-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SAa/7pNhnhRKOrncjfMMIgkAbHSokWAh0GHWFPQ17SYXgzGX2tg3MLtISInINPqR FcugfuEq00ygrTPTKmXi2g== 0000904080-98-000004.txt : 19980403 0000904080-98-000004.hdr.sgml : 19980403 ACCESSION NUMBER: 0000904080-98-000004 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980320 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: STONE ENERGY CORP CENTRAL INDEX KEY: 0000904080 STANDARD INDUSTRIAL CLASSIFICATION: 1311 IRS NUMBER: 721235413 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-12074 FILM NUMBER: 98570146 BUSINESS ADDRESS: STREET 1: 625 E KALISTE SALOOM RD CITY: LAFAYETTE STATE: LA ZIP: 70508 BUSINESS PHONE: 3182370410 MAIL ADDRESS: STREET 1: 625 E KALISTLE SALOOM RD CITY: LAFAYETTE STATE: LA ZIP: 70508 10-K405 1 STONE ENERGY CORPORATION- 12/31/97 - - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1997 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission File Number: 1-12074 STONE ENERGY CORPORATION (Exact name of registrant as specified in its charter) State of incorporation: Delaware I.R.S. Employer Identification No. 72-1235413 625 E. Kaliste Saloom Road Lafayette, Louisiana 70508 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (318) 237-0410 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered -------------------- ----------------------- Common Stock, Par Value $.01 Per Share New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None 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. [x] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $408,812,885 as of March 11, 1998 (based on the last reported sale price of such stock on the New York Stock Exchange Composite Tape). As of March 11, 1998, the registrant had outstanding 15,062,408 shares of Common Stock, par value $.01 per share. Document incorporated by reference: Proxy Statement of Stone Energy Corporation relating to the Annual Meeting of Stockholders to be held on May 14, 1998, which is incorporated into Part III of this Form 10-K. - - -------------------------------------------------------------------------------- TABLE OF CONTENTS Page No. PART I Item 1. Business...................................................... 1 Item 2. Properties.................................................... 11 Item 3. Legal Proceedings............................................. 13 Item 4. Submission of Matters to a Vote of Security Holders........... 14 Item 4A. Executive Officers of the Registrant.......................... 14 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................................... 16 Item 6. Selected Financial and Operating Data......................... 17 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................... 18 Item 8. Financial Statements and Supplementary Data................... 24 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................................... 24 PART III Item 10. Directors and Executive Officers of the Registrant............ 24 Item 11. Executive Compensation........................................ 24 Item 12. Security Ownership of Certain Beneficial Owners and Management......................................... 24 Item 13. Certain Relationships and Related Transactions................ 24 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................................... 25 Index to Financial Statements................................ F-1 Glossary of Certain Industry Terms........................... G-1 PART I ITEM 1. BUSINESS OVERVIEW Stone Energy Corporation is an independent oil and gas company engaged in the acquisition, exploration, development and operation of oil and gas properties onshore and offshore in the Gulf Coast Basin. The Company and its predecessors have been active in the Gulf Coast Basin since 1973, which gives the Company extensive geophysical, technical and operational expertise in this area. As of December 31, 1997, the Company had estimated proved reserves of approximately 189.2 Bcf of natural gas and 17.8 MMBbls of oil, or an aggregate of approximately 49.3 MMBOE, with a present value of estimated pre-tax future net cash flows of $367.9 million (based upon prices in December 1997). The Company's business strategy is to increase production, cash flow and reserves through the acquisition and development of mature properties located in the Gulf Coast Basin. The Company seeks properties that have an established production history, proved undeveloped reserves and multiple prospective reservoirs that provide significant development opportunities and an attractive price due to low current production levels and properties in which the Company would have the ability to control operations. Prior to acquiring a property, the Company performs a thorough geological, geophysical and engineering analysis of the property to formulate a comprehensive development plan. Through development activities, the Company seeks to increase cash flow from existing proved reserves and to establish additional proved reserves. These activities typically involve the drilling of new wells, workovers and recompletions of existing wells, and the application of other techniques designed to increase production. Since 1993, the Company has increased the number of properties in which it has an interest from five to 15, and serves as operator of 14 of these properties. In addition, the Company has substantially expanded its technical database, including 3-D seismic data relating to its properties and potential acquisitions. As a result, the Company has been able to significantly increase its development activities. For the year ending December 31, 1998, the Company has budgeted capital expenditures of $130.5 million which includes $12.5 million for the recently acquired East Cameron Block 64 field and $118.0 million for development operations, which includes plans to drill 27 new wells, conduct eight workovers/recompletions on existing wells and, depending upon the success of specific development activities, install two new offshore production platforms. The Company's capital expenditures for 1997 totaled $148.8 million, of which $37.0 million was for the acquisition of interests in producing properties. The Company completed its initial public offering of common stock in July 1993 (the "Initial Public Offering"), and its shares are listed on the New York Stock Exchange. A secondary offering of common stock was completed in November 1996, and the Company had a total of 15,062,408 shares outstanding at March 11, 1998. In September 1997, the Company completed an offering of $100 million principal amount of its 8-3/4% Senior Subordinated Notes. Stone Energy is headquartered in Lafayette, Louisiana, with additional offices in New Orleans and Houston. As used herein, the "Company" or "Stone Energy" refers to Stone Energy Corporation and its consolidated subsidiaries, unless the context requires otherwise. Certain terms relating to the oil and gas industry are defined in "Glossary of Certain Industry Terms", which begins on page G-1 of this Form 10-K. OIL AND GAS MARKETING All of the Company's natural gas is sold at current market prices. The Company's oil and natural gas condensate production is sold at current market prices, either under short-term contracts providing for variable or market sensitive prices or under various long-term contracts that dedicate the oil and natural gas condensate from a property or well to a single purchaser for an extended period of time, but which still involve variable, market sensitive pricing. From time to time, the Company may enter into transactions hedging the price of oil, natural gas and natural gas condensate. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." 1 COMPETITION AND MARKETS Competition in the Gulf Coast Basin is intense, particularly with respect to the acquisition of producing properties and proved undeveloped acreage. The Company competes with the major oil companies and other independent producers of varying sizes, all of which are engaged in the acquisition of properties and the exploration and development of such properties. Many of the Company's competitors have financial resources and exploration and development budgets that are substantially greater than those of the Company, which may adversely affect the Company's ability to compete, particularly in regions outside of the Gulf Coast Basin. See "Risk Factors-Competition." The availability of a ready market for and the price of any hydrocarbons produced will depend on many factors beyond the control of the Company, including the extent of domestic production and imports of foreign oil, the marketing of competitive fuels, the proximity and capacity of natural gas pipelines, the availability of transportation and other market facilities, the demand for hydrocarbons, the effect of federal and state regulation of allowable rates of production, taxation and the conduct of drilling operations and federal regulation of natural gas. In addition, the restructuring of the natural gas pipeline industry virtually eliminated the gas purchasing activity of traditional interstate gas transmission pipeline buyers. See "Regulation-Federal Regulation of Sales and Transportation of Natural Gas." Producers of natural gas have therefore been required to develop new markets among gas marketing companies, end users of natural gas and local distribution companies. All of these factors, together with economic factors in the marketing area, generally may affect the supply and/or demand for oil and gas and thus the prices available for sales of oil and gas. REGULATION REGULATION OF PRODUCTION. In all areas where the Company conducts activities, there are statutory provisions regulating the production of oil and natural gas under which administrative agencies may promulgate rules in connection with the operation and production of both oil and gas wells, determine the reasonable market demand for oil and gas, and establish allowable rates of production. Such regulatory orders may restrict the rate at which the Company's wells produce oil or gas below the rate at which such wells would be produced in the absence of such regulatory orders, with the result that the amount or timing of the Company's revenues could be adversely affected. FEDERAL LEASES. The Company has oil and gas leases in the Gulf of Mexico, which were granted by the federal government and are administered by the United States Department of the Interior Minerals Management Service (the "MMS"). For offshore operations, lessees must obtain MMS approval for exploration plans and development and production plans prior to the commencement of such operations. In addition to permits required from other agencies (such as the Coast Guard, the Army Corps of Engineers and the United States Environmental Protection Agency (the "EPA")), lessees must obtain a permit from the MMS prior to the commencement of drilling. The MMS has promulgated regulations requiring offshore production facilities located on the Outer Continental Shelf ("OCS") to meet stringent engineering and construction specifications. The MMS proposed additional safety-related regulations concerning the design and operating procedures for OCS production platforms and pipelines. These proposed regulations were withdrawn pending further discussions among interested federal agencies. The MMS also has regulations restricting the flaring or venting of natural gas, and recently amended such regulations to prohibit the flaring of liquid hydrocarbons and oil without prior authorization. Similarly, the MMS has promulgated other regulations governing the plugging and abandoning of wells located offshore and the removal of all production facilities. With respect to any Company operations conducted on offshore federal leases, liability may generally be imposed under the Outer Continental Shelf Lands Act (the "OCSLA") for costs of clean-up and damages caused by pollution resulting from such operations, other than damages caused by acts of war or the negligence of third parties. To cover the various obligations of lessees on the OCS, the MMS generally requires that lessees post substantial bonds or other acceptable assurances that such obligations will be met. The cost of such bonds or other surety can be substantial and there is no assurance that bonds or other surety can be obtained in all cases. Since November 26, 1993, new levels of lease and areawide bonds have been required of lessees taking certain actions with regard to OCS leases. Operators in the OCS waters of the Gulf of Mexico, including the Company, have been or may be required to increase their areawide bonds and individual lease bonds to $3 million and $1 million, respectively, unless exemptions or reduced amounts are allowed by the MMS. The Company currently has an areawide pipeline bond of $0.3 million and areawide lease bonds totaling $3.0 million issued in favor of the MMS for its existing 2 offshore properties. The MMS also has discretionary authority to require supplemental bonding in addition to the foregoing required bonding amounts but this authority is only exercised on a case-by-case basis at the time of filing an assignment of record title interest for MMS approval. Based upon certain financial parameters, the Company has been granted exempt status by the MMS, which exempts the Company from the supplemental bonding requirements. Under certain circumstances, the MMS may require any Company operations on federal leases to be suspended or terminated. Any such suspension or termination could materially and adversely affect the Company's financial condition and operations. In April 1997, after two years of study, the MMS withdrew proposed changes to the way it values natural gas for royalty payments. These proposed changes have established an alternative market-based method to calculate royalties on certain natural gas sold to affiliates or pursuant to non-arm's length sales contracts. In addition, the MMS has recently issued a notice of proposed rulemaking in which it proposes to amend it regulations governing the calculation of royalties and the valuation of crude oil produced from federal leases. This proposed rule would modify the valuation procedures for both arm's-length and non-arm's-length crude oil transactions to decrease reliance on crude oil posted prices and assign a value to crude oil that better reflects market value, establish a new MMS form for collecting value differential data and amend the valuation procedure for the sale of federal royalty oil. Recently, the MMS has issued a final rule to clarify the types of costs that are deductible transportation costs for purposes of royalty valuation of production sold off the lease. In particular, under the rule, the MMS will not allow deduction of costs associated with marketer fees, cash out and other pipeline imbalance penalties, or long-term storage fees. The Company cannot predict what action the MMS will take on these matters, nor can it predict at this stage of the rulemaking proceeding how the Company might be affected by amendments to the regulations. OIL PRICE CONTROLS AND TRANSPORTATION RATES. Sales of crude oil, condensate and gas liquids by the Company are not currently regulated and are made at negotiated prices. Effective as of January 1, 1995, the Federal Energy Regulatory Commission (the "FERC") implemented regulations establishing an indexing system for transportation rates for oil that could increase the cost of transporting oil to the purchaser. The Company is not able to predict what effect, if any, this order will have on it, but it may tend to increase transportation costs or reduce wellhead prices for crude oil. FEDERAL REGULATION OF SALES AND TRANSPORTATION OF NATURAL GAS. Historically, the transportation and sale for resale of natural gas in interstate commerce have been regulated pursuant to the Natural Gas Act of 1938 (the "NGA"), the Natural Gas Policy Act of 1978 (the "NGPA") and the regulations promulgated thereunder by the FERC. In the past, the Federal government has regulated the prices at which gas could be sold. While sales by producers of natural gas can currently be made at uncontrolled market prices, Congress could reenact price controls in the future. Deregulation of wellhead natural gas sales began with the enactment of the NGPA. In 1989, Congress enacted the Natural Gas Wellhead Decontrol Act (the "Decontrol Act"). The Decontrol Act removed all NGA and NGPA price and non-price controls affecting wellhead sales of natural gas effective January 1, 1993. Commencing in April 1992, the FERC issued Order Nos. 636, 636-A, 636-B, and 636-C (collectively, "Order No. 636"), which require interstate pipelines to provide transportation separate, or "unbundled," from the pipelines' sales of gas. Also, Order No. 636 requires pipelines to provide open-access transportation on a basis that is equal for all gas suppliers. Although Order No. 636 does not directly regulate the Company's activities, the FERC has stated that it intends for Order No. 636 to foster increased competition within all phases of the natural gas industry. It is unclear what impact, if any, increased competition within the natural gas industry under Order No. 636 will have on the Company's activities. Although, Order No. 636, assuming it is upheld in its entirety, could provide the Company with additional market access and more fairly applied transportation service rates, Order No. 636, could also subject the Company to more restrictive pipeline imbalance tolerances and greater penalties for violation of those tolerances. The FERC has issued final orders in all Order No. 636 pipeline restructuring proceedings. The United States Court of Appeals for the District of Columbia Circuit ("D.C. Circuit") has generally affirmed Order No. 636 and remanded certain issues for further explanation or clarification. The issues remanded for further action do not appear to materially affect the Company. Proceedings on the remanded issues are currently ongoing before the FERC following its issuance of Order No. 636-C in February 1997. Numerous petitions for review of the individual pipeline restructuring orders are currently pending in that court. Although it is difficult to predict when all appeals of pipeline restructuring orders will be completed or their impact on the Company, the Company does not believe that it will be affected by the restructuring rule and orders any differently than other natural gas producers and marketers with which it competes. 3 The FERC has announced several important transportation-related policy statements and proposed rule changes, including the appropriate manner in which interstate pipelines release capacity under Order No. 636 and, more recently, the price that shippers can charge for their released capacity. In addition, in 1995, the FERC issued a policy statement on how interstate natural gas pipelines can recover the costs of new pipeline facilities. In January 1996, the FERC issued a policy statement and a request for comments concerning alternatives to its traditional cost-of-service ratemaking methodology. A number of pipelines have obtained FERC authorization to charge negotiated rates as one such alternative. In February 1997, the FERC announced a broad inquiry into issues facing the natural gas industry to assist the FERC in establishing regulatory goals and priorities in the post-Order No. 636 environment. In November 1997, the FERC issued a proposed rulemaking to further standardize pipeline transportation tariffs that, if implemented as proposed, could adversely affect the reliability of scheduled interruptible transportation service. In December 1997, the FERC requested comments on the financial outlook of the natural gas pipeline industry, including among other matters, whether the FERC's current rate making policies are suitable in the current industry environment. While any additional FERC action on these matters would affect the Company only indirectly, any new rules and policy statements may have the effect of enhancing competition in natural gas markets by, among other things, encouraging non-producer natural gas marketers to engage in certain purchase and sale transactions. The Company cannot predict what action the FERC will take on these matters, nor can it accurately predict whether the FERC's actions will achieve the goal of increasing competition in markets in which the Company's natural gas is sold. However, the Company does not believe that it will be affected by any action taken materially differently than other natural gas producers and marketers with which it competes. The OCSLA requires that all pipelines operating on or across the OCS provide open-access, non-discriminatory service. Although the FERC has opted not to impose the regulations of Order No. 509, in which the FERC implemented the OCSLA, on gatherers and other non-jurisdictional entities, the FERC has retained the authority to exercise jurisdiction over those entities if necessary to permit non-discriminatory access to service on the OCS. If the FERC were to apply Order No. 509 to gatherers in the OCS, and eliminate the exemption of gathering lines, then these acts could result in a reduction in available pipeline space for existing shippers in the Gulf of Mexico, such as the Company. Commencing in May 1994, the FERC issued a series of orders in individual cases that delineate its new gathering policy. Among other matters, the FERC slightly narrowed its statutory tests for establishing gathering status and reaffirmed that, except in situations in which the gatherer acts in concert with an interstate pipeline affiliate to frustrate the FERC's transportation policies, it does not generally have jurisdiction over natural gas gathering facilities and services, and that such facilities and services located in state jurisdictions are properly regulated by state authorities. This FERC action may further encourage regulatory scrutiny of natural gas gathering by state agencies. In addition, the FERC has approved several transfers by interstate pipelines of gathering facilities to unregulated independent or affiliated gathering companies, subject to the transferee providing service for two years from the date of transfer to the pipeline's existing customers pursuant to a default contract or pursuant to mutually agreeable terms. In August 1996, the D.C. Circuit largely upheld the FERC's new gathering policy, but remanded the FERC's default contract condition. The Company does not believe that it will be affected by the FERC's new gathering policy any differently than other producers, gatherers and marketers with which it competes. Additional proposals and proceedings that might affect the natural gas industry are pending before Congress, the FERC and the courts. The natural gas industry historically has been very heavily regulated; therefore, there is no assurance that the less stringent regulatory approach recently pursued by the FERC and Congress will continue. ENVIRONMENTAL REGULATIONS. The Company's operations are subject to numerous laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. These laws and regulations