------------------ 1998 1997 ---- ---- Revenues - Oil and gas sales $22,107 $18,032 ------- ------- Expenses: Oil and gas production 8,060 5,482 Production and other taxes 1,619 1,479 General and administrative 2,731 1,083 Amortization of stock option awards 1,264 1,263 Exploration and abandonment 2,094 404 Depletion, depreciation and amortization 6,763 4,639 ------- ------- Total expenses 22,531 14,350 ------- ------- Operating income(loss) (424) 3,682 ------- ------- Other income (expense): Interest income 65 59 Interest expense (1,707) (242) Equity in net loss of affiliate (132) - Other 153 4 ------- ------- Income (loss) before income taxes (2,045) 3,503 ------- ------- Income tax expense (benefit) (720) 1,226 ------- ------- Net income (loss) $(1,325) $ 2,277 ======= ======= Net income (loss) per share $ (.03) $ .07 ======= ======= Net income (loss) per share - assuming dilution $ (.03) $ .06 ======= =======
See accompanying notes to consolidated financial statements. 3 TITAN EXPLORATION, INC. Unaudited Consolidated Statements of Cash Flows (in thousands)
Three Months Ended March 31, ---------------------------------------- 1998 1997 -------- -------- Cash flows from operating activities: Net income (loss) $ (1,325) $ 2,277 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depletion, depreciation and amortization 6,763 4,639 Amortization of stock option awards 1,264 1,263 Exploration and abandonments 1,096 -- Equity in net loss of affiliate 132 -- Loss on sale of assets 3 -- Deferred income taxes (720) 1,226 Changes in assets and liabilities: Accounts receivable 2,229 1,048 Prepaid expenses and other current assets (1,440) (157) Other assets (94) -- Accounts payable and accrued liabilities (3,227) 2,446 -------- -------- Total adjustments 6,006 10,465 -------- -------- Net cash provided by operating activities 4,681 12,742 -------- -------- Cash flows from investing activities: Redemption of restricted investment 2,331 -- Investing in oil and gas properties (10,588) (14,713) Additions to other property and equipment (3,401) (140) Capital contribution in equity investment (78) -- Other investing activities 17 15 -------- -------- Net cash used in investing activities (11,719) (14,838) -------- -------- Cash flows from financing activities: Proceeds from debt 17,100 -- Payments of debt (1,350) -- Exercise of stock options 14 -- Purchase of treasury stock (5,376) -- Other financing activities (17) -- -------- -------- Net cash provided by financing activities 10,371 -- -------- -------- Net increase (decrease) in cash and cash equivalents 3,333 (2,096) Cash and cash equivalents, beginning of period 1,603 6,290 -------- -------- Cash and cash equivalents, end of period $ 4,936 $ 4,194 ======== ========
See accompanying notes to consolidated financial statements. 4 TITAN EXPLORATION, INC. Unaudited Consolidated Statements of Comprehensive Income (Loss) (in thousands)
Three Months Ended March 31, ------------------------------------------- 1998 1997 ---- ---- Net income (loss) $(1,325) $2,277 ------- ------ Other comprehensive income - Tax benefit on exercise of stock options 3 -- ------- ------ Comprehensive income (loss) $(1,322) $2,277 ======= ======
See accompanying notes to consolidated financial statements. 5 TITAN EXPLORATION, INC. Notes to Consolidated Financial Statements March 31, 1998 and 1997 (Unaudited) (1) BASIS OF PRESENTATION In the opinion of management, the unaudited consolidated financial statements of Titan Exploration, Inc. (the "Company") as of March 31, 1998 and for the three months ended March 31, 1998 and 1997 include all adjustments and accruals, consisting only of normal recurring accrual adjustments, which are necessary for a fair presentation of the results for the interim period. These interim results are not necessarily indicative of results for a full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accounting principles have been condensed or omitted in this Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's 1997 Form 10-K. Preparation of the accompanying consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In 1998, the Company adopted Financial Accounting Standards Board ("FAS") Statement No. 130, "Reporting Comprehensive Income." The Company has included as part of the basic financial statements the consolidated statements of comprehensive income (loss) for the three months ended March 31, 1998 and 1997. Reclassifications Certain reclassifications have been made to the 1997 amounts to conform to the 1998 presentations. (2) DEBT Line of Credit On October 31, 1996, the Company entered into a credit agreement, as amended (the "Credit Agreement"), with