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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------------------
FORM 10-Q
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[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 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: 000-21843
TITAN EXPLORATION, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 75-2671582
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization
500 W. TEXAS, SUITE 500 79701
MIDLAND, TEXAS (Zip Code)
(Address of principal executive offices)
(915) 498-8600
(Registrant's telephone number, including area code)
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
--- ---
As of August 3, 1998, 38,074,675 shares of common stock, par value $.01 per
share of Titan Exploration, Inc. were outstanding.
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TABLE OF CONTENTS
-----------------
Forward Looking Information and Risk Factors................................ 1
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1998 (Unaudited) and
December 31, 1997................................................ 2
Unaudited Consolidated Statements of Operations for the Three and
Six Months Ended June 30, 1998 and 1997.......................... 3
Unaudited Consolidated Statements of Cash Flows for the Three and
Six Months Ended June 30, 1998 and 1997.......................... 4
Unaudited Consolidated Statements of Comprehensive Income (Loss)
for the Three and Six Months ended June 30, 1998 and 1997........ 5
Notes to Consolidated Financial Statements.......................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 10
PART II -- OTHER INFORMATION
Item 3. Legal Proceedings................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders................. 17
Item 5. Other Information................................................... 17
Item 6. Exhibits and Reports on Form 8-K.................................... 18
Signatures.......................................................... 19
<PAGE>
TITAN EXPLORATION, INC.
FORWARD LOOKING INFORMATION AND RISK FACTORS
Titan Exploration, Inc. (the "Company") or its representatives may make
forward looking statements, oral or written, including statements in this
report's Management's Discussion and Analysis of Financial Condition and Results
of Operations, press releases and filings with the Securities and Exchange
Commission, regarding estimated future net revenues from oil and natural gas
reserves and the present value thereof, planned capital expenditures (including
the amount and nature thereof), increases in oil and gas production, the number
of wells the Company anticipates drilling through 1998 and the Company's
financial position, business strategy and other plans and objectives for future
operations. Although the Company believes that the expectations reflected in
these forward looking statements are reasonable, there can be no assurance that
the actual results or developments anticipated by the Company will be realized
or, even if substantially realized, that they will have the expected effects on
its business or operations. Among the factors that could cause actual results
to differ materially from the Company's expectations are general economic
conditions, inherent uncertainties in interpreting engineering data, operating
hazards, delays or cancellations of drilling operations for a variety of
reasons, competition, fluctuations in oil and gas prices, government regulations
and other factors set forth in the Company's Annual Report on Form 10-K. All
subsequent oral and written forward looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by these factors. The Company assumes no obligation to update any of
these statements.
1
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ITEM 1. FINANCIAL STATEMENTS
TITAN EXPLORATION, INC.
Consolidated Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1998 1997
---- ----
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,130 $ 1,603
Restricted investments 2,331
Accounts receivable:
Oil and gas 10,863 13,663
Other 104 2,900
Inventories 1,198 624
Prepaid expenses and other current assets 1,140 531
--------- --------
Total current assets 14,435 21,652
--------- --------
Property, plant and equipment, at cost:
Oil and gas properties, using the successful efforts method of accounting:
Proved properties 359,436 341,163
Unproved properties 25,851 24,942
Other property and equipment 6,116 2,421
Accumulated depletion, depreciation and amortization (108,237) (94,387)
--------- --------
283,166 274,139
--------- --------
Investments in affiliates and others 56,108 55,900
Other assets, net of accumulated amortization of $525 in 1998 and $413 in 1997 1,101 892
--------- --------
$ 354,810 $352,583
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities:
Trade $ 8,374 $ 16,983
Accrued interest 262 307
Other 9,532 4,334
--------- --------
Total current liabilities 18,168 21,624
--------- --------
Long-term debt 113,000 85,450
Other liabilities 2,761 2,720
Deferred income tax payable 5,179 10,368
Stockholders' equity:
Preferred Stock, $.01 par value, 10,000,000 shares authorized; none issued
and outstanding - -
Common Stock, $.01 par value, 60,000,000 shares authorized; 40,374,675 and
40,332,497 shares issued and outstanding at June 30, 1998 and December 31,
1997, respectively 404 403
Additional paid-in capital 277,806 277,500
Treasury stock, at cost; 1,300,000 and 55,000 shares at June 30, 1998 and
December 31, 1997, respectively (10,834) (504)
Deferred compensation (7,580) (10,108)
Retained deficit (44,094) (34,870)
--------- --------
Total stockholders' equity 215,702 232,421
--------- --------
Commitments and contingencies (Note 3)
$ 354,810 $352,583
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
TITAN EXPLORATION, INC.
Unaudited Consolidated Statements of Operations
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues -
Oil and gas sales $ 18,361 $16,166 $ 40,468 $34,168
-------- ------- -------- -------
Expenses:
Oil and gas production 7,117 4,188 15,177 10,224
Production and other taxes 1,473 819 3,092 1,744
General and administrative 2,594 1,260 5,325 2,343
Amortization of stock option awards 1,263 1,264 2,527 2,527
Exploration and abandonments 2,107 352 4,201 756
Depletion, depreciation and amortization 6,212 5,460 12,975 10,099
Impairment of long-lived assets 8,017 - 8,017 -
-------- ------- -------- -------
Total expenses 28,783 13,343 51,314 27,693
-------- ------- -------- -------
Operating income (loss) (10,422) 2,823 (10,486) 6,475
-------- ------- -------- -------
Other income (expense):
Interest income 36 38 101 97
Interest expense (1,984) (244) (3,691) (486)
Equity in net loss of affiliate (109) (241)
Other 203 37 356 71
-------- ------- -------- -------
Income (loss) before income taxes (12,276) 2,654 (14,321) 6,157
-------- ------- -------- -------
Income tax expense (benefit) (4,377) 929 (5,097) 2,135
-------- ------- -------- -------
Net income (loss) $ (7,899) $ 1,725 $ (9,224) $ 4,002
======== ======= ======== =======
Net income (loss) per share $(.20) $.05 $(.23) $.12
======== ======= ======== =======
Net income (loss) per share - assuming
dilution $(.20) $.05 $(.23) $.11
======== ======= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
TITAN EXPLORATION, INC.
Unaudited Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- --------------------
<S> <C> <C> <C> <C>
1998 1997 1998 1997
-------- -------- -------- --------
Cash flows from operating activities:
Net income (loss) $ (7,899) $ 1,725 $ (9,224) $ 4,002
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depletion, depreciation and amortization 6,212 5,460 12,975 10,099
Impairment of long-lived assets 8,017 - 8,017 -
Amortization of stock option awards 1,263 1,264 2,527 2,527
Exploration and abandonments 1,436 - 2,532 -
Equity in net loss of affiliate 109 - 241 -
Loss on sale of assets 8 - 11 -
Deferred income taxes (4,377) 929 (5,097) 2,155
Other items 199 - 199 -
Changes in assets and liabilities:
Accounts receivable 1,894 (804) 4,123 244
Prepaid expenses and other current assets 249 (62) (1,191) (219)
Other assets 76 - (18) -
Accounts payable and accrued liabilities (3,619) 1,134 (6,846) 3,580
-------- -------- -------- --------
Total adjustments 11,467 7,921 17,473 18,386
-------- -------- -------- --------
Net cash provided by operating activities 3,568 9,646 8,249 22,388
-------- -------- -------- --------
Cash flows from investing activities:
Redemption of restricted investment - - 2,331 -
Investing in oil and gas properties (13,423) (16,218) (24,011) (30,931)
Additions to other property and equipment (294) - (3,695) -
Capital contribution in equity investment (485) - (563) -
Other investing activities (2) (467) 15 (592)
-------- -------- -------- --------
Net cash used in investing activities (14,204) (16,685) (25,923) (31,523)
-------- -------- -------- --------
Cash flows from financing activities:
Proceeds from debt 11,800 3,500 28,900 3,500
Payments of debt - - (1,350) -
Exercise of stock options 201 - 215 -
Purchase of treasury stock (4,954) - (10,330) -
Other financing activities (217) - (234) -
-------- -------- -------- --------
Net cash provided by financing activities 6,830 3,500 17,201 3,500
-------- -------- -------- --------
Net decrease in cash and cash equivalents (3,806) (3,539) (473) (5,635)
Cash and cash equivalents, beginning of period 4,936 4,194 1,603 6,290
-------- -------- -------- --------
Cash and cash equivalents, end of period $ 1,130 $ 655 $ 1,130 $ 655
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
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TITAN EXPLORATION, INC.
