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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 NO. 001-11899
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THE HOUSTON EXPLORATION COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 22-2674487
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1100 LOUISIANA STREET, 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 May 15, 1998, 23,890,490 shares of Common Stock, par value $.01
per share, were outstanding.
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THE HOUSTON EXPLORATION COMPANY
TABLE OF CONTENTS
<TABLE>
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Page
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FACTORS AFFECTING FORWARD LOOKING STATEMENTS ............................................. 3
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets -- March 31, 1998 and December 31, 1997 ............. 4
Consolidated Statements of Operations -- Three-Month Periods Ended
March 31, 1998 and 1997 ..................................................... 5
Consolidated Statements of Cash Flows -- Three Month Periods Ended
March 31, 1998 and 1997 ..................................................... 6
Notes to the Consolidated Financial Statements .................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ....................................................... 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ................................................ 17
SIGNATURES ............................................................................... 18
</TABLE>
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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.
Unless otherwise indicated, references to "Houston Exploration" or the
"Company" refer to The Houston Exploration Company and its subsidiaries on a
combined basis.
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PART I. FINANCIAL INFORMATION
ITEMS 1. FINANCIAL STATEMENTS
THE HOUSTON EXPLORATION COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Cash and cash equivalents ................................................ $ 2,138 $ 4,745
Accounts receivable ...................................................... 32,186 37,898
Accounts receivable-- Brooklyn Union ..................................... 1,303 1,303
Inventories .............................................................. 1,385 1,265
Prepayments and other .................................................... 776 645
--------- ---------
Total current assets ........................................... 37,788 45,856
Natural gas and oil properties, full cost method
Unevaluated properties ................................................. 114,508 104,075
Properties subject to amortization ..................................... 595,947 566,868
Other property and equipment ............................................. 9,258 9,341
--------- ---------
719,713 680,284
Less: Accumulated depreciation, depletion and amortization ............... (255,743) (236,546)
--------- ---------
463,970 443,738
Other assets ............................................................. 3,685 1,797
--------- ---------
TOTAL ASSETS ................................................... $ 505,443 $ 491,391
========= =========
LIABILITIES:
Accounts payable and accrued expenses .................................... $ 27,589 $ 42,432
Deferred stock obligation ................................................ -- 8,825
--------- ---------
Total current liabilities ...................................... 27,589 51,257
Long-term debt ........................................................... 135,000 113,000
Deferred federal income taxes ............................................ 72,926 70,741
Other deferred liabilities ............................................... 182 206
--------- ---------
TOTAL LIABILITIES .............................................. 235,697 235,204
COMMITMENTS AND CONTINGENCIES (SEE NOTE 4)
STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value, 50,000 shares authorized and 23,883 shares
issued and outstanding at March 31, 1998 and 23,361 shares issued and
outstanding at December 31, 1997 .................................... 239 234
Additional paid-in capital ............................................. 230,738 221,907
Retained earnings ...................................................... 38,769 34,046
--------- ---------
TOTAL STOCKHOLDERS' EQUITY ..................................... 269,746 256,187
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..................... $ 505,443 $ 491,391
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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THE HOUSTON EXPLORATION COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
---------- ----------
(UNAUDITED)
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REVENUES:
Natural gas and oil revenues .................................. $32,884 $25,014
Other ......................................................... 200 314
------- -------
Total revenues ........................................ 33,084 25,328
OPERATING COSTS AND EXPENSES:
Lease operating ............................................... 3,869 3,143
Severance tax ................................................. 1,118 1,106
Depreciation, depletion and amortization ...................... 19,314 11,382
General and administrative, net ............................... 1,575 1,410
------- -------
Total operating expenses .............................. 25,876 17,041
Income from operations .......................................... 7,208 8,287
Interest expense, net ........................................... 300 143
------- -------
Net income before income taxes .................................. 6,908 8,144
Provision for federal income taxes .............................. 2,185 2,451
------- -------
NET INCOME ...................................................... $ 4,723 $ 5,693
======= =======
Net income per share ............................................ $ 0.20 $ 0.24
======= =======
Net income per share-- assuming dilution ........................ $ 0.20 $ 0.24
======= =======
Weighted average shares outstanding ............................. 23,384 23,333
Weighted average shares outstanding -- assuming dilution ........ 23,560 24,005
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
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THE HOUSTON EXPLORATION COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
1998 1997
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(UNAUDITED)
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OPERATING ACTIVITIES:
Net income ................................................................ $ 4,723 $ 5,693
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization ................................ 19,314 11,382
Deferred income tax expense ............................................. 2,185 2,451
Changes in operating assets and liabilities:
Decrease in accounts receivable ...................................... 5,712 9,731
Increase in inventories .............................................. (120) (500)
Increase in prepayments and other .................................... (131) (317)