The Chase Manhattan Bank, N.A. which establishes a four year revolving credit facility, up to the maximum amount of $250 million subject to a borrowing base. All amounts outstanding are due and payable in full by January 1, 2001. The borrowing base, which was $165 million at March 31, 1998, is subject to redetermination semiannually by the lenders based on certain proved oil and gas reserves and other assets of the Company with the next redetermination date scheduled for April 1998. At March 31, 1998, the outstanding principal balance was $97 million and the amount available to borrow was approximately $67 million. Unsecured Credit Agreement In April 1997, the Company entered into a credit agreement, as amended (the "Unsecured Credit Agreement"), with Chase Bank of Texas, N.A. (the "Bank"), an affiliate of The Chase Manhattan Bank, N.A., which establishes a revolving credit facility, up to the maximum of $5 million. All outstanding amounts pursuant to the Unsecured Credit Agreement are due and payable in full on or before December 31, 1999. The interest rate of each loan under the Unsecured Credit Agreement is at a rate determined by agreement between the Company and the Bank. The rate shall not exceed the maximum interest rate permitted under applicable laws. Interest rates generally are at the Bank's cost of funds plus 1% per annum. At March 31, 1998, the outstanding principal balance was $4.2 million. 6 (3) COMMITMENTS AND CONTINGENCIES Litigation The following is a brief description of certain litigation to which the Company is subject, as a result of assuming the obligations of Offshore Energy Development Corporation ("OEDC"). The Company believes it has meritorious defenses to the claims and intends to vigorously defend against such claims. The Company does not believe that it has a probable and estimable loss with respect to any such litigation in excess of currently provided reserves, if any. If such loss becomes probable and estimable, the amount of any recorded liability could have a material adverse effect on the Company's (i) results of operations for the period in which such liability is recorded, (ii) consolidated financial position as a whole and (iii) liquidity and capital resources. However, the Company does not expect that any such liability will have a material adverse effect on its consolidated financial position as a whole or on its liquidity or capital resources. Due to the uncertainties inherent in litigation, no assurance can be given to the ultimate outcome of these matters. OEDC and certain of its officers and directors, as well as Natural Gas Partners, L.P. ("NGP"), the managing underwriters of OEDC's initial public offering and an analyst from each of the managing underwriters, have been named as defendants in a suit styled Eric Barron and Edward C. Allen, On behalf of Themselves and all Others Similarly Situated, v. David B. Strassner, Douglas H. Kiesewetter, David R. Albin, Natural Gas Partners, L.P., David Garcia, John J. Myers, Offshore Energy Development Corporation, Morgan Keegan & Company, Inc. and Principal Securities Inc., which was filed October 20, 1997, in the Texas State District Court of Harris County, Texas 270th Judicial District. The defendants removed plaintiffs' claims to federal court in the United States Southern District of Texas. Plaintiffs motion to have the case remanded to the state court was granted by the federal judge in April 1998. The suit seeks class certification on behalf of certain holders of common stock of OEDC, excluding the defendants and holders related to or affiliated with the defendants. The suit alleges generally that the defendants wrongfully made false or misleading statements or omissions relating to OEDC's business and prospects in the course of OEDC's initial public offering and subsequent thereto. The suit seeks rescission of sales of common stock of OEDC and unspecified monetary damages, including punitive damages. OEDC and certain of its officers and directors, as well as NGP, have also been named defendants in a suit styled John W. Robertson, et al. v. David B. Strassner, Douglas H. Kiesewetter, David R. Albin, Natural Gas Partners, L.P. and Offshore Energy Development Corporation, which was filed February 6, 1998, in the United States Southern District of Texas, Houston Division. This suit mirrors the allegations of the foregoing matter, but adds request for relief under federal securities laws. It, too, seeks certification of a class of certain purchasers of common stock of OEDC. The suit seeks compensatory damages, including rescissory damages, where applicable. The Company is seeking to consolidate both of these lawsuits as the Company believes the claims are connected. Plaintiffs in both lawsuits are represented by the same lawyers. The Company is involved in other various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's financial position, results of operations or liquidity. Letters of Credit At March 31, 1998, the Company had outstanding letters of credit of $275,000, which were issued through the Credit Agreement. 