<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-Q
(MARK ONE)
|X|QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
OTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO _____________
COMMISSION FILE NUMBER: 001-11899
THE HOUSTON EXPLORATION COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 22-2674487
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYEE
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1100 LOUISIANA, SUITE 2000
HOUSTON, TEXAS 77002-5219
(ADDRESS OF PRINCIPAL
EXECUTIVE OFFICES
AND ZIP CODE)
(713) 830-6800
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, 23,337,363 shares of Common Stock, $.01 per
share, were outstanding.
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<PAGE> 2
THE HOUSTON EXPLORATION COMPANY
TABLE OF CONTENTS
Page
----
FACTORS AFFECTING FORWARD LOOKING STATEMENTS.................................2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Combined Balance Sheets --September 30, 1997 and
December 31, 1996...........................................3
Combined Statements of Operations -- Three-Month Periods and
the Nine-Month Periods Ended September 30, 1997 and 1996....4
Combined Statements of Cash Flows -- Nine Month Periods
Ended September 30, 1997 and 1996...........................5
Notes to the Combined Financial Statements......................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...............................17
SIGNATURES..................................................................18
-1-
<PAGE> 3
FACTORS AFFECTING FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1993, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The
words "anticipate," "believe," "expect," "estimate," "project" and similar
expressions are intended to identify forward-looking statements. Without
limiting the foregoing, all statements under the caption "Item 2--Management's
Discussion and Analysis of Financial Condition and Results of Operations"
relating to the Company's anticipated capital expenditures, future cash flows
and borrowings, pursuit of potential future acquisition opportunities and
sources of funding for exploration and development are forward-looking
statements. Such statements are subject to certain risks and uncertainties, such
as the volatility of natural gas and oil prices, uncertainty of reserve
information and future net revenue estimates, reserve replacement risks,
drilling risks, operating risks of natural gas and oil operations, acquisition
risks, substantial capital requirements, government regulation, environmental
matters and competition. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those anticipated, believed, expected, estimated or
projected. For additional discussion of such risks, uncertainties and
assumptions, see "Items 1 and 2. Business and Properties" and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in the Company's Annual Report on Form 10-K filed under the
Securities Act of 1934, as amended.
-2-
<PAGE> 4
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE HOUSTON EXPLORATION COMPANY
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
--------------- ---------------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Cash and cash equivalents................................................. $ 3,354 $ 2,851
Accounts receivable....................................................... 32,893 35,845
Accounts receivable--Affiliate............................................. 1,305 --
Inventories............................................................... 1,622 992
Prepayments and other..................................................... 1,766 924
--------------- ---------------
Total current assets.................................................. 40,940 40,612
Natural gas and oil properties, full cost method
Unevaluated properties................................................ 103,569 60,258
Properties subject to amortization.................................... 521,046 468,062
Other property and equipment.............................................. 8,251 7,308
--------------- ---------------
632,866 535,628
Less: Accumulated depreciation, depletion and amortization................ (216,044) (176,504)
--------------- ---------------
416,822 359,124
Other assets.............................................................. 729 1,549
--------------- ---------------
TOTAL ASSETS.......................................................... $ 458,491 $ 401,285
=============== ===============
LIABILITIES:
Accounts payable and accrued expenses..................................... $ 38,269 $ 36,650
Accounts payable-affiliate............................................... -- 1,010
Deferred stock obligation................................................ 8,825 --
-------------- ---------------
Total current liabilities............................................ 47,094 37,660
Long-term debt............................................................ 98,000 65,000
Deferred federal income tax............................................... 66,103 56,475
Other deferred liabilities................................................ 135 8,850
--------------- ---------------
TOTAL LIABILITIES..................................................... 211,332 167,985
COMMITMENTS AND CONTINGENCIES (NOTE 4)
STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value, 50,000 shares authorized,
23,333 shares issued and outstanding ................................. 233 233
Additional paid-in capital................................................ 221,470 222,271
Retained earnings......................................................... 25,456 10,796
--------------- ---------------
TOTAL STOCKHOLDERS' EQUITY............................................ 247,159 233,300
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................ $ 458,491 $ 401,285
=============== ===============
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
-3-
<PAGE> 5
THE HOUSTON EXPLORATION COMPANY
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Natural gas and oil revenues.................. $29,065 $18,922 $76,129 $40,174
Other........................................ 247 249 731 784
------- ------- ------- -------
Total revenues.............................. 29,312 19,171 76,860 40,958
OPERATING COSTS AND EXPENSES
Lease operating............................... 4,345 3,603 12,358 7,237
Depreciation, depletion and amortization...... 15,517 10,744 39,472 22,315
General and administrative, net............... 1,385 2,084 4,341 4,786
------- ------- ------- -------
Total operating expenses.................... 21,247 16,431 56,171 34,338
INCOME FROM OPERATIONS........................... 8,065 2,740 20,689 6,620
Interest expense, net............................ 65 1,488 494 2,606
------- ------- ------- -------
Income before income taxes....................... 8,000 1,252 20,195 4,014
Provision (benefit) for federal
income taxes................................ 2,475 (15) 5,535 (42)
------- ------- ------- -------
NET INCOME ...................................... $ 5,525 $ 1,267 $ 14,660 $ 4,056
========= ========= ========== =========
Net income per share............................. $ 0.24 $ 0.08 $ 0.63 $ 0.26
========= ========= ========== =========
Weighted average shares outstanding.............. 23,333 16,155 23,333 15,584
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
-4-
<PAGE> 6
THE HOUSTON EXPLORATION COMPANY
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1996
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................................... $ 14,660 $ 4,056
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, depletion and amortization.......................... 39,472 22,315
Deferred income tax expense....................................... 8,963 9,692
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable........................ 1,647 (3,828)
Increase in inventories........................................... (630) (28)
Increase in prepayments and other................................. (842) (78)
Decrease in other assets and liabilities ......................... 935 942
Increase in accounts payable and accrued expenses................. 609 8,710
------------- ------------
Net cash provided by operating activities............................ 64,814 41,781
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property and equipment ................................ (98,530) (134,711)
Dispositions and other............................................... 1,360 1,571
------------- ------------
Net cash used in investing activities................................ (97,170) (133,140)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings .................................. 47,000 71,138
Paydowns on long-term borrowings..................................... (14,000) (78,000)
Common stock issuance proceeds (costs)............................... (141) 101,178
Capital contributions from Brooklyn Union............................ -- 6,342
------------- ------------
Net cash provided by financing activities............................ 32,859 100,658
Increase in cash and cash equivalents ............................... 503 9,299
Cash and cash equivalents, beginning of period....................... 2,851 598
------------- ------------
Cash and cash equivalents, end of period............................. $ 3,354 $ 9,897
============= ============
Cash paid for interest............................................... $ 4,021 $ 4,283
============= ============
Cash paid for income taxes........................................... $ -- $ --
============= ============
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
-5-
<PAGE> 7
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
Organization
The Houston Exploration Company ("Houston Exploration" or the
"Company"), a Delaware corporation, was incorporated in December 1985 and began
operations in January 1986 for the purpose of conducting certain natural gas and
oil exploration and development activities for The Brooklyn Union Gas Company
("Brooklyn Union"). Effective September 29, 1997, Brooklyn Union became a
wholly-owned subsidiary of KeySpan Energry Corporation ("KeySpan"). Prior to its
initial public offering in September 1996 (the "IPO"), the Company was an
indirect wholly-owned subsidiary of Brooklyn Union. The Company's operations
focus on the exploration, development and acquisition of domestic natural gas
and oil properties offshore in the Gulf of Mexico and onshore in South Texas,
the Arkoma Basin, East Texas and West Virginia.
