<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------------------------
FORM 10-Q
--------------------------------------------
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 1999
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 200 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 May 3, 1999, 37,934,675 shares of common stock, par value $.01
per share of Titan Exploration, Inc. were outstanding.
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<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
<S> <C>
Forward Looking Information and Risk Factors ................................................... 1
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
Consolidated Balance Sheets as of March 31, 1999 (Unaudited) and December 31, 1998... 2
Unaudited Consolidated Statements of Operations for the three months ended
March 31, 1999 and 1998.............................................................. 3
Unaudited Consolidated Statements of Cash Flows for the three months ended
March 31, 1999 and 1998.............................................................. 4
Notes to Consolidated Financial Statements........................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9
-------------------------------------------------------------------------------------
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................... 15
---------------------------------------------------------
PART II -- OTHER INFORMATION
Item 5. Other Information.................................................................... 16
-----------------
Item 6. Exhibits and Reports on Form 8-K..................................................... 16
--------------------------------
Signatures........................................................................... 17
</TABLE>
<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 1999, potential reserves 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
<PAGE>
Item 1. Financial Statements
TITAN EXPLORATION, INC.
Consolidated Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1999 1998
------------------ ------------------
(unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 1,086 $ 610
Accounts receivable:
Oil and gas 10,027 13,497
Other 770 761
Inventories 1,416 1,276
Assets held for sale 84,301 109,452
Prepaid expenses and other current assets 371 316
--------- --------
Total current assets 97,971 125,912
--------- --------
Property, plant and equipment, at cost:
Oil and gas properties, using the successful efforts method of accounting:
Proved properties 301,903 299,412
Unproved properties 7,803 6,699
Other property and equipment 6,353 6,340
Accumulated depletion, depreciation and amortization (102,860) (98,095)
--------- --------
Other assets, net of accumulated amortization of $700 in 1999 and $639 in 1998 231,199 214,356
734 754
--------- --------
$ 311,904 $341,022
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities:
Trade $ 8,651 $ 14,097
Accrued interest 1,624 466
Other 5,638 5,652
--------- --------
Total current liabilities 15,913 20,215
--------- --------
Long-term debt 148,300 144,200
Other liabilities 5,077 5,253
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; 40,534,675 shares
issued and outstanding at March 31, 1999 and December 31, 1998 405 405
Additional paid-in capital 278,109 278,109
Treasury stock, at cost; 2,600,000 shares at March 31, 1999 and December 31, 1998 (20,020) (20,020)
Deferred compensation (3,790) (5,053)
Accumulated deficit (112,090) (82,087)
--------- --------
Total stockholders' equity 142,614 171,354
--------- --------
Commitments and contingencies (Note 3) $ 311,904 $341,022
========= ========
</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
March 31,
------------------------------------------
1999 1998
-------------------- --------------------
<S> <C> <C>
Revenues:
Gas sales $ 8,411 $13,518
Oil sales 6,369 8,589
-------- -------
Total revenues 14,780 22,107
-------- -------
Expenses:
Oil and gas production 4,953 8,060
Production and other taxes 1,207 1,619
General and administrative 2,169 2,731
Amortization of stock option awards 1,263 1,264
Exploration and abandonment (Note 7) 2,545 2,094
Depletion, depreciation and amortization 4,826 6,763
Impairment of long-lived assets 25,900
-------- -------
Total expenses 42,863 22,531
-------- -------
Operating loss (28,083) (424)
-------- -------
Other income (expense):
Interest income 11 65
Interest expense (2,551) (1,707)
Gain (loss) on sale of assets 202 (3)
Equity in net loss of affiliates (115) (132)
Other 533 156
-------- -------
Loss before income taxes (30,003) (2,045)
-------- -------
Income tax benefit - (720)
-------- -------
Net loss $(30,003) $(1,325)
======== =======
Net loss per share $ (.79) $ (.03)
======== =======
Net loss per share - assuming dilution $ (.79) $ (.03)
======== =======
</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
March 31,
----------------------------------------
1999 1998
-------------------- ------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(30,003) $ (1,325)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depletion, depreciation and amortization 4,826 6,763
Impairment of long-lived assets 25,900
Amortization of stock option awards 1,263 1,264
Exploration and abandonments 2,015 1,096
Equity in net loss of affiliate 115 132
Loss (gain) on sale of assets (202) 3
Deferred income taxes - (720)
Other items 137 -
Changes in assets and liabilities:
Accounts receivable 3,461 2,229
Prepaid expenses and other current assets (195) (1,440)
Other assets (2) (94)
Accounts payable and accrued liabilities (4,158) (3,227)
-------- --------
Total adjustments 33,160 6,006
-------- --------
Net cash provided by operating activities 3,157 4,681
-------- --------
Cash flows from investing activities:
Redemption of restricted investment 2,331
Investing in oil and gas properties (6,920) (10,588)
Additions to other property and equipment (13) (3,401)
Contributions in equity investments of affiliates (615) (78)
Proceeds from sale of assets 805 17
-------- --------
Net cash used in investing activities (6,743) (11,719)
-------- --------
Cash flows from financing activities:
Proceeds from debt 4,100 17,100
Payments of debt - (1,350)
Exercise of stock options - 14
Purchase of treasury stock - (5,376)
Other financing activities (38) (17)
-------- --------
Net cash provided by financing activities 4,062 10,371
-------- --------
Net increase in cash and cash equivalents 476 3,333
Cash and cash equivalents, beginning of period 610 1,603
-------- --------
Cash and cash equivalents, end of period $ 1,086 $ 4,936
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
TITAN EXPLORATION, INC.