7 (4) COMMON STOCK In May 1997, the Company announced a plan to repurchase up to $25 million of the Companys common stock. The repurchase 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 March 31, 1998 and December 31, 1997, the Company had purchased 690,000 and 55,000 shares of its common stock for approximately $5,880,000 and $504,000, respectively. (5) NET INCOME (LOSS) PER COMMON SHARE The following table sets forth the computation of basic and diluted net income (loss) per common share:
Three Months Ended March 31, ------------------------------------------- 1998 1997 ---- ---- (in thousands, except per share data) Numerator: Net income (loss) and numerator for basic and diluted net income (loss) per common share - income available to common stockholders $(1,325) $ 2,277 ------- ------- Denominator: Denominator for basic net income (loss) per common share - weighted average common shares 39,875 33,942 Effect of dilutive securities - employee stock options -- 1,759 ------- ------- Denominator for diluted net income (loss) per common share - adjusted weighted average common shares and assumed conversions 39,875 35,701 ======= ======= Basic net income (loss) per common share $ (.03) $ .07 ======= ======= Diluted net income (loss) per common share $ (.03) $ .06 ======= =======
Employee stock options to purchase 4,587,832 and 60,000 shares of common stock were outstanding during 1998 and 1997, respectively, but were not included in the computation of diluted net income (loss) per common share because either (i) the employee stock options' exercise price was greater than the average market price of the common stock of the Company or (ii) the Company had a loss from continuing operations and, therefore, the effect would be antidilutive. (6) DERIVATIVE FINANCIAL INSTRUMENTS The Company utilizes various swap contracts and other financial instruments to hedge the effect of price changes on future gas production. The following table sets forth the future volumes hedged by year and the range of prices to be received based upon the fixed price of the individual swap contracts and other financial instruments outstanding at March 31, 1998:
Gas Volume Price per Year (MMcf) Mcf ---- ------ --- Gas Production: 1998: Commodity price swaps 4,875 $1.95 to $2.35 Commodity price collars 7,078 $1.83 to $3.10 1999 - Commodity price collars 6,544 $1.83 to $3.10
8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company is an independent energy company engaged in the exploitation, development, exploration and acquisition of oil and gas properties. The Company's strategy is to grow reserves, production and net income per share through (i) the exploitation and development of its reserve base, (ii) the acquisition of producing properties that provide significant development and exploratory drilling potential, (iii) the exploration for oil and gas reserves, (iv) capitalization on advanced technology to identify, explore and exploit projects, (v) financial flexibility, and (vi) a low overhead and operating cost structure. The Company has grown rapidly through the acquisition and exploitation of oil and gas properties, consummating the 1995 Acquisition for a purchase price of approximately $41.0 million, the 1996 Acquisition for approximately $136.0 million and the Pioneer Acquisition, in 1997, for approximately $55.8 million. In addition, the Company issued, in 1997, 5,486,734 shares and 899,965 shares of the Company's common stock in connection with the Offshore Energy Development Corporation ("OEDC") acquisition and the Carrollton Resources, L.L.C. ("Carrollton") acquisition, respectively. The Company's growth from acquisitions has impacted its financial results in a number of ways. Acquired properties may not have received focused attention prior to sale. After acquisition, certain of these properties required extensive maintenance, workovers, recompletions and other remedial activity that while not constituting capital expenditures may initially increase lease operating expenses. The Company may dispose of certain of the properties it determines are outside the Company's strategic focus. The increased production and revenue resulting from the rapid growth of the Company has required it to recruit and develop operating, accounting and administrative personnel compatible with its increased size. As a result, the Company has incurred and anticipates future increases in its general and administrative expense levels. 