Unaudited Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ----------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $(7,899) $1,725 $(9,224) $4,002
------- ------ ------- ------
Other comprehensive income -
Tax benefit on exercise of stock options 89 - 92 -
------- ------ ------- ------
Comprehensive income (loss) $(7,810) $1,725 $(9,132) $4,002
======= ====== ======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
TITAN EXPLORATION, INC.
Notes to Consolidated Financial Statements
June 30, 1998 and 1997
(Unaudited)
(1) BASIS OF PRESENTATION
In the opinion of management, the unaudited consolidated financial
statements of Titan Exploration, Inc. (the "Company") as of June 30, 1998 and
for the three and six months ended June 30, 1998 and 1997 include all
adjustments and accruals, consisting only of normal recurring accrual
adjustments, which are necessary for a fair presentation of the results for the
interim period. These interim results are not necessarily indicative of results
for a full year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted in this Form 10-Q pursuant to the rules and
regulations of the Securities and Exchange Commission. These consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and notes thereto included in the Company's 1997 Form 10-K.
Preparation of the accompanying consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
In 1998, the Company adopted Financial Accounting Standards Board ("FAS")
Statement No. 130, "Reporting Comprehensive Income." The Company has included
as part of the basic financial statements the consolidated statements of
comprehensive income (loss) for the three and six months ended June 30, 1998 and
1997.
Reclassifications
Certain reclassifications have been made to the 1997 amounts to conform to
the 1998 presentations.
(2) DEBT
Line of Credit
On October 31, 1996, the Company entered into a credit agreement, as
amended (the "Credit Agreement"), with The Chase Manhattan Bank, N.A. which
establishes a four year revolving credit facility, up to the maximum amount of
$250 million subject to a borrowing base. All amounts outstanding are due and
payable in full by January 1, 2001. The borrowing base, which was $165 million
at June 30, 1998, is subject to redetermination semiannually by the lenders
based on certain proved oil and gas reserves and other assets of the Company
with the next redetermination date scheduled for April 1999. At June 30, 1998,
the outstanding principal balance was $109 million and the amount available to
borrow was approximately $56 million.
Unsecured Credit Agreement
In April 1997, the Company entered into a credit agreement, as amended (the
"Unsecured Credit Agreement"), with Chase Bank of Texas, N.A. (the "Bank"), an
affiliate of The Chase Manhattan Bank, N.A., which establishes a revolving
credit facility, up to the maximum of $5 million. All outstanding amounts
pursuant to the Unsecured Credit Agreement are due and payable in full on or
before December 31, 1999. The interest rate of each loan under the Unsecured
Credit Agreement is at a rate determined by agreement between the Company and
the Bank. The rate shall not exceed the maximum interest rate permitted under
applicable laws. Interest rates
6
<PAGE>
generally are at the Bank's cost of funds plus 1% per annum. At June 30, 1998,
the outstanding principal balance was $4.0 million.
(3) COMMITMENTS AND CONTINGENCIES
Litigation
The following is a brief description of certain litigation to which the
Company is subject, as a result of assuming the obligations of Offshore Energy
Development Corporation ("OEDC"). The Company believes it has meritorious
defenses to the claims and intends to vigorously defend against such claims.
The Company does not believe that it has a probable and estimable loss with
respect to any such litigation in excess of currently provided reserves, if any.
If such loss becomes probable and estimable, the amount of any recorded
liability could have a material adverse effect on the Company's (i) results of
operations for the period in which such liability is recorded, (ii) consolidated
financial position as a whole and (iii) liquidity and capital resources.
However, the Company does not expect that any such liability will have a
material adverse effect on its consolidated financial position as a whole or on
its liquidity or capital resources. Due to the uncertainties inherent in
litigation, no assurance can be given to the ultimate outcome of these matters.
OEDC and certain of its officers and directors, as well as Natural Gas
Partners, L.P. ("NGP"), the managing underwriters of OEDC's initial public
offering and an analyst from each of the managing underwriters, have been named
as defendants in a suit styled Eric Barron and Edward C. Allen, On behalf of
Themselves and all Others Similarly Situated, v. David B. Strassner, Douglas H.
Kiesewetter, David R. Albin, Natural Gas Partners, L.P., David Garcia, John J.
Myers, Offshore Energy Development Corporation, Morgan Keegan & Company, Inc.
and Principal Securities Inc., which was filed October 20, 1997, in the Texas
State District Court of Harris County, Texas 270th Judicial District. The
defendants removed plaintiffs' claims to federal court in the United States
Southern District of Texas. Plaintiffs motion to have the case remanded to the
state court was granted by the federal judge in April 1998. The suit seeks
class certification on behalf of certain holders of common stock of OEDC,
excluding the defendants and holders related to or affiliated with the
defendants. The state court has denied class certification at this time, in
deference to a parallel federal court action, which is described below. The
state court suit alleges generally that the defendants wrongfully made false or
misleading statements or omissions relating to OEDC's business and prospects in
the course of OEDC's initial public offering and subsequent thereto. The state
court suit seeks rescission of sales of common stock of OEDC and unspecified
monetary damages, including punitive damages.
OEDC and certain of its officers and directors, as well as NGP, have also
been named defendants in a suit styled John W. Robertson, et al. v. David B.
Strassner, Douglas H. Kiesewetter, David R. Albin, Natural Gas Partners, L.P.
and Offshore Energy Development Corporation, which was filed February 6, 1998,
in the United States Southern District of Texas, Houston Division. This suit
mirrors the allegations of the foregoing matter, but adds request for relief
under federal securities laws. It, too, seeks certification of a class of
certain purchasers of common stock of OEDC. The suit seeks compensatory
damages, including rescissory damages, where applicable.
The Company is seeking to consolidate both of these lawsuits as the Company
believes the claims are connected. Plaintiffs in both lawsuits are represented
by the same lawyers.
The Company is involved in other various claims and legal actions arising
in the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
Letters of Credit
At June 30, 1998, the Company had outstanding letters of credit of
$169,000, which were issued through the Credit Agreement.
7
<PAGE>
(4) COMMON STOCK
In May 1997, the Company announced a plan to repurchase up to $25 million
of the Companys common stock. The repurchases will be made periodically,
depending on market conditions, and will be funded with cash flow from
operations and, as necessary, borrowings under the Credit Agreement. At June 30,
1998 and December 31, 1997, the Company had purchased 1,300,000 and 55,000
shares of its common stock for approximately $10,834,000 and $504,000,
respectively. Subsequent to June 30, 1998, the Company purchased an additional
1,100,000 shares of its common stock for approximately $7,986,000 using
available funds from the Credit Agreement.
