<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 March 31, 1998
OR
--- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-22695
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 No.)
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
----- -----
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
----- -----
As of May 15, 1998, there were 6,731,331 outstanding shares of Sheridan
Energy, Inc. Common Stock, $.01 par value.
1
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SHERIDAN ENERGY, INC.
Report on Form 10-QSB For The Quarter Ended March 31, 1998
Index
Page
Part I. Financial Information 2
Item 1. Financial Statements (Unaudited) 2
Consolidated Balance Sheets -
March 31, 1998 and December 31, 1997 3
Consolidated Statements of Operations -
Three Month Periods Ended March 31, 1998 and 1997 4
Consolidated Statements of Cash Flows -
Three Month Periods Ended March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements - Unaudited 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Part II. Other Information 16
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, the Company's attempts to reduce overhead
and eliminate non-core assets, 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 March 31, 1998
Part 1. Financial Information
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
The accompanying unaudited consolidated financial statements of
Sheridan Energy, Inc. and its subsidiary (collectively 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. The financial statements have been prepared in conformity with the
accounting principles and practices as disclosed in the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1997. These interim financial
statements reflect all adjustments (which were normal recurring adjustments)
which are, in the opinion of management, necessary for a fair presentation, in
all material respects, of the Company's financial position as of March 31, 1998.
Results of operations for the three month period ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998. It is recommended that these unaudited consolidated
financial statements be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-KSB for the year ended December 31, 1997.
2
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SHERIDAN ENERGY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS MARCH 31, DECEMBER 31,
------ 1998 1997
-------------- ---------------
(Unaudited)
(in thousands,except for share
and per share data)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ -- $ 274
Accounts receivable, net of allowance for doubtful accounts of $90 5,463 3,109
Deferred tax asset 165 165
Other current assets 238 244
-------- -------
Total current assets 5,866 3,792
-------- -------
Property and equipment:
Oil and natural gas properties 72,153 70,139
Other property and equipment 562 427
Accumulated depletion, depreciation and amortization (10,206) (7,694)
-------- -------
Property and equipment, net 62,509 62,872
-------- -------
Investment in natural gas treating plant 436 505
Deferred tax asset 765 765
Other assets 726 765
-------- -------
Total other assets 1,927 2,035
-------- -------
TOTAL ASSETS $ 70,302 $68,699
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and accrued liabilities $ 8,234 $ 4,836
-------- -------
Total current liabilities 8,234 4,836
-------- -------
Long term debt 31,250 31,500
-------- -------
Total liabilities 39,484 36,336
-------- -------
Commitments and contingencies (Note 3)
Redeemable Preferred Stock, 1,000,000 shares outstanding;
redemption value $10,000 10,000 10,000
Stockholders' equity:
Common Stock, 6,731,331 shares outstanding 67 67
Additional paid-in capital 29,005 29,005
Accumulated (deficit) (8,254) (6,709)
-------- -------
Total stockholders' equity 20,818 22,363
-------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 70,302 $68,699
======== =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE>
SHERIDAN ENERGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------
1998 1997
------------------ -----------------
<S> <C> <C>
(in thousands,
except for share and per share data)
REVENUES:
Oil and natural gas sales $ 4,452 $ 1,789
Natural gas gathering 56 57
Gain on property sale 178 --
------- -------
4,686 1,846