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. IMPACT OF DECLINING CRUDE OIL PRICES During the quarter ended March 31, 1998, the posted price of West Texas intermediate crude oil (the "West Texas Crude Oil Price") ranged from $15.75 to $11.00 per barrel. This decline in prices is thought to be caused primarily by an oversupply of crude oil inventory created, in part, by an unusually warm winter in the United States and Europe, an announced increase in crude oil production quotas for OPEC countries and a possible decline in demand in certain Asian markets. If such a decline in the West Texas Crude Oil Price worsens or persists for a protracted period, it could adversely affect the Company's revenues, net income and cash flows from operations. Also, if these prices maintain their present level for an extended time period or decline further the Company may delay or postpone certain of its capital projects. If the posted price for West Texas Crude Oil Price remains at current levels or continues to decline, the Company would expect that it may be required to record an impairment to its oil and gas properties in 1998. The extent of an impairment, if any, cannot be determined. 9 OPERATING DATA The following table sets forth the Company's historical operating data for the periods indicated.
Three Months Ended March 31, --------------------------------- 1998 1997 ---- ---- Production: Oil (MBbls) 629 431 Gas (MMcf) 7,326 4,735 Total (MMcfe) 11,100 7,321 Average Sales Prices Per Unit (a): Oil (Bbl) $13.65 $21.21 Gas (Mcf) $ 1.85 $ 1.87 Total (Mcfe) $ 1.99 $ 2.46 Expenses Per Mcfe: Production costs, excluding production and other taxes $ .73 $ .75 Production and other taxes $ .15 $ .20 General and administrative $ .26 $ .15 Depletion, depreciation and amortization $ .61 $ .63
- ---------------------------- (a) Reflects results of hedging activities. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 1997 Oil and Gas Revenues. Revenues from oil and gas operations totaled $22.1 million for the three months ended March 31, 1998 compared to $18.0 million for the three months ended March 31, 1997. The increase is primarily attributable to the increase in production as a result of the acquisitions made in December 1997 and continued exploitation of oil and gas properties, offset by a decrease in the average price received for both oil and gas. Of total oil and gas revenues for the three months ended March 31, 1998, revenues of approximately $5.0 million are attributable to the acquisitions made in December 1997. The average oil price received decreased 36% from $21.21 to $13.65 per Bbl and the average gas price received decreased 1% from $1.87 to $1.85 per Mcf for the three months ended March 31, 1998 compared to the three months ended March 31, 1997. Hedging activities during the three months ended March 31, 1998 increased oil revenues approximately $206,000 ($.33 per Bbl) and gas revenues approximately $1,927,000 ($.27 per Mcf). There were no hedging activities during the three months ended March 31, 1997. Production Costs. Oil and gas production costs, including production and other taxes, were $9.7 million for the three months ended March 31, 1998 compared to $7.0 million for the three months ended March 31, 1997. The increase in production costs was primarily attributable to production costs associated with the properties from the acquisitions made in December 1997, which were approximately $4.2 million ($1.80 per Mcfe). Initially, recently acquired properties generally incur significant rework expenses, which are costs incurred to perform required maintenance, workovers and other remedial activities. The properties acquired in the Pioneer Acquisition were primarily oil in nature and generally have a higher per unit operating cost as compared to gas properties. The Company expects as it integrates the recently acquired properties into its structure that the per unit operating costs should be reduced. 