SHERIDAN ENERGY INC, 10KSB40, 1998-03-31

SHERIDAN ENERGY INC
10KSB40, 1998-03-31
OIL & GAS FIELD EXPLORATION SERVICES

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________

FORM 10-KSB
_______________

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 NO.)

1000 LOUISIANA, SUITE 800 HOUSTON, TEXAS 77002
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (713) 651-7899

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Stock, $.01 par value Nasdaq Small Cap

_______________

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:

Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB: [X]

APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed
all documents and reports required to be filed by Section 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 [ ]

The aggregate market value of the voting stock held by non-affiliates as of
March 27, 1998, was approximately $16,443,000. For this purpose, all shares
held by officers and directors of the registrant are considered to be held by
affiliates, but neither the registrant nor such persons concede that they are
affiliates of the Registrant.

As of March 27, 1998, there were 6,731,331 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's definitive Proxy Statement to be filed within 120
days after December 31, 1997, are incorporated by reference into Part III of
this Form 10-KSB.
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INDEX
<TABLE>
<CAPTION>
Page
Item Number
- ---- ------
<S> <C>
PART I................................................................. 1
ITEM 1. DESCRIPTION OF BUSINESS.................................. 1
ITEM 2. DESCRIPTION OF PROPERTY.................................. 15
ITEM 3. LEGAL PROCEEDINGS........................................ 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...... 15

PART II............................................................... 16
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS................................................. 16
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION............................................... 17
ITEM 7. FINANCIAL STATEMENTS.................................... 24
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..................... 52

PART III.............................................................. 52
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
ACT..................................................... 52
ITEM 10. EXECUTIVE COMPENSATION.................................. 52
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.............................................. 52
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......... 52
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K........................ 52

SIGNATURES............................................................ 56
</TABLE>
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PART I

ITEM 1. DESCRIPTION OF BUSINESS

GENERAL

Sheridan Energy, Inc. ("Sheridan" or the "Company"), a Delaware
Corporation, is a successor to TGX Corporation ("TGX"), a Delaware corporation
that was organized in June 1980. Sheridan is a domestic independent energy
company engaged in the production of oil and natural gas. Sheridan is also
engaged in intrastate natural gas gathering and treating.

TGX commenced operations on July 1, 1981 as the result of the consummation
of an offer in which shares of its common stock (the "TGX Common Stock") were
issued in exchange for certain interests in developed and undeveloped oil and
natural gas properties held by various affiliated and unaffiliated entities. On
December 5, 1985, TGX acquired Amarex, Inc. ("Amarex"), an oil and gas
exploration company operating primarily through general and limited partnerships
(the "Amarex Partnerships"), in exchange for the payment of approximately $52.0
million in cash and the issuance of approximately 11.5 million shares of TGX
Common Stock to former creditors of Amarex. Following this acquisition, TGX was
general partner of the Amarex Partnerships until their liquidation or
dissolution in 1994.

On February 22, 1990, TGX filed a voluntary petition in the United States
Bankruptcy Court for the Western District of Louisiana (the "Bankruptcy Court")
for reorganization (the "Reorganization Proceeding") pursuant to Chapter 11
("Chapter 11") of Title 11 of the United States Bankruptcy Code.

On January 7, 1992, a reorganization plan (the "Reorganization Plan") was
confirmed by the Bankruptcy Court and the Reorganization Plan became effective
on January 21, 1992 (the "Effective Date"). On October 2, 1992, the Bankruptcy
Court's order of substantial consummation regarding the Reorganization Plan
became final and non-appealable. See "Reorganization Proceeding" below.

Sheridan was organized as a wholly-owned subsidiary of TGX on July 1, 1996,
under the name GeoStrat Resources, Inc. The Company changed its name to
Sheridan Energy, Inc. on May 7, 1997. On June 12, 1997, TGX was merged (the
"Merger") into Sheridan and, at that time, all of the persons owning TGX Series
A Senior Preferred Stock (the "TGX Senior Preferred Stock") had such preferred
stock exchanged for Sheridan common stock ("Sheridan Common Stock") on the basis
of 0.5 shares of Sheridan Common Stock for each share of TGX Senior Preferred
Stock. At that same time, pursuant to the terms of the Merger, holders of all
other classes of equity securities of TGX had their securities eliminated.

The Company's executive offices are at 1000 Louisiana Street, Suite 800,
Houston, Texas 77002, and its telephone number is (713) 651-7899. When used
herein, unless the context otherwise requires, the term "Sheridan" or the
"Company" includes activities of its predecessor, TGX.

This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended, which are intended to be covered by
safe harbors created thereby. 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 effect of the Merger,
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.
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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.

BUSINESS STRATEGY

After substantial consummation of the Reorganization Plan in 1992, and in
order to maximize stockholder value, TGX embarked on a strategy of eliminating
non-core assets, reducing overhead and restructuring its debt. During 1993 and
1994, a substantial portion of management's efforts were engaged in implementing
the components of this business plan. Beginning in 1995, TGX turned its focus to
increasing its oil and gas reserves and revenues through a limited number of
acquisitions and the drilling of a small number of oil and gas exploration and
development wells.

In early 1993, TGX relocated and consolidated its offices in Houston,
Texas, thereby reducing expenses and began a program of downsizing, including
outsourcing certain financial and administrative services.

TGX's efforts also involved the restructuring and replacing of its secured
long-term debt with the Bank of Montreal ("BMO"), the renegotiation of its debt
with certain persons holding notes arising from administrative claims incurred
during the Reorganization Proceeding, and a program to liquidate and dissolve
all the Amarex Partnerships. TGX also implemented a program of selling assets
which were either believed not to be essential to TGX's long-term business
strategy or which could provide a significant immediate cash infusion to relieve
debt obligations and provide long-term benefit by reducing overhead.

In furtherance of these strategies, TGX retained an investment banker to
conduct an extensive review of TGX's operations and assets to determine the most
appropriate means for implementing management's strategy. In 1994, TGX
completed the sale of substantially all of its oil and gas properties in Ohio
and New York to Belden & Blake Corporation ("BBC") for approximately $16.2
million; restructured its bank indebtedness as set forth under "Bank
Indebtedness"; liquidated 17 Amarex Partnerships and began the process of
dissolving and winding up an additional eight Amarex Partnerships, which was
completed in 1995; and sold, to a third party, approximately 31 properties for
$1.4 million which management believed were not essential to TGX's long-term
business strategy. During 1994, TGX was able to reduce the number of its
employees from 27 to 13, excluding contract personnel, and its general and
administrative expenses from $3.3 million to $2.2 million.

In 1995, TGX's oil and gas activities focused on lower risk workover
operations, drilling development wells and acquiring producing oil and gas
properties. During this period, TGX participated in ten workovers, drilled seven
new wells, and acquired additional interests in certain of its operated
producing properties and five new producing wells. As a result of these
activities and upward revisions of previous estimates, in 1995 TGX increased its
total proved reserves by approximately 1.9 equivalent billion cubic feet of gas
("Bcfe") (one barrel of oil equals six Mcf of gas and 1,000,000 Mcf equals one
Bcf) from year end 1994, representing a 12% increase in equivalent year end
reserves.

On April 12, 1996, TGX entered into a settlement agreement (the "Settlement
Agreement") with National Fuel Gas Distribution Corporation ("NFG") and the
Public Service Commission of the State of New York ("PSC") to settle a long-
standing significant lawsuit (the "NFG Litigation"). Pursuant to the Settlement
Agreement, TGX

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received $7.2 million from NFG, and all parties to the Settlement Agreement
dismissed all claims and counterclaims against each other. In conjunction with
the Settlement Agreement, TGX recognized a net litigation settlement gain of
$7.1 million, after payment of $100,000 to a third party entitled to participate
in the proceeds. For further information concerning the settlement, see "NFG
Litigation" below. As TGX's financial condition continued to improve, TGX
expanded its drilling and property acquisition activity resulting in total 1996
capital expenditures of $4.3 million. As a result of these expenditures and
improvement in year end product prices, TGX, in 1996, increased its total proved
reserves by 3.8 Bcfe, or 21% from year end 1995 equivalent reserves.

In June 1997, TGX obtained stockholder approval for the Merger. Pursuant
to the Merger, holders of the TGX Senior Preferred Stock received 0.5 shares of
Sheridan Common Stock for each share of TGX Senior Preferred Stock they held at
the time of the Merger. Other series of TGX preferred stock and TGX Common Stock
were eliminated pursuant to the terms of the Merger.

Subsequent to the Merger, Sheridan engaged in two significant oil and gas
property acquisitions. In December 1997, but effective as of November 1, 1997,
the Company acquired approximately $46.7 million of oil and gas producing and
non-producing properties from Pioneer Natural Resources USA, Inc. (the "Pioneer
Acquisition"). As a result of the Pioneer Acquisition, the Company obtained an
interest in approximately 329 gross (156.9 net) producing oil and gas wells and
approximately 79,000 gross (31,400 net) producing and non-producing oil and gas
leasehold acres in Oklahoma, Texas and Louisiana. In order to finance a portion
of the Pioneer Acquisition, the Company renegotiated its bank line of credit and
drew down approximately $28.0 million. See "Bank Indebtedness." In addition,
the Company entered into an agreement (the "ECT Agreement") with Enron Capital &
Trade Resources Corp. ("ECT"), an unaffiliated party, pursuant to which ECT
acquired 1.0 million shares of the Company's Series A Preferred Stock (the
"Sheridan Preferred Stock") and 1.6 million shares of Sheridan Common Stock. For
information about the Sheridan Preferred Stock, see "Item 5. Market for Common
Equity and Related Stockholder Matters" and Note 10 of the Notes to Consolidated
Financial Statements.

On December 31, 1997, but effective as of September 1, 1997, the Company
acquired additional oil and gas producing properties in Louisiana (the "Grand
Gulf Acquisition") for consideration consisting of 850,000 shares of Sheridan
Common Stock and warrants to acquire an additional 150,000 shares of Sheridan
Common Stock. Such warrants expire five years after the date of issuance and
are exercisable in whole or in part from time to time at a price of $5.50 per
share. The properties were acquired from Grand Gulf Properties, L.L.C. ("Grand
Gulf") and JEDI Hydrocarbon Investments I Limited Partnership ("JEDI I").
Through a series of transactions among Grand Gulf, other related parties and
Joint Energy Development Investments Limited Partnership ("JEDI"), a Delaware
Limited Partnership and sole limited partner of JEDI I, the 850,000 shares of
Sheridan Common Stock and the 150,000 warrants are now owned by JEDI or JEDI I.
JEDI and JEDI I are affiliates of ECT.

In 1998, the Company intends to continue its program of acquiring oil and
gas producing and non-producing properties, drilling exploration and development
wells and attempting to enhance its current oil and gas reserve position. As
part of this overall effort, the Company intends to seek out strategic alliances
or other opportunities to expand its reserve base and increase cash flow. The
Company may seek out joint venture partners to spread the risk and costs of such
acquisitions and development, use bank and institutional debt financing to fund
a portion of the costs of the facilities or properties or raise additional
capital through the sale of debt or equity securities. No assurance can be made
that joint venture partners or debt financing or equity capital will be
available to fund the Company's acquisition or development of additional
facilities or properties or that the Company could obtain debt financing or
equity capital on terms that the Company would consider reasonable or, in the
case of a sale of equity securities, on terms that would not be dilutive to
existing stockholders.

BANK INDEBTEDNESS

Prior to the Reorganization Proceeding, BMO was TGX's principal secured
lender. At the time of the Chapter 11 filing, TGX owed approximately $29.7
million to BMO (the "Existing BMO Debt") which was secured by substantially all
of TGX's assets. Pursuant to the Reorganization Plan, TGX entered into an
Amended and Restated Credit Agreement (the "Amended Credit Agreement") under
which the Existing BMO Debt was continued and

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preserved, but was evidenced by new loans ("New BMO Loans"), in the original
aggregate principal amount of approximately $27.0 million which continued to be
secured by substantially all of TGX's assets.

In early 1993, TGX was notified that events of default had occurred under
the Amended Credit Agreement which were not cured and, as a result, BMO had the
right to take certain actions under the Amended Credit Agreement, including
without limitation, the acceleration of all of the New BMO Loans.

In January 1994, in conjunction with TGX's sale of certain assets to BBC,
TGX made a debt service payment of approximately $14.3 million to BMO and
entered into a limited forbearance agreement, pursuant to which TGX was required
to make a payment (the "Required Payment") of $18.0 million plus accrued
interest and fees less (i) the $14.3 million paid to BMO and (ii) any amounts
paid to BMO subsequent to January 1, 1994, that were applied toward the Required
Payment.

In July 1994, TGX entered into a series of agreements with BMO and Bank
One, Texas, N.A. ("Bank One") whereby the New BMO Loans were restructured, and
all BMO events of default resolved. Pursuant to the restructuring, Bank One
established a borrowing-base facility of $2.4 million under which $1.4 million
was paid to BMO in satisfaction of the remaining amount due of the Required
Payment. The Bank One facility originally bore interest at Bank One's stated
rate plus 2% and was to mature on July 13, 1997. Effective September 30, 1996,
the Bank One credit facility was amended and the borrowing base was increased to
$5.0 million, with monthly borrowing base reductions of $100,000, the interest
rate was lowered to stated rate plus 1.5% and the maturity was extended to June
30, 1999.

In late 1997, in conjunction with the Pioneer Acquisition, the Bank One
credit facility was further amended, the 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. At December 31, 1997, the Company's
borrowing base under this facility was $39.4 million, and the Company had $31.5
million borrowed. Due to the excess of borrowing base over year end borrowings
outstanding and the current monthly facility reduction rate, no current
maturities for debt were reflected at December 31, 1997.

The Bank One credit facility requires the maintenance of certain financial
ratios including ratios relating to working capital, tangible net worth and
annual limitations on general and administrative expense. In addition, the
payment of dividends on Sheridan Common Stock and 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 ratio of at least 1.2 to 1. See Note 4
of the Notes to Consolidated Financial Statements.

NFG LITIGATION

In 1974, a gas sales and purchase contract was executed by predecessors of
TGX and NFG, as seller and buyer, respectively (the "NFG Contract"). In 1983,
the PSC, under whose jurisdiction NFG's intrastate gas purchases fell, expressed
dissatisfaction with the NFG Contract for among other reasons the inclusion of a
"three-pipeline escalator" ("3-PE") in its pricing provision. The PSC, in its
Opinion No. 83-26 ("Opinion 83-26") found 3-PE clauses to be unacceptable and
disapproved contracts containing such clauses.

A dispute arose between NFG and TGX as to whether the NFG Contract remained
in force after Opinion 83-26 and, if it did, what price the NFG Contract
prescribed starting in December, 1983 when Opinion 83-26 was issued. In November
1984, NFG commenced an action in the United States District Court for the
Western District of New York (the "District Court") seeking a declaration from
the District Court of the rights and obligations of the parties under the NFG
Contract after Opinion 83-26. TGX counterclaimed for damages claiming that NFG
had breached the terms of the NFG Contract.

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In January 1991, the District Court declared that Opinion 83-26 had voided
the NFG Contract, but in December 1991, the Court of Appeals for the Second
Circuit (the "Second Circuit") reversed the judgment of the District Court. On
remand from the Second Circuit, in January 1993, the District Court granted
TGX's motion for partial summary judgment regarding the price to be paid under
the NFG Contract.

During its Reorganization Proceeding, TGX filed an adversary proceeding
(the "Turnover Proceeding") in the Bankruptcy Court to compel NFG to pay the
amount due to TGX pursuant to the provisions of the NFG Contract. Effective June
19, 1992, TGX and NFG entered into a partial settlement agreement, and, in
consideration of a payment of $2.9 million from NFG, TGX dismissed the Turnover
Proceeding and released NFG from any and all liability and affirmative claims
for relief based upon certain evidence presented by TGX in the Turnover
Proceeding.

Simultaneously with securing the Bank One credit facility and payment of
the Required Payment, BMO released all of its liens on TGX's properties with the
exception of its lien on the NFG Litigation. As part of the loan restructuring,
BMO converted $4.6 million (the "BMOF Note") of the New BMO Loans, including
fees and expenses, to a non-recourse note secured only by the NFG Litigation and
any proceeds that might be received therefrom. BMO assigned its rights to the
loan, security and BMOF Note, to BMO's wholly-owned subsidiary, BMO Financial
Inc. ("BMOF").

On December 31, 1995, TGX and BMOF executed a First Amendment to the Second
Amended and Restated Credit Agreement ("BMOF Agreement"). Pursuant to the BMOF
Agreement, TGX and BMOF were to equally share any NFG Litigation proceeds up to
$8.0 million. BMOF was to receive 100% of any proceeds in excess of $8.0 million
until the total received by BMOF equalled the BMOF Note, plus any accrued
interest. Thereafter, TGX was to receive proceeds until the total it received
equalled the amount received by BMOF, and any additional NFG Litigation proceeds
would have been shared equally by TGX and BMOF.

On April 12, 1996, a final settlement of the NFG Litigation was reached. In
return for a lump-sum payment to TGX of $7.2 million, of which TGX retained
approximately $3.5 million after a debt retirement payment of $3.6 million to
BMOF and a $100,000 payment to another party entitled to participate in the
proceeds. A full release of all claims between TGX and NFG was executed. See
Note 4 of the Notes to Consolidated Financial Statements.

FRESH START REPORTING

As a result of the substantial consummation of the Reorganization Plan and
due to (i) the reallocation of the voting rights of equity interest owners and
(ii) the reorganization value of TGX's assets being less than the total of all
of its post-petition liabilities and allowed claims, as of October 2, 1992, the
effects of the Reorganization Proceeding were accounted for in accordance with
the fresh start reporting standards promulgated under the American Institute of
Certified Public Accountants Statement of Position 90-7 "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7").

In conjunction with implementing fresh start reporting, TGX's management
determined a reorganization value ("RV") which attempted to establish the fair
market value ("FMV") of TGX as of the date of substantial consummation of the
Reorganization Plan. The RV was determined by management on the basis of its
best judgment of what it considered at the time to be the fair market value of
TGX's assets and liabilities, after reviewing relevant facts concerning the
price at which similar assets were being sold between willing buyers and
sellers. However, there can be no assurances that the RV and the FMV were
comparable and the difference between TGX's calculated RV and the FMV may have,
in fact, been material.

In conjunction with the implementation of fresh start reporting, TGX also
implemented the successful efforts method, rather than the full cost method, of
accounting for oil and natural gas properties. In the opinion of TGX's
management, this accounting method was preferable since it would result in a
better matching of oil and natural gas

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revenue with the related exploration and production cost and expense. See Note 1
of the Notes to Consolidated Financial Statements.

REORGANIZATION PROCEEDING

Overview of the Plan. The following is a brief summary of certain
information regarding the Reorganization Plan. The summary is necessarily
incomplete and selective and is qualified in its entirety by reference to the
Reorganization Plan, the full terms of which are hereby incorporated by
reference.

Pursuant to the Reorganization Plan, TGX entered into the Amended Credit
Agreement with BMO, and satisfied unsecured claims with cash or TGX Senior
Preferred Stock or otherwise retained or provided for such claims. See "Bank
Indebtedness." In addition, certain executory contracts were assumed or
rejected. As of December 31, 1995, the aggregate balance of prepetition
obligations related to assumed executory contracts was approximately $317,000,
which related to undistributed net oil and gas revenues in a "suspended pay"
status. Pursuant to the Reorganization Plan and statute of limitations, the
"suspended pay" liability was dismissed during 1996 and recognized as other
revenues.