------- -------
COST AND EXPENSES:
Operating expense 1,487 390
Treating and transportation expense 192 147
Depletion, depreciation and amortization 2,504 346
General and administrative expense 1,144 630
Exploration costs 29 13
------- -------
5,356 1,526
------- -------
OPERATING INCOME (LOSS) (670) 320
Other income (expenses):
Equity earnings in natural gas treating plant 156 90
Interest and other income -- 76
Interest expense (674) (44)
------- -------
(518) 122
------- -------
INCOME (LOSS) BEFORE INCOME TAXES (1,188) 442
Income tax expense:
Current -- 10
------- -------
-- 10
------- -------
NET INCOME (LOSS) (1,188) 432
Preferred stock dividends (359) (3,245)
Accretion of TGX Senior Preferred Stock redemption value -- (1,753)
------- -------
NET LOSS APPLICABLE TO COMMON STOCK $(1,547) $(4,566)
======= =======
LOSS PER SHARE - BASIC $(0.23) $(1.06)
======= =======
LOSS PER SHARE - DILUTED $(0.22) $(1.06)
======= =======
WEIGHTED AVERAGE SHARES:
Basic 6,731 4,327
======= =======
Diluted 7,076 4,327
======= =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE>
SHERIDAN ENERGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------
1998 1997
-------------- -------------
(in thousands)
<S> <C> <C>
Cash flow from operating activities:
Net income (loss) $(1,188) $ 432
Adjustments to reconcile net income (loss) to cash provided by operating
activities:
Depletion, depreciation and amortization 2,504 346
Amortization of debt transaction costs and stock compensation 57 (11)
Distribution in excess of equity earnings 69 10
Changes in current operating assets and liabilities:
Increase (decrease) in accounts receivable (2,354) 78
Decrease (increase) in other current assets 6 (198)
Increase (decrease) in accounts payable and accrued liabilities 3,039 (403)
------- ------
Net cash provided by operating activities 2,133 254
------- ------
Cash flow from investing activities:
Capital expenditures (2,149) (707)
Decrease in other assets 9 5
------- ------
Net cash used in investing activities (2,140) (702)
------- ------
Cash flow from financing activities:
Payments on revolving credit facility and notes payable (3,850) --
Borrowings under revolving credit facility 3,600 --
Debt transaction costs and other (17) --
------- ------
Net cash used in financing activities (267) --
------- ------
Net decrease in cash and cash equivalents (274) (448)
Cash and cash equivalents at beginning of period 274 1,924
------- ------
Cash and cash equivalents at end of period $ -- $1,476
======= ======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE>
SHERIDAN ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
1. BUSINESS AND EQUITY RESTRUCTURING
Business
Sheridan Energy, Inc. ("Sheridan" or the "Company") is the surviving entity
resulting from the merger (the "Merger") effective June 12, 1997 with its former
parent company, TGX Corporation ("TGX"). Sheridan 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.
Equity Restructuring
Pursuant to the Merger, holders of TGX Senior Preferred Stock received 0.5
shares of Sheridan common stock ("Sheridan Common Stock") for each share of TGX
Senior Preferred Stock, resulting in the issuance of approximately 4.3 million
shares of Sheridan Common Stock. Other classes of TGX Preferred Stock and TGX
Common Stock (collectively "Other TGX Stock") were eliminated pursuant to the
Merger. The Merger was accounted for as a reorganization of related parties
with carry over basis of assets and liabilities. The Sheridan Common Stock was
recorded at the combined carrying value of Other TGX Stock and the initial value
ascribed to the TGX Senior Preferred Stock upon their issuance on the date of
the Merger. Accordingly, upon cancellation, all recorded TGX preferred stock
liabilities, including accretion and unpaid dividends, were credited to
accumulated deficit. No gain or loss was recognized upon consummation of the
Merger, and all pre-Merger results, including TGX Senior Preferred Stock
dividends and accretion charges, were reflected as Sheridan activity. The costs
of soliciting proxies and effecting the Merger were charged to expense as
incurred. All prior period per share data and amounts have been restated to
reflect issuance of Sheridan Common Stock on a retroactive basis.