Effective February 29, 1996 Brooklyn Union implemented a reorganization
of its exploration and production assets and liabilities by transferring to
Houston Exploration certain onshore producing properties and acreage formerly
owned by Fuel Resources, Inc. ("FRI"), a wholly owned subsidiary of Brooklyn
Union. These combined financial statements have been prepared giving effect to
the transfer of these assets and liabilities from the time of the acquisition of
such assets and liabilities by Brooklyn Union. The transfer of assets and
liabilities has been accounted for at historical cost as a reorganization of
companies under common control in a manner similar to a pooling-of-interests and
the financial statements reflect the combined historical results of Houston
Exploration and the assets and liabilities transferred by Brooklyn Union for all
of the periods presented.
Interim Financial Statements
The balance sheet of the Company at September 30, 1997 and the
statements of operations and cash flows for the periods indicated herein have
been prepared by the Company without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted, although the Company believes that the disclosures contained herein are
adequate to make the information presented not misleading. The balance sheet at
December 31, 1996 is derived from the December 31, 1996 audited financial
statements, but does not include all disclosures required by generally accepted
accounting principles. The Interim Financial Statements should be read in
conjunction with the Combined Financial Statements and Notes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1996.
In the opinion of management, all adjustments, consisting of normal
recurring accruals, necessary to present fairly the information in the
accompanying financial statements have been included. The results of operations
for such interim periods are not necessary indicative of the results for the
full year.
-6-
<PAGE> 8
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share". This statement supersedes APB Opinion No. 15, "Earnings per Share" and
simplifies the computation of earnings per share ("EPS"). Primary EPS is
replaced with a presentation of basic EPS. Basic EPS includes no dilution and is
computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Fully
diluted EPS is replaced with diluted EPS. Diluted EPS reflects the potential
dilution if certain securities are converted. SFAS No. 128 requires dual
presentation of basic and diluted EPS by entities that issue any securities
other than ordinary common stock. SFAS No. 128 will be effective for financial
statements for both interim and annual periods ending after December 15, 1997,
and requires retroactive restatement of all EPS data presented. The Company
plans to adopt the statement on December 31, 1997. The Company does not expect
the effect of adopting SFAS No. 128 to have a material impact on its EPS
calculations, and, if adopted currently, SFAS No. 128 would not have a material
impact on the Company's reported EPS.
NOTE 2 -- ACQUISITIONS
TransTexas
On July 2, 1996, the Company acquired certain natural gas and oil
properties and associated gathering pipelines and equipment located in Zapata
County, Texas (the "TransTexas Acquisition") from TransTexas Gas Corporation and
TransTexas Transmission Corporation (together, "TransTexas"). The Company
acquired a 100% working interest (95% after the exercise by James G. Floyd, the
Company's President and Chief Executive Officer, of his right to purchase a 5%
working interest) in the approximately 142 wells on such properties. The
purchase price of $62.2 million ($59.1 million after giving effect to the
exercise of Mr. Floyd's purchase option) for the TransTexas Acquisition was
reduced by $3.1 million for production revenues and expenses related to the
assets between the May 1, 1996 effective date and July 2, 1996. The purchase
price of the TransTexas Acquisition was paid in cash, financed with borrowings
under the Company's Credit Facility.
Soxco
On September 25, 1996, the Company acquired substantially all of the
natural gas and oil properties and related assets (the "Soxco Acquisition") of
Smith Offshore Exploration Company ("Soxco"). The natural gas and oil properties
acquired in the Soxco Acquisition consisted solely of working interests in
properties located in the Gulf of Mexico that were already operated by the
Company or in which the Company also had a working interest. Pursuant to the
Soxco Acquisition, the Company paid Soxco cash in the aggregate amount of $20.3
million (net of $3.4 million for certain purchase price adjustments), and issued
to Soxco 762,387 shares of common stock. The cash portion of the purchase price
was funded with the proceeds of the Company's initial public offering. In
addition to the foregoing, the Company will pay Soxco a deferred purchase price
of up to $17.6 million payable on January 31, 1998. The amount of the deferred
purchase price will be determined by the probable reserves of Soxco as of
December 31, 1995 (approximately 17.6 Bcfe) that are produced prior to or
classified as proved as of December 31, 1997, provided that Soxco is entitled to
receive a minimum deferred purchase price of approximately $8.8 million. The
Company has accrued and classified as current the $8.8 million minimum deferred
purchase price. The amounts so determined will be paid in shares of common stock
based on the fair market value of such stock at the time of issuance.
-7-
<PAGE> 9
NOTE 3 -- STOCKHOLDERS' EQUITY
On September 19, 1996, the Company entered into an underwriting
agreement with respect to the initial public offering of its common stock at a
price of $15.50 per share (the "IPO"). The initial closing of the IPO, in which
the Company issued 6,200,000 shares of common stock, was completed on September
25, 1996. The underwriters delivered notice of the exercise of their over
allotment option on September 30, 1996. The closing of the over allotment, in
which the Company issued an additional 930,000 shares of common stock, was
completed on October 3, 1996. The Company received net proceeds of approximately
$101.0 million from the total of 7,130,000 shares sold in the IPO.
Concurrently with the completion of the IPO, the Company's President
exchanged certain of his after program-payout working interests valued at $2.3
million for 145,161 shares of common stock. In addition, concurrently with the
completion of the public offering, the Company issued 762,387 shares of common
stock valued at $11.8 million to Soxco in connection with the Soxco Acquisition.
See Note 2--Acquisitions.
In connection with the IPO, the Company's certificate of incorporation
was amended to effect an increase in the authorized capital stock of the Company
to 50,000,000 shares of common stock, par value $.01 per share, and 5,000,000
shares of preferred stock, par value $.01 per share. Additionally, the Company
effected a forward stock split, effective prior to the completion of the public
offering, increasing the number of shares of common stock issued and outstanding
to 15,295,215. The financial statements reflect, retroactively, the conversion
and reclassification of the Company's common stock pursuant to the split.
Net income per share for each period presented was determined by
dividing net income by the weighted average number of common shares outstanding,
after giving effect to the split referred to above. As of September 30, 1997,
the Company had 2,333,276 options authorized of which 1,670,238 had been
granted. The options and the estimated number of shares issuable to Soxco
pursuant to the $8.8 million minimum deferred purchase price (see Note 2 -
Acquisitions) were not reflected in the earnings per share calculation as they
are considered antidutive because the dilutive effect was not greater than 3%
for the three months and the nine months ended September 30, 1997.
NOTE 4 -- COMMITMENTS AND CONTINGENCIES
The Company is involved from time to time in various claims and
lawsuits incidental to its business. In the opinion of management, the ultimate
liability thereunder, if any, will not have a material adverse affect on the
financial position or results of operations of the Company.
NOTE 5 -- PRO FORMA COMBINED FINANCIAL INFORMATION
The unaudited combined pro forma information for the three months and
the nine months ended September 30, 1996 gives effect to the TransTexas
Acquisition, the Soxco Acquisition and the application of the net proceeds from
the IPO as if such transactions had been completed as of January 1, 1996. See
Note 2--Acquisitions and Note 3--Stockholders' Equity.
The historical results of operations have been adjusted to reflect (i)
an increase in natural gas and oil revenues, lease operating expense, general
and administrative expense and depreciation, depletion and amortization
attributed to the acquired properties, (ii) a reduction in interest expense
giving effect to the use of proceeds from the IPO to pay down long-term debt and
(iii) a net increase in income taxes as a result of the above.
-8-
<PAGE> 10
The pro forma combined financial information does not purport to be
indicative of the results of operations of the Company had such transactions
occurred on the date assumed, nor is the pro forma combined information
necessarily indicative of the future results of operations of the Company. The
pro forma combined financial information should be read together with the
Combined Financial Statements of the Company, including the Notes thereto.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1996
------------------ ------------------
<S> <C> <C>
REVENUES
Natural gas and oil revenues.................... $ 21,860 $ 62,915
Other........................................... 249 784
----------- ------------
Total revenues............................... 22,109 63,699
OPERATING COSTS AND EXPENSES......................