may require the acquisition of a permit before drilling commences, restrict the types, quantities and concentration of various substances that can be released into the environment in connection with drilling and production activities, limit or prohibit drilling activities on certain lands lying within wilderness, wetlands and other protected areas, and impose substantial liabilities for pollution resulting from the Company's operations. Legislation has been proposed in Congress from time to time that would reclassify certain oil and gas exploration and production wastes as "hazardous wastes," which would make the reclassified wastes subject to much more stringent handling, disposal and clean-up requirements. If such legislation were to be enacted, it could have a significant impact on the operating costs of the 4 Company, as well as the oil and gas industry in general. Initiatives to further regulate the disposal of oil and gas wastes are also pending in certain states, and these various initiatives could have a similar impact on the Company. Management believes that the Company is in substantial compliance with current applicable environmental laws and regulations and that continued compliance with existing requirements will not have a material adverse impact on the Company. The Oil Pollution Act ("OPA") and regulations thereunder impose a variety of regulations on "responsible parties" related to the prevention of oil spills and liability for damages resulting from such spills in United States waters. A "responsible party" includes the owner or operator of a facility or vessel, or the lessee or permittee of the area in which an offshore facility is located. OPA assigns liability to each responsible party for oil cleanup costs and a variety of public and private damages. While liability limits apply in some circumstances, a party cannot take advantage of liability limits if the spill was caused by gross negligence or willful misconduct or resulted from violation of a federal safety, construction or operating regulation. If the party fails to report a spill or to cooperate fully in the cleanup, liability limits likewise do not apply. Even if applicable, the liability limits for offshore facilities require the responsible party to pay all removal costs, plus up to $75 million in other damages. Few defenses exist to the liability imposed by OPA. OPA imposes ongoing requirements on a responsible party, including the preparation of oil spill response plans and proof of financial responsibility to cover environmental cleanup and restoration costs that could be incurred in connection with an oil spill. As amended by the Coast Guard Authorization Act of 1996, OPA requires responsible parties for offshore facilities to provide financial assurance in the amount of $35 million to cover potential OPA liabilities. This amount can be increased up to $150 million if a formal risk assessment indicates that an amount higher than $35 million should be required. The Company does not anticipate that it will experience any difficulty in satisfying the MMS's requirements for demonstrating financial responsibility under OPA. In 1996, the American Institute of Certified Public Accountants issued its Statement of Position 96-1 ("SOP 96-1"), which provides guidance on accounting for environmental remediation liabilities. SOP 96-1 interprets existing Financial Accounting Standards Board standards applicable to public companies. The Company adopted SOP 96-1 effective January 1, 1997, with no material effect. The Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"), also known as the "Superfund" law, imposes liability, without regard to fault or the legality of the original conduct, on certain classes of persons that are considered to be responsible for the release of a "hazardous substance" into the environment. These persons include the owner or operator of the disposal site or sites where the release occurred and companies that disposed or arranged for the disposal of the hazardous substances found at the site. Persons who are or were responsible for releases of hazardous substances under CERCLA may be subject to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment and for damages to natural resources, and it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment. The EPA has indicated that the Company may be potentially responsible for costs and liabilities associated with alleged releases of hazardous substances at one site. See "Item 3. Legal Proceedings-Environmental." The Federal Water Pollution Control Act ("FWPCA") imposes restrictions and strict controls regarding the discharge of produced waters and other oil and gas wastes into navigable waters. Permits must be obtained to discharge pollutants to waters and to conduct construction activities in waters and wetlands. The FWPCA and similar state laws provide for civil, criminal and administrative penalties for any unauthorized discharges of pollutants and unauthorized discharges of reportable quantities of oil and other hazardous substances. Many state discharge regulations and the Federal National Pollutant Discharge Elimination System general permits prohibit the discharge of produced water and sand, drilling fluids, drill cuttings and certain other substances related to the oil and gas industry to coastal waters. Although the costs to comply with recently-enacted zero discharge mandates under federal or state law may be significant, the entire industry is expected to experience similar costs and the Company believes that these costs will not have a material adverse impact on the Company's results of operations or financial position. In 1992, the EPA adopted regulations requiring certain oil and gas exploration and production facilities to obtain permits for storm water discharges. Costs 5 may be associated with the treatment of wastewater or developing and implementing storm water pollution prevention plans. OPERATIONAL RISKS AND INSURANCE The Company's operations are subject to the usual hazards incident to the drilling of oil and gas wells, such as cratering, explosions, uncontrollable flows of oil, gas or well fluids, fires, pollution and other environmental risks. The Company's activities are also subject to perils peculiar to marine operations, such as capsizing, collision, and damage or loss from severe weather. These hazards can cause personal injury and loss of life, severe damage to and destruction of property and equipment, pollution or environmental damage and suspension of operations. The Company maintains insurance of various types to cover its operations, including maritime employer's liability and comprehensive general liability. Amounts in excess of base coverages are provided by primary and excess umbrella liability policies with ultimate limits of $50 million. In addition, the Company maintains up to $50 million in operator's extra expense coverage, which provides coverage for the care, custody and control of wells drilled and/or completed plus redrill and pollution coverage. The exact amount of coverage for each well is dependent upon its depth and location. The occurrence of a significant event not fully insured or indemnified against could materially and adversely affect the Company's financial condition and operations. Moreover, no assurance can be given that the Company will be able to maintain adequate insurance in the future at rates it considers reasonable. During late 1997, production commenced from the D platform at the Company's South Pelto Block 23 Field. Production from the D platform accounted for approximately 34% of the Company's total oil and gas production for the first two months of 1998. EMPLOYEES At March 11, 1998, the Company had 90 full time employees. The Company believes that its relationships with its employees are satisfactory. None of the Company's employees are covered by a collective bargaining agreement. From time to time the Company utilizes the services of independent contractors to perform various field and other services. FORWARD-LOOKING STATEMENTS Certain of the statements under this Item and elsewhere in this Form 10-K are "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than statements of historical facts included in this Form 10-K, including without limitation statements under "Item 1. Business", "Item 2. Properties" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding budgeted capital expenditures, increases in oil and gas production, the Company's financial position, oil and gas reserve estimates, business strategy and other plans and objectives for future operations, are forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. There are numerous uncertainties inherent in estimating quantities of proved oil and natural gas reserves and in projecting future rates of production and timing of development expenditures, including many factors beyond the control of the Company. Reserve engineering is a subjective process of estimating underground accumulations of oil and natural gas that cannot be measured in an exact way, and the accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. As a result, estimates made by different engineers often vary from one another. In addition, results of drilling, testing and production subsequent to the date of an estimate may justify revisions of such estimate and such revisions, if significant, would change the schedule of any further production and development drilling. Accordingly, reserve estimates are generally different from the quantities of oil and natural gas that are ultimately recovered. Additional important factors that could cause actual results to differ materially from the Company's expectations are disclosed under "Risk Factors" and elsewhere in this Form 10-K. Should one or more of these risks or uncertainties occur, or should underlying assumptions prove incorrect, the Company's actual results and plans for 1998 and beyond could differ materially from those 6 expressed in forward-looking statements. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by such factors. RISK FACTORS VOLATILITY OF OIL AND GAS PRICES; MARKETABILITY OF PRODUCTION. The Company's revenue, profitability and future rate of growth are substantially dependent upon the prevailing prices of, and demand for, oil and natural gas. Prices for oil and natural gas have been volatile and are likely to continue to be subject to wide fluctuation in response to relatively minor changes in the supply of and demand for oil and natural gas, market uncertainty and a variety of additional factors that are beyond the control of the Company. These factors include the level of consumer product demand, weather conditions, domestic and foreign governmental regulations, the price and availability of alternative fuels, political conditions in the Middle East, the foreign supply of oil and natural gas, the price of oil and gas imports and overall economic conditions. From time to time, oil and gas prices have been depressed by excess domestic and imported supplies. There can be no assurance that current price levels will be sustained. It is impossible to predict future oil and natural gas price movements with any certainty. However, since December 31, 1997, prices for oil have declined. Declines in oil and natural gas prices may adversely affect the Company's financial condition, liquidity and results of operations and may reduce the amount of the Company's oil and natural gas that can be produced economically. Additionally, substantially all the Company's sales of oil and natural gas are made in the spot market or pursuant to contracts based on spot market prices and not pursuant to long-term fixed price contracts. With the objective of reducing price risk, the Company may from time to time enter into hedging transactions with respect to a portion of its expected future production. See "-- Risks of Hedging Transactions." There can be no assurance that such hedging transactions will reduce risk or mitigate the effect of any substantial or extended decline in oil or natural gas prices. Any substantial or extended decline in the prices of oil or natural gas would have a material adverse effect on the Company's financial condition and results of operations. In addition, the marketability of the Company's production depends upon the availability and capacity of gas gathering systems, pipelines and processing facilities. The unavailability or lack of capacity thereof could result in the shut-in of producing wells or the delay or discontinuance of development plans for properties. Federal and state regulation of oil and gas production and transportation, general economic conditions and changes in supply and demand all could adversely affect the Company's ability to produce and market its oil and natural gas. If market factors were to change dramatically, the financial impact on the Company could be substantial. The availability of markets and the volatility of product prices are beyond the control of the Company and represent a significant risk. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." UNCERTAINTY OF ESTIMATES OF OIL AND GAS RESERVES. This Form 10-K contains estimates of the Company's proved oil and gas reserves and the estimated future net revenues therefrom based upon the Company's own estimates or on Reserve Reports that rely upon various assumptions, including assumptions required by the Commission as to oil and gas prices, drilling and operating expenses, capital expenditures, taxes and availability of funds. The process of estimating oil and gas reserves is complex, requiring significant decisions and assumptions in the evaluation of available geological, geophysical, engineering and economic data for each reservoir. As a result, such estimates are inherently imprecise. Actual future production, oil and gas prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable oil and gas reserves may vary substantially from those estimated by the Company or contained in the Reserve Reports. Any significant variance in these assumptions could materially affect the estimated quantity and value of reserves set forth in this Form 10-K. The Company's properties may also be susceptible to hydrocarbon drainage from production by other operators on adjacent properties. In addition, the Company's proved reserves may be subject to downward or upward revision based upon production history, results of future exploration and development, prevailing oil and gas prices, mechanical difficulties, government regulation and other factors, many of which are beyond the Company's control. Actual production, revenues, taxes, development expenditures and operating expenses with respect to the Company's reserves will likely vary from the estimates used, and such variances may be material. Approximately 23% of the Company's total proved reserves at December 31, 1997 were undeveloped, which are by their nature less certain. Recovery of such reserves will require significant capital expenditures and successful drilling operations. The Company's reserve data assume that substantial capital expenditures by the Company will be required 7 to develop such reserves. Although cost and reserve estimates attributable to the Company's oil and gas reserves have been prepared in accordance with industry standards, no assurance can be given that the estimated costs are accurate, that development will occur as scheduled or that the results will be as estimated. See "Item 2. Properties -- Oil and Gas Reserves." The present value of future net revenues referred to in this Form 10-K should not be construed as the current market value of the estimated oil and gas reserves attributable to the Company's properties. In accordance with applicable requirements of the Commission, the estimated discounted future net cash flows from proved reserves are generally based on prices and costs as of the date of the estimate, whereas actual future prices and costs may be materially higher or lower. Actual future net cash flows also will be affected by increases in consumption by gas and oil purchasers and changes in governmental regulations or taxation. The timing of actual future net cash flows from proved reserves, and thus their actual present value, will be affected by the timing of both the production and the incurrence of expenses in connection with development and production of oil and gas properties. In addition, the 10% discount factor, which is required by the Commission to be used in calculating discounted future net cash flows for reporting purposes, is not necessarily the most appropriate discount factor based on interest rates in effect from time to time and risks associated with the Company or the oil and gas industry in general. SUBSTANTIAL CAPITAL REQUIREMENTS. The Company makes, and will continue to make, substantial expenditures for the development, exploration, acquisition and production of oil and gas reserves. The Company made capital expenditures of $149 million in 1997, $79 million during 1996 and $46 million during 1995. The Company plans to make capital expenditures of $130.5 million in 1998 (which includes $12.5 million for acquisition costs already incurred in 1998). Management believes that the cash provided by operating activities and borrowings under the bank credit facility will be sufficient to fund planned capital expenditures in 1998. However, if revenues or cash flows from operations decrease as a result of lower oil and natural gas prices, operating difficulties or other factors, many of which are beyond the control of the Company, the Company may be limited in its ability to expend the capital necessary to undertake or complete its drilling program, or it may be forced to raise additional debt or equity proceeds to fund such expenditures. There can be no assurance that additional debt or equity financing or cash generated by operations will be available to meet these requirements. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." NEED FOR ACQUISITION AND DEVELOPMENT OF ADDITIONAL RESERVES. The Company's future success, as is generally the case in the industry, depends upon its ability to find, develop or acquire additional oil and gas reserves that are economically recoverable. Unless the Company acquires additional properties containing proved reserves or conducts successful development and exploitation activities on properties it currently owns, the Company's proved reserves will decline resulting in lower revenues and cash flow from operations. The successful acquisition of producing properties requires an assessment of recoverable reserves, future oil and gas prices and operating costs, potential environmental and other liabilities, title issues and other factors. Such assessments are necessarily inexact and their accuracy is inherently uncertain. In addition, any such assessment will not reveal all existing or potential problems, nor will it permit the Company to become sufficiently familiar with the properties to assess fully their deficiencies and capabilities. The inventory of oil and gas properties offered for sale has declined over the last several years. This reduced availability of properties, combined with the emergence during the same period of a number of well-capitalized independent oil and gas companies, has caused an increase in the prices paid for properties. See "-- Competition and Markets" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company's strategy includes increasing its production and reserves by the implementation of a carefully designed field-wide development plan that is formulated prior to acquisition of a property. There can be no assurance, however, that the Company's development projects will result in significant additional reserves or that the Company will have success drilling productive wells at economically viable costs. Furthermore, while the Company's revenues may increase if prevailing oil and gas prices increase, the Company's finding costs for additional reserves could also increase. The Company's strategy includes a significant increase in development activities and related capital expenditures due to, among other things, its significant acquisitions in 1996 and 1997. There can be no assurance that the Company can effectively manage this increased activity. 8 DRILLING RISKS; OPERATING DELAYS. Drilling involves numerous risks, including the risk that no commercially productive oil or gas reservoirs will be encountered. The cost of drilling and completing wells is often uncertain, and drilling operations may be curtailed, delayed or canceled as a result of a variety of factors, many of which are beyond the Company's control, including unexpected drilling conditions, pressure or irregularities in formations, equipment failures or accidents, weather conditions, and shortages or delays in the delivery of equipment. Demand for drilling rigs, production equipment and related services increased significantly during 1997, and the costs associated with these items are higher than in 1996. The Company has experienced delays in obtaining such equipment and services, and in some instances the costs incurred are higher than originally budgeted. There can be no assurance as to the success of the Company's future drilling activities. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." OPERATING HAZARDS. The oil and gas business involves a variety of operating risks, including the risk of fire, explosions, blowouts, pipe failure, abnormally pressured formations and environmental hazards such as oil spills, gas leaks, ruptures or discharges of toxic gases, the occurrence of any of which could result in substantial losses to the Company due to injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, clean-up responsibilities, regulatory investigation and penalties, and suspension of operations. In addition to the foregoing, the Company's offshore operations are subject to the additional hazards of marine operations, such as capsizing, collision and adverse weather and sea conditions. In accordance with customary industry practice, the Company maintains insurance against some, but not all, of the risks described above. There can be no assurance that any insurance obtained by the Company will be adequate to cover any losses or liabilities. The Company cannot predict the continued availability of insurance or the availability of insurance at premium levels that justify its purchase. COMPLIANCE WITH GOVERNMENTAL REGULATIONS. Oil and gas operations are subject to various federal, state and local governmental regulations which may be changed from time to time in response to economic or political conditions. Matters subject to regulation include discharge permits for drilling operations, drilling and abandonment bonds or other financial responsibility requirements, reports concerning operations, the spacing of wells, unitization and pooling of properties and taxation. From time to time, regulatory agencies have imposed price controls and limitations on production by restricting the rate of flow of oil and gas wells below actual production capacity in order to conserve supplies of oil and gas. The production, handling, storage, transportation and disposal of oil and gas, by-products thereof and other substances and materials produced or used in connection with oil and gas operations are subject to regulation under federal, state and local laws and regulations primarily relating to protection of human health and the environment. See "--Regulation" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- Regulatory and Litigation Issues." EFFECTS OF LEVERAGE. As of December 31, 1997, the Company's long-term debt totaled approximately $132 million and the Company had $18.5 million of additional available borrowing capacity under the Company's bank credit facility. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations --Liquidity and Capital Resources." The Company's level of indebtedness will have several important effects on its operations, including (i) a substantial portion of the Company's cash flow from operations will be dedicated to the payment of interest on its indebtedness and will not be available for other purposes, (ii) the covenants contained in its indenture and the bank credit facility limit its ability to borrow additional funds or to dispose of assets and may affect the Company's flexibility in planning for, and reacting to, changes in business conditions, (iii) the Company's ability to obtain additional financing in the future for working capital, capital expenditures (including acquisitions), general corporate purposes or other purposes may be impaired, (iv) the Company's leveraged financial position may make the Company more vulnerable to economic downturns and may limit its ability to withstand competitive pressures, (v) to the extent that the Company incurs any indebtedness under the bank credit facility, which indebtedness will be at variable rates, the Company may be vulnerable to increases in interest rates and (vi) the Company's flexibility in planning for or reacting to changes in market conditions may be limited. Moreover, future acquisition or development activities may require the Company to alter its capitalization significantly. These changes in capitalization may significantly increase the leverage of the Company. The Company's ability to meet its debt service obligations and to reduce its total indebtedness will be dependent upon 9 the Company's future performance, which will be subject to general economic conditions and to financial, business and other factors affecting the operations of the Company, many of which are beyond its control. If the Company is unable to generate sufficient cash flow from operations in the future to service its indebtedness and to meet its other commitments, the Company will be required to adopt one or more alternatives, such as refinancing or restructuring its indebtedness, selling material assets or operations or seeking to raise additional debt or equity capital. There can be no assurance that any of these actions could be effected on a timely basis or on satisfactory terms or that these actions would enable the Company to continue to satisfy its capital requirements. The terms of the Company's indebtedness, including the bank credit facility and the indenture, also may prohibit the Company from taking such actions. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." RELIANCE ON KEY PERSONNEL. The Company's operations are dependent upon a relatively small group of key management and technical personnel. There can be no assurance that such individuals will remain with the Company for the immediate or foreseeable future. The unexpected loss of the services of one or more of these individuals could have a detrimental effect on the Company. See "Item 4A. Executive Officers of the Registrant." RISKS OF HEDGING TRANSACTIONS. In order to manage its exposure to price risks in the marketing of its oil and gas, the Company has in the past and expects to continue to enter into oil and gas price hedging arrangements with respect to a portion of its expected production. The Company's hedging policy provides that, without the prior approval of the Board of Directors, generally not more than 50% of its production quantities can be hedged, and that any such hedges shall not be longer than one year in duration. These arrangements may include futures contracts on the New York Mercantile Exchange ("NYMEX"). While intended to reduce the effects of volatility of the price of oil and gas, such transactions may limit potential gains by the Company if oil and gas prices were to rise substantially over the price established by the hedge. In addition, such transactions may expose the Company to the risk of financial loss in certain circumstances, including instances in which (i) production is less than expected, (ii) there is a widening of price differentials between delivery points for the Company's production and the delivery point assumed in the hedge arrangement, (iii) the counterparties to the Company's future contracts fail to perform the contract or (iv) a sudden, unexpected event materially impacts oil or gas prices. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." CONFLICTS OF INTEREST. Certain employees of the Company, including James H. Stone, the Company's Chairman of the Board and Chief Executive Officer, own working interests in certain of the Company's oil and gas properties acquired prior to 1995 and will have the opportunity to participate as working interest owners in certain of the Company's future drilling activities on such properties. In addition, certain officers of the Company were granted net profits interests in certain of the oil and gas properties of the Company acquired prior to the Company's initial public offering in 1993. The recipients of the net profits interests are not required to pay capital costs incurred on the properties burdened by such interests. Therefore, a conflict of interest may exist between the Company and such employees and officers with respect to the drilling of additional wells or other development operations. The Company and James H. Stone also continue to manage programs formed prior to 1993, and James H. Stone continues to individually participate in various oil and gas operations and ventures. It is possible, as a result of these activities, that conflicts of interest could arise. CONTROL BY MANAGEMENT. Executive officers and directors of the Company beneficially own approximately 26.8% of the outstanding Common Stock of the Company (the "Common Stock"). This percentage ownership is based on the number of shares of Common Stock outstanding at March 11, 1998 and the beneficial ownership of such persons at such date. As a result, these persons may be in a position to control the Company through their ability to determine the outcome of elections of the Company's directors and certain other matters requiring the vote or consent of the Company's stockholders. COMPETITION. The Company operates in a highly competitive environment. The Company competes with major and independent oil and gas companies for the acquisition of desirable oil and gas properties, as well as for the equipment and labor required to develop and operate such properties. Many of these competitors have financial, technical and other resources substantially greater than those of the Company. See "Competition and Markets." 10 ITEM 2. PROPERTIES The Company has grown principally through the acquisition and subsequent development and exploitation of properties purchased from major oil companies. The Company's proved oil and gas reserves at December 31, 1997 were attributable to 14 properties, eight of which are in the Gulf of Mexico offshore Louisiana, and six of which are onshore Louisiana. The Company currently manages four partnerships formed prior to its Initial Public Offering, and less than 5% of the Company's assets are owned through these entities. OIL AND GAS RESERVES The following table sets forth estimated net proved oil and gas reserves of the Company and the present value of estimated future pre-tax net cash flows related to such reserves as of December 31, 1997. All information in this Form 10-K relating to estimated oil and gas reserves and the estimated future net cash flows attributable thereto is based upon the reserve reports (the "Reserve Reports") prepared by Atwater Consultants, Ltd. and Cawley, Gillespie & Associates, Inc., both independent petroleum engineers, as of December 31, 1997. Using the information contained in the Reserve Reports, the average product prices for all of the Company's properties were $17.00 per Bbl of oil and $2.64 per Mcf of gas. All product pricing and cost estimates used in the Reserve Reports are in accordance with the rules and regulations of the Securities and Exchange Commission, and, except as otherwise indicated, the reported amounts give no effect to federal or state income taxes otherwise attributable to estimated future cash flows from the sale of oil and gas. The present value of estimated future net cash flows has been calculated using a discount factor of 10%.
Proved Proved Total Developed Undeveloped Proved --------------- ---------------- --------------- (Dollars in thousands) Oil (MBbls).......................................... 14,485 3,278 17,763 Gas (MMcf)........................................... 141,424 47,815 189,239 Total oil and gas (MBOE)............................. 38,056 11,247 49,303 Estimated future net revenues before income taxes..................................... $619,514 $181,103 $800,617 Present value of estimated future pre-tax net cash flows........................... $326,654 $41,262 $367,916
There are numerous uncertainties inherent in estimating quantities of proved reserves and in projecting future rates of production and the timing of development expenditures, including many factors beyond the control of the producer. The reserve data set forth herein represent only estimates. Reserve engineering is a subjective process of estimating underground accumulations of oil and gas that cannot be measured in an exact way, and the accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment and the existence of development plans. As a result, estimates of reserves made by different engineers for the same property will often vary. Results of drilling, testing and production subsequent to the date of an estimate may justify a revision of such estimates. Accordingly, reserve estimates are generally different from the quantities of oil and gas that are ultimately produced. Further, the estimated future net revenues from proved reserves and the present value thereof are based upon certain assumptions, including geological success, prices, future production levels and costs that may not prove to be correct. Predictions about prices and future production levels are subject to great uncertainty, and the meaningfulness of such estimates depends on the accuracy of the assumptions upon which they are based. As an operator of domestic oil and gas properties, the Company has filed Department of Energy Form EIA-23, "Annual Survey of Oil and Gas Reserves," as required by Public Law 93-275. There are differences between the reserves as reported on Form EIA-23 and as reported herein. The differences are attributable to the fact that Form EIA-23 requires that an operator report on the total reserves attributable to wells which are operated by it, without regard to ownership (i.e., reserves are reported on a gross operated basis, rather than on a net interest basis). 11 ACQUISITION, PRODUCTION AND DRILLING ACTIVITY ACQUISITION AND DEVELOPMENT COSTS. The following table sets forth certain information regarding the costs incurred by the Company in its development and acquisition activities during the periods indicated.
Year Ended December 31, ------------------------------------------------------ 1997 1996 1995 ------------- ------------- ------------- (In thousands) Acquisition costs.................................... $43,791 $26,650 $ 8,074 Development costs.................................... 43,762 24,090 27,383 Exploratory costs.................................... 57,770 26,339 8,261 ------------- ------------- ------------- Subtotal........................................... 145,323 77,079 43,718 Capitalized general and administrative costs and interest, net of fees and reimbursements........... 3,457 2,325 1,790 ------------- ------------- ------------- Total costs incurred................................. $148,780 $79,404 $45,508 ============= ============= =============
PRODUCTIVE WELL AND ACREAGE DATA. The following table sets forth certain statistics for the Company regarding the number of productive wells and developed and undeveloped acreage as of December 31, 1997. Gross Net ------------- -------------- Productive Wells: Oil (1).......................... 47.00 36.61 Gas (2)........................... 47.00 33.45 ------------- -------------- Total......................... 94.00 70.06 ============= ============== Developed Acres: Onshore Louisiana................. 2,093.41 1,668.67 Offshore Louisiana................ 13,018.12 9,394.52 ------------- -------------- Total......................... 15,111.53 11,063.19 ============= ============== Undeveloped Acres (3): Onshore Louisiana................. 16,556.13 14,311.89 Offshore Louisiana................ 43,016.39 30,315.64 ------------- -------------- Total......................... 59,572.52 44,627.53 ============= ============== (1) 4 gross wells each have dual completions. (2) 8 gross wells each have dual completions. (3) Leases covering approximately 1.24% of the Company's undeveloped acreage will expire in 1998, 0.12% in 1999, 7.39% in 2000, 4.00% in 2001 and 0.44% in 2002. Leases covering the remainder of the Company's undeveloped gross acreage (86.81%) are held by production. 12 DRILLING ACTIVITY. The following table sets forth the Company's drilling activity for the periods indicated. Gross Net ------------ ------------- Wells drilled during the years ended December 31: 1997: Exploratory........................ 10.00 8.70 Development........................ 2.00 1.26 1996: Exploratory........................ 4.00 3.73 Development........................ 5.00 4.50 1995: Exploratory........................ 3.00 2.94 Development........................ 6.00 4.40 All wells drilled were productive except for three gross exploratory wells (2.75 net) and one gross development well (0.76 net) drilled in 1996 and two gross exploratory wells (1.94 net) and one gross development well (0.38 net) drilled in 1995. TITLE TO PROPERTIES The Company believes it has satisfactory title on substantially all of its producing properties in accordance with standards generally accepted in the oil and gas industry. The Company's properties are subject to customary royalty interests, liens for current taxes and other burdens which the Company believes do not materially interfere with the use of or affect the value of such properties. The title investigation performed by the Company prior to acquiring undeveloped properties is thorough but less vigorous than that conducted prior to drilling, consistent with standard practice in the oil and gas industry. Prior to the commencement of drilling operations, a thorough title examination is conducted and curative work is performed with respect to significant defects before proceeding with operations. A thorough title examination has been performed with respect to substantially all producing properties owned by the Company. ITEM 3. LEGAL PROCEEDINGS ENVIRONMENTAL In August 1989, the Company was advised by the EPA that it believed the Company to be a potentially responsible party (a "PRP") for the cleanup of an oil field waste disposal facility located near Abbeville, Louisiana, which was included on CERCLA's National Priority List (the "Superfund List") by the EPA in March 1989. In addition to the Company, approximately 370 other companies have been named as being potentially responsible for the cleanup of the site. While the Company's records do not indicate that any drilling wastes generated by the Company were disposed of at this site, it is possible that one or more waste haulers contracted by the Company may have disposed of wastes at this site. Given the extremely large number of PRPs at this site, management does not believe that any liability for this site would materially adversely affect the financial condition of the Company. 13 OTHER PROCEEDINGS In December 1995, Goodrich Leasehold L.L.C. and Goodrich Drillers L.L.C. filed a civil action (No. 95-61313) in the 333rd Judicial District Court, Harris County, Texas, against the Company in an attempt to set aside a farmout agreement affecting portions of the West Flank of the Weeks Island Field in Iberia Parish, Louisiana. This case was tried in Harris County, Texas, and on March 12, 1998, the jury found in favor of the Company. The Company does not anticipate an appeal by either party. The Company is also named as a defendant in certain lawsuits and is a party to certain regulatory proceedings arising in the ordinary course of business. Management does not expect these matters, individually or in the aggregate, to have a material adverse effect on the financial condition of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth information regarding the names and ages of (as of March 11, 1998) and positions held by each of the Company's executive officers. The Company's executive officers serve at the discretion of the Board of Directors.
Name Age Position ------ --- -------- James H. Stone.................................. 72 Chairman of the Board and Chief Executive Officer Joe R. Klutts................................... 63 Vice Chairman of the Board D. Peter Canty.................................. 51 President, Chief Operating Officer and Director Michael L. Finch................................ 42 Executive Vice President, Chief Financial Officer and Director Phillip T. Lalande.............................. 48 Vice President - Engineering James H. Prince................................. 55 Vice President, Chief Accounting Officer and Controller Andrew L. Gates, III............................ 50 Vice President - Legal, Secretary and General Counsel E. J. Louviere.................................. 49 Vice President - Land Craig L. Glassinger............................. 50 Vice President - Acquisitions
The following biographies describe the business experience of the executive officers of the Company for at least the past five years. The Company was formed in March 1993 to become a holding company for The Stone Petroleum Corporation ("TSPC") and its subsidiaries. James H. Stone has served as Chairman of the Board and Chief Executive Officer of the Company since March 1993, and as Chairman of the Board of TSPC since 1981 and served as President of TSPC from September 1992 to July 1993. Mr. Stone is currently a director of Hibernia Corporation and Newpark Resources, Inc., and is a member of the Advisory Committee of the St. Louis Rams Football Company. Joe R. Klutts has served as Vice Chairman of the Board since March 1994 and as a Director since March 1993. He has also served as a Director of TSPC since 1981. He served as President of the Company from March 1993 to February 1994, and as Executive Vice President - Exploration and President of TSPC from 1981 to 1993 and from July 1993 to May 1994, respectively. 14 D. Peter Canty served as an Executive Vice President of the Company from March 1993 to March 1994, when he was named President of the Company. He has also served as Chief Operating Officer and as a Director of the Company since March 1993. Mr. Canty was a Vice President and the Chief Geologist of TSPC from 1987 to May 1994, when he was named President of TSPC. Michael L. Finch has served as Executive Vice President, Chief Financial Officer and Director since March 1993. From 1988 through July 1993, he was a partner in the firm of Finch & Pierret, CPAs, which performed a substantial amount of financial reporting, tax compliance and financial advisory services for TSPC and its affiliates. Phillip T. Lalande has served as Vice President - Engineering of the Company since March 1995. He served as the Company's Operations Manager from July 1993 to March 1995, and as a consulting engineer to TSPC from 1988 to July 1993. James H. Prince has served as Vice President, Chief Accounting Officer and Controller of the Company since March 1993 and as Vice President and Controller of TSPC since 1981, as Treasurer since 1989, as Secretary from 1989 to 1991 and as Assistant Secretary since 1992. Andrew L. Gates, III has served as Vice President - Legal, Secretary and General Counsel of the Company since August 1995. Prior to joining Stone Energy in 1995, he was a partner in the law firm of Ottinger, Gates, Hebert & Sikes from 1987 to August 1995. E. J. Louviere has served as Vice President - Land since June 1995. He served as the Land Manager of TSPC and the Company from July 1981 to June 1995. Craig L. Glassinger has served as Vice President - Acquisitions of the Company since December 1995. He served TSPC and Stone Energy from October 1992 to December 1995 as Acquisitions Manager. Prior to joining TSPC, he was a division geologist for Forest Oil Corporation for approximately ten years. 15 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Since July 9, 1993, the Common Stock has been listed on the New York Stock Exchange under the symbol "SGY." The following table sets forth, for the periods indicated, the high and low closing prices per share for the Common Stock. High Low ------------- ------------- 1996 First Quarter..................... $17 1/4 $13 1/4 Second Quarter.................... 20 1/8 15 5/8 Third Quarter..................... 23 1/2 17 3/4 Fourth Quarter.................... 30 18 1/8 1997 First Quarter..................... $29 1/4 $22 Second Quarter.................... 29 3/8 22 3/4 Third Quarter..................... 34 1/2 25 1/16 Fourth Quarter.................... 37 28 9/16 1998 First Quarter (through March 11, 1998)....$37 $28 9/16 On March 11, 1998, the last reported sales price on the New York Stock Exchange Composite Tape was $36.50 per share. As of that date there were approximately 159 holders of record of the Common Stock. The Company has not in the past, and does not intend to pay cash dividends on its Common Stock in the foreseeable future. The Company currently intends to retain earnings, if any, for the future operation and development of its business. The Company has entered into a credit facility that contains provisions that may have the effect of limiting or prohibiting the payment of dividends. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." 16 ITEM 6. SELECTED FINANCIAL AND OPERATING DATA SELECTED HISTORICAL FINANCIAL INFORMATION (In thousands, except per share amounts) The following table sets forth a summary of selected historical financial information for the five years ended December 31, 1997 for the Company. This information is derived from the consolidated financial statements of the Company and the notes thereto. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Item 8. Financial Statements and Supplementary Data."
