<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-22695
SHERIDAN ENERGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 76-0507664
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1000 Louisiana, Suite 800
Houston, Texas 77002
(Address of principal executive offices) (Zip Code)
(713) 651-7899
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [_]
As of November 16, 1998, there were 6,731,331 outstanding shares of
Sheridan Energy, Inc. Common Stock, $.01 par value.
<PAGE>
SHERIDAN ENERGY, INC.
Report on Form 10-QSB For The Quarter Ended September 30, 1998
<TABLE>
<CAPTION>
Index
Page
<C> <S> <C>
Part I. Financial Information............................................................ 3
Item 1. Financial Statements (Unaudited)....................................... 3
Consolidated Balance Sheets -
September 30, 1998 and December 31, 1997............................... 4
Consolidated Statements of Operations -
Three Month and Nine Month Periods Ended September 30, 1998 and 1997... 5
Consolidated Statements of Cash Flow -
Nine Month Periods Ended September 30, 1998 and 1997................... 6
Notes to Consolidated Financial Statements - Unaudited................. 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................... 10
Part II. Other Information............................................................... 17
Signatures................................................................................. 18
</TABLE>
Forward-Looking Statements
Stockholders are cautioned that all forward-looking statements involve
risks and uncertainties, including without limitation, statements about the
costs of exploring and developing new oil and natural gas reserves, the price
for which such reserves can be sold, the Company's attempts to reduce overhead
and eliminate non-core assets, environmental concerns affecting the drilling of
oil and natural gas wells, pending litigation, and general market conditions,
competition and pricing. Although the Company believes that the assumptions
underlying the forward-looking statements contained herein are reasonable, any
of the assumptions could be inaccurate, and there can therefore be no assurance
that the forward-looking statements included in this Form 10-QSB will prove
accurate. Because of the significant uncertainties inherent in the forward-
looking statements contained in this Form 10-QSB, the inclusion of such
information should not be regarded as a representation by the Company or any
other person that the objectives and plans of the Company will be achieved.
2
<PAGE>
SHERIDAN ENERGY, INC.
Report on Form 10-QSB For the Quarter Ended September 30, 1998
Part 1. Financial Information
1. FINANCIAL STATEMENTS (UNAUDITED)
The accompanying unaudited consolidated financial statements of Sheridan
Energy, Inc. and its subsidiary (collectively the "Company") have been prepared
in accordance with Rule 310 of Regulation S-B, "Interim Financial Statements,"
and accordingly do not include all information and notes required under
generally accepted accounting principles for complete financial statements. The
financial statements have been prepared in conformity with the accounting
principles and practices as disclosed in the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1997. These interim financial
statements reflect all adjustments (which were normal recurring adjustments)
which are, in the opinion of management, necessary for a fair presentation, in
all material respects, of the Company's financial position as of September 30,
1998. Results of operations for the three month period ended September 30, 1998
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1998. It is recommended that these unaudited consolidated
financial statements be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report on Form 10-
KSB for the year ended December 31, 1997.
3
<PAGE>
SHERIDAN ENERGY, INC
CONSOLIDATED BALANCE SHEET
(In thousands except for share data)
<TABLE>
<CAPTION>
ASSETS September 30, December 31,
1998 1997
------------- ------------
(Unaudited)
<S> <C> <C>
Current assets:..............................................................................
Cash and cash equivalents................................................................... $ 1,123 $ 274
Accounts receivable, net of allowance for doubtful accounts of $120 (1998) and $90 (1997)... 3,931 3,109
Deferred tax asset.......................................................................... 165 165
Other assets................................................................................ 819 244
-------- -------
Total current assets................................................................ 6,038 3,792
-------- -------
Property and equipment
Oil and natural gas properties............................................................. 71,398 70,139
Other property and equipment............................................................... 884 427
Accumulated depletion, depreciation and amortization....................................... (14,281) (7,694)
-------- -------
Property and equipment, net......................................................... 58,001 62,872
-------- -------
Investment in natural gas treating plant..................................................... 396 505
Deferred tax asset........................................................................... 765 765
Total other assets........................................................................... 607 765
-------- -------
Total other assets.................................................................. 1,768 2,035
-------- -------
TOTAL ASSETS................................................................................. $ 65,807 $68,699
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................................................... $ 12,522 $ 4,836
-------- -------
Total current liabilities................................................................... 12,552 4,836
-------- -------
Long-term debt............................................................................... 27,000 31,500
-------- -------
Total liabilities................................................................... 39,522 36,336
-------- -------
Commitments and contingencies
Redeemable Preferred Stock, 1,000,000 shares outstanding; redemption value $10,000........... 10,000 10,000
Stockholders' equity:
Common stock, 6,731,331 shares outstanding.................................................. 67 67
Additional paid-in capital.................................................................. 29,005 29,005
Accumulated (deficit)....................................................................... (12,787) (6,709)
-------- -------
Total stockholders' equity.......................................................... 16,285 22,363
-------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................................................... $ 65,807 $68,699
======== =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements
4
<PAGE>
SHERIDAN ENERGY, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the For the