Lease operating expense......................... 4,053
11,089
Depreciation, depletion and amortization........ 12,162 32,486
General and administrative, net................. 2,131 4,927
----------- ------------
Total operating expenses..................... 18,346 48,502
INCOME FROM OPERATIONS............................ 3,763 15,197
Interest expense, net............................. 504 1,294
----------- -------------
Income before income taxes........................ 3,259
13,903
Provision for federal income taxes................ 687 3,419
----------- ------------
NET INCOME........................................ $ 2,572 $ 10,484
=========== ===========
Net income per share.............................. $ 0.11 $ 0.45
=========== ===========
Weighted average shares outstanding............... 23,333 23,333
</TABLE>
NOTE 6 -- RELATED PARTY TRANSACTIONS
Effective January 1, 1997, the Company entered into an agreement to sell
to a subsidiary of Brooklyn Union certain interests in onshore producing wells
of the Company that produce from formations that qualify for tax credits under
Section 29 of the Internal Revenue Code ("Section 29"). Section 29 provides for
a tax credit from non-conventional fuel sources such as oil produced from shale
and tar sands and natural gas produced from geopressured brine, Devonian shale,
coal seams and tight sands formations. Brooklyn Union acquired an economic
interest in wells that are qualified for the tax credits and in exchange, the
Company (i) retained a volumetric production payment and a net profits interest
of 100% in the properties, (ii) received a cash down payment of $1.4 million and
(iii) will receive a quarterly payment of $0.75 for every dollar of tax credit
utilized. The Company will manage and administer the daily operations of the
properties in exchange for an annual management fee of $100,000. At September
30, 1997, the balance sheet effect of this transaction was a $1.4 million
reduction to the full cost pool for the down payment. The income statement
effect for the three months ended and the nine months ended September 30, 1997
was a reduction to income tax expense of $0.3 million and $1.2 million,
respectively, representing benefits received from the Section 29 tax credits.
-9-
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion is intended to assist in an understanding
of the historical financial position and results of operations of The Houston
Exploration Company (the "Company") for the three months and the nine months
ended September 30, 1996 and 1997. The Company's historical combined financial
statements and notes thereto included elsewhere in this report contain detailed
information that should be referred to in conjunction with the following
discussion.
GENERAL
The Company was incorporated in December 1985 to conduct certain of
the natural gas and oil exploration and development activities of The Brooklyn
Union Gas Company ("Brooklyn Union"). Effective September 29, 1997, Brooklyn
Union became a wholly-owned subsidiary of KeySpan Energy Corporation
("KeySpan"). The Company initially focused on the exploration and development of
high potential prospects in the Gulf of Mexico. Effective February 29, 1996,
Brooklyn Union implemented a reorganization of its exploration and production
assets by transferring to the Company certain onshore producing properties and
related developed and undeveloped acreage. Subsequent to the reorganization, the
Company has expanded its focus to include low risk exploitation and development
drilling on the onshore properties transferred, in addition to seeking
opportunistic acquisitions both onshore and offshore. On July 2, 1996, the
Company acquired certain natural gas and oil properties and associated pipelines
located in Zapata County, Texas (the "TransTexas Acquisition") from TransTexas
Gas Corporation and TransTexas Transmission Corporation. In September 1996, the
Company completed an initial public offering (the "IPO") of 7,130,000 shares of
its common stock at $15.50 per share, resulting in net cash proceeds of
approximately $101.0 million. Concurrently with the completion of the IPO, the
Company completed the acquisition of the natural gas and oil properties and
related assets of Smith Offshore Exploration Company (the "Soxco Acquisition").
As of December 31, 1996, THEC Holdings Corp., a wholly-owned subsidiary of
Brooklyn Union, owned approximately 66% of the outstanding shares of Common
Stock. At December 31, 1996, the Company had net proved reserves of 327 Bcfe,
98% of which were natural gas and 74% of which were classified as proved
developed.
The Company's revenue, profitability and future rate of growth are
substantially dependent upon prevailing prices for natural gas, oil and
condensate, which are dependent upon numerous factors beyond the Company's
control, such as economic, political and regulatory developments and competition
from other sources of energy. The energy markets have historically been highly
volatile, and future decreases in natural gas and oil prices could have a
material adverse effect on the Company's financial position, results of
operations, quantities of natural gas and oil reserves that may be economically
produced, and access to capital.
The Company uses the full cost method of accounting for its
investment in natural gas and oil properties. Under the full cost method of
accounting, all costs of acquisition, exploration and development of natural gas
and oil reserves are capitalized into a "full cost pool" as incurred, and
properties in the pool are depleted and charged to operations using the
unit-of-production method based on the ratio of current production to total
proved natural gas and oil reserves. To the extent that such capitalized costs
(net of accumulated depreciation, depletion and amortization) less deferred
taxes exceed the present value (using a 10% discount rate) of estimated future
net cash flows from proved natural gas and oil reserves and the lower of cost or
fair value of unproved properties, such excess costs are charged to operations.
If a writedown is required, it would result in a charge to earnings but would
not have an impact on cash flows from operating activities.
-10-
<PAGE> 12
The Company utilizes natural gas fixed-floating price swaps for a
portion of its natural gas production to achieve a more predictable cash flow,
as well as to reduce its exposure to adverse price fluctuations of natural gas.
The swap agreements call for the Company to receive or make payment based upon
the differential between a fixed and a variable commodity price specified in the
contracts. The Company accounts for these transactions as hedging activities
and, accordingly, gains or losses are included in natural gas and oil revenues
in the period of the hedged production. The Company has entered into contracts
covering an average of approximately 76,300 Mmbtu per day (73,300 Mcf/d) for
October 1997 through December 1997 at a weighted average price of $2.56 per
Mmbtu and contracts covering an average of approximately 30,400 Mmbtu per day
(29,300 Mcf/d) for November 1997 through March 1998 at a weighted average price
of $2.60 per Mmbtu, in each case before transaction and transportation costs.
During September 1997, net production from the Company's properties averaged
approximately 166,000 Mcfe per day.
RESULTS OF OPERATIONS
The following table sets forth the Company's historical and pro forma
natural gas and oil production data during the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------- ------------------------------------
PROFORMA PRO FORMA
1997 1996 1996(1) 1997 1996 1996(1)
------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Production:
Natural gas (Mmcf)........................ 13,330 9,511 10,650 35,147 21,009 31,606
Oil (Mbbls)............................... 39 35 47 111 76 98
Total (Mmcfe)............................. 13,564 9,721 10,932 35,813 21,465 32,194
Average sales prices:
Natural gas (per Mcf)(2).................. $ 2.13 $ 1.91 $ 1.96 $ 2.11 $ 1.84 $ 1.93
Oil (per Bbl)............................. 17.79 21.83 21.70 18.71 20.26 20.13
Expenses (per Mcfe):
Lease operating........................... $ 0.32 $ 0.37 $ 0.37 $ 0.34 $ 0.34 $ 0.34
Depreciation, depletion and
amortization........................... 1.14 1.11 1.11 1.10 1.04 1.01
General and administrative, net........... 0.10 0.21 0.19 0.12 0.22 0.15
</TABLE>
- ----------------------------
(1) THE PRO FORMA PRODUCTION INFORMATION FOR THE THREE MONTH AND THE NINE MONTH
PERIODS ENDED SEPTEMBER 30, 1996 GIVES EFFECT TO THE TRANSTEXAS ACQUISITION
AND THE SOXCO ACQUISITION AS IF SUCH TRANSACTIONS HAD BEEN COMPLETED AS OF
JANUARY 1, 1996.