(5) NET INCOME (LOSS) PER COMMON SHARE
The following table sets forth the computation of basic and diluted net
income (loss) per common share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
1998 1997 1998 1997
------- ------- ------- -------
(in thousands, except (in thousands, except
per share data) per share data)
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) and numerator for basic and
diluted net income (loss) per common share -
income available to common stockholders $(7,899) $ 1,725 $(9,224) $ 4,002
------- ------- ------- -------
Denominator:
Denominator for basic net income (loss) per common
share - weighted average common shares 39,242 33,942 39,555 33,942
Effect of dilutive securities - employee stock
options - 1,489 - 1,634
------- ------- ------- -------
Denominator for diluted net income (loss) per
common share - adjusted weighted average common
shares and assumed conversions
39,242 35,431 39,555 35,576
======= ======= ======= =======
Basic net income (loss) per common share $ (.20) $ .05 $ (.23) $ .12
======= ======= ======= =======
Diluted net income (loss) per common share $ (.20) $ .05 $ (.23) $ .11
======= ======= ======= =======
</TABLE>
Employee stock options to purchase 4,580,332, 4,580,332, 85,000, and 85,000
shares of common stock were outstanding during the three and six months ended
June 30, 1998 and 1997, respectively, but were not included in the computation
of diluted net income (loss) per common share because either (i) the employee
stock options' exercise price was greater than the average market price of the
common stock of the Company or (ii) the Company had a loss from continuing
operations and, therefore, the effect would be antidilutive.
8
<PAGE>
(6) DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilizes various swap contracts and other financial instruments
to hedge the effect of price changes on future gas production. The following
table sets forth the future volumes hedged by year and the range of prices to be
received based upon the fixed price of the individual swap contracts and other
financial instruments outstanding as of June 30, 1998:
Gas
Volume Price per
Year (MMcf) Mcf
---- ------ ---
Gas Production:
1998:
Commodity price swaps 1,840 $2.08 to $2.11
Commodity price collars 5,980 $1.83 to $3.10
1999 - Commodity price collars 6,544 $1.83 to $3.10
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company is an independent energy company engaged in the exploitation,
development, exploration and acquisition of oil and gas properties. The
Company's strategy is to grow reserves, production and net income per share
through (i) the exploitation and development of its reserve base, (ii) the
acquisition of producing properties that provide significant development and
exploratory drilling potential, (iii) the exploration for oil and gas reserves,
(iv) capitalization on advanced technology to identify, explore and exploit
projects, (v) financial flexibility, and (vi) a low overhead and operating cost
structure. The Company has grown rapidly through the acquisition and
exploitation of oil and gas properties, consummating the 1995 Acquisition for a
purchase price of approximately $41.0 million, the 1996 Acquisition for
approximately $136.0 million and the Pioneer Acquisition, in 1997, for
approximately $55.8 million. In addition, the Company issued, in 1997,
5,486,734 shares and 899,965 shares of the Company's common stock in connection
with the Offshore Energy Development Corporation ("OEDC") acquisition and the
Carrollton Resources, L.L.C. ("Carrollton") acquisition, respectively.
The Company's growth from acquisitions has impacted its financial results
in a number of ways. Acquired properties may not have received focused attention
prior to sale. After acquisition, certain of these properties required extensive
maintenance, workovers, recompletions and other remedial activity that while not
constituting capital expenditures may initially increase lease operating
expenses. The Company may dispose of certain of the properties it determines are
outside the Company's strategic focus. The increased production and revenue
resulting from the rapid growth of the Company has required it to recruit and
develop operating, accounting and administrative personnel compatible with its
increased size. As a result, the Company has incurred increases in its general
and administrative expense levels. The Company believes that with its current
inventory of drilling locations and the additional staff it will be well
positioned to follow a more balanced program of exploration and exploitation
activities to complement its acquisition efforts.
Titan uses the successful efforts method of accounting for its oil and gas
producing activities. Costs to acquire mineral interests in oil and gas
properties, to drill and equip exploratory wells that result in proved reserves,
and to drill and equip development wells are capitalized. Costs to drill
exploratory wells that do not result in proved reserves, and geological and
geophysical costs are expensed. Costs of significant nonproducing properties,
wells in the process of being drilled and significant development projects are
excluded from depletion until such time as the related project is developed and
proved reserves are established or impairment is determined.
IMPACT OF DECLINING CRUDE OIL PRICES
During the six months ended June 30, 1998, the posted price of West Texas
intermediate crude oil (the "West Texas Crude Oil Price") ranged from $7.75 to
$15.75 per barrel. This decline in prices is thought to be caused primarily by
an oversupply of crude oil inventory created, in part, by an unusually warm
winter in the United States and Europe, the apparent unwillingness of OPEC
countries to abide by their respective crude oil production quotas and a
possible decline in demand in certain Asian markets.
If such a decline in the West Texas Crude Oil Price worsens or persists for
a protracted period, it would adversely affect the Company's revenues, net
income and cash flows from operations. Also, if these prices maintain their
present level for an extended time period or decline further the Company may
delay or postpone certain of its capital projects.
If the posted price for West Texas Crude Oil Price remains at current
levels or continues to decline, the Company would expect that it may be required
to record an impairment to its oil and gas properties in 1998. The extent of an
impairment, if any, cannot be determined.
RECENT DEVELOPMENTS
The Company recently completed its first exploratory well in Webb County,
Texas, the Habanero No. 1. The well was drilled as a dual lateral horizontal
well to evaluate the deep, down-dip, overpressured Austin Chalk
10
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Formation. The well, initially, tested at flow rates ranging from 4.2 to 15.0
MMcf/d and is currently shut-in awaiting a pipeline connection.
The Company owns a 39% interest in the Habanero No. 1 located on its
190,000 acre leasehold position all in Webb County, Texas. The Company plans on
drilling additional wells in 1998 to further test the economic viability of this
area. Depending upon the success of this near term drilling activity, the
Company could have a significant development program on this acreage over the
next several years.
The Company's Humphrey No. 2 well in the MiVida Field has been connected to
a sales line and is currently flowing approximately 1.5 MMcf/d. Since the
Humphrey No. 2 well is producing from the overpressured Atoka formation, the
Company plans to gradually increase the choke size over time to avoid damage to
the formation. As the choke size increases, flow rates should increase until an
optimum flow rate is achieved.
YEAR 2000 ISSUES
The Company has reviewed the effect of the year 2000 issues relating to its
information systems. The Company has determined that the year 2000 issues
directly related to its information systems will not have a material impact on
its business, operations or its financial position. However, the Company cannot
determine what effect if any, the year 2000 issues affecting its vendors,
customers, other business and the numerous local, state, federal and other U.S.
and foreign governmental entities with which it conducts business or by which it
is regulated or governed or taxed will have on its business or financial
position.