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES
Oil and natural gas sales.......................................... $ 4,265 $1,567 $13,329 $4,765
Natural gas gathering.............................................. 73 63 192 171
Gain on property sales............................................. 1,444 5 1,630 51
-------- -------- -------- --------
5,782 1,635 15,151 4,987
-------- -------- -------- --------
COSTS AND EXPENSES
Operating expenses................................................. 1,634 464 4,610 1,262
Treating and transportation expense................................ 213 151 626 432
Depletion, depreciation and amortization........................... 2,230 500 7,161 1,291
General and administrative expenses................................ 1,251 467 3,398 1,496
Exploration costs.................................................. 11 72 41 85
-------- -------- -------- --------
5,339 1,654 15,836 4,566
-------- -------- -------- --------
OPERATING INCOME (LOSS).............................................. 443 (19) (685) 421
-------- -------- -------- --------
OTHER INCOME (EXPENSE)
Provision for litigation expense................................... (2,750) - (2,750) -
Equity earnings in natural gas treating plant...................... 149 135 462 337
Other income (loss)................................................ 3 (1) 3 124
Interest expense..................................................... (675) (54) (2,156) (128)
-------- -------- -------- --------
(3,273) 80 (4,441) 333
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES.................................... (2,830) 61 (5,126) 754
-------- -------- -------- --------
Income tax expense:
Current............................................................ -- 5 -- 15
Deferred........................................................... -- -- -- 250
-------- -------- -------- --------
-- 5 -- 265
-------- -------- -------- --------
NET INCOME (LOSS).................................................... (2,830) 56 (5,126) 489
Preferred stock dividends............................................ (319) - (952) --
TGX preferred dividends and accretion of redemption value............ -- -- -- (9,046)
-------- -------- -------- --------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK......................... $(3,149) $ 56 $(6,078) $(8,557)
======== ======== ======== ========
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE OF COMMON
STOCK................................................................ $(0.47) $0.01 $(0.90) $(1.99)
======== ======== ======== ========
BASIC AND DILUTED COMMON SHARES OUTSTANDING.......................... 6,731 4,281 6,731 4,296
======== ======== ======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
5
<PAGE>
SHERIDAN ENERGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------
1998 1997
-------- --------
<S> <C> <C>
Cash flow from operating activities:
Net income (loss)......................................................... $ (5,126) $ 489
Adjustments to reconcile net income (loss) to cash provided by operating
activities:
Depletion, depreciation and amortization................................ 7,161 1,291
Provision for litigation expense........................................ 2,750 --
Amortization of debt transaction costs and stock compensation........... 171 1
Gain on property sales.................................................. (1,630) (51)
Distribution in excess of equity earnings............................... 109 64
Changes in current operating assets and liabilities:
Decrease in accounts receivable....................................... (822) (145)
Decrease in deferred tax asset........................................ -- 348
Increase in other current assets...................................... (575) (85)
Increase (decrease) in accounts payable and accrued liabilities....... 4,936 (158)
Deferred tax asset...................................................... -- (90)
-------- --------
Net cash provided by operating activities............................... 6,974 1,664
-------- --------
Cash flow from investing activities:
Capital expenditures...................................................... (13,411) (4,257)
Proceeds from disposal of other assets.................................... 12,728 272
Increase in other assets.................................................. (31) --
-------- --------
Net cash used in investing activities..................................... (714) (3,985)
-------- --------
Cash flow from financing activities:
Payments on revolving credit facility and notes payable................... (21,875) (3,798)
Borrowings under revolving credit facility................................ 17,375 4,362
Payment of preferred share dividends...................................... (897) --
Debt transaction costs and other.......................................... (14) (29)
-------- --------
Net cash provided by (used in) financing activities....................... (5,411) 535
-------- --------
Net increase (decrease) in cash and cash equivalents........................ 849 (1,786)
Cash and cash equivalents at beginning of period............................ 274 1,924
-------- --------
Cash and cash equivalents at end of period.................................. $ 1,123 $ 138
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE>
SHERIDAN ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
1. BUSINESS AND EQUITY RESTRUCTURING
Business
Sheridan Energy, Inc. ("Sheridan" or the "Company") is the surviving
entity resulting from the merger (the "Merger") effective June 12, 1997 with its
former parent company, TGX Corporation ("TGX"). Sheridan is a domestic
independent energy company engaged in the production of oil and natural gas. The
Company is also engaged in intrastate natural gas gathering and treating.
Equity Restructuring
Pursuant to the Merger, holders of TGX Senior Preferred Stock received
0.5 shares of Sheridan common stock ("Sheridan Common Stock") for each share of
TGX Senior Preferred Stock, resulting in the issuance of approximately 4.3
million shares of Sheridan Common Stock. Other classes of TGX Preferred Stock
and TGX Common Stock (collectively "Other TGX Stock") were eliminated pursuant
to the Merger. The Merger was accounted for as a reorganization of related
parties with carryover basis of assets and liabilities. The Sheridan Common
Stock was recorded at the combined carrying value of Other TGX Stock and the
initial value ascribed to the TGX Senior Preferred Stock upon their issuance on
the date of the Merger. Accordingly, upon cancellation, all recorded TGX
preferred stock liabilities, including accretion and unpaid dividends, were
credited to accumulated deficit. No gain or loss was recognized upon
consummation of the Merger, and all pre-Merger results, including TGX Senior
Preferred Stock dividends and accretion charges, were reflected as Sheridan
activity. The costs of soliciting proxies and effecting the Merger were charged
to expense as incurred. All prior period per share data and amounts have been
restated to reflect issuance of Sheridan Common Stock on a retroactive basis.