(2) REFLECTS THE EFFECTS OF HEDGING. ABSENT THE EFFECTS OF HEDGING, AVERAGE
REALIZED NATURAL GAS PRICES WOULD HAVE BEEN $2.25, $2.06 AND $2.09 PER MCF
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997, 1996 AND PRO FORMA 1996,
RESPECTIVELY; AND $2.31, $2.19 AND $2.16 PER MCF FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997,1996 AND PRO FORMA 1996.
-11-
<PAGE> 13
RECENT FINANCIAL AND OPERATING RESULTS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
General. Houston Exploration's production increased 40% from 9,721
Mmcfe for the three months ended September 30, 1996 to 13,564 Mmcfe for the
three months ended September 30, 1997. The primary source of this production
increase is the Charco Field which the Company acquired July 1, 1996 in the
TransTexas Acquisition. Beginning in the fourth quarter of 1996 the Company
initiated a development drilling and work over program that as of September 30,
1997 has resulted in the successful completion of 16 new Charco wells. Since the
end of September 1997, the Company brought on line four additional Charco wells
and was in the process of drilling two more at October 31, 1997. Adding to the
production increase for the three months ended September 30, 1997 was new
offshore production at East Cameron 82/83, Mustang Island 807, Galveston Island
272 and West Cameron 60.
Natural Gas and Oil Revenues. Natural gas and oil revenues increased
54% from $18.9 million for the three months ended September 30, 1996 to $29.1
million for the three months ended September 30, 1997 as a result of the 40%
increase in production combined with a 12% increase in average realized natural
gas prices from $1.91 per Mcf for the three months ended September 30, 1996 to
$2.13 per Mcf for the three months ended September 30, 1997.
As a result of hedging activities, the Company realized an average gas
price of $2.13 per Mcf for the three months ended September 30, 1997, compared
to an average price of $2.25 per Mcf that otherwise would have been received,
resulting in a $1.6 million decrease in natural gas revenues for the three month
period. For the three months ended September 30, 1996, the average realized gas
price was $1.91 per Mcf compared to an unhedged average gas price of $2.06 per
Mcf, resulting in a decrease to natural gas revenues of $1.4 million for the
three month period.
Lease Operating Expenses. Lease operating expenses increased 19% from
$3.6 million for the three months ended September 30, 1996 to $4.3 million for
the three months ended September 30, 1997. On an Mcfe basis, lease operating
expenses decreased 14% from $0.37 for the three months ended September 30, 1996
to $0.32 for the comparable period of 1997. The increase in lease operating
expense is attributable to expansion of the Company's operations at the Charco
Field, the start-up of operations at Mustang Island 807 in early June 1997,
combined with a general increase in costs in the oil service industry. The
decline in the rate per Mcfe reflects the 40% growth in production during the
current three month period combined with the Company's efforts to control costs.
Included as a component of lease operating expense is severance tax which
increased from $0.5 million, or $0.05 per Mcfe, for the three months ended
September 30, 1996 to $0.9 million, or $0.07 per Mcfe, for the corresponding
period of 1997. The increase in severance tax is due to the increase in
production from the onshore Charo Field properties combined with an increase in
gas prices.
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization expense increased 45% from $10.7 million for the three months ended
September 30, 1996 to $15.5 million for the three months ended September 30,
1997. Depreciation, depletion and amortization expense per Mcfe increased 3%
from $1.11 for the three months ended September 30, 1996 to $1.14 for the three
months ended September 30, 1997. The increase in expense was a result of the
production increases from properties acquired in the TransTexas and Soxco
Acquisitions as well as newly developed properties combined with an increase in
the depletion rate. The increase in the depletion rate is attributable to the
expansion of the Company's exploration and development drilling program and
reflects the industry-wide increase in the costs of drilling goods and services,
platform and facilities construction.
-12-
<PAGE> 14
General and Administrative Expenses. General and administrative
expenses, net of overhead reimbursements received from other working interest
owners of $0.3 million and $0.2 million for the three months ended September 30,
1996 and 1997, respectively, decreased 33% from $2.1 million for the three
months ended September 30, 1996 to $1.4 million for the three months ended
September 30, 1997. However, general and administrative expense for the three
months ended September 30, 1996 includes an $0.8 million charge taken in
conjunction with the IPO for the buyout and termination of stock options granted
to certain officers and directors of Brooklyn Union under the Company's 1994
Incentive Plan. After excluding this one-time charge of $0.8 million taken in
September 1996, general and administrative expense has increased 8% from $1.3
million for the three months ended September 30,1996 to $1.4 million for the
three months ended September 30, 1997 and reflects the overall growth and
expansion of the Company and its operations since the second half of 1996 and
continuing through the first nine months of 1997. The Company capitalized
general and administrative expenses directly related to oil and gas exploration
and development activities of $1.1 million and $1.8 million, respectively, for
the three months ended September 30, 1996 and 1997. The increase in capitalized
general and administrative expense directly corresponds with the growth of the
Company's technical workforce and the implementation of an incentive
compensation plan. On an Mcfe basis, general and administrative expenses
decreased 52% from $0.21 for the three months ended September 30, 1996 to $0.10
for the three months ended September 30, 1997. The lower rate per Mcfe for the
three months ended September 30, 1997 is directly attributable to the
significant increase in production for the three months ended September 30, 1997
as compared to the same period of 1996.
Income Tax Provision. The provision for income taxes increased from a
benefit of $0.02 million for the three months ended September 30, 1996 to an
expense of $2.5 million for the three months ended September 30, 1997 due to the
increase in pretax income offset by the benefit received from Section 29 tax
credits.
Net Income. Operating income increased 200% to $8.1 million for the
three months ended September 30, 1997, an increase of $5.4 million compared to
$2.7 million for the same period of 1996. Net income increased 323%, or $4.2
million, from $1.3 million for the three months ended September 30, 1996 to $5.5
million for the three months ended September 30, 1997. The increase in operating
income and net income was attributable primarily to higher production volumes
combined with higher realized natural gas prices.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
General. Houston Exploration's production increased 67% from 21,465
Mmcfe for the nine months ended September 30, 1996 to 35,813 Mmcfe for the nine
months ended September 30, 1997. The increase in production was attributable to
added production from both the TransTexas and the Soxco Acquisitions, which were
completed during the second half of 1996, combined with newly developed offshore
production brought on line during the the second and third quarters of 1997 and
the successful development drilling and workover programs begun in the latter
half of 1996 and continuing through the third quarter of 1997 on the Charco
Field properties acquired in the TransTexas Acquisition.
Natural Gas and Oil Revenues. Natural gas and oil revenues increased
89% from $40.2 million for the nine months ended September 30, 1996 to $76.1
million for the nine months ended September 30, 1997 as a result of the 67%
increase in production combined with a 15% increase in average realized natural
gas prices, from $1.84 per Mcf in the nine months ended September 30, 1996 to
$2.11 per Mcf in the nine months ended September 30, 1997.
As a result of hedging activities, the Company realized an average gas
price of $2.11 per Mcf for the nine months ended September 30, 1997, compared to
an average price of $2.31 per Mcf that otherwise would have been received,
resulting in a $7.3 million decrease in natural gas revenues for the nine month
-13-
<PAGE> 15
period. For the nine months ended September 30, 1996, the average realized gas
price was $1.84 per Mcf compared to an unhedged average gas price of $2.19,
resulting in a decrease to natural gas revenues of $7.5 million for the nine
month period.