Operating Data
The following table sets forth the Company's historical operating data for
the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ----------------------------
1998 1997 1998 1997
------- ------ ------- -------
<S> <C> <C> <C> <C>
Production:
Oil (MBbls) 630 464 1,259 895
Gas (MMcf) 6,798 5,564 14,124 10,299
Total (MMcfe) 10,578 8,348 21,678 15,669
Average Sales Prices Per Unit (a):
Oil (Bbl) $ 11.91 $17.51 $ 12.78 $ 19.29
Gas (Mcf) $ 1.60 $ 1.45 $ 1.73 $ 1.64
Total (Mcfe) $ 1.74 $ 1.94 $ 1.87 $ 2.18
Expenses Per Mcfe:
Production costs, excluding
production and other taxes $ .67 $ .50 $ .70 $ .65
Production and other taxes $ .14 $ .10 $ .14 $ .11
General and administrative $ .25 $ .15 $ .25 $ .15
Depletion, depreciation and
amortization $ .59 $ .66 $ .60 $ .65
</TABLE>
- --------------------
(a) Reflects results of hedging activities.
11
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1997
Oil and Gas Revenues. Revenues from oil and gas operations totaled $18.4
million for the three months ended June 30, 1998 compared to $16.2 million for
the three months ended June 30, 1997. The increase is primarily attributable to
the increase in production as a result of the acquisitions made in December
1997, continued exploitation of oil and gas properties and an increase in the
average price received for gas, offset by a decrease in the average price
received for oil. Of total oil and gas revenues for the three months ended June
30, 1998, revenues of approximately $4.6 million are attributable to the
acquisitions made in December 1997. The average oil price received decreased
32% from $17.51 to $11.91 per Bbl and the average gas price received increased
10% from $1.45 to $1.60 per Mcf for the three months ended June 30, 1997
compared to the three months ended June 30, 1998. Hedging activities during the
three months ended June 30, 1998 increased gas revenues approximately $200,000
($.03 per Mcf). There were no oil hedging activities during the three months
ended June 30, 1998 and 1997 and no gas hedging activities during the three
months ended June 30, 1997.
Production Costs. Oil and gas production costs, including production and other
taxes, were $8.6 million ($.81 per Mcfe) for the three months ended June 30,
1998 compared to $5.0 million ($.60 per Mcfe) for the three months ended June
30, 1997. The increase in production costs was primarily attributable to
production costs associated with the properties from the acquisitions made in
December 1997, which were approximately $3.4 million ($1.57 per Mcfe).
Initially, recently acquired properties generally incur significant rework
expenses, which are costs incurred to perform required maintenance, workovers
and other remedial activities. The properties acquired in the Pioneer
Acquisition were primarily oil in nature and generally have a higher per unit
operating cost as compared to gas properties. The Company expects as it
integrates the recently acquired properties into its structure that the per unit
operating costs should be reduced.
Depletion, Depreciation and Amortization Expense. Depletion, depreciation and
amortization expense was $6.2 million for the three months ended June 30, 1998
($.59 per Mcfe) compared to $5.5 million ($.66 per Mcfe) for the three months
ended June 30, 1997. The 11% decrease per Mcfe is primarily due to the effects
of the impairment taken in the fourth quarter of 1997, offset by the higher
finding cost per Mcfe of the properties acquired in the 1997 acquisitions as
compared to previous acquisitions. Included for the three months ended June 30,
1998 and 1997 is approximately $.03 per Mcfe and $.01 per Mcfe of depreciation
and amortization associated with other property and equipment and assets,
respectively.
Impairment of Long-Lived Assets. In the fourth quarter of 1997, the Company
recorded an impairment related to its long-lived assets of approximately $69
million, which was primarily related to significantly depressed commodity
prices. In the second quarter of 1998 the Company recorded an impairment,
unrelated to commodity price levels, of its long-lived assets of approximately
$8.0 million. This impairment is primarily related to (a) a $3.6 million
impairment resulting from the loss of offshore proved reserves attributable to
downhole mechanical problems encountered during a recent rework operation and
(b) a $4.0 million impairment resulting from the loss of proved reserves from
lower than expected development drilling results on three of the Company's
wells.
General and Administrative Expense. General and administrative expense was $2.6
million ($.25 per Mcfe) for the three months ended June 30, 1998 compared to
$1.3 million ($.15 per Mcfe) for the three months ended June 30, 1997. The
increase is due to increased staff costs associated with the Company's 1997
growth and the additional staff of the acquired OEDC and Carrollton entities.
The Company plans to reduce annualized general and administrative costs as it
integrates the acquisitions and achieves economies of scale.
Exploration and Abandonment Expense. Exploration and abandonment expense
increased to $2.1 million for the three months ended June 30, 1998 from $352,000
for the three months ended June 30, 1997. The increase is primarily related to
the Company's increased geological and geophysical staff and increases in
seismic related costs and other exploratory costs. Part of the increase in
activities is due to the Company's offshore activities as a result of its
acquisition of OEDC.
12
<PAGE>
Equity in Net Loss of Affiliate. The equity in net loss of affiliate is
attributable to the Company's ownership in Dauphin Island Gathering Partners
("DIGP") as a result of the OEDC acquisition. Included in the equity in net
loss is approximately $156,000 of the amortization of the Company's cost basis
in excess of the underlying historical net assets of DIGP.
Interest Expense. Interest expense was $2.0 million for the three months ended
June 30, 1998 compared to $244,000 for the three months ended June 30, 1997.
This increase is primarily due to an increase in the Company's average
outstanding debt. In 1997, average outstanding debt was low due to the recently
completed common stock offering in December 1996. In 1998, the average
outstanding debt increased over the comparable 1997 period, due primarily to the
Pioneer Acquisition in December 1997, the purchase of treasury stock and the
Company's capital expenditures.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1997
Oil and Gas Revenues. Revenues from oil and gas operations totaled $40.5
million for the six months ended June 30, 1998 compared to $34.2 million for the
six months ended June 30, 1997. The increase is primarily attributable to the
increase in production as a result of the acquisitions made in December 1997,
the increase in the average price received for gas and continued exploitation of
oil and properties, offset by a decrease in the average price received for oil.
Of total oil and gas revenues for the six months ended June 30, 1998, revenues
of $9.7 million are attributable to the acquisitions made in December 1997. The
average oil price received decreased 34% from $19.29 to $12.78 per Bbl and the
average gas price received increased 3% from $1.64 to $1.73 per Mcf for the six
months ended June 30, 1997 compared to the six months ended June 30, 1998.
Hedging activities during the six months ended June 30, 1998 increased oil
revenues approximately $206,000 (.16 per Bbl) and gas revenues approximately
$2.1 million ($.15 per Mcf). There were no hedging activities during the six
months ended June 30, 1997.
Production Costs. Oil and gas production costs, including production and other
taxes, were $18.3 million ($.84 per Mcfe) for the six months ended June 30, 1998
compared to $12.0 million ($.76 per Mcfe) for the six months ended June 30,
1997. The increase in production costs was primarily attributable to production
costs associated with the properties from the acquisitions made in December
1997, which were approximately $7.6 million ($1.68 per Mcfe). Initially,
recently acquired properties generally incur significant rework expenses, which
are costs incurred to perform required maintenance, workovers and other remedial
activities. The properties acquired in the Pioneer Acquisition were primarily
oil in nature and generally have a higher per unit operating cost as compared to
gas properties. The Company expects as it integrates the recently acquired
properties into its structure that the per unit operating costs should be
reduced.