The following table reflects pro forma earnings per share for 1997 as if
the Merger had been effective as of January 1, 1997 and all TGX Senior Preferred
Stock and other classes of TGX Preferred Stock dividend and related accretion
charges had been eliminated as of such date:
BASIC DILUTED
1997 1997
------ ------
(in thousands, except per share data)
Pro forma net income per share $ 0.10 $ 0.10
====== ======
Weighted average shares outstanding 4,327 4,327
====== ======
2. LONG TERM DEBT AND NOTES PAYABLE
As of March 31, 1998 and December 31, 1997 the components of long term
debt were as follows:
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
(in thousands)
Secured bank debt under revolving credit facility $31,250 $31,500
Less current maturities -- --
------- -------
Long term debt $31,250 $31,500
======= =======
In late 1997, in conjunction with the Pioneer Acquisition and Grand Gulf
Acquisition, the Bank One credit facility was amended and the maturity was
extended to June 30, 2000. The Company may elect to borrow at Bank One's stated
rate (8.5% at March 31, 1998) or LIBOR plus 2.5% (8.19% at March 31, 1998). In
addition, the Company must
6
<PAGE>
pay a commitment fee of 0.375% per annum on the unused portion of the borrowing
base. The facility is secured by substantially all of the Company's oil and gas
properties and is repayable through monthly borrowing base reductions of
$550,000. The borrowing base is redetermined every six months or at Bank One's
discretion. At March 31, 1998, the Company's borrowing base under this facility
was approximately $37.8 million.
Cash paid for interest as of March 31, 1998 and 1997 totaled approximately
$635,000 and $40,000, respectively.
3. COMMITMENTS AND CONTINGENCIES
Litigation
(a) In July 1992, certain unleased mineral interest owners commenced a
legal action in the 19th Judicial District for East Baton Rouge, Parish,
Louisiana 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 which are
utilized to offset the plaintiffs' proportionate share of cost associated with
drilling the wells. The Louisiana District Court has entered a judgment against
the Company for an amount to be determined at a later time which the Company has
appealed. Sheridan also argued that any claim which arose prior to the date of
the entry of the order confirming the Reorganization Plan has been discharged
through bankruptcy. The Company filed a lawsuit in the U.S. Bankruptcy Court
for the Western District of Louisiana ("Bankruptcy Court") claiming such a
defense. However, the Bankruptcy Court rejected that defense and the Company's
appeal of such ruling was also denied. The Company plans to continue to
vigorously defend against these actions but is unable to predict the final
outcome.
(b) In July 1995, certain royalty owners in the same wells commenced a
separate legal action alleging that the Company 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 a motion on behalf of
TGX for a partial summary judgment, holding that all of the royalty owner's
claims preceding the filing of the suit by more than three years were time-
barred. The Company has asked the court to dismiss the remaining claims
asserted by the royalty owners. If not dismissed, the Company will vigorously
defend against this lawsuit.
(c) In December 1996, Tomcat Exploration, Inc. and others brought suit
against Sheridan's predecessor, TGX, in the 215th District Court of Harris
County, Texas alleging that TGX's operation of the Sinclair No. 1 Well in
Louisiana was negligent and, as a result, caused damage and loss to the
plaintiffs. The suit alleges, among other things, that TGX negligently ceased
to properly treat the corrosive environments around the tubing in the well,
resulting in the well ceasing production and causing plaintiffs' loss. Sheridan
has responded by claiming, among other things, that its activities did not cause
the loss, that even if there were any such loss, plaintiffs were aware of the
state of the well prior to their acquisition of their interest in the well, and
plaintiffs' work over operation on the well, after their acquisition of their
interest, caused the well to cease production. The Company filed a lawsuit in
Bankruptcy Court claiming that the plaintiff's improperly were pursuing a pre-
petition claim against the Company regarding this matter. The Bankruptcy Court
ruled that the plaintiffs' were barred from pursuing any damages that may have
occurred pre-petition. The Bankruptcy Court ruling does allow the plaintiffs to
pursue any post-bankruptcy claims, if any. Extensive pre-trial production and
depositions have been taken, and a trial is scheduled to commence during 1998
regarding post-petition damages, if any, claimed by the plaintiffs.
As a result of management's assessment of the likelihood of losses from the
various litigation matters against the Company, based on advice of legal counsel
and review of the facts, circumstances, and developments surrounding the various
litigation matters, the Company recorded a provision of $1.0 million in the
fourth quarter of 1997, representing its estimate of losses and/or related costs
and expenses associated with such litigation matters.
