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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 8-K/A
(AMENDMENT NO. 1)
CURRENT REPORT
Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
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Date of Report (Date of Earliest event reported):
January 25, 1999
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SHERIDAN ENERGY, INC.
(Exact name of registrant as specified in its charter)
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Delaware 1-10201 76-0507664
(State of Incorporation) (Commission File Number) (IRS Employee
Identification No.)
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1000 Louisiana, Suite 800
Houston, Texas 77002
(Address of principal executive offices)
Registrant's telephone number, including area code
(713) 651-7899
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SHERIDAN ENERGY, INC.
FORM 8-K/A
TABLE OF CONTENTS
PAGE
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ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS................................... 1
(a) Financial Statements of the Acquisition......................... 1
Report of Independent Auditors.................................. 1
Historical Statements of Revenues and Direct
Operating Expenses of Certain Oil and Gas Properties Acquired
from Amerada Hess Corporation................................... 2
Notes to the Historical Statements of Revenues and
Direct Operating Expenses of Certain Oil and Gas Properties
Acquired from Amerada Hess Corporation.......................... 3
(b) Pro Forma Financial Information................................. 7
Unaudited Pro Forma Condensed Consolidated Financial
Statements...................................................... 7
Pro Forma Condensed Consolidated Balance Sheet - Unaudited
December 31, 1998............................................... 8
Pro Forma Condensed Consolidated Statement of
Operations - Unaudited Year Ended December 31, 1998............. 9
Notes to Unaudited Pro Forma Condensed Consolidated
Financial Statements............................................10
(c) Exhibits........................................................12
SIGNATURES...................................................................13
i
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ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of the Acquisition
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Sheridan Energy, Inc.
We have audited the accompanying historical statements of revenues and
direct operating expenses of certain oil and gas properties acquired from
Amerada Hess Corporation (the "Amerada Transaction") by Sheridan Energy, Inc.
and its subsidiary (the "Company") for the years ended December 31, 1998 and
1997. These historical statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these historical
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the historical statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the historical
statements. We believe that our audits provide a reasonable basis for our
opinion.
The accompanying historical statements were prepared as described in Note 1
for the purpose of complying with the rules and regulations of the Securities
and Exchange Commission and are not intended to be a complete presentation of
the revenues and direct operating expenses of the Amerada Transaction.
In our opinion, the historical statements referred to above present fairly,
in all material respects, the revenues and direct operating expenses of the
Amerada Transaction for the years ended December 31, 1998, and 1997, in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Houston, Texas
March 12, 1999
1
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SHERIDAN ENERGY, INC. AND SUBSIDIARY
Historical Statements of Revenues and Direct Operating Expenses
of Certain Oil and Gas Properties Acquired from Amerada Hess Corporation
(in thousands)
Year Ended December 31,
----------------------
1998 1997
---------- ----------
Revenues:
Natural gas $13,765 $16,874
Oil and condensate 87 180
------- -------
Total revenues 13,852 17,054
Direct operating expenses 2,123 2,357
------- -------
Revenues in excess of direct operating expenses $11,729 $14,697
======= =======
See the accompanying notes to these statements.
2
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SHERIDAN ENERGY, INC. AND SUBSIDIARY
Notes to the Historical Statements of Revenues and Direct Operating Expenses
of Certain Oil and Gas Properties Acquired from Amerada Hess Corporation
1. Basis of Presentation
Sheridan Energy, Inc. (the "Company"), through a newly formed subsidiary,
Sheridan California Energy, Inc. ("SCEI"), signed an agreement dated November 9,
1998 to acquire from Amerada Hess Corporation ("Amerada Hess"), effective
November 1, 1998, certain oil and gas properties located in the Sacramento
Basin, California (the "Amerada Transaction") for approximately $58.0 million.
The Amerada Transaction closed on January 25, 1999.
The revenues and direct operating expenses associated with the Amerada
Transaction were derived from the Amerada Hess accounting records. Revenues and
direct operating expenses, as set forth in the accompanying historical
statements, include oil and gas revenues and associated direct operating
expenses related to the net revenue interest and net working interest,
respectively, in the acquired properties. Each owner recognizes revenue and
expenses based on its proportionate share of the related production and costs.
The historical statements include oil and gas revenues, net of royalties.
Expenses include labor, services, repairs and maintenance, and supplies utilized
to operate and maintain the wells and related equipment as well as property
taxes.