During the Reorganization Proceeding, TGX incurred approximately $7.1
million in administrative fees and expenses relating to the reorganization
("Administrative Claims"). TGX objected to certain of the Administrative Claims
and negotiated settlement amounts and terms of payment with certain holders of
Administrative Claims. As a result, each of the TGX administrative claimants,
other than three designated administrative claimants whose administrative claims
were satisfied as described below, were entitled to receive a promissory note
(the "Administrative Notes") due December 31, 1994, in satisfaction of each
claimant's unpaid Administrative Claim. During late 1994 and early 1995, TGX
renegotiated the terms of substantially all of the Administrative Notes. As a
result of renegotiations and forfeitures, Administrative Notes totaling
approximately $1.1 million in principal and $253,000 in accrued interest charges
were renegotiated, with TGX making cash payments of $455,000, issuing 151,518
shares of the TGX Senior Preferred Stock and a $90,000 principal amount
nonrecourse note payable out of TGX's share of proceeds, if any, to be received
from the NFG Litigation. As a result of the Administrative Note renegotiations
and administrative claim forfeitures, TGX reflected an extraordinary net gain in
1995 of $93,000, and all such notes and claims were settled as of year end 1995.
At the time of the Reorganization Proceeding, three of the larger administrative
claimants agreed that in consideration for the satisfaction in full of the
balance of their Administrative Claims as of the date of substantial
consummation they would receive (i) a payment of $300,000, (ii) 55,000 shares of
the TGX Senior Preferred Stock and (iii) the conveyance of approximately 29,400
acres of undeveloped land in Culberson and Hudspeth Counties, Texas.

TGX Stock. The Reorganization Plan provided for a total of approximately
8.5 million shares of TGX Senior Preferred Stock to be issued to holders of
certain unsecured claims on the basis of one share of TGX Senior Preferred Stock
for every $10 of certain finally allowed or otherwise agreed upon claims. In
addition, as described above, certain administrative claimants received shares
of TGX Senior Preferred Stock. The TGX Senior Preferred Stock entitled its
holders to receive a 10% annual compounded cash dividend, payable quarterly and
had a liquidation preference in the amount of $10 per share.

In addition, the Reorganization Plan provided for the issuance of up to
300,000 shares of 9% Cumulative Convertible Preferred Stock ("Old Preferred
Stock"), with a liquidation preference of $10 per share with the right to
receive dividends at the rate of 9% per annum beginning on the Effective Date of
the Reorganization Plan, payable annually on the first business day of January
of each year, with such dividends being paid in additional shares of Old
Preferred Stock. Pursuant to the Reorganization Plan, approximately 25.0
million shares of TGX Common Stock remained outstanding.

Following substantial confirmation of the Reorganization Plan, TGX, BMO and
Bank One entered into the agreements described under "Bank Indebtedness." In
April 1996, TGX settled the NFG Litigation and the related BMOF indebtedness as
described under "NFG Litigation."

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As of the date of the Merger, no dividends had been paid to the holders of
the TGX Senior Preferred Stock, and accrued, but unpaid, dividends on the TGX
Senior Preferred Stock totaled approximately $59.0 million. This dividend
obligation, together with the liquidation preference with respect to the
outstanding 8.7 million shares of TGX Senior Preferred Stock of approximately
$86.8 million, would have required an aggregate payment of approximately $146.9
million to redeem the TGX Senior Preferred Stock. In order to eliminate these
obligations, the Merger was consummated, whereby the TGX Senior Preferred Stock
was exchanged for Sheridan Common Stock and holders of all other classes of
equity securities of TGX had their securities eliminated.

BUSINESS SEGMENT INFORMATION

The only segment in which TGX operates is the development and production
of, and to a lesser degree the exploration for, oil and natural gas plus
intrastate natural gas gathering and treating.

PROPERTIES

Oil and Gas Exploration and Production. Prior to 1995, the Company's
principal post-bankruptcy activity was the production of oil and natural gas. In
1995, the Company began a modest program of oil and natural gas exploration and
development drilling and property acquisition activities as allowed by its
financial condition. In 1996, as the Company's financial condition continued to
improve, the Company expanded its development drilling and property acquisition
activity resulting in total 1996 capital expenditures of $4.3 million. During
1997, capital expenditures totaled $54.9 million, reflecting a significant
expansion of its property acquisition activities through the completion of the
Pioneer Acquisition. Additionally, in conjunction with the Grand Gulf
Acquisition, the Company issued 850,000 shares of Sheridan Common Stock and
warrants to purchase an additional 150,000 shares of Sheridan Common Stock
valued at $4.1 million. See Note 3 of the Notes to Consolidated Financial
Statements.

Proved Oil and Natural Gas Reserves.

(a) General:

Estimating economically recoverable crude oil and natural gas reserves and
their future net revenues is not an exact science and is based upon a number of
variables, such as historical production of the subject properties as compared
with similar producing properties, and assumptions such as the effects of
regulation by governmental agencies, future taxes, and development and other
costs, all of which may vary considerably from actual results. All such
estimates are to some degree speculative, and classifications of reserves are
only attempts to define the degree of speculation involved. For these reasons,
estimates of economically recoverable reserves of crude oil and natural gas
attributable to any particular group of properties, the classification and risk
of recovering such reserves, and estimates of the future net revenues expected
therefrom, prepared by different engineers or by the same engineers at different
times, may vary substantially.

Proved oil and natural gas reserves are the estimated quantities of crude
oil, natural gas and natural gas liquids which geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating conditions. Estimates
with respect to proved undeveloped and proved developed non-producing reserves
that may be developed and produced in the future are based upon volumetric
calculations or upon analogy to similar types of reservoirs. Later studies of
the same reservoirs based upon production history may result in variations,
which may be substantial. The actual production, revenues, severance and excise
taxes, development costs, and operating expenditures with respect to the
Company's reserves as reflected herein may vary from estimates, and such
variances may be material.

Based on the independent petroleum engineering report of Netherland, Sewell
& Associates, Inc., as of December 31, 1997 and 1996, utilizing year end product
prices and costs held constant, the Company's proved oil and natural gas reserve
volumes, in thousand of barrels ("MBbls") and billion of cubic feet ("Bcf"), and
associated

7
<PAGE>

estimated future net revenues, undiscounted and discounted at 10% ("PV 10"),
before future income taxes, are as follows (dollars in thousands):

1997 1996
------------------------ ------------------------
OIL(MBBLS) GAS(BCF) OIL(MBBLS) GAS(BCF)
------------- --------- ------------- ---------
<S> <C> <C> <C> <C>
Proved developed.......... 1,514 55.3 525 13.4
Proved undeveloped........ 724 9.5 456 2.4
-------- ------- ------- -------
Total proved reserves.. 2,238 64.8 981 15.8
======== ======= ======= =======

1997 1996
----------------------- -----------------------
UNDISCOUNTED PV 10 UNDISCOUNTED PV 10
------------ -------- ------------ --------
Proved developed.......... $105,088 $62,209 $39,118 $23,761
Proved undeveloped........ 19,578 10,165 11,827 5,495
-------- ------- ------- -------
Total proved reserves.. $124,666 $72,374 $50,945 $29,256
======== ======= ======= =======
</TABLE>

Estimated future development costs associated with proved developed non-
producing and proved undeveloped reserves for 1997 and 1996 total $11.9 million
and $3.8 million, respectively. Production of those reserves is dependent upon
the Company's ability to fund such future development costs, which are scheduled
to be incurred over numerous years. 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 late December 1997, the
Company hedged 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 late January 1998, the Company hedged approximately 48%
of 1998 oil production, as estimated by independent petroleum engineers, at a
weighted average sales price per barrel of approximately $17.89. See Note 18 of
the Notes to Consolidated Financial Statements for a discussion of the
calculation of the estimated future net revenues on an undiscounted and
discounted basis.

(b) Tabular Information:

The table below sets forth an analysis of the change in the Company's
proved oil and natural gas reserves for the periods indicated.

<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
OIL GAS OIL GAS
(MBBLS) (BCF) (MBBLS) (BCF)
------- ----- -------- -----
<S> <C> <C> <C> <C>
Proved reserves:
Beginning of year................ 981 15.8 944 12.2
Sales of reserves-in-place....... -- (.1) (8) (.1)
Purchases of reserves-in-place... 1,322 46.8 45 4.1
Extensions and discoveries....... 68 4.3 57 .6
Revisions of previous estimates.. (40) .2 19 .5
Production....................... (93) (2.2) (76) (1.5)
----- ---- --- ----
End of year...................... 2,238 64.8 981 15.8
===== ==== === ====

Proved developed reserves............ 1,514 55.3 525 13.4
===== ==== === ====
</TABLE>

Except for the data contained in filings with the Securities and Exchange
Commission and information furnished in conjunction with the Reorganization
Proceeding pursuant to the order of the Bankruptcy Court, the Company has not
filed information relating to estimates of its proved oil and natural gas
reserves with any federal agencies.

8
<PAGE>

Oil and Gas Production. The following table sets forth information
pertaining to the Company's oil and natural gas production revenues, average
price and average costs per equivalent Mcf of natural gas. Average natural gas
price is shown per thousand cubic feet of gas ("Mcf") and equivalent Mcf
("Mcfe") is based on one barrel of oil equals six Mcf of natural gas on a
heating value basis.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996
----------- ----------
<S> <C> <C>
Net Production:
Oil (Bbls).................................... 93,114 76,200
Natural gas (MMcf)............................ 2,163 1,542
Total production (MMcfe)...................... 2,722 1,999

Oil and natural gas revenues (in thousands):
Oil and condensate sales...................... $ 1,805 $ 1,613
Natural gas sales............................. $ 5,269 $ 3,446

Average realized price:
Oil and condensate (per Bbl).................. $ 19.38 $ 21.16
Natural gas (per Mcf)......................... $ 2.44 $ 2.24

Operating Costs:
Lease operating expense (in thousands)........ $ 1,703 $ 1,183
Lease operating expense per Mcfe.............. $ 0.63 $ 0.59
</TABLE>

Wells. The following table summarizes drilling and acquisition well
activity for wells in which the Company owned a working interest, as of December
31 for each year presented:

<TABLE>
<CAPTION>
GROSS WELLS NET WELLS
---------------------- -----------
PRODUCTIVE DRY TOTAL PRODUCTIVE DRY TOTAL
---------- --- ----- ---------- --- ------
<S> <C> <C> <C> <C> <C> <C>
Development wells:
1997............ 6 1 7 .99 .28 1.27
1996............ 6 1 7 1.32 .12 1.44
Exploration wells:
1997............ 8 3 11 2.07 .75 2.82
1996............ -- 1 1 -- .31 .31
Acquisition wells:
1997............ 360 -- 360 184.60 -- 184.60
1996............ 23 -- 23 7.87 -- 7.87
</TABLE>

Expenditures. The following table sets forth total net expenditures by the
Company by category for the periods indicated.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996
----------- ----------
<S> <C> <C>
(in thousands)
Unproved leasehold.................. $ 229 $ 163
Drilling and capital workovers (1).. 2,371 1,124
Acquisitions (2).................... 52,293 2,932
Other property and equipment........ 222 61
------- ------
Total............................... $55,115 $4,280
======= ======
</TABLE>

9
<PAGE>

____________
(1) Excludes $484 and $164 which were expensed as unsuccessful exploration cost
for the years ended December 31, 1997 and 1996, respectively.

(2) Includes Grand Gulf Acquisition purchased with Sheridan Common Stock and
warrants to buy Sheridan Common Stock valued at approximately $4.1 million.

Leasehold Acreage and Productive Wells. The following table sets forth the
Company's interest in undeveloped acreage, developed acreage and productive
wells in which it owns a working interest as of December 31, 1997. Productive
wells are wells in which the Company has a working interest and are capable of
producing oil or natural gas. Gross represents the total number of acres or
wells in which the Company owns a working interest. Net represents the
Company's proportionate working interest resulting from its ownership in the
gross acres or wells.

<TABLE>
<CAPTION>
UNDEVELOPED ACRES DEVELOPED ACRES PRODUCTIVE WELLS
----------------- --------------- ----------------
GROSS NET GROSS NET GROSS NET
-------- ------- ------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Alabama....... -- -- 1,925 197 18 1.94
Arkansas...... 1,630 471 3,993 1,198 55 22.59
Colorado...... -- -- 2,794 511 -- --
Kansas........ -- -- 640 116 1 .18
Louisiana..... 42,558 41,542 9,870 4,935 56 34.75
Mississippi... -- -- 7,706 2,278 25 6.92
Montana....... -- -- 640 18 1 .03
North Dakota.. -- -- 80 1 1 --
Oklahoma...... 4,765 953 60,283 14,257 132 33.74
Texas......... 1,748 29 42,420 19,509 199 118.80
------ ------ ------- ------ --- ------
Total...... 50,701 42,995 130,351 43,020 488 218.95
====== ====== ======= ====== === ======
</TABLE>

The following table provides, as of December 31 for each year presented,
additional information pertaining to the productive wells in which the Company
owns a working interest. Gross are the total number of wells in which the
Company owns a working interest. Net represents the Company's proportionate
working interest resulting from its ownership in each gross well. Of the total
number of gross wells in which the Company has an interest, 267 are operated by
the Company, and 221 are operated by others.

<TABLE>
<CAPTION>
GROSS NET
--------------- ----------
OIL GAS TOTAL OIL GAS TOTAL
--- --- ----- --- --- -----
<S> <C> <C> <C> <C> <C> <C>
1997............ 99 389 488 44 175 219
1996............ 56 85 141 20 15 35
</TABLE>

Natural Gas Treating Plant. Through a joint venture, the Company owns a 35%
interest in a natural gas treating plant located in the Comite Field, East Baton
Rouge Parish, Louisiana. Natural gas from one well operated by the Company and
two wells operated by third parties is transported to the plant where it is
treated to satisfy pipeline specifications. The plant also provides condensate
handling and salt water disposal facilities. The Company receives cash
distributions from the joint venture for its share of net cash flow. In
addition, the joint venture charges the Company for treating the natural gas
produced from the Company-operated well and such charges are included in
operating expenses. For information concerning this treating plant, see Note 7
of the Notes to Consolidated Financial Statements.

10
<PAGE>

COMPETITION, MARKETS AND OTHER EXTERNAL FACTORS

Competition and Marketing--Oil and Natural Gas Industry. The oil and
natural gas industry is highly competitive both in the search for, and
acquisition of, oil and natural gas reserves and in the redefining, processing
and marketing of petroleum products. Competitors include the major and
independent crude oil and natural gas companies, individual producers and
operators, and major pipeline companies. Other sources of energy, such as coal
and nuclear power, also provide competition, and crude oil and natural gas are
subject to substantial competition from foreign sources.

The price the Company receives for its oil production depends on many
variables over which it has no control, such as the world supply of, and demand
for, oil, the level of imports, and the political stability of foreign
governments. The influence exerted by these and other factors has caused
domestic oil prices to fluctuate dramatically.

The availability of a ready market as well as the price received for
natural gas produced and sold by the Company also depend upon numerous factors
beyond its control, including the proximity of producing natural gas properties
to pipelines, the capacity of such pipelines, fluctuations in seasonal or
overall demand, domestic deliverability, government regulations, and competition
from alternative forms of energy. A trend has emerged recently among major
natural gas marketing companies toward consolidation mergers, both amongst
themselves as well as in the form of strategic alliances with large producers or
end-users. These consolidations have the effect of putting control of the
majority of the supply and the market in hands of a few industry participants.
The longer term ramifications of this trend are difficult to foresee, but will
likely have an impact on the way natural gas is bought and sold in the future
and this impact could be potentially more significant to the smaller independent
producers such as the Company.

Major Customers. Information concerning sales to customers who accounted
for more than 10% of total revenues, the loss of any of which could have a
material adverse effect on the Company's operations if alternative customers
could not be found, is contained in Note 13 of the Notes to Consolidated
Financial Statements.

Production and Development Hazards. Hazards such as unexpected formations,
blow-outs, cratering and fires are involved in crude oil and natural gas
drilling, production and development activities. Such hazards, as well as
adverse weather conditions, may hinder or delay drilling and development
operations. Sheridan attempts to obtain and maintain insurance coverage
customary in the crude oil and natural gas industry, but may be subject to
liability for pollution and other damages or may lose substantial portions of
its properties due to hazards against which it is impossible or impractical (due
to prohibitive premium requirements) to maintain insurance. Governmental
regulations relating to environmental matters could also increase Sheridan's
cost of production and development operations or require it to cease production
and development operations in certain areas.

REGULATION

Environmental Regulation. The Company's operations are subject to numerous
laws and regulations governing the discharge of materials into the environment
or otherwise relating to environmental protection. These laws and regulations
require the acquisition of a permit before drilling commences, restrict the
types, quantities and concentration of various substances that can be released
into the environment in connection with drilling and production activities,
limit or prohibit drilling activities on certain lands lying within wilderness,
wetlands and other protected areas, and impose substantial liabilities for
pollution resulting from the Company's operations. Moreover, the recent trend
toward stricter standards in environmental legislation and regulation is likely
to continue. For instance, legislation has been proposed in Congress from time-
to-time that would reclassify certain crude oil and natural gas exploration and
production wastes as "hazardous wastes" which would make the reclassified wastes
subject to much more stringent handling, disposal and clean-up requirements. If
such legislation were to be enacted, it could have a significant impact on the
operating costs of the Company, and on the oil and gas industry in general.
Initiatives to further regulate the disposal of crude oil and natural gas wastes
are also pending in certain states, and these various initiatives could have a
similar impact on the Company. Management believes that the Company is in

11
<PAGE>

substantial compliance with current applicable environmental laws and
regulations, but the Company's operations could nevertheless result in liability
for personal injuries, property damage, oil spills, discharge of hazardous
materials, remediation and clean-up costs and other environmental damages. The
Company could also be liable for environmental damages caused by previous
property owners. As a result, substantial liabilities to third parties or
governmental entities may be incurred, the payment of which could have a
material adverse effect on the Company's financial condition and results of
operations. The Company maintains insurance coverage for its operations,
including coverage for sudden environmental damages, but does not believe that
insurance coverage for environmental damages that occur over time is or will be
available at a reasonable cost. Moreover, the Company does not believe that
insurance coverage against the full potential liability that could be caused by
sudden environmental damages is available at a reasonable cost. Accordingly, the
Company may be subject to liability against which it cannot fully insure, but
which could have a material adverse effect on the Company. Oil and gas
operations are subject to extensive governmental regulation, which may be
changed from time to time in response to economic or political conditions. The
Oil Pollution Act of 1990 imposes a variety of regulations on "responsible
parties" related to the prevention of oil spills. The implementation of new or
the modification of existing environmental laws or regulations, including
regulations promulgated pursuant to the Oil Pollution Act of 1990, could have a
material adverse impact on the Company.

State Regulation. All states in which the Company conducts oil and natural
gas production operations have statutory provisions regulating the drilling for,
production, transportation, storage and sale of oil and natural gas. Such
statutes, and the regulations promulgated in connection therewith, generally are
intended to prevent the waste of oil and natural gas and to protect correlative
rights and opportunities to produce oil and natural gas as between owners of
interests in a common reservoir. Certain state regulatory authorities also
regulate the amount of oil and natural gas produced by assigning allowable rates
of production to each well or proration unit.