From time to time, in the normal course of business, the Company is a party
to other litigation matters. The outcome of the foregoing matters, to the
extent not otherwise provided for, should not, in the opinion of management,
have a material adverse effect on the Company's financial position.
7
<PAGE>
4. ACCOUNTS RECEIVABLE
As of March 31, 1998 and December 31, 1997, the primary components of
accounts receivable were:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
---------- -------------
(in thousands)
<S> <C> <C>
Accrued oil and gas sales $3,603 $1,783
Receivables for pre-closing activity for purchased properties 400 923
Joint interest billing and other 1,550 493
Allowance for doubtful accounts (90) (90)
------ ------
$5,463 $3,109
====== ======
</TABLE>
5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
As of March 31, 1998 and December 31, 1997, the primary components of
accounts payable and accrued liabilities were:
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
(in thousands)
Accounts payable $2,180 $ 953
Undistributed net oil and natural gas revenues 2,565 1,457
Provision for litigation expenses 1,100 1,100
Accrued operating and tax expenses 1,550 638
Accrued professional fees 269 350
Miscellaneous accruals 570 338
------ ------
$8,234 $4,836
====== ======
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion is intended to assist in an understanding of the
Company's financial position and results of operations 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 and conditions or that are
reasonably likely to cause the historical financial statements not to be
necessarily indicative of future operating results or condition. It should be
read in conjunction with the unaudited consolidated financial statements and
related notes appearing elsewhere herein and the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1997.
Stockholders are cautioned that all forward-looking statements involve
risks and uncertainty, including without limitation, statements about the cost
of exploring and developing new oil and natural gas reserves, the price for
which such reserves can be sold, the Company's attempts to reduce overhead and
eliminate non-core assets, environmental concerns affecting the drilling of oil
and natural gas wells, the attempts to acquire producing and non-producing oil
and gas properties, the ability of the Company to make projected capital
expenditures and to achieve projected quarterly results, and general market
conditions, competition and pricing.
All statements, other than statements of historical facts, included or
incorporated by reference in this document that address activities, events or
developments that the Company expects or anticipates will or may incur in the
future, including such things as future capital expenditures and acquisitions,
business strategy and measures to implement such strategy, competitive
strengths, goals, expansion and growth of the Company's business and operations,
plans, references to future success as well as other statements which include
words such as "anticipate," "believe," "plan," "estimate," "expect," and
"intend," and other similar expressions constitute forward-looking statements.
Although the Company believes that the assumptions underlying the forward-
looking statements contained herein are reasonable, any of the assumptions could
be inaccurate, and therefore, there can be no assurance that the forward-looking
statements included in this document will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included
herein, 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.
RESULTS OF OPERATIONS
General
Sheridan Energy, Inc. is the surviving entity resulting from the Merger
with its former parent company, TGX Corporation, effective June 12, 1997.
Pursuant to the Merger, all persons owning TGX Senior Preferred Stock had their
preferred shares exchanged for Sheridan Common Stock on the basis of 0.5 shares
of Sheridan Common Stock for each share of TGX Preferred Stock owned. At the
same time, holders of all other classes of equity securities of TGX had their
securities eliminated.
The following events affect the comparative results of operations and
financial condition for the three month periods ended March 31, 1998 and 1997
and may impact future operations and financial conditions.
1997 Acquisitions. In 1997, the Company purchased $52.5 million of
producing and non-producing oil and gas properties with effective dates at
various times during the year, including two significant transactions, which
closed in December 1997. In one transaction, effective November 1, 1997 but
closed December 15, 1997, the Company purchased, for cash, $46.7 million of oil
and gas producing and non-producing properties from Pioneer Natural Resources
USA, Inc. (the "Pioneer Acquisition"). In a second transaction, effective
September 1, 1997 but closed December 31, 1997, the Company acquired $4.1
million of oil and gas producing and non-producing properties from Grand Gulf
Production, L.L.C. and JEDI Hydrocarbon Investments I Limited Partnership
through the issuance of 850,000 shares of Sheridan Common Stock and warrants to
purchase an additional 150,000 shares of Sheridan Common Stock (the "Grand Gulf
Acquisition").