Decrease (increase) in other assets and liabilities .................. (1,912) 536
Decrease in accounts payable and accrued expenses .................... (14,843) (10,795)
--------- ---------
Net cash provided by operating activities ................................. 14,928 18,181
INVESTING ACTIVITIES:
Investment in property and equipment ...................................... (39,549) (26,664)
Dispositions and other .................................................... -- 1,360
--------- ---------
Net cash used in investing activities ..................................... (39,549) (25,304)
FINANCING ACTIVITIES:
Proceeds from long term borrowings ........................................ 121,000 21,500
Repayments of long term borrowings ........................................ (99,000) (9,000)
Proceeds from issuance of common stock, net of offering costs ............. 14 (9)
--------- ---------
Net cash provided by financing activities ................................. 22,014 12,491
Increase (decrease) in cash and cash equivalents .......................... (2,607) 5,368
Cash and cash equivalents, beginning of period ............................ 4,745 2,851
--------- ---------
Cash and cash equivalents, end of period .................................. $ 2,138 $ 8,219
========= =========
Cash paid for interest .................................................... $ 2,034 $ 1,410
========= =========
Cash paid for taxes ....................................................... $ -- $ --
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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THE HOUSTON EXPLORATION COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
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"), a wholly-owned subsidiary of KeySpan Energy Corporation
("KeySpan"). Effective February 29, 1996, Brooklyn Union implemented a
reorganization of its exploration and production assets by transferring to
Houston Exploration certain onshore producing properties and developed and
undeveloped acreage. 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 (together, "TransTexas"). In September 1996, the
Company completed its initial public offering ("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 (the "Soxco Acquisition") of substantially all
of the natural gas and oil properties and related assets of Smith Offshore
Exploration Company ("Soxco"). As of March 31, 1998, THEC Holdings Corp., a
wholly-owned subsidiary of Brooklyn Union, holds approximately 64% of the
outstanding shares of the Company's common stock. 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.
Principles of Consolidation
The consolidated financial statements include the accounts of The
Houston Exploration Company and its wholly-owned subsidiary, Seneca Upshur
Petroleum Company (collectively the "Company"). All significant intercompany
balances and transactions have been eliminated.
Interim Financial Statements
The balance sheet of the Company at March 31, 1998 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, 1997 is
derived from the December 31, 1997 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, 1997.
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.
Reclassifications and Use of Estimates
The preparation of the 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 dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. The Company's most significant financial estimates are based
on remaining
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proved natural gas and oil reserves. Because there are numerous uncertainties
inherent in the estimation process, actual results could differ from the
estimates. Certain reclassifications for prior years have been made to conform
with current year presentation.
Net Income Per Share
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share." The statement specifies the computation, presentation, and
disclosure requirements for earnings per share ("EPS") and is designed to
improve the EPS information provided in the financial statements by simplifying
the prior computation. Primary EPS has been replaced with Basic EPS which is
calculated by dividing net income by the weighted average number of shares of
common stock outstanding during the year. No dilution for any potentially
dilutive securities is included. Fully diluted EPS is now called Diluted EPS and
assumes the conversion of all potentially dilutive securities. The Company
adopted SFAS No. 128 in its December 31, 1997 financial statements and has
presented Diluted EPS for the three months ended March 31, 1997, which
presentation previously was not required because the dilutive effect of options
and contingent shares was less than 3%.
Under the requirements of SFAS No. 128, the Company's EPS are as
follows:
<TABLE>
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THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
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(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Net income ................................................. $ 4,723 $ 5,693
Denominator:
Weighted average shares outstanding ........................ 23,384 23,333
Add: dilutive securities
Options .............................................. 176 --
Contingent shares .................................... -- 672
------- -------
Total weighted average shares outstanding and dilutive
securities ............................................... 23,560 24,005
======= =======
Net income per share ....................................... $ 0.20 $ 0.24
Net income per share -- assuming dilution .................. $ 0.20 $ 0.24
</TABLE>
New Accounting Pronouncements
In February 1997, the FASB issued SFAS No. 129, "Disclosure of
Information About Capital Structure," which consolidates the existing
requirements to disclose certain information about an entity's capital
structure, for both public and nonpublic entities. In June 1997, the FASB issued
SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for
reporting and display of comprehensive income and its components. Also issued in
June of 1997 was SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information," which specifies and revises guidelines for determining an
entity's operating and geographic segments and the type and level of financial
information about those segments to be disclosed. The Company adopted the
provisions of SFAS Nos. 129, 130 and 131 in its December 31, 1997 financial
statements. The adoption of SFAS Nos. 129, 130 and 131 did not have a material
effect on its results of operations or the calculation of net income.
In March 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits". This statement revises
employers' disclosures about pension and other postretirement benefit plans. It
standardizes the disclosure requirements for pensions and other postretirement
benefits to the extent practicable, requires additional information on changes
in the benefits obligations and fair values of plan assets that will facilitate
analysis and eliminates certain disclosures. The Company will adopt SFAS 132 in
its consolidated financial statements for the year ended December 31, 1998. The
Company believes that such adoption will not have a material effect on its
results of operations or the calculation of net income.