The Company may conduct operations on federal oil and natural gas leases,
and such operations must comply with numerous regulatory restrictions and
requirements issued by the Mineral Management Service, including various
nondiscrimination statutes, and certain of such operations must be conducted
pursuant to appropriate permits issued by the Bureau of Land and Management.

EMPLOYEES

The Company maintains a staff of professional and support personnel
required to manage its properties. As of December 31, 1997, the Company had 20
employees, including three engineers, one geologist and three marketing and land
personnel. None of the Company's employees are represented by a labor union or
collective bargaining agent. The Company considers its relations with its
employees to be good and has experienced no work stoppages associated with labor
disputes or grievances.

YEAR 2000

The Company utilizes and is dependent upon data processing systems and
software to conduct its business. As the Year 2000 approaches, a critical
business issue has emerged regarding how existing application software programs
and operating systems can accommodate this date value. Management is in the
process of working with its software vendors to assure that the Company is
prepared for the Year 2000. In 1997, the Company initiated a review and
assessment of all hardware and software to confirm that it will function
properly in the Year 2000. the Company is in the final stages of identifying
those computer applications where program changes will be required in order for
the applications to process information accurately subsequent to 1999. Since
the Company currently uses an outside service bureau for much of its data
processing, the Company is dependent on the service bureau to be Year 2000
compliant. The service bureau has informed the Company that it is Year 2000
compliant. To date, indications are that all systems are or will be Year 2000
compliant, with no material costs anticipated.

12
<PAGE>

OTHER RISK FACTORS

Stockholders should carefully examine this entire report but should give
particular attention to the following risk factors.

Volatility of Oil, Gas and Natural Gas Liquid Prices. The Company's
revenues, profitability, cash flow, future growth and the carrying value of its
oil and gas properties are affected by changes in oil, gas and NGL prices. The
Company's ability to maintain or increase its borrowing capacity and to obtain
additional capital on attractive terms is also substantially dependent upon such
prices. Prices for oil, gas and NGLs are subject to significant fluctuations in
response to market changes beyond the control of the Company including, but not
limited to, weather conditions, the condition of the United States economy, the
actions of the Organization of Petroleum Exporting Countries, governmental
regulation, political stability in the Middle East and elsewhere, foreign supply
of oil and gas, the price of foreign imports and the availability of alternate
fuel sources. These influences have resulted in significant fluctuations in
prices in recent years.

At December 31, 1997, the NYMEX price for natural gas, based on an Mcf
basis, was $2.58, as compared to $4.10 for December 1996. As of December 31,
1997, the per barrel posted price for West Texas Intermediate oil production
("WTI"), the benchmark for domestic oil prices, was $15.50, as compared to
$24.42 for the same date in 1996. As of March 23, 1998 oil and natural gas
prices were $16.25 and $2.35, respectively. Moreover, the NYMEX natural gas
future prices are only an indicator of price trends and may not be indicative of
prices ultimately realized at the wellhead. Volatile oil and gas prices make it
difficult to estimate the value of producing properties for acquisition and to
budget for and project the return on development and exploitation projects.

Estimates of Oil and Gas Reserves. This Report contains estimates of
proved oil and gas reserves and the future net cash flows attributable to those
reserves prepared by independent petroleum and geological engineers. There are
numerous uncertainties inherent in estimating quantities of proved oil and gas
reserves and cash flows attributable to such reserves, including factors beyond
the control of the Company and their engineers. Reserve engineering is a
subjective process of estimating underground accumulations of oil and gas that
cannot be measured in an exact manner. The accuracy of an estimate of
quantities of reserves, or of cash flows attributable to such reserves, is a
function of the available data, assumptions regarding future oil and gas prices
and expenditures for future development and exploitation activities, and of
engineering and geological interpretation and judgment. Additionally, reserves
and future cash flows may be subject to material downward or upward revisions,
based upon production history, development and exploration activities and prices
of oil and gas. Actual future production, revenue, taxes, development
expenditures, operating expenses, quantities of recoverable reserves and the
value of cash flows from such reserves may vary significantly from the
assumptions set forth herein. In addition, different reserve engineers may make
different estimates of reserves and cash flows based on the same available data.

Acquisition and Development of Reserves. The Company's future success
depends upon its ability to find, develop and acquire additional crude oil and
natural gas reserves that are economically recoverable. Many of the Company's
properties are characterized by a high initial production rate, followed by a
steep decline in production. As a result, the Company must locate and develop
or acquire new oil and gas reserves to replace those being depleted by
production. This process is capital intensive and, for the Company to maintain
its asset base of oil and gas reserves, the Company must reinvest a significant
amount of cash flow from operations in property acquisitions and development and
exploration activities. To the extent cash flow from operations is reduced and
external sources of capital become limited or unavailable, the Company's ability
to make the necessary capital investments to maintain or expand its asset base
would be impaired. Without such investment, the Company's oil and gas reserves
could decline. The Company is also subject to the risks inherent in acquiring
or developing economically recoverable oil and gas reserves, including the need
to invest a significant amount of cash flow in the identification and
acquisition of properties, the drilling and completing of wells and the conduct
of development operations. Except to the extent that the Company acquires
additional recoverable reserves or conducts successful exploration and
development programs, the proved reserves of the Company will decline over time
as they are produced. There can be no assurance that the Company will be able
to increase or replace reserves through acquisitions, exploration and
development at an acceptable cost. The successful acquisition of producing
properties requires an assessment of

13
<PAGE>

recoverable reserves, future oil and gas prices and operating costs, potential
environmental and other liabilities and other factors. The Company's operations
may be curtailed, delayed or cancelled as a result of lack of adequate capital
and other factors, such as title problems, weather, compliance with governmental
regulations or price controls, mechanical difficulties or shortages or delays in
the delivery of equipment. Moreover, the costs of exploration and development
may materially exceed initial estimates.

Future Capital Needs. The Company makes, and will continue to make,
substantial capital expenditures for the acquisition, exploration, development
and production of oil and natural gas reserves and the acquisition and
development of gas processing and gas gathering facilities. The Company may
seek out joint venture partners to spread the risk and costs of such
acquisitions and development, use bank and institutional debt financing to find
a portion of the costs of the facilities or properties or raise additional
capital through the sale of debt or equity securities. No assurance can be made
that joint venture partners or debt financing will be available to fund the
Company's acquisition or development of additional facilities or properties or
that the Company could obtain debt financing or equity capital on terms that the
Company would consider reasonable or, in the case of a sale of equity
securities, on terms that would not be dilutive to existing stockholders. See
"Management's Discussion and Analysis or Plan of Operation."

Operating Hazards and Uninsured Risks. The Company's operations are
subject to the risks inherent in the oil and gas industry, such as blowouts,
cratering, explosions, uncontrollable flows of crude oil, natural gas or well
fluids, product spills, leaks, fires, pollution and other environmental risks.
These risks could result in substantial losses to the Company due to injury and
loss of life, severe damage to and destruction of property and equipment,
pollution and other environmental damage and suspension of operations. The
Company is not fully insured against all risks incident to its business, and the
occurrence of a significant event not fully insured or indemnified against could
materially and adversely affect the Company's financial condition and results of
operations.

Principal Stockholders. The Susskind Family Trust, The AIF-Lion Group and
ECT and affiliates currently own directly and indirectly in the aggregate 65% of
the Sheridan Common Stock, and ECT owns 100% of the Sheridan Preferred Stock.
Accordingly, these principal stockholders will be able to exercise substantial
influence over the election of the directors and management of Sheridan and over
the operations and affairs of Sheridan, including the ability to exercise
substantial influence to prevent or cause a change in control of Sheridan.
These principal stockholders do not, however, constitute a "group" under Rule
13d of the Exchange Act. ECT and Susskind, however, have agreed to vote their
shares for the nominees for the Board designated by the other.

Absence of Active Trading Market. Sheridan's stock is listed on the Nasdaq
SmallCap System. Since the Merger, the trading activity in its stock has been
sporadic. Sheridan can make no assurance that an active trading market for
Sheridan Common Stock will develop or be sustained. To the extent an active
trading market develops, the market price of Sheridan Common Stock could be
subject to significant fluctuations in response to variations in quarterly and
yearly operating results, the success of Sheridan's business strategy, general
trends in the oil and gas industry, competition, changes in federal regulations
affecting Sheridan or the oil and gas industry and other factors. In addition,
the stock market in recent years has experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating
performance of affected companies. These broad fluctuations may adversely
affect the market price, if any, of Sheridan Common Stock.

No Anticipated Dividends. The Company expects to retain cash generated
from future operations to support its cash needs and does not anticipate the
payment of any dividends on Sheridan Common Stock for the foreseeable future.
In addition, dividends or distributions by Sheridan are restricted by currently
existing credit facilities or may be restricted by future bank and institutional
debt financing. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

Preferred Stock. In addition to the Sheridan Preferred Stock, the board of
directors of Sheridan has the authority to issue additional series of preferred
stock and to fix the rights and preferences of the shares of any such series
without stockholder approval. Any series of preferred stock is likely to be
senior to Sheridan Common Stock with respect to dividends, liquidation rights
and possibly voting rights. The Company has no present plans to issue any
additional series of preferred stock.

14
<PAGE>

ITEM 2. DESCRIPTION OF PROPERTY

For information concerning the Company's properties, see Item 1.
"Description of Business--Properties".

ITEM 3. LEGAL PROCEEDINGS

(a) In July, 1992, certain unleased mineral interest owners commenced a
legal action in the 19th Judicial District for East Baton Rouge, Parish,
Louisiana Case No. 383844, Division "A," against 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
costs associated with drilling the wells. Louisiana District Court has entered
a judgment against the Company for an amount to be determined at a later time.
The Company 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 (Case No. 96AP-1047) claiming such a
defense. However, the Bankruptcy Court rejected that defense and the ruling is
on appeal. The Company has also commenced an appeal of the judgment of the East
Baton Rouge District Court. The Company plans to continue to vigorously defend
against these actions 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 Sheridan's predecessor, 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 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.

(b) In December, 1996, Tomcat Exploration, Inc. and others brought suit
against Sheridan's predecessor, TGX, in the 215th District Court of Harris
County, Texas (Cause No. 96-61561) 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 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 production. Extensive pre-trial
production and depositions have been taken, and a trial is scheduled to commence
during 1998.

From time to time, in the normal course of business, the Company is a 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.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

During the fourth quarter of 1997, no matters were submitted to a vote of
the security holders.

15
<PAGE>

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET PRICE INFORMATION

Prior to July 2, 1997, Sheridan Common Stock was listed on the NASD's
"bulletin board". The shares were sporadically traded. After the Merger and
commencing July 2, 1997, Sheridan Common Stock was listed on the Nasdaq SmallCap
Market with the trading symbol SHDN.

As of December 31, 1997, there were approximately 2,300 holders of record
of Sheridan Common Stock. The following table sets forth bid quotations for TGX
Common Stock prior to the Merger, as reported by the National Quotations Bureau,
Inc. Bid quotations represent bid prices between dealers without retail markup
or markdown or commission and do not reflect actual transactions. Prices shown
subsequent to June 17, 1997 are high and low closing sales prices of Sheridan
Common Stock, as reported on the Nasdaq SmallCap Market.

<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
- ------------- ------ ------
<S> <C> <C>
1997:
March 31......... $ * $ *
June 30.......... * *
September 30..... 3.62 2.25
December 31...... 8.31 3.50

1996:
March 31......... $ * $ *
June 30.......... .0002 .0002
September 30..... .10 .10
December 31...... .01 .001
</TABLE>
- ------------
* No reported trading activity for the period noted.

The Company has not paid, and does not anticipate paying, any cash
dividends with respect to Sheridan Common Stock. Pursuant to its bank
indebtedness, the Company has certain restrictions on making cash payments on
Sheridan Common Stock or Sheridan Preferred Stock.

On March 27, 1998, the closing bid price per share of Sheridan Common
Stock, as reported by the Nasdaq SmallCap, was $5.125.

SHERIDAN PREFERRED STOCK

Sheridan sold 1.0 million shares of the Sheridan Preferred Stock to ECT in
connection with the Pioneer Acquisition. The Sheridan Preferred Stock provides
for cash dividends in an amount equal to $0.60 per share payable semi-annually
(a 12% annual rate) or, at the discretion of the Company, dividends may be paid
by issuing additional fully paid shares of Sheridan Preferred Stock in an amount
equal to .0675 additional shares (a 13.5% annual rate) for each share of
Sheridan Preferred Stock then issued and outstanding. The Sheridan Preferred
Stock also provides for a liquidation preference of $10 per share. The Sheridan
Preferred Stock is redeemable from time to time at the discretion of the Company
at certain established redemption prices, and must be redeemed on December 15,
2002 or upon the occurrence of certain defined situations, including a change of
control or a default as defined in the Sheridan Preferred Stock designation.

16
<PAGE>

ITEM 6. 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 for the two years ended
December 31, 1997 and 1996. The Company's financial statements and the notes
thereto which follow contain detailed information that should be referred to in
conjunction with the following discussion.

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 effect of the Merger, 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.

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 (the
"Merger Effective Date"). 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 Company follows the successful efforts method of accounting for its oil
and gas operations. Under the successful efforts method, costs of productive
wells, development dry holes and productive leases are capitalized and amortized
on a unit-of-production basis over the life of remaining proved resources. Cost
centers for amortization purposes are determined on a field-by-field basis. See
Note 1 of the Notes to Consolidated Financial Statements.

In addition to the accounting principle described above, the following
events affect the comparative results of operations and financial condition for
the years ended December 31, 1997 and 1996 and may impact future operations and
financial conditions.

1997 Acquisitions. In 1997, the Company purchased $52.5 million of
producing and non-producing 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"). Operations attributable to the last two weeks of
December 1997 are included in the Company's 1997 revenues and expenses. 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, LLC and JEDI I 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"). This
transaction resulted in no impact on 1997 revenues and expenses. See Note 3 of
the Notes to Consolidated Financial Statements.

1996 Acquisitions. In 1996, the Company purchased, for cash, $2.9 million
of producing properties through various transactions with effective dates at
various times during the year. Of such purchases, $1.7 million, comprising
eight separate transactions, were acquired in December with effective dates at
the end of December 1996, resulting in no impact on 1996 revenues and expenses.

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 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.

17
<PAGE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996 CHANGE
-------- -------- -------
<S> <C> <C> <C>
Production:
Oil and condensate (Bbl)...................................... 93,114 76,200 22 %
Natural gas (MMcf)............................................ 2,163 1,542 40 %
Total production (MMcfe)...................................... 2,722 1,999 36 %
Natural gas production as a percentage of total production.... 79% 77% 3 %

Oil, condensate and natural gas sales (in thousands, except
percentages):
Oil and condensate sales...................................... $ 1,805 $ 1,613 12 %
Natural gas sales............................................. $ 5,269 $ 3,446 53 %
Total oil, condensate and natural gas sales................... $ 7,074 $ 5,059 40 %
Natural gas revenues as a percentage of oil and gas revenues.. 74% 68% 9 %

Average realized price:
Oil and condensate (per Bbl).................................. $ 19.38 $ 21.16 (8)%
Natural gas (per Mcf)......................................... $ 2.44 $ 2.24 9 %

Average cost (per Mcfe):
Operating expenses (excludes production taxes)................ $ 0.63 $ 0.59 7 %
Depreciation, depletion and amortization...................... $ 0.87 $ 0.48 81 %
General and administrative expense............................ $ 0.87 $ 1.22 (29)%
</TABLE>

YEAR ENDED DECEMBER 31, 1997, COMPARED TO YEAR ENDED DECEMBER 31, 1996

Production

Natural gas sales volumes for 1997 were 2,163 MMcf, up 40% from sales
reported in 1996 of 1,542 MMcf. Oil volumes for 1997 were 93,114 barrels, up
22% over 1996 volumes of 76,200 barrels. The natural gas and oil sales volume
increases for 1997 reflect the successful results of the Company's acquisition,
drilling and workover activity and the full year impact of late 1996
acquisitions.

Revenues

Revenues from the sale of oil, condensate and natural gas for 1997 were
approximately $7.1 million, an increase of $2.0 million, or 40%, over 1996
revenues of approximately $5.1 million. Of this increase, sales volume
increases contributed $1.7 million, or 87%, of the revenue increase. An
increase in gas price per Mcf of $0.20 was partially offset by a reduction in
oil price per barrel of $1.78, resulting in net additional revenues of $269,000
from product price changes.

For 1997, the Company recorded gains on property sales of $29,000, as
compared to $166,000 for 1996. The 1996 gain on property sales of $166,000 is
primarily the result of the Company selling, in separate transactions, marginal
wells and an interest in a pipeline.

18
<PAGE>

Costs and Expenses

Operating expense. For 1997, total operating expense, which includes
through wellhead production costs (lifting costs), severance taxes and workover
costs, increased $610,000, or 43%, to approximately $2.0 million, as compared to
approximately $1.4 million for 1996. This increase was primarily the result of
higher production volumes and higher revenues. Production taxes for 1997 and
1996 totaled $324,000 and $234,000, respectively. Operating expense, excluding
production taxes, per Mcfe increased 7%, from $0.59 in 1996 to $0.63 in 1997 due
to high lifting costs related to the Company's Dorcheat Field in Arkansas.
Workover costs, which are typically included as part of operating expense, for
1997 and 1996 totaled $179,000 and $252,000, 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 1997 decreased to $611,000, as compared to $794,000 in 1996. 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. The 1997 decrease primarily was due to the recognition of previously
deferred fees in 1996.

Depletion, depreciation, and amortization. Depletion, depreciation, and
amortization ("DD&A") expense for 1997 was approximately $2.6 million, an
increase of approximately $1.6 million from the $964,000 reported for 1996. This
increase primarily was due to a 36% increase in equivalent volumes produced and
a 20% increase in the DD&A rate reflecting the cost characteristics of recent
acquisitions. DD&A per Mcfe for 1997, excluding the impairment provision, was
$0.87, as compared to $0.48 for 1996. Also included in 1997 DD&A is a provision
for impairment loss on oil and gas properties of $223,000. The impairment
provision is due to unanticipated production declines and lower product prices
related to the Oaks Field in Louisiana. The unamortized cost at year-end 1997
was impaired based on year end reserves fair value. In 1998, the primary well in
this field encountered mechanical problems. The cost anticipated to be incurred
to repair the well exceeds the year end anticipated recoverable reserves fair
value, and thus, the Company anticipates recording an impairment provision in
1998, of $300,000, for the remaining unamortized cost. Salvage value is
estimated to approximate abandonment cost.

General and administrative expense. General and administrative expense in
1997 was approximately $2.8 million, an increase of $330,000 from $2.4 million
in 1996. This increase was primarily attributable to increases in termination
expense and legal and other professional fees which were partially offset by
lower 1997 Merger expenses. General and administrative expenses for 1997 include
one-time net termination expenses of $186,000 related to the former president
and another officer's resignation. Legal expenses for 1997 increased $148,000
due primarily to the activity related to the unleased owners' lawsuit in East
Baton Rouge Parish, Louisiana and the Tomcat Exploration, Inc. litigation matter
(see Note 5 of the Notes to Consolidated Financial Statements). Legal costs are
anticipated to continue to increase in 1998, as these litigation matters proceed
to trial. Recurring professional fees and accruals related to year end reservior
engineering, accounting fees and consultants increased $215,000 due to the 1997
increase in properties and related activity. General and administrative expenses
for 1997 and 1996 also include $181,000 and $440,000, respectively, of one-time
costs and fees related to the Merger. The Company anticipates that general and
administration expenses will increase in 1998 as a result of the Pioneer and
Grand Gulf Acquisitions.