1997 Sale of Sheridan Common Stock and Sheridan Preferred Stock. In
connection with the Pioneer Acquisition, the Company issued 1.6 million shares
of Sheridan Common Stock for $10.0 million ($9.2 million net of expenses) and
1.0 million shares of Sheridan Preferred Stock for $10.0 million ($9.6 million
net of expenses) to Enron
9
<PAGE>
Capital & Trade Resources Corp. ("ECT"). The Company also issued 850,000 shares
of Sheridan Common Stock and warrants to purchase an additional 150,000 shares
of Sheridan Common Stock at $5.50 per share as part of the Grand Gulf
Acquisition.
Oil and Gas Operations. The following table sets forth certain information
with respect to the oil and gas operations of the Company. Oil and condensate
and natural gas prices are shown on a per barrel and per Mcf basis,
respectively. Oil and condensate and natural gas volumes are shown in barrels
and million of cubic feet (MMcf), respectively. Total production is shown on an
equivalent Mcf basis ("Mcfe"), where one barrel of oil or condensate is equal to
six Mcf of natural gas.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------
1998 1997 Change
--------- --------- -------
<S> <C> <C> <C>
Production:
Oil and condensate (Bbl) 55,608 17,680 215%
Natural gas (MMcf) 1,686 488 246%
Total production (MMcfe) 2,020 594 240%
Natural gas production as a percentage of total production 83% 82% 1%
Oil, condensate and natural gas sales (in thousands, except
percentages):
Oil and condensate sales $ 750 $ 385 95%
Natural gas sales $ 3,702 $ 1,404 164%
Total oil, condensate and natural gas sales $ 4,452 $ 1,789 149%
Natural gas revenues as a percentage of oil and gas revenues 83% 78% 6%
Average realized price:
Oil and condensate (per Bbl) $ 13.49 $ 21.78 (38)%
Natural gas (per Mcf) $ 2.20 $ 2.88 (24)%
Average cost (per Mcfe):
Operating expenses (excludes production taxes) $ 0.59 $ 0.52 13%
Depreciation, depletion and amortization (excludes $ 1.09 $ 0.58 88%
impairment)
General and administrative expense $ 0.57 $ 1.06 (46)%
</TABLE>
Three Months Ended March 31, 1998 ("1998") Compared to Three Months Ended March
31, 1997 ("1997")
Production
Natural gas sales volumes for 1998 were 1,686 MMcf, up 246% from sales
reported in 1997 of 488 MMcf. Oil volumes for 1998 were 55,608 barrels, up 215%
over 1997 volumes of 17,680 barrels. The natural gas and oil sales volume
increases for 1998 reflect the full period impact of the late 1997 Pioneer and
Grand Gulf Acquisitions and the successful results of the Company's 1998
drilling and workover activity.
Revenues
Revenues from the sale of oil, condensate and natural gas for 1998 were
approximately $4.5 million, an increase of $2.7 million, or 149%, over 1997
revenues of approximately $1.8 million. Of this increase, sales volume
increases contributed $4.3 million of additional revenues which was offset by
significant product price declines. The average oil price per barrel for 1998
was $13.49, a decrease of $8.29 per barrel, or 38%, as compared to the 1997
price of $21.78. The average realized price per Mcf of natural gas for 1998,
after product price hedging, was $2.20, a decrease of $0.68 per Mcf, or 24%,
from $2.88 in 1997. The declines in product prices reduced current quarter
revenues
10
<PAGE>
by approximately $1.6 million. Natural gas product price hedging during the
first quarter of 1998 decreased the average realized price per Mcf by $0.05, or
natural gas revenues by $100,000.
For 1998, the Company recorded gains on property sales of $178,000
primarily related to undeveloped acreage.