The accompanying historical statements vary from an income statement in that
they do not show certain expenses which were incurred in connection with
ownership of the acquired properties including general and administrative
expenses and income taxes. These costs were not separately allocated to the
acquired properties in Amerada Hess' accounting records and any pro forma
allocation would be both time consuming and expensive and would not be a
reliable estimate of what these costs would actually have been had the acquired
properties been operated historically as a stand-alone entity. In addition,
these allocations, if made using historical general and administrative
structures and tax burdens, would not produce allocations that would be
indicative of the historical performance of the acquired properties had they
been assets of the Company due to the greatly varying size, structure,
operations and accounting of the two companies. The accompanying historical
statements also do not include provisions for depreciation, depletion and
amortization as such amounts would not be indicative of those costs which would
be incurred by the Company upon allocation of the purchase price.
For the same reason, primarily the lack of segregated or easily obtainable
reliable data on asset values and related liabilities, a balance sheet is not
presented for the Amerada Transaction.
At the end of the economic life of these fields, certain restoration and
abandonment costs will be incurred by the respective owners of these fields. No
accrual for these costs is included in direct operating expenses.
With respect to gas sales, the sales method is used for recording revenues.
Under this approach, revenues were based on the monthly production sold by
Amerada Hess.
3
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SHERIDAN ENERGY, INC. AND SUBSIDIARY
Notes to the Historical Statements of Revenues and Direct Operating Expenses
of Certain Oil and Gas Properties Acquired from Amerada Hess Corporation
2. Related Party Transactions
Affiliates of Amerada Hess acquired all of the natural gas production from
the acquired properties for each of the two years ended December 31, 1998.
3. Supplementary Oil and Gas Information (Unaudited)
Proved Reserve Estimates
Oil and gas proved reserves cannot be measured exactly. Reserve estimates
are based on many factors related to reservoir performance which require
evaluations by the engineers interpreting the available data, as well as price
and other economic factors. The reliability of these estimates at any point in
time depends on both the quality and quantity of the technical and economic
data, the production performance of the reservoirs, as well as extensive
engineering judgment. Consequently, reserve estimates are subject to revision as
additional data becomes available during the producing life of a reservoir. When
a commercial reservoir is discovered, proved reserves are initially determined
based on limited data from the first well or wells. Subsequent data may better
define the extent of the reservoir and additional production performance, well
tests and engineering studies will likely improve the reliability of the reserve
estimate. The evolution of technology may also result in the application of
improved recovery techniques such as supplemental or enhanced recovery projects,
or both, which have the potential to increase reserves beyond those envisioned
during the early years of a reservoir's producing life.
Proved reserves are those quantities which, upon analysis of geological and
engineering data, appear with reasonable certainty to be recoverable in the
future from known oil and gas reservoirs under current prices and costs as of
the date the estimate is made. Proved developed reserves are those reserves
which can be expected to be recovered from existing wells, equipment and
operating methods. Proved undeveloped reserves are those reserves which can be
expected to be recovered from new wells on undrilled acreage or from existing
wells where a relatively major expenditure is required. Proved reserves
represent the estimated recoverable volumes after deducting from gross reserves
the portion due land owners or others as royalty or operating interests.
Estimates of proved reserves include and rely upon a production and
development strategy. The Company's estimates, as determined by reservoir
engineers, are based upon plans developed using current information and reflect
the Company's risk tolerance and philosophy of minimizing future capital
expenditures in producing incremental reserves during the last years of the
acquired properties as well as its plans with respect to developing proved
undeveloped reserves. Such reserves typically involve a higher degree of
uncertainty. As a result, the Company's estimates may not be comparable to other
oil and gas producers. In any case, many factors such as changes in prices or
costs or efforts in sound technical judgment made on the best information
available may cause actual production to vary significantly from estimated
reserves. Estimates of proved reserves for prior periods reflect the Company's
estimate of proved reserves as determined retrospectively.