Exploration costs. Pursuant to successful efforts accounting, unsuccessful
exploration costs are expensed. For 1997, exploration costs totaled $484,000,
representing unsuccessful activities on 3 gross (.75 net) wells. For 1996,
exploration costs were $164,000, representing unsuccessful activities on two
gross (0.43 net) wells.

Other Income (Expenses)

Provision for litigation expense; Litigation settlement gain. For 1997, the
Company recorded a provision for litigation expense of $1.0 million,
representing management's assessment of the likelihood of losses and/or related
costs and expenses of 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.

In April 1996, TGX entered into a Settlement Agreement with NFG and the
PSC. Pursuant to the Settlement Agreement, TGX received $7.2 million of gross
settlement proceeds from NFG, and all parties to the Settlement Agreement
dismissed all claims and counterclaims against each other. The Company
recognized a net

19
<PAGE>

litigation settlement gain of $7.1 million in connection with the Settlement
Agreement. See Note 4 to Consolidated Financial Statements.

Equity earnings in the natural gas treating plant (the "Comite Plant")
decreased by 7% to $507,000 in 1997, compared to $548,000 in 1996. This decrease
was primarily attributable to the recoupment of previously deferred fees in 1996
and natural gas field production declines. In 1997, as the result of new field
development, the Comite Plant added one new well, at a lower relative fee, and
anticipates adding one additional well in 1998.

Interest and other income. Interest and other income is comprised primarily
of the sale of an option to purchase a pipeline for $50,000 and interest income
of $24,000. Interest and other income for 1996 is comprised of take-or-pay
contract net settlement proceeds of approximately $110,000; net settlement
proceeds regarding fees on the pipeline interest sold in 1996 of $218,000; and
dismissal of certain pre-petition liabilities of $217,000, with the remaining
amount being primarily attributed to interest income.

Interest expense. Interest expense for 1997 increased to $344,000 from
$207,000 in 1996, primarily due to an increase in long term debt as a result of
1997 acquisitions. Interest expense for 1996 also included $132,000 of interest
payable through the issuance of additional notes related to the BMOF Note.
Included in 1997 and 1996 interest expense is approximately $46,000 and $30,000,
respectively, of amortization of credit facility establishment costs which are
being amortized over the remaining term of the facility.

Extraordinary Gain

In April 1996, the Company received $7.2 million of gross proceeds in
connections with the Settlement Agreement. Pursuant to amended credit
agreements with BMOF, 50%, or $3.6 million, of the settlement proceeds were paid
to BMOF in cancellation and full payment of BMOF note. The Company recognized
an extraordinary gain from debt forgiveness of $1.8 million, net of income taxes
of $37,000, in connection with the final payment. See Note 4 of the Notes to
Consolidated Financial Statements.

Taxes

Due to tax loss carry forwards, the Company currently pays federal
alternative minimum income taxes only. In 1996, the Company recognized a
deferred tax asset of $930,000, based on then future income projections. In
1997, due to losses, no tax expense was recorded. In 1996, in conjunction with
the recognition of the litigation settlement and related tax gain resulting from
the final BMO debt settlement, the Company had estimated and accrued alternative
minimum income taxes of $180,000, which included $37,000 of income tax related
to the extraordinary gain. The tax expense recognized represented an effective
tax rate of approximately 2% on income before income taxes.

The issuance of additional shares of Sheridan Common Stock in late 1997
resulted in a change of ownership ("1997 Ownership Change") for tax purposes. As
a result of the change of ownership, the Company's use of available net
operating loss carryovers, alternative minimum tax credit carryovers, investment
tax credit carryovers and other tax attributes are subject to limitation.
Because of the 1997 Ownership Change, the Company is subject to an annual
limitation (the "382 Limitation") of $1.1 million on the use of pre-"change of
ownership" loss carryovers. The annual 382 Limitation results in a maximum
available net operating loss carryover of approximately $9.0 million.

In addition to the 382 Limitation, the Company has approximately $20.0
million of potential net operating loss utilization attributable to unrealized
built-in gains. The built-in gain net operating loss utilization is only
available if the gains on identified assets are realized within five years of
the 1997 Ownership Change.

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 historical results. 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 cancelled. See Notes 9 and 10 to Consolidated
Financial Statements.

In conjunction with the Pioneer Acquisition, $10.0 million of Sheridan
Preferred Stock was issued, which provides for cash dividends in an amount equal
to $0.60 per share payable semi-annually (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. Included in 1997 dividends is $53,000 of accrued
dividends on the Sheridan Preferred Stock, based on the cash rate.

20
<PAGE>

FINANCIAL CONDITION

During 1997, the Company's cash capital expenditures totaled $51.0 million,
an increase of $46.7 million from 1996 capital expenditures of $4.3 million.
The Pioneer Acquisition, effective November 1, 1997 but closed on December 15,
1997, resulted in little impact on 1997 revenues and expenses as results from
the effective date of purchase to closing were reflected as adjustments to the
purchase price. The Pioneer Acquisition represented $46.7 million, or 92%, of
total 1997 cash capital expenditures. Effective September 1, 1997 but closed
December 31, 1997, the Company acquired additional oil and gas producing and
non-producing properties through the Grand Gulf Acquisition by issuing 850,000
shares of Sheridan Common Stock and warrants to acquire an additional 150,000
shares of Sheridan Common Stock which are currently owned by JEDI and JEDI I.
Such warrants expire five years after the date of issuance and are exercisable
in whole or in part from time to time at $5.50. The Grand Gulf Acquisition total
assets were valued at $4.1 million, based on the estimated value of the
assets acquired and an analysis of the value of the securities given in
consideration. The proved reserves attributable to these acquisitions are
included in reserve quantities reported at December 31, 1997.

At December 31, 1997, the Company had a working capital deficit of
approximately $1.0 million. The working capital deficit is primarily the result
of a provision for litigation expense of $1.0 million.

Prior to 1996, the Company entered into a borrowing base facility with Bank
One. The Bank One credit facility initially provided for a borrowing base of
$2.4 million, bore interest at Bank One's stated rate plus 2% and was to mature
on July 13, 1997. Effective September 30, 1996, the Bank One credit facility
was amended, which increased the borrowing base to $5.0 million, with monthly
borrowing base reductions of $100,000, lowered the interest rate to stated rate
plus 1.5% and extended the maturity to June 30, 1999.

In late 1997, in conjunction with the Pioneer Acquisition and Grand Gulf
Acquisition, the Bank One credit facility was further amended, the 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. At December 31, 1997, the Company's
borrowing base under this facility was $39.4 million, and the Company had $31.5
million outstanding. Due to the excess of borrowing base over year end
borrowings and the current monthly borrowing base reduction rate, no current
maturities for debt were reflected at December 31, 1997.

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 annual limitations on general and
administrative expense. 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.

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 December 31, 1997,
the Sheridan Preferred Stock redemption value was $10.0 million. The Company
has no redemption obligation on the Sheridan Preferred Stock until December 15,
2002, at which point all of the Sheridan Preferred Stock then outstanding must
be redeemed.

LIQUIDITY AND CAPITAL RESOURCES

For 1997, cash provided by operating activities was approximately $660,000,
including approximately $598,000 of proceeds received from the Company's 35%
equity investment in the Comite Plant.

21
<PAGE>

In 1997, the Company purchased $52.5 million of oil and gas properties,
with effective dates at various times during the year, for cash and the issuance
of Sheridan Common Stock and warrants. The Pioneer Acquisition and the Grand
Gulf Acquisition were closed in late December 1997 and resulted in little impact
on 1997 revenues and expenses. Had all 1997 properties purchased been acquired
at the beginning of the year, the impact on revenues and net loss applicable to
common stock would have been an increase of $13.6 million and of $1.3 million,
respectively. The increase in loss applicable to common stock was due primarily
to increased preferred dividends and depletion and depreciation expense. The
Company anticipates that these acquisition properties will have a positive
impact on future results.

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 late December 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 late January 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.

At December 31, 1997, the Bank One credit facility had a borrowing base of
$39.4 million with $31.5 million of borrowings outstanding. The Company had
letter of credit commitments totaling $104,000 outstanding under the credit
facility, resulting in a year end facility availability of $7.8 million. The
borrowing base is reduced monthly by $550,000, and the next borrowing base
redetermination is scheduled for April 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 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 December 31, 1997 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 workovers
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.
Effective implementation of the Company's development and acquisition plans is
expected to meet the Company's long-term operation and liquidity requirements.

22
<PAGE>

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 but ultimately trend upward 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.

YEAR 2000

23
<PAGE>

ITEM 7. FINANCIAL STATEMENTS

The Company's Consolidated Financial Statements as of December 31, 1997 and
1996 and for each of the two years ended December 31, 1997, and the report of
Price Waterhouse LLP, independent accountants, follow.

REPORT OF INDEPENDENT ACCOUNTANTS

In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Sheridan
Energy, Inc. and its subsidiary (the "Company") at December 31, 1997 and 1996,
and the results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.

PRICE WATERHOUSE LLP

Houston, Texas
March 27, 1998

24
<PAGE>

SHERIDAN ENERGY, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
ASSETS 1997 1996
------ -------- ---------
(IN THOUSANDS,
EXCEPT FOR PER SHARE DATA)
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................................... $ 274 $ 1,924
Accounts receivable, net of allowance for doubtful accounts of
$90 (1997) and $200 (1996)................................................. 3,109 1,291
Deferred tax asset........................................................... 165 680
Other current assets......................................................... 244 117
------- --------
Total current assets....................................................... 3,792 4,012
------- --------

Property and equipment:
Oil and natural gas properties............................................... 70,139 15,535
Other property and equipment................................................. 427 204
Accumulated depletion, depreciation and amortization......................... (7,694) (5,103)
------- --------
Property and equipment, net................................................ 62,872 10,636
------- --------

Investment in natural gas treating plant...................................... 505 596
Deferred tax asset............................................................ 765 250
Other assets.................................................................. 765 53
------- --------
Total other assets........................................................... 2,035 899
------- --------
TOTAL ASSETS.................................................................. $68,699 $ 15,547
======= ========

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------

Current liabilities:
Accounts payable and accrued liabilities..................................... $ 4,836 $ 2,997
------- --------
Total current liabilities.................................................. 4,836 2,997
------- --------

Long term debt................................................................ 31,500 1,500
------- --------
Total liabilities.......................................................... 36,336 4,497
------- --------
Commitments and contingencies (Note 5)
Redeemable Preferred Stock:
Sheridan Preferred Stock, 1,000,000 shares outstanding; redemption
value $10,000.............................................................. 10,000 --
TGX Preferred Stock, 8,788,571 shares outstanding; redemption value $87,886.. -- 80,726
------- --------
Total redeemable preferred stock............................................ 10,000 80,726
------- --------

Stockholders' equity (deficit):
TGX 9% Cumulative Convertible Preferred Stock, 300,000 shares outstanding;
plus 185,000 shares to be issued for dividends............................. -- 485
Common Stock:
Sheridan Common Stock, 6,731,331 shares outstanding........................ 67 --
TGX Common Stock, 24,955,807 shares outstanding............................ -- 290
Additional paid-in capital................................................... 29,005 1,665
Accumulated (deficit)........................................................ (6,709) (72,116)
------- --------
Total stockholders' equity (deficit)....................................... 22,363 (69,676)
------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT).......................... $68,699 $ 15,547
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.

25
<PAGE>

SHERIDAN ENERGY, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>

YEAR ENDED DECEMBER 31,
----------------------------
1997 1996
-------------- ------------
(IN THOUSANDS,
EXCEPT FOR PER SHARE DATA)
<S> <C> <C>
REVENUES:
Oil and natural gas sales......................................... $ 7,074 $ 5,059
Natural gas gathering............................................. 224 220
Gain on property sale............................................. 29 166
-------- --------
7,327 5,445
-------- --------
COST AND EXPENSES:
Operating expense................................................. 2,027 1,417
Treating and transportation expense............................... 611 794
Depletion, depreciation and amortization.......................... 2,592 964
General and administrative expense................................ 2,767 2,437
Exploration costs................................................. 484 164
-------- --------
8,481 5,776
-------- --------
OPERATING LOSS...................................................... (1,154) (331)
Other income (expenses):
Provision for litigation (expense); Litigation settlement gain.... (1,000) 7,100
Equity earnings in natural gas treating plant..................... 507 548
Interest and other income......................................... 124 707
Interest expense.................................................. (344) (207)
-------- --------
(713) 8,148
-------- --------
INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY GAIN............ (1,867) 7,817
Income tax expense (benefit):
Current........................................................... -- 143
Deferred.......................................................... -- (930)
-------- --------
-- (787)
-------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY GAIN............................. (1,867) 8,604
Extraordinary gain, net of income taxes of $37...................... -- 1,831
-------- --------
NET INCOME (LOSS)................................................... (1,867) 10,435
Preferred stock dividends........................................... (5,894) (13,143)
Accretion of TGX Senior Preferred redemption value.................. (3,205) (6,104)
-------- --------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK........................ $(10,966) $ (8,812)
======== ========

EARNINGS (LOSS) PER SHARE - BASIC:
Loss before extraordinary gain.................................... $(2.51) $ (2.42)
Extraordinary gain................................................ -- 0.42
-------- --------
Loss per share.................................................... $(2.51) $ (2.00)
======== ========

EARNINGS (LOSS) PER SHARE - DILUTED:
Loss before extraordinary gain.................................... $(2.48) $ (2.42)
Extraordinary gain................................................ -- .42
-------- --------
Loss per share.................................................... $(2.48) $ (2.00)
======== ========

WEIGHTED AVERAGE SHARES:
Basic............................................................. 4,365 4,406
======== ========
Diluted........................................................... 4,421 4,406
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.

26
<PAGE>

SHERIDAN ENERGY, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CASH FLOW
<TABLE>
<CAPTION>

YEAR ENDED DECEMBER 31,
-------------------------
1997 1996
------------ -----------
(IN THOUSANDS)
<S> <C> <C>

Cash flow from operating activities:
Net income (loss)..................................................................... $ (1,867) $10,435
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depletion, depreciation and amortization........................................... 2,592 964
Provision for litigation expense................................................... 1,000 --
Amortization of debt transaction costs and stock compensation...................... 31 55
Gain on property sale.............................................................. (29) (166)
Distribution in excess of equity earnings.......................................... 91 143
Interest to have been paid through issuance of additional notes.................... -- 132
Extraordinary gain................................................................. -- (1,868)
Changes in current operating assets and liabilities:
Increase in accounts receivable.................................................. (1,818) (150)
Decrease in accounts due from affiliates, net.................................... -- 6
Increase in other current assets................................................. (127) (66)
Increase (decrease) in accounts payable and accrued liabilities.................. 787 (356)
Deferred tax asset................................................................. -- (930)
-------- -------
Net cash provided by operating activities............................................... 660 8,199
-------- -------

Cash flow from investing activities:
Capital expenditures.................................................................. (50,988) (4,280)
Proceeds from disposal of other assets................................................ 283 215
Increase in other assets.............................................................. -- (7)
-------- -------
Net cash used in investing activities................................................. (50,705) (4,072)
-------- -------

Cash flow from financing activities:
Proceeds from issuance of redeemable preferred shares................................. 10,000 --
Proceeds from issuance of common shares, net.......................................... 9,153 --
Payments on revolving credit facility and notes payable............................... (7,950) (4,500)
Borrowings under revolving credit facility............................................ 37,950 1,900
Debt and preferred stock transaction costs and other.................................. (758) 13
-------- -------
Net cash provided by (used in) financing activities................................... 48,395 (2,587)
-------- -------
Net increase (decrease) in cash and cash equivalents.................................... (1,650) 1,540
Cash and cash equivalents at beginning of period........................................ 1,924 384
-------- -------
Cash and cash equivalents at end of period.............................................. $ 274 $ 1,924
======== =======

Supplemental Disclosure of Non-Cash Investing and Financing Activities:
Common shares and warrants issued for oil and gas properties, net..................... $ 4,127 $ --
Forgiveness of bank debt and other notes payable...................................... $ -- $ 1,868
Interest to have been paid through issuance of additional notes....................... $ -- $ 132
</TABLE>

See accompanying notes to consolidated financial statements.

27
<PAGE>

SHERIDAN ENERGY, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Years ended December 31, 1996 and 1997
(in thousands)
<TABLE>
<CAPTION>
Old Preferred TGX Sheridan
Stock Common Stock Common Stock Additional
---------------- ---------------- -------------- Paid-in
Shares Amount Shares Amount Shares Amount Capital
------- ------- ------- ------- ------ ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995......................... 458 $ 458 24,956 $ 290 -- $-- $ 1,422
Preferred dividends payable with
additional shares of Old Preferred......... 27 27 -- -- -- -- 243
Dividends on TGX Senior Preferred Stock........ -- -- -- -- -- -- --
Accretion of TGX Senior Preferred
Stock redemption value..................... -- -- -- -- -- -- --
Net income..................................... -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ -------
Balance, December 31, 1996......................... 485 485 24,956 290 -- -- 1,665
------ ------ ------ ------ ------ ------ -------
Preferred dividends payable with
additional shares of Old Preferred......... 12 12 -- -- -- -- 108
Dividends on TGX Senior Preferred Stock........ -- -- -- -- -- -- --
Accretion of TGX Senior Preferred
Stock redemption value..................... -- -- -- -- -- -- --
Adjustments due to Merger (Note 1)............. (497) (497) (24,956) (290) 4,281 43 14,006
Issuance of shares for cash.................... -- -- -- -- 1,600 16 9,137
Issuance of shares for oil and gas properties.. -- -- -- -- 850 8 4,089
Dividends on Sheridan Preferred Stock.......... -- -- -- -- -- -- --
Net loss....................................... -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ -------
Balance, December 31, 1997......................... -- $ -- -- $ -- 6,731 $67 $29,005
====== ====== ====== ====== ====== ====== =======

Total
Accumulated Stockholders'
Deficit Equity (Deficit)
------------ ---------------
<S> <C> <C>
Balance, December 31, 1995......................... $(63,304) $(61,134)
Preferred dividends payable with
additional shares of Old Preferred......... (270) --
Dividends on TGX Senior Preferred Stock........ (12,873) (12,873)
Accretion of TGX Senior Preferred
Stock redemption value..................... (6,104) (6,104)
Net income..................................... 10,435 10,435
-------- --------
Balance, December 31, 1996......................... (72,116) (69,676)
-------- --------
Preferred dividends payable with
additional shares of Old Preferred......... (120) --
Dividends on TGX Senior Preferred Stock........ (5,721) (5,721)
Accretion of TGX Senior Preferred
Stock redemption value..................... (3,205) (3,205)
Adjustments due to Merger (Note 1)............. 76,373 89,635
Issuance of shares for cash.................... -- 9,153
Issuance of shares for oil and gas properties.. -- 4,097
Dividends on Sheridan Preferred Stock.......... (53) (53)
Net loss....................................... (1,867) (1,867)
-------- --------
Balance, December 31, 1997......................... $ (6,709) $ 22,363
======== ========

</TABLE>

<PAGE>

SHERIDAN ENERGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BUSINESS, REORGANIZATION PROCEEDINGS AND EQUITY RESTRUCTURING

Business

Sheridan Energy, Inc. ("Sheridan" or the "Company") is the successor to its
former parent company, TGX Corporation ("TGX"), and 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.