10 Depletion, Depreciation and Amortization Expense. Depletion, depreciation and amortization expense was $6.8 million for the three months ended March 31, 1998 ($.61 per Mcfe) compared to $4.6 million ($.63 per Mcfe) for the three months ended March 31, 1997. The 3% decrease per Mcfe is primarily due to the effects of the impairment taken in the fourth quarter of 1997, offset by the higher finding cost per Mcfe of the properties acquired in the 1997 acquisitions as compared to previous acquisitions. Included for 1998 and 1997 is approximately $.04 per Mcfe and $.01 per Mcfe of DD&A associated with other property and equipment, respectively. General and Administrative Expense. General and administrative expense was $2.7 million ($.26 per Mcfe) for the three months ended March 31, 1998 compared to $1.1 million ($.15 per Mcfe) for the three months ended March 31, 1997. The increase is due to the additional general and administrative expenses attributable to increased staff associated with the Company's 1997 growth and the additional staff of the acquired OEDC and Carrollton entities. The Company plans to reduce annualized general and administrative costs as it integrates the acquisitions and achieves economies of scale. Exploration and Abandonment Expense. Exploration and abandonment expense increased to $2.1 million in 1998 from $400,000 in 1997. The increase is primarily related to the Company's increased geological and geophysical staff and increases in seismic related costs and other exploratory costs. Part of the increase in activities is due to the Company's offshore activities as a result of its acquisition of OEDC. Equity in Net Loss of Affiliate. The equity in net loss of affiliate is attributable to the Company's ownership, as a result of the OEDC acquisition, of Dauphin Island Gathering Partners ("DIGP"). Included in the equity in net loss is approximately $160,000 of the amortization of the Company's cost basis in excess of the underlying historical net assets of DIGP. Interest Expense. Interest expense was $1,707,000 for the three months ended March 31, 1998 compared to $242,000 for the three months ended March 31, 1997. The 600% increase is primarily due to an increase in the average outstanding debt. In 1997, average outstanding debt was low due to the recently completed common stock offering in December 1996. In 1998, the average outstanding debt increased over the comparable 1997 period, due primarily to the Pioneer Acquisition in December 1997, the purchase of treasury stock and the Company's capital expenditures. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of capital have been its initial capitalization, private equity sales, bank financing, cash flow from operations and the Company's initial public offering. The Company requires capital primarily for the exploration, development and acquisition of oil and gas properties, the repayment of indebtedness and general working capital needs. Net Cash Provided by Operating Activities. Net cash provided by operating activities, before changes in operating assets and liabilities, was $7.2 million for the three months ended March 31, 1998 compared to $9.4 million for the three months ended March 31, 1997. The decrease was primarily attributable to the decrease in oil and gas prices realized during the first quarter of 1998 and an increase in general and administrative, production, exploration and interest costs, offset by an increase in net revenues from the acquisitions completed in 1997. Capital Expenditures. For 1998, the Company expects to spend (i) approximately $25.1 million to drill proved undeveloped properties, (ii) approximately $3.6 million on probable projects, (iii) approximately $9.6 million to explore unproven locations, (iv) approximately $15.3 million on development projects following successful exploration efforts, (v) approximately $10.4 million to acquire additional acreage and seismic, (vi) $16.0 million to fund development of pipeline and processing project investments and (vii) $3.8 million on other items. The final determination with respect to the drilling of any well, including those currently budgeted, will depend on a number of factors, including (i) the results of exploration efforts and the review and analysis of the seismic data, (ii) the availability of sufficient capital resources by the Company and other participants for drilling prospects, (iii) economic and industry conditions at the time of drilling, including prevailing and anticipated prices for natural gas and oil and the availability and costs of drilling rigs and crews, (iv) the financial resources and results of the 11 Company, and (v) the availability of leases on reasonable terms and permitting for the potential drilling location. There can be no assurance that the budgeted wells will encounter, if drilled, recompleted or worked over, reservoirs of commercial quantities of natural gas or oil. While the Company regularly engages in discussions relating to potential acquisitions of oil and gas properties, the Company has no present agreement, commitment or understanding with respect to