Depletion, Depreciation and Amortization Expense. Depletion, depreciation and
amortization expense was $13.0 million for the six months ended June 30, 1998
($.60 per Mcfe) compared to $10.1 million ($.65 per Mcfe) for the six months
ended June 30, 1997. The 8% decrease per Mcfe is primarily due to the effects
of the impairment taken in the fourth quarter of 1997, offset by the higher
finding cost per Mcfe of the properties acquired in the 1997 acquisitions as
compared to previous acquisitions. Included for the six months ended June 30,
1998 and 1997 is approximately $.03 per Mcfe and $.01 per Mcfe of depreciation
and amortization associated with other property and equipment and assets,
respectively.
Impairment of Long-Lived Assets. In the fourth quarter of 1997, the Company
recorded an impairment related to its long-lived assets of approximately $69
million, which was primarily related to significantly depressed commodity
prices. In the second quarter of 1998 the Company recorded an impairment,
unrelated to commodity price levels, of its long-lived assets of approximately
$8.0 million. This impairment is primarily related to (a) a $3.6 million
impairment resulting from the loss of offshore proved reserves attributable to
downhole mechanical problems encountered during a recent rework operation and
(b) a $4.0 million impairment resulting from the loss of proved reserves from
lower than expected development drilling results on three of the Company's
wells.
General and Administrative Expense. General and administrative expense was $5.3
million ($.25 per Mcfe) for the six months ended June 30, 1998 compared to $2.3
million ($.15 per Mcfe) for the six months ended June 30, 1997. The increase is
due to increased staff costs associated with the Company's 1997 growth and the
additional
13
<PAGE>
staff of the acquired OEDC and Carrollton entities. The Company plans to reduce
annualized general and administrative costs as it integrates the acquisitions
and achieves economies of scale.
Exploration and Abandonment Expense. Exploration and abandonment expense
increased to $4.2 million for the six months ended June 30, 1998 from $756,000
for the six months ended June 30, 1997. The increase is primarily related to
the Company's increased geological and geophysical staff and increases in
seismic related costs and other exploratory costs. Part of the increase in
activities is due to the Company's offshore activities as a result of its
acquisition of OEDC.
Equity in Net Loss of Affiliate. The equity in net loss of affiliate is
attributable to the Company's ownership in DIGP as a result of the OEDC
acquisition. Included in the equity in net loss is approximately $316,000 of
the amortization of the Company's cost basis in excess of the underlying
historical net assets of DIGP.
Interest Expense. Interest expense was $3.7 million for the six months ended
June 30, 1998 compared to $486,000 for the six months ended June 30, 1997. This
increase is primarily due to an increase in the average outstanding debt. In
1997, average outstanding debt was low due to the recently completed common
stock offering in December 1996. In 1998, the average outstanding debt increased
over the comparable 1997 period, due primarily to the Pioneer Acquisition in
December 1997, the purchase of treasury stock and the Company's capital
expenditures.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of capital have been its initial
capitalization, private equity sales, bank financing, cash flow from operations
and the Company's initial public offering. The Company requires capital
primarily for the exploration, development and acquisition of oil and gas
properties, the repayment of indebtedness and general working capital needs.
Net Cash Provided by Operating Activities. Net cash provided by operating
activities, before changes in operating assets and liabilities, was $5.0 and
$12.2 million for the three and six months ended June 30, 1998 compared to $9.4
and $18.8 million for the three and six months ended June 30, 1997. The
decrease was primarily attributable to the decrease in oil prices realized
during 1998 and an increase in general and administrative, production,
exploration and interest costs, offset by an increase in net revenues from the
acquisitions completed in 1997.
Capital Expenditures. For 1998, the Company budgeted to spend (i) approximately
$25.1 million to drill proved undeveloped properties, (ii) approximately $3.6
million on probable projects, (iii) approximately $9.6 million to explore
unproven locations, (iv) approximately $15.3 million on development projects
following successful exploration efforts, (v) approximately $10.4 million to
acquire additional acreage and seismic, (vi) $16.0 million to fund development
of pipeline and processing project investments and (vii) $3.8 million on other
items. The final determination with respect to the drilling of any well,
including those currently budgeted, will depend on a number of factors,
including (i) the results of exploration efforts and the review and analysis of
the seismic data, (ii) the availability of sufficient capital resources by the
Company and other participants for drilling prospects, (iii) economic and
industry conditions at the time of drilling, including prevailing and
anticipated prices for natural gas and oil and the availability and costs of
drilling rigs and crews, (iv) the financial resources and results of the
Company, and (v) the availability of leases on reasonable terms and permitting
for the potential drilling location. There can be no assurance that the
budgeted wells will encounter, if drilled, recompleted or worked over,
reservoirs of commercial quantities of natural gas or oil. Through June 30,
1998, the Company has spent less than 40% of its annual budget. At the present
time, the Company expects that it will not spend all of its 1998 budget
primarily as a result of deferring some of its projects (mainly oil) due to
uncertainties over future commodity price levels.
While the Company regularly engages in discussions relating to potential
acquisitions of oil and gas properties, the Company has no present agreement,
commitment or understanding with respect to any such acquisition, other than the
acquisition of oil and gas properties and interests in its normal course of
business. Any future acquisitions may require additional financing and will be
dependent upon available financing which may be required in the future to fund
the Company's acquisition and drilling programs.
14
<PAGE>
Cash expenditures for investing in oil and gas properties were $13.4 and
$24.0 million for the three and six months ended June 30, 1998. This includes
$1.6 for the acquisition of properties and $22.4 million for development and
exploratory costs.
Capital Resources. The Company's primary capital resources are net cash
provided by operating activities and borrowings under the Credit Agreement.
Credit Agreement. The Credit Agreement established a four year revolving credit
facility, up to the maximum amount of $250 million, subject to a borrowing base
to be redetermined semi-annually by the lenders based on certain proved oil and
gas reserves and other assets of the Company. The borrowing base at June 30,
1998 was $165 million. The Company is negotiating with its banks for an
increase in the borrowing base. To the extent that the borrowing base is less
than the aggregate principal amount of all outstanding loans and letters of
credit under the Credit Agreement, such deficiency must be cured by the Company
ratably within 180 days, by either prepaying a portion of the outstanding
amounts under the Credit Agreement or pledging additional collateral to the
lenders. A portion of the credit facility is available for the issuance of up
to $15.0 million of letters of credit, of which $169,000 was outstanding at June
30, 1998. All outstanding amounts under the Credit Agreement are due and
payable in full on January 1, 2001. The Company's outstanding long-term debt
under the Credit Agreement was $109 million on June 30, 1998.
At the Company's option, borrowings under the Credit Agreement bear
interest at either the "Base Rate" (i.e., the higher of the applicable prime
commercial lending rate, or the federal funds rate plus .5% per annum) or the
Eurodollar rate, plus 1% to 1.50% per annum, depending on the level of the
Company's aggregate outstanding borrowings. In addition, the Company is
committed to pay quarterly in arrears a fee of .30% to .375% of the unused
borrowing base.
The Credit Agreement contains certain covenants and restrictions that are
customary in the oil and gas industry. In addition, the line of credit is
secured by substantially all of the Company's oil and gas properties.
Liquidity and Working Capital. At June 30, 1998, the Company had $1.1 million
of cash and cash equivalents as compared to $1.6 million at December 31, 1997.
The Company's ratio of current assets to current liabilities was .79 at June 30,
1998, compared to 1.00 at December 31, 1997. The Company's working capital
decreased $3.7 million from $28,000 at December 31, 1997 to a working capital
deficit of $3.7 million at June 30, 1998. The Company maintains low cash levels
for cash management purposes. The working capital deficit at June 30, 1998 is
adequately covered by the Company's ability to borrow under its Credit
Agreement.