Reorganization Proceeding

On February 22, 1990, TGX filed a voluntary petition for reorganization
pursuant to Chapter 11, Title 11 of the United States Code (the "Reorganization
Proceeding"). On January 7, 1992, the bankruptcy court confirmed a
reorganization plan ("Reorganization Plan") for TGX, and the confirmation order
became effective on January 21, 1992. On September 21, 1992, the bankruptcy
court determined that the Reorganization Plan had been substantially
consummated, and the bankruptcy court's order of substantial consummation became
final and non-appealable on October 2, 1992. The effects of the Reorganization
Proceeding were accounted for in accordance with the fresh start reporting
standards of AICPA Statement of Position 90-7 "Financial Reporting by Entities
in Reorganization Under the Bankruptcy Code."

In conjunction with implementing fresh start reporting, a reorganization
value of TGX's assets and liabilities as of October 2, 1992 was determined by
management on the basis of its best judgment of the fair market value of TGX's
assets and liabilities at the time, after reviewing relevant facts concerning
the price at which similar assets were being sold. Accordingly, the balance
sheet includes amounts reflecting reorganization values.

TGX was a party to numerous executory contracts which, pursuant to the
provisions of the Reorganization Plan, could be assumed or rejected by TGX. If
an executory contract was assumed by TGX, all defaults related to the executory
contract were cured (generally, paid-in-full with cash). As of December 31,
1995, the aggregate balance of pre-petition obligation related to assumed
executory contracts was approximately $317,000, which related to undistributed
net oil and gas revenues in a "suspended pay" status. Pursuant to the
Reorganization Plan and statute of limitations, the "suspended pay" liability
was dismissed during 1996 and recognized as other revenues.

Under the Reorganization Plan, creditors of TGX received shares of TGX's
Series A Senior Preferred Stock (the "TGX Senior Preferred Stock") which were
mandatorily redeemable on or before January 21, 2002. The Reorganization Plan
provided that the holders of TGX 9% Cumulative Convertible Preferred Stock ("Old
Preferred") and TGX common stock ("TGX Common Stock") would retain their shares
primarily to preserve their interest in a potential recovery from TGX's
litigation with National Fuel Gas Distribution Corporation ("NFG") ("NFG
Litigation") (See Note 4). The NFG Litigation was settled on April 12, 1996, and
TGX, after payments to other non-affiliated parties entitled to share in the
settlement, retained approximately $3.5 million from such settlement. Because
TGX's net assets, including proceeds from the NFG Settlement, or expected cash
flows were clearly insufficient to redeem the TGX Senior Preferred Stock, TGX
effected an equity restructuring ("the Merger") on June 12, 1997.

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. The Old 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.

29
<PAGE>

SHERIDAN ENERGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The following table reflects pro forma earnings per share of Sheridan
Common Stock as if the Merger had been effective as of January 1, 1996 and all
TGX Senior Preferred Stock and Old Preferred Stock dividend and related
accretion charges had been eliminated as of such date:

<TABLE>
<CAPTION>
BASIC DILUTED
------------------- ------------------
1997 1996 1997 1996
---------- ------- --------- -------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income before extraordinary gain per share.. $(0.44) $ 1.95 $(0.43) $ 1.95
Extraordinary gain per share.................... -- 0.42 -- 0.42
------ ------ ------ ------
Pro forma net income (loss) per share........... $(0.44) $ 2.37 $(0.43) $ 2.37
====== ====== ====== ======
Weighted average shares outstanding............. 4,365 4,406 4,421 4,406
====== ====== ====== ======
</TABLE>

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of
Sheridan and its subsidiary, TEIC. All significant intercompany accounts and
transactions have been eliminated. Companies owned 20% to 50% are accounted for
under the equity method of accounting.

Oil and Natural Gas Properties

The Company follows the successful efforts method of accounting for oil and
natural gas operations. Under the successful efforts method, capitalized costs
relating to proved properties are amortized using the unit-of-production method
based on estimated proved reserves. The cost of unsuccessful exploration wells
is charged to operations. If an assessment indicates that an unproved property
has been impaired, a loss is recognized by providing a valuation allowance.
Generally, a gain or loss is recognized on the disposition of a property.

Other Property and Equipment

Depreciation of other property and equipment is provided on the straight-
line method over the estimated useful lives of the related assets, which range
from 3 to 10 years.

Revenue Recognition

Revenue from the sale of crude oil is recognized upon the passage of title,
net of royalties. Revenue from natural gas production is recognized using the
sales method, net of royalties. 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, the Company is in an under-produced status of
approximately 656 MMcf as of December 31, 1997. 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.

Derivative Financial Instruments

The Company has limited involvement with derivative financial instruments
and does not use them for trading purposes. They are used to manage well-defined
natural gas and crude oil price and interest rate risk. Gains and losses on
natural gas and oil swaps are recognized in revenues when the hedged production
is sold.

Interest rate swap agreements are used to reduce the potential impact of
increases in interest rates on the Company's variable rate revolving credit
facility. Amounts receivable or payable under interest rate swaps are settled in
cash and are reflected as adjustments to interest expense.

30
<PAGE>

SHERIDAN ENERGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Stock Based Compensation

As allowed by SFAS No. 123, the Company has elected to continue to follow
the accounting prescribed by Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees," whereby compensation costs are
recognized only in situations where stock compensation plans award intrinsic
value to recipients at the date of grant, rather than the fair value method of
SFAS No. 123. Pro Forma disclosure of the estimated effects on net income and
earnings per share had the fair value method, prescribed by SFAS No. 123, been
followed are included in Note 10.

Per Share Amounts

In February 1997, the FASB issued SFAS No. 128, Earnings per Share, which
changed the computation of earnings per share (EPS) and requires presentation of
basic and diluted EPS. EPS for prior periods presented, including unaudited
interim periods, has been restated in accordance with SFAS No. 128.

Cash and Cash Equivalents

The Company records as cash equivalents all highly liquid short-term
investments with original maturities of three months or less.

Accounting Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses and the disclosure of contingent assets and liabilities. Actual
results could differ from those estimates.

Reclassifications

Certain amounts from prior years have been reclassified to conform to the
current year presentation.

31
<PAGE>

SHERIDAN ENERGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

3. PROPERTY AND EQUIPMENT

Acquisitions

During 1997, the Company purchased, for cash and securities of the Company,
$52.5 million of oil and gas properties. In one transaction closed December 15,
1997, the Company acquired oil and gas producing and non-producing properties
from Pioneer Natural Resources USA, Inc. (the "Pioneer Acquisition") for $46.7
million, which was funded through the issuance of $10.0 million of Series A
Preferred Stock ("Sheridan Preferred Stock"), $10.0 million of Sheridan Common
Stock and approximately $28.0 million in bank borrowings. In a second
transaction closed December 31, 1997, the Company acquired additional oil and
gas producing and non-producing properties from Grand Gulf Resources, L.L.C.
("Grand Gulf") and JEDI Hydrocarbon Investments I Limited Partnership ("JEDI I")
(the "Grand Gulf Acquisition") through the issuance of 850,000 shares of
Sheridan Common Stock and warrants to acquire an additional 150,000 shares of
Sheridan Common Stock at $5.50 per share. The Grand Gulf Acquisition was valued
at $4.1 million, based on the estimated value of the assets acquired and an
analysis of the value of the securities given in consideration.

In 1996, the Company purchased oil and gas producing properties for $2.9
million, including $1.7 million acquired at the end of December.

The acquisitions have been accounted for on a purchase basis, effective at
date of closing.

Pro Forma Acquisition Information (Unaudited)

Had all 1997 and 1996 properties purchased been acquired at the beginning
of 1996, the impact would have been an increase in revenues of $13.6 million and
an increase in the loss before extraordinary gain of $32,000 for 1997 and an
increase in revenues and income before extraordinary gain of $17.3 million and
$705,000, respectively, for 1996. The 1997 and 1996 loss applicable to common
stock would have increased by $1.3 million and $568,000, respectively.

The following table summarizes certain pro forma condensed consolidated
results of operations data that give effect to the 1997 and 1996 acquisitions as
if they had occurred on January 1, 1996, including the associated impact of
financing costs, including dividends, and incremental general and administrative
costs.

32
<PAGE>

SHERIDAN ENERGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996
--------- --------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Total revenues................................ $ 21,469 $23,250
Income (loss) before extraordinary gain....... $ (1,899) $ 9,309
Net loss applicable to common stock........... $(12,271) $(9,380)
Net loss per share of common stock - basic.... $ (1.80) $ (1.37)
Net loss per share of common stock - diluted.. $ (1.79) $ (1.37)
</TABLE>

Provision for Impairment Loss

In 1998, mechanical problems were experienced on a certain property such
that the estimated cost to repair the property exceeded the estimated
recoverable value from the reserves, and the remaining recorded net book value
of $300,000 will be expensed in 1998.

4. LONG TERM DEBT AND NOTES PAYABLE

As of December 31, 1997 and 1996, the components of long term debt were as
follows:

<TABLE>
<CAPTION>
1997 1996
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Secured bank debt under revolving credit facility.. $31,500 $1,500
Less current maturities............................ -- --
------- ------
Long term debt..................................... $31,500 $1,500
======= ======
</TABLE>

Prior to 1996, the Company entered into a borrowing-base facility with Bank
One, Texas, N.A. ("Bank One"). The facility initially provided a borrowing base
of $2.4 million and bore interest at Bank One's stated rate plus 2% and
was to mature on July 13, 1997. Effective September 30, 1996, the facility was
amended and the borrowing base was increased to $5.0 million, with monthly
borrowing base reductions of $100,000, the interest rate was lowered to stated
rate plus 1.5% and the maturity was extended to June 30, 1999.

In late 1997, in conjunction with the Pioneer Acquisition and Grand Gulf
Acquisition, the Bank One credit facility was further amended, the borrowing
base was increased to $40.0 million, and the maturity was extended to June 30,
2000. The Company may elect to borrow at Bank One's stated rate (8.5% at
December 31, 1997) or LIBOR plus 2.5%. In addition, the Company must 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 December 31, 1997, the Company's borrowing base under this
facility was $39.4 million, and the Company had $31.5 million outstanding. Due
to the excess of borrowing base over year end borrowings outstanding and the
current monthly facility reduction rate, no current maturities for debt were
reflected at December 31, 1997 or 1996.

The Bank One credit facility requires the maintenance of certain ratios
relating to working capital, tangible net worth and annual limitations on
general and administrative expense. In addition, the payment of dividends on
Sheridan Common Stock and Sheridan Preferred Stock is restricted except that
cash

33
<PAGE>

SHERIDAN ENERGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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.

As of December 31, 1997, the Company had letters of credit outstanding of
$104,000 under the Bank One credit facility, which reduced the Company's
availability under the facility.

In connection with the amendment to the Bank One credit facility in 1997, the
Company incurred $395,000 in costs which are included in other assets and are
being amortized over the term of the facility.

Prior to restructuring its debt through the Bank One facility, TGX had been
subject to the terms of an Amended and Restated Credit Agreement with the Bank
of Montreal ("BMO"). Simultaneously with obtaining the Bank One facility, BMO
released all of its liens on TGX's properties with the exception of its lien on
the NFG Litigation. As part of the loan restructuring, BMO converted $4.6
million of its outstanding indebtedness to a non-recourse note secured only by
the NGF Litigation and assigned it to a wholly-owned subsidiary, BMO Financial,
Inc. ("BMOF"). The BMOF note was to mature on December 31, 1997 and bore
interest at the rate of 10% per annum. TGX was to pay interest in kind through
the issuance of additional notes to BMOF.

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,
TGX received $7.2 million from NFG, and all parties to the settlement dismissed
all claims and counterclaims against each other. As a result of the receipt of
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
$7.1 million. Under amended credit agreements with BMOF, 50%, or $3.6 million,
of the gross settlement proceeds was paid to BMOF in cancellation and full
payment of the BMOF note, which totaled $5.4 million. TGX recorded an
extraordinary gain for debt forgiveness of $1.8 million, net of income taxes of
$37,000.

Cash paid for interest during 1997 and 1996 totaled approximately $264,000 and
$45,000, respectively.

34
<PAGE>

SHERIDAN ENERGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

5. 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. 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 claiming such a defense. However, the Bankruptcy Court rejected that
defense and the ruling is on appeal. The Company has also commenced an appeal of
the judgment of the East Baton Rouge District Court. 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 March 1994, a hearing was conducted in the Bankruptcy Court regarding
the final allowance of prepetition and administrative claims that related to an
overriding royalty interest previously conveyed by TGX. During that hearing, the
parties stipulated that the finally allowed amount of claimant's prepetition
claim would be $600,000. The petition claim was fully satisfied by the issuance
of 60,000 shares of TGX Senior Preferred Stock. TGX had previously estimated a
petition claim in that amount, and therefore it had been reflected in prior
years' financial statements. Subsequent to the March 1994 hearing, and after
post-hearing motions from both TGX and the claimant, the Bankruptcy Court
entered an order on September 7, 1994, which determined that the claimant would
be granted an allowed administrative expense claim for unpaid overriding
royalties arising post petition but prior to October 4, 1992 in the amount of
$244,000. That administrative claim, when finally allowed, was to be treated by
the issuance of a promissory note under the terms of the Reorganization Plan.
The Bankruptcy Court further ruled that it would not exercise any jurisdiction
over claims for alleged unpaid overriding royalties arising subsequent to
October 4, 1992. In May 1996, TGX settled this litigation for payment of
$400,000 and the return to TGX of the 60,000 shares of TGX Senior Preferred
Stock previously issued.

(d) 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'
workover operation on the well, after their acquisition of their interest,
caused the well to cease production. Extensive pre-trial production and
depositions have been taken, and a trial is scheduled to commence during 1998.

35
<PAGE>

SHERIDAN ENERGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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 these
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.

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.

Leases

As of December 31, 1997, future annual noncancelable minimum lease amounts for
office and equipment leases are as follow:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, AMOUNT
------------ --------------
(IN THOUSANDS)
<S> <C>
1998.......................... $162
1999.......................... 158
2000.......................... 158
2001.......................... 129
2002.......................... 1
----
Total minimum lease payments.. $608
====
</TABLE>

Rent expense for the years ended December 31, 1997 and 1996 was $90,000 and
$112,000, respectively.

6. INVESTMENT IN NATURAL GAS TREATING PLANT

The Company owns a 35% interest in the Comite Field Plant Venture, an
Oklahoma general partnership, formed in April 1982 for the purpose of
constructing and operating a natural gas treating plant to serve the Comite
Field in East Baton Rouge Parish, Louisiana. Natural gas produced from one well
operated by the Company and two wells operated by third parties are transported
to the Comite Plant where contaminants are extracted to satisfy pipeline
specifications. In addition, the plant also provides condensate handling and
salt water disposal facilities. The Company receives cash distributions for its
share of net cash flow. Further, the Company is charged for gas treating and
transportation for its share of throughput. Such charges are included in the
consolidated statement of operations as treating and transportation expense.

36
<PAGE>

SHERIDAN ENERGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

A summary of the Comite Plant's unaudited financial position as of December
31, 1997 and 1996 and the results of its operations for the years then ended is:

<TABLE>
<CAPTION>
1997 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
SUMMARY BALANCE SHEET
Current Assets................................................................ $ 783 $ 594
Net property and equipment.................................................... 885 1,278
------ ------
$1,668 $1,872
====== ======

Current liabilities........................................................... $ 225 $ 144
Long term debt................................................................ -- 50
Partners' capital............................................................. 1,443 1,678
------ ------
$1,668 $1,872
====== ======

SUMMARY STATEMENT OF EARNINGS
Fee earned.................................................................... $2,631 $2,608
Operating expenses............................................................ 1,158 1,062
------ ------
Operating income.............................................................. 1,473 1,546
Other income.................................................................. -- 4
------ ------
Net income.................................................................... $1,473 $1,550
====== ======

7. ACCOUNTS RECEIVABLE

As of December 31, 1997 and 1996, the primary components of accounts
receivable were:

1997 1996
------ -------
(IN THOUSANDS)
<S> <C> <C>
Accrued oil and gas sales..................................................... $1,783 $1,137
Receivables for pre-closing activity for purchased properties................. 923 --
Joint interest billing and other.............................................. 493 354
Allowance for doubtful accounts............................................... (90) (200)
------ ------
$3,109 $1,291
====== ======
</TABLE>

8. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

As of December 31, 1997 and 1996, the primary components of accounts payable
and accrued liabilities were:

<TABLE>
<CAPTION>
1997 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
Accounts payable.............................................................. $ 953 $ 360
Undistributed net oil and natural gas revenues................................ 1,457 1,281
Provision for litigation expenses............................................. 1,100 100
Accrued operating and tax expenses............................................ 638 354
Accrued professional fees..................................................... 350 347
Income tax liability.......................................................... -- 180
Operation advances............................................................ -- 115
Miscellaneous accruals........................................................ 338 260
------ ------
$4,836 $2,997
====== ======
</TABLE>

37
<PAGE>

SHERIDAN ENERGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

9. REDEEMABLE PREFERRED STOCK

Sheridan Preferred Stock

The Company is authorized to issue 5.0 million shares of preferred stock
with a par value of $.01 per share. In order to finance a portion of the Pioneer
Acquisition, Sheridan issued 1.0 million shares of preferred stock to Enron
Capital & Trade Resources Corp. ("ECT") for $10.0 million. The preferred stock
provides for cash dividends in an amount equal to $0.60 per share payable semi-
annually (a 12% annual rate) or, at the discretion of the Company, dividends may
be paid by issuing additional fully paid shares of preferred stock in an amount
equal to 0.0675 additional shares for each share of preferred stock then issued
and outstanding (a 13.5% annual rate). The preferred stock also provides for a
liquidation preference of $10 per share. The preferred stock is redeemable from
time to time at the discretion of the Company under certain conditions and at
certain established redemption prices and must be redeemed on December 15, 2002
or upon the occurrence of certain defined situations, including a change of
control or a default, as defined in the preferred stock designation.
The Company paid ECT a financing fee of $1.0 million, relative to the Sheridan
Common Stock and preferred stock issued to ECT, of which $300,000 was attributed
to the preferred stock. The total fees incurred related to the preferred stock
were $363,000 which will be amortized over the five year redemption period as
additional dividends. These deferred costs are included in other assets.

TGX Senior Preferred Stock

TGX was authorized to issue 10.0 million shares of senior preferred stock
with a par value of $1 per share. The senior preferred stock entitled its
holders to receive a 10% annual compounded cash dividend, payable quarterly,
provided however, that the payment of such dividend did not violate Delaware law
or certain covenants in TGX's bank loan agreements. TGX did not pay any of the
quarterly dividends required. The senior preferred stock had a liquidation
preference of $10 per share and had priority over the liquidation preference
afforded the holders of Series B Preferred Stock (the "Junior Preferred"), Old
Preferred and TGX Common Stock. The senior preferred stock was scheduled to be
redeemed on January 21, 2002. The accretion of the difference between the
recorded value and the redemption amount of the senior preferred stock was
reflected as a reduction of income applicable to common stockholders. Holders of
senior preferred stock had 95% of the voting rights of TGX, with the remaining
5% being allocated among the holders of the Junior Preferred, Old Preferred and
TGX Common Stock.

As of December 31, 1995, TGX had approximately 8.9 million shares of Senior
Preferred Stock outstanding. In 1996, 60,000 shares were canceled in
conjunction with a litigation settlement and 2,789 shares were canceled as a
result of purchase by TGX, resulting in approximately 8.8 million shares
outstanding. In 1997, 110,000 shares of TGX Senior Preferred Stock were
canceled due to certain management resignations, and 115,629 shares were
forfeited pursuant to the Reorganization Plan, resulting in approximately 8.6
million shares of TGX Senior Preferred outstanding as of the Merger effective
date. Pursuant to the terms of the Merger, each share of TGX Senior Preferred
was exchanged for 0.5 shares of Sheridan Common Stock.