The pro forma basic and diluted earnings per share for 1997 as if the
Merger had been effective as of January 1, 1997 and all TGX Senior Preferred
Stock and other classes of TGX Preferred Stock dividend and related accretion
charges had been eliminated as of such date was $0.11 based on weighted average
basic and diluted shares outstanding of 4,296,000.
2. LONG TERM DEBT AND NOTES PAYABLE
As of September 30, 1998 and December 31, 1997 the components of long term
debt were as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------- -------
(in thousands)
<S> <C> <C>
Secured bank debt under revolving credit facility $27,000 $31,500
Less current maturities -- --
------- -------
Long term debt $27,000 $31,500
======= =======
</TABLE>
7
<PAGE>
In late 1997, in conjunction with the acquisition of oil and gas
producing properties from Pioneer Natural Resources USA, Inc. ("Pioneer
Acquisition") and Grand Gulf Resources, L.L.C. ("Grand Gulf Acquisition"), the
borrowing-base facility with Bank One Texas, N.A. ("Bank One") credit facility
was amended and the maturity was extended to June 30, 2000. The Company may
elect to borrow at Bank One's stated rate (8.5% at September 30, 1998) or LIBOR
plus 2.5% (8.375% at September 30, 1998). 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 September 30, 1998, the Company's borrowing base under this
facility was approximately $37.6 million.
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, cash flow to debt service, tangible net worth
and an annual limitation on general and administrative expense of 14% of
revenues. In addition, the payment of dividends on Sheridan Common Stock and
Sheridan Preferred Stock is restricted except that cash dividends may be paid on
the Sheridan Preferred Stock if the Company has a cash flow to debt service
ratio of at least 1.2 to 1. At September 30, 1998, the Company did not meet the
covenant regarding tangible net worth due to the increase in provision for
litigation expense or limitation on general and administrative expense of
revenues. To date the Company has not received a waiver from Bank One regarding
such covenants but anticipates such will be received.
Cash paid for interest as of September 30, 1998 and 1997 totaled
approximately $2.0 million and $112,000, respectively.
3. COMMITMENTS AND CONTINGENCIES
Litigation
(a) In July 1992, certain unleased mineral interest owners commenced a
legal action in the 19th Judicial District for East Baton Rouge, Parish,
Louisiana against Sheridan's predecessor, TGX, as operator of three wells. The
petition alleges that the unleased owners are entitled to a refund of revenues
paid to TGX and other working interest owners, since first production, which are
attributable to the unleased owners' proportionate unit interest which are
utilized to offset the plaintiffs' proportionate share of cost associated with
drilling the wells. Sheridan argued that any claim which arose prior to the date
of the entry of the order confirming the Reorganization Plan has been discharged
through bankruptcy. The Company filed a lawsuit in the U.S. Bankruptcy Court for
the Western District of Louisiana ("Bankruptcy Court") claiming such a defense.
However, the Bankruptcy Court rejected that defense and the Company's appeal of
such ruling was also denied. Further, the Company has argued that its payout
notice to the unleased owners complied with statute requirements. The Louisiana
District Court in August 1998 entered a judgment against the Company for $2.4
million, plus interest and plaintiff court costs. The Company is currently
appealing the District Court's judgment and plans to continue to vigorously
defend against these actions but is unable to predict the final outcome.
Subsequent to September 30, 1998 the Company was required by statute to issue a
letter of credit of $3.6 million to pursue its appeal.
(b) In July 1995, certain royalty owners in the same wells commenced a
separate legal action alleging that the Company and other working interest
owners improperly profited under the terms of a gas gathering and transportation
agreement. In 1996, the court entered an order granting a motion on behalf of
TGX for a partial summary judgment, holding that all of the royalty owner's
claims preceding the filing of the suit by more than three years were time-
barred. The Company has asked the court to dismiss the remaining claims asserted
by the royalty owners. If not dismissed, the Company will vigorously defend
against this lawsuit.
(c) In December 1996, Tomcat Exploration, Inc. and others brought suit
("Tomcat Litigation') 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 in excess of $10 million. In October 1998, the Company agreed to
settle this lawsuit by paying the plaintiff group $1.5 million and receiving a
full release regarding this matter.
8
<PAGE>
(d) In May 1982, Samson Resources Company ("Samson") brought suit
against Sheridan's predecessor, TGX, in the United States District Court for the
Western District of Oklahoma alleging that the Company owed Samson for its under
production on a well in Oklahoma. Sheridan argued that the claim which arose
prior to the date of the entry of the order confirming the Reorganization Plan
had been discharged through bankruptcy. The Oklahoma District Court in August
1998 entered a judgment against the Company for $205,000, plus interest and
plaintiff court costs. The Company is currently appealing the District Court's
judgment and plans to continue to vigorously defend against this action.
Subsequent to September 30, 1998 the Company was required by statute to issue a
letter of credit of $376,000 to pursue its appeal.
