<PAGE>
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to _______________________
Commission file number 0-22691
SHERIDAN ENERGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 76-0507664
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
1000 Louisiana, Suite 800
Houston, Texas 77002
(Address of principal executive offices) (Zip Code)
(713) 651-7899
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for 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 November 10, 1997 there were 4,281,471 outstanding shares of
Sheridan Energy, Inc. Common Stock, $.01 par value.
================================================================================
<PAGE>
SHERIDAN ENERGY, INC.
Report on Form 10-QSB For The Quarter Ended September 30, 1997
Index
<TABLE>
<CAPTION>
Page
<S> <C>
Part I. Financial Information
Item 1. Financial Statements (Unaudited) 1
Consolidated Balance Sheet -
September 30, 1997 and December 31, 1996 2
Consolidated Statement of Operations -
Three and Nine Month Periods Ended September 30, 1997 and 1996 3
Consolidated Statement of Cash Flows -
Nine Month Periods Ended September 30, 1997 and 1996 4
Notes to Consolidated Financial Statements (Unaudited) 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II. Other Information 14
</TABLE>
Forward-Looking Statements
Stockholders are cautioned that all forward-looking statements involve
risks and uncertainties, including without limitation, statements about the
costs of exploring and developing new oil and natural gas reserves, the price
for which such reserves can be sold, environmental concerns affecting the
drilling of oil and natural gas wells, pending litigation, and general market
conditions, competition and pricing. Although the Company believes that the
assumptions underlying the forward-looking statements contained herein are
reasonable, any of the assumptions could be inaccurate, and there can
therefore be no assurance that the forward-looking statements included in this
Form 10-QSB will prove accurate. Because of the significant uncertainties
inherent in the forward-looking statements contained in this Form 10-QSB, the
inclusion of such information should not be regarded as a representation by the
Company or any other person that the objectives and plans of the Company will be
achieved.
<PAGE>
Sheridan Energy, Inc.
Report on Form 10-QSB For the Quarter Ended September 30, 1997
Part I. Financial Information
Item 1. FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements of
Sheridan Energy, Inc., ("Sheridan"), and Sheridan's subsidiary (collectively
Sheridan and its subsidiary are herein called the "Company"), have been
prepared in accordance with Rule 310 of Regulation S-B, "Interim Financial
Statements", and accordingly do not include all information and notes required
under generally accepted accounting principles for complete financial
statements. Sheridan is the surviving entity resulting from the merger effective
June 12, 1997 (the "Merger") with its former parent company, TGX Corporation
("TGX"). The financial statements have been prepared in conformity with the
accounting principles and practices as disclosed in TGX's Annual Report on Form
10-KSB for the year ended December 31, 1996. These interim financial statements
reflect all adjustments (which were normal recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation of the Company's
financial position as of September 30, 1997 and the results of its operations
and cash flows for the nine month period ended September 30, 1997. Results of
operations for the nine month period ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997. It is recommended that these unaudited consolidated
financial statements be read in conjunction with the consolidated financial
statements and notes thereto included in the TGX's Annual Report on Form 10-KSB
for the year ended December 31, 1996.
Page 1
<PAGE>
SHERIDAN ENERGY, INC.
CONSOLIDATED BALANCE SHEET
(In thousands except for share data)
<TABLE>
<CAPTION>
September 30 December 31,
ASSETS 1997 1996
------ ------- --------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................................... $ 138 $ 1,924
Accounts receivable, net of allowance for doubtful accounts of $90 and $200,
respectively...................................................................... 1,436 1,291
Deferred tax asset.................................................................. 332 680
Other current assets................................................................ 202 117
------- --------
Total current assets........................................................ 2,108 4,012
------- --------
Property and equipment:
Oil and natural gas properties...................................................... 19,707 15,535
Other property and equipment........................................................ 262 204
Accumulated depletion, depreciation and amortization................................ (6,388) (5,103)
------- --------
Property and equipment, net................................................. 13,581 10,636
------- --------
Investment in Comite Field Plant Venture.................................................... 532 596
Deferred tax asset.......................................................................... 340 250
Other assets................................................................................ 64 53
------- --------
Total other assets.......................................................... 936 899
------- --------
TOTAL ASSETS................................................................................ $16,625 $ 15,547
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current liabilities:
Accounts payable and accrued liabilities-Note 4..................................... $ 2,839 $ 2,997
Note payable-Note 2................................................................. 63 --
------- --------
Total current liabilities................................................... 2,902 2,997
------- --------
Long-term debt-Note 2....................................................................... 2,200 1,500
------- --------
Total liabilities........................................................... 5,102 4,497
------- --------
Commitments and contingencies-Note 3
Redeemable Senior Preferred Stock, 8,788,571 shares outstanding; redemption $87,886-Note 5 -- 80,726
Stockholders' equity (deficit)-Note 5:
9% Cumulative Convertible Preferred stock, 300,000 shares issued plus 185,000 shares
to be issued for dividends........................................................ -- 485
Common stock, 4,281,471 and 24,955,807, respectively, shares outstanding............ 42 290
Additional paid-in capital.......................................................... 15,780 1,665
Accumulated deficit................................................................. (4,299) (72,116)
------- --------
Total stockholders' equity (deficit)........................................ 11,523 (69,676)