Lease Operating Expenses. Lease operating expenses increased 72% from
$7.2 million for the nine months ended September 30, 1996 to $12.4 million for
the nine months ended September 30, 1997. On an Mcfe basis, lease operating
expenses remained unchanged at $0.34 for both the nine month periods ended
September 30, 1996 and 1997. The increase in lease operating expense for the
first nine months of 1997 is primarily attributable to properties acquired in
the TransTexas Acquisition and the significant expansion of operations in the
Charco Field combined with the effects of an industry-wide increase in drilling
and operating costs. Included as a component of lease operating expense is
severance tax which increased from $0.8 million, or $0.04 per Mcfe, for the nine
months ended September 30, 1996 to $2.6 million, or $0.07 per Mcfe, for the
corresponding period of 1997. The increase in severance tax is due to the
onshore Charco Field properties acquired and the increase in production from
these properties during 1997 combined with an increase in gas prices.
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization expense increased 77% from $22.3 million for the nine months ended
September 30, 1996 to $39.5 million for the nine months ended September 30,
1997. Depreciation, depletion and amortization expense per Mcfe increased 6%
from $1.04 for the nine months ended September 30, 1996 to $1.10 for the nine
months ended September 30, 1997. The increase in expense was a result of the
increased production from acquired as well as newly developed properties
combined with an increased depletion rate. The increase in the depletion rate is
attributable to exploratory drilling in 1996 and 1997 which did not add
significant new reserves combined with an industry wide increase in costs of
drilling goods and services, platform and facilities construction.
General and Administrative Expenses. General and administrative
expenses, net of overhead reimbursements received from other working interest
owners of $0.7 million for each the nine month periods ended September 30, 1996
and 1997, decreased 10% from $4.8 million for the nine months ended September
30, 1996 to $4.3 million for the nine months ended September 30, 1997. After
excluding the one-time charge of $0.8 million taken in September 1996, in
conjunction with the IPO, for the buyout and termination of stock options
granted to certain officers and directors of Brooklyn Union, general and
administrative expense increased 8% from $4.0 million for the nine months ended
September 30, 1996 to $4.3 million for the corresponding period of 1997. The
increase in general and administrative expense reflects the overall growth and
expansion of the Company and its operations since the second half of 1996 and
continuing through the first nine months of 1997. The Company capitalized
general and administrative expenses directly related to oil and gas exploration
and development activities of $3.5 million and $5.2 million, respectively, for
the nine months ended September 30, 1996 and 1997. The increase in capitalized
general and administrative expense directly corresponds with the growth of the
Company's technical workforce and the implementation of an incentive
compensation plan. On an Mcfe basis, general and administrative expenses
decreased 45% from $0.22 for the nine months ended September 30, 1996 to $0.12
for the nine months ended September 30, 1997. The lower rate per Mcfe during the
first nine months of 1997 reflects the increase in the Company's production
during the first nine months of 1997.
Income Tax Provision. The provision for income taxes increased from a
benefit of $0.04 million for the first nine months of 1996 to an expense of $5.5
million for the first nine months of 1997 due to the increase in pretax income
offset by the benefit received from Section 29 tax credits.
Net Income. Operating income increased 213% to $20.7 million for the
nine months ended September 30, 1997, an increase of $14.1 million compared to
$6.6 million for the same period of 1996. Net income increased 259%, or $10.6
million, from $4.1 million for the nine months ended September 30, 1996 to $14.7
million for the nine months ended September 30, 1997. The significant increase
in operating income
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<PAGE> 16
and net income was attributable primarily to higher production volumes and
higher net realized natural gas prices.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its operations, acquisitions,
capital expenditures and working capital requirements from cash flows from
operations, bank borrowings and capital contributions from Brooklyn Union.
Subsequent to the IPO, the Company has not received and does not anticipate
receiving capital contributions from Brooklyn Union.
As of September 30, 1997, the Company had a working capital deficit of
$6.2 million (which includes the accrued liability of $8.8 million for the Soxco
deferred purchase price which is payable in shares of common stock during the
first quarter of 1998) and $30.4 million of available borrowing base under its
Credit Facility. Net cash provided by operating activities for the first nine
months of 1997 was $64.8 million compared to $41.8 million for the same period
of 1996. The Company's cash position was increased during the period by
borrowings of $47.0 million under the Company's Credit Facility. Funds used in
investing and financing activities consisted of $98.5 million for investments in
property and equipment and principal payments of $14.0 million on long-term
borrowing under the Credit Facility. As a result of these activities, cash and
cash equivalents increased $0.5 million from $2.8 million at December 31, 1996
to $3.3 million at September 30, 1997.
During the nine months ended September 30, 1997, the Company spent
approximately $98.5 million on exploration and development. As a result of the
Company's continued development drilling program in the Charco Field and the
acceleration of offshore exploratory drilling during the second half of 1997,
the Company's Board of Directors has approved an increase of $45 million to the
initial capital expenditure budget of $75 million for 1997. These amounts
include development costs associated with recently acquired properties and
amounts that are contingent upon drilling success. The Company will continue to
evaluate its capital spending plans through the remainder of the year. No
significant abandonment or dismantlement costs are anticipated through 1997.
Actual levels of capital expenditures may vary significantly due to a variety of
factors, including drilling results, natural gas and oil prices, industry
conditions and outlook and future acquisitions of properties. The Company
believes cash flows from operations and borrowings under its credit facility
will be sufficient to fund these expenditures. The Company will continue to
selectively seek acquisition opportunities for proved reserves with substantial
exploration and development potential both offshore and onshore. The size and
timing of capital requirements for acquisitions is inherently unpredictable. The
Company expects to fund exploration and development through a combination of
cash flow from operations, borrowings under its credit facility, additional
borrowing facilities or the issuance of equity or debt securities.
The Company has entered into a credit facility (the "Credit Facility")
with a syndicate of lenders led by Texas Commerce Bank National Association
("TCB") which provides a maximum loan amount of $150 million, subject to
borrowing base limitations, on a revolving basis. Effective August 4, 1997, the
borrowing base was redetermined to be $130 million. The previous borrowing base
of $150 million was established July 2, 1996 in order to facilitate the
TransTexas and Soxco Acquisitions. At September 30, 1997, $98 million was
borrowed and $1.6 million was committed under outstanding letter of credit
obligations. The Credit Facility matures on July 1, 2000. Advances under the
Credit Facility bear interest, at the Company's election at (i) a fluctuating
rate ("Base Rate") equal to the higher of the Federal Funds Rate plus 0.5% or
TCB's prime rate or (ii) a fixed rate ("Fixed Rate") equal to a quoted LIBOR
rate plus a margin between 0.5% and 1.125% depending on the amount outstanding
under the Credit Facility. Interest is due at calendar quarters for Base Rate
loans and at the earlier of maturity or three months from the date of the loan
for Fixed Rate loans. The Credit Facility, as amended August 4, 1997, contains
covenants of the Company, including certain restrictions on liens and financial
covenants which require the Company to, among other things, maintain
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<PAGE> 17
(i) an interest coverage ratio of 2.5 to 1.00 of cash interest to earnings
before interest, taxes and depreciation and (ii) a total debt to capitalization
ratio of less than 60%. The Credit Facility also restricts the Company's ability
to purchase or redeem its capital stock or to pledge its oil and gas properties
or other assets. As of September 30, 1997 the Company was in compliance with all
Credit Facility covenants. The borrowing base under the Credit Facility is
determined by TCB in its discretion in accordance with TCB's then current
standards and practices for similar oil and gas loans taking into account such
factors as TCB deems appropriate.
-16-
<PAGE> 18
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NO. DESCRIPTION
10.1 __ Second Amendment to Credit Agreement among The Houston
Exploration Company and Texas Commerce Bank National
Association
27.1 __ Financial Data Schedule
(b) Reports on Form 8-K:
None.