As a result of management's assessment of the likelihood of losses from
the various litigation matters against the Company, based on advice of legal
counsel and review of the facts, circumstances, and developments surrounding the
various litigation matters, the Company recorded a provision of $2.8 million in
the third quarter of 1998, representing its estimate of losses and/or related
costs and expenses associated with such litigation matters, including the Tomcat
Litigation settlement.
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.
4. ACCOUNTS RECEIVABLE
As of September 30, 1998 and December 31, 1997, the primary components
of accounts receivable were:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------- -------------
(in thousands)
<S> <C> <C>
Accrued oil and gas sales.......................................... $2,980 $1,783
Receivables for pre-closing activity for purchased properties...... 150 923
Joint interest billing and other................................... 921 493
Allowance for doubtful accounts.................................... (120) (90)
------ ------
$3,931 $3,109
====== ======
</TABLE>
5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
As of September 30, 1998 and December 31, 1997, the primary components
of accounts payable and accrued liabilities were:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
--------- --------
(in thousands)
<S> <C> <C>
Accounts payable..................................... $ 736 $ 953
Undistributed net oil and natural gas revenues....... 3,853 1,457
Provision for litigation expenses.................... 3,850 1,100
Accrued operating and tax expenses................... 2,881 638
Accrued preferred dividends.......................... 350 53
Accrued professional fees............................ 182 350
Miscellaneous accruals............................... 670 285
------- ------
$12,522 $4,836
======= ======
</TABLE>
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion is intended to assist in an understanding of
the Company's financial position and results of operations and those presently
known events, trends or uncertainties that are reasonably likely to have a
material impact on the Company's future results of operations and conditions or
that are reasonably likely to cause the historical financial statements not to
be necessarily indicative of future operating results or condition. It should be
read in conjunction with the unaudited consolidated financial statements and
related notes appearing elsewhere herein and the Company's Annual Report on Form
10-KSB for the year ended December 31, 1997.
Stockholders are cautioned that all forward-looking statements involve
risks and uncertainty, including without limitation, statements about the cost
of exploring and developing new oil and natural gas reserves, the price for
which such reserves can be sold, the Company's attempts to reduce overhead and
eliminate non-core assets, environmental concerns affecting the drilling of oil
and natural gas wells, the attempts to acquire producing and non-producing oil
and gas properties, the ability of the Company to make projected capital
expenditures, to obtain necessary financing and to achieve projected quarterly
results, and general market conditions, competition and pricing.
All statements, other than statements of historical facts, included or
incorporated by reference in this document that address activities, events or
developments that the Company expects or anticipates will or may incur in the
future, including such things as future capital expenditures and acquisitions,
business strategy and measures to implement such strategy, competitive
strengths, goals, expansion and growth of the Company's business and operations,
plans, references to future success as well as other statements which include
words such as "anticipate," "believe," "plan," "estimate," "expect," and
"intend," and other similar expressions constitute forward-looking statements.
Although the Company believes that the assumptions underlying the forward-
looking statements contained herein are reasonable, any of the assumptions could
be inaccurate, and therefore, there can be no assurance that the forward-looking
statements included in this document will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included
herein, the inclusion of such information should not be regarded as a
representation by the Company or any other person that the objectives and plans
of the Company will be achieved.
RESULTS OF OPERATIONS
General
Sheridan Energy, Inc. is the surviving entity resulting from the Merger
with its former parent company, TGX Corporation, effective June 12, 1997.
Pursuant to the Merger, all persons owning TGX Senior Preferred Stock had their
preferred shares exchanged for Sheridan Common Stock on the basis of 0.5 shares
of Sheridan Common Stock for each share of TGX Preferred Stock owned. At the
same time, holders of all other classes of equity securities of TGX had their
securities eliminated.
10
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 1998 ("1998") COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997 ("1997")
Oil and Gas Operations. The following table sets forth certain
information with respect to the oil and gas operations of the Company for the
respective three month periods. Oil and condensate and natural gas prices are
shown on a per barrel and per thousand cubic feet ("Mcf") basis, respectively.
Oil and condensate and natural gas volumes are shown in barrels and million
cubic feet ("MMcf"), respectively. Total production is shown on an equivalent
million cubic feet ("MMcfe"), where one barrel of oil or condensate is equal to
six Mcf of natural gas.
<TABLE>
<CAPTION>
Three Months Ended September 30,
-----------------------------------
1998 1997 Change
---------- ---------- ---------
<S> <C> <C> <C>
Production:
Oil and condensate (Bbl) 53,587 23,500 128%
Natural gas (MMcf) 1,698 517 228%
Total production (MMcfe) 2,020 658 204%
Natural gas production as a percentage of total production 84% 78% 6%
Oil, condensate and natural gas sales (in thousands, except percentages):
Oil and condensate sales $ 793 $ 441 80%
Natural gas sales (includes product liquids) $ 3,472 $ 1,126 208%
Total oil, condensate and natural gas sales $ 4,265 $ 1,567 172%
Natural gas revenues as a percentage of oil and gas revenues 81% 72% 9%
Average realized price:
Oil and condensate (per Bbl) $ 14.80 $ 18.77 (21)%
Natural gas (per Mcf) $ 2.11 $ 2.18 (3)%
Per Mcfe $ 2.11 $ 2.36 11%
Average cost (per Mcfe):
Operating expenses (excludes production taxes) $ 0.68 $ 0.61 11%
Depreciation, depletion and amortization $ 1.10 $ 0.75 47%
General and administrative expense $ 0.62 $ 0.70 (11)%
</TABLE>
Production
The natural gas and oil and condensate sales volume increases for 1998
reflect the full period impact of the late 1997 Pioneer and Grand Gulf
Acquisitions and the successful results of the Company's 1998 drilling and
workover activity. Total production for the third quarter of 1998 was down 11%
from the second quarter of 1998 due to producing property sales completed in the
third quarter that reduced daily net production by 2,000 Mcfe and pipeline
connection delays on drilled wells.