Year Ended December 31, ----------------------------------------------------- 1997 1996 1995 1994 1993 ------ ------ ------ ------ ------ Statement of Operations Data: Operating revenue: Oil production revenue................................... $31,082 $27,788 $24,775 $18,482 $17,752 Gas production revenue................................... 37,997 28,051 13,918 12,697 10,718 Other revenue............................................ 1,908 2,126 1,858 1,708 1,252 ------ ------ ------ ------ ------ Total revenue.......................................... 70,987 57,965 40,551 32,887 29,722 ------ ------ ------ ------ ------ Expenses: Normal lease operating expenses.......................... 10,123 8,625 6,294 5,312 4,326 Major maintenance expenses............................... 1,844 427 446 1,834 822 Production taxes......................................... 2,215 3,399 3,057 2,303 2,000 Depreciation, depletion and amortization................. 28,739 19,564 15,719 11,569 8,028 Interest expense......................................... 4,916 3,574 2,191 982 1,499 Other expense ........................................... - - - - 245 General and administrative costs......................... 3,903 3,509 3,298 3,099 2,248 Incentive compensation plan.............................. 833 928 85 1,358 - Exchange offer expenses.................................. - - - - 780 ------ ------- ------ ------ ------ Total expenses......................................... 52,573 40,026 31,090 26,457 19,948 ------ ------- ------ ------ ------ Net income before income taxes............................ 18,414 17,939 9,461 6,430 9,774 ------ ------- ------ ------ ------ Provision for income taxes: Current.................................................. - 208 131 - - Deferred................................................. 6,495 6,698 3,514 2,410 943 ------ ------- ------ ------ ------ Total income taxes..................................... 6,495 6,906 3,645 2,410 943 ------ ------- ------ ------ ------ Net income................................................. $11,919 $11,033 $5,816 $4,020 $8,831 ======= ======= ====== ====== ====== Earnings and dividends per common share: Basic net income per common share (2).................... $0.79 $0.90 $0.49 $0.34 $0.88 ===== ===== ===== ===== ===== Diluted net income per common share (2).................. $0.78 $0.90 $0.49 $0.34 $0.88 ===== ===== ===== ===== ===== Cash dividends declared.................................. - - - - - Cash Flow Data: Net cash provided by operating activities (before working capital changes).............. $47,153 $37,295 $25,049 $17,911 $17,852 Net cash provided by operating activities............................................... 32,679 32,751 27,650 9,609 13,857 Balance Sheet Data (at end of period): Working capital ........................................... $8,328 $6,683 $5,379 $4,437 $18,421 Oil and gas properties, net................................ 291,420 171,396 111,248 81,291 60,097 Total assets (1)........................................... 354,144 209,406 139,460 109,956 98,770 Long-term debt, less current portion....................... 132,024 26,172 47,754 22,725 21,620 Stockholders' equity (1)................................... 156,637 144,441 66,927 61,045 56,997
(1) Total assets and stockholders' equity at December 31, 1993 have been restated for an adjustment of the cumulative effect of the adoption in 1992 of SFAS No. 109. (2) Earnings per share for the years ended December 31, 1997, 1996 and 1995 have been restated to reflect the adoption of SFAS No. 128. 17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion is intended to assist in an understanding of the Company's financial position and results of operations for each year of the three-year period ended December 31, 1997. The Company's financial statements and the notes thereto contain detailed information that should be referred to in conjunction with the following discussion. See "Item 8. Financial Statements and Supplementary Data." FORMATION OF STONE ENERGY The Company was formed in March 1993 to become a holding company for TSPC, its subsidiaries and certain partnership interests, and approximately 8.1 million shares of Common Stock were issued to holders of interests in those entities. In July 1993, the Company also sold approximately 3.7 million shares of newly issued Common Stock in the Initial Public Offering. In November 1996, the Company completed a secondary offering of an additional 3.2 million shares of Common Stock. OPERATING ENVIRONMENT During late 1997, the oil and gas industry began to experience declines in natural gas and crude oil prices. The decline in natural gas prices have been attributable to a milder-than-normal 1997-98 winter, while oil prices, which are more subject to global economic forces, have declined because of higher world supplies coupled with an anticipated decrease in future demand. Even though the near-term outlook for oil and gas prices remains below 1997 and 1996 levels, the Company's growth plans and budgets for 1998 have not been materially impacted because of the Company's relatively high operating margin. At present, the Company does not expect that changes in the rates of overall economic growth or inflation will significantly impact product prices in the short-term. Furthermore, because all of the factors that affect the prices that the Company receives for its production are beyond its control, the Company's marketing efforts are devoted to achieving the best price available in each geographic location and entering into a limited amount of fixed price sales and hedging transactions to take advantage of short-term prices it believes to be attractive. Demand for drilling rigs and related products and services continued to increase during 1997, and the costs associated with these items are higher than one year ago. The Company has experienced delays in obtaining drilling rigs and certain other services, and in some instances the costs incurred are higher than originally budgeted. Despite these changes in the market for drilling supplies and services, the Company does not expect these current conditions to have a material impact on the timing or long-term profitability of its planned activities. The inventory of oil and gas properties offered for sale has declined over the last several years. This reduced availability of properties, combined with the emergence during the same period of a number of well-capitalized independent oil and gas companies, has caused an increase in the prices paid for properties. 18 RESULTS OF OPERATIONS The following table sets forth certain operating information with respect to the oil and gas operations of the Company and summary information with respect to the Company's estimated proved oil and gas reserves. See "Item 2. Properties-Oil and Gas Reserves."
Year Ended December 31, ----------------------------------------------------- 1997 1996 1995 -------------- ------------- ------------- Production: Oil (MBbls)................................................... 1,585 1,356 1,400 Gas (MMcf).................................................... 14,183 11,331 8,399 Oil and gas (MBOE)............................................ 3,949 3,245 2,800 Sales data (in thousands): Total oil sales............................................... $31,082 $27,788 $24,775 Total gas sales............................................... 37,997 28,051 13,918 Average sales prices: Oil (per Bbl)................................................. $19.61 $20.49 $17.70 Gas (per Mcf)................................................. 2.68 2.48 1.66 Per BOE....................................................... 17.49 17.21 13.82 Average costs (per BOE): Normal operating costs........................................ $2.56 $2.66 $2.25 General and administrative.................................... 0.99 1.08 1.18 Depreciation, depletion and amortization...................... 7.12 5.93 5.57 Reserves at December 31: Oil (MBbls)................................................... 17,763 12,772 7,985 Gas (MMcf).................................................... 189,239 144,316 81,179 Oil and gas (MBOE)............................................ 49,303 36,825 21,515 Present value of estimated pre-tax future net cash flows (in thousands)............................... $367,916 $448,895 $179,725
1997 COMPARED TO 1996. Net income for the year ended December 31, 1997 totaled $11.9 million, an increase of 8.0% from 1996 net income of $11.0 million. However, because of the secondary public offering of the Company's common stock in late-1996 which issued approximately 3.2 million shares, the Company's earnings per share during 1997 declined to $0.79 per share, compared to $0.90 per share during 1996. During 1997, the Company implemented a significantly expanded capital expenditures program. As a result of the success of this program, the Company experienced a 22% increase in production volumes, on a MBOE basis, over 1996 production levels. Production volumes of both oil and gas during 1997, compared to 1996, rose 17% and 25%, respectively, totaling 1.6 MMBbls of oil and 14.2 Bcf of gas. This growth in production volumes resulted in 1997 oil and gas revenues rising to $69.1 million, a 24% increase from 1996 oil and gas revenues of $55.8 million. The average prices received for oil and gas during 1997 were $19.61 per barrel and $2.68 per Mcf as compared to $20.49 per barrel and $2.48 per Mcf during 1996. Normal operating costs increased during 1997 to $10.1 million compared to $8.6 million in 1996. The increase was attributable to property acquisitions, higher production rates, as well as generally higher costs of services during 1997. However, on a unit basis, these costs declined during 1997 to $2.56 per BOE from $2.66 per BOE in 1996. Major maintenance expenses during 1997 totaled $1.8 million compared to $0.4 million during 1996. The increase was due to one major, non-recurring workover project during 1997 which cost $1.2 million. 19 Total depreciation, depletion and amortization ("DD&A") expense attributable to oil and gas properties increased during 1997 because of higher production rates and increased investment in the properties. DD&A increased to $28.1 million or $7.12 per BOE in 1997 from $19.3 million or $5.93 per BOE in 1996. During 1997, the Company borrowed funds pursuant to its bank credit facility and completed a $100 million public offering of its 8-3/4% Senior Subordinated Notes to finance a portion of its 1997 capital expenditures program. As a result, interest expense increased to $4.9 million during 1997 compared to $3.6 million in 1996. Because of the overall increase in the Company's operations during 1997, general and administrative costs increased in total to $3.9 million. However, on a unit basis, general and administrative costs declined to $0.99 per BOE, compared with $1.08 per BOE, in 1996. In addition to increasing production volumes, the 1997 capital expenditures program also increased the Company's year-end 1997 reserve levels. At December 31, 1997, the Company's reserves totaled 49.3 MMBOE, a 34% increase from December 31, 1996 reserves of 36.8 MMBOE. Oil reserves increased to 17.8 MMBbls at the end of 1997 from 12.8 MMBbls at the beginning of the year, and gas reserves grew to 189.2 Bcf at December 31, 1997 compared to 144.3 Bcf at year-end 1996. Pre-tax income increased to $18.4 million in 1997 from $17.9 million in 1996. The 1997 tax provision, however, decreased to $6.5 million from $6.9 million in 1996 because of an adjustment to the Company's annual tax rate during 1997. 1996 COMPARED TO 1995. Net income for the year ended December 31, 1996 was $11.0 million, an increase of 90% from 1995 earnings of $5.8 million. Earnings per share rose to $0.89 in 1996, as compared to $0.49 per share in 1995. Net income for the three months ended December 31, 1996, was $2.9 million or $0.21 per share, an increase from the $1.8 million and $0.15 per share reported for the fourth quarter of 1995. For 1996, oil and gas revenues were $55.8 million as compared to $38.7 million in 1995, a 44% increase. Proceeds from sales of production in 1996 were 50% oil and 50% gas, as compared to 64% and 36%, respectively, for 1995. Production volumes for 1996 were 1.4 MMBbls of oil and 11.3 Bcf of gas. Oil production for 1996 was essentially the same as 1995, and gas deliveries increased 35% from the 1995 amount of 8.4 Bcf of gas. The increase in 1996's oil and gas revenues resulted from overall production growth of 16% for the year and a 25% increase in the average price received per BOE. The average gas price per Mcf increased 49% to $2.48 in 1996 from the 1995 amount of $1.66, and the average oil price per barrel climbed 16%, from $17.70 in 1995 to $20.49 in 1996. For the fourth quarter of 1996, oil and gas revenues were 37% higher than for the comparable 1995 period due to overall increases, stated in equivalent barrels, in production of 8% and prices of 27%. Normal operating costs for 1996 increased in total to $8.6 million from $6.3 million in 1995 due to an increased number of properties and higher production rates. The primary reason for the increase in such costs on a unit of production basis ($2.66 per BOE in 1996 versus $2.25 per BOE in 1995) was certain nonrecurring repairs and generally higher costs of services, although the 1996 unit amount was within the Company's budgeted range for these costs. DD&A expense attributable to oil and gas properties increased because of higher production rates and investments in the properties. This non-cash expense increased to $19.3 million or $5.93 per BOE in 1996 from $15.6 million or $5.57 per BOE in 1995. During 1996, the Company borrowed funds pursuant to its bank credit facility to finance a portion of its capital expenditures budget, and as a result interest expense increased to $3.6 million in 1996 from $2.2 million in 1995. General and administrative costs also increased in total to $3.5 million in 1996 from $3.3 million in 1995, but on a unit basis declined 9% to $1.08 per BOE in 1996 from $1.18 per BOE in 1995. Due to higher bonus awards during the year, the Company's incentive compensation program expenses increased to $0.9 million in 1996 from $0.1 million in 1995. Pre-tax income increased to $17.9 million in 1996 from $9.5 million in 1995, and therefore the tax provision increased to $6.9 million in 1996 from $3.6 million in 1995. Except for an estimated minimum tax liability of $0.2 million, the remainder of the tax provision is deferred and does not require current funding. 20 The Company's reserves at December 31, 1996 were 36.8 MMBOE and represented an increase of 71% from the comparable 1995 amount of 21.5 MMBOE. Oil reserves increased to 12.8 MMBbls at the end of 1996 from 8.0 MMBbls at the beginning of the year, and gas reserves rose to 144.3 Bcf at December 31, 1996 from 81.2 Bcf at December 31, 1995. LIQUIDITY AND CAPITAL RESOURCES In September 1997, the Company completed an offering of $100 million principal amount of its 8-3/4% Senior Subordinated Notes. The net proceeds from the offering were used to retire the Term Loan and for other general corporate purposes. See "Liquidity and Capital Resources - Historical Financing Sources." The Company believes that its existing working capital, combined with expected cash flow from operations and borrowings under its bank credit facility, will be sufficient to fund its operations and development activities through the end of 1998. WORKING CAPITAL AND CASH FLOW. Working capital at December 31, 1997 was $8.3 million. Net cash flow from operations before working capital changes for 1997 was $47.2 million, which represents a 26% increase from the 1996 amount of $37.3 million. On a per share basis, net cash flow from operations before working capital changes was $3.14 per share in 1997 as compared to $3.05 per share in 1996. During 1997, the Company invested $148.8 million in its oil and gas properties, which included $3.5 million of net capitalized general and administrative and interest costs. These investments were financed from cash flow from operations, proceeds from the Company's Notes offering and borrowings under the Company's bank credit facility. As a result of these investments, the Company's average net daily production rate for the first two months of 1998 increased to 21.3 MMBOE, as compared to the 1997 average net daily rate of 10.8 MMBOE. The Company's production is sold on month-to-month contracts at prevailing prices. From time to time, however, the Company has entered into hedging transactions or fixed price sales contracts for its oil and gas production. The purpose of these transactions is to reduce the Company's exposure to future oil and gas price declines. This hedging policy provides that, unless prices change by more than 25%, not more than one-half of the Company's production quantities can be hedged without the consent of the Company's Board of Directors. Such swap agreements typically provide for monthly payments by (if prices rise) or to (if prices decline) the Company based on the difference between the strike price and the average closing price of the near month NYMEX futures contract for each month of the agreement. Because its properties are located in the Gulf Coast Basin, the Company believes that fluctuations in the NYMEX futures prices will closely match changes in the market prices for its production. The Company's net loss from hedging transactions for 1997 was $0.6 million. Swap contracts totaled 237.7 MBbls of oil and 4,395 BBtus of gas, which represented approximately 15% and 33%, respectively, of the Company's oil and gas production for the year. As of March 11, 1998, the Company had hedged oil and gas prices for certain periods in 1998, and the applicable periods, quantities and average prices are as follows:
Oil Gas ----------------------------------- ------------------------------------ Volumes Price Volumes Price Period (MBbls) ($/Bbl) (BBtus) ($/MMBtu) ---------------- ------------- --------------- --------------- First quarter 1998..................... 108 $21.58 1,800 $2.940 Second quarter 1998.................... 36 21.15 300 2.427
The Company's net loss from hedging transactions for 1996 was $3.8 million. Swap contracts totaled 493.9 MBbls of oil and 4,880 BBtus of gas, which represented 36% and 43%, respectively, of the Company's oil and gas production for the year. HISTORICAL FINANCING SOURCES. Since the Company's Initial Public Offering in July 1993, the Company has financed its activities with both debt and equity offering proceeds, cash flow from operations, borrowings under its bank credit facility and investments by two partnerships formed before the Initial Public Offering which had uncommitted funds. 21 These partnerships were provided the option of participating for a combined interest of 25%, subject to the amount of available funds, in all new properties acquired by the Company that met their investment criteria. As of December 1994, all funds of these partnerships were committed and the Company is not required to offer participation in subsequently acquired properties to these entities, unless such acquisitions represent additional interests in properties already owned by the partnerships. On September 16, 1997, the Company completed an offering of $100 million principal amount of its 8-3/4% Senior Subordinated Notes (the "Notes") due September 15, 2007 with interest payable semiannually commencing March 15, 1998. The Notes were sold at a discount for an aggregate price of $99.3 million and the net proceeds from the offering were used to repay amounts outstanding under the Company's bank credit facility and for other general corporate purposes. There are no sinking fund requirements on the Notes and they are redeemable at the option of the Company, in whole or in part, at 104.375% of their principal amount beginning September 15, 2002, and thereafter at prices declining annually to 100% on and after 2005. Provisions of the Notes include, without limitation, restrictions on liens, indebtedness, asset sales and other restricted payments. On July 30, 1997, the Company executed its Third Amended and Restated Credit Agreement with NationsBank of Texas, N.A., as agent for a group of banks. The agreement provided for a total facility of $150 million and was comprised of a three-year revolving credit facility (the "Revolver") and a one-year term loan (the "Term Loan"). The Term Loan of $50 million, which was established to finance the closing of the largest acquisition in the Company's history, the Vermilion Block 255 Field, and certain development costs, was retired in September 1997 with proceeds generated from the Company's notes offering. Additionally, the borrowing base of its $100 million revolving credit facility was reduced to $55 million subsequent to the offering of the Notes. The Company anticipates that the borrowing base will be increased on or before March 31, 1998. At December 31, 1997, the Revolver had an outstanding principal balance of $29.0 million with a weighted average interest rate of 6.9% per annum, and letters of credit totaling $7.5 million had been issued pursuant to the facility. The principal balance of the Revolver is due on July 30, 2000. The credit agreement provides for certain covenants, including restrictions or requirements with respect to working capital, net worth, disposition of properties, incurrence of additional debt, change of ownership and reporting responsibilities. Such covenants may result in the limitation or prohibition of the payment of cash dividends by the Company. A facility fee of $150,000 was paid by the Company on July 30, 1997, and a portion of the fee was expensed in the third quarter of 1997 upon the retirement of the Term Loan. On November 30, 1995, the Company executed a term loan agreement with FNBC in the original principal amount of $3.3 million for the purchase of the RiverStone office building, a portion of which is used by the Company for its Lafayette office. The loan has a five year term bearing interest at a rate of 7.45% over the entire term of the loan. Principal and interest are payable monthly and are based upon a 20 year amortization period. The indebtedness under the agreement is collateralized by the building. This loan agreement contains covenants and restrictions that are similar to the NationsBank credit facility. LONG-TERM FINANCING. The Company's 1998 capital expenditures budget totals $130.5 million and includes development expenditures of $118.0 million and $12.5 million for the acquisition of the East Cameron Block 64 Field which occurred in January 1998. Initially, the development budget has been allocated to the Company's property base and would be funded by a combination of cash flow from operations and borrowings available under its bank credit facility. A number of proposals for property acquisitions are currently outstanding, and evaluations of a number of other properties for potential purchase or joint venture are continuing, although no offers have been accepted and no future acquisitions can be assured. The Company may seek additional capital to finance future acquisitions or development activities beyond its current plans. In addition to the public markets, the Company would also consider new private financing sources and joint venture or partnership structures to fund such additional investments. REGULATORY AND LITIGATION ISSUES. In December 1995, Goodrich Leasehold L.L.C. and Goodrich Drillers L.L.C. filed a civil action against the Company in an attempt to set aside a Farmout Agreement affecting portions of the West Flank of the Weeks Island Field in Iberia Parish, Louisiana. This case was tried in Harris County, Texas, and on March 12, 1998, the jury found in favor of the Company. The Company does not anticipate an appeal by either party. 22 The Company is also named as a defendant in certain lawsuits and is a party to certain regulatory proceedings arising in the ordinary course of business. The regulatory proceedings include one instance in which the EPA has indicated that it believes that the Company is a PRP for the cleanup of oil field waste facilities. Management does not expect these matters, individually or in the aggregate, to have a material adverse effect on the financial condition of the Company. Since November 26, 1993, new levels of lease and area wide bonds have been required of lessees taking certain actions with regard to OCS leases. Operators in the OCS waters of the Gulf of Mexico, including the Company, have been or may be required to increase their area wide bonds and individual lease bonds to $3 million and $1 million, respectively, unless exemptions or reduced amounts are allowed by the MMS. The Company currently has an area wide pipeline bond of $0.3 million and area wide lease bonds totaling $3.0 million issued in favor of the MMS for its existing offshore properties. The MMS also has discretionary authority to require supplemental bonding in addition to the foregoing required bonding amounts but this authority is only exercised on a case-by-case basis at the time of filing an assignment of record title interest for MMS approval. Based upon certain financial parameters, the Company has been granted exempt status by the MMS, which exempts the Company from the supplemental bonding requirements. Under certain circumstances, the MMS may require any Company operations on federal leases to be suspended or terminated. Any such suspension or termination could materially and adversely affect the Company's financial condition and operations. As amended by the Coast Guard Authorization Act of 1996, OPA requires responsible parties for offshore facilities to provide financial assurance in the amount of $35 million to cover potential OPA liabilities. This amount can be increased up to $150 million if a formal risk assessment indicates that an amount higher than $35 million should be required. The Company does not anticipate that it will experience any difficulty in satisfying the MMS's requirements for demonstrating financial responsibility under OPA. In 1996, the American Institute of Certified Public Accountants issued its Statement of Position 96-1 ("SOP 96-1"), which provides guidance on accounting for environmental remediation liabilities. SOP 96-1 interprets existing Financial Accounting Standards Board standards applicable to public companies. The Company adopted SOP 96-1 effective January 1, 1997, with no material effect. The Company operates under numerous state and federal laws enacted for the protection of the environment. In the ordinary course of business, the Company conducts an ongoing review of the effects of these various environmental laws on its business and operations. The estimated cost of continued compliance with current environmental laws, based upon the information currently available, is not material to the Company's results of operations or financial position. It is impossible to determine whether and to what extent the Company's future performance may be affected by environmental laws; however, management believes that such laws will not have a material adverse effect on the Company's results of operations or financial position. The Company is currently in the process of evaluating its information technology for Year 2000 compliance. The Company's primary information systems are currently scheduled for replacement or modification to fully-compliant new systems. These modifications and replacements are expected to be completed by the first quarter of 1999. The Company does not expect that the cost to modify and replace its information technology to be Year 2000 compliant will be material to its financial condition or results of operations. The Company has not incurred significant costs related to Year 2000 compliance prior to December 31, 1997 other than internal costs to evaluate the extent of compliance. The costs of these projects and the date on which the Company plans to complete modifications and replacements are based on managements' best estimates, which were derived utilizing assumptions of future events including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those plans. The Company does not anticipate any material disruption in its operations as a result of any failure by the Company to be in compliance. 23 The Company does not currently have any information concerning the Year 2000 compliance of its suppliers and customers. In the event that any of the Company's significant suppliers or customers do not successfully and timely achieve Year 2000 compliance, the Company does not believe its business or operations would be adversely affected. FORWARD-LOOKING STATEMENTS Certain of the statements set forth under this Item and elsewhere in this Form 10-K are forward-looking and are based upon assumptions and anticipated results that are subject to numerous risks and uncertainties. See "Item 1. Business --Forward Looking Statements" and " --Risk Factors." ACCOUNTING MATTERS BASIS OF PRESENTATION. The consolidated financial statements include the accounts of the Company and its proportionate share of certain partnerships, TSPC and TSPC's proportionate share of certain partnerships. All intercompany balances and transactions are eliminated. FULL COST METHOD. The Company uses the full cost method of accounting for its oil and gas properties. Under this method, all acquisition and development costs, including certain related employee costs and general and administrative costs (less any reimbursements for such costs) incurred for the purpose of acquiring and finding oil and gas are capitalized. The net employee, general and administrative costs that were capitalized were $3.5 million, $2.3 million and $1.8 million for the years ended December 31, 1997, 1996 and 1995, respectively. The Company amortizes its investment in oil and gas properties using the future gross revenue method. DEFERRED INCOME TAXES. Deferred income taxes have been determined in accordance with Financial Accounting Standards Board Statement No. 109, "Accounting for Income Taxes." TSPC recorded a deferred tax asset on January 1, 1992, based on the estimated value to be derived from the utilization of the tax attribute carryovers of TSPC and its subsidiaries. As of December 31, 1997, the Company had a deferred tax liability of $18.7 million which was calculated with the assumption that the Company will have sufficient taxable income in future years to utilize certain tax attribute carryforwards. The achievement of these levels of taxable income, however, is subject to a number of factors beyond the control of the Company. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information concerning this Item begins on Page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III For information concerning Item 10. Directors and Executive Officers of the Registrant, Item 11. Executive Compensation, Item 12. Security Ownership of Certain Beneficial Owners and Management and Item 13. Certain Relationships and Related Transactions, see the definitive Proxy Statement of Stone Energy Corporation relating to the Annual Meeting of Stockholders to be held on May 14, 1998, which will be filed with the Securities and Exchange Commission and is incorporated herein by reference. For information concerning Item 10, see Part I - - - Item 4A. Executive Officers of Registrant. 24 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. FINANCIAL STATEMENTS: The following financial statements of the Company and the Report of the Company's Independent Public Accountants thereon are included on pages F-1 through F-22 of this Form 10-K. Report of Independent Public Accountants Consolidated Balance Sheet as of December 31, 1997 and 1996 Consolidated Statement of Operations for the three years in the period ended December 31, 1997 Consolidated Statement of Cash Flows for the three years in the period ended December 31, 1997 Consolidated Statement of Changes in Equity for the three years in the period ended December 31, 1997 Notes to the Consolidated Financial Statements 2. FINANCIAL STATEMENT SCHEDULES: All schedules are omitted because the required information is inapplicable or the information is presented in the Financial Statements or the notes thereto. 3. EXHIBITS: 3.1 -- Certificate of Incorporation of the Registrant, as amended (incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-1 (Registration No. 33-62362)). 3.2 -- Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form S-1 (Registration No. 33-62362)). +10.1 -- Stone Energy Corporation 1993 Nonemployee Directors' Stock Option Plan (incorporated by reference to Exhibit 10.1 to the Registrant's Registration Statement on Form S-1 (Registration No. 33-62362)). +10.2 -- Deferred Compensation and Disability Agreements between TSPC and D. Peter Canty dated July 16, 1981, and between TSPC and Joe R. Klutts and James H. Prince dated August 23, 1981 and September 20, 1981, respectively (incorporated by reference to Exhibit 10.8 to the Registrant's Registration Statement on Form S-1 (Registration No. 33-62362)). +10.3 -- Conveyances of Net Profits Interests in certain properties to D. Peter Canty and James H. Prince (incorporated by reference to Exhibit 10.9 to the Registrant's Registration Statement on Form S-1 (Registration No. 33-62362)). +10.4 -- Stone Energy Corporation 1993 Stock Option Plan (incorporated by reference to Exhibit 10.12 to the Registrant's Registration Statement on Form S-1 (Registration No. 33-62362)). +10.5 -- Stone Energy Corporation Annual Incentive Compensation Plan (incorporated by reference to Exhibit 10.14 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 (File No. 011-12074)). 25 *10.6 -- Third Amended and Restated Credit Agreement between the Registrant, the financial institutions named therein and NationsBank of Texas, N.A., as Agent, dated as of July 30, 1997. +10.7 -- Deferred Compensation and Disability Agreement between TSPC and E. J. Louviere dated July 16, 1981 (incorporated by reference to Exhibit 10.10 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 (File No. 011-12074)). 10.8 -- Term Loan Agreement, dated November 30, 1995, between the Registrant and First National Bank of Commerce (incorporated by reference to Exhibit 10.11 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 (File No. 011-12074)). *+10.9 -- Stone Energy Corporation 1993 Stock Option Plan, As Amended and Restated Effective as of May 15, 1997. 21.1 -- Subsidiaries of the Registrant (incorporated by reference to Exhibit 21.1 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995). *23.1 -- Consent of Arthur Andersen LLP. *23.2 -- Consent of Atwater Consultants, Ltd. *23.3 -- Consent of Cawley, Gillespie & Associates, Inc. *27.1 -- Financial Data Schedule *27.2 -- Financial Data Schedule-Restated *27.3 -- Financial Data Schedule-Restated *27.4 -- Financial Data Schedule-Restated - - ------------ * Filed herewith. + Identifies management contracts and compensatory plans or arrangements. (b) REPORTS ON FORM 8-K The Company filed a Current Report on Form 8-K and on Form 8-K/A under Items 2 and 7 dated August 15, 1997 that discussed the Company's acquisition of the Vermilion Block 255 Field. 26 SIGNATURES Pursuant to the requirements of the Securities Exchange Act, as amended, the Registrant has duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Lafayette, State of Louisiana, on the 20th day of March, 1998. STONE ENERGY CORPORATION By: /s/ JAMES H. STONE -------------------------- James H. Stone Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act, this Form 10-K has been signed by the following persons in the capacities and on the dates indicated.