------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)........................................ $16,625 $ 15,547
======= ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
Page 2
<PAGE>
SHERIDAN ENERGY, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
(In thousands, except per share data) 1997 1996 1997 1996
- ------------------------------------------------------------------ ---------- -------------- ------------ -------------
<S> <C> <C> <C> <C>
REVENUES
Oil and natural gas sales..................................... $1,567 $ 1,146 $ 4,765 $ 3,473
Natural gas gathering......................................... 63 65 171 173
Equity earnings in Comite Field Plant Venture................. 135 130 337 439
Gain on property sales........................................ 5 - 51 145
---------- -------------- ------------ -------------
1,770 1,341 5,324 4,230
---------- -------------- ------------ -------------
COSTS AND EXPENSES
Operating expenses............................................ 464 295 1,262 950
Treating and transportation expense........................... 151 189 432 617
Depletion, depreciation and amortization...................... 500 268 1,291 729
General and administrative expenses........................... 467 547 1,496 1,800
Exploration costs............................................. 72 - 85 -
---------- -------------- ------------ -------------
1,654 1,299 4,566 4,096
---------- -------------- ------------ -------------
OPERATING INCOME 116 42 758 134
---------- -------------- ------------ -------------
OTHER INCOME (EXPENSE)
Litigation settlement gain, net - Note 2..................... - - - 7,100
Other income (loss)........................................... (1) 176 124 233
Interest expense.............................................. (54) (24) (128) (211)
---------- -------------- ------------ -------------
(55) 152 (4) 7,122
---------- -------------- ------------ -------------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY GAIN 61 194 754 7,256
---------- -------------- ------------ -------------
Income tax expense - Note 6:
Current....................................................... 5 - 15 127
Deferred...................................................... - - 250 -
---------- -------------- ------------ -------------
5 - 265 127
---------- -------------- ------------ -------------
INCOME BEFORE EXTRAORDINARY GAIN 56 194 489 7,129
---------- -------------- ------------ -------------
Extraordinary gain, net of income taxes of $37 - Note 2......... - - - 1,831
---------- -------------- ------------ -------------
NET INCOME...................................................... 56 194 489 8,960
Preferred stock dividends - Note 5.............................. - (3,308) (5,841) (9,835)
Accretion of Senior Preferred redemption value - Note 5......... - (1,576) (3,205) (4,441)
---------- -------------- ------------ -------------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK.................... $ 56 $ (4,690) $(8,557) $ (5,316)
========== ============== ============ =============
NET INCOME (LOSS) PER SHARE OF COMMON STOCK (Note 7):
Before extraordinary gain............................. $0.01 $ (1.07) $(2.00) $ (1.62)
Extraordinary gain.................................... - - - 0.41
---------- -------------- ------------ -------------
NET INCOME (LOSS) PER SHARE..................................... $0.01 $ (1.07) $(2.00) $ (1.21)
========== ============== ============ =============
AVERAGE COMMON SHARES OUTSTANDING............................... 4,281 4,394 4,281 4,394
========== ============== ============ =============
</TABLE>
See accompanying notes to unaudited consolidated financial statements
Page 3
<PAGE>
SHERIDAN ENERGY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
(In thousands) 1997 1996
- --------------------------------------------------------------- ------------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................... $ 489 $ 8,960
Adjustments to reconcile net income to cash provided by
operating activities:
Depletion, depreciation and amortization................... 1,291 729
Amortization of debt transaction costs and stock
compensation.............................................. 1 44
Distribution in excess of equity earnings.................. 64 46
Gain on property sales..................................... (51) (145)
Recovery of accounts receivable loss provisions............ 80 -
Interest to be paid through issuance of additional notes... - 133
Extraordinary gain......................................... - (1,868)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable............... (225) 136
Decrease in accounts receivable from affiliates.......... - 6
Decrease in deferred tax asset........................... 348 -
Increase in other current assets......................... (85) (173)
Increase in accounts payable and accrued liabilities..... (158) (374)
Deferred tax asset (Increase).............................. (90) -
------------- -----------
Net cash provided by operating activities.................. 1,664 7,494
------------- -----------
Cash flows from investing activities:
Capital expenditures......................................... (4,257) (810)
Proceeds from disposal of assets............................. 272 145
Increase in other assets..................................... - (24)
------------- -----------
Net cash used by investing activities........................ (3,985) (689)
------------- -----------
Cash flows from financing activities:
Principal payments on long-term debt and note payable........ 4,362 400
Advances pursuant to revolving credit facility and note
payable..................................................... (3,798) (4,500)
Debt transaction costs and other............................. (29) -
------------- -----------
Net cash provided (used) by financing activities............. 535 (4,100)
------------- -----------
Net increase (decrease) in cash and cash equivalents........... (1,786) 2,705
Cash and cash equivalents at beginning of period............... 1,924 384
------------- -----------
Cash and cash equivalents at end of period..................... $ 138 $ 3,089
============= ===========
Supplemental Disclosure of Non-Cash Financing Activities:
Forgiveness of long term debt and notes payable, net of
taxes of $37................................................ $ - $ 1,831
Interest to be paid through the issuance of additional notes. - 133
</TABLE>
See accompanying notes to unaudited consolidated financial statements
Page 4
<PAGE>
SHERIDAN ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
Sheridan Energy, Inc. ("Sheridan"), is the surviving entity resulting from
the merger (the "Merger") effective June 12, 1997 ("Effective Date") with its
former parent company, TGX Corporation ("TGX"). Sheridan and its subsidiary
(collectively Sheridan and its subsidiary are herein called the "Company") is a
domestic independent energy company engaged in the production of oil and natural
gas. The Company is also engaged in intrastate natural gas gathering and
treating.