Revenues
Revenues from the sale of oil, condensate and natural gas for the third
quarter of 1998 were approximately $4.3 million, an increase of $2.7 million
over 1997 revenues of approximately $1.6 million. Of this increase, sales volume
increases contributed $3.0 million of additional revenues which were partially
offset by lower commodity prices. The average realized oil price per barrel for
the third quarter of 1998, after price hedging, was $14.80, a decrease of $3.97
per barrel, or 21%, as compared to the 1997 price of $18.77. Oil price hedging
during the third quarter of 1998 increased revenues by $150,000 or $2.80 per
barrel. The average realized price per Mcf of natural gas for the third quarter
of 1998, after price hedging, was $2.11, as compared to $2.18 for 1997. Natural
gas product
11
<PAGE>
price hedging during the third quarter of 1998 increased the average realized
price per Mcf by $0.05, or natural gas revenues by $87,000. Even after taking
into effect the positive impact of oil and natural gas hedging, lower prices in
the third quarter reduced revenues by approximately $320,000.
During the third quarter, the Company completed the sale of certain non-
strategic oil and gas properties for net sale proceeds of $12.5 million,
resulting in a gain on property sales of $1.4 million. The sale proceeds were
used primarily to reduce bank debt.
Costs and Expenses
Operating expense. For the third quarter of 1998, total operating
expense, which includes through the wellhead production costs (lifting costs),
severance taxes and workover costs, increased approximately $1.2 million to
approximately $1.6 million, as compared to approximately $464,000 for 1997. This
increase was primarily the result of higher production volumes, taxes and
workover costs. Production taxes for the third quarter of 1998 and 1997 totaled
$254,000 and $62,000, respectively. Operating expense, excluding production
taxes, per Mcfe increased 11%, from $0.61 in 1997 to $0.68 in 1998 primarily due
to higher workover expenses. Workover costs, which are included as part of
operating expense, for the third quarter of 1998 and 1997 totaled $204,000 and
$12,000, respectively, and primarily represent discretionary remedial well
activities that are implemented to enhance or increase production from existing
producing zones.
Depletion, depreciation and amortization. Depletion, depreciation and
amortization ("DD&A") expense for the third quarter of 1998 was approximately
$2.2 million, an increase of approximately $1.7 million from the $500,000
reported for the same period in 1997. This increase primarily was due to a 204%
increase in equivalent volumes produced and a 47% increase in the DD&A rate.
DD&A per Mcfe for 1998 was $1.10 as compared to $0.75 for the same period in
1997. The increase in the DD&A rate per Mcfe rate reflects the production and
cost characteristics of recent acquisitions.
General and administrative expense. General and administrative expense
in the third quarter of 1998 was approximately $1.3 million, an increase of
$784,000 from $467,000 for the comparative period in 1997. This increase is
primarily attributable to 1998 staff additions as a result of the 1997 Pioneer
and Grand Gulf Acquisitions and increase in legal and other professional fees.
G&A costs for 1998 declined to $0.62 per Mcfe from $0.70 in the 1997 period.
Other Income (Expense)
Provision for litigation expense. In the 1998 quarter the Company
increased its provision for litigation expense by $2.8 million based on its
assessment of the likelihood of losses and/or related costs and expenses
associated with various litigation matters against the Company. Subsequent to
quarter end the Company agreed to settle the Tomcat Litigation (See Note 3 of
Note to Consolidated Financial Statements - Unaudited) through the payment of
$1.5 million, which is included in the current quarter provision for litigation
expense.
Interest expense. Interest expense for the third quarter of 1998
increased to $675,000 from $54,000 in 1997, primarily due to an increase in long
term debt resulting from the 1997 acquisitions.
12
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1998 ("1998") COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997 ("1997")
Oil and Gas Operations. The following table sets forth certain
information with respect to the oil and gas operations of the Company for the
first nine months of 1998 and 1997. 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 MMcf, respectively, while total
production is shown on a MMcfe basis.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
----------------------------------
1998 1997 Change
----------- --------- --------
<S> <C> <C> <C>
Production:
Oil and condensate (Bbl) 159,073 62,300 155%
Natural gas (MMcf) 5,377 1,511 256%
Total production (MMcfe) 6,331 1,885 236%
Natural gas production as a percentage of total production 85% 80% 5%
Oil, condensate and natural gas sales (in thousands, except
percentages):
Oil and condensate sales $ 2,256 $ 1,228 84%
Natural gas sales (includes liquids) $ 11,073 $ 3,537 213%
Total oil, condensate and natural gas sales $ 13,329 $ 4,765 180%
Natural gas revenues as a percentage of oil and gas revenues 83% 74% 9%
Average realized price:
Oil and condensate (per Bbl) $ 14.18 $ 19.71 (28)%
Natural gas (per Mcf) $ 2.10 $ 2.34 (10)%
Per Mcfe $ 2.10 $ 2.53 (17)%
Average cost (per Mcfe):
Operating expenses (excludes production taxes) $ 0.60 $ 0.56 7%
Depreciation, depletion and amortization (excludes impairment) $ 1.08 $ 0.68 59%
General and administrative expense $ 0.54 $ 0.79 (32)%
</TABLE>
Production
The natural gas and oil and condensate sales volume increases for 1998
reflect the full period impact of the late 1997 Pioneer and Grand Gulf
Acquisitions and the successful results of the Company's 1998 drilling and
workover activity. At September 30, 1998, daily net production was approximately
24,500 Mcfe, an increase of 25% from the 1997 year-end exit rate of 19,600 Mcfe.