Estimated quantities of proved oil and gas reserves and of changes in
quantities of proved developed and undeveloped reserves in thousands of barrels
("MBbls") and billion cubic feet ("Bcf") for each of the periods indicated were
as follows:
4
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SHERIDAN ENERGY, INC. AND SUBSIDIARY
Notes to the Historical Statements of Revenues and Direct Operating Expenses
of Certain Oil and Gas Properties Acquired from Amerada Hess Corporation
Oil Gas
(MBbls) (Bcf)
------- -----
Proved reserves at December 31, 1996 48 95.3
Production (11) (7.2)
Extensions, discoveries and improved recovery -- --
Revisions of previous estimates 2 .4
---- ----
Proved reserves at December 31, 1997 39 88.5
Production (8) (6.7)
Extensions, discoveries and improved recovery -- --
Revisions of previous estimates 1 1.0
---- ----
Proved reserves at December 31, 1998 32 82.8
==== ====
Proved developed reserves at:
December 31, 1996 47 90.4
December 31, 1997 39 84.7
December 31, 1998 32 80.0
Standardized Measure of Discounted Future Net Cash Flows
The following disclosures concerning the standardized measure of discounted
future cash flows from proved oil and gas reserves are presented in accordance
with the Statement of Financial Accounting Standards No. 69 ("SFAS 69"). As
prescribed by SFAS 69, the amounts shown are based on prices and costs at the
end of each period and a 10 percent annual discount factor. Since prices and
costs do not remain static, and no price or cost changes have been considered,
the results are not necessarily indicative of the fair market value of the
estimated proved reserves, but they do provide a common benchmark which may
enhance the user's ability to project future cash flows.
The standardized measure in discounted future net cash flows related to
proved oil and gas reserves at December 31 was as follows (in thousands):
1998 1997
---- ----
Future cash flows $182,079 $169,841
Future production costs (42,630) (43,207)
Future development costs (1,888) (2,393)
-------- --------
Future pre-tax cash flows 137,561 124,241
Future income taxes (30,810) (26,243)
-------- --------
Future net cash flows 106,751 97,998
10% annual discount for estimated timing of cash flows (46,713) (44,677)
-------- --------
Standardized measure of discounted future net cash flows $ 60,038 $ 53,321
======== ========
5
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SHERIDAN ENERGY, INC. AND SUBSIDIARY
Notes to the Historical Statements of Revenues and Direct Operating Expenses
of Certain Oil and Gas Properties Acquired from Amerada Hess Corporation
The standardized measure of discounted future net cash flows is based on the
following oil and gas prices at December 31:
1998 1997
---- ----
Oil (per Bbl) $12.97 $13.57
Gas (per Mcf) $ 2.18 $ 1.91
The principal sources of changes in the standardized measure for the years
ended December 31 were as follows (in thousands):
1998 1997
---- ----
Balance at beginning of the year $ 53,321 $102,948
Sales and transfers of oil and gas produced, net
of production costs (11,729) (15,234)
Net change in prices and costs 13,072 (76,252)
Extensions, discoveries and improved recovery -- --
Changes in estimated future development costs 504 244
Revisions of quantity estimates 922 288
Net change in income taxes (2,900) 29,780
Accretion of discount 5,332 10,295
Changes in production rates (timing) and other 1,516 1,252
-------- --------
Balance at the end of the year $ 60,038 $ 53,321
======== ========
6
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(b) Pro Forma Financial Information
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma condensed consolidated financial statements of
Sheridan Energy, Inc. and its subsidiaries (the "Company") have been prepared to
give effect to the acquisition of certain oil and gas properties of Amerada Hess
Corporation (the "Amerada Transaction") through a newly formed subsidiary,
Sheridan California Energy, Inc. ("SCEI") and the related financing transactions
of the issuance of SCEI's redeemable senior preferred stock and shares of SCEI's
common stock to Calpine Corporation and CPN Production Company, and the entering
into of a borrowing base facility with Bank One, Texas, N.A., as if such
transactions had taken place as of January 1, 1998 for the Pro Forma Condensed
Consolidated Statement of Operations and as of December 31, 1998 for the Pro
Forma Condensed Consolidated Balance Sheet. This information should be read in
conjunction with the Consolidated Financial Statements for Sheridan Energy, Inc.
filed in Form 10-KSB for the year ended December 31, 1998 and the Historical
Statements of Revenues and Direct Operating Expenses included herein with
respect to the oil and gas properties acquired in the Amerada Transaction.
7
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SHERIDAN ENERGY, INC. AND SUBSIDIARIES
Pro Forma Condensed Consolidated Balance Sheet - Unaudited
December 31, 1998
(in thousands)
AMERADA PRO FORMA
TRANSACTION SHERIDAN
SHERIDAN PRO FORMA ENERGY, INC.