-17-
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE HOUSTON EXPLORATION COMPANY
Date: October 31, 1997 By: /s/ James G. Floyd
---------------------
James G. Floyd
President and Chief Executive Officer
Date: October 31, 1997 By: /s/ James F. Westmoreland
----------------------------
James F. Westmoreland
Vice President, Chief Accounting
Officer, Comptroller and Secretary
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<PAGE> 20
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
10.1 __ Second Amendment to Credit Agreement among The Houston
Exploration Company and Texas Commerce Bank National
Association
27.1 __ Financial Data Schedule
<PAGE> 1
EXHIBIT 10.1
SECOND AMENDMENT TO
CREDIT AGREEMENT
This SECOND AMENDMENT TO CREDIT AGREEMENT (the "Amendment"), effective
as of August 4, 1997, is entered into by and among THE HOUSTON EXPLORATION
COMPANY, a Delaware corporation (the "Company"); TEXAS COMMERCE BANK NATIONAL
ASSOCI ATION, a national banking association ("TCB"), with offices at 712 Main
Street, Houston, Texas 77002, as Agent (TCB, in its capacity as Agent
hereinafter called "Agent") for itself and each of the other banks or lending
institutions (collectively the "Banks") that is a signatory hereto or which
hereinafter becomes a party to the "Credit Agreement" (hereinafter defined); and
the Banks.
PRELIMINARY STATEMENTS:
A. The Company, the Agent and TCB, as the sole Bank, entered into that
certain Credit Agreement dated as of July 2, 1996 (as amended by First Amendment
to Credit Agreement and Security Agreement dated as of August 30, 1996, and as
the same may from time to time be further amended, supplemented or modified, the
"Credit Agreement") under the terms of which TCB, as the sole Bank, agreed to
make available to the Company a revolving line of credit not to exceed, in the
aggregate, $150,000,000 at any one time outstanding.
B. Pursuant to separate Assignments and Acceptances dated as of the
date hereof, TCB has assigned to each of the Banks (other than TCB) that is a
signatory hereto an undivided interest in and to all of its rights and
obligations under the Credit Agreement, as set forth on Schedule I attached to
each respective Assignment and Acceptance, and the "Commitment" (as defined in
the Credit Agreement) of each Bank shall be the amount set forth opposite such
Bank's name on the signature pages hereof under the caption "Commitment".
C. The Company, the Banks and the Agent hereby mutually desire to
amend and modify certain terms of the Credit Agreement.
NOW THEREFORE, in consideration of the foregoing the parties hereto
hereby agree as follows:
Section 1. Certain Defined Terms. All capitalized terms used herein
(including in the preliminary statements hereof) and not otherwise defined shall
have the meanings set forth in the Credit Agreement.
Section 2. Amendments to Certain Definitions. Certain terms defined
in Section 1.02 of the Credit Agreement are hereby amended as follows:
(a) The term "Agreement" is hereby amended to mean the Credit
Agreement, as amended hereby and as the same may from time to time be
further amended or supplemented.
<PAGE> 2
(b) The term "Applicable Margin" is hereby amended in its
entirety to read as follows:
"Applicable Margin" shall mean at the time of calculation,
with respect to any Loan, calculated as a function of the type of such
Loan, the following rate per annum as applicable:
<TABLE>
<CAPTION>
THRESHOLD AMOUNT FIXED RATE LOAN APPLICABLE BASE RATE LOAN APPLICABLE
UTILIZATION MARGIN PERCENTAGE MARGIN PERCENTAGE
---------------- -------------------------- -------------------------
<S> <C> <C>
Less than 25% .375% 0%
Greater than or equal to 25% .50% 0%
but less than 50%
Greater than or equal to 50% .625% 0%
but less than 75%
Greater than or equal to 75% .75% 0%
but less than 100%
Greater than or equal to 1.125% 0%
100%
</TABLE>
Section 3. Additional Definition. Section 1.02 of the Credit
Agreement is hereby further amended and supplemented by adding thereto the
following new definition, to read in entirety as follows:
"EBITDA" shall mean, for any period, the sum of Consolidated
Net Income for such period plus the following expenses or charges to
the extent deducted from Consolidated Net Income in such period:
interest, taxes, depreciation, depletion and amortization.
Section 4. Letters of Credit. Clause (i) of Section 2.01(b) of the
Credit Agreement is hereby amended in its entirety to read as follows:
(i) During the period from and including the Closing Date to and
including the Drawdown Termination Date, the Banks agree to extend
credit to the Company at any time and from time to time by
participating in the issuance, renewal, extension or reissuance of
Letters of Credit pursuant to this Agreement; provided, that all such
Letters of Credit issued on or after the Closing Date shall be issued
by the Agent; and further provided, however, the aggregate LC Exposure
at any one time shall not exceed the lesser of (1) $5,000,000, or (2)
(A) the lesser of (x) the Borrowing Base, or (y) the aggregate
Commitments, as then in effect, minus (B) the aggregate principal
amount of all Loans then outstanding.
Section 5. Fees. The grid set forth at the end of Section 2.04(b)
is hereby amended in its entirety to read as follows:
-2-
<PAGE> 3
Threshold Amount
Utilization Issuance Fee
---------------- ------------
Less than 25% .375%
Greater than or equal to 25% but less than 50% .50%
Greater than or equal to 50% but less than 75% .625%
Greater than or equal to 75% but less than 100% .75%
Greater than or equal to 100% 1.125%
Section 6. Borrowing Base; Threshold Amount. For the period from and
after the date of this Amendment to and including the date of the next
redetermination of the Borrowing Base in accordance with Section 2.09 of the
Credit Agreement, the amount of the Borrowing Base shall be $130,000,000.00, and
the amount of the Threshold Amount shall be $130,000,000.00.
Section 7. Investments. Section 9.05 of the Credit Agreement is hereby
amended by deleting the words "FRI or" from the 12th line thereof.
Section 8. Minimum Consolidated Net Worth. Section 9.12 of the Credit
Agreement is hereby be amended in its entirety to read as follows:
Section 9.12 Interest Coverage Ratio. The Company will not permit
its Interest Coverage Ratio as of the end of any fiscal quarter of the
Company (calculated quarterly at the end of each fiscal quarter) to be
less than 2.50 to 1.00. For the purposes of this Section 9.12, 'Interest
Coverage Ratio' shall mean the ratio of (i) EBITDA for the four fiscal
quarters ending on such date to (ii) cash interest payments made for
such four fiscal quarters of the Company and its Subsidiaries.
Section 9. Debt to Total Capitalization Ratio. Section 9.13 of the
Credit Agreement is hereby amended by deleting therefrom the percentage "55%"
found in clause (ii) and substituting therefore the amount 60%.
Section 10. Exhibit F. Exhibit F attached to the Credit Agreement is
hereby amended, restated and replaced in its entirety by Exhibit F attached to
this Amendment.
Section 11. Conditions Precedent. In addition to any and all other
applicable conditions precedent contained in the Credit Agreement, the
obligations of the Agent and the Banks to enter into this Amendment are
conditioned upon receipt by each of the Banks of (i) their respective Note, duly
completed and executed by the Company, and (ii) their Assignment and Acceptance
duly completed and executed by the parties thereto.
Section 12. Ratification. The Company acknowledges and ratifies the
Credit Agreement as amended hereby, and agrees and acknowledges that all the
terms thereof as amended hereby (a)
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<PAGE> 4
are hereby brought forward for the benefit of the Banks and the Agent and (b)
shall remain in full force and effect.
Section 13. Counterparts. This Amendment may be signed in any number
of counterparts, each of which shall be construed as an original, but all of
which together shall constitute one and the same instrument.
Section 14. References. On and after the date hereof, the terms
"Agreement," "hereof," "herein," "hereunder," and terms of like import when used
in the Credit Agreement shall, except where the context otherwise requires,
refer to the Credit Agreement, as amended and supplemented by this Amendment.