In 1996, TGX recorded $24,000 of stock compensation expense related to
executive officers stock issuance and a benefit in 1997 of $15,000 as a result
of executive officer resignations and associated stock forfeitures. Stock
compensation expense was amortized over the stock award forfeiture period of two
years from grant date. The stock awards were valued based on a reported 1995
TGX Senior Preferred Stock trade at $0.20 per share. The

38
<PAGE>

SHERIDAN ENERGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

compensation accruals recognized by the Company were not significantly different
from amounts that would have been recognized under the SFAS 123 fair value
method at the grant date.

Since December 31, 1995, the components of the number of shares of TGX
Senior Preferred Stock and changes in associated values are as follows:

<TABLE>
<CAPTION>
NUMBER RECORDED
OF SHARES VALUE
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Balance, December 31, 1995....................................... 8,851 $ 61,737
Accrued and unpaid dividends................................... -- 12,873
Accretion on redemption value and dividends.................... -- 6,104
Amortization of compensation pursuant to management agreement.. -- 24
Shares canceled................................................ (63) (12)
------ --------
Balance, December 31, 1996....................................... 8,788 $ 80,726
------ --------
Accrued and unpaid dividends................................... -- 5,721
Accretion on redemption value and dividends.................... -- 3,205
Compensation benefit due to management forfeitures............. (110) (13)
Shares canceled................................................ (115) (2)
Other adjustments.............................................. -- (2)
------ --------
Subtotal....................................................... 8,563 89,635
Cancellation of shares due to Merger........................... (8,563) (89,635)
------ --------
Balance, December 31, 1997....................................... -- $ --
====== ========
</TABLE>

39
<PAGE>

SHERIDAN ENERGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

10. STOCKHOLDERS' EQUITY (DEFICIT)

Sheridan Common Stock

The Company is authorized to issue 20.0 million shares of common stock,
with a $0.01 par value. All outstanding shares of common stock are fully paid
and non-assessable. The holders of common stock are entitled to one vote per
share upon all matters presented to them and are entitled to dividends in such
amounts as may be declared from time to time out of any funds legally available
for such purposes. However, no dividends are payable until all accrued Sheridan
Preferred Stock dividends have been paid. In the event of liquidation,
dissolution or winding up of the affairs of the Company, whether voluntary or
involuntary, after payment of debts and liquidation preferences on the Sheridan
Preferred Stock, all remaining assets, if any, will be divided and distributed
among the holders of common stock pro rata according to the number of shares
owned by them. The common stock does not have preemptive rights and is not
subject to redemption. In order to finance a portion of the Pioneer Acquisition,
the Company entered into an agreement with ECT, a previously unaffiliated party,
pursuant to which ECT acquired 1.6 million shares of common stock for $10.0
million. The Company paid ECT a financing fee of $1.0 million, of which $700,000
was attributed to the common stock. Total fees incurred related to the common
stock issuance were $847,000, which were netted against the proceeds received.

Effective as of December 31, 1997, pursuant to the Grand Gulf Acquisition,
the Company issued 850,000 shares of common stock and warrants to acquire an
additional 150,000 shares of common stock. Such warrants expire five years after
the date of issuance and are exercisable in whole or in part from time to time
at a price of $5.50 per share. The properties were acquired from Grand Gulf and
JEDI I.

TGX 9% Cumulative Convertible Preferred Stock

TGX was authorized to issue 10.0 million shares of Old Preferred Stock with
a $1 par value and a liquidation preference of $10 per share, convertible at any
time at the rate of one Old Preferred Stock share for four shares of TGX Common
Stock. All Old Preferred Stock was eliminated pursuant to the Merger.

TGX Common Stock

TGX was authorized to issue 100.0 million shares of TGX Common Stock, with
a $.01 par value. All shares of TGX Common Stock were eliminated pursuant to the
Merger.

40
<PAGE>

SHERIDAN ENERGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Stock Incentive Plan

Pursuant to the Company's 1997 Flexible Incentive Plan ("Incentive Plan"),
the Company can issue up to 450,000 options for the purchase of Sheridan Common
Stock to directors, officers and key employees of the Company. These stock
options may be granted subject to exercise terms not to exceed 10 year at a
price equal to the fair market value of the stock at date of grant. At December
31, 1997, options granted under the Incentive Plan totaled 304,000 at exercise
prices ranging from $2.50 to $2.56 resulting in a weighted average exercise
price of $2.50 per share. The options granted vest primarily over three years,
with a small portion vesting over four years. All options granted have an
exercise term of 10 years. None of the options granted were exercisable at
December 31, 1997. There were no options outstanding in 1996.

The fair value of each 1997 option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions: expected stock price volatility of 57%; risk-free interest rate of
5.5%; and an expected option life of 10 years. Had compensation expense for
stock based compensation been determined based on the fair value at the date of
grant, the Company's net income and earnings per share would have been reduced
to the pro forma amounts indicated below (in thousands except per share
information):

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
------------------------
AS REPORTED PRO FORMA
------------ ----------
<S> <C> <C>
Net loss......................... $(10,966) $(11,051)
Loss per common share - basic.... $ (2.51) $ (2.53)
Loss per common share - diluted.. $ (2.48) $ (2.50)
</TABLE>

11. FINANCIAL INSTRUMENTS

Natural Gas and Crude Oil Swaps

In conjunction with the Pioneer Acquisition and pursuant to the ECT
Agreement, the Company entered into natural gas swap agreements on December 23,
1997 to reduce its exposure to price fluctuations on a portion of natural gas
sales in 1998 and to achieve a more predictable cash flow. These agreements
provide for monthly settlements on specified production volumes, based on the
difference between the price specified in the agreements and the price received
for such

41
<PAGE>

SHERIDAN ENERGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

production. With respect to any particular swap agreement, the counterparty is
required to make a payment to the Company in the event the price received for a
specified production volume is less than the price specified in the agreement,
and the Company is required to make a payment to the counterparty in the event
the price received for a specified production volume is greater than the price
specified in the agreement. While the use of hedging transactions limits the
downside risk of adverse price movements, they may also limit future revenues
from favorable price movements. To date, all of the Company's hedging
transactions have been carried out with an affiliate of ECT. The Company
accounts for these transactions as hedging activities and, accordingly, gains or
losses are included in oil and gas revenues when the hedged production is sold.

The Company's natural gas swap agreements are for the period January
through December 1998 on volumes of 3.9 billion cubic feet ("BCF"), or
approximately 45% of 1998 production, as estimated by independent petroleum
engineers. The weighted average sales point price per Mcf under the swap
agreements is approximately $2.19. The fair value of the swap agreements is the
amount at which they could be settled at December 31, 1997, based on the
difference between the price specified in the swap agreements and the NYMEX
futures contract prices existing at December 31, 1997. At December 31, 1997, the
Company would have been required to pay approximately $405,000 to terminate its
natural gas swap agreements.

Subsequent to December 31, 1997, the Company entered into oil swap
agreements for the period March through December 1998 on volumes of 120,000
barrels, or approximately 48% of 1998 production, as estimated by independent
petroleum engineers. The weighted average oil sales price under the swap
agreements is approximately $17.89 per barrel.

The Company has an unsecured line of credit of $500,000 with an affiliate
of ECT in connection with its commodities hedging program.

Interest Rate Swap Agreement

On December 19, 1997, pursuant to the Bank One credit facility, the Company
entered into an interest rate swap to manage its exposure to changes in interest
rates. Pursuant to the interest rate swap, the Company contracted a fixed rate,
based on the one month LIBOR, of 6.03% for $20.0 million ("Notional Amount") of
its outstanding bank debt. The Notional Amount is reduced monthly by $400,000
over the term of the swap, which expires June 19, 2000. The average LIBOR
floating rate at December 31, 1997 was 5.97%. At December 31, 1997, the Company
would have been required to pay approximately $72,000 to terminate its interest
rate swap agreement.

Counterparty Risk

The Company is exposed to credit losses under its natural gas and crude oil
and interest rate swaps in the event of non-performance by the counterparties to
these hedging activities. The Company anticipates, however, that counterparties
will be able to fully satisfy their obligations under the swap agreements based
on their credit standing. Natural gas and crude oil swaps are with an affiliate
of ECT (See Note 14). The interest rate swap is with Bank One.

12. 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.

42
<PAGE>

SHERIDAN ENERGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

In conjunction with the recognition of tax gains on property sales,
litigation settlements and debt forgiveness, the Company estimated and accrued
federal income taxes of $180,000 in 1996 of which $37,000 was netted against the
extraordinary gain.

In 1996, as a result of improvement in recurring income and projections of
continued improvement in such, the Company recognized a deferred tax asset of
$930,000, including $187,000 of alternative minimum tax. The valuation of this
asset was based on assumptions concerning future oil and gas prices, limited
Company history of positive financial results and other factors unique to the
Company.

The components of income tax expense (benefit) are as follows:

<TABLE>
<CAPTION>
1997 1996
----- -------
(IN THOUSANDS)
<S> <C> <C>
Income taxes currently payable.............................. $ -- $ 180
Income taxes expense attributable to extraordinary gain..... -- (37)
----- -----
-- 143
----- -----

Deferred tax (benefit):
Current................................................. -- (680)
Non-current............................................. -- (250)
----- -----
Total deferred tax expense (benefit).................... -- (930)
----- -----
Total income tax expense................................ $ -- $(787)
===== =====
</TABLE>

The issuance of additional shares of Sheridan Common Stock in late 1997
("1997 Ownership Change") resulted in a change of ownership for tax purposes. As
a result of the change of ownership, the Company's use of available net
operating loss carryovers, alternative minimum tax credit carryovers, investment
tax credit carryovers and other tax attributes are subject to limitation. The
Company had previously undergone an ownership change in 1992 as a result of the
Reorganization Plan. The Company is required to redetermine the annual
limitation and will no longer have available, as a carryover, the unused annual
limitation amounts resulting from the 1992 ownership change.

43
<PAGE>

SHERIDAN ENERGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The Company has pre-ownership change net operating losses totaling $207.9
million which expire through the year 2012. Because of the 1997 Ownership
Change, the Company is subject to an annual limitation (the "382 Limitation") of
$1.1 million on the use of pre-"change of ownership" loss carryovers. The annual
382 Limitation results in a maximum available net operating loss carryover of
approximately $9.0 million.

Deferred tax assets (liabilities) are comprised of the following:

<TABLE>
<CAPTION>
1997 1996
--------- --------
Deferred tax assets: (IN THOUSANDS)
<S> <C> <C>
Loss carryovers................................... $ 3,077 $ 7,531
Alternative minimum tax credit carryover
and other....................................... 187 187
------- -------
3,264 7,718
------- -------

Deferred tax liabilities:
Oil and gas properties............................ (1,466) (1,405)
------- -------
Net deferred tax asset............................ 1,798 6,313
Valuation allowance............................... (868) (5,383)
------- -------
Net deferred tax asset after valuation reserve.... $ 930 $ 930
======= =======
</TABLE>

Income tax expense differs from the amounts computed by applying the statutory
federal rate as follows:

<TABLE>
<CAPTION>
1997 1996
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
Income taxes computed at statutory federal rate (34%)........... $ (635) $ 2,658
Change in valuation allowance for deferred tax asset............ 4,515 (930)
Decrease in available net operating loss limitation............. (4,454) --
Net operating losses utilized in current period................. -- (2,658)
Provision adjustment for 1996 actual............................ 359 --
Provision for state deferred taxes.............................. 165 --
Alternative minimum tax and other............................... 99 143
State income taxes net of federal tax benefit................... (49) --
------- -------
Total income tax expense (benefit).............................. $ -- $ (787)
======= =======
</TABLE>

13. MAJOR CUSTOMERS

The Company's revenues are derived principally from uncollateralized sales
to customers in the oil and natural gas industry. The concentration of credit
risk in a single industry affects the Company's overall exposure to credit risks
since customers may be similarly affected by changes in economic and other
conditions.

44
<PAGE>

SHERIDAN ENERGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Customers which accounted for greater than 10% of oil and gas sales are as
follows:

<TABLE>
<CAPTION>
1997 1996
----- -----
<S> <C> <C>
Lion Oil Company................... 20% 24%
Chesapeake Energy Marketing, Inc... 16% 14%
Energy Source, Inc................. -- 11%
Duke Energy, Inc................... 15% --
</TABLE>

14. RELATED PARTY TRANSACTIONS

As discussed in Note 11, the Company has natural gas and crude oil swap
agreements with ECT. The swap agreements were, in the opinion of management, at
arm's-length terms based on comparable prices confirmed with another third party
at the time of executing the agreements.

As discussed in Note 3, in connection with the Grand Gulf Acquisition, the
Company issued 850,000 shares of Sheridan Common Stock and 150,000 warrants to
purchase additional shares of Sheridan Common Stock to Grand Gulf and JEDI I.
Through a series of transactions among Grand Gulf, other related parties and
JEDI I, the 850,000 shares and 150,000 warrants are now held by JEDI I or Joint
Energy Development Investments Limited Partnership, both of which are affiliates
of ECT. As discussed in Notes 9 and 10, the Company paid ECT a $1.0 million fee
in connection with the issuance of common and preferred shares to ECT related to
the Pioneer Acquisition.

15. EARNINGS PER SHARE

In accordance with SFAS 128, Earnings Per Share, adopted in 1997, basic
earning per share has been computed by dividing net income (loss) applicable to
common stock by the weighted average number of common shares outstanding.
Diluted earnings per share has been computed by dividing net income (loss)
applicable to common stock by the weighted average number of common shares
outstanding plus dilutive potential common shares. The Company's potentially
dilutive securities are stock options awarded to employees and Sheridan Common
Stock warrants (See Note 10).

45
<PAGE>

SHERIDAN ENERGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The following table presents information necessary to calculate basic and
diluted earnings per share for the periods indicated, with 1996 being restated
to conform with the requirements of SFAS No. 128, Earnings Per Share, and
the impact of the Merger:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996
---------------- ---------------
<S> <C> <C>
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
EARNINGS (LOSS) PER SHARE - BASIC:
Weighted average common shares outstanding......................... 4,365 4,406
======== ========

Loss before extraordinary gain..................................... $ (2.51) $ (2.42)
Extraordinary gain................................................. -- .42
-------- --------
Loss per share..................................................... $ (2.51) $ (2.00)
======== ========

EARNINGS (LOSS) PER SHARE - DILUTED:
Weighted average common shares outstanding......................... 4,365 4,406
Shares issuable from assumed conversion of
common share options............................................. 56 --
-------- --------
Weighted average common shares outstanding......................... 4,421 4,406
======== ========

Loss before extraordinary gain..................................... $ (2.48) $ (2.42)
Extraordinary gain................................................. -- .42
-------- --------
Loss per share..................................................... $ (2.48) $ (2.00)
======== ========

EARNINGS FOR BASIC AND DILUTED COMPUTATION:
Net income (loss) before preferred dividends and accretion
and extraordinary gain........................................... $ (1,867) $ 8,604
Preferred stock dividends.......................................... (5,894) (13,143)
Accretion of TGX Senior Preferred Stock redemption value........... (3,205) (6,104)
-------- --------
Net loss before extraordinary gain................................. (10,966) (10,643)
Extraordinary gain, net of taxes of $37............................ -- 1,831
-------- --------
Net loss applicable to common stock per share (basic and diluted).. $(10,966) $ (8,812)
======== ========
</TABLE>

The 150,000 warrants issued in connection with the Grand Gulf Acquisition
were not included in the earnings per share calculation as they were anti-
dilutive.

16. FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments comprise cash, receivable and payables,
bank loans and swap agreements. For trade receivables and accrued receivables
and payables, the carrying values approximates fair values due to the liquidity
and short-term nature of these instruments. Carrying value of outstanding bank
debt under the revolving credit facility approximates fair value as the interest
rates are variable market rates.

46
<PAGE>

SHERIDAN ENERGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Fair value of natural gas and crude oil swaps and interest rate swaps used
for hedging are estimated by obtaining quotes from brokers to estimate the
amounts the Company would be entitled to receive or required to pay at the
reporting date to cancel the swap agreements (see Note 11).

The carrying value of the Sheridan Preferred Stock, which was issued on
December 15, 1997, approximates its fair value at December 31, 1997.

17. INTERIM FINANCIAL DATA (UNAUDITED)

The unaudited interim results of operations, are summarized below.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
---------- --------- -------------- -------------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1997:
Revenues...................................... $ 1,846 $ 1,506 $ 1,635 $ 2,340
Operating income (loss)....................... 320 120 (19) (1,575)
Provision for litigation expense.............. -- -- -- (1,000)
Net income (loss) applicable to common stock.. (4,566) (4,047) 56 (2,409)
Net income (loss) per common share-basic...... $ (1.06) $ (0.94) $ 0.01 $ (0.53)
Net income (loss) per common share-diluted.... $ (1.06) $ (0.94) $ 0.01 $ (0.52)

1996:
Revenues...................................... $ 1,246 $ 1,326 $ 1,211 $ 1,662
Operating income (loss)....................... (206) (19) (88) (18)
Litigation settlement gain, net............... -- 7,100 -- --
Extraordinary gain, net of income tax of $37.. -- 1,831 -- --
Net income (loss) applicable to common stock.. (4,827) 4,201 (4,690) (3,496)
Net income (loss) per common share-basic...... $ (1.09) $ 0.95 $ (1.07) $ (0.80)
Net income (loss) per common share-diluted.... $ (1.09) $ 0.95 $ (1.07) $ (0.80)
</TABLE>

18. INFORMATION ON OIL AND GAS ACTIVITIES

Following are supplemental disclosures relating to the Company's oil and
natural gas exploration and production activities.

47
<PAGE>

SHERIDAN ENERGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Oil and Gas Related Costs and Operating Results

The following schedules present capitalized costs and costs incurred,
whether capitalized or expensed, and operating results for the periods then
ended.

<TABLE>
<CAPTION>
1997 1996
--------- ---------
(IN THOUSANDS)
Capitalized costs:
<S> <C> <C>
Unproved properties....................................... $ 229 $ 191
Proved properties......................................... 69,911 15,344
Accumulated depletion and depreciation.................... (7,537) (4,996)
------- -------
$62,603 $10,539
======= =======

Costs incurred:
Acquisition properties:
Unproved.............................................. $ 229 $ 163
Proved................................................ 52,293 2,932
Exploration............................................... 1,067 --
Development............................................... 1,304 1,124
------- -------
$54,893 $ 4,219
======= =======

Operating results (1):
Revenues.................................................. $ 7,074 $ 5,059
Costs and expenses:
Production costs.......................................... 2,638 2,211
Exploration costs......................................... 484 164
Depletion and depreciation and impairment provisions...... 2,563 933
------- -------
5,685 3,308
------- -------
Operating earnings before income taxes....................... 1,389 1,751
Income tax expense (benefit)................................. -- (787)
------- -------
Operating earnings........................................... $ 1,389 $ 2,538
======= =======
</TABLE>
- ---------------
(1) Excludes general and administrative and interest expense

Proved Reserves (Unaudited)

The following schedule presents estimates of proved oil and natural gas
reserves attributable to the Company, all of which are located in the United
States. Proved reserves are estimated quantities of oil and natural gas which
geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and
operating conditions. Proved developed reserves are those which are expected to
be recovered through existing wells with existing equipment and operating
methods. Reserves are stated in thousands of barrels of oil and Bcf of natural
gas.