Signature Title Date ---------- ----- ------ /s/ JAMES H. STONE Chief Executive Officer and March 20, 1998 ----------------------------------------- Chairman of the Board James H. Stone (Principal Executive Officer) /s/ D. PETER CANTY President, Chief Operating Officer March 20, 1998 ----------------------------------------- and Director D. Peter Canty /s/ MICHAEL L. FINCH Executive Vice President, Chief March 20, 1998 ----------------------------------------- Financial Officer and Director Michael L. Finch (Principal Financial Officer) /s/ JAMES H. PRINCE Vice President, Chief Accounting March 20, 1998 ----------------------------------------- Officer and Controller James H. Prince (Principal Accounting Officer) /s/ JOE R. KLUTTS Director and Vice Chairman of March 20, 1998 ----------------------------------------- the Board Joe R. Klutts /s/ DAVID R. VOELKER Director March 20, 1998 ----------------------------------------- David R. Voelker /s/ JOHN P. LABORDE Director March 20, 1998 ----------------------------------------- John P. Laborde /s/ ROBERT A. BERNHARD Director March 20, 1998 ----------------------------------------- Robert A. Bernhard /s/ RAYMOND B. GARY Director March 20, 1998 ----------------------------------------- Raymond B. Gary /s/ B. J. DUPLANTIS Director March 20, 1998 ----------------------------------------- B. J. Duplantis
27 INDEX TO FINANCIAL STATEMENTS Report of Independent Public Accountants................................ F-2 Consolidated Balance Sheet of Stone Energy Corporation as of December 31, 1997 and 1996........................................... F-3 Consolidated Statement of Operations of Stone Energy Corporation for the years ended December 31, 1997, 1996 and 1995................. F-4 Consolidated Statement of Cash Flows of Stone Energy Corporation for the years ended December 31, 1997, 1996 and 1995................. F-5 Consolidated Statement of Changes in Equity of Stone Energy Corporation for the years ended December 31, 1997, 1996 and 1995................. F-6 Notes to Consolidated Financial Statements.............................. F-7 F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of Stone Energy Corporation: We have audited the accompanying consolidated balance sheets of Stone Energy Corporation (a Delaware corporation) and subsidiary as of December 31, 1997 and 1996, and the related consolidated statements of operations, changes in equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Stone Energy Corporation and subsidiary as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP New Orleans, Louisiana March 2, 1998 F-2 STONE ENERGY CORPORATION CONSOLIDATED BALANCE SHEET (Dollar amounts in thousands, except per share amounts)
December 31, ----------------------------------- ASSETS 1997 1996 ------ ------------- ------------- Current assets: Cash and cash equivalents...................................................... $10,304 $9,864 Marketable securities, at market............................................... 19,940 10,331 Accounts receivable............................................................ 22,202 12,466 Unbilled accounts receivable................................................... 529 470 Other current assets........................................................... 176 94 ------------- ------------- Total current assets......................................................... 53,151 33,225 Oil and gas properties--full cost method of accounting: Proved, net of accumulated depreciation, depletion and amortization of $154,289 and $125,533, respectively.......................... 274,116 167,562 Unevaluated.................................................................... 17,304 3,834 Building and land, net of accumulated depreciation of $166 and $79, respectively............................................................ 3,538 3,390 Other assets, net of accumulated depreciation and amortization of $2,542 and $2,058, respectively............................................. 6,035 1,395 ------------- ------------- Total assets................................................................. $354,144 $209,406 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Current portion of long-term loans............................................. $81 $76 Advance payments............................................................... 239 354 Accounts payable to vendors.................................................... 32,793 17,651 Undistributed oil and gas proceeds............................................. 6,447 4,567 Other accrued liabilities...................................................... 5,263 3,894 ------------- ------------- Total current liabilities.................................................... 44,823 26,542 Long-term loans.................................................................... 132,024 26,172 Deferred tax liability............................................................. 18,659 12,112 Other long-term liabilities........................................................ 2,001 139 ------------- ------------- Total liabilities............................................................ 197,507 64,965 ------------- ------------- Commitments and Contingencies (see Note 9) Common Stock, $.01 par value; authorized 25,000,000 shares; issued and outstanding 15,045,408 and 15,015,408 shares, respectively.......... 150 150 Paid-in capital.................................................................... 118,883 118,606 Retained earnings.................................................................. 37,604 25,685 ------------- ------------- Total stockholders' equity................................................... 156,637 144,441 ------------- ------------- Total liabilities and stockholders' equity................................... $354,144 $209,406 ============= =============
The accompanying notes are an integral part of this consolidated balance sheet. F-3 STONE ENERGY CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS (Amounts in thousands, except per share amounts)
Year Ended December 31, ----------------------------------------------------- 1997 1996 1995 ------------ ----------- ------------ Revenues: Oil and gas production............................................. $69,079 $55,839 $38,693 Overhead reimbursements and management fees........................ 531 814 522 Other income....................................................... 1,377 1,312 1,336 ------------ ----------- ------------ Total revenues................................................... 70,987 57,965 40,551 ------------ ----------- ------------ Expenses: Normal lease operating expenses.................................... 10,123 8,625 6,294 Major maintenance expenses......................................... 1,844 427 446 Production taxes................................................... 2,215 3,399 3,057 Depreciation, depletion and amortization........................... 28,739 19,564 15,719 Interest........................................................... 4,916 3,574 2,191 Salaries and other employee costs.................................. 2,329 2,062 1,663 Incentive compensation plan........................................ 833 928 85 General and administrative costs................................... 1,574 1,447 1,635 ------------ ----------- ------------ Total expenses................................................... 52,573 40,026 31,090 ------------ ----------- ------------ Net income before income taxes ........................................ 18,414 17,939 9,461 ------------ ----------- ------------ Provision for income taxes: Current............................................................ - 208 131 Deferred........................................................... 6,495 6,698 3,514 ------------ ----------- ------------ Total income taxes............................................... 6,495 6,906 3,645 ------------ ----------- ------------ Net income............................................................. $11,919 $11,033 $5,816 ============ =========== ============ Earnings per common share (see Note 1): Basic earnings per share .......................................... $0.79 $0.90 $0.49 ============ =========== ============ Diluted earnings per share ........................................ $0.78 $0.90 $0.49 ============ =========== ============ Average shares outstanding......................................... 15,024 12,208 11,790 ============ =========== ============ Average shares outstanding assuming dilution....................... 15,230 12,300 11,807 ============ =========== ============
The accompanying notes are an integral part of this consolidated statement. F-4 STONE ENERGY CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (Dollar amounts in thousands)
Year Ended December 31, ---------------------------------------------------- 1997 1996 1995 -------------- ------------ ------------ Cash flows from operating activities: Net income......................................................... $11,919 $11,033 $5,816 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization...................... 28,739 19,564 15,719 Provision for deferred income taxes........................... 6,495 6,698 3,514 -------------- ------------ ------------ 47,153 37,295 25,049 (Increase) decrease in marketable securities.................. (9,609) (99) 4,964 (Increase) decrease in accounts receivable.................... (9,795) (5,600) 426 (Increase) decrease in other current assets................... (116) 518 (370) Increase (decrease) in accrued liabilities.................... 3,133 777 (2,260) Other......................................................... 1,913 (140) (159) -------------- ------------ ------------ Net cash provided by operating activities.............................. 32,679 32,751 27,650 -------------- ------------ ------------ Cash flows from investing activities: Investment in oil and gas properties............................... (133,638) (72,733) (48,122) Sale of reserves in place.......................................... 623 -- -- Purchase of building and land, building additions and renovations.................................................. (235) (185) (3,284) Other asset additions.............................................. (1,830) (743) (101) -------------- ------------ ------------ Net cash used in investing activities.................................. (135,080) (73,661) (51,507) -------------- ------------ ------------ Cash flows from financing activities: Proceeds from borrowings........................................... 112,000 49,000 30,098 Repayment of debt.................................................. (106,143) (70,575) (5,000) Proceeds from issuance of 8-3/4% Notes............................. 100,000 -- -- Deferred financing costs........................................... (3,293) (418) (151) Sale of common stock............................................... -- 66,446 -- Expenses from common stock offering................................ (111) -- -- Exercise of stock options.......................................... 388 35 66 -------------- ------------ ------------ Net cash provided by financing activities.............................. 102,841 44,488 25,013 -------------- ------------ ------------ Net increase in cash and cash equivalents.............................. 440 3,578 1,156 Cash and cash equivalents, beginning of year........................... 9,864 6,286 5,130 -------------- ------------ ------------ Cash and cash equivalents, end of year................................. $10,304 $9,864 $6,286 ============== ============ ============ Supplemental disclosures of cash flow information: Cash paid during the year for: Interest (net of amount capitalized)............................. $2,606 $3,672 $1,927 Income taxes..................................................... 100 145 216 -------------- ------------ ------------ $2,706 $3,817 $2,143 ============== ============ ============
The accompanying notes are an integral part of this consolidated statement. F-5 STONE ENERGY CORPORATION CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Dollar amounts in thousands)
Common Paid-In Retained Stock Capital Earnings -------------- --------------- ------------- Balance, December 31, 1994............................................. $ 118 $ 52,091 $ 8,836 Net income........................................................... -- -- 5,816 Exercise of stock options............................................ -- 66 -- -------------- --------------- ------------- Balance, December 31, 1995............................................. 118 52,157 14,652 Net income........................................................... -- -- 11,033 Sale of common stock................................................. 32 66,414 -- Exercise of stock options............................................ -- 35 -- -------------- --------------- ------------- Balance, December 31, 1996............................................. 150 118,606 25,685 Net income........................................................... -- -- 11,919 Exercise of stock options............................................ -- 388 -- Expenses from common stock offering.................................. -- (111) -- -------------- --------------- ------------- Balance, December 31, 1997............................................. $ 150 $118,883 $37,604 ============== =============== =============
The accompanying notes are an integral part of this consolidated statement. F-6 STONE ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in thousands, except per share amounts) NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Stone Energy Corporation (the "Company" or "Stone Energy") is an independent oil and gas company primarily engaged in the acquisition, exploration, development and operation of oil and gas properties located in the Gulf Coast Basin. The Company's business strategy is focused on the acquisition of mature properties with established production history that have significant exploitation and development potential. Since implementing its present business strategy in 1989, Stone Energy has acquired 15 properties that comprise its asset base - nine offshore and six onshore Louisiana. The Company is headquartered in Lafayette, Louisiana, with additional offices in New Orleans and Houston. A summary of significant accounting policies followed in the preparation of the accompanying consolidated financial statements is set forth below: CONSOLIDATION: The consolidated financial statements include the accounts of the Company and its proportionate interest in certain partnerships; TSPC, a wholly-owned subsidiary organized in June 1981 and TSPC's proportionate share of managed limited partnerships. In December 1996, TSPC adopted a plan of dissolution whereby a majority of its assets were transferred to the Company. Any assets necessary to satisfy any known liabilities remain in TSPC. All intercompany balances and transactions are eliminated. Certain prior year amounts have been reclassified to conform to current year presentation. USE OF ESTIMATES: The preparation of 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates are used primarily when accounting for depreciation, depletion and amortization, taxes and contingencies. FAIR VALUE OF FINANCIAL INSTRUMENTS: Fair value of cash, cash equivalents, net accounts receivable, accounts payable, bank debt and the Company's 8-3/4% Notes approximates book value at December 31, 1997. F-7 STONE ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollar amounts in thousands, except per share amounts) NOTE 1 --ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:(Continued) OIL AND GAS PROPERTIES: The Company follows the full cost method of accounting for oil and gas properties. Under this method, all acquisition, exploration and development costs, including certain related employee costs and general and administrative costs (less any reimbursements for such costs), incurred for the purpose of finding oil and gas are capitalized. Such amounts include the cost of drilling and equipping productive wells, dry hole costs, lease acquisition costs, delay rentals and other costs related to such activities. Employee, general and administrative costs that are capitalized include salaries and all related fringe benefits paid to employees directly engaged in the acquisition, exploration and development of oil and gas properties, as well as all other directly identifiable general and administrative costs associated with such activities, such as rentals, utilities and insurance. Fees received from managed partnerships for providing such services are accounted for as a reduction of capitalized costs. Employee, general and administrative costs associated with production operations and general corporate activities are expensed in the period incurred. The Company amortizes its investment in oil and gas properties using the future gross revenue method, a unit of production method, whereby the annual provision for depreciation, depletion and amortization is computed by dividing revenue produced during the period by future gross revenues at the beginning of the period, and applying the resulting rate to the cost of oil and gas properties, including estimated future development, restoration, dismantlement and abandonment costs. Additionally, the capitalized costs of oil and gas properties cannot exceed the present value of the estimated net cash flow from its proved reserves, together with the lower of cost or estimated fair value of its unevaluated properties (the full cost ceiling). Transactions involving sales of reserves in place, unless extraordinarily large portions of reserves are involved, are recorded as adjustments to the reserves for accumulated depreciation, depletion and amortization. Oil and gas properties include $17,304 and $3,834 of unevaluated properties and related costs that are not being amortized at December 31, 1997 and 1996, respectively. These costs are associated with the acquisition and evaluation of unproved properties and major development projects expected to entail significant costs to ascertain quantities of proved reserves. The unevaluated costs at December 31, 1997 relate to acquisition and development costs incurred during late 1996 and throughout 1997, and costs at December 31, 1996 relate to acquisition costs incurred in 1996. The Company currently believes that the unevaluated properties at December 31, 1997 will be evaluated within one to 24 months. The excluded costs and related proved reserves will be included in the amortization base as the properties are evaluated and proved reserves are established or impairment is determined. Interest capitalized on unevaluated properties during the years ended December 31, 1997 and 1996 was $144 and $90, respectively. In March 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 121 ("SFAS No. 121"), "Accounting for the Impairment of Long-Lived Assets and For Long-Lived Assets to be Disposed of." The Company adopted SFAS No. 121 in 1996 with no material effect. CASH AND CASH EQUIVALENTS: The Company considers all highly liquid investments in overnight securities through its commercial bank accounts, which result in available funds on the next business day, to be cash and cash equivalents. F-8 STONE ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollar amounts in thousands, except per share amounts) NOTE 1 --ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:(Continued) MARKETABLE SECURITIES: The Company has retained a third-party investment firm to manage its portfolio of short-term marketable securities, which are actively and frequently bought and sold with the primary objective of generating profits on the short-term differences in prices. Thus, the related security investments are classified as trading securities, which are marked to market in accordance with SFAS No. 115. All realized and unrealized gains and losses are included in current operating results. The net unrealized gain on the portfolio for the year ended December 31, 1997 was immaterial. The securities included in the portfolio are primarily U.S. Treasury obligations and mortgage-backed securities with an average maturity of not more than 180 days. INCOME TAXES: The Company accounts for income taxes in accordance with SFAS No. 109. Provisions for income taxes include deferred taxes resulting primarily from temporary differences due to different reporting methods for oil and gas properties for financial reporting purposes and income tax purposes. For financial reporting purposes, all exploratory and development expenditures are capitalized and depreciated, depleted and amortized on the future gross revenue method. For income tax purposes, only the equipment and leasehold costs relative to successful wells are capitalized and recovered through depreciation or depletion. Generally, most other exploratory and development costs are charged to expense as incurred; however, the Company uses certain provisions of the Internal Revenue Code which allow capitalization of intangible drilling costs where management deems appropriate. Other financial and income tax reporting differences occur as a result of statutory depletion, different reporting methods for sales of oil and gas reserves in place, and different reporting periods used in accounting for income and costs arising from oil and gas operations conducted through tax partnerships. GAS PRODUCTION REVENUES: The Company records as revenue only that portion of gas production sold and allocable to its ownership interest in the related well. Any gas production proceeds received in excess of its ownership interest are reflected as a liability in the accompanying consolidated financial statements. Revenues relating to gas production to which the Company is entitled but for which the Company has not received payment are not recorded in the consolidated financial statements until compensation is received. Amounts related to net underdelivered production positions at December 31, 1997 and 1996 are immaterial. EARNINGS PER COMMON SHARE: In February 1997, the FASB issued SFAS 128, "Earnings Per Share," which simplifies the computation of earnings per share ("EPS"). The Company adopted SFAS 128 in the fourth quarter of 1997 and restated prior years' EPS data as required by SFAS 128. All EPS data in the financial statements and accompanying footnotes reflects the adoption of SFAS 128. Basic net income per share of common stock was calculated by dividing net income applicable to common stock by the weighted-average number of common shares outstanding during the year. Diluted net income per share of common stock was calculated by dividing net income applicable to common stock by the weighted-average number of common shares outstanding during the year plus the weighted-average number of dilutive stock options granted to outside directors and certain employees totaling approximately 200,000 shares in 1997, 90,000 shares in 1996 and 17,000 shares in 1995. There were no options which were considered antidilutive as a result of the exercise price of the options exceeding the average price for the applicable period during 1996 or 1995 and antidilutive options were immaterial for 1997. F-9 STONE ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollar amounts in thousands, except per share amounts) NOTE 1 --ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:(Continued) BUILDING AND LAND: The Company records building and land at cost. The Company's office building is being depreciated for financial statement purposes on the straight-line method over its estimated useful life. OTHER ASSETS: Other assets at December 31, 1997 includes approximately $3,293 of deferred financing costs related to the sale of the 8-3/4% Notes (Note 5). These costs are being amortized over the life of the Notes using the effective interest method. HEDGING ACTIVITIES: From time to time, the Company utilizes futures and hedging activities in order to reduce the effect of product price volatility. The resulting gains or losses on hedging contracts are accounted for as revenues from oil and gas production in the financial statements. NOTE 2 -- ACCOUNTS RECEIVABLE AND ADVANCE PAYMENTS: In its capacity as operator, manager and/or sponsor for its partners and other co-venturers, the Company incurs drilling and other costs and receives payment for advance billings for drilling, all of which are billed to the respective parties. Accounts receivable and advance payments were comprised of the following amounts: December 31, ------------------------------------------ 1997 1996 ------------------ ----------------- Accounts Receivable: Managed partnerships............. $ 1,485 $ 1,687 Other co-venturers............... 5,025 1,136 Trade............................ 15,639 9,637 Officers and employees........... 53 6 ------------------ ----------------- $ 22,202 $ 12,466 ================== ================= Advance Payments: Other co-venturers............... $ 239 $ 256 Trade............................ -- 98 ------------------ ----------------- $ 239 $ 354 ================== ================= Costs incurred but not yet billed to the managed partnerships and other co-venturers at December 31, 1997 and 1996 amounted to $529 and $470, respectively. F-10 STONE ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollar amounts in thousands, except per share amounts) NOTE 3--INVESTMENT IN OIL AND GAS PROPERTIES: The following table discloses certain financial data relative to the Company's oil and gas producing activities, which are located onshore and offshore the continental United States:
Year Ended December 31, --------------------------------------------------------- 1997 1996 1995 --------------- --------------- ------------- Costs incurred during year: Capitalized-- Acquisition costs: Proved................................................... $39,619 $24,522 $8,104 Unevaluated.............................................. 4,172 2,065 -- Investments posted as performance bonds.................... -- 63 (30) Exploratory drilling: Proved................................................... 46,750 26,339 8,261 Unevaluated.............................................. 11,020 -- -- Development drilling: Proved................................................... 43,715 22,321 27,383 Unevaluated.............................................. 47 1,769 -- General and administrative costs......................... 4,494 3,238 2,743 Less: overhead reimbursements, management fees and repromotion income................................... (1,037) (913) (953) --------------- --------------- ------------- $148,780 $79,404 $45,508 =============== =============== ============= Charged to expenses-- Operating costs: Normal lease operating expenses.......................... $10,123 $8,625 $6,294 Major maintenance expenses............................... 1,844 427 446 --------------- --------------- ------------- Total operating costs...................................... 11,967 9,052 6,740 Production taxes........................................... 2,215 3,399 3,057 --------------- --------------- ------------- $14,182 $12,451 $9,797 =============== =============== ============= Depreciation, depletion and amortization......................... $28,133 $19,256 $15,551 =============== =============== ============= Oil and gas properties-- Balance, beginning of year................................... $296,929 $217,525 $172,017 Additions.................................................... 148,780 79,404 45,508 --------------- --------------- ------------- Balance, end of year......................................... 445,709 296,929 217,525 --------------- --------------- ------------- Accumulated depreciation, depletion and amortization-- Balance, beginning of year............................... (125,533) (106,277) (90,726) Provision for depreciation, depletion and amortization... (28,133) ( 19,256) (15,551) Sale of reserves......................................... (623) -- -- --------------- --------------- ------------- Balance, end of year......................................... (154,289) (125,533) (106,277) --------------- --------------- ------------- Net capitalized costs (proved and unevaluated)................... $291,420 $171,396 $111,248 =============== =============== =============