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
(Unaudited)
(1) Basis of Presentation
In the opinion of management, the unaudited consolidated financial
statements of Titan Exploration, Inc. (the "Company") as of March 31, 1999 and
for the three months ended March 31, 1999 and 1998 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 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 1998 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.
Reclassifications
Certain reclassifications have been made to the 1998 amounts to conform to
the 1999 presentations.
(2) Debt
Line of Credit
The Company anticipates entering into a new credit agreement prior to May
31, 1999 which will principally amend the credit agreement (the "Credit
Agreement"), dated October 31,1996, with Chase Bank of Texas, N.A. and other
syndicate banks which established 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 $200 million at March 31, 1999, is subject to redetermination annually
each April by the lenders based on certain proved oil and gas reserves and other
assets of the Company. The borrowing base redetermination has not been reset by
the lenders, as the lenders have not yet determined the effect the asset sales
will have on the borrowing base. The Company does not anticipate a material
downward adjustment as less than 13% of the Company's proved reserves have been
sold or are anticipated to be sold. At March 31, 1999, the outstanding principal
balance was $145 million and the amount available to borrow was approximately
$55 million.
At March 31, 1999, the Company was not in compliance with a coverage test
required by the Credit Agreement. The Company has received a waiver for the
event of non-compliance and believes that it will be able to meet the coverage
test in the periods following the term of the waiver.
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
5
<PAGE>
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 generally
are at the Bank's cost of funds plus 1% per annum. At March 31, 1999, the
outstanding principal balance was $3.3 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 Baron 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 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 suit seeks rescission of sales of common stock of OEDC and
unspecified monetary damages, including punitive damages. The state court judge
has declined to certify the case at this time until resolution of the federal
action, which is described below.
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.
Discovery in the federal action has commenced. A mediation
hearing was held on April 20, 1999 which did not result in any final resolutions
to the cases.
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 March 31, 1999, the Company had outstanding letters of credit of
$144,000, which were issued under the Credit Agreement.
6
<PAGE>
(4) Earnings per Share
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------------------
1999 1998
--------------------- ---------------------
(in thousands, except per share data)
<S> <C> <C>
Numerator:
Net loss and numerator for basic and diluted net loss per
common share - income available to common stockholders $(30,003) $(1,325)
======== =======
Denominator:
Denominator for basic net loss per common share -
weighted average common shares 37,935 39,875
Effect of dilutive securities - employee stock options - -
-------- -------
Denominator for diluted net loss per common share -
adjusted weighted average common shares and assumed
conversions 37,935 39,875
======== =======
Basic net loss per common share $ (.79) $ (.03)
======== =======
Diluted net loss per common share $ (.79) $ (.03)
======== =======
</TABLE>
Employee stock options to purchase 4,252,728 and 4,587,832 shares of common
stock were outstanding during 1999 and 1998, respectively, but were not included
in the computation of diluted net loss per common share because the Company had
a loss from continuing operations and, therefore, the effect would be
antidilutive.