48
<PAGE>

SHERIDAN ENERGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

<TABLE>
<CAPTION>
1997 1996
------------- -----------
OIL GAS OIL GAS
------ ----- ---- -----
<S> <C> <C> <C> <C>
Proved reserves:
Beginning of year................ 981 15.8 944 12.2
Sales of reserves-in-place....... -- (.1) (8) (.1)
Purchase of reserves-in-place.... 1,322 46.8 45 4.1
Extensions and discoveries....... 68 4.3 57 .6
Revisions of previous estimates.. (40) .2 19 .5
Production....................... (93) (2.2) (76) (1.5)
----- ---- --- ----
End of year...................... 2,238 64.8 981 15.8
===== ==== === ====

Proved developed reserves........... 1,514 55.3 525 13.4
===== ==== === ====
</TABLE>

Estimating economically recoverable crude oil and natural gas reserves and
the future net revenues therefrom is not an exact science. It is based upon a
number of variables such as historical production of the subject properties, as
compared with similar producing properties, and assumptions, such as the effects
of Company regulation by governmental agencies, future taxes, and development
and other costs, all of which may vary considerably from actual results. All
such estimates are to some degree speculative, and classifications of reserves
are only attempts to define the degree of speculation involved. For these
reasons, estimates of economically recoverable reserves of crude oil and natural
gas attributable to any particular group of properties, the classification and
risk of recovering such reserves, and estimates of the future net revenues
expected therefrom, prepared by different engineers or by the same engineers at
different times, may vary substantially.

Standardized Measure of Discounted Future Net Cash Flows (Unaudited)

The following schedules present the standardized measure of estimated
discounted future net cash flows attributable to the Company's proved oil and
gas reserves ("Standardized Measure"), and an analysis of the changes in these
amounts and quantities for the periods indicated. The Standardized Measure was
computed on the basis of (a) contractual prices, including escalations for
natural gas, in effect at year end for oil and natural gas (b) the market price
for natural gas and the posted price for oil in effect at year end for the area
in the case of properties being commercially developed but not covered by
existing contracts, (c) estimated deliverability, which not only considers the
physical characteristics of the well or property, but also the amount and timing
of future production estimated to be taken by its purchasers, and (d) where
applicable, the premise that future prices and deliveries will be in accordance
with existing contractual terms which may require arbitration or litigation to
ultimately assure compliance. Estimated future production and development costs
are based on economic conditions at the respective year ends. Estimated future
development costs associated with proved developed non-producing and proved
undeveloped reserves were $11.9 million for 1997 and $3.8 million for 1996.
Production of those reserves is dependent upon the Company's ability to fund
such future development costs, which are scheduled to be incurred over numerous
years. Future income taxes, if any, are computed by applying statutory income
tax rates to the difference between the future pre-tax cash flows and

49
<PAGE>

SHERIDAN ENERGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

the tax basis of proved oil and gas properties, after considering investment tax
credits and depletion carry-forwards and net operating loss carryovers
associated with these properties.

Since the Standardized Measure was prepared using the prevailing economic
conditions existing at each applicable year end, it is emphasized that such
conditions continually change, as evidenced by the fluctuations in oil and
natural gas prices during recent years. Weighted average year end oil and
natural gas prices per barrel and Mcf utilized in computing the Standardized
Measure for 1997 were $16.54 and $2.51, respectively, and for 1996 were $24.43
and $3.33, respectively. Accordingly, such information should not serve as a
basis in making any judgment on the potential value of the Company's recoverable
reserves, or in estimating future results of operations.

50
<PAGE>

SHERIDAN ENERGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

<TABLE>
<CAPTION>
1997 1996
---------- ---------
(IN THOUSANDS)
Future net cash flows:
<S> <C> <C>
Future revenues................................................. $203,740 $ 76,568
-------- --------
Future production costs......................................... 67,136 21,793
Future development costs........................................ 11,938 3,830
-------- --------
79,074 25,623
-------- --------
Future pre-tax cash flows....................................... 124,666 50,945
Future income taxes............................................. (25,288) (4,444)
-------- --------
Future net cash flows........................................... 99,378 46,501
10% discount factors............................................ (41,240) (19,257)
-------- --------
Standardized Measure of future net cash flows discounted at 10%....... $ 58,138 $ 27,244
======== ========

Changes in Standardized Measure:
Standardized Measure, beginning of year......................... $ 27,244 $ 11,804
-------- --------
Purchases of reserves-in-place.................................. 49,470 5,818
Extensions and discoveries...................................... 5,171 2,377
Revisions of previous quantity estimates........................ 456 878
Changes in future development costs............................. (1,392) (539)
Development costs incurred during the period that
reduce future development costs............................... 56 538
Net changes in prices and production costs...................... (10,869) 10,511
Sales of oil and natural gas produced, net of production costs.. (4,436) (2,848)
Net change in income taxes...................................... (12,224) (2,012)
Accretion of discount........................................... 2,707 1,180
Sales of reserves-in-place...................................... (179) (134)
Changes in production rates and other, net...................... 2,134 (329)
-------- --------
Net increase.................................................... 30,894 15,440
-------- --------
Standardized Measure, end of year............................... $ 58,138 $ 27,244
======== ========
</TABLE>

The impact of the Company's natural gas and crude oil hedges on the
Standardized Measure is not material.

Since year end 1997, natural gas prices have declined. At March 23, 1998,
the NYMEX price for natural gas, based on an Mcf basis, was approximately $2.35
and the per barrel posted price for West Texas Intermediate oil was $16.25.

51
<PAGE>

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

During 1997, there were no disagreements with the Company's independent
accountants regarding accounting or financial disclosure matters.

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

The information regarding Directors and Executive Officers of the
Registrant as required by Items 401 and 405 of Regulation S-K is set forth in
Part I of this Form 10-KSB under the caption "Executive Officers of the Company"
and under the caption "Election of Directors" in the Company's definitive Proxy
Statement (the "Proxy Statement") for the Company's 1998 annual meeting of
stockholders which will be filed with the Securities and Exchange Commission not
later than 120 days after December 31, 1997, and is hereby incorporated by this
reference.

ITEM 10. EXECUTIVE COMPENSATION

The information required by Item 402 of Regulation S-K is set forth under
the captions "Compensation of Executive Officers," "Compensation Committee of
the Board of Directors Report on Executive Compensation," and "Compensation
Committee Interlocks and Insider Participation" in the Proxy Statement, and is
hereby incorporated by this reference.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by Item 403 of Regulation S-K is set forth under
the captions "Security Ownership of Management" and "Security Ownership of
Certain Other Stockholders" in the Proxy Statement, and is hereby incorporated
by this reference.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information regarding certain relationships and related transactions as
required by Item 404 of Regulation S-K is set forth in the Proxy Statement under
the captions "Compensation of Executive Officers" and "Related Transactions" and
is hereby incorporated by this reference.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

1. Exhibits:

Exhibit 2.1 Amended Plan of Reorganization and Disclosure Statement as
revised and filed by TGX, as debtor-in-possession, on
January 7, 1992. (Incorporated by reference to Exhibit 2.1
of TGX's Current Report on Form 8-K dated February 4, 1992,
File No. 1-10201.)

Exhibit 2.2 Order Confirming Amended Plan of Reorganization dated
January 7, 1992. (Incorporated by reference to Exhibit 2.2
of TGX's Current Report on Form 8-K dated February 4, 1992,
File No. 1-10201.)

52
<PAGE>

<TABLE>
<S> <C>
Exhibit 2.3 Agreement of Merger between the Company and TGX (Incorporated by reference to
Exhibit 2.1 to the Registrant's Registration Statement No. 333-10729, and all amendments
thereto).

Exhibit 3.1 Certificate of Incorporation of the Company. (Incorporated by reference to Exhibit 3.1 to
the Registrant's Registration Statement No. 333-10729 and all amendments thereto).

Exhibit 3.2 Amended and Restated By-Laws of the Company. (Incorporated by reference to Exhibit
3.2 to the Registrant's Registration Statement No. 333-10729).

Exhibit 4.1 Specimen Certificate representing shares of Common Stock (Incorporated by reference to
Exhibit 4 to the Registrant's Registration Statement No. 333-10729).

Exhibit 4.2 Designation of the Preferences relating to the Sheridan Preferred Stock. Filed herewith.

Exhibit 4.3 Specimen Certificate representing shares of the Registrant's Preferred Stock. Filed
herewith.

Exhibit 10.1 Amended and Restated Credit Agreement effective as of February 1, 1992 between TGX
and the Bank of Montreal and the First Amendment thereto. (Incorporated by reference
to Exhibit 10.1 of TGX's Annual Report on Form 10-K for the year ended December 31,
1991, File No. 0-10201).

Exhibit 10.2 Amended and Restated Security Agreement effective as of February 1, 1992 between
TGX and the Bank of Montreal. (Incorporated by reference to Exhibit 10.2 of TGX's
Annual Report on Form 10-K for the year ended December 31, 1991, File No. 0-10201).

Exhibit 10.3 Amended and Restated Security Agreement (Partnerships) effective as of February 1,
1992 between TGX and the Bank of Montreal. (Incorporated by reference to
Exhibit 10.3 of TGX's Annual Report on Form 10-K for the year ended December 31,
1991, File No. 0-10201).

Exhibit 10.4 Amendment and Restated Stock Pledge Agreement effective as of February 1, 1992
betwen TGX and the Bank of Montreal. (Incorporated by reference to Exhibit 10.4 of
TGX's Annual Report on Form 10-K for the year ended December 31, 1991, File
No. 0-10201).

Exhibit 10.5 Amended and Restated Pledge of Secured Notes effective as of February 1, 1992
between TGX and the Bank of Montreal. (Incorporated by reference to Exhibit 10.5 of
TGX's Annual Report on Form 10-K for the year ended December 31, 1991, File
No. 0-10201).

Exhibit 10.6 Purchase and Sale Agreement between TGX and Belden and Blake Corporation dated as
of December 17, 1993 (Incorporated by reference to Exhibit C of Form 8-K dated
January 14, 1994 of TGX File No. 0-10201).

Exhibit 10.7 Limited Forbearance Agreement between TGX and Bank of Montreal dated as of
January 10, 1994 (Incorporated by reference to Exhibit C of Form 8-K of TGX dated
January 14, 1994, File No. 0-10201).
</TABLE>

53
<PAGE>

<TABLE>
<S> <C>
Exhibit 10.8 Second Amended and Restated Credit Agreement between the Company and BMO
Financial, Inc. dated as of July 13, 1994 (Incorporated by reference to Exhibit 10.1 of
TGX's Form 8-K dated July 13, 1994).

Exhibit 10.9 Amended and Restated Credit Agreement between the Company and Bank One, Texas,
N.A. dated as of July 13, 1994 (Incorporated by reference to Exhibit 10.4 of the
Registrant's report on Form 8-K dated July 13, 1994).

Exhibit 10.10 First Amendment to Second Amended and Restated Credit Agreement dated as of
December 31, 1995. (Incorporated by reference to Exhibit 10.25 of TGX's Form 10-K
for the year ended December 31, 1995, File No. 0-10201).

Exhibit 10.11 Settlement Agreement among TGX, National Fuel Gas Distribution Company, and the
New York Public Service Commission dated as of April 12, 1996. (Incorporated by
reference to Exhibit C of TGX's Form 8-K dated April 30, 1996, File No. 0-10201).

Exhibit 10.12 Third Amendment to Amended and Restated Credit Agreement between Sheridan
Corporation and Bank One, Texas, N.A. effective as of October 1, 1996. (Incorporated
by reference to Exhibit 10.27 of Form 10-KSB for the year ended December 31, 1996,
File No. 0-10201).

Exhibit 10.13 Settlement, Release and Confidentiality Agreement between the Company and Larry H.
Carpenter dated as of March 31, 1997. (Incorporated by reference to Exhibit 10.28 of
Form 10-KSB for the year ended December 31, 1996, File No. 0-10201).

Exhibit 10.14 1997 Flexible Incentive Plan (Incorporated by reference to Appendix "F" of the
Registration Statement No. 333-10729, and all amendments thereto).

Exhibit 10.15 Employment Agreement dated June 5, 1997 between the Company and B.A. Berilgen
(Incorporated by reference to Exhibit 10.29 of the Company's Form 10-KSB filed
August 14, 1997).

Exhibit 10.16 Acquisition Agreement dated November 13, 1997, between the Company and Pioneer
Natural Resources USA, Inc. (Incorporated by reference to Exhibit 10-1 of the
Company's Form 8-K filed December 2, 1997).

Exhibit 10.17 Agreement between the Company and ECT relating to the sale of shares of the
Company's Common Stock and Preferred Stock, dated November 28, 1997 (Incorporated
by reference to Exhibit 10.1 of the Company's Form 8-K filed December 2, 1997).

Exhibit 10.18 Grand Gulf Acquisition Agreement dated as of December 31, 1997 (Incorporated by
reference to Exhibit 10.1 of the Company's Form 8-K filed on January 6, 1998).

Exhibit 10.19 Shareholder Agreement among the Company, ECT et al., (Incorporated by reference to
Exhibit 10.2 of the Company's Form 8-K filed on December 2, 1997).

Exhibit 18 Letter regarding Change in Accounting Principles. (Incorporated by reference to
Exhibit 18 of Form 10-K for the year ended December 31, 1992, File No. 0-10201).
</TABLE>

54
<PAGE>

<TABLE>
<S> <C>
Exhibit 24 Power of Attorney - filed herewith - See Signature Page.

Exhibit 27 Financial Data Schedule - filed herewith.
</TABLE>

(b) Reports on Form 8-K for the quarter ended December 31, 1997:

(i) a) On December 2, 1997, the Company reported on Item 5
concerning information on the Pioneer Acquisition;

b) On December 17, 1997, the Company reported on Item 2 the
completion of the Pioneer Acquisition; and

c) On February 27, 1998, the Company reported on Form 8-K/A,
Item 7, financial statements for the Pioneer Acquisition.

(ii) On December 31, 1997, the Company reported on Item 5
concerning information relating to the Grand Gulf Acquisition.

55
<PAGE>

SIGNATURES

IN ACCORDANCE WITH SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934, THE REGISTRANT CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED, ON MARCH 26, 1998.

SHERIDAN ENERGY, INC.
(Registrant)

By: /s/ B. A. BERILGEN
-----------------------------
B. A. Berilgen
President

Each person whose signature appears below constitutes and appoints B.A.
Berilgen and Michael A. Gerlich, and each of them (with full power to each of
them to act alone), his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities to sign on his behalf individually and in each
capacity stated below any amendment to this Report on Form 10-KSB under the
Securities Exchange Act of 1934, as amended, and to file the same, with all
exhibits thereto and other documents in connection therewith with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents and either of them, or
their substitutes, may lawfully do or cause to be done by virtue hereof.

IN ACCORDANCE WITH THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS
BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN
THE CAPACITIES AND ON THE DATES INDICATED.

Signature Title Date
- --------- ----- ----

By: /s/ B.A. BERILGEN President and March 27, 1998
- ------------------------ Chief Executive
B. A. Berilgen Officer

By: /s/ MICHAEL A. GERLICH Vice President, March 27, 1998
- ----------------------------- Chief Financial
Michael A. Gerlich Officer, and Chief
Accounting Officer

By: /s/ JONATHAN B. CARROLL Director March 27, 1998
- ------------------------------
Jonathan B. Carroll

By: /s/ W. CRAIG CHILDERS Director March 27, 1998
- ----------------------------
W. Craig Childers

By: /s/ D. BRADLEY DUNN Director March 27, 1998
- --------------------------
D. Bradley Dunn

By: /s/ DAVID H. SCHEIBER Director March 27, 1998
- ----------------------------
David H. Scheiber

By: /s/ JEFFREY E. SUSSKIND Director March 27, 1998
- ------------------------------
Jeffrey E. Susskind

<PAGE>

EXHIBIT 4.2

CCERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RIGHTS OF SERIES A PREFERRED STOCK

Pursuant to Section 151(g) of the Delaware General Corporation Law

___________________

SHERIDAN ENERGY, INC., a corporation organized and existing under the laws
of the State of Delaware (the "Corporation"), HEREBY CERTIFIES that the
following resolutions were duly adopted by the Board of Directors of the
Corporation by unanimous written consent of the Board of Directors pursuant to
Section 228 of the Delaware General Corporation Law:

RESOLVED, that pursuant to the authority vested in the Board of Directors
of the Corporation by Article Four of the Certificate of Incorporation, a series
of Preferred Stock be, and it hereby is, created out of the authorized but
unissued shares of Preferred Stock of the Corporation, such series to be
designated "Series A Preferred Stock" (the "Series A Preferred Stock") to
consist of 1,900,000 shares, par value $0.01 per share, of which the powers,
designations, preferences and relative, participating, optional and other
special rights of the shares of such series, and the qualifications, limitations
and restrictions thereof shall be as follows:

1. Amount. The number of shares constituting the Series A Preferred
Stock shall be 1,900,000.

2. Payment of Dividends. Holders of the Series A Preferred Stock are
entitled to receive when, as and if declared by the Board of Directors, out of
the funds of the Corporation legally available therefore cash dividends in an
amount equal to $0.60 per share, payable semi-annually, on June 15 and December
15 in each year commencing on June 15, 1998, except that if any such day is not
a business day in Houston, Texas, then such dividends shall be payable on the
next succeeding business day (each such date on which a dividend is payable is
referred to herein as a "Dividend Payment Date"). At the option of the
Corporation, upon declaration of the Board of Directors, dividends may be paid,
in whole or in part, by issuing additional fully paid and non-assessable shares
of the Series A Preferred Stock (the "Preferred Dividend Stock") in an amount
equal to .0675 additional shares of Series A Preferred Stock for each Series A
Preferred Stock then issued and outstanding, payable semi-annually on each
Dividend Payment Date. Dividends on the Series A Preferred Stock are cumulative
from the date of original issuance of shares of Series A Preferred Stock, and
will be payable, when, as and if declared, to holders of record on the
applicable record date as shall be fixed by the Board of Directors. Dividends
in arrears may be declared and paid at any time, without reference to any
regular dividend payment date, to holders of record on such date not exceeding
60 days preceding the payment date thereof, as may be fixed by the Board of
Directors. The amount of Preferred Dividend Stock issuable to a holder by way
of a dividend shall be computed on the basis of the aggregate number of shares
of Series A Preferred Stock registered in such holder's name on the record date
fixed for the payment of such dividend plus the amount of accrued but not
declared dividends of Preferred Dividend Stock. Dividends payable for any
period less than a full semi-annual period shall be computed on the basis of a
360-day year of twelve 30-day months. Dividends shall accrue
<PAGE>

whether or not there are profits, surplus or other funds of the Corporation
legally available for the payment of dividends. Accrued but unpaid dividends
will not bear interest.

3. Voting Rights. The holders of shares of Series A Preferred Stock
shall have the following voting rights with respect thereto:

(A) Each share of Series A Preferred Stock shall entitle the holder
thereof to the voting rights required by applicable law.