Pursuant to the Merger, holders' of TGX's Series A Redeemable Senior
Preferred Stock ("Senior Preferred Stock") received .5 shares of Sheridan common
stock ("Sheridan Common Stock") for each share of Senior Preferred Stock
resulting in the issuance of 4,281,471 shares of Sheridan Common Stock. The TGX
9% Cumulative Convertible Preferred Stock ("Old Preferred Stock') and TGX Common
Stock ("TGX Common Stock") (collectively "TGX Stock") were eliminated pursuant
to the Merger. Pursuant to the Merger, certain adjustments were made to
stockholders' equity on an historic cost basis to reflect the cancellation of
the TGX Stock and Senior Preferred Stock and issuance of Sheridan Common Stock.
All Senior Preferred Stock and Old Preferred Stock and associated dividends and
accretion were eliminated as of the Effective Date of the Merger; however, all
pre-Effective Date dividend and accretion charges are reflected in the
historical results applicable to common shares. The Sheridan asset and
liability accounts continue to reflect TGX's historic values at the time of the
Merger, including any impact related to TGX's October 2, 1992 fresh start
reporting reorganization values. All pre-Effective Date income statement
activity is also reflected on an historic basis as Sheridan activity.
2. LONG-TERM DEBT AND NOTE PAYABLE
As of September 30, 1997 and December 31, 1996, the components of long-term
debt were:
<TABLE>
<CAPTION>
September 30, December 31,
(Thousands of dollars) 1997 1996
- ------------------------------------------------ -------------------- -----------------
Bank borrowings:
<S> <C> <C>
Revolving credit (secured) $2,200 $1,500
Less current maturities - -
-------------------- -----------------
Long-term debt $2,200 $1,500
==================== =================
</TABLE>
On July 13, 1994, the Company entered into a series of agreements with Bank
One, Texas N.A. ("Bank One") whereby the Company's then outstanding secured debt
with the Bank of Montreal ("BMO") was restructured and all existing BMO events
of default were resolved. The Bank One facility is secured by substantially all
of the Company's oil and gas properties. Effective September 30, 1997, the Bank
One facility borrowing base was $12,000,000 and the Company's interest rate was
lowered resulting in a current rate of Bank One's stated rate, which was 8.5% at
current quarter end, plus .25%. The borrowing base is reduced monthly by
$175,000 and approximately $3,855,000 of the borrowing base is committed to
current development of the Company's Dorcheat Field in Columbia County, Arkansas
and acquisition activity. The borrowing base is redetermined every six months or
at Bank One's discretion and the loan matures on June 30, 1999.
The Company has outstanding an unsecured note payable of $63,000 to a third
party related to financing of certain insurance premiums. The note bears
interest at 8.31% commencing July 1, 1997, and is payable in nine equal monthly
installments, plus interest.
Page 5
<PAGE>
On April 12, 1996, TGX entered into a Settlement Agreement with NFG
and the Public Service Commission of the State of New York. Pursuant to the
Settlement Agreement, TGX received $7,200,000 from NFG and all parties to the
Settlement Agreement dismissed all claims and counterclaims against each other.
As a result of the NFG gross settlement proceeds and payment of $100,000 to
another party entitled to participate in the proceeds, TGX recorded a net
litigation settlement gain of $7,100,000. Pursuant to amended credit agreements
with BMOF, 50% of the gross settlement proceeds were paid to BMOF in
cancellation and full payment of the non-recourse secured note totaling
$5,468,000, including accrued interest of $816,000. TGX recorded an
extraordinary gain for debt forgiveness of $1,831,000, net of income taxes of
$37,000, in conjunction with the $3,600,000 BMOF final payment.
Cash paid for interest during the first nine months of 1997 and 1996
totaled approximately $112,000 and $53,000, respectively.
3. COMMITMENTS AND CONTINGENCIES
Litigation
- ----------
In July, 1992, certain unleased mineral interest owners commenced a
legal action in the 19th Judicial District Court for East Baton Rouge Parish,
Louisiana, (Case No. 383844, Division"A") against Sheridan's predecessor, TGX,
as operator of three wells. The petition alleges that the unleased owners are
entitled to a refund of revenues paid to TGX and other working interest owners,
since first production, which are attributable to the unleased owners
proportionate unit interest and which were utilized to offset the Plaintiff's
proportionate share of costs associated with drilling the wells. The court
entered a judgment against Sheridan for an amount to be determined at a later
time. Sheridan has asked the court to reconsider the ruling. If the court does
not reverse its ruling, Sheridan intends to appeal. Sheridan has also argued
that any claim which arose prior to the date of the entry of the order
confirming TGX's Chapter 11 plan of reorganization has been discharged through
bankruptcy. TGX filed a lawsuit in the U.S. Bankruptcy Court for the Western
District of Louisiana (Case No. 96AP-1047) claiming such a defense, however the
bankruptcy court rejected that defense and that ruling is also on appeal.