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NOTE 2 -- LONG-TERM DEBT
As of March 31, 1998, long-term debt consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31,1997
(IN THOUSANDS)
<S> <C> <C>
SENIOR DEBT:
Bank revolving credit facility ............................. $ 35,000 $113,000
85/8% Senior Subordinated Notes, due 2008 .................. 100,000 --
-------- --------
Total long-term debt ................................... $135,000 $113,000
======== ========
</TABLE>
Credit Facility
The Company has entered into a revolving credit facility ("Credit
Facility") with a syndicate of lenders led by Chase Bank of Texas, National
Association ("Chase"), which provides a maximum commitment of $150 million,
subject to borrowing base limitations. The Credit Facility was amended in March
of 1998 in connection with the Company's private placement of $100 million of
senior subordinated notes and as of March 31, 1998, the available borrowing base
was $135 million. In addition, up to $5 million of the Credit Facility is
available for the issuance of letters of credit to support performance
guarantees. The Credit Facility matures on July 1, 2000 and is unsecured. At
March 31, 1998, $35 million was outstanding under the Credit Facility and $1.6
million was outstanding in letter of credit obligations.
Interest is payable on borrowings under the Credit Facility, at the
Company's option, at an alternate base rate of the greater of the Federal Funds
rate plus 0.5% or Chase's prime rate or at a margin of 0.375% to 1.125% above a
quoted LIBOR rate. Interest is payable at calendar quarters on base rate loans
and at maturity on LIBOR loans. In addition, the Credit Facility requires a
commitment fee of: (i) between 0.20% and 0.375% per annum on the unused portion
of the Designated Borrowing Base, and (ii) 33% of the fee in (i) above on the
difference between the lower of the Facility Amount or the Borrowing Base and
the Designated Borrowing Base.
The Credit Facility, as amended, contains covenants of the Company,
including certain restrictions on liens and financial covenants which require
the Company to, among other things, maintain (i) an interest coverage ratio of
2.5 to 1.0 of earnings before interest, taxes and depreciation ("EBITDA") to
cash interest and (ii) a total debt to capitalization ratio of less than 60%. In
addition to maintenance of certain financial ratios, cash dividends and/or
purchase or redemption of the Company's stock is restricted as well as the
encumbering of the Company's gas and oil assets or the pledging of the assets as
collateral. As of March 31, 1998, the Company was in compliance with all such
covenants.
Senior Subordinated Notes
On March 2, 1998, the Company issued $100 million of 8 5/8% Senior
Subordinated Notes (the "Notes") due January 1, 2008 in a private placement to
qualified institutional buyers. The Notes bear interest at a rate of 8 5/8% per
annum with interest payable semi-annually on January 1 and July 1, commencing
July 1, 1998. The Notes are redeemable at the option of the Company, in whole or
in part, at anytime on or after January 1, 2003 at a price equal to 100% of the
principal amount plus accrued and unpaid interest, if any, plus a specified
premium if the Notes are redeemed prior to January 1, 2006. Notwithstanding the
foregoing, any time prior to January 1, 2001, the Company may redeem up to 35%
of the original aggregate principal amount of the Notes with the net proceeds of
any equity offering; provided that at least 65% of the original aggregate
principal amount of the Notes remains outstanding immediately after the
occurrence of such redemption. Upon the occurrence of a change of control (as
defined), the Company will be required to offer to purchase the Notes at a
purchase price equal to 101% of the aggregate principal amount thereof, plus
accrued and unpaid interest, if any. The Notes are general unsecured obligations
of the Company and rank subordinate in right of payment to all existing and
future senior debt, including the Credit Facility, and will rank senior or pari
passu in right of payment to all existing and future subordinated indebtedness.
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NOTE 3 -- STOCKHOLDERS' EQUITY
Soxco Deferred Purchase Price
On September 25, 1996, the Company completed the Soxco Acquisition and
acquired substantially all of the natural gas and oil properties and related
assets of 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 are operated by the Company or in which the Company also has
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
with an aggregate value (determined by reference to the IPO price) of $11.8
million. The cash portion of the purchase price was funded with the proceeds of
the IPO. In addition to the foregoing, on March 27, 1998, the Company issued
520,777 shares of common stock with an aggregate value (determined by reference
a 20 trading day average price of the Company's common stock) of $8.8 million to
Soxco in payment of the deferred purchase price.
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 -- RELATED PARTY TRANSACTIONS
Sale of Section 29 Tax Credits
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 December 31, 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 March 31, 1998 and 1997 was a
reduction to income tax expense of $0.2 million and $0.4 million, respectively,
representing benefits received from the Section 29 tax credits.
NOTE 5 -- ACQUISITIONS
South Louisiana Acquisition
On April 29, 1998, the Company completed the acquisition of certain
natural gas and oil properties and associated gathering pipelines and equipment,
together with leased and unleased acreage, located in South Louisiana (the
"South Louisiana Acquisition"). The properties and acreage acquired are located
primarily in the South Lake Arthur and Lake Pagie Fields, located primarily in
Vermilion Parish and Terrebonne Parish, respectively. The properties purchased
represent approximately 41 Bcfe of net proved reserves, and currently contain
approximately 64 producing wells. The average net production in March 1998
attributable to such properties was approximately 12.5 MMcfe per day, net to the
interest acquired by the Company. The purchase price of $53.9 million will be
adjusted for production revenues and operating expenses related to the acquired
properties between November 1, 1997 and the April 29, 1998 closing date of the
South Louisiana Acquisition. The purchase price of the South Louisiana
Acquisition was paid in cash, financed with borrowings under the Credit
Facility.