Excluding 1998 property sales, the quarter end daily Mcfe production rate would
have increased 39% from year-end 1997.
Revenues
Revenues from the sale of oil, condensate and natural gas for the first
nine months of 1998 were approximately $13.3 million, an increase of $8.6
million, or 180%, over 1997 comparable revenues of approximately $4.8 million.
Of this increase, higher oil and natural gas sales volume contributed $10.7
million of additional revenues which was offset by significant price declines.
The average oil price per barrel for 1998, after price hedging, was $14.18, a
decrease of $5.53 per barrel, or 28%, as compared to the 1997 price of $19.71.
Commencing April 1998, the Company hedged 12,000 barrels of oil per month
through December 1998 at a weighted average price of approximately $17.89. The
oil price hedge for the first nine months of 1998 increased oil revenues by
$286,000 or $1.79 per barrel. The average realized price per Mcf of natural gas
for the first nine months of 1998, after price hedging, was $2.10, a decrease of
$0.24 per Mcf, or 10%, from the 1997 price per Mcf of $2.34. Natural gas price
hedging during 1998 decreased the average realized price per Mcf by $0.01, or
natural gas revenues by $71,000. The Company currently has fourth quarter 1998
gas Mcf volumes of approximately 1,180,000 hedged at approximately $2.28 per
Mcf.
13
<PAGE>
In 1998 the Company completed the sale of certain non-strategic oil and
gas producing properties for net sale proceeds of $12.7 million, resulting in a
gain on property sales of $1.6 million.
Costs and Expenses
Operating expense. For the first nine months of 1998, total operating
expense, which includes through the wellhead production costs (lifting costs),
severance taxes and workover costs, increased approximately $3.3 million, or
265%, to approximately $4.6 million, as compared to approximately $1.3 million
for the comparable 1997 period. This increase was primarily the result of higher
production volumes, taxes and workover costs. Production taxes for 1998 and 1997
totaled $804,000 and $200,000, respectively. Operating expense, excluding
production taxes, per Mcfe increased 7%, from $0.56 in 1997 to $0.60 in 1998 due
primarily to anticipated clean-up and production enhancement costs related to
the acquisition properties. Workover costs, which are included as part of
operating expense, for 1998 and 1997 totaled $479,000 and $104,000,
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
for the first nine months of 1998 increased to $626,000, as compared to $432,000
for the comparable 1997 period and represent post wellhead expenses incurred
primarily to treat gas to comply with pipeline specifications or to transport
the gas to market. For 1998 and 1997, approximately 75% and 90%, respectively,
of this expense is associated to the Company's Comite Field.
Depletion depreciation and amortization. DD&A expense for the first nine
months of 1998 was approximately $7.2 million, an increase of approximately $5.9
million from the $1.3 million reported for the same period in 1997. This
increase primarily was due to a 236% increase in equivalent volumes produced and
a 59% increase in the DD&A rate. The increase in the DD&A rate per Mcfe reflects
the production and cost characteristics of recent acquisitions. Also included in
1998 DD&A is a provision for impairment loss on oil and gas properties of
$300,000 due to mechanical problems on a well in Louisiana.
General and administrative expense. General and administrative expense
for the first nine months of 1998 was approximately $3.4 million, an increase of
$1.9 million from $1.5 million for the comparable 1997 period. This increase was
primarily attributable to 1998 staff additions as a result of the 1997 Pioneer
and Grand Gulf Acquisitions and increases in legal and other professional fees.
Legal expenses for 1998 increased $310,000 due primarily to the activity related
to the Tomcat Litigation (See Note 3 of the Notes to Consolidated Financial
Statements-Unaudited). Legal costs are anticipated to decline in the fourth
quarter of 1998 due to the Tomcat Litigation settlement. General and
administrative expenses for 1997 also included one-time net termination expenses
of $186,000 related to the former president and another officer's resignation
and $179,000 of one-time costs and fees related to the Merger. These 1997 one-
time expenses were partially offset by the collection of $80,000 of previously
allowed for doubtful accounts receivable.
Other Income (Expense)
Provision for litigation expense. In the 1998 third quarter the Company
increased its provision for litigation expense by $2.8 million based on its
assessment of the likelihood of losses and/or related costs and expenses
associated with various litigation matters against the Company. Subsequent to
quarter end the Company agreed to settle the Tomcat Litigation (See Note 3 of
Note to Consolidated Financial Statements - Unaudited) through the payment of
$1.5 million, which is included in the current quarter provision for litigation
expense.