(5) 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 at March 31, 1999:
Gas Volume
Year (MMbtu) Floor Ceiling
- ---- ---------- ----- -------
(dollars per MMbtu)
Gas commodity price collars:
1999 7,593,000 $1.90 $2.44
2000 1,365,000 $1.98 $2.33
7
<PAGE>
(6) Other Liabilities
The other current and noncurrent liabilities consist of the following (in
thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ------------
<S> <C> <C>
Other current liabilities:
Capital costs and operating expenses $1,283 $2,220
Gas processing obligation 564 564
Restructuring costs 625 625
Oil and gas payables 1,074 1,106
Other 2,092 1,137
------ ------
$5,638 $5,652
====== ======
Other noncurrent liabilities:
Gas processing obligation $1,130 $1,130
Environmental reserve 824 824
Plugging and abandonment reserve 2,483 2,483
Gas and pipeline imbalances 204 225
Other 436 591
------ ------
$5,077 $5,253
====== ======
</TABLE>
(7) Exploration and Abandonment
Exploration and abandonment expense consist of the following (in
thousands):
<TABLE>
<CAPTION>
Three months ended March 31,
------------------------------------------
1999 1998
-------------------- --------------------
<S> <C> <C>
Geological and geophysical staff $ 270 $ 352
Uneconomical exploratory wells 1,914 525
Seismic costs 101 407
Delay rentals 79 456
Plugging and abandonment reserve - 244
Other 181 110
------ ------
$2,545 $2,094
====== ======
</TABLE>
(8) Impairment of Long-Lived Assets
In the fourth quarter of 1998, the Company approved a plan to dispose of
non-strategic assets, including its Gulf of Mexico, Gulf Coast and certain
Permian Basin assets. The Company's reason to dispose of these assets varied
depending on the portfolio of assets being considered. The disposition will
allow the Company to (a) realize full value for certain assets whose value is
not fully reflected in the public valuation of the Company in the capital
markets, (b) redeploy capital to higher return projects or acquisitions, (c)
invest in projects that will accelerate cash flow to the Company, (d) eliminate
certain administrative costs and (e) reduce the Company's debt obligations.
In 1999, the Company recognized an impairment of $25.9 million on the
assets held for sale. The impairment was the result of comparing the estimated
sales proceeds, less costs to sell, to the underlying net cost basis of each
specific portfolio of assets.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Recent Developments
Asset Divestitures
In the fourth quarter of 1998, the Company approved a plan to dispose of
non-strategic assets, including its Gulf of Mexico, Gulf Coast and certain
Permian Basin assets. The Company's reason to dispose of these assets varied
depending on the portfolio of assets being considered. The disposition will
allow the Company to (a) realize full value for certain assets whose value is
not fully reflected in the public valuation of the Company in the capital
markets, (b) redeploy capital to higher return projects or acquisitions, (c)
invest in projects that will accelerate cash flow to the Company, (d) eliminate
certain administrative costs and (e) reduce the Company's debt obligations.
In April 1999, the Company entered into an agreement with Coastal Oil & Gas
Corporation to sell its assets in the Gulf of Mexico for $71.3 million in cash
subject to due diligence, adjustments and certain other conditions. At March
31, 1999, the Company wrote down its costs in these assets by $24.5 million.
The Company closed the sale of its Gulf Coast properties in April 1999 for
$5.4 million in cash. At March 31, 1999, the Company wrote down its cost in
these assets by $1.4 million.
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.
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 in prior periods.
The Company 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.
9
<PAGE>
Impact of Crude Oil Prices
During 1998 and through March 31, 1999, the posted price of West Texas
intermediate crude oil (the "West Texas Crude Oil Price") ranged from $15.75 to
$8.00 per barrel. These low prices are 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 Organization of
Petroleum Exporting Countries ("OPEC") to abide by their respective crude oil
production quotas and a decline in demand in certain Asian markets.
If the West Texas Crude Oil Price worsens or persists for a protracted
period, it will adversely affect the Company's revenues, net income and cash
flows from operations and the Company may delay or postpone certain of its
capital projects.
It is the Company's expectation that it will not have positive earnings in
1999 or the near term future unless commodity prices especially the price of
crude oil, improve above the levels of the past 15 months.
Year 2000 Issues
Many computer software systems, as well as certain hardware and equipment
using date-sensitive data, were structured to use a two-digit date field meaning
that they may not be able to properly recognize dates in the year 2000. The
Company is addressing this issue through a process that entails evaluation of
the Company's critical software and, to the extent possible, its hardware and
equipment to identify and assess Year 2000 issues and to remediate, replace or
establish alternative procedures addressing non-Year 2000 complaint systems,
hardware and equipment.