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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 Company's historical financial position and results of operations for the
three months ended March 31, 1997 and 1998. The Company's consolidated 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 Houston Exploration Company ("Houston Exploration" or 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"). The Company initially focused primarily 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 Houston Exploration certain
onshore producing properties and developed and undeveloped acreage. Subsequent
to the reorganization, the Company has expanded its focus to include lower risk
exploitation and development drilling on the onshore properties transferred or
acquired, 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 (together, "TransTexas"). In September 1996, the
Company completed its initial public offering ("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 (the "Soxco Acquisition") of substantially all
of the natural gas and oil properties and related assets of Smith Offshore
Exploration Company ("Soxco"). As of March 31, 1998, THEC Holdings Corp., a
wholly owned subsidiary of Brooklyn Union, owned approximately 64% of the
outstanding shares of the Company's common stock. At December 31, 1997, the
Company had net proved reserves of 337 Bcfe, 98% of which were natural gas and
78% 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 and related deferred taxes) exceed the
present value (using a 10% discount rate) of estimated future net after tax 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
write-down is required, it would result in a charge to earnings but would not
have an impact on cash flows from operating activities. Once incurred, a
write-down of oil and gas properties is not reversible at a later date even if
oil and gas prices increase.
In February 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 128, "Earnings Per Share." The statement specifies the
computation, presentation, and disclosure requirements for earnings per share
("EPS") and is designed to improve the EPS information provided in the financial
statements by simplifying the prior computation. Primary EPS has been replaced
with Basic EPS which is calculated by dividing net income by the weighted
average number of shares of common stock outstanding during the year. No
dilution for any potentially dilutive securities is included. Fully diluted EPS
is now called Diluted EPS and assumes the conversion of all options, contingent
shares and other potentially dilutive securities. The Company adopted SFAS No.
128 in its December 31, 1997 financial statements and has presented Diluted EPS
for the three months ended March 31, 1997 which were
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<PAGE> 12
previously not required as the dilutive effect of options and contingent shares
was less than 3%. See Note 1 to the Company's Combined Financial Statements.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of
Information About Capital Structure," which consolidates the existing
requirements to disclose certain information about an entity's capital
structure, for both public and nonpublic entities. In June 1997, the FASB issued
SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for
reporting and display of comprehensive income and its components. Also issued in
June of 1997 was SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information," which specifies and revises guidelines for determining an
entity's operating and geographic segments and the type and level of financial
information about those segments to be disclosed. The Company adopted the
provisions of SFAS Nos. 129, 130 and 131 in its 1997 financial statements. The
adoption of SFAS Nos. 129, 130 and 131 did not have a material effect on its
results of operations or the calculation of net income.
In March 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits". This statement revises
employers' disclosures about pension and other postretirement benefit plans. It
standardizes the disclosure requirements for pensions and other postretirement
benefits to the extent practicable, requires additional information on changes
in the benefits obligations and fair values of plan assets that will facilitate
analysis and eliminates certain disclosures. The Company will adopt SFAS 132 in
its consolidated financial statements for the year ended December 31, 1998. The
Company believes that such adoption will not have a material effect on its
results of operations or the calculation of net income.
RESULTS OF OPERATIONS
The following table sets forth the Company's historical natural gas and
oil production data during the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------
1998 1997
---------- ----------
<S> <C> <C>
PRODUCTION:
Natural gas (MMcf) ..................................... 15,135 10,571
Oil (MBbls) ............................................ 47 33
Total (MMcfe) .......................................... 15,417 10,769
AVERAGE SALES PRICES:
Natural gas (per Mcf) realized(1) ...................... $ 2.13 $ 2.30
Natural gas (per Mcf) unhedged ......................... 2.06 2.77
Oil (per Bbl) .......................................... 14.17 21.09
EXPENSES (PER MCFE):
Lease operating ........................................ $ 0.25 $ 0.29
Severance tax .......................................... 0.07 0.10
Depreciation, depletion and amortization ............... 1.25 1.06
General and administrative, net ........................ 0.10 0.13
</TABLE>
- ---------------------------
(1) Reflects the effects of hedging.
RECENT FINANCIAL AND OPERATING RESULTS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1997 AND 1998
Production. Houston Exploration's production increased 43% from 10,769
MMcfe for the three months ended March 31, 1997 to 15,417 MMcfe for the three
months ended March 31, 1998. The increase in production was
-12-
<PAGE> 13
primarily attributable to the Company's successful development drilling program
in the Charco Field during 1997 and continuing through the first three months of
1998. The Charco Field in South Texas was acquired in July of 1996 in the
TransTexas Acquisition and since the beginning of 1997, the Company successfully
completed and brought on-line 27 new wells, with two additional wells currently
being completed and two wells currently being drilled. Production in the Charco
Field more than doubled from 3,289 MMcfe, or 37 MMcfe per day, in the first
quarter of 1997 to 7,003 MMcfe, or 78 MMcfe per day, in the first quarter of
1998. The remaining portion of the Company's first quarter 1998 production
increase is a result of new production from wells drilled during 1997 offshore
and onshore in the Arkoma Basin.