Section 15. Choice of Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of Texas.
Section 16. Final Agreement of the Parties. THIS AMENDMENT, THE CREDIT
AGREEMENT, THE NOTES AND OTHER SECURITY INSTRUMENTS CONSTITUTE A "LOAN
AGREEMENT" AS DEFINED IN SECTION 26.02(a) OF THE TEXAS BUSINESS AND COMMERCE
CODE, AND 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.
[SIGNATURE PAGES FOLLOW]
-4-
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their respective officers thereunto duly authorized as of the
date first above written.
COMPANY:
THE HOUSTON EXPLORATION COMPANY
By: /s/ Thomas W. Powers
--------------------------
Thomas W. Powers
Senior Vice President
(Signature Page 1)
<PAGE> 6
AGENT AND BANKS:
Commitment: $50,000,000.00 TEXAS COMMERCE BANK NATIONAL
ASSOCIATION, Individually as a Bank and
in its capacity as Agent
By: /s/ Paul J. Nidoh
-------------------------
Paul J. Nidoh
Vice President
(Signature Page 2)
<PAGE> 7
Commitment: $30,000,000.00 CIBC INC.
By: /s/ Aleksandra K. Dymanus
---------------------------
Name: Aleksandra K. Dymanus
Title: Authorized Signatory
(Signature Page 3)
<PAGE> 8
Commitment: $20,000,000.00 FIRST UNION NATIONAL BANK
By: /s/ Michael J. Kolosowsky
------------------------------
Name: Michael J. Kolosowsky
Title: Vice President
(Signature Page 4)
<PAGE> 9
Commitment: $30,000,000.00 THE BANK OF NOVA SCOTIA
By: THE BANK OF NOVA SCOTIA,
ATLANTA AGENCY
By: /s/ F.C.H. Ashby
------------------------
Name: F.C.H. Ashby
Title: Senior Manager Loan Operations
(Signature Page 5)
<PAGE> 10
Commitment: $20,000,000.00 PNC BANK, N.A.
By: /s/ John Way
--------------------------
Name: John Way
Title: Commercial Banking Officer
(Signature Page 6)
<PAGE> 11
EXHIBIT F
FORM OF
ASSIGNMENT AND ACCEPTANCE AGREEMENT
ASSIGNMENT AND ACCEPTANCE AGREEMENT ("Agreement") dated as of
________________, 199___ between: _______________________________ (the
"Assignor") and __________________________ (the "Assignee").
RECITALS
A. The Assignor is a party to the Credit Agreement dated as of
July 2, 1996 (as amended and supplemented and in effect from time to time, the
"Credit Agreement") among THE HOUSTON EXPLORATION COMPANY, a Delaware
corporation (the "Company"), each of the lenders that is or becomes a party
thereto as provided in Section 12.06 of the Credit Agreement (individually,
together with its successors and assigns, a "Bank", and collectively, together
with their successors and assigns, the "Banks"), and TEXAS COMMERCE BANK
NATIONAL ASSOCIATION, in its individual capacity, ("TCB") and as agent for the
Banks (in such capacity, together with its successors in such capacity, the
"Agent").
B. The Assignor proposes to sell, assign and transfer to the
Assignee, and the Assignee proposes to purchase and assume from the Assignor,
[all][a portion] of the Assignor's Commitment, outstanding Loans and its pro
rata share of the outstanding LC Exposure, all on the terms and conditions of
this Agreement.
C. In consideration of the foregoing and the mutual agreements
contained herein, and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
ARTICLE I
DEFINITIONS.
Section 1.01 Definitions. All capitalized terms used but not
defined herein have the respective meanings given to such terms in the Credit
Agreement.
Section 1.02 Other Definitions. As used herein, the following
terms have the following respective meanings:
"Assigned Interest" shall mean all of Assignor's (in its
capacity as a "Bank") rights and obligations (i) under the Credit
Agreement and the other Security Instruments in respect of the
Commitment of the Assignor in the principal amount equal to
$____________________, including, without limitation, any obligation
to participate prorata in any LC Exposure, and (ii) to make Loans
under its Commitment and any right to receive payments for the Loans
F-1
<PAGE> 12
outstanding under the Commitment assigned hereby of
$__________________ (the "Loan Balance"), plus the interest and fees
which will accrue from and after the Assignment Date.
"Assignment Date" shall mean _____________________, 199___.
ARTICLE II
SALE AND ASSIGNMENT.
Section 2.01 Sale and Assignment. On the terms and conditions
set forth herein, effective on and as of the Assignment Date, the Assignor
hereby sells, assigns and transfers to the Assignee, and the Assignee hereby
purchases and assumes from the Assignor, all of the right, title and interest
of the Assignor in and to, and all of the obligations of the Assignor in
respect of, the Assigned Interest. Such sale, assignment and transfer is
without recourse and, except as expressly provided in this Agreement, without
representation or warranty.
Section 2.02 Assumption of Obligations. The Assignee agrees with
the Assignor (for the express benefit of the Assignor and the Borrower) that
the Assignee will, from and after the Assignment Date, perform all of the
obligations of the Assignor in respect of the Assigned Interest. From and after
the Assignment Date: (a) the Assignor shall be released from the Assignor's
obligations in respect of the Assigned Interest, and (b) the Assignee shall be
entitled to all of the Assignor's rights, powers and privileges under the
Credit Agreement and the other Security Instruments in respect of the Assigned
Interest.
Section 2.03 Consent by Agent. By executing this Agreement as
provided below, in accordance with Section 12.06(b) of the Credit Agreement,
the Agent hereby acknowledges notice of the transactions contemplated by this
Agreement and consents to such transactions.
ARTICLE III
PAYMENTS.
Section 3.01 Payments. As consideration for the sale, assignment
and transfer contemplated by Section 2.01 hereof, the Assignee shall, on the
Assignment Date, assume Assignor's obligations in respect of the Assigned
Interest and pay to the Assignor an amount equal to the Loan Balance, if any.
An amount equal to all accrued and unpaid interest and fees shall be paid to
the Assignor as provided in Section 3.02 (iii) below. Except as otherwise
provided in this Agreement, all payments hereunder shall be made in Dollars and
in immediately available funds, without setoff, deduction or counterclaim.
Section 3.02 Allocation of Payments. The Assignor and the
Assignee agree that (i) the Assignor shall be entitled to any payments of
principal with respect to the Assigned Interest made prior to the Assignment
Date, together with any interest and fees with respect to the Assigned Interest
accrued prior to the Assignment Date, (ii) the Assignee shall be entitled to
any payments of
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<PAGE> 13
principal with respect to the Assigned Interest made from and after the
Assignment Date, together with any and all interest and fees with respect to
the Assigned Interest accruing from and after the Assignment Date, and (iii)
the Agent is authorized and instructed to allocate payments received by it for
account of the Assignor and the Assignee as provided in the foregoing clauses.
Each party hereto agrees that it will hold any interest, fees or other amounts
that it may receive to which the other party hereto shall be entitled pursuant
to the preceding sentence for account of such other party and pay, in like
money and funds, any such amounts that it may receive to such other party
promptly upon receipt.
Section 3.03 Delivery of Notes. Promptly following the receipt
by the Assignor of the consideration required to be paid under Section 3.01
hereof, the Assignor shall, in the manner contemplated by Section 12.06(b) of
the Credit Agreement, (i) deliver to the Agent (or its counsel) the Note held
by the Assignor and (ii) notify the Agent to request that the Borrower execute
and deliver new Notes to the Assignor, if Assignor continues to be a Bank, and
the Assignee, dated the date of this Agreement in respective principal amounts
equal to the respective Commitment of the Assignor (if appropriate) and the
Assignee after giving effect to the sale, assignment and transfer contemplated
hereby.