Sheridan plans on continuing to vigorously defend against this action, but is
unable to predict the final outcome.
In July, 1995, certain royalty owners in the same wells commenced a
separate legal action alleging that TGX and other working interest owners
improperly profited under the terms of a gas gathering and transportation
agreement. In 1996, the court entered an order granting TGX's motion for a
partial summary judgment, holding that all of the royalty owners' claims
preceding the filing of the suit by more than three years were time barred.
Sheridan has asked the court to dismiss the remaining claims asserted by the
royalty owners. If not dismissed, Sheridan will vigorously defend against
this lawsuit. Because this case is in the early stages of discovery, Sheridan
is unable to predict the outcome of this action.
In December, 1996, Tomcat Exploration, Inc. and others brought suit
against Sheridan in the 215th District Court of Harris County, Texas (Cause No.
96-61561) alleging that Sheridan's operation of the Sinclair No. 1 well was
negligent and, as a result, caused damage and loss to the Plaintiffs. The suit
alleges, among other things, that Sheridan negligently ceased to properly treat
the corrosive environment surrounding the tubing in the well, resulting in the
well ceasing production and causing their loss. Sheridan has responded by
claiming, among other things, that its activities did not cause the loss, that
even if there was any such loss, Plaintiffs were aware of the state of the well
prior to their acquisition of their interest in the well and, Plaintiffs'
workover operation on the well, after their acquisition of their interest,
caused the well to cease producing. Extensive pre-trial production and
depositions have been taken, and the trial is scheduled to commence during the
first quarter of 1998.
Page 6
<PAGE>
Sheridan intends to vigorously defend against the Plaintiffs' claims but can
make no prediction as to the outcome of such litigation. Plaintiffs are seeking
damages in excess of $10 million.
From time to time, in the normal course of business, the Company is
party to various other litigation matters the outcome of which, to the extent
not otherwise provided for, should not have a material adverse effect on the
Company.
4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
As of September 30, 1997 and December 31, 1996, the primary components
of accounts payable and accrued liabilities were:
<TABLE>
<CAPTION>
(In thousands) 1997 1996
- ------------------------------------------------------ ---------- ----------
<S> <C> <C>
Accounts payable $ 406 $ 360
Undistributed net oil and natural gas revenue 1,214 1,281
Accrued capital, operating and production tax expenses 826 354
Accrued professional fees 158 347
Income tax liability 4 180
Operation advances - 115
Miscellaneous accruals 231 360
---------- ----------
$2,839 $2,997
========== ==========
</TABLE>
5. SENIOR PREFERRED AND STOCKHOLDERS' EQUITY (DEFICIT)
Pursuant to the Merger, holders' of Senior Preferred Stock received .5
shares of Sheridan Common Stock for each share of Senior Preferred Stock
resulting in the issuance of 4,281,471 shares of Sheridan Common Stock and the
Old Preferred Stock and TGX Common Stock were eliminated. As a result of the
Merger, certain adjustments were made to stockholders' equity, on an historic
cost basis, to reflect the cancellation of the TGX Stock and Senior Preferred
Stock and issuance of Sheridan Common Stock. All Senior Preferred Stock and Old
Preferred Stock dividends and accretion were also eliminated as of the Effective
Date of the Merger.
Since December 31, 1996 the components of the number of shares of
Senior Preferred Stock and changes in associated values are as follows (in
thousands):
<TABLE>
<CAPTION>
Number Recorded
of Shares Value
------------ --------------
<S> <C> <C>
Balance, December 31, 1996................................... 8,788 $ 80,726
Shares canceled pursuant to management option agreements..... (110) (15)
Shares canceled.............................................. (116) -
Accrued and unpaid dividends................................. - 5,721
Accretion of redemption value and dividends.................. - 3,205
Cancellation of stock due to Merger.......................... (8,562) (89,637)
------ --------
Balance, September 30, 1997................................. - $ -
====== ========
</TABLE>
Page 7
<PAGE>
The following table reflects the components and changes since December 31,
1996 to the number of shares of stock outstanding (in thousands):
<TABLE>
<CAPTION>
Old TGX Sheridan
Preferred Common Common
Stock Stock Stock
-------------- ------------- -----------
<S> <C> <C> <C>
Balance, December 31, 1996............................. 485 24,956 -
Dividends on Old Preferred Stock......................... 12 - -
Cancellation of stock due to Merger...................... (497) (24,956) -
Issuance of common stock due to Merger................... - - 4,281
---- ------- -----
Balance, September 30, 1997.............................. - - 4,281
==== ======= =====
</TABLE>
The following table reflects the components and changes since December
31, 1996 to the Company's equity (deficit) and associated values (in thousands):
<TABLE>
<CAPTION>
Old TGX Sheridan Additional
Preferred Common Common Paid-In Accumulated
Stock Stock Stock Capital Deficit
----------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996............. $ 485 $ 290 $ - $ 1,665 $(72,116)
Preferred dividends payable with
additional shares of Old Preferred
Stock................................. 12 - - 108 (120)
Dividends on Senior Preferred Stock.... - - - - (5,721)
Accretion of Senior Preferred
redemption value...................... - - - - (3,205)
Net income............................. - - - - 489
Cancellation of stocks due to Merger... (497) (290) - 14,050 76,374