Costs and Expenses
Operating expense. For 1998, total operating expense, which includes
through wellhead production costs (lifting costs), severance taxes and workover
costs, increased approximately $1.1 million, or 281%, to approximately $1.5
million, as compared to approximately $390,000 for 1997. This increase was
primarily the result of higher production volumes and taxes. Production taxes
for 1998 and 1997 totaled $290,000 and $81,000, respectively. Operating expense,
excluding production taxes, per Mcfe increased 13%, from $0.52 in 1997 to $0.59
in 1998 due primarily to anticipated clean-up and production enhancement costs
related to the acquisition properties. Workover costs, which are typically
included as part of operating expense, for 1998 and 1997 totaled $119,000 and
$60,000, respectively, and primarily represent discretionary remedial well
activities that are implemented to enhance or increase production from existing
producing zones.
Treating and transportation expense. Treating and transportation expense
in 1998 increased to $192,000, as compared to $147,000 in 1997. These costs
represent post wellhead expenses incurred primarily to treat the Company's
Comite Field gas to comply with pipeline specifications or to transport the gas
to market.
Depletion, depreciation, and amortization. Depletion, depreciation, and
amortization ("DD&A") expense for 1998 was approximately $2.5 million, an
increase of approximately $2.2 million from the $346,000 reported for 1997. This
increase primarily was due to a 240% increase in equivalent volumes produced and
a 88% increase in the DD&A rate. DD&A per Mcfe for 1998, excluding the
impairment provision, was $1.09, as compared to $0.58 for 1997. The increase in
the per Mcfe rate reflects the production and cost characteristics of recent
acquisitions. Also included in 1998 DD&A is a provision for impairment loss on
oil and gas properties of $300,000. This impairment provision is due to
mechanical problems on a well in Louisiana. The cost anticipated to be incurred
to repair the well exceeds anticipated future recoverable reserves fair value,
and thus, the Company expensed the remaining unamortized cost. Salvage value is
estimated to approximate abandonment cost.
General and administrative expense. General and administrative expense in
1998 was approximately $1.1 million, an increase of $514,000 from $630,000 in
1997. This increase was primarily attributable to 1998 staff additions as a
result of the 1997 Pioneer and Grand Gulf Acquisitions and increases in legal
and other professional fees. General and administrative expenses for 1997
included one-time net termination expenses of $186,000 related to the former
president and another officer's resignation. Legal expenses for 1998 increased
$195,000 due primarily to the activity related to the Tomcat Exploration, Inc.
litigation matter (see Note 3 of the Notes to Consolidated Financial Statements-
Unaudited). Legal costs are anticipated to continue to run at increased levels
from 1997, as this litigation matter and the unleased mineral owners lawsuit
proceed to trial. Recurring professional fees and accruals related to reservoir
engineering, accounting fees and consultants increased $157,000 due to the 1997
increase in properties and related activity. General and administrative
expenses for 1997 also include $45,000 of one-time costs and fees related to the
Merger.
Other Income (Expenses)
Equity earnings in the Company's natural gas treating plant (the "Comite
Plant") increased by 56% to a combined total of $156,000 in 1998, compared to
$90,000 in 1997. This increase was primarily attributable to lower plant
operating expenses and the full quarter impact of two wells added to the Comite
Plant as the result of adjacent field development.
Interest and other income. Interest and other income for 1997 is comprised
primarily of the sale of an option to purchase a pipeline for $50,000 and
interest income.
11
<PAGE>
Interest expense. Interest expense for 1998 increased to $674,000 from
$44,000 in 1997, primarily due to an increase in long term debt resulting from
the 1997 acquisitions. Included in 1998 and 1997 interest expense is
approximately $39,000 and $4,000, respectively, of amortization of credit
facility establishment costs which are being amortized over the remaining term
of the facility.
Preferred Dividends and Accretion of Preferred Stock
Pursuant to the terms of the Reorganization Plan, dividends accrued on the
TGX Senior Preferred Stock at 10%, compounded annually, and on the TGX Old
Preferred at 9% payable through the issuance of additional TGX Old Preferred
shares. The accretion of the TGX Senior Preferred Stock redemption value, also
a non-cash item, was calculated based on the interest method. Effective with
the Merger, all dividends and accretion obligations were eliminated; however,
all pre-Merger Effective Date dividend and accretion charges continue to be
reflected in the historical results of 1997. Pursuant to the Merger each share
of TGX Senior Preferred Stock was exchanged for 0.5 shares of Sheridan Common
Stock, and the TGX Old Preferred was canceled.