any such acquisition, other than the acquisition of oil and gas properties and interests in its normal course of business. Any future acquisitions may require additional financing and will be dependent upon available financing which may be required in the future to fund the Company's acquisition and drilling programs. Cash expenditures for investing in oil and gas properties were $10.6 million for the three months ended March 31, 1998. This includes $300,000 for the acquisition of properties and $10.3 million for development and exploratory costs. Capital Resources. The Company's primary capital resources are net cash provided by operating activities and borrowings under the Credit Agreement. Credit Agreement. The Credit Agreement established a four year revolving credit facility, up to the maximum amount of $250 million, subject to a borrowing base to be redetermined semi-annually by the lenders based on certain proved oil and gas reserves and other assets of the Company. The borrowing base at March 31, 1998 was $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 $275,000 was outstanding at March 31, 1998. All outstanding amounts under the Credit Agreement are due and payable in full on January 1, 2001. The Company's outstanding long-term debt under the Credit Agreement was $97.0 million on March 31, 1998. At the Company's option, borrowings under the Credit Agreement bear interest at either the "Base Rate" (i.e., the higher of the applicable prime commercial lending rate, or the federal funds rate plus .5% per annum) or the Eurodollar rate, plus 1% to 1.50% per annum, depending on the level of the Company's aggregate outstanding borrowings. In addition, the Company is committed to pay quarterly in arrears a fee of .30% to .375% of the unused borrowing base. The Credit Agreement contains certain covenants and restrictions that are customary in the oil and gas industry. In addition, the line of credit is secured by substantially all of the Company's oil and gas properties. Liquidity and Working Capital. At March 31, 1998, the Company had $4.9 million of cash and cash equivalents as compared to $1.6 million at December 31, 1997. The Company's ratio of current assets to current liabilities was 1.20 at March 31, 1998, compared to 1.00 at December 31, 1997. The Company's working capital increased $3.8 million from $28,000 at December 31, 1997 to $3.8 million at March 31, 1998, primarily as a result of increased cash balances and payments of current liabilities, both a result of the increased long-term debt levels. Unsecured Credit Agreement. In April 1997, the Company entered into a credit agreement (the "Unsecured Credit Agreement") with Chase Bank of Texas, N.A. (the "Bank"), which establishes a revolving credit facility, up to the maximum of $5 million. All outstanding amounts pursuant to the Unsecured Credit Agreement are due and payable in full on or before December 31, 1999. Proceeds of the Unsecured Credit Agreement are utilized to fund short-term needs (less than thirty days). The Company had $4.2 outstanding debt under the Unsecured Credit Agreement at March 31, 1998. The interest rate of amounts outstanding under the Unsecured Credit Agreement is at a rate determined by agreement between the Company and the Bank. The rate shall not exceed the maximum interest rate permitted under applicable laws. Interest rates generally are the bank's cost of funds plus 1% per annum. 12 OTHER MATTERS Hedging Activities The Company uses swap agreements and other financial instruments in an attempt to reduce the risk of fluctuating oil and gas prices and interest rates. The Company is party to various agreements with numerous counterparties for purposes of utilizing financial instruments, of which the Company assesses the creditworthiness of its counterparties. Among other counterparties, the Company has utilized Enron Capital & Trade Resources Corp. (an affiliate of a significant stockholder of the Company) as a counterparty. Settlement of gains or losses on the hedging transactions was generally based on the difference between the contract price and a formula using New York Mercantile Exchange ("NYMEX") or other major indices related prices and was reported as a component of oil and gas revenues as the associated production occurs. The Company, at March 31, 1998, had entered into hedging transactions with respect to approximately 11,953 and 6,544 MMcfe of its 1998 and 1999, respectively, estimated production. Recently Issued Accounting Pronouncements In June 1997, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" which establishes standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS No. 131 is effective for financial statements for periods beginning after December 15, 1997 but the statement need not be applied to interim financial statements in the initial year of application. The Company does not expect SFAS No. 131 to materially affect the Company's reporting practices. 