Issuance of Sheridan Common Stock...... - - 43 (43) -
Cancellation of Sheridan Common Stock.. - - (1) - -
------------ ------------- -------------- ------------ -------------
Balance, September 30, 1997............ $ - $ - $42 $15,780 $ (4,299)
============ ============= ============== ============ =============
</TABLE>
6. INCOME TAXES
The Company follows Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes", which requires recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference, if any, between the financial reporting and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
The Company's current income tax expense for 1997 and 1996 of $15,000
and $127,000, respectively, consists solely of alternative minimum tax. In
1996, the Company recognized a deferred tax asset of $930,000 based on income
projections for 1997 and 1998 and the Company's expected statutory tax rate of
34%. As a result of changes in oil and gas prices and the results of actual
operations, the Company's income tax expense for the nine months ending
September 30, 1997 of $250,000 represents deferred income tax expense, based
on the statutory rate of 34%, of $256,000 attributable to current operations,
less a decrease in the valuation allowance ascribed to the deferred tax asset of
approximately $6,000. The valuation adjustment is based on the Company's
continuing reassessment of the value of the deferred tax asset determined, in
part, on expected income for the prospective two year period. Further, as part
of its reassessment process, the Company reclassified a portion ($90,000) of
the deferred tax asset from current to long-term.
Page 8
<PAGE>
7. EARNINGS PER SHARE
All prior period per share data and amounts have been restated to
reflect issuance of Sheridan Common Stock on a retroactive basis. All preferred
stock dividends and accretion were eliminated as of the Effective Date of the
Merger; however, all pre-Effective Date dividend and accretion charges are
reflected in the historical earnings results applicable to common shares.
The following table reflects pro forma earnings per share of common
stock as if the Merger had been effective as of January 1, 1996 and all
dividends and accretion charges had been eliminated as of such date:
<TABLE>
<CAPTION>
Nine Months
Three Months Ended
Ended September 30, September 30,
1997 1996 1997 1996
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Before extraordinary gain......................... $0.01 $0.04 $0.11 $1.62
Extraordinary gain................................ - - - .41
----------- ----------- ----------- ------------
Pro forma net income per share.................... $0.01 $0.04 $0.11 $2.03
=========== =========== =========== ============
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
- -------
The following discussion provides information which management
believes is relevant to an understanding and assessment of the Company's results
of operations and financial condition, and those presently known events, trends
or uncertainties that are reasonably likely to have a material impact on the
Company's future results of operations or financial condition or that are
reasonably likely to cause the historical financial statements not to be
necessarily indicative of future operating results or financial condition. It
should be read in conjunction with the unaudited consolidated financial
statements and related notes appearing elsewhere herein. As a result of the
Merger, the results of operations and financial condition discussions below
includes pre- Effective Date historical results of TGX as Sheridan activity.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1997 ("1997") and September 30, 1996 ("1996")
Revenues
- ---------
Revenues from oil and natural gas sales for the current quarter of
1997 increased $421,000 or 37% over 1996 comparable revenues. The increase in
quarterly revenues was due primarily to an increase in oil and natural gas
volumes sold. On an equivalent unit basis (one barrel of oil equals six Mcf of
natural gas on a heating value basis ("Mcfe"), sales volumes increased 36%
primarily due to the Company's acquisition and drilling program activity. The
increase in volumes sold resulted in $401,000 of additional revenues with the
remaining increase attributable to product price changes. A summary of oil and
natural gas sales revenues and volumes for the respective three month periods
follows with natural gas prices being reflected on a thousand cubic feet ("Mcf")
and volumes on a thousand Mcf ("Mmcf") basis.
Page 9
<PAGE>
Summary of Volumes Sold and Revenues
<TABLE>
<CAPTION>
Three Months Ended September 30,
1997 1996 Change
--------------- -------------- ----------
<S> <C> <C> <C>
Oil revenues (in thousands)............................... $ 441 $ 386 14%
Oil sales volume (barrels)................................ 23,500 18,600 26%
Oil average sales price per barrel........................ $ 18.77 $ 20.75 (10)%
Natural gas revenues (in thousands)....................... $ 1,126 $ 760 48%
Natural gas sales volume (Mmcf)........................... 517 371 39%
Natural gas average sales price per Mcf................... $ 2.18 $ 2.05 6%
</TABLE>
Costs and Expenses
- ------------------
For the third quarter of 1997, operating expenses, which is comprised
of workover costs, severance taxes and through wellhead production costs
(lifting costs), increased $169,000 or 57%. Excluding workover costs and
severance taxes, 1997 and 1996 quarterly operating expenses totaled $390,000 and
$184,000, respectively, for production costs through the wellhead. Operating
expenses for the current quarter increased due to higher production volumes and
discretionary repair costs related to recent well acquisitions. Production costs
per Mcfe for the 1997 three month period were $0.59 as compared to $0.38 for
1996.