Equity earnings in natural gas treating plant. Equity earnings in the
Comite Plant increased by 37% to a combined total of $462,000 for the first nine
months of 1998, compared to $337,000 for the comparable 1997 period. This
increase was primarily attributable to lower plant operating expenses and the
full period impact of wells added to the Comite Plant as the result of adjacent
field development.
Other income (loss). Other income (loss) for 1997 is comprised primarily
of interest income of $25,000 and the sale of an option to purchase a pipeline
for $50,000 and other miscellaneous revenues.
14
<PAGE>
Interest expense. Interest expense for the first nine months of 1998
increased to approximately $2.2 million from $128,000 in 1997, primarily due to
an increase in long term debt resulting from the 1997 acquisitions. Included in
1998 and 1997 interest expense is approximately $118,000 and $16,000,
respectively, of amortization of credit facility establishment costs which are
being amortized over the remaining term of the facility.
Preferred Dividends and Accretion of Preferred Stock
Pursuant to the terms of the Reorganization Plan, dividends accrued on
the TGX Senior Preferred Stock at 10%, compounded annually, and on the TGX Old
Preferred at 9% payable through the issuance of additional TGX Old Preferred
shares. The accretion of the TGX Senior Preferred Stock redemption value, also a
non-cash item, was calculated based on the interest method. Effective with the
Merger, all dividends and accretion obligations were eliminated; however, all
pre-Merger Effective Date dividend and accretion charges continue to be
reflected in the historical results of 1997. Pursuant to the Merger each share
of TGX Senior Preferred Stock was exchanged for 0.5 shares of Sheridan Common
Stock, and the TGX Old Preferred was canceled.
The 1998 preferred stock dividend expense is the result of the $10.0
million of Sheridan Preferred Stock issued in conjunction with the Pioneer
Acquisition. The preferred stock dividend expense is based on the annual 12%
cash rate and includes $54,000 of amortization expense related to Sheridan
Preferred Stock fees, which are being amortized over the five year redemption
period. Cash dividends to date of $600,000 have been paid in 1998.
FINANCIAL CONDITION
At September 30, 1998, the Company had a working capital deficit of
approximately $6.5 million, which includes a provision for litigation expense of
$3.9 million. Subsequent to September 30, 1998, the Company settled the Tomcat
Litigation through the payment of $1.5 million which reduced the litigation
provision and increased long term debt. The increase in working capital deficit
from December 31, 1997, of approximately $2.7 million, excluding the provision
for litigation expense, is due to an increase in undistributed revenues and
operating and capital accruals related to recent drilling and acquisition
activity. Subsequent to September 30, 1998, the Company settled the Tomcat
Litigation through the payment of $1.5 million which reduced the litigation
provision and increased long term debt.
In late 1997, in conjunction with the Pioneer and Grand Gulf
Acquisitions, the Bank One credit facility borrowing base was increased to $40.0
million, and the maturity extended to June 30, 2000. Under the current facility,
the Company may elect to borrow at Bank One's stated rate or LIBOR plus 2.5%.
The Bank One facility is secured by substantially all of the Company's oil and
gas properties and is repayable through monthly borrowing base reductions of
$550,000. The borrowing base is redetermined every six months or at Bank One's
or Company's discretion with the next scheduled redetermination due December
1998. At September 30, 1998, the Company's borrowing base under this facility
was approximately $37.6 million with debt outstanding of approximately $27.0
million. Due to the excess borrowing base over current borrowing, no current
maturities for debt were reflected at September 30, 1998.
The Bank One credit facility requires the maintenance of certain
financial ratios including ratios relating to working capital, as adjusted
pursuant to the credit facility, cash flow to debt service, tangible net worth
and an annual limitation on general and administrative expense of 14% of
revenues. In addition, the payment of dividends on Sheridan Common Stock and
Sheridan Preferred Stock is restricted except that cash dividends may be paid on
the Sheridan Preferred Stock if the Company has a cash flow to debt service
ratio of at least 1.2 to 1. At September 30, 1998, the Company did not meet the
covenant regarding tangible net worth due to the increase in provision for
litigation expense or limitation on general and administrative expense of
revenues. To date the Company has not received a waiver from Bank One regarding
such covenants but anticipates such will be received. The Company anticipates
that it will not comply with the general and administrative expense covenant
until late 1998 as production is anticipated to increase as a result of drilling
and recompletion activity. The Company has also requested a permanent reduction
in the tangible net worth requirement due to the decrease resulting from the
provision for litigation expense which is also anticipated to be received.
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
15
<PAGE>
not classified as a component of stockholders' equity. At September 30, 1998,
the Sheridan Preferred Stock redemption value was $10.0 million plus accrued
dividends of approximately $350,000. At the discretion of the Company,
dividends may be paid in kind through the issuance of additional fully paid
shares at the rate of 13.5%. The Company has no redemption obligation on the
Sheridan Preferred Stock until December 15, 2002, at which time all of the
Sheridan Preferred Stock then outstanding, plus any accrued dividends, must be
redeemed.
LIQUIDITY AND CAPITAL RESOURCES
For 1998, cash provided by operating activities before working capital
changes was approximately $3.4 million, before the gain on property sales or
provision for litigation expense.