(B) The consent of the holders of at least 66% of the outstanding
shares of the Series A Preferred Stock, voting separately as a single
class, in person or by proxy, either in writing without a meeting or at an
annual or a special meeting of shareholders called for the purpose, shall
be necessary to (i) increase or decrease the aggregate number of authorized
shares of the Series A Preferred Stock, provided that such decrease shall
never be below the number of then outstanding shares of Series A Preferred
Stock, (ii) effect an exchange, reclassification, or cancellation of all or
part of the Series A Preferred Stock, (iii) change the designations,
powers, preferences, relative and other special rights, or the
qualifications, limitations or restrictions thereof, of the Series A
Preferred Stock (which change shall apply equally to the then outstanding
shares of Series A Preferred Stock), (iv) issue any additional shares of or
securities convertible into or exchangeable for, or reclassify any other
shares of other classes or series into, shares of the Series A Preferred
Stock, (v) create any equity security ranking senior to or on a parity with
(with respect to voting or dividends or upon liquidation, dissolution or
winding up) the Series A Preferred Stock, (vi) approve any material change
in the principal business of the Corporation or (vii) pay a dividend or
distribution of cash or property in respect of, or redeem, repurchase
otherwise acquire, any Junior Security (as hereinafter defined), provided,
however, that no change in the dividend rate can be effected without the
consent of all holders of the Series A Preferred Stock. In all cases where
the holders of shares of the Series A Preferred Stock have the right to
vote separately as a class, all such holders shall be entitled to one vote
for each share held by them. The term "Junior Securities" as used herein
shall mean any of the Corporation's capital stock other than the Series A
Preferred Stock.

(C) If at any time (i) dividends on the Series A Preferred Stock shall
be in arrears for more than thirty days after the applicable Dividend
Payment Date or (ii) the Corporation shall be obligated to and shall have
failed to redeem any shares of the Series A Preferred Stock pursuant to
Section 6, and for so long thereafter as shares of the Series A Preferred
Stock remain outstanding, at the election of the holders of the Series A
Preferred Stock (exercisable by notice to the Corporation from a majority
of the holders of the then outstanding shares of Series A Preferred Stock),
the holders of the Series A Preferred Stock shall have the voting power,
voting separately as a single class, to elect such number of directors as
constitutes a majority of the Board of Directors of the Corporation. Under
such circumstances, the holders of the Series A Preferred Stock shall be
authorized to exercise such voting powers by increasing the size of the
Board of Directors and filling the resulting vacancies. The directors
elected by the holders of the

2
<PAGE>

Series A Preferred Stock may be removed from the Board of Directors only by
a vote of the holders of a majority of the then outstanding shares of the
Series A Preferred Stock. If the office of a director elected by the
holders of the Series A Preferred Stock becomes vacant by reason of
resignation, death or removal, the vacancy shall be filled by the vote of
the holders of a majority of the outstanding shares of the Series A
Preferred Stock, voting separately as a single class. Holders of the Series
A Preferred Stock shall not be entitled to cumulate their shares for the
election of directors. The holders of the Series A Preferred Stock may
assign their rights under this Section 3(C) to appoint a majority of the
Board of Directors of the Corporation.

4. Liquidation Preference. In the event of any liquidation, dissolution,
or winding up of the affairs of the Corporation, whether voluntary or otherwise
("Liquidation"), after payment or provision for payment by the Corporation of
the debts and other liabilities of the Corporation, each holder of the Series A
Preferred Stock shall be entitled to receive an amount in cash for each share of
the then outstanding Series A Preferred Stock held by such holder equal to
$10.00 per share (such amount being referred to herein as the "Liquidation
Preference"), plus accrued and unpaid dividends on each such share (whether or
not declared), and shall not be entitled to any further payment, before any
distribution shall be made to the holders of any Junior Securities upon the
Liquidation of the Corporation. Written notice of any Liquidation of the
Corporation, stating a payment date and the place where the distributable
amounts shall be payable, shall be given by mail, postage prepaid, not less than
30 days prior to the payment date stated therein, to the holders of record of
the Series A Preferred Stock, if any, at their respective addresses as the same
shall appear on the books of the Corporation. For the purposes of this Section
4, the merger or consolidation of the Corporation into or with any other
corporation, or the merger of any other corporation into it, or the sale, lease
or conveyance of all or substantially all the assets, property or business of
the Corporation, shall not be deemed to be a Liquidation of the Corporation,
unless such merger, consolidation, sale, lease or conveyance shall be in
connection with a dissolution or winding up of the business of the Corporation.

5. Redemption at the Option of the Corporation. (A) The Corporation, at
its option, may redeem the shares of Series A Preferred Stock, in whole or in
part, out of funds legally available therefor, at any time or from time to time,
subject to the notice provisions, provisions for partial redemption and
provisions limiting the Corporation's optional redemption rights described
below, at the redemption price ("Redemption Price") as follows:

(i) 50% of the number of shares of Series A Preferred Stock issued and
outstanding on the date of the first redemption of the Series A Preferred
Stock may be redeemed at the price of $10.00 per share plus an amount equal
to accrued and unpaid dividends on such shares (whether or not declared),
if any, to (and including) the date fixed for redemption, whether or not
earned or declared; and

(ii) the remaining number of shares of Series A Preferred Stock issued
and outstanding on the date of the first redemption and all shares of
Series A Preferred Stock issued after the date of the first redemption may
be redeemed at the price described below that is set opposite each year
following the Anniversary Date (as hereinafter defined) in

3
<PAGE>

which such shares may be redeemed, plus an amount equal to accrued and
unpaid dividends, if any, on such shares (whether or not declared), to (and
including) the date fixed for redemption, whether or not earned or
declared:

Year Following
Anniversary Date Redemption Price
- ---------------------------- ----------------
<S> <C>
1 $10.50
2 $10.30
3 $10.20
4 and thereafter $10.00
</TABLE>

The term "Anniversary Date" as used herein shall mean December 15, 1997.

(B) In the event the Corporation shall redeem shares of Series A Preferred
Stock under this Section 5, notice of such redemption shall be given by first
class mail, postage prepaid, mailed not less than 30 nor more than 60 days prior
to the redemption date, to each holder of record of the shares to be redeemed,
at such holder's address as the same appears on the stock records of the
Corporation. Each such notice shall state: (i) the redemption date; (ii) the
number of shares of Series A Preferred Stock to be redeemed and, if less than
all the shares held by such holder are to be redeemed, the number of such shares
to be redeemed from such holder; (iii) the Redemption Price; (iv) the place or
places where certificates for such shares are to be surrendered for payment of
the Redemption Price; (v) that dividends on the shares to be redeemed shall
cease to accrue on such redemption date.

(C) Upon surrender in accordance with said notice of the certificates for
any such shares so redeemed (properly endorsed or assigned for transfer, if the
Board of Directors shall so require and the notice shall so state), such shares
shall be redeemed by the Corporation at the applicable Redemption Price
aforesaid. If fewer than all the outstanding shares of Series A Preferred Stock
are to be redeemed, shares to be redeemed shall be selected by the Corporation
from outstanding shares of Series A Preferred Stock not previously called for
redemption by lot or pro rata (as near as may be) or by any other method
determined by the Board of Directors of the Corporation in its sole discretion
to be equitable. If fewer than all the shares represented by any certificate are
redeemed, a new certificate shall be issued representing the unredeemed shares
without cost to the holder thereof.

(D) Upon the occurrence of any Default (as defined in Section 6(C)) or
Change in Control (as defined in Section 6(C)), the Corporation may not exercise
its redemption rights pursuant to this Section 5.

(E) On or before the expiration of the third year following the Anniversary
Date, the Corporation shall only have the right to redeem outstanding shares of
Series A Preferred Stock pursuant to this Section 5 with proceeds received from
the sale by the Corporation of (i) equity securities of the Corporation or (ii)
assets of the Corporation (excluding the sale of oil, gas, natural gas liquid or
condensate in the ordinary course of business).

4
<PAGE>

6. Mandatory Redemption. (A) On December 15, 2002, the Corporation shall
redeem, for cash, all of the outstanding shares of the Series A Preferred Stock
at the Mandatory Redemption Price (as hereinafter defined).

(B) Upon the occurrence of a Change of Control (as hereinafter defined)
with respect to the Corporation, any holder of Series A Preferred Stock may
require, at the holder's option, for a period of 90 days after receipt of a
notice by the Corporation to the holders of the Series A that a Change of
Control has occurred, the Corporation to redeem the shares of Series A Preferred
Stock held by such holder, in whole or in part, at the Mandatory Redemption
Price. A "Change in Control" shall be deemed to have occurred (i) upon a
merger, consolidation or reorganization or similar transaction that requires
approval of holders of Common Stock, or any person or "group" (as defined in
Rule 13d-5 under the Securities Exchange Act of 1934, as amended) (other than
Enron Capital Trade & Resources Corp. or its Affiliates or Jeffrey E. Susskind
and his Affiliates) becoming the beneficial owner (as defined in Rule 13d-3
under the Securities Exchange of 1934, as amended) of a 50% or more of the
outstanding voting securities of the Corporation, (ii) upon the sale of all or
substantially all of the Corporation's assets, or (iii) upon the execution of an
agreement by the Corporation to do any of the foregoing. The term "Affiliate"
shall mean any person, corporation or other entity controlling, controlled by or
under common control with the party in question and, as used in this definition,
the term "control," including the correlative terms "controlling," "controlled
by" and "under common control with" shall mean possession, directly or
indirectly, of the power to direct or cause the direction of management or
policies (whether through ownership of securities or any partnership or other
ownership interest, by contract or otherwise) of a person, corporation or other
entity.

(C) Upon the occurrence of a Default (as hereinafter defined) with respect
to the Corporation, any holder of Series A Preferred Stock may require, at the
holder's option, the Corporation to redeem the shares of Series A Preferred
Stock held by such holder, in whole or in part, at the Mandatory Redemption
Price. A "Default" shall mean shall be deemed to have occurred if at any time
(i) dividends payable on the shares of Series A Preferred Stock at the time
outstanding have not been fully paid on the Dividend Payment Date; provided,
however, if such dividends are paid on or before the 30th day following such
Dividend Payment Date, the Corporation shall not be considered in Default, (ii)
directors elected by the holders of the Series A Preferred Stock pursuant to
Section 3 are not permitted to serve on the Board of Directors of the
Corporation, (iii) the consent of the holders of Series A Preferred Stock in not
obtained pursuant to the terms of Section 3(B), or (iv) the Corporation breaches
any covenant made with respect to the Series A Preferred Stock.

(D) A holder of Series A Preferred Stock may exercise the mandatory
redemption rights pursuant to Sections 6 (A), (B), and (C) by delivering notice
of such exercise to the Corporation, together with the certificate or
certificates representing such shares. Upon receipt of such redemption notice,
the Corporation shall, within 30 days, calculate the Mandatory Redemption Price
as of the end of the month preceding the month in which the Corporation receives
such notice; provided that with respect to the exercise of the mandatory
redemption right set forth in Section 6(C), the Corporation shall calculate the
Mandatory Redemption Price within 5 days after the receipt of such redemption
notice. The Corporation shall pay to the holder exercising such

5
<PAGE>

redemption right the Mandatory Redemption Price times the number of shares
redeemed on or before the 45th day of the receipt by the Corporation of the
redemption notice; provided that with respect to the exercise of the mandatory
redemption right set forth in Section 6(C), the Corporation shall pay to the
holder exercising such redemption right the Mandatory Redemption Price within 10
days after the receipt of such redemption notice.

(E) The term "Mandatory Redemption Price" shall mean with respect to (i)
the exercise of a mandatory redemption right pursuant to Section 6(A), $10.00
per share of Series A Preferred Stock, plus all accrued and unpaid dividends
(whether or not declared), (ii) the exercise of a mandatory redemption right
pursuant to Section 6(B), $10.10 per share of Series A Preferred Stock, plus all
accrued and unpaid dividends (whether or not declared), or (iii) the exercise of
a mandatory redemption right pursuant to Section 6(C), $10.50 per share of
Series A Preferred Stock, plus all accrued and unpaid dividends (whether or not
declared), if exercised prior to the third anniversary of the Anniversary Date
or $10.00 per share of Series A Preferred Stock, plus all accrued and unpaid
dividends (whether or not declared), if exercised on or after the third
anniversary of the Anniversary Date.

7. Reacquired Shares. Any shares of the Series A Preferred Stock
redeemed or purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and canceled promptly after the acquisition thereof.
All such shares shall upon their cancellation become authorized but unissued
shares of Series A Preferred Stock to be created by resolution or resolutions of
the Board of Directors, subject to the conditions and restrictions on issuance
set forth herein.

8. Covenant. (a) For so long as any shares of the Series A Preferred
Stock are outstanding, neither the Corporation nor its Consolidated Subsidiaries
shall incur, create or assume any Indebtedness (as hereinafter defined), if,
taking into account such Indebtedness, the Corporation's aggregate Indebtedness
would exceed 70% of the estimated value of future gross revenues (estimated in
accordance with the requirements of the Securities and Exchange Commission) to
be generated from the production of proved reserves, net of estimated production
and future development costs, using prices and costs in effect as of the date
indicated, without giving effect to non-property related expenses such as
general and administrative expenses and future income tax expenses or to
depreciation, depletion and amortization, discounted using an annual discount
rate of 10% as reported in the Corporation's most recent Annual Report on Form
10-K, or if no Form 10-K is available as of the most recent fiscal year end
(adjusted for any material asset sales or acquisitions since the date of the
last determination).

(b) The following definitions shall apply to terms used in this Section 8:

(i) "Indebtedness" means for any Person the sum of the following
(without duplication): (a) all obligations of such Person for borrowed
money or evidenced by bonds, debentures, notes or other similar
instruments; (b) all obligations of such Person (whether contingent or
otherwise) in respect of bankers' acceptances, surety or other bonds and
similar instruments; (c) all obligations of such Person to pay the deferred
purchase price of property or services (other than for borrowed money)
arising in the ordinary course of business of such Person to the extent
that such obligations have remained

6
<PAGE>

outstanding in excess of sixty days; (d) all obligations under leases which
shall have been, or should have been, in accordance with GAAP, recorded as
capital leases in respect of which such Person is liable, contingently or
otherwise, as obligor, guarantor or otherwise, or in respect of which
obligations such Person otherwise assures a creditor against loss; (e) all
Indebtedness and other obligations of others secured by a lien on any asset
of such Person, whether or not such Indebtedness is assumed by such Person;
(f) all Indebtedness and other obligations of others guaranteed by such
Person; (g) all obligations or undertakings of such Person to maintain or
cause to be maintained the financial position or covenants of other
Persons; (h) payments received in consideration of oil, gas, or other
minerals yet to be acquired or produced at the time of payment (including
without limitation obligations under "take-or-pay" contracts to deliver gas
in return for payments already received) or obligations to deliver goods or
services in consideration of advance payments therefor; (i) obligations
arising under futures contracts, swap contracts, or similar agreements,
except for those entered into by the Corporation in accordance with its
Commodity Price Risk Program adopted in December 1997; (j) obligations
arising with respect to letters of credit or applications or reimbursement
agreements therefor; (k) mandatory redemption or mandatory dividend rights
on capital stock (including Series A Preferred Stock); and (l) all unfunded
postretirement and postemployment benefits including, without limitation,
unfunded pension liabilities;

(ii) "Consolidated" refers to the consolidation of financial
statements in accordance with GAAP;

(iii) "GAAP" means generally accepted accounting principles
(including principles of consolidation), in effect from time to time,
consistently applied;

(iv) "Subsidiary" means, as to any Person, any corporation, company,
association, partnership, limited liability company or other business
entity of which such Person or one or more of its Subsidiaries or such
Person and one or more of its Subsidiaries owns sufficient equity or voting
interests to enable it or them (as a group) ordinarily, in the absence of
contingencies, to elect a majority of the directors (or Persons performing
similar functions) of such entity, and any partnership, limited liability
company or joint venture if more than a 50% interest in the profits or
capital thereof is owned by such Person or one or more of its Subsidiaries
or such Person and one or more of its Subsidiaries; and

(v) "Person" means an individual or individuals, a partnership, a
corporation, a company, a limited liability company, an association, a
joint stock company, a trust, a joint venture, an unincorporated
organization, any other form of legal entity, or a governmental authority.

7
<PAGE>

III. The Resolution was adopted by the Board of Directors of the
Corporation on ______, 1997.

IV. The Resolution was duly adopted by all necessary action on the part of
the Corporation.

DATED: ____________, 1997.

SHERIDAN ENERGY, INC.

By:
-------------------------------
President

<PAGE>

EXHIBIT 4.3

ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE

NUMBER SHARES

SHERIDAN ENERGY, INC.
AUTHORIZED ISSUE 25,000,000 SHARES

20,000,000 SHARES COMMON STOCK 5,000,000 SHARES PREFERRED STOCK
PAR VALUE $.01 PER SHARE PAR VALUE $.01 PER SHARE

This Certifies that __________________________________ is the owner of
_________________________________________________ fully paid and non-assessable
Shares of the 1,900,000 Shares Series A Preferred Stock of SHERIDAN ENERGY, INC.
transferable only on the books of the Corporation by the holder hereof in person
or by duly authorized Attorney upon surrender of this Certificate properly
endorsed.
In Witness Whereof, the said Corporation has caused this Certificate to
be signed by its duly authorized officers and to be sealed with the Seal of the
Corporation.

Dated:

[Seal Appears
/s/ [Signature appears here] Here] /s/ [Signature appears here]
- ----------------------------- -----------------------------
Secretary President

<PAGE>

The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations. Additional abbreviations may also
be used though not in the list.

TEN COM - as tenants in common UNIF GIFT MIN ACT ...................Custodian.............(Minor)
TEN ENT - as tenants by the entireties under Uniform Gifts to Minors Act........................(State)
JT TEN - as joint tenants with right of survivorship
and not as tenants in common

PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
For value received, the undersigned hereby sells, assigns and transfers unto _________________________________________

- ----------------------------------------------------------------------------- _________________________________________
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE

- -----------------------------------------------------------------------------------------------------------------------------

- ---------------------------------------------------------------------------------------------------------------------- Shares
represented by the within Certificate, and hereby irrevocably constitutes and appoints---------------------------------------
- ---------------------------------------------------------------------------------------Attorney to transfer the said
Shares on the books of the within-named Corporation with full power of substitution in the premises.
Dated, ______________________________________
In presence of ____________________________________________________________________

______________________________________________
</TABLE>

NOTICE: The signature to this assignment must correspond with the name as
written upon the face of the certificate in every particular without
alteration or enlargement, or any change whatever.

<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 274
<SECURITIES> 0
<RECEIVABLES> 3,199
<ALLOWANCES> 90
<INVENTORY> 0
<CURRENT-ASSETS> 3,792
<PP&E> 70,566
<DEPRECIATION> 7,694
<TOTAL-ASSETS> 68,699
<CURRENT-LIABILITIES> 4,836
<BONDS> 0
10,000
0
<COMMON> 67
<OTHER-SE> 22,296
<TOTAL-LIABILITY-AND-EQUITY> 68,669
<SALES> 7,074
<TOTAL-REVENUES> 7,834
<CGS> 2,638
<TOTAL-COSTS> 2,638
<OTHER-EXPENSES> 5,843
<LOSS-PROVISION> 1,000<F1>
<INTEREST-EXPENSE> 220<F2>
<INCOME-PRETAX> (1,867)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,867)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,966)
<EPS-PRIMARY> (2.51)
<EPS-DILUTED> (2.48)
<FN>
<F1>Reflects provision for litigation expense and related costs based on
Management's assessment of the likelihood of losses from various litigation
matters.
<F2>Net of interest income and other.
</FN>

</TABLE>