Treating and transportation quarterly expenses decreased by $38,000 or
20% in 1997. These costs represent post wellhead expenditures primarily
associated to the Company's Comite field production and are incurred to treat
Company gas to comply with pipeline specifications or to transport the gas to
market. The expense decrease is the result of anticipated production declines in
the Comite field and this trend should continue into the future in this mature
field.
Depletion, depreciation, and amortization ("DD&A") expense in 1997
increased $232,000 or 87% due to an increase in the weighted average DD&A rate
per Mcfe and higher sales volumes. The weighted average quarterly DD&A rate for
the current quarter of 1997 increased 37% to $0.76 per Mcfe as compared to
1996's comparable rate of $0.56. The remaining increase in quarterly DD&A
expense for 1997 is the result of an increase in Mcfe sold of approximately 36%.
General and administrative expenses for the current quarter decreased
by $80,000 or 15% from the comparable 1996 period. The decrease in expense is
the result of lower equity recapitalization costs which were partially offset by
higher professional and consulting fees.
Pursuant to successful efforts accounting, unsuccessful exploration
costs are expensed as opposed to capitalized. Exploration costs for 1997 totaled
$72,000 and represent costs incurred related to two current quarter unsuccessful
wells.
Dividends and Accretion on Preferred Stock
- ------------------------------------------
Effective with the Merger, all dividend and accretion obligations were
eliminated; however, all pre- Effective Date dividend and accretion charges
continue to be reflected in the 1996 historical results.
Page 10
<PAGE>
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1997 ("1997") and September 30, 1996 ("1996")
Revenues
- --------
Revenues from oil and natural gas sales for the first nine months of 1997
increased $1,292,000 or 37% over 1996 comparable revenues. Of the increase in
1997 revenues, $899,000 or 70% was due to an increase in oil and gas volumes
sold of 13% and 32%, respectively. A summary of oil and natural gas sales
revenues and volumes for the respective nine month periods follows with natural
gas prices being reflected on an Mcf basis and volumes on an Mmcf basis.
Summary of Volumes Sold and Revenues
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1997 1996 Change
------------------ ----------------- ----------
<S> <C> <C> <C>
Oil revenues (in thousands)....................... $ 1,228 $ 1,112 10%
Oil sales volume (barrels)........................ 62,300 54,900 13%
Oil average sales price per barrel................ $ 19.71 $ 20.26 (3)%
Natural gas revenues (in thousands)............... $3,537 $2,361 50%
Natural gas sales volume (Mmcf)................... 1,511 1,147 32%
Natural gas average sales price per Mcf........... $ 2.34 $ 2.06 14%
</TABLE>
Natural gas represented 80% of the Company's 1997 Mcfe sales volumes and 74%
of total oil and natural gas revenues. Due to the Company's production being
heavily weighted toward gas, its revenues and cash flow are significantly
influenced by changes in gas prices. During 1997, average gas prices increased
to $2.34 or $0.28 per Mcf from the 1996 average price of $2.06. Changes in oil
and natural gas prices contributed to an increase in 1997 revenues of $393,000
or 30% of the current period revenue increase. Since current quarter end, gas
prices have continued to increase in anticipation of the winter heating season
while oil prices have stayed relatively flat.
Natural gas gathering revenues were flat as compared to 1996, while equity
earnings in the Comite Field Plant Venture treating plant decreased by $102,000
or 23%. The decrease in treating plant earnings is attributed to continued
Comite field production declines and 1996 benefiting from the recoupment of
approximately $78,000 of previously deferred treating fees pursuant to an
agreement. As a result of recent third party exploration activity in close
proximity to both the treating plant and gathering system, an additional well
was connected, in December 1996, to this facility with prospects of one
additional well being added early 1998. Though new wells treating and gathering
rates per Mcf are lower than current well agreements, the addition of new wells
should partially offset the continued decrease in revenues resulting from
production decline on the two older existing contracted wells.
Gain on property sales for 1997 and 1996 of $51,000 and $145,000,
respectively, represent primarily the sale of the Company's interest in
marginal producing wells. Sales of these wells resulted in actual proceeds from
disposal of assets for 1997 and 1996 of $272,000 and $145,000, respectively.
Page 11
<PAGE>
Costs and Expenses
- ------------------
For 1997, operating expenses, which is comprised of workover costs, severance
taxes and through wellhead production costs (lifting costs), increased $312,000
or 33%. Workover costs for 1997 and 1996 totaled $104,000 and $193,000,
respectively, and primarily represent discretionary well production activities
that are implemented to enhance or increase production. Severance taxes for
1997 and 1996 were $200,000 and $171,000, respectively. The increase in
severance taxes is related to increased oil and natural gas revenues due to
higher prices and increased sales volumes.
Excluding workover costs and severance taxes, 1997 and 1996 operating expenses
totaled $958,000 and $586,000, respectively, for production costs through the
wellhead. Operating expenses for 1997 increased due to higher production
volumes resulting from 1997 drilling and acquisition activity and one-time
expenses of approximately $69,000 related to flood damage at the Company's
Dorcheat field and other field clean-up charges. Production costs per Mcfe for
1997, excluding the one-time charges, were $0.47 as compared to $0.40 for 1996.
Treating and transportation expenses decreased by $185,000 or 30% in 1997.