The Company has substantially completed an inventory of its systems and
equipment including computer systems and business applications. Based upon this
review, the Company currently believes that all of its critical software and
computer hardware systems are either Year 2000 compliant or will be within the
next three months. The Company continues to inventory its equipment and
facilities to determine if they contain embedded date-sensitive technology. If
problems are discovered, remediation, replacement or alternative procedures for
non-compliant equipment and facilities will be undertaken on a business priority
basis. This process will continue and, depending upon the equipment and
facilities, is scheduled for completion during the first three quarters of 1999.
As of March 31, 1999, the Company had not incurred any material amount of
expense related to its Year 2000 compliance efforts. These costs are currently
being expensed as they are incurred. However, in certain instances the Company
may determine that replacing existing equipment may be more efficient,
particularly where additional functionality is available. These replacements
may be capitalized and therefore would reduce the estimated 1999 expenses
associated with the Year 2000 issue. The Company currently expects total out-
of-pocket costs to become Year 2000 compliant to be less than $100,000. The
Company currently expects that such costs will not have a material adverse
effect on the Company's financial condition, operations or liquidity.
The foregoing timetable and assessment of costs to become Year 2000 compliant
reflect management's current best estimates. These estimates are based on many
assumptions, including assumptions about the cost, availability and ability of
resources to locate, remediate and modify affected systems, equipment and
facilities. Based upon its activities to date, the Company does not currently
believe that these factors will cause results to differ significantly from those
estimated. However, the Company cannot reasonably estimate the potential impact
on its financial condition and operations if key third parties including, among
others, suppliers, contractors, joint venture partners, financial institutions,
customers and governments do not become Year 2000 compliant on a timely basis.
The Company is contacting many of these third parties to determine whether they
will be able to resolve in a timely fashion their Year 2000 issues as they may
affect the Company.
In the event that the Company is unable to complete the remediation or
replacement of its critical systems, facilities and equipment, establish
alternative procedures in a timely manner, or if those with whom the Company
conducts business are unsuccessful in implementing timely solutions, Year 2000
issues could have a material adverse effect on the Company's liquidity and
results of operations. At this time, the potential effect in the event the
Company and/or third parties are unable to timely resolve their Year 2000
problems is not determinable;
10
<PAGE>
however, the Company currently believes that it will be able to resolve its own
Year 2000 issues in a timely manner.
The disclosure set forth in this section is provided pursuant to Securities
Act Release No. 33-7558. As such it is protected as a forward-looking statement
under the Private Securities Litigation Reform Act of 1995. See "Forward-
Looking Statements." This disclosure is also subject to protection under the
Year 2000 Information and Readiness Disclosure Act of 1998, Public Law 105-271,
as a "Year 2000 Statement" and "Year 2000 Readiness Disclosure" as defined
therein.
11
<PAGE>
Operating Data
The following table sets forth the Company's historical operating data for
the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------------------
1999 1998
------------------ ------------------
Production:
<S> <C> <C>
Oil (MBbls) 598 629
Gas (MMcf) 6,192 7,326
Total (MMcfe) 9,780 11,100
Average sales price per unit (excluding the effects of hedging):
Oil (per Bbl) $10.64 $ 13.32
Gas (per Mcf) $ 1.24 $ 1.58
Total (per Mcfe) $ 1.44 $ 1.80
Average sales prices per unit (including the effects of hedging):
Oil (per Bbl) $10.64 $ 13.65
Gas (per Mcf) $ 1.36 $ 1.85
Total (per Mcfe) $ 1.51 $ 1.99
Expenses per Mcfe:
Production costs, excluding production and other taxes $ .51 $ .73
Production and other taxes $ .12 $ .15
General and administrative $ .22 $ .26
Depletion, depreciation and amortization $ .49 $ .61
</TABLE>
Results of Operations
Three Months Ended March 31, 1999 Compared to the Three Months Ended March 31,
1998
The Company's revenues from the sale of oil and gas (excluding the effects
of hedging) were $6.4 million and $7.7 million in 1999 and $8.4 million and
$11.6 million in 1998, respectively. Realized oil and gas prices decreased $2.68
per Bbl and $.34 per Mcf, respectively, between comparable quarters. Assuming
1998 prices in 1999 the revenues would have increased by approximately $4.0
million. Oil and gas production decreased 31,000 barrels and 1,134 MMcf,
respectively, between comparable quarters. The decrease in the oil production is
principally due to normal production declines and the Company deferring some of
its exploitation and production projects in 1998 due to uncertainties over
future commodity price levels. The decrease in gas production is partially due
to normal production declines and loss and/or curtailment of production on wells
due to mechanical and/or reservoir problems, offset by increased gas production
in certain areas from the Company's drilling activities.