13 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS No significant changes in legal proceedings. See Note 3 of notes to consolidated financial statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10 Master Promissory Note, dated March 6, 1998, between Titan Resources, L.P. and Chase Bank of Texas, National Association 27 Financial Data Schedule (b) Reports Submitted on Form 8-K: Form 8-K, Amendment No. 1, dated December 29, 1997 (Date of Event: December 12, 1997), which reported the required financial information related to the Pioneer Acquisition. 14 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: May 12, 1998 15 EX-10 2 MASTER PROMISSORY NOTE MASTER PROMISSORY NOTE --------------- $5,000,000.00 (this "Note") March 6, 1998 ---- FOR VALUE RECEIVED, the undersigned, TITAN RESOURCES, L.P., a Texas limited partnership ("Company") promises to pay to the order of CHASE BANK OF TEXAS, ------- NATIONAL ASSOCIATION ("Bank"), on or before December 31, 1999 ("Final Maturity ---- -------------- Date") at its offices located at 712 Main Street, Houston, Texas 77002 in lawful - ---- money of the United States of America and in immediately available funds, the principal amount of each loan (a "Loan") shown in Bank's records to have been ---- made by Bank and on the relevant maturity date as set forth in Bank's records. Each Loan shall also have its own date of maturity agreed by Company and Bank which will occur prior to the Final Maturity Date. The rate of interest on each Loan evidenced hereby from time to time shall be the interest rate which shall be determined for each Loan by agreement between Company and Bank but, in no event, shall exceed the maximum interest rate permitted under applicable law ("Highest Lawful Rate"). If Texas law determines the Highest Lawful Rate, Bank - --------------------- has elected the "indicated" (weekly) ceiling as defined in the Texas Credit Code or any successor statute. All past due amounts shall bear interest at a per annum interest rate equal to the Prime Rate plus one percent (1%). "Prime Rate" ---------- means the rate determined from time to time by Bank as its prime rate. The Prime Rate shall change automatically from time to time without notice to Borrower or any other person. THE PRIME RATE IS A REFERENCE RATE AND MAY NOT BE BANK'S LOWEST RATE. Interest on each Loan shall be: (i) computed on the unpaid principal amount of the Loan outstanding from the date of advance until paid; (ii) payable at maturity and thereafter on demand; and (iii) shall be calculated on the basis of a year of 360 days for the actual days elapsed. The total amount of interest (as defined under applicable law) contracted for, charged or collected under this Note will never exceed the Highest Lawful Rate. If Bank contracts for, charges or receives any excess interest, it will be deemed a mistake. Bank will automatically reform the contract or charge to conform to applicable law, and if excess interest has been received, Bank will either refund the excess or credit the excess on the unpaid principal amount of this Note. All amounts constituting interest will be spread throughout the full term of this Note in determining whether interest exceeds lawful amounts. Each of the following is an event of default ("Events of Default"): ----------------- (a) Company shall fail to pay any amount of principal of or interest on this Note when due; (b) Company shall fail to pay when due any amount of principal or interest with respect to any obligation to Bank (other than this Note); or (c) Company shall fail to pay any amount relating to any other indebtedness for borrowed money or other pecuniary obligation (including any contingent such obligation) or an event or condition shall occur or exist which gives the holder of any such indebtedness or obligation the right or option to accelerate the maturity thereof. (d) Company shall commence any bankruptcy, reorganization or similar case or proceeding relating to it or its property under the law of any jurisdiction, or a trustee or receiver shall be appointed for itself or any substantial part of its property; (e) any involuntary bankruptcy, reorganization or similar case or proceeding under the law of any jurisdiction shall have been commenced against Company or any substantial part of its property and such case or proceeding shall not have been