Unsecured Credit Agreement. In April 1997, the Company entered into a credit
agreement (the "Unsecured Credit Agreement") with Chase Bank of Texas, N.A. (the
"Bank"), which establishes a revolving credit facility, up to the maximum of
$5.0 million. All outstanding amounts pursuant to the Unsecured Credit
Agreement are due and payable in full on or before December 31, 1999. Proceeds
of the Unsecured Credit Agreement are utilized to fund short-term needs (less
than thirty days). The Company owed $4.0 million under the Unsecured Credit
Agreement at June 30, 1998.
The interest rate of amounts outstanding under the Unsecured Credit Agreement
is at a rate determined by agreement between the Company and the Bank. The rate
shall not exceed the maximum interest rate permitted under applicable laws.
Interest rates generally are the Bank's cost of funds plus 1% per annum.
15
<PAGE>
OTHER MATTERS
Hedging Activities
The Company uses swap agreements and other financial instruments in an
attempt to reduce the risk of fluctuating oil and gas prices and interest rates.
The Company is party to various agreements with numerous counterparties for
purposes of utilizing financial instruments, of which the Company assesses the
creditworthiness of its counterparties. Among other counterparties, the Company
has utilized Enron Capital & Trade Resources Corp. (an affiliate of a
significant stockholder of the Company) as a counterparty. Settlement of gains
or losses on the hedging transactions are generally based on the difference
between the contract price and a formula using New York Mercantile Exchange
("NYMEX") or other major indices related prices and is reported as a component
of oil and gas revenues as the associated production occurs. The Company, at
June 30, 1998, had entered into hedging transactions with respect to
approximately 7,820 and 6,544 MMcfe of its 1998 and 1999, respectively,
estimated production.
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" which establishes standards for reporting information about
operating segments in annual financial statements and requires selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS No. 131 is
effective for financial statements for periods beginning after December 15, 1997
but the statement need not be applied to interim financial statements in the
initial year of application. The Company does not expect SFAS No. 131 to
materially affect the Company's reporting practices.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" which establishes standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. It establishes conditions
under which a derivative may be designated as a hedge, and establishes standards
for reporting changes in the fair value of a derivative. SFAS No. 133 is
required to be implemented for the first quarter of the fiscal year ended 2000.
Early adoption is permitted. The Company has not evaluated the effects of
implementing SFAS No. 133.
16
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No significant changes in legal proceedings. See Note 3 of notes to
consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders of the Company was held at 10:00
a.m., local time, on Thursday, May 28, 1998.
(b) Proxies were solicited by the Board of Directors of the Company
pursuant to Regulation 14A under the Securities Exchange Act of 1934.
There were no solicitations in opposition to the Board of Directors'
nominees as listed in the proxy statement and all of such nominees were
duly elected.
(c) Out of a total of 39,274,675 shares of common stock of the Company
outstanding and entitled to vote, 33,792,776 shares were present in person
or by proxy, representing approximately 86%. The only matters voted on by
the stockholders, as fully described in the definitive proxy materials for
the annual meeting, were the election of directors of the Company and the
approval of the selection of the independent auditors for the Company for
1998. The results were as follows:
1. To elect a Board of Directors to hold office until the next
annual meeting of stockholders and until their successors are elected
and qualified.
<TABLE>
<CAPTION>
Number of Shares Voting
---------------------------------------------------------
For Against Withholding
Election as Election as Authority to Vote for
Nominees Director Director Election as Director
-------- -------------- ----------------- ----------------------
<S> <C> <C> <C>
Jack Hightower 33,743,653 - 49,123
George G. Staley 33,743,653 - 49,123
David R. Albin 33,743,653 - 49,123
Kenneth A. Hersh 33,743,653 - 49,123
William J. Vaughn, Jr. 33,743,653 - 49,123
</TABLE>
2. To approve the selection by the Board of Directors, of the firm
of KPMG Peat Marwick LLP as independent auditors for the Company for
1998.
For 33,779,671
Against 8,464
Abstain 4,641
(c) Inapplicable.
ITEM 5. OTHER INFORMATION
None
17
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
10 Third Amendment to Amended and Restated Credit Agreement, dated
May 12, 1997, among Titan Resources, L.P., the Chase Manhattan
Bank, as Administrative Agent and Financial Institutions now or
thereafter parties thereto.
27 Financial Data Schedule
(b) Reports Submitted on Form 8-K:
None
18
<PAGE>
SIGNATURE
---------
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.
TITAN EXPLORATION, INC.
By: /s /Jack Hightower
-------------------------------------
Jack Hightower
President and Chief Executive Officer
By: /s/ William K. White
-------------------------------------
William K. White
Vice President and Chief Financial
Officer
Date: August 14, 1998
19
<PAGE>
Titan Exploration, Inc.
Exhibit 10
----------
Third Amendment to Amended and Restated Credit Agreement, dated May 12, 1997,
among Titan Resources, L.P., the Chase Manhattan Bank, as Administrative Agent
and Financial Institutions now or thereafter parties thereto.
<PAGE>
EXHIBIT A
THIRD AMENDMENT TO AMENDED AND
RESTATED CREDIT AGREEMENT
BY AND AMONG
TITAN RESOURCES, L.P.,
as Company,
THE CHASE MANHATTAN BANK,
as Administrative Agent,
FIRST UNION NATIONAL BANK,
as Documentation Agent
MORGAN GUARANTY TRUST COMPANY OF NEW YORK,
as Syndication Agent,
and
THE LENDERS SIGNATORY HERETO
December 12, 1997
<PAGE>
THIRD AMENDMENT TO AMENDED AND
RESTATED CREDIT AGREEMENT
-------------------------
This THIRD AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (this "Third
-----
Amendment") dated effective as of the 12th day of December, 1997 (the "Effective
- --------- ---------
Date"), is by and among TITAN RESOURCES, L.P., a Texas limited partnership (the
- ----
("Company"); THE CHASE MANHATTAN BANK, individually, as the Issuing Bank and as
-------
Administrative Agent (in such capacity, the "Administrative Agent"); FIRST UNION
--------------------
NATIONAL BANK, individually and as Documentation Agent (in such capacity, the
"Documentation Agent"); MORGAN GUARANTY TRUST COMPANY OF NEW YORK, individually
- --------------------
and as Syndication Agent (in such capacity, the "Syndication Agent"); and each
-----------------
of the lenders that is a signatory hereto or which becomes a signatory hereto
and to the Credit Agreement (hereinafter defined) as provided in Section 8.07 of
the Credit Agreement (individually, together with its successors and assigns,
"Lender" and collectively, "Lenders").