The Company's hedging activities in 1999 increased gas revenues by $717,000
($.12 per Mcf), as compared to 1998, when hedging activities increased oil and
gas revenues by $206,000 ($.33 per Bbl) and $1.9 million ($.27 per Mcf),
respectively. At March 31, 1999 the Company had gas hedges in place for a
portion of its production through early 2000. The Company will realize, at a
minimum, a price of a $1.90 per MMbtu on the gas volumes hedged.
The Company's production costs were $5.0 million ($.51 per Mcfe) and $8.0
million ($.73 per Mcfe) in 1999 and 1998, respectively. Part of the decrease is
due to the 1998 rework expenses associated with the 1997 acquired properties.
Initially, acquired properties generally incur significant rework expenses,
which are costs incurred to perform required maintenance, workovers and other
remedial activities. In the first quarter of 1998,
12
<PAGE>
the Company spent over $.13 per Mcfe on the 1997 acquired properties rework
expenses. Also, the decrease is due to the sale of some properties in 1998 and
1999 and the Company performing only routine and necessary expenditures in
certain fields, specifically oil fields, due to depressed commodity prices.
Depletion, depreciation and amortization expense (DD&A) was $4.8 million
($.49 per Mcfe) and $6.8 million ($.61 per Mcfe) for the comparable quarters of
1999 and 1998, respectively. The decrease in the absolute and per unit amounts
is attributable to (a) the first quarter of 1999 excluding DD&A for the assets
classified as assets held for sale and (b) the effects from the impairments
taken in the prior years.
The Company recognized an impairment of $25.9 million in 1999. The
impairment relates to the write-down of the net cost of the assets held for sale
at March 31, 1999 based on the expected net proceeds from the sale of these
assets.
The Company's exploration and abandonment expense was $2.5 million and $2.1
million for the comparable quarters of 1999 and 1998, respectively. Included in
the first quarter 1999 are approximately $1.9 million of costs associated with
uneconomical exploratory wells, primarily the Titan No. 1 in the central Texas,
Austin Chalk area.
The Company's general and administrative expense (G&A) was $2.2 million
($.22 per Mcfe) and $2.7 million ($.26 per Mcfe) for the comparable quarters of
1999 and 1998, respectively. The decrease in G&A is primarily due to the
integration in 1998 of the 1997 acquisitions and the Company's previously
announced cost cutting measures.
The Company's interest expense was $2.6 million and $1.7 million for the
comparable quarters of 1999 and 1998, respectively. The increase in interest
expense is primarily due to increased debt levels related to the Company's 1998
capital expenditures and treasury stock purchases.
In the first quarter of 1999, the Company did not record an income tax
benefit related to loss from operations. No deferred tax benefit was recorded
due to it being more likely than not that the Company may not be able to utilize
all of its available loss carryforwards prior to their ultimate expiration.
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. In 1997, two acquisitions were
completed by issuing common stock in exchange for the equity interest in two
entities and one significant property acquisition was funded with bank
financing.
Net Cash Provided By Operating Activities. Net cash provided by operating
activities, before changes in operating assets and liabilities, was $4.1 million
for the three months ended March 31, 1999, compared to $7.2 million for the
three months ended March 31, 1998. The decrease was primarily attributable to
significant decrease in revenues and an increase in interest costs, offset by a
decrease in operating costs. Revenues were significantly below expectation due
to depressed commodity prices.
Capital Expenditures. For 1999, the Company budgeted $49.5 million for capital
expenditures and incurred actual cash expenditures of $7.5 million through March
31, 1999. Approximately $8.0 million of the annual budget related to assets in
the Gulf of Mexico which the Company has entered into a formal agreement to
sell. At March 31, 1999 the Company had spent approximately $.6 million
associated with the Gulf of Mexico assets.
Cash expenditures for investing in oil and gas properties were $6.9 million
for the three months ended March 31, 1999. This includes $2.2 million for the
acquisition of oil and gas leases and $4.7 million for development and
exploratory drilling.