ENERGY, INC. ADJUSTMENTS AND SUBSIDIARY
------------ ----------- --------------
Assets
Current assets $11,099 $(55,170)(A) $ 8,099
(430)(B)
37,700 (C)
14,900 (D)
Property and equipment, net 55,958 55,170 (A) 111,128
Other assets 1,820 430 (B) 2,250
------- -------- --------
Total assets $68,877 $ 52,600 $121,477
======= ======== ========
Liabilities and Stockholders'
Equity
Current liabilities $15,868 $ -- $ 15,868
Long-term debt 31,950 37,700 (C) 69,650
Redeemable preferred stock 10,675 13,000 (D) 23,675
Minority interest -- 1,900 (H) 1,900
Stockholders' equity 10,384 1,900 (D) 10,384
(1,900)(H)
------- -------- --------
Total Liabilities &
Stockholders' Equity 68,877 $ 52,600 $121,477
======= ======== ========
See accompanying notes to unaudited pro forma condensed consolidated
financial statements.
8
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SHERIDAN ENERGY, INC. AND SUBSIDIARIES
Pro Forma Condensed Consolidated Statement of Operations - Unaudited
Year Ended December 31, 1998
(in thousands, except per share data)
<TABLE>
<CAPTION>
PRO FORMA
SHERIDAN AMERADA PRO FORMA SHERIDAN
ENERGY, INC. TRANSACTION ADJUSTMENTS ENERGY, INC.
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues $ 19,831 $ 13,852 $ -- $ 33,683
Costs and expenses:
Oil and gas production 6,957 2,123 -- 9,080
Depreciation, depletion and amortization 10,057 -- 4,766 (E) 14,823
Impairment provision on oil and gas
properties 3,244 -- -- 3,244
General and administrative 4,669 -- -- 4,669
Exploration costs 931 -- -- 931
-------- -------- -------- --------
25,858 2,123 4,766 32,747
-------- -------- -------- --------
Operating loss (6,027) 11,729 (4,766) 936
Other income (expenses):
Provision for litigation expense (2,349) -- -- (2,349)
Interest expense (2,826) -- (3,128)(F) (5,954)
Other 603 -- -- 603
-------- -------- -------- --------
(4,572) -- (3,128) (7,700)
-------- -------- -------- --------
Income (loss) before income taxes (10,599) 11,729 (7,894) (6,764)
Income tax expense -- -- -- --
-------- -------- -------- --------
Net income (loss) (10,599) 11,729 (7,894) (6,764)
Preferred stock dividends 1,380 -- 1,884 (G) 3,264
-------- -------- -------- --------
Net income (loss) before minority interest (11,979) 11,729 (9,778) (10,028)
Minority interest -- -- 389 (H) 389
-------- -------- -------- --------
Net income (loss) applicable to common stock $(11,979) $ 11,729 $(10,167) $(10,417)
======== ======== ======== ========
Basic and diluted loss per share
of common stock $ (1.78) $ (1.55)
======== ========
Weighted average shares outstanding -
basic and diluted 6,731 6,731
======== ========
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated
financial statements.
9
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SHERIDAN ENERGY, INC. AND SUBSIDIARIES
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
Note 1. Basis of Presentation
The unaudited pro forma condensed consolidated financial statements of
Sheridan Energy, Inc. and its subsidiaries ("Sheridan" or the "Company") have
been prepared to give effect to the acquisition, for approximately $58.0
million, effective November 1, 1998, of certain properties (the "California
Properties") of Amerada Hess Corporation (the "Amerada Transaction") through a
newly formed subsidiary, Sheridan California Energy, Inc. ("SCEI") and the
related financing transactions including the issuance of SCEI's seven-year
redeemable non-voting preferred stock (the "SCEI Preferred Stock") and shares of
SCEI's common stock, and the establishment of a borrowing base facility (the
"SCEI Facility") with Bank One, Texas N.A., ("Bank One") as if such acquisition
and financing transactions had taken place as of January 1, 1998 for the Pro
Forma Condensed Consolidated Statement of Operations and as of December 31, 1998
for the Pro Forma Condensed Consolidated Balance Sheet.