- ------- -------
W I T N E S S E T H:
-------------------
WHEREAS, the Company, the Administrative Agent, the Documentation Agent,
the Syndication Agent and Lenders are parties to that certain Amended and
Restated Credit Agreement dated as of October 31, 1996 (as amended by First
Amendment to Amended and Restated Credit Agreement dated as of May 12, 1997, and
as further amended by Second Amendment to Amended and Restated Credit Agreement
dated August 12, 1997, effective as of April 1, 1997, the "Credit Agreement"),
----------------
pursuant to which Lenders agreed to make loans to and extensions of credit on
behalf of the Company; and
WHEREAS, the Company has requested and, subject to the terms and conditions
contained herein, the Administrative Agent, the Documentation Agent, the
Syndication Agent and Lenders have agreed to amend certain aspects of the Credit
Agreement to, among other things (a) permit the Company to make a $7,000,000
capital distribution to its limited partner, Titan Resources Holdings, Inc. and
(b) permit the Company to make a one-time advance to OEDC Exploration &
Production, L.P. using proceeds of a Loan hereunder to allow OEDC Exploration &
Production, L.P. to pay down certain outstanding indebtedness to Union Bank of
California, N.A.; and
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the parties hereto agree as follows:
ARTICLE I. DEFINITIONS
-----------
Section 1.01 Terms Defined Above. As used in this Third Amendment, each
-------------------
of the terms "Administrative Agent," "Company," "Credit Agreement,"
-------------------- ------- ----------------
"Documentation Agent," "Lender," "Lenders," "Syndication Agent" and "Third
- -------------------- ------ -------- ----------------- -----
Amendment" shall have the meaning assigned to such term hereinabove.
- ---------
<PAGE>
Section 1.02 Terms Defined in Credit Agreement. Each term defined in
---------------------------------
the Credit Agreement and used herein without definition shall have the meaning
assigned to such term in the Credit Agreement, unless expressly provided to the
contrary.
Section 1.03 Other Definitional Provisions.
-----------------------------
(a) The words "hereby," "herein," "hereinafter," "hereof," "hereto"
and "hereunder" when used in this Third Amendment shall refer to this Third
Amendment as a whole and not to any particular Article, Section, subsection
or provision of this Third Amendment.
(b) Section, subsection and Exhibit references herein are to such
Sections, subsections and Exhibits to this Third Amendment unless otherwise
specified.
ARTICLE II. AMENDMENTS TO CREDIT AGREEMENT
------------------------------
The Company, the Administrative Agent, the Documentation Agent, the
Syndication Agent and Lenders agree that the Credit Agreement is hereby amended,
effective as of the Effective Date, in the following particulars.
Section 2.01 Amendments and Supplements to Definitions.
-----------------------------------------
(a) The term "Agreement," as defined in the Credit Agreement, is
---------
hereby amended to mean the Credit Agreement, as amended and supplemented by
this Third Amendment and as the same may from time to time be further
amended or supplemented.
(b) The term "Guarantors," as defined in the Credit Agreement, is
----------
hereby amended in its entirety to read as follows:
"Guarantors" means (a) the Parent, (b) the General Partner, (c)
----------
Titan Resources Holdings, Inc., a Nevada corporation, (d) OEDC E&P (e)
Carrollton Resources, L.L.C., a Louisiana limited liability company,
and (f) those Subsidiaries of the Parent or the Company designated as
Guarantors on Exhibit B and any other Subsidiary of the Parent or the
---------
Company, designated as a Guarantor by (i) the Company with the
approval of the Administrative Agent, or (ii) the Majority Lenders, in
each case pursuant to Section 5.01(j).
(c) The terms "Subsidiary" or "Subsidiaries", as used in Sections 4.01
through 4.05, Sections 4.07 through 4.18, Sections 4.20 through 4.23,
Sections 5.01(a), (b), (c), (e), (f), (g), (h), (i), (k) and (l), Sections
5.02 (f) and (j), and Sections 5.03(a), (b), (c), (e), (f), (g), (h), (j),
(k) and (l), are hereby amended to include OEDC E&P.
-2-
<PAGE>
Section 2.02 New Definitions. Section 1.01 of the Credit Agreement is
---------------
hereby amended and supplemented by adding thereto the following new definitions,
to read in their entirety as follows:
"OEDC" means Offshore Energy Development Corporation, a Delaware
----
corporation, a wholly-owned subsidiary of the Parent.
"OEDC E&P" means OEDC Exploration & Production, L.P., a Texas limited
--------
partnership, the general partner of which is OEDC, Inc., a wholly-owned
subsidiary of OEDC.
Section 2.03 Amendments to Section 5.02 - Reporting Covenants.
------------------------------------------------
(a) Sections 5.02 (a) and (b) of the Credit Agreement are hereby
amended by (i) replacing the word "Company" with the word "Parent" in all
places, and (ii) by replacing the word "Company's" with the word "Parent's"
in all places.
(b) Section 5.02 (d) is hereby amended by replacing the word "Company"
with the words "Company and/or Parent" in all places.
Section 2.04 Amendments to Section 5.03(a) B Indebtedness. Section
--------------------------------------------
5.03(a) of the Credit Agreement is hereby amended as follows:
(a) Section 5.03(a)(iv) is hereby amended by deleting the word "and"
following the "semi-colon (;)" at the end thereof.
(b) Section 5.03(a)(v) is hereby amended by deleting the "period (.)"
from the end thereof and substituting "; and" therefor.
(c) Section 5.03(a) is hereby further amended by adding a new clause,
to be clause (vi), to read in its entirety as follows:
"(vi) Indebtedness of any Guarantor permitted by Section 5.03(e)(x)
hereof."
Section 2.05 Amendment to Section 5.03(d) B Distribution, Etc. Section
------------------------------------------------
5.03(d) of the Credit Agreement is hereby amended in its entirety to read as
follows:
"(d) Distribution, etc. Make any distribution of profits or
-----------------
purchase, redeem or otherwise acquire for value any of the partnership
interests in the Company now or hereafter outstanding, return any capital
to its Partners, or make any distribution of its assets to its Partners as
such; provided, however, so long as no Default or Event of Default has
-------- -------
occurred and is continuing hereunder or would occur as a consequence
thereof, the Company may make (i) distributions to its Partners for the
payment of cash taxes due and payable by the Partners as a result of their
partnership interests in the Company, (ii) distributions to the Parent
which will be used by the Parent from time to time to purchase up to and
including $25,000,000 in the aggregate of its issued and outstanding common
stock; provided,
--------
-3-
<PAGE>
however, no such distribution shall be made unless twenty-five percent
-------
(25%) of the Maximum Available Amount shall remain available under this
Agreement after giving effect to the latest borrowings hereunder made in
connection with the acquisition of the Parent's common stock, (iii) other
distributions to its Partners not to exceed $2,500,000 in the aggregate in
any calendar year, less the aggregate principal amount of Indebtedness
permitted by Section 5.03(a)(v) which is incurred and outstanding in the
same calendar year; and (iv) make, on or before November __, 1997, a
one-time capital distribution to Titan Resources Holdings, Inc. in an
amount not to exceed $7,000,000."
Section 2.06 Amendment to Section 5.03(e) B Investments, Loans, etc.
------------------------------------------------------
Section 5.03(e)(x) of the Credit Agreement is hereby amended in its entirety to
read as follows:
"(x) unsecured intercompany loans permitted by Section 5.03(a)(v)
hereof, and unsecured intercompany loans to any Guarantor which has
executed and delivered a Guaranty Agreement in favor of the Administrative
Agent for the benefit of the Lenders."
Section 2.07 Amendment to Section 5.03(j) - Proceeds of Loans. The
------------------------------------------------
first sentence of Section 5.03(j) of the Credit Agreement is hereby amended in
its entirety to read as follows:
"Use any proceeds of the Loans for any purpose other than (i) to renew,
rearrange and modify the outstanding principal balance owing under the
Prior Notes, (ii) to acquire proven oil and gas properties, and development
of oil and gas properties, (iii) for general corporate purposes, and (iv) a
one-time advance to OEDC E&P of up to $30,000,000 to allow OEDC E&P to pay
down certain outstanding balances owing to Union Bank of California, N.A.
under or in connection with that certain First Restated Credit Agreement
dated as of November 7, 1997 by and between OEDC E&P and Union Bank of
California, N.A., in exchange for OEDC E&P's execution of a Guaranty
Agreement guaranteeing prompt payment of the Lender Indebtedness."