F-11 STONE ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollar amounts in thousands, except per share amounts) NOTE 4--INCOME TAXES: The Company follows the provisions of SFAS No. 109, "Accounting For Income Taxes," which provides for recognition of a deferred tax asset for deductible temporary timing differences, operating loss carryforwards, statutory depletion carryforwards and tax credit carryforwards net of a "valuation allowance." An analysis of the Company's deferred tax liability follows: December 31, ---------------------------------- 1997 1996 -------------- ------------ Net operating loss carryforwards.............. $3,658 $ 1,224 Statutory depletion carryforward.............. 3,826 4,463 Investment tax credit carryforward............ 158 887 Alternative minimum tax credit................ 396 447 Temporary differences: Oil and gas properties--full cost....... (25,035) (18,794) Other................................... (1,662) (339) -------------- ------------ (18,659) (12,112) Valuation allowance........................... -- -- -------------- ------------ ($18,659) ($12,112) ============== ============ For tax reporting purposes, the Company had operating loss carryforwards of $10,290 and investment tax credit carryforwards of $158 at December 31, 1997. If not utilized, such carryforwards would begin expiring in 2001 and would completely expire by the year 2007. Because of tax rules relating to changes in corporate ownership and computations required to be made on a separate entity basis, the utilization by the Company of these benefit carryforwards in reducing its tax liability is restricted. Additionally, the Company had available for tax reporting purposes $10,761 in statutory depletion deductions that may be carried forward indefinitely. Recognition of a deferred tax asset associated with these carryforwards is dependent upon the Company's evaluation that it is more likely than not that the asset will ultimately be realized. The Company's provision for income taxes during 1997 decreased because of an adjustment to the Company's annual tax rate. Reconciliations between the statutory federal income tax expense rate and the Company's effective income tax expense rate as a percentage of income before income taxes were as follows:
Year Ended December 31, ----------------------------------------------- 1997 1996 1995 ----------- ---------- ---------- Income taxes computed at the statutory federal income tax rate.... 35% 35% 35% State tax and other............................................... -- 4 4 ----------- ---------- ---------- Effective income tax rate......................................... 35% 39% 39% =========== ========== ==========
F-12 STONE ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollar amounts in thousands, except per share amounts) NOTE 5--LONG-TERM LOANS: Long-term loans consisted of the following at:
December 31, ----------------------------------- 1997 1996 -------------- ------------- 8-3/4% Senior Subordinated Notes due 2007............................... $100,000 $-- Unsecured revolving credit facility with NationsBank of Texas, N.A. ("NationsBank") (described below)...................... 29,000 23,073 Term Loan Agreement with First National Bank of Commerce ("FNBC") with interest at 7.45%.............................. 3,105 3,175 Less: portion due within one year...................................... (81) (76) -------------- ------------- Total long-term loans................................................... $132,024 $26,172 ============== =============
Aggregate minimum principal payments at December 31, 1997 for the next five years are as follows: 1998-$81, 1999-$88, 2000-$29,094, 2001-$2,842 and 2002-$0. On September 16, 1997, the Company completed an offering of $100,000 principal amount of its 8-3/4% Senior Subordinated Notes (the "Notes") due September 15, 2007 with interest payable semiannually commencing March 15, 1998. At December 31, 1997, $2,565 had been accrued in connection with the March 1998 interest payment. The Notes were sold at a discount for an aggregate price of $99,283 and the net proceeds from the offering were used to repay amounts outstanding under the Company's bank credit facility and for other general corporate purposes. There are no sinking fund requirements on the Notes and they are redeemable at the option of the Company, in whole or in part, at 104.375% of their principal amount beginning September 15, 2002, and thereafter at prices declining annually to 100% on and after 2005. Provisions of the Notes include, without limitation, restrictions on liens, indebtedness, asset sales and other restricted payments. On July 30, 1997, the Company executed its Third Amended and Restated Credit Agreement with NationsBank as agent for a group of banks. The agreement provided for a total facility of $150,000 and was comprised of a three-year revolving credit facility and a one-year term loan. The term loan of $50,000, which was established to finance the acquisition of the Vermilion Block 255 Field and certain development costs, was retired in September 1997 with proceeds from the Company's notes offering. Additionally, the borrowing base of its $100,000 revolver was reduced to $55,000 subsequent to the offering of the Notes. Interest under the revolver is payable quarterly and at December 31, 1997, the weighted average interest rate of the facility was 6.9% per annum and letters of credit totaling $7,522 had been issued pursuant to the facility. On November 30, 1995, the Company executed a term loan agreement with FNBC in the original principal amount of $3,250 to finance the purchase of the Company's office building (see Note 6). The loan has a five-year term bearing interest at the rate of 7.45% over the entire term of the loan. Payments of $26 are due monthly and are based upon a 20-year amortization period. The indebtedness under the agreement is collateralized by the building. The terms of the NationsBank and FNBC agreements contain, among other provisions, requirements for maintaining defined levels of working capital and tangible net worth. F-13 STONE ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollar amounts in thousands, except per share amounts) NOTE 6--TRANSACTIONS WITH RELATED PARTIES: The Company receives certain fees as a result of its function as managing partner of certain partnerships. For the years ended December 31, 1997, 1996 and 1995, the Company generated management fees and overhead reimbursements from partnerships amounting to $1,098, $744 and $851, respectively, the majority of which was treated as a reduction of the investment in oil and gas properties. The Company collects and distributes production revenues as managing partner for the partnerships' interests in oil and gas properties. At December 31, 1995, $858 was included in undistributed oil and gas proceeds that was identified as distributable to partners in the partnerships. TSPC leased office space in a building owned by RiverStone Associates, an affiliate, from 1982 through November 30, 1995, on which date the building and related land were purchased by the Company. The entire purchase price of $3,250 was paid to the holder of the first mortgage on the property. RiverStone Associates and its partners did not receive any of the sales proceeds, nor were any such parties relieved of any personal liability as a result of the sale. James H. Stone and Joe R. Klutts, each an officer and director of the Company, are partners in RiverStone Associates. The sale was approved by the disinterested members of the Board of Directors. The Company and TSPC incurred net rent expense of $633 for the year ended December 31, 1995. The Company's interests in certain oil and gas properties are burdened by various net profit interests granted at the time of acquisition to certain officers and other employees of the Company. Such net profit interest owners do not receive any cash distributions until the Company has recovered all of its acquisition, development, financing and operating costs. Management believes the estimated value of such interests at the time of acquisition is not material to the Company's financial position or results of operations. Certain officers and directors and their affiliates are working interest owners in properties operated by the Company and are billed and pay their proportionate share of drilling and operating costs in the normal course of business. NOTE 7--HEDGING ACTIVITIES: The Company engages in futures contracts with certain of its production through master swap agreements ("Swap Agreements"). The Company considers these futures contracts to be hedging activities and, as such, monthly settlements on these contracts are reflected in revenues from oil and gas production. In order to consider these futures contracts as hedges, (i) the Company must designate the futures contract as a hedge of future production and (ii) the contract must reduce the Company's exposure to the risk of changes in prices. Changes in the market value of futures contracts treated as hedges are not recognized in income until the hedged item is also recognized in income. If the above criteria are not met, the Company will record the market value of the contract at the end of each month and recognize a related gain or loss. Proceeds received or paid relating to terminated contracts or contracts that have been sold are amortized over the original contract period and reflected in revenues from oil and gas production. The Company enters into hedging transactions for the purpose of securing a price for a portion of future production that is acceptable at the time the transaction is entered into. The primary objective of these activities is to reduce the Company's exposure to the possibility of declining oil and gas prices during the term of the hedge. F-14 STONE ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollar amounts in thousands, except per share amounts) NOTE 7--HEDGING ACTIVITIES: (Continued) The crude oil contracts are tied to the price of NYMEX light sweet crude oil futures and are settled monthly based on the differences between contract prices and the average NYMEX closing prices for that month applied to the related contract volumes. Settlement for gas swap contracts is based on the average closing prices of either the last three days or last full month of trading on the NYMEX for each month of the swap. As of February 27, 1998, the Company's forward sales position was as follows:
Oil Gas ---------------------------------- -------------------------------------- Average Average Price Price Mbbls ($/Bbl) BBtu ($/MMBtu) ------------ -------------- ------------- ----------------- 1998...................... 144 $21.47 2,100 $2.87
The fair market value of the hedging contracts totaled $1,317 and ($434) at December 31, 1997 and 1996, respectively. For the years ended December 31, 1997 and 1996, the Company incurred net oil and gas hedging losses of $569 and $3,801, respectively, which were treated as a reduction of revenues from oil and gas production. NOTE 8--COMMON STOCK: On November 19, 1996, the Company completed an underwritten public offering of 3,680,000 shares of Common Stock at a price to the public of $21.75 per share. The shares offered included 3,221,159 shares sold by the Company (480,000 shares of which represented the exercise of the underwriters' over-allotment option) and 458,841 shares sold by certain selling stockholders. This offering resulted in the receipt by the Company of cash proceeds (net of $217 of offering costs) totaling approximately $66,446. The Company used a portion of the proceeds to retire a term loan incurred to finance the cost of acquisitions and certain development projects performed in the third quarter of 1996, and the remainder was used to repay a portion of the outstanding indebtedness under its revolving bank credit facility. NOTE 9--COMMITMENTS AND CONTINGENCIES: The Company leases office facilities in New Orleans, Louisiana under the terms of a long-term non-cancelable lease expiring on April 4, 2003. Office facilities in Lafayette, Louisiana were leased through November 30, 1995, on which date the Company purchased the building (see Note 6). Additionally, the Company leases automobiles under terms of non-cancelable leases expiring at various dates through 2000. The minimum net annual commitments under all leases, subleases and contracts noted above at December 31, 1997 are as follows: 1998.................................................................. $102 1999.................................................................. 93 2000.................................................................. 73 2001.................................................................. 70 2002.................................................................. 70 Thereafter............................................................ 18 F-15 STONE ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollar amounts in thousands, except per share amounts) NOTE 9--COMMITMENTS AND CONTINGENCIES: (Continued) Rent expense for the years ended December 31, 1997, 1996 and 1995 was approximately $118, $114 and $727, respectively. The Company is the managing general partner of four partnerships and is contingently liable for any recourse debts and other liabilities that result from their operations. Management currently is not aware of the existence of any such liabilities that would have a material impact on the future operations of the Company. In August 1989, the Company was advised by the EPA that it believed the Company to be a potentially responsible party (a "PRP") for the cleanup of an oil field waste disposal facility located near Abbeville, Louisiana, which was included on CERCLA's National Priority List (the "Superfund List") by the EPA in March 1989. In addition to the Company, approximately 370 other companies have been named as being potentially responsible for the cleanup of the site. While the Company's records do not indicate that any drilling wastes generated by the Company were disposed of at this site, it is possible that one or more waste haulers contracted by the Company may have disposed of wastes at this site. Given the extremely large number of PRPs at this site, management does not believe that any liability for this site would materially adversely affect the financial condition of the Company. In December 1995, Goodrich Leasehold L.L.C. and Goodrich Drillers L.L.C. filed a civil action in the 333rd Judicial District Court, Harris County, Texas, against the Company in an attempt to set aside a Farmout Agreement affecting portions of the West Flank of the Weeks Island field in Iberia Parish, Louisiana. This case was tried in Harris County, Texas, and on March 12, 1998, the jury found in favor of the Company. The Company does not anticipate an appeal by either party. The Company is contingently liable to a surety insurance company in the aggregate amount of $14,774 relative to bonds issued on its behalf to the MMS and certain third parties from which it purchased oil and gas working interests. The bonds represent guarantees by the surety insurance company that the Company will operate offshore in accordance with MMS rules and regulations and perform certain plugging and abandonment obligations as specified by the applicable working interest purchase and sale contracts. The Company is also named as a defendant in certain lawsuits and is a party to certain regulatory proceedings arising in the ordinary course of business. Management does not expect these matters, individually or in the aggregate, to have a material adverse effect on the financial condition of the Company. OPA imposes ongoing requirements on a responsible party, including the preparation of oil spill response plans and proof of financial responsibility to cover environmental cleanup and restoration costs that could be incurred in connection with an oil spill. As amended by the Coast Guard Authorization Act of 1996, OPA requires responsible parties for offshore facilities to provide financial assurance in the amount of $35,000 to cover potential OPA liabilities. This amount can be increased up to $150,000 if a formal risk assessment indicates that an amount higher than $35,000 should be required. The Company does not anticipate that it will experience any difficulty in satisfying the MMS's requirements for demonstrative financial responsibility under OPA. In 1996, the American Institute of Certified Public Accountants issued its Statement of Position 96-1 ("SOP 96-1"), which provides guidance on accounting for environmental remediation liabilities. SOP 96-1 interprets existing FASB standards applicable to public companies. The Company adopted SOP 96-1 effective January 1, 1997, with no material effect. F-16 STONE ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollar amounts in thousands, except per share amounts) NOTE 10--EMPLOYEE BENEFIT PLANS: The Company entered into deferred compensation and disability agreements with certain of its employees whereby the Company has purchased split-dollar life insurance policies to provide certain retirement and death benefits for the employees and death benefits payable to the Company. The aggregate death benefit of the policies is $3,195 at December 31, 1997, of which $1,975 is payable to employees or their beneficiaries and $1,220 is payable to the Company. Total cash surrender value of the policies, net of related surrender charges at December 31, 1997, was approximately $948. Additionally, the benefits under the deferred compensation agreements vest after certain periods of employment, and at December 31, 1997, the liability for such vested benefits was approximately $760. The difference between the actuarial determined liability for retirement benefits or the vested amounts, where applicable, and the net cash surrender value has been recorded as an other long-term liability and is being amortized over the remaining term of the various deferred compensation agreements. The Company has adopted a series of incentive compensation plans designed to align the interests of the executives and employees with those of its stockholders. The following is a brief description of each of the plans: i. The Annual Incentive Compensation Program provides for an annual incentive bonus that ties incentives to the annual return on the Company's Common Stock and also a comparison of the price performance of the Common Stock to the average annual return on the shares of stock of a peer group of companies with which the Company competes and to the growth in net earnings, net cash flow and net asset value of the Company. Incentive bonuses are awarded to participants based upon individual performance factors. ii. The Nonemployee Directors' Stock Option Plan provides for the issuance of up to 250,000 shares of Common Stock upon the exercise of such options granted pursuant to such plan. Generally, options outstanding under the Nonemployee Directors' Stock Option Plan: (a) are granted at prices that equate to the fair market value of the Common Stock on date of grant, (b) vest ratably over a three year service vesting period, and (c) expire five years subsequent to award. iii. The Company's 1993 Stock Option Plan (as amended and restated) provides for 1,170,000 shares of Common Stock to be reserved for issuance pursuant to such plan. Under this plan, the Company may grant both incentive stock options qualifying under Section 422 of the Internal Revenue Code and options that are not qualified as incentive stock options. All such options: (a) must have an exercise price of not less than the fair market value of the Common Stock on the date of grant, (b) vest ratably over a five year service vesting period, and (c) expire ten years subsequent to award. iv. The 401(k) Profit Sharing Plan provides eligible employees with the option to defer receipt of a portion of their compensation and the Company may, at its discretion, match a portion or all of the employee's deferral. The amounts held under the plan are invested in various investment funds maintained by a third party in accordance with the directions of each employee. An employee is 20% vested in the Company's matching contributions (if any) for each year of service and is fully vested upon five years of service with the Company. For the years ended December 31, 1997, 1996 and 1995, the Company contributed $207, $169 and $168, respectively, to the plan. F-17 STONE ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollar amounts in thousands, except per share amounts) NOTE 10--EMPLOYEE BENEFIT PLANS: (Continued) In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation," which became effective with respect to the Company in 1996. Under SFAS No. 123, companies can either record expense based on the fair value of stock-based compensation upon issuance or elect to remain under the current Accounting Principles Board Opinion No. 25 ("APB 25") method whereby no compensation cost is recognized upon grant if certain requirements are met. The Company is continuing to account for its stock-based compensation under APB 25. However, pro forma disclosures as if the Company adopted the cost recognition requirements under SFAS No. 123 are presented below. If the compensation cost for the Company's 1997, 1996 and 1995 grants for stock-based compensation plans had been determined consistent with SFAS No. 123, the Company's 1997, 1996 and 1995 net income and earnings per common share would have approximated the pro forma amounts below:
Year Ended December 31, ------------------------------------------------------------------------------------------ 1997 1996 1995 -------------------------- ------------------------ --------------------------- As Pro As Pro As Pro Reported forma Reported forma Reported forma ----------- ---------- ------------ ---------- ----------- ---------- Net income......................... $11,919 $10,966 $11,033 $10,639 $ 5,816 $ 5,749 Earnings per common share: Basic ........................ $0.79 $0.73 $0.90 $0.87 $0.49 $0.49 Diluted....................... $0.78 $0.72 $0.90 $0.87 $0.49 $0.49
The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts. SFAS No. 123 does not apply to grants prior to 1995, and additional awards in the future are anticipated. F-18 STONE ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollar amounts in thousands, except per share amounts) NOTE 10--EMPLOYEE BENEFIT PLANS: (Continued) A summary of the Company's stock options as of December 31, 1997, 1996 and 1995 and changes during the years ended on those dates is presented below:
December 31, ---------------------------------------------------------------------------------------------- 1997 1996 1995 ---------------------------- ---------------------------- ------------------------- Wgtd. Wgtd. Wgtd. Number Avg. Number Avg. Number Avg. of Exer. of Exer. of Exer. Options Price Options Price Options Price ------------ ---------- ------------ ---------- ------------- --------- Outstanding at beginning of year 735,000 $15.76 420,000 $12.33 248,000 $12.24 Granted 245,000 28.26 317,000 20.27 195,000 12.45 Expired -- -- -- -- (18,000) 12.38 Exercised (30,000) 12.95 (2,000) 12.38 (5,000) 12.38 ------------ ------------ -------------- Outstanding at end of year 950,000 $19.07 735,000 $15.76 420,000 $12.33 Options exercisable at year-end 309,400 $13.93 180,667 $12.29 86,997 $12.23 Options available for future grant 413,000 338,000 655,000 Weighted average fair value of options granted during the year $17.05 $12.95 $7.83
The fair value of each option granted during the periods presented is estimated on the date of grant using the Black- Scholes option-pricing model with the following assumptions: (a) dividend yield of 0%, (b) expected volatility of 41.20%, 42.83% and 46.86% in the years 1997, 1996 and 1995, respectively, (c) risk-free interest rate of 6.04 %, 6.41% and 5.55% in the years 1997, 1996 and 1995, respectively, and (d) expected life of 10 years for employee options and five years for director options. The following table summarizes information regarding stock options outstanding at December 31, 1997:
Options Outstanding Options Exercisable --------------------------------------------------------- ---------------------------------- Range of Number Wgtd. Avg. Wgtd. Avg. Number Wgtd. Avg. Exercise Outstanding Remaining Exercise Exercisable Exercise Prices at 12/31/97 Contractual Life Price at 12/31/97 Price ------ ---------------- ----------------- --------- ---------------- -------------- $11-$15 390,000 9.3 years $12.32 246,334 $12.32 15 - 19 25,000 5.0 years 17.81 6,666 17.81 19 - 24 290,000 10.0 years 20.48 56,400 20.49 27 - 34 245,000 10.0 years 28.26 -- -- ---------------- ---------------- 950,000 9.6 years 19.07 309,400 13.93 ================ ================
F-19 STONE ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollar amounts in thousands, except per share amounts) NOTE 11--OIL AND GAS RESERVE INFORMATION - UNAUDITED A majority of the Company's net proved oil and gas reserves at December 31, 1997 have been estimated by independent petroleum consultants in accordance with guidelines established by the Securities and Exchange Commission ("SEC"). Accordingly, the following reserve estimates are based upon existing economic and operating conditions at the respective dates. There are numerous uncertainties inherent in estimating quantities of proved reserves and in providing the future rates of production and timing of development expenditures. The following reserve data represents estimates only and should not be construed as being exact. In addition, the present values should not be construed as the current market value of the Company's oil and gas properties or the cost that would be incurred to obtain equivalent reserves. The following table sets forth an analysis of the Company's estimated quantities of net proved and proved developed oil (including condensate) and gas, all located onshore and offshore the continental United States:
Natural Oil in Gas in MBbls MMcf --------------- --------------- Proved reserves as of December 31, 1994....................................... 6,455 68,285 Revisions of previous estimates........................................... 476 1,208 Extensions, discoveries and other additions............................... 399 13,478 Purchase of producing properties.......................................... 2,054 6,607 Production................................................................ (1,399) (8,399) --------------- --------------- Proved reserves as of December 31, 1995....................................... 7,985 81,179 Revisions of previous estimates........................................... (783) (4,025) Extensions, discoveries and other additions............................... 5,526 37,175 Purchase of producing properties.......................................... 1,400 41,318 Production................................................................ (1,356) (11,331) --------------- --------------- Proved reserves as of December 31, 1996....................................... 12,772 144,316 Revisions of previous estimates........................................... 1,673 (12,252) Extensions, discoveries and other additions............................... 2,675 45,276 Purchase of producing properties.......................................... 2,302 26,409 Sale of reserves.......................................................... (74) (327) Production.................................................................. (1,585) (14,183) --------------- --------------- Proved reserves as of December 31, 1997....................................... 17,763 189,239 =============== =============== Proved developed reserves: as of December 31, 1995................................................... 7,055 67,797 =============== =============== as of December 31, 1996................................................... 9,260 109,628 =============== =============== as of December 31, 1997................................................... 14,485 141,424 =============== ===============
The following tables present the standardized measure of future net cash flows related to proved oil and gas reserves together with changes therein, as defined by the FASB. The oil, condensate and gas price structure utilized to project future net cash flows reflects current prices at each year end and has been escalated only where known and determinable price changes are provided by contracts and law. Future production and development costs are based on current costs F-20 STONE ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollar amounts in thousands, except per share amounts) NOTE 11--OIL AND GAS RESERVE INFORMATION - UNAUDITED (Continued) with no escalations. Estimated future cash flows net of future income taxes have been discounted to their present values based on a 10% annual discount rate.