13
<PAGE>
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.
For 1999, after giving effect to assets sold or anticipated to be sold, the
Company, currently, expects to spend (i) approximately $15.4 million on
developmental projects, (ii) approximately $21.4 million on exploratory and
probable projects, of which $6.2 million relates to contingent projects
following successful exploratory and probable projects, (iii) approximately $4.8
million to acquire additional acreage and seismic data and (iv) $.7 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.
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 interest in its normal course
business. Any future acquisitions may require additional financial and will be
dependent upon financing which may be required in the future to fund the
Company's acquisition and drilling programs.
Capital Resources. The Company's primary capital resources are net cash
provided by operating activities and the availability under the Credit
Agreement, of which $55 million was available at March 31, 1999.
Credit Agreement. The Credit Agreement established a four year revolving credit
facility, up to a maximum amount of $250 million, subject to a borrowing base to
be redetermined annually by the lenders based on certain proved oil and gas
reserves and other assets of the Company. The borrowing base at March 31, 1999
was $200 million. 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 $144,000 was outstanding at March 31,
1999. All outstanding amounts under the Credit Agreement are due and payable in
full on January 1, 2001. The Company's outstanding debt under the Credit
Agreement was $145 million on March 31, 1999.
The Company underwent a borrowing base review in April 1999. The borrowing
base has not been reset by the banks, as the banks have not yet determined the
effect the asset sales will have on the borrowing base. The Company does not
anticipate a material downward adjustment as less than 13% of the Company's
proved reserves have been sold or are anticipated to be sold.
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 .50% per annum) or the
Eurodollar rate, plus 1.00% 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 .300% 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 a majority of the Company's proved oil and gas properties.
At March 31, 1999, the Company was not in compliance with a coverage test
required by the Credit Agreement. The Company has received a waiver for the
event of non-compliance and believes that it will be able to meet the coverage
test in the periods following the term of the waiver.
14
<PAGE>
Liquidity and Working Capital. At March 31, 1999, the Company had $1.1 million
of cash and cash equivalents as compared to $610,000 at December 31, 1998. The
Company's ratio of current assets to current liabilities was 6.16 at March 31,
1999, compared to 6.23 at December 31, 1998. The Company's significant working
capital ratio is due to the assets held for sale. Excluding the assets held for
sale the Company would have a working capital deficit of $2.2 million at March
31, 1999. The working capital deficit is due primarily to the Company
maintaining low cash levels for cash management purposes. The Company, at March
31, 1999, has availability under its Credit Agreement to fund the working
capital deficit.
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 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 had $3.3 million outstanding principal
under the Unsecured Credit Agreement at March 31, 1999.
The interest payable on amounts outstanding under the Unsecured Credit
Agreement is at a rate determined by agreement between the Company and the Bank.
The rate may not exceed the maximum interest rate permitted under applicable
laws. Interest rates generally are the Bank's cost of funds plus 1% per annum.
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 was 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 was reported as a component
of oil and gas revenues as the associated production occurs. The Company, at
March 31, 1999, had entered into hedging transactions with respect to
approximately 7,593,000 and 1,365,000 MMbtu of its 1999 and 2000, respectively,
estimated production.
Recently Issued Accounting Pronouncements
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
No significant changes have occurred from the data disclosed in the
Company's 1998 Annual Report on Form 10-K.
15
<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
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
27 Financial Data Schedule
(b) Reports Submitted on Form 8-K:
None
16
<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: May 17, 1999
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,086
<SECURITIES> 0
<RECEIVABLES> 10,797
<ALLOWANCES> 0
<INVENTORY> 1,416
<CURRENT-ASSETS> 97,971
<PP&E> 316,059
<DEPRECIATION> (102,860)
<TOTAL-ASSETS> 311,904
<CURRENT-LIABILITIES> 15,913
<BONDS> 0
0
0
<COMMON> 405
<OTHER-SE> 142,209
<TOTAL-LIABILITY-AND-EQUITY> 311,904
<SALES> 14,780
<TOTAL-REVENUES> 14,780
<CGS> 0
<TOTAL-COSTS> 42,863
<OTHER-EXPENSES> (631)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,551
<INCOME-PRETAX> (30,003)
<INCOME-TAX> 0
<INCOME-CONTINUING> (30,003)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (30,003)
<EPS-PRIMARY> (.79)
<EPS-DILUTED> (.79)
</TABLE>