The 1998 preferred stock dividend expense is the result of the $10.0
million of Sheridan Preferred Stock issued in conjunction with the Pioneer
Acquisition. The Sheridan Preferred Stock provides for cash dividends in an
amount equal to $0.60 per share payable semi-annually in June and December (a
12% annual rate) or, at the discretion of the Company, dividends may be paid by
issuing additionally fully paid shares of Sheridan Preferred Stock in an amount
equal to 0.0675 additional shares (a 13.5% annual rate) for each share of
Sheridan Preferred Stock then issued and outstanding. The preferred stock
dividend expense is based on the 13.5% rate and includes $18,000 of amortization
expense related to Sheridan Preferred Stock fees which are being amortized over
the five year redemption period.
FINANCIAL CONDITION
At March 31, 1998, the Company had a working capital deficit of
approximately $2.4 million which includes a provision for litigation expense of
$1.0 million. The increase in working capital deficit from December 31, 1997 of
approximately $1.3 million is due to an increase in undistributed revenues and
operating and capital accruals related to the acquisition properties.
In late 1997, in conjunction with the Pioneer and Grand Gulf Acquisitions,
the Bank One credit facility borrowing base was increased to $40.0 million, and
the maturity extended to June 30, 2000. Under the current facility, the Company
may elect to borrow at Bank One's stated rate or LIBOR plus 2.5%. The Bank One
facility is secured by substantially all of the Company's oil and gas properties
and is repayable through monthly borrowing base reductions of $550,000. The
borrowing base is redetermined every six months or at Bank One's discretion with
the next redetermination due May 1998. At March 31, 1998, the Company's
borrowing base under this facility was approximately $37.8 million, and the
Company had approximately $31.3 million outstanding. Due to the excess of
borrowing base over current borrowings, no current maturities for debt were
reflected at March 31, 1998.
The Bank One credit facility requires the maintenance of certain financial
ratios including ratios relating to working capital, as adjusted pursuant to the
credit facility, tangible net worth and an annual limitation on general and
administrative expense of 14% of revenues. In addition, the payment of
dividends on Sheridan Common Stock and Sheridan Preferred Stock is restricted
except that cash dividends may be paid on the Sheridan Preferred Stock if the
Company has a cash flow to debt service of at least 1.2 to 1. At March 31,
1998, the Company did not meet the covenant regarding limitation on general and
administrative expense of revenues but received a waiver from Bank One regarding
such covenant. At current product prices, the Company anticipates that it will
not comply with the general and administrative covenant until late 1998 as
production is anticipated to increase as a result of recompletion and drilling
activity.
The Company has certain dividend and redemption obligations related to the
Sheridan Preferred Stock. For financial reporting purposes, the Sheridan
Preferred Stock has both debt and equity characteristics and, accordingly, is
not classified as a component of stockholders' equity. At March 31, 1998, the
Sheridan Preferred Stock redemption value was $10.0 million plus accrued
dividends of approximately $394,000. The Company has no redemption
12
<PAGE>
obligation on the Sheridan Preferred Stock until December 15, 2002, at which
point all of the Sheridan Preferred Stock then outstanding, plus any accrued
dividends, must be redeemed.
LIQUIDITY AND CAPITAL RESOURCES
For 1998, cash provided by operating activities was approximately $2.1
million, including approximately $225,000 of proceeds received from the
Company's 35% equity investment in the Comite Plant.