These costs represent post wellhead expenditures primarily associated to the
Company's Comite field production and are incurred to treat Company gas to
comply with pipeline specifications or to transport the gas to market. The 1997
decrease is primarily due to 1996 including approximately $78,000 of previously
deferred treating fees pursuant to an agreement and anticipated Comite field gas
production declines.
Depletion, depreciation, and amortization ("DD&A") expense in 1997 increased
$562,000 or 77% due to an increase in the weighted average DD&A rate per Mcfe
and higher sales volumes. The weighted average DD&A rate for 1997 increased 39%
to $0.68 per Mcfe as compared to 1996's rate of $0.49. The remaining increase
in DD&A expense for 1997 is the result of an increase in Mcfe sold of
approximately 28%.
General and administrative expenses in 1997 decreased by $304,000 or 17% from
1996. General and administrative expenses for 1997 include a net charge of
$186,000 resulting from a settlement payment, pursuant to an agreement, to the
former chief executive officer while benefitting from the collection of $75,000
of previously allowed for doubtful accounts receivable. Excluding the net
officer settlement expense and doubtful accounts collection, 1997 general and
administrative expenses, as compared to 1996, decreased $415,000 due primarily
to lower legal costs and higher direct costs attributed to capital activity.
Pursuant to successful efforts accounting, unsuccessful exploration costs are
expensed as opposed to capitalized. Exploration costs for 1997 totaled $85,000
and represent two unsuccessful 1997 wells and additional costs incurred related
to unsuccessful 1996 exploration activities of $13,000.
Other Income (Expense)
- ----------------------
On April 12, 1996, TGX entered into a Settlement Agreement with NFG and the
Public Service Commission of the State of New York. Pursuant to the Settlement
Agreement, TGX received $7,200,000 from NFG and all parties to the Settlement
Agreement dismissed all claims and counterclaims against each other. As a
result of the NFG gross settlement proceeds and payment of $100,000 to another
party entitled to participate in the proceeds, TGX recorded a net litigation
settlement gain of $7,100,000. Pursuant to amended credit agreements with BMOF,
50% of the gross settlement proceeds were paid to BMOF in cancellation and full
payment of the non-recourse secured note totaling $5,468,000, including accrued
interest of $816,000. TGX recorded an extraordinary gain for debt forgiveness
of $1,831,000, net of income taxes of $37,000, in conjunction with the
$3,600,000 BMOF final payment.
Page 12
<PAGE>
Other income for 1997 of $124,000 consists of interest income of $25,000, the
sale of the Company's option to purchase a pipeline in Arkansas to a third party
for $50,000 and other miscellaneous revenues. Other revenues for 1996 consisted
of interest income of $101,000, take or pay settlement income of $100,000 and
other miscellaneous revenues.
Interest expense for 1997 decreased $83,000 or 39% due to 1996 including
accrued interest of $133,000 pursuant to the nonrecourse BMOF note. The accrued
BMOF note interest was payable in kind through issuance of additional notes. In
conjunction with the April 1996 NFG Litigation settlement, BMOF was paid 50% of
the settlement proceeds, pursuant to the amended credit agreement, in
cancellation and full payment of the non-recourse secured note. In conjunction
with the BMOF note settlement, the Company recognized an extraordinary gain from
debt forgiveness, including accrued interest.
Income Tax Expense
- ------------------
Due to tax loss carryforwards, the Company currently pays only federal
alternative minimum income taxes and recognized current tax expense in 1997 and
1996, of $15,000 and $127,000, respectively. In 1996, the Company recognized
a deferred tax asset of $930,000 based on then income projections for 1997 and
1998. As a result of changes in oil and gas prices and actual operations, the
Company recognized in 1997 $250,000 of deferred income tax expense of which
$256,000 was attributed to current operations less a decrease in the deferred
tax valuation allowance of approximately $6,000. The valuation adjustment is
based on the Company's continuing reassessment of the value of the deferred tax
asset determined, in part, on expected income for the prospective two year
period.
Dividends and Accretion Preferred Stock
- ---------------------------------------
Pursuant to the terms of the TGX bankruptcy plan, dividends for the Senior
Preferred stock were calculated at 10%, compounded annually and resulted in
accrued, but unpaid, dividends expense for 1997 and 1996 of $5,721,000 and
$9,633,000, respectively. Dividends on the Old Preferred Stock for 1997 and
1996 were $120,000 and $202,000, respectively. The accretion of the Senior
Preferred redemption value, also a non-cash item, was calculated based on the
interest method. Effective with the Merger, all dividend and accretion
obligations were eliminated; however, all pre- Effective Date dividend and
accretion charges continue to be reflected in the historical results.
FINANCIAL CONDITION
For the first nine months of 1997, the Company's capital expenditures totaled
$4,257,000, an increase of $3,447,000 from 1996 activity. Of the 1997
expenditures, $2,086,000 or 49% was related to producing well acquisition
activity. The Company also incurred 1997 workover costs of $104,000.