The SCEI Facility has an initial borrowing base of $43.0 million with a
maturity of December 31, 2001. Under the SCEI Facility, SCEI may elect to borrow
at Bank One's stated rate (7.75% at December 31, 1998) or LIBOR (5.06% at
December 31, 1998) plus 2.5%. The SCEI Facility is secured by substantially all
of SCEI's oil and gas properties and is repayable through monthly borrowing base
reductions of $450,000. The borrowing base is redetermined every six months or
at Bank One's discretion. At closing on January 25, 1999, SCEI borrowed $30.6
million and anticipates borrowing an additional $7.1 million upon final closing
of the Amerada Transaction in April 1999. The SCEI Facility is repayable only by
SCEI and is not an obligation of Sheridan.
The SCEI Facility requires the maintenance of certain financial ratios
including ratios relating to working capital, tangible net worth, cash flow to
debt service of at least 1.1 to 1.0 and annual limitations on general and
administrative expense and non-oil and gas capital expenditures. In addition,
the payment of dividends on SCEI common stock and preferred stock is restricted
except that cash dividends may be paid on the SCEI Preferred Stock if SCEI has a
cash flow to debt service of at least 1.2 to 1.0.
In addition, the Company entered into an agreement with Calpine Corporation
and CPN Production Company ("CPN"), each unaffiliated parties, pursuant to which
SCEI was created to acquire and own the California Properties. CPN contributed
$14.9 million in cash and received $13.0 million in SCEI Preferred Stock and 20%
of the outstanding common stock of SCEI. In certain circumstances, the Company
may be entitled to acquire the common stock held by CPN. The Company contributed
$3.0 million in cash and $4.6 million of seismic data and oil and gas producing
assets in California and received 80% of the outstanding common stock of SCEI.
The SCEI Preferred Stock provides for cash dividends in an amount equal to
$0.70 per share payable annually (a 14.0% annual rate) or, at the discretion of
SCEI, dividends may be paid by issuing additional fully paid and non-assessable
shares of SCEI Preferred Stock in an amount equal to .07 additional shares (a
14.0% annual rate) for each share of SCEI Preferred Stock then issued and
outstanding. The SCEI Preferred Stock is redeemable from time to time at the
discretion of SCEI and must be redeemed on January 15, 2006, or upon the
occurrence of certain defined situations, including a change of control or a
default as defined in the SCEI Preferred Stock designation.
10
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SHERIDAN ENERGY, INC. AND SUBSIDIARIES
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
The unaudited pro forma condensed consolidated financial statements give
effect only to the adjustments set forth in the accompanying notes to the
unaudited pro forma condensed consolidated financial statements. Unaudited pro
forma information is not necessarily indicative of the results of operations or
financial position which would have occurred had the Amerada Transaction and
related financing transactions been consummated on the dates indicated, nor is
it necessarily indicative of the Company's future results of operations or
financial position.
Note 2. Pro Forma Adjustments
(A) To record the Amerada Transaction at $58.0 million, net of $2.8
million receivable in relation to results of operations for the period
from the effective date, November 1, 1998, to the closing date,
January 25, 1999.
(B) To record the loan fees incurred relating to the SCEI Facility with
Bank One.
(C) To record bank debt incurred under the SCEI Facility for the Amerada
Transaction.
(D) To record the CPN contribution of $14.9 million in cash in exchange for
$13.0 million of SCEI Preferred Stock and 20% of the outstanding shares
of SCEI common stock.
(E) To record estimated depreciation, depletion and amortization for the
properties acquired in the Amerada Transaction.
(F) To record interest on the SCEI Facility with Bank One for the Amerada
Transaction based on the current borrowing rate of 7.75% plus other
financing costs. Also includes amortization of loan fees over the
term of the SCEI Facility (36 months).
Incremental interest expense includes the following components:
Year Ended
December 31, 1998
-----------------
Interest on borrowings and other financing costs
for the Amerada Transaction $ 2,978
Amortization of loan fees 150
-------
$ 3,128
=======
(G) To record estimated SCEI Preferred Stock dividends at a payment-in-
kind dividend rate of 14% annually, payable semi-annually.
(H) To reflect 20% minority interest ownership of SCEI.
11
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(c) Exhibits
None
12
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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.
Date: April 9, 1999 By: /s/ Michael A. Gerlich
-----------------------------
Michael A. Gerlich
Vice President
and Chief Financial Officer
13