In connection with the Pioneer Acquisition and the ECT Agreement, the
Company entered into swap agreements to reduce its exposure to price
fluctuations on a portion of its natural gas and oil sales in 1998 and to
achieve a more predictable cash flow. In 1997, the Company entered into swap
agreements representing approximately 45% of 1998 natural gas production, as
estimated by independent petroleum engineers, at a weighted average sales price
per Mcf of approximately $2.19. In early 1998, the Company entered into swap
agreements representing approximately 48% of 1998 oil production, as estimated
by independent petroleum engineers, at a weighted average sales price per barrel
of approximately $17.89. The fair value of the swap agreements is the amount at
which they could be settled at March 31, 1998, based on the difference between
the price specified in the swap agreement and the NYMEX futures contract prices
existing at such date. If the Company had elected to terminate its natural gas
and oil swap agreements as of March 31, 1998, the Company would have been
required to pay approximately $1.2 million. This opportunity loss would be
substantially offset in the cash market when the hedged production is delivered.
In conjunction with the swap agreements, the Company was required to issue a
letter of credit of $1.0 million to ECT through which all swap agreements are
maintained. The issuance of this letter of credit does not reduce the
Company's availability under the Bank One credit facility. In April 1998, the
Company hedged an additional 100,000 Mcf per month for May, June and July 1998
at an average price of approximately $2.65 per Mcf.
At March 31, 1998, the Bank One credit facility had a borrowing base of
$37.8 million with approximately $31.3 million of borrowings outstanding. The
Company had letter of credit commitments, excluding the ECT letter of
credit,totaling $104,000 outstanding under the credit facility, resulting in a
quarter end facility availability of $6.4 million. The borrowing base is
reduced monthly by $550,000, and the next borrowing base redetermination is
scheduled for May 1998. All amounts are due June 30, 2000. Considering the
Company's working capital position, expected operating results and availability
under the credit facility, capital resources are deemed sufficient for current
operating activities. The Company, however, will be required to seek additional
financing sources to effect any sizeable acquisition or expand its capital
exploration program.
There are 1.0 million shares of Sheridan Preferred Stock outstanding with a
redemption value of $10 per share. Cash dividends of $0.60 per share are payable
semi-annually each June 15 and December 15 beginning June 15, 1998 (a 12% annual
rate). At the option of the Company, dividends may be paid-in-kind, semi-
annually, in an amount equal to 0.0675 shares for each share then issued and
outstanding (a 13.5% annual rate). The Company has an obligation to redeem the
Sheridan Preferred Stock on December 15, 2002.
Pursuant to the terms of various agreements, the Company, as a working
interest owner, is responsible for marketing its share of natural gas production
from certain properties. If the Company is unable or unwilling to market its
share of natural gas production from a property, its under-produced status is
subject to balancing with other working interest owners who have sold more than
their proportionate share of natural gas production. On an aggregate net basis
for certain natural gas properties, it appears that the Company is in an under-
produced status of approximately 656 MMcf as of March 31, 1998 and is currently
recouping or attempting to settle its net under-produced status. Any balancing
recoupments or settlements, which will typically be over an extended period of
time, are not anticipated to be material to future operating results.
The Company anticipates that continued development drilling and work overs
will maintain or increase current production volumes. The current projected
cash flows from existing properties and borrowings available under the Company's
current line of credit are considered adequate to fund current operating
activities. 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. Any sizeable
acquisitions will have to be financed through a combination of bank borrowings,
mezzanine financing, production payments and additional equity issuance.
13
<PAGE>
Effective implementation of the Company's development and acquisition plans is
expected to meet the Company's long-term operation and liquidity requirements.
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. Although the
futures markets provide some indication of crude oil and natural gas prices for
the subsequent 12 to 18 months, prices in the future markets are subject to
substantial changes in relatively short periods of time. For management
purposes, the Company assumes that oil and natural gas prices will continue to
fluctuate and that operating costs and expenses will escalate at or above the
current inflation per annum rate. 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 1980s, have recently been increasing primarily due to an
industry-wide increase in drilling activity. This increase in drilling costs is
not anticipated to significantly impact the Company's current operations due to
its limited drilling activity and onshore operations.
14
<PAGE>
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
None.
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.
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: May 15, 1998 By: /s/ Michael A. Gerlich
-------------------------
Michael A. Gerlich
Vice President and Chief Financial Officer
16
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