ARTICLE III. CONDITIONS PRECEDENT
--------------------
The obligation of the Administrative Agent, the Documentation Agent, the
Syndication Agent and each Lender to enter into this Third Amendment is subject
to the satisfaction of the following conditions:
Section 3.01 Additional Documents. The Administrative Agent shall have
--------------------
received the following, each dated as of the Effective Date, in form and
substance satisfactory to the Administrative Agent, with an original thereof for
the Administrative Agent and with sufficient copies thereof for each Lender:
(a) Guaranty Agreements. A duly completed and executed Guaranty Agreement
-------------------
from each of OEDC E&P and Carrollton Resources, L.L.C., a Louisiana limited
liability company.
(b) Security Instruments. The instruments or documents described on
--------------------
Exhibit A attached to this Third Amendment, duly completed and executed by OEDC
- ---------
E&P in a sufficient number of
-4-
<PAGE>
counterparts for recording, if necessary, granting to the Administrative Agent,
for the benefit of the Lenders, first priority Liens (subject only to Liens
permitted under Section 5.03(b) of the Credit Agreement) upon certain Property
of OEDC E&P more particularly described therein as security for the payment and
performance of OEDC E&P's obligations under its Guaranty Agreement.
(c) Other Documents. Such other documents as the Administrative Agent or
---------------
any Lender or special counsel to the Administrative Agent may reasonably
request, all in form and substance satisfactory to the Administrative Agent.
Section 3.02 Default or Event of Default. There shall exist no Default or
---------------------------
no Event of Default under the Credit Agreement or any other Financing Document.
ARTICLE IV. MISCELLANEOUS
-------------
Section 4.01 Adoption, Ratification and Confirmation of Credit Agreement.
-----------------------------------------------------------
Each of the Company, the Administrative Agent, the Documentation Agent, the
Syndication Agent and Lenders does hereby adopt, ratify and confirm the Credit
Agreement, as amended hereby, and acknowledges and agrees that the Credit
Agreement, as amended hereby, is and remains in full force and effect.
Section 4.02 Successors and Assigns. This Third Amendment shall be
----------------------
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns permitted pursuant to the Credit Agreement.
Section 4.03 Counterparts. This Third Amendment may be executed by one or
------------
more of the parties hereto in any number of separate counterparts, and all of
such counterparts taken together shall be deemed to constitute one and the same
instrument and shall be enforceable as of the Effective Date upon the execution
of one or more counterparts hereof by the Company, the Administrative Agent, the
Documentation Agent, the Syndication Agent and Lenders. In this regard, each of
the parties hereto acknowledges that a counterpart of this Third Amendment
containing a set of counterpart execution pages reflecting the execution of each
party hereto shall be sufficient to reflect the execution of this Third
Amendment by each necessary party hereto and shall constitute one instrument.
Section 4.04 Number and Gender. Whenever the context requires, reference
-----------------
herein made to the single number shall be understood to include the plural; and
likewise, the plural shall be understood to include the singular. Words denoting
sex shall be construed to include the masculine, feminine and neuter, when such
construction is appropriate; and specific enumeration shall not exclude the
general but shall be construed as cumulative. Definitions of terms defined in
the singular or plural shall be equally applicable to the plural or singular, as
the case may be, unless otherwise indicated.
Section 4.05 Entire Agreement. This Third Amendment constitutes the
----------------
entire agreement among the parties hereto with respect to the subject hereof.
All prior understandings, statements and agreements, whether written or oral,
relating to the subject hereof are superseded by this Third Amendment.
-5-
<PAGE>
Section 4.06 Invalidity. In the event that any one or more of the
----------
provisions contained in this Third Amendment shall for any reason be held
invalid, illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision of this Third Amendment.
Section 4.07 Titles of Articles, Sections and Subsections. All titles
--------------------------------------------
or headings to Articles, Sections, subsections or other divisions of this Third
Amendment or the exhibits hereto, if any, are only for the convenience of the
parties and shall not be construed to have any effect or meaning with respect to
the other content of such Articles, Sections, subsections, other divisions or
exhibits, such other content being controlling as the agreement among the
parties hereto.
Section 4.08 Governing Law. This Third Amendment shall be deemed to be
-------------
a contract made under and shall be governed by and construed in accordance with
the internal laws of the State of New York.
THIS THIRD AMENDMENT, THE CREDIT AGREEMENT, AS SUPPLEMENTED AND AMENDED
HEREBY, THE NOTES, AND THE OTHER SECURITY INSTRUMENTS REPRESENT THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
-6-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Third Amendment to
be duly executed and delivered by their proper and duly authorized officers as
of the Effective Date.
BORROWER: TITAN RESOURCES, L.P., a Texas limited
- -------- partnership
By: Titan Resources I, Inc., its General Partner
By: /s/ Jack Hightower
-------------------
Name: Jack Hightower
Title: President
AGENT AND LENDERS: THE CHASE MANHATTAN BANK, Individually as
- ----------------- Issuing Bank and as Administrative Agent
By: /s/ Peter M. Ling
------------------
Name: Peter M. Ling
Title: Vice President
FIRST UNION NATIONAL BANK, Individually and
as Documentation Agent
By: /s/ Jay Chernowski
-------------------
Name: Jay Chernowski
Title: Senior Vice President
MORGAN GUARANTY TRUST COMPANY OF
NEW YORK, Individually and as Syndication Agent
By: /s/ John Kowalozuk
-------------------
Name: John Kowalozuk
Title: Vice President
-7-
<PAGE>
CREDIT LYONNAIS NEW YORK BRANCH
By: /s/ Philipe Sousira
--------------------
Name: Philippe Sousira
Title: Senior Vice President
BANK ONE, TEXAS, N.A.
By: /s/ Wm. Mark Cramer
--------------------
Name: Wm. Mark Cramer
Title: Vice President
BANQUE PARIBAS
By: /s/ Brian M. Malone
--------------------
Name: Brian M. Malone
Title: Director
By: /s/ Michael H. Fiuzat
----------------------
Name: Michael H. Fiuzat
Title: Vice President
UNION BANK OF CALIFORNIA, N.A.
By: /s/ Randal Osterberg
---------------------
Name: Randal Osterberg
Title: Vice President
By: /s/ Gary Shekerjian
--------------------
Name: Gary Shekerjian
Title: Assistant Vice President
-8-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,130
<SECURITIES> 0
<RECEIVABLES> 10,967
<ALLOWANCES> 0
<INVENTORY> 1,198
<CURRENT-ASSETS> 14,435
<PP&E> 391,403
<DEPRECIATION> (108,237)
<TOTAL-ASSETS> 354,810
<CURRENT-LIABILITIES> 18,168
<BONDS> 0
0
0
<COMMON> 404
<OTHER-SE> 215,298
<TOTAL-LIABILITY-AND-EQUITY> 354,810
<SALES> 40,468
<TOTAL-REVENUES> 40,468
<CGS> 0
<TOTAL-COSTS> 51,314
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,691
<INCOME-PRETAX> (14,321)
<INCOME-TAX> 5,097
<INCOME-CONTINUING> (9,224)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,224)
<EPS-PRIMARY> (.23)
<EPS-DILUTED> (.23)
</TABLE>