Natural Gas and Oil Revenues. Natural gas and oil revenues increased
32% from $25.0 million for the three months ended March 31, 1997 to $32.9
million for the three months ended March 31, 1998 as a result of the 43%
increase in production offset set by a 7% decrease in average realized natural
gas prices, from $2.30 per Mcf for the three months ended March 31, 1997 to
$2.13 per Mcf for the three months ended March 31, 1998.
As a result of hedging activities, the Company realized an average gas
price of $2.13 per Mcf for the three months ended March 31, 1998, which was 103%
of the unhedged natural gas price of $2.06 per Mcf that otherwise would have
been received, resulting in a $1.1 million increase in natural gas revenues for
the three months ended March 31, 1998. For the corresponding three month period
of 1997, the average realized gas price was $2.30 per Mcf, which was 85% of the
unhedged average gas price of $2.77 per Mcf, resulting in a decrease in natural
gas revenues of $5.0 million for the three months ended March 31, 1997.
Lease Operating Expenses and Severance Tax. Lease operating expenses
increased 26% from $3.1 million for the three months ended March 31, 1997 to
$3.9 million for the three months ended March 31, 1998. On an Mcfe basis, lease
operating expenses decreased from $0.29 for the first three months of 1997 to
$0.25 for the first three months of 1998. The increase in lease operating
expenses during 1998 is attributable to the significant expansion of operations
in the Charco Field combined with the effects of an industry-wide increase in
operating costs. The decrease in the lease operating expenses per Mcfe resulted
from the substantial increase in production during the first three months of
1998 as compared to the corresponding period of 1997. Severance tax, which is a
function of volume and revenues generated from onshore production, remained flat
at $1.1 million for both of the three month periods ended March 31, 1997 and
1998. On an Mcfe basis, severance tax decreased from $0.10 per Mcfe, for the
first three months of 1997 to $0.07 per Mcfe, for the first three months of
1998. The decrease in severance tax per Mcfe is due to lower natural gas prices
received during the first three months of 1998 as compared to prices received
during the first three months of 1997.
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization expense increased 69% from $11.4 million for the three months ended
March 31, 1997 to $19.3 million for the three months ended March 31, 1998.
Depreciation, depletion and amortization expense per Mcfe increased 18% from
$1.06 for the three months ended March 31, 1997 to $1.25 for the corresponding
three months in 1998. The increase in depreciation, depletion and amortization
expense was a result of the increased production from newly developed properties
combined with an increased depletion rate. The increase in the depletion rate is
attributable to the industry-wide increase in drilling and development costs.
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 March 31,
1997 and 1998, respectively, increased 14% from $1.4 million for the three
months ended March 31, 1997 to $1.6 for the three months ended March 31, 1998.
The increase in general and administrative expenses reflects the continued
growth and expansion of the Company and its operations. As the Company continues
to grow and expand its workforce, the Company expects aggregate general and
administrative expenses to increase. The Company capitalized general and
administrative expenses directly related to oil and gas exploration and
development activities of $1.8 million and $2.0 million, respectively, for the
three months ended March 31, 1997 and 1998. The increase in capitalized general
and administrative expenses directly corresponds with the growth of the
Company's technical workforce and the Company's incentive compensation plan. On
an Mcfe basis, general and administrative expenses decreased 22% from $0.13 for
-13-
<PAGE> 14
the three months ended March 31, 1997 to $0.10 for the three months ended March
31, 1998. The lower rate per Mcfe during the first three months of 1998 reflects
the increase in the Company's production.
Interest Expense, Net. Interest expense, net of capitalized interest,
increased from $0.1 million for the three months ended March 31, 1997 to $0.3
million for the three ended March 31, 1998. Capitalized interest increased from
$1.1 million for three months of 1997 to $2.0 million for the first three months
of 1998. The increase in aggregate interest expense was attributable to higher
average debt levels during the first three months of 1998. With the issuance of
$100 million of senior subordinated indebtedness in March 1998, the Company
expects its 1998 average debt levels to exceed those in 1997 and accordingly,
expects an increase in net interest expense.
Income Tax Provision. The provision for income taxes decreased 12% from
an expense of $2.5 for the first three months of 1997 to an expense of $2.2
million for the first three months of 1998. The decrease in income tax expense
for the three months ended March 31, 1998 as compared to the corresponding
period of 1997 is due to the 15% decrease in pretax income for the three months
ended March 31, 1998, offset by the decrease in the benefit received from
Section 29 tax credits.
Operating Income and Net Income. As a result of the increase in natural
gas production offset by the decline in natural gas prices and the increase in
operating costs, operating income decreased 13% from $8.3 million for the three
months ended March 31, 1997 to $7.2 million for the three months ended March 31,
1998. Net income decreased 17% from $5.7 million for the three months ended
March 31, 1997 to $4.7 million for the three months ended March 31, 1998.