At September 30, 1997, the Company had negative working capital of $794,000
resulting primarily from an increase in accrued capital and operating costs of
$549,000 from year end 1996. The accrued capital and operating cost increase
is due to higher 1997 drilling and acquisition activity which has been funded by
current operations and an increase in long-term debt borrowings under the
existing Bank One credit facility. Effective September 30, 1997, the borrowing
base under the Bank One facility was increased to $12,000,000 of which
approximately $3,855,000 is committed to projected Comite field development and
related acquisition activity. The borrowing base is reduced monthly by $175,000
per month and is redetermined on a semi-annual basis or at Bank One's
discretion. The credit facility is secured by substantially all of the
Company's assets and includes certain financial ratio and default covenants and
is to mature on June 30, 1999.
Page 13
<PAGE>
The Company, prior to the Merger, had certain dividend and redemption
obligations related to the Senior Preferred shares. For financial reporting
purposes, the Senior Preferred shares had both debt and equity characteristics
and, accordingly, was not classified as a component of stockholders' equity.
Effective with the Merger, all preferred Stock dividend and accretion accruals
and associated amounts were eliminated and the associated adjustments to reflect
the Merger resulted in a stockholders' equity balance of $11,523,000 as of
September 30, 1997 as compared to a deficit of $69,676,000 as of December 31,
1996.
LIQUIDITY AND CAPITAL RESOURCES
For the first nine months of 1997, the Company's cash provided by
operating activities was $1,794,000 which was used primarily to fund the
Company's acquisition and drilling activities. Cash provided by operating
activities for 1997 was reduced by the net settlement cost incurred of $186,000
related to the resignation of the former chief executive officer. Also, included
in cash provided by operating activities is approximately $401,000 of proceeds
received from the Company's 35% equity investment in the Comite Field Plant
Venture.
At the end of the third quarter of 1997, the Company had outstanding
debt of $2,200,000 and letters of credit commitments outstanding of $104,000
resulting in available borrowing capacity of $9,696,000 under its bank credit
facility of which $3,855,000 is committed to current Comite field development
and acquisition activity.
The Company anticipates that continued development drilling and
workovers will maintain or increase current production volumes. In addition, the
Company is continually evaluating opportunities for acquisition of producing
properties and currently intends to pursue future production volume and reserve
base growth through acquisitions. Additional acquisitions, depending on size,
may be financed through a combination of working capital, bank borrowings,
mezzanine financing, production payments and equity. Effective implementation of
the Company's development and acquisition plans is expected to meet the
Company's long-term operation and liquidity requirements. However, there can be
no assurance that the Company will be successful in such endeavors.
Inflation and Changes in Prices. The Company's revenues have been and
will continue to be affected by changes in oil and natural gas prices which have
been unstable. For management purposes, the Company assumes that oil and natural
gas prices will escalate at 5% per annum and that costs and expenses will
escalate at 4% per annum. The principal effects of inflation on the Company
relate to the costs required to drill, complete and operate oil and natural gas
properties. Drilling costs, which had been on a general downward trend since the
early 1980's have recently been increasing due primarily to an industry wide
increase in drilling activity. The increases in drilling costs are not
anticipated to significantly impact Company current operations.
Part II. Other Information
Item 1. LEGAL PROCEEDINGS
Except as set forth in Note 3 of the Notes to Consolidated Financial
Statements Unaudited included in Part I hereof, since the filing date of the
Annual Report on Form 10-KSB, there have been no substantial developments
related to the legal proceedings described therein .
Item 2. DEFAULTS UPON SENIOR SECURITIES
Prior to the Merger, dividends for the Senior Preferred Stock began
accruing on the effective date of the TGX bankruptcy plan, however, as of the
Effective Date of the Merger, no dividends had been declared.
Page 14
<PAGE>
The Senior Preferred Stock was to receive a 10% annual compounded cash dividend,
payable quarterly, provided however, that the payment of such dividends did not
violate (i) Delaware Law which prohibits the payment of dividends when such
payment would impair the capital of the Company or (ii) certain covenants in the
Company's Credit Agreement with Bank One, Texas N.A. Effective with the Merger,
all Senior Preferred Stock was exchanged for Sheridan Common Stock and all
dividends eliminated.
Item 3. Submission of Matters to a Vote of Security Holders
None.
Item 4. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K:
None.
Page 15
<PAGE>
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.
SHERIDAN ENERGY, INC.
(Registrant)
Date: November 14, 1997 By: /s/ Michael A. Gerlich
--------------------------------
Michael A. Gerlich
Vice President and
Chief Financial Officer
Page 16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 138
<SECURITIES> 0
<RECEIVABLES> 1,526
<ALLOWANCES> 90
<INVENTORY> 0
<CURRENT-ASSETS> 2,108
<PP&E> 19,969
<DEPRECIATION> 6,388
<TOTAL-ASSETS> 16,625
<CURRENT-LIABILITIES> 2,902
<BONDS> 0
0
0
<COMMON> 42
<OTHER-SE> 11,481
<TOTAL-LIABILITY-AND-EQUITY> 16,625
<SALES> 4,765
<TOTAL-REVENUES> 5,324
<CGS> 1,694
<TOTAL-COSTS> 1,694
<OTHER-EXPENSES> 2,872
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 128
<INCOME-PRETAX> 754
<INCOME-TAX> 265
<INCOME-CONTINUING> 489
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,557)
<EPS-PRIMARY> (2.00)
<EPS-DILUTED> 0
</TABLE>