Section 3.04 Further Assurances. The Assignor and the Assignee
hereby agree to execute and deliver such other instruments, and take such other
actions, as either party may reasonably request in connection with the
transactions contemplated by this Agreement.
ARTICLE IV
CONDITIONS PRECEDENT.
Section 4.01 Conditions Precedent. The effectiveness of the
sale, assignment and transfer contemplated hereby is subject to the
satisfaction of each of the following conditions precedent:
(a) the execution and delivery of this Agreement by
the Assignor and the Assignee;
(b) the receipt by the Assignor of the payment
required to be made by the Assignee under Section 3.01 hereof; and
(c) the acknowledgment and consent by the Agent
contemplated by Section 2.03 hereof.
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<PAGE> 14
ARTICLE V
REPRESENTATIONS AND WARRANTIES.
Section 5.01 Representations and Warranties of the Assignor. The
Assignor represents and warrants to the Assignee as follows:
(a) it has all requisite power and authority, and has
taken all action necessary to execute and deliver this Agreement and
to fulfill its obligations under, and consummate the transactions
contemplated by, this Agreement;
(b) the execution, delivery and compliance with the
terms hereof by Assignor and the delivery of all instruments required
to be delivered by it hereunder do not and will not violate any
Governmental Requirement applicable to it;
(c) this Agreement has been duly executed and
delivered by it and constitutes the legal, valid and binding
obligation of the Assignor, enforceable against it in accordance with
its terms;
(d) all approvals and authorizations of, all filings
with and all actions by any Governmental Authority necessary for the
validity or enforceability of its obligations under this Agreement
have been obtained;
(e) the Assignor has good title to, and is the sole
legal and beneficial owner of, the Assigned Interest, free and clear
of all Liens, claims, participations or other charges of any nature
whatsoever; and
(f) the transactions contemplated by this Agreement
are commercial banking transactions entered into in the ordinary
course of the banking business of the Assignor.
Section 5.02 Disclaimer. Except as expressly provided
in Section 5.01 hereof, the Assignor does not make any representation or
warranty, nor shall it have any responsibility to the Assignee, with respect to
the accuracy of any recitals, statements, representations or warranties
contained in the Credit Agreement or in any certificate or other document
referred to or provided for in, or received by any Bank under, the Credit
Agreement, or for the value, validity, effectiveness, genuineness, execution,
effectiveness, legality, enforceability or sufficiency of the Credit Agreement,
the Notes or any other document referred to or provided for therein or for any
failure by the Borrower or any other Person (other than Assignor) to perform
any of its obligations thereunder prior or for the existence, value, perfection
or priority of any collateral security or the financial or other condition of
the Borrower or the Subsidiaries [or any other obligor or guarantor], or any
other matter relating to the Credit Agreement or any other Security Instrument
or any extension of credit thereunder.
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<PAGE> 15
Section 5.03 Representations and Warranties of the Assignee. The
Assignee represents and warrants to the Assignor as follows:
(a) it has all requisite power and authority, and has
taken all action necessary to execute and deliver this Agreement and
to fulfill its obligations under, and consummate the transactions
contemplated by, this Agreement;
(b) the execution, delivery and compliance with the
terms hereof by Assignee and the delivery of all instruments required
to be delivered by it hereunder do not and will not violate any
Governmental Requirement applicable to it;
(c) this Agreement has been duly executed and
delivered by it and constitutes the legal, valid and binding
obligation of the Assignee, enforceable against it in accordance with
its terms;
(d) all approvals and authorizations of, all filings
with and all actions by any Governmental Authority necessary for the
validity or enforceability of its obligations under this Agreement
have been obtained;
(e) the Assignee has fully reviewed the terms of the
Credit Agreement and the other Security Instruments and has
independently and without reliance upon the Assignor, and based on
such information as the Assignee has deemed appropriate, made its own
credit analysis and decision to enter into this Agreement;
(f) the transactions contemplated by this Agreement
are commercial banking transactions entered into in the ordinary
course of the banking business of the Assignee.
ARTICLE VI
MISCELLANEOUS.
Section 6.01 Notices. All notices and other communications
provided for herein (including, without limitation, any modifications of, or
waivers, requests or consents under, this Agreement) shall be given or made in
writing (including, without limitation, by telex or telecopy) to the intended
recipient at its "Address for Notices" specified below its name on the
signature pages hereof or, as to either party, at such other address as shall
be designated by such party in a notice to the other party.
Section 6.02 Amendment, Modification or Waiver. No provision of
this Agreement may be amended, modified or waived except by an instrument in
writing signed by the Assignor and the Assignee, and consented to by the Agent.
Section 6.03 Successors and Assigns. This Agreement shall be
binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns. The representations and
warranties made herein by the Assignee are also made for the benefit of the
Agent
F-5
<PAGE> 16
and the Borrower, and the Assignee agrees that the Agent and the Borrower are
entitled to rely upon such representations and warranties.
Section 6.04 Assignments. Neither party hereto may assign any of
its rights or obligations hereunder except in accordance with the terms of the
Credit Agreement.
Section 6.05 Captions. The captions and section headings
appearing herein are included solely for convenience of reference and are not
intended to affect the interpretation of any provision of this Agreement.
Section 6.06 Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be identical and all of which,
taken together, shall constitute one and the same instrument, and each of the
parties hereto may execute this Agreement by signing any such counterpart.
Section 6.07 Governing Law. This Agreement shall be governed by,
and construed in accordance with, the law of the State of Texas.
Section 6.08 Expenses. To the extent not paid by the Borrower
pursuant to the terms of the Credit Agreement, each party hereto shall bear its
own expenses in connection with the execution, delivery and performance of this
Agreement.
Section 6.09 Waiver of Jury Trial. EACH OF THE PARTIES HERETO
HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY AND ALL
RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO
THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
F-6
<PAGE> 17
IN WITNESS WHEREOF, the parties hereto have caused this Assignment
Agreement to be executed and delivered as of the date first above written.
ASSIGNOR
--------
---------------------------------------
By:
-----------------------------------
Name:
Title:
Address for Notices:
---------------------------------------
---------------------------------------
---------------------------------------
Telecopier No.:
-----------------------
Telephone No.:
-----------------------
Attention:
-----------------------
F-7
<PAGE> 18
ASSIGNEE
--------
---------------------------------------
By:
-----------------------------------
Name:
Title:
Address for Notices:
---------------------------------------
---------------------------------------
---------------------------------------
Telecopier No.:
-----------------------
Telephone No.:
-----------------------
Attention:
-----------------------
ACKNOWLEDGED AND CONSENTED TO:
- -------------------------------,
as Agent
By:
---------------------------
Name:
Title:
F-8
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMBINED
FINANCIAL STATEMENTS OF THE HOUSTON EXPLORATION COMPANY SET FORTH IN THE
COMPANY'S FORM 10-Q FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 3,354
<SECURITIES> 0
<RECEIVABLES> 34,198
<ALLOWANCES> 0
<INVENTORY> 1,622
<CURRENT-ASSETS> 40,940
<PP&E> 632,866
<DEPRECIATION> 216,044
<TOTAL-ASSETS> 458,491
<CURRENT-LIABILITIES> 47,094
<BONDS> 98,000
0
0
<COMMON> 233
<OTHER-SE> 246,926
<TOTAL-LIABILITY-AND-EQUITY> 458,491
<SALES> 76,129
<TOTAL-REVENUES> 76,860
<CGS> 0
<TOTAL-COSTS> 56,171
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 494
<INCOME-PRETAX> 20,195
<INCOME-TAX> 5,535
<INCOME-CONTINUING> 14,660
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,660
<EPS-PRIMARY> .63
<EPS-DILUTED> .63
</TABLE>