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, prior to the IPO, capital contributions from
Brooklyn Union. On March 2, 1998, the Company issued $100 million of senior
subordinated indebtedness in a private placement to qualified institutional
buyers. Net proceeds of approximately $97 million were used to repay a portion
of the outstanding indebtedness under the Company's revolving bank credit
facility (the "Credit Facility").
As of March 31, 1998, the Company had a working capital of $10.2
million and $98.4 million of available borrowing base under the Credit Facility.
Net cash provided by operating activities for the three months ended March 31,
1998 was $14.9 million compared to $18.2 million for the three months ended
March 31, 1997. The decrease in net cash flow from operations is due to a
combination of (i) lower net income caused by decreased natural gas prices and
higher operating expenses offset by increased production and (ii) a decrease in
current liabilities. The Company's cash position was increased during the three
months ended March 31, 1998 by increases in long-term debt of $121.0 which
includes $100 million from the issuance of the Notes and $21.0 million from
borrowings under the Credit Facility. Funds used in investing and financing
activities consisted of $39.5 million for investments in property and equipment
and principal payments of $99.0 million on long-term borrowing under the Credit
Facility. As a result of these activities, cash and cash equivalents decreased
$2.6 million from $4.7 million at December 31, 1997 to $2.1 million at March 31,
1998.
The Company's capital expenditure budget for 1998 of $100 million
includes $55 million and $45 million, respectively, for exploration and
development. 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 year.
No significant abandonment or dismantlement costs are anticipated through 1998.
Actual levels of capital expenditures may vary significantly due to a variety of
factors, including drilling results, natural gas 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
-14-
<PAGE> 15
inherently unpredictable. The Company expects to fund exploration and
development through a combination of cash flow from operations, borrowings under
its Credit Facility, or the issuance of equity or debt securities.
The Company has entered into the Credit Facility with a syndicate of
lenders led by Chase Bank of Texas, National Association ("Chase"), which
provides a maximum loan amount of $150 million, subject to borrowing base
limitations, on a revolving basis. The Credit Facility was amended in March of
1998 in connection with the Company's private placement of $100 million of
senior subordinated notes and had a borrowing base of $135 million as of March
31, 1998. At March 31, 1998, $35 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 Chase's prime rate or (ii) a fixed
rate ("Fixed Rate") equal to a quoted LIBOR rate plus a margin between 0.375%
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 contains covenants of the Company, including certain
restrictions on liens and financial covenants which require the Company to,
among other things, maintain (i) an interest coverage ratio of 2.5 to 1.0 of
earnings before interest, taxes and depreciation ("EBITDA") to cash interest 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 March 31, 1998 the
Company was in compliance with all Credit Facility covenants. The borrowing base
under the Credit Facility is determined by Chase in its discretion in accordance
with Chase's then current standards and practices for similar oil and gas loans
taking into account such factors as Chase deems appropriate.
On March 2, 1998, the Company issued $100 million of 8 5/8% Senior
Subordinated Notes (the "Notes") due January 1, 2008 in a private placement to
qualified institutional buyers. The Notes bear interest at 8 5/8% annum with
interest payable semi-annually on January 1 and July 1, commencing July 1, 1998.
The Notes are redeemable at the option of the Company, in whole or in part, at
anytime on or after January 1, 2003 at a price equal to 100% of the principal
amount plus accrued and unpaid interest, if any, plus a specified premium if the
Notes are redeemed prior to January 1, 2006. Notwithstanding the foregoing, any
time prior to January 1, 2001, the Company may redeem up to 35% of the original
aggregate principal amount of the Notes with the net proceeds of any equity
offering; provided that at least 65% of the original aggregate principal amount
of the Notes remains outstanding immediately after the occurrence of such
redemption. Upon the occurrence of a change of control (as defined), the Company
will be required to offer to purchase the Notes at a purchase price equal to
101% of the aggregate principal amount thereof, plus accrued and unpaid
interest, if any. The Notes are general unsecured obligations of the Company and
rank subordinate in right of payment to all existing and future senior debt,
including the Credit Facility, and will rank senior or pari passu in right of
payment to all existing and future subordinated indebtedness.
The Company utilizes derivative commodity instruments to hedge future
sales prices on 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. While the use of these hedging arrangements limits
the downside risk of adverse price movements, they may limit future revenues
from favorable price movements. The use of hedging transactions also involves
the risk that the counterparties will be unable to meet the financial terms of
such transactions. Hedging instruments used are swaps, collars and options, and
are generally placed with major financial institutions that the Company believes
are minimal credit risks. 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 the hedged production occurs. Neither the hedging
contracts nor the unrealized gains or losses on these contracts, if any, are
recognized in the consolidated financial statements.
-15-
<PAGE> 16
As of March 31, 1998, the Company had entered into commodity price
hedging contracts with respect to its gas production as listed below. All such
commodity price hedging contracts in effect as of such date were "collar"
transactions. Natural gas production during the month of March 1998 was 5,097
MMcf (5,236 MMMBtu).