In connection with the Pioneer Acquisition and anthe agreement with
Enron Capital & Trade Resources Corp. ("ECT"), the Company entered into swap
agreements to reduce its exposure to price fluctuations on a portion of its
natural gas and oil sales in 1998 and to achieve a more predictable cash flow.
In 1997, the Company entered into swap agreements representing approximately 45%
of 1998 natural gas production, as estimated by independent petroleum engineers,
at a weighted average sales price per Mcf of approximately $2.19. In early 1998,
the Company entered into swap agreements representing approximately 48% of 1998
oil production, as estimated by independent petroleum engineers, at a weighted
average sales price per barrel of approximately $17.89. The fair value of the
swap agreements is the amount at which they could be settled at September 30,
1998, based on the difference between the price specified in the swap agreement
and the NYMEX futures contract prices existing at such date was nominal. In
conjunction with the swap agreements, the Company was required to issue a letter
of credit of $1.0 million to ECT through which all swap agreements are
maintained. The issuance of this letter of credit does not reduce the Company's
availability under the Bank One credit facility.
At September 30, 1998, the Bank One credit facility had a borrowing base
of $37.6 million with approximately $27.0 million of borrowings outstanding. The
Company had letter of credit commitments, excluding the ECT letter of credit,
totaling $354,000 outstanding under the credit facility, resulting in a quarter
end facility availability of approximately $10.2 million. Subsequent to
September 30, 1998, the Company settled the Tomcat Litigation through the
payment of $1.5 million which reduced the litigation provision and increased
long term debt. Further, in conjunction with the appeal of summary judgments
regarding the Edwards Litigation and Samson Litigation, the Company issued
letters of credit totaling approximately $4.0 million (See Note 3 of Notes to
Consolidated Financial Statements - Unaudited) which reduced the Company's
availability under the credit facility to $6.2 million. Considering the
Company's working capital position, expected operating results and availability
under the credit facility, capital resources are deemed sufficient for current
operating activities. The Company, however, will be required to seek additional
financing sources to effect any sizeable acquisition or expand its capital
exploration program.
There are 1.0 million shares of Sheridan Preferred Stock outstanding
with a redemption value of $10 per share. Cash dividends of $0.60 per share are
payable semi-annually each June 15 and December 15 beginning June 15, 1998 (a
12% annual rate). At the option of the Company, dividends may be paid-in-kind,
semi-annually, in an amount equal to 0.0675 shares for each share then issued
and outstanding (a 13.5% annual rate). The Company has an obligation to redeem
the Sheridan Preferred Stock on December 15, 2002.
The Company anticipates that continued development drilling and work
overs will maintain or increase current production volumes. The current
projected cash flows from existing properties and borrowings available under the
Company's current line of credit are considered adequate to fund current
operating activities. In addition, the Company is continually evaluating
opportunities for acquisition of producing properties and currently intends to
pursue future production volume and reserve base growth through acquisitions.
Any sizeable acquisitions will have to be financed through a combination of bank
borrowings, mezzanine financing, production payments and additional equity
issuance. Effective implementation of the Company's development and acquisition
plans is expected to meet the Company's long-term operation and liquidity
requirements.
16
<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 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.
Part II. Other Information
ITEM 1. SUBMISSION OF MATTERS OF SECURITY HOLDERS
None
ITEM 2. LEGAL PROCEEDINGS
Except as set forth in Note 3 of the Notes of Consolidated Financial
Statements Unaudited included in Part 1 hereof, since the filing date of
the Annual Report on Form 10-KSB, there have been no substantial
developments related to the legal proceedings described therein.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
See Note 2 of the Notes of Consolidated Financial Statements - Unaudited.
ITEM 4. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
Exhibit 27 - Financial Data Schedule
(B) REPORTS ON FORM 8-K:
On September 9, 1998, the Company reported under Item 5 the Edwards
Litigation summary judgment against the Company.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SHERIDAN ENERGY, INC.
(Registrant)
Date: November 16, 1998 By: /s/ Michael A. Gerlich
-------------------------
Michael A. Gerlich
Vice President and Chief
Financial Officer
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,123
<SECURITIES> 0
<RECEIVABLES> 4,051
<ALLOWANCES> 120
<INVENTORY> 0
<CURRENT-ASSETS> 6,038
<PP&E> 72,282
<DEPRECIATION> 14,281
<TOTAL-ASSETS> 65,807
<CURRENT-LIABILITIES> 12,552
<BONDS> 0
10,000
0
<COMMON> 67
<OTHER-SE> 16,218
<TOTAL-LIABILITY-AND-EQUITY> 65,807
<SALES> 13,329
<TOTAL-REVENUES> 15,151
<CGS> 5,236
<TOTAL-COSTS> 5,236
<OTHER-EXPENSES> 10,600
<LOSS-PROVISION> 2,750<F1>
<INTEREST-EXPENSE> 1,481
<INCOME-PRETAX> (5,126)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,126)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,078)
<EPS-PRIMARY> (0.90)
<EPS-DILUTED> (0.90)
<FN>
<F1>Represents provision for litigation expenses and related costs based on
management's assessment of the likelihood of losses from various litigation
matters.
</FN>
</TABLE>