dismissed within 60 days, or Company shall have consented to such case or proceeding; or (f) Company shall admit in writing its inability to pay its debts as they become due. Upon the happening of any Event of Default specified in paragraphs (d), (e) or (f) above, automatically the Loans evidenced by this Note (with accrued interest thereon) shall immediately become due and payable, and upon the happening of an Event of Default specified in paragraphs (a), (b) or (c) above, Bank may, by notice to Company, declare the Loans evidenced by this Note (with accrued interest thereon) to be due and payable, whereupon the same shall immediately become due and payable. Except as expressly provided above, presentment, demand, protest, notice of intent to accelerate, acceleration and all other notices of any kind are hereby expressly waived. The Company hereby agrees to pay on demand, in addition to unpaid principal and interest, all Bank's costs and expenses incurred in attempting or effecting collection hereunder, including the reasonable fees and expenses of counsel (which may include, to the extent permitted by applicable law, allocated costs of in-house counsel), whether or not suit is instituted. This Note is executed and delivered by Company to evidence Loans which may be made by Bank to Company not to exceed $5,000,000.00. COMPANY UNDERSTANDS THAT BANK HAS NO OBLIGATION TO MAKE ANY LOAN TO COMPANY UNDER THIS NOTE. All Loans evidenced by this Note are and will be for business and commercial purposes and no Loan will be used for the purpose of purchasing or carrying any margin stock as that term is defined in Regulation U of the Board of Governors of the Federal Reserve System (the "Board"). ----- Chapter 346 of the Texas Finance Code does not apply to this Note or to any Loan evidenced by this Note. This Note shall be governed by the laws of the State of Texas and the laws of the United States as applicable. Bank shall, and is hereby authorized by Company, to record in its records the date, amount, interest rate and due date of each Loan as well as the date and amount of each payment by the undersigned in respect thereof. Payments may be applied to accrued interest or principal in whatever order Bank chooses. Loans evidenced by this Note may not be prepaid. In the event any such prepayment occurs, Company shall indemnify Bank against any loss, liability, damage, cost or expense which Bank may sustain or incur as a consequence thereof, including without limitation any loss, liability, damage, cost or expense sustained or incurred in liquidating or employing deposits from third parties acquired to effect or maintain such Loan or any part thereof. Bank shall provide to Company a written statement explaining the amount of any such loss or expense, which statement shall be conclusive absent manifest error. No waiver of any default shall be deemed to be a waiver of any other default. No failure to exercise or delay in exercising any right or power under this Note shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power preclude any further or other exercise thereof or the exercise of any other right or power. No amendment, modification or waiver of this Note shall be effective unless the same is in writing and signed by the person against whom such amendment, modification or waiver is sought to be enforced. No notice to or demand on any person shall entitle any person to any other or further notice or demand in similar or other circumstances. This Note shall be binding upon the successors and assigns of Company and inure to the benefit of Bank, its successors, endorsees and assigns (furthermore, Bank may assign or pledge this Note or any interest therein to any Federal Reserve Bank). If any term or provision of this Note shall be held invalid, illegal or unenforceable the validity of all other terms and provisions will not be affected. THIS NOTE REPRESENTS 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. 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 (The Bank's signature is provided as its acknowledgment of the above as the final written agreement between the parties.) CHASE BANK OF TEXAS, NATIONAL ASSOCIATION By: /s/ Sandra Aultman --------------------------------------------------- Name: Sandra I. Aultman ------------------------------------------------- Title: Vice President ------------------------------------------------ EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 4,936 0 14,835 0 1,214 22,365 380,006 (100,073) 359,246 18,595 0 0 0 403 226,598 359,246 22,107 22,107 0 22,531 0 0 1,707 (2,045) 720 (1,325) 0 0 0 (1,325) (.03) (.03)
-----END PRIVACY-ENHANCED MESSAGE-----