<TABLE>
<CAPTION>
NYMEX
VOLUME CONTRACT PRICE
PERIOD (MMMBTU) FLOOR CEILING
- ---------- -------- -------- --------
<S> <C> <C> <C>
April 1998 900 $ 2.20 $ 2.58
May 1998 3,410 $ 2.26 $ 2.70
June 1998 3,300 $ 2.26 $ 2.70
July 1998 2,790 $ 2.25 $ 2.70
August 1998 2,790 $ 2.25 $ 2.70
September 1998 2,700 $ 2.25 $ 2.70
October 1998 930 $ 2.20 $ 2.50
</TABLE>
As of May 15, 1998, the Company had no commodity hedging contracts
extending beyond October 1998. The Company has entered into basis swaps with
respect to more than 50% of the indicated NYMEX hedged volume.
These hedging transactions are settled based upon the average of the reported
settlement prices on the New York Mercantile Exchange (the "NYMEX") for the last
three trading days of a particular contract month (the "settlement price"). With
respect to any particular swap transaction, the counterparty is required to make
a payment to the Company in the event that the settlement price for any
settlement period is less than the swap price for such transaction, and the
Company is required to make payment to the counterparty in the event that the
settlement price for any settlement period is greater than the swap price for
such transaction. For any particular collar transaction, the counterparty is
required to make a payment to the Company if the settlement price for any
settlement period is below the floor price for such transaction, and the Company
is required to make payment to the counterparty if the settlement price for any
settlement period is above the ceiling price for such transaction. For any
particular floor transaction, the counterparty is required to make a payment to
the Company if the settlement price for any settlement period is below the floor
price for such transaction. The Company is not required to make any payment in
connection with a floor transaction. For option contracts, the Company has the
option, but not the obligation, to buy contracts at the strike price up to the
day before the last trading day for that NYMEX contract.
The Company periodically enters into basis swaps (either as part of a
particular hedging transaction or separately) tied to a particular NYMEX-based
transaction to eliminate basis risk. Basis risk is the risk associated with the
sales point price for natural gas production varying from the reference (or
settlement) price for a particular hedging transaction. Because substantially
all of the Company's natural gas production is sold under spot contracts, that
have historically correlated with the swap price, the Company believes that it
has no material basis risk with respect to gas swaps that are not coupled with
basis swaps.
-16-
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
EXHIBITS DESCRIPTION
4.1 -- Indenture, dated as of March 2, 1998, between The Houston
Exploration Company and The Bank of New York, as Trustee, with
respect to the 85/8% Senior Subordinated Notes Due 2008
(including form of 85/8% Senior Subordinated Note Due 2008)
(incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-4 (No. 333-50235)).
4.2 -- Registration Rights Agreement, dated as of March 2, 1998,
among The Houston Exploration Company, as issuer, and
Donaldson, Lufkin & Jenrette Securities Corporation, Salomon
Brothers Inc, PaineWebber Incorporated, Chase Securities Inc.,
and Howard, Weil, Labouisse, Friedrichs Incorporated
(incorporated by reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-4 (No. 333-50235)).
* 10.1 -- Third Amendment to Credit Agreement among The Houston
Exploration Company and Chase Bank of Texas National
Association, dated February 12,1998.
* 27.1 -- Financial Data Schedule.
- ---------------------------
* Filed herewith.
(b) Reports on Form 8-K:
None
-17-
<PAGE> 18
SIGNATURES
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.
THE HOUSTON EXPLORATION COMPANY
By: /s/ James G. Floyd
-----------------------------------------
James G. Floyd
Date: May 15, 1998 President and Chief Executive Officer
By: /s/ James F. Westmoreland
-----------------------------------------
James F. Westmoreland
Date: May 15, 1998 Vice President, Chief Accounting Officer,
Comptroller and Secretary
-18-
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
<S> <C>
4.1 -- Indenture, dated as of March 2, 1998 between, The Houston
Exploration Company and The Bank of New York, as Trustee, with
respect to the 85/8% Senior Subordinated Notes Due 2008
(including form of 85/8% Senior Subordinated Note Due 2008)
(incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-4 (No. 333-50235)).
4.2 -- Registration Rights Agreement, dated as of March 2, 1998,
among The Houston Exploration Company, as issuer, and
Donaldson, Lufkin & Jenrette Securities Corporation, Salomon
Brothers Inc, PaineWebber Incorporated, Chase Securities Inc.,
and Howard, Weil, Labouisse, Friedrichs Incorporated
(incorporated by reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-4 (No. 333-50235)).
* 10.1 -- Third Amendment to Credit Agreement among The Houston
Exploration Company and Chase Bank of Texas National
Association, dated February 12,1998.
* 27.1 -- Financial Data Schedule.
</TABLE>
- ---------------------------
* Filed herewith.
<PAGE> 1
THIRD AMENDMENT TO
CREDIT AGREEMENT
THIS THIRD AMENDMENT TO CREDIT AGREEMENT (this "Amendment") dated as
of February 12, 1998, is entered into by and among THE HOUSTON EXPLORATION
COMPANY, a Delaware corporation (the "Company"); CHASE BANK OF TEXAS, N.A.
(formerly known as Texas Commerce Bank National Association), a national
banking association ("CBT"), with offices at 712 Main Street, Houston, Texas
77002, as Agent (CBT, 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 the Banks are parties to 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 further amended by Second Amendment to Credit Agreement dated
effective as of August 4, 1997, the "Credit Agreement") under the terms of
which the Banks 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. The Company, the Banks and the Agent hereby mutually desire to
amend and modify certain terms of the Credit Agreement to, among other things
(i) reduce the amount of the Borrowing Base and the Threshold Amount effective
upon the completion of the Company's initial issuance of the "Senior
Subordinated Notes" (hereinafter defined), and (ii) permit the Company's
issuance of the Senior Subordinated Notes.
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. 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.
Section 3. Additional Definition. Section 1.02 of the Credit
Agreement is hereby further amended and supplemented by adding thereto the
following new definitions, to read in their entirety as follows:
"Senior Subordinated Notes" shall mean those certain Senior
Subordinated Notes of the Company to be issued by the Company on terms
substantially similar
<PAGE> 2
to those set forth on Annex A attached to the Third Amendment, in the
aggregate principal amount not to exceed $150,000,000.
"Third Amendment" shall mean that certain Third Amendment to
Credit Agreement dated as of February __, 1998, among the Company, the
Agent and the Lenders party thereto.
Section 4. Borrowing Base; Threshold Amount. For the period from and
after the date of completion of the Company's initial issuance of the Senior
Subordinated Notes 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 $115,000,000.00, and the amount of the
Threshold Amount shall be $115,000,000.00.
Section 5. Debt. Section 9.01 of the Credit Agreement is hereby
amended as follows:
(a) by deleting the word "and" found at the end of clause
(h) of Section 9.01;
(b) by deleting the period (.) found at the end of clause
(i) of Section 9.01 and substituting therefor "; and "; and
(c) by adding thereto a new clause, to be clause (j), to
read in its entirety as follows:
"(j) Debt of the Company evidenced by the Senior
Subordinated Notes; provided, however, that (i) the aggregate
principal amount of the Senior Subordinated Notes shall not
exceed $150,000,000, (ii), payment of principal of, premium,
if any, and interest on the Senior Subordinated Notes shall be
subordinated to the payment of the Company's obligations under
this Agreement, the Notes, the Letters of Credit, the Letter
of Credit Agreements and any other Security Instruments on the
terms provided for in Annex A attached to the Third Amendment,
and (iii) the portion of the proceeds received by the Company
from the issuance of the Senior Subordinated Notes used by the
Company in connection with the proposed acquisition of oil and
gas properties announced by the Company on February 9, 1998,
shall not exceed $60,000,000, and the balance of all such
proceeds shall be used by the Company to prepay amounts
outstanding under this Agreement and the Notes."
Section 6. Acquisitions. The first paragraph of Section 9.11 of the
Credit Agreement is hereby amended in its entirety to read as follows:
"Section 9.11 Acquisitions. Make any Acquisition other than
an Acceptable Acquisition."
Section 7. Negative Pledge Agreements. Section 9.14 of the Credit
Agreement is hereby amended by inserting a comma (,) and the phrase "the Senior
Subordinated Notes and any indenture relating thereto" immediately following
the term "Security Instruments" found in the third line thereof.
-2-
<PAGE> 3
Section 8. 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) are hereby brought forward for the benefit
of the Banks and the Agent and (b) shall remain in full force and effect.
Section 9. 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 10. 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 11. Choice of Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of Texas.
Section 12. 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]
-3-
<PAGE> 4
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/ JAMES F. WESTMORELAND
-------------------------------------
James F. Westmoreland
Vice President
(Signature Page 1)
<PAGE> 5
AGENT AND BANKS:
CHASE BANK OF TEXAS, N.A. (formerly
known as 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
CIBC INC.
By: /s/ ALELESANDRA K. DYMERAUS
------------------------------------
Name: Alelesandra K. Dymeraus
----------------------------------
Title: Authorized Signatory
---------------------------------
(Signature Page 2)
<PAGE> 6
FIRST UNION NATIONAL BANK
By: /s/ DAVID ROBERTS
-------------------------------------
Name: David Roberts
Title: Senior Vice President
(Signature Page 3)
<PAGE> 7
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 4)
<PAGE> 8
PNC BANK, N.A.
By: /s/ JOHN WAY
----------------------------------
Name: John Way
Title: Commercial Banking Officer
(Signature Page 5)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE HOUSTON EXPLORATION COMPANY SET FORTH IN THE
COMPANY'S FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,138
<SECURITIES> 0
<RECEIVABLES> 33,489
<ALLOWANCES> 0
<INVENTORY> 1,303
<CURRENT-ASSETS> 37,788
<PP&E> 719,713
<DEPRECIATION> 255,743
<TOTAL-ASSETS> 505,443
<CURRENT-LIABILITIES> 27,589
<BONDS> 135,000
0
0
<COMMON> 239
<OTHER-SE> 269,507
<TOTAL-LIABILITY-AND-EQUITY> 505,443
<SALES> 32,884
<TOTAL-REVENUES> 33,084
<CGS> 0
<TOTAL-COSTS> 25,876
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 300
<INCOME-PRETAX> 6,908
<INCOME-TAX> 2,185
<INCOME-CONTINUING> 4,723
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 4,723
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</TABLE>