Standardized Measure December 31, -------------------------------------------------------- 1997 1996 1995 ------------- ------------- ------------- Future cash flows................................................. $801,647 $894,418 $347,796 Future production and development costs........................... (268,641) (187,715) (89,739) Future income taxes............................................... (104,521) (198,637) (56,146) ------------- ------------- ------------- Future net cash flows............................................. 428,485 508,066 201,911 10% annual discount............................................... (132,145) (178,728) (57,121) ------------- ------------- ------------- Standardized measure of discounted future net cash flows.......... $296,340 $329,338 $144,790 ============= ============= =============
Changes in Standardized Measure Year Ended December 31, -------------------------------------------------------- 1997 1996 1995 ------------- ------------- ------------- Standardized measure at beginning of year......................... $329,338 $144,790 $83,068 Sales and transfers of oil and gas produced, net of production costs.............................................. (54,898) (43,389) (28,897) Changes in price, net of future production costs.................. (186,615) 81,428 39,592 Extensions and discoveries, net of future production and development costs......................................... 87,491 156,804 25,927 Changes in estimated future development costs, net of development costs incurred during the period.................. 26,738 (13,214) 6,717 Revisions of quantity estimates................................... (3,502) (19,372) 5,867 Accretion of discount............................................. 32,934 17,837 9,739 Net change in income taxes........................................ 52,338 (80,443) (19,257) Purchase of reserves in place..................................... 21,725 105,035 22,039 Sale of reserves in place......................................... 420 -- -- Changes in production rates (timing) and other.................... (9,629) (20,138) (5) ------------- ------------- ------------- Standardized measure at end of year............................... $296,340 $329,338 $144,790 ============= ============= =============
F-21 STONE ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollar amounts in thousands, except per share amounts) NOTE 12--SUMMARIZED QUARTERLY FINANCIAL INFORMATION - UNAUDITED:
Basic Diluted Net Earnings Earnings Revenues Expenses Income Per Share Per Share ------------- ------------- -------------- --------------- -------------- 1997 First Quarter.............. $16,237 $12,641 $3,596 $0.24 $0.24 Second Quarter............. 13,662 12,065 1,597 0.11 0.11 Third Quarter.............. 15,958 13,463 2,495 0.17 0.16 Fourth Quarter............. 25,130 20,899 4,231 0.28 0.28 ------------- ------------- -------------- --------------- -------------- $70,987 $59,068 $11,919 $0.79 $0.78 ============= ============= ============== =============== ============== 1996 First Quarter.............. $15,093 $11,831 $3,262 $0.28 $0.28 Second Quarter............. 14,403 11,548 2,855 0.24 0.24 Third Quarter.............. 13,251 11,230 2,021 0.17 0.17 Fourth Quarter............. 15,218 12,323 2,895 0.22 0.21 ------------- ------------- -------------- --------------- -------------- $57,965 $46,932 $11,033 $0.90 $0.90 ============= ============= ============== =============== ==============
F-22 GLOSSARY OF CERTAIN INDUSTRY TERMS The definitions set forth below shall apply to the indicated terms as used in this Form 10-K. All volumes of natural gas referred to herein are stated at the legal pressure base of the state or area where the reserves exist and at 60 degrees Fahrenheit and in most instances are rounded to the nearest major multiple. BBtu. One billion Btus. Bcf. Billion cubic feet of gas. Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein in reference to crude oil or other liquid hydrocarbons. BOE. Barrels of oil equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids. Btu. British thermal unit, which is the heat required to raise the temperature of a one-pound mass of water from 58.5 to 59.5 degrees Fahrenheit. Development well. A well drilled within the proved area of an oil or gas reservoir to the depth of a stratigraphic horizon known to be productive. Exploratory well. A well drilled to find and produce oil or gas reserves not classified as proved, to find a new reservoir in a field previously found to be productive of oil or gas in another reservoir or to extend a known reservoir. Farmin or farmout. An agreement whereunder the owner of a working interest in an oil and gas lease assigns the working interest or a portion thereof to another party who desires to drill on the leased acreage. Generally, the assignee is required to drill one or more wells in order to earn its interest in the acreage. The assignor usually retains a royalty or reversionary interest in the lease. The interest received by an assignee is a "farmin" while the interest transferred by the assignor is a "farmout." Finding costs. Costs associated with acquiring and developing proved oil and gas reserves which are capitalized by the Company pursuant to generally accepted accounting principles, excluding any capitalized general and administrative expenses. Gross acreage or gross wells. The total acres or wells, as the case may be, in which a working interest is owned. MBbls. One thousand barrels of crude oil or other liquid hydrocarbons. MBbls/d. One thousand barrels of crude oil or other liquid hydrocarbons per day. MBOE. One thousand barrels of oil equivalent. MBOE/d. One thousand barrels of oil equivalent per day. Mcf. One thousand cubic feet of gas. Mcf/d. One thousand cubic feet of gas per day. MMBbls. One million barrels of crude oil or other liquid hydrocarbons. MMBOE. One million barrels of oil equivalent. MMBtu. One million Btus. G-1 GLOSSARY OF CERTAIN INDUSTRY TERMS--(Continued) Mmcf. One million cubic feet of gas. MMcf/d. One million cubic feet of gas per day. Net acres or net wells. The sum of the fractional working interests owned in gross acres or gross wells. Present value. When used with respect to oil and gas reserves, present value means the estimated future gross revenue to be generated from the production of proved reserves, net of estimated production and future development costs, using prices and costs in effect as of the date of the report or estimate, without giving effect to non-property related expenses such as general and administrative expenses, debt service and future income tax expense or to depreciation, depletion and amortization, discounted using an annual discount rate of 10%. Productive well. A well that is found to be capable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of such production exceed production expenses and taxes. Proved developed reserves. Proved reserves that can be expected to be recovered from existing wells with existing equipment and operating methods. Proved reserves. The estimated quantities of crude oil, natural gas and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved undeveloped reserves. Reserves that are expected to be recovered from new wells on developed acreage where the subject reserves cannot be recovered without drilling additional wells. Royalty interest. An interest in an oil and gas property entitling the owner to a share of oil or gas production free of costs of production. Undeveloped acreage. Lease acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and gas regardless of whether such acreage contains proved reserves. Working interest. The operating interest which gives the owner the right to drill, produce and conduct operating activities on the property and a share of production. G-2 EXHIBIT INDEX Exhibit Number Description 3.1 -- Certificate of Incorporation of the Registrant, as amended (incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-1 (Registration No. 33-62362)). 3.2 -- Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form S-1 (Registration No. 33-62362)). +10.1 -- Stone Energy Corporation 1993 Nonemployee Directors' Stock Option Plan (incorporated by reference to Exhibit 10.1 to the Registrant's Registration Statement on Form S-1 (Registration No. 33-62362)). +10.2 -- Deferred Compensation and Disability Agreements between TSPC and D. Peter Canty dated July 16, 1981, and between TSPC and Joe R. Klutts and James H. Prince dated August 23, 1981 and September 20, 1981, respectively (incorporated by reference to Exhibit 10.8 to the Registrant's Registration Statement on Form S-1 (Registration No. 33-62362)). +10.3 -- Conveyances of Net Profits Interests in certain properties to D. Peter Canty and James H. Prince (incorporated by reference to Exhibit 10.9 to the Registrant's Registration Statement on Form S-1 (Registration No. 33-62362)). +10.4 -- Stone Energy Corporation 1993 Stock Option Plan (incorporated by reference to Exhibit 10.12 to the Registrant's Registration Statement on Form S-1 (Registration No. 33-62362)). +10.5 -- Stone Energy Corporation Annual Incentive Compensation Plan (incorporated by reference to Exhibit 10.14 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 (File No. 011- 12074)). *10.6 -- Third Amended and Restated Credit Agreement between the Registrant, the financial institutions named therein and NationsBank of Texas, N.A., as Agent, dated as of July 30, 1997. +10.7 -- Deferred Compensation and Disability Agreement between TSPC and E.J. Louviere dated July 16, 1981 (incorporated by reference to Exhibit 10.10 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 (File No. 011-12074)). 10.8 -- Term Loan Agreement, dated November 30, 1995, between the Registrant and First National Bank of Commerce (incorporated by reference to Exhibit 10.11 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 (File No. 011-12074)). *+10.9 -- Stone Energy Corporation 1993 Stock Option Plan, As Amended and Restated Effective as of May 15, 1997. 21.1 -- Subsidiaries of the Registrant (incorporated by reference to Exhibit 21.1 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995). *23.1 -- Consent of Arthur Andersen LLP. *23.2 -- Consent of Atwater Consultants, Ltd. *23.3 -- Consent of Cawley, Gillespie & Associates, Inc. *27.1 -- Financial Data Schedule *27.2 -- Financial Data Schedule-Restated *27.3 -- Financial Data Schedule-Restated *27.4 -- Financial Data Schedule-Restated ------------ * Filed herewith. + Identifies management contracts and compensatory plans or arrangements. G-3 EX-10 2 THIRD AMENDED AND RESTATED CREDIT FACILITY Exhibit 10.6 $150,000,000.00 THIRD AMENDED AND RESTATED CREDIT AGREEMENT Among STONE ENERGY CORPORATION as Borrower, THE FINANCIAL INSTITUTIONS NAMED IN THIS CREDIT AGREEMENT as Banks, and NATIONSBANK OF TEXAS, N.A. as Agent July 30, 1997 -1- TABLE OF CONTENTS Page ARTICLE I DEFINITIONS AND ACCOUNTING TERMS Section 1.01. Certain Defined Terms...............................1 Section 1.02. Computation of Time Periods........................16 Section 1.03. Accounting Terms; Changes in GAAP..................16 Section 1.04. Types of Advances..................................17 Section 1.05. Miscellaneous......................................17 ARTICLE II CREDIT FACILITIES Section 2.01. Commitment for Advances............................17 Section 2.02. Borrowing Base.....................................19 Section 2.03. Method of Borrowing................................20 Section 2.04. Prepayment of Advances.............................23 Section 2.05. Repayment of Advances..............................26 Section 2.06. Letters of Credit..................................26 Section 2.07. Fees...............................................30 Section 2.08. Interest...........................................31 Section 2.09. Payments and Computations..........................32 Section 2.10. Sharing of Payments, Etc...........................33 Section 2.11. Breakage Costs.....................................34 Section 2.12. Increased Costs....................................34 Section 2.13. Taxes..............................................35 ARTICLE III CONDITIONS OF LENDING Section 3.01. Conditions Precedent to Amendment and Restatement..38 Section 3.02. Condition to Initial Term Advances.................39 -i- Section 3.03. Conditions Precedent to All Borrowings.............39 ARTICLE IV REPRESENTATIONS AND WARRANTIES Section 4.01. Corporate Existence; Subsidiaries..................40 Section 4.02. Corporate Power....................................40 Section 4.03. Authorization and Approvals........................40 Section 4.04. Enforceable Obligations............................41 Section 4.05. Financial Statements...............................41 Section 4.06. True and Complete Disclosure.......................41 Section 4.07. Litigation.........................................42 Section 4.08. Use of Proceeds....................................42 Section 4.09. Investment Company Act.............................42 Section 4.10. Public Utility Holding Company Act.................42 Section 4.11. Taxes..............................................42 Section 4.12. Pension Plans......................................43 Section 4.13. Condition of Property; Casualties..................43 Section 4.14. No Burdensome Restrictions; No Defaults............44 Section 4.15. Environmental Condition............................44 Section 4.16. Permits, Licenses, Etc.............................45 Section 4.17. Gas Contracts......................................45 ARTICLE V AFFIRMATIVE COVENANTS Section 5.01. Compliance with Laws, Etc..........................45 Section 5.02. Maintenance of Insurance...........................46 Section 5.03. Preservation of Corporate Existence, Etc...........46 Section 5.04. Payment of Taxes, Etc..............................46 Section 5.05. Visitation Rights..................................46 Section 5.06. Reporting Requirements.............................47 Section 5.07. Maintenance of Property............................50 Section 5.08. New Subsidiaries...................................50 Section 5.09. Collateral.........................................51 Section 5.10. Hedging Transactions...............................51 -ii- ARTICLE VI NEGATIVE COVENANTS Section 6.01. Liens, Etc.........................................52 Section 6.02. Debts, Guaranties, and Other Obligations...........53 Section 6.03. Agreements Restricting Liens and Distributions.....53 Section 6.04. Merger or Consolidation; Asset Sales...............54 Section 6.05. Restricted Payments................................54 Section 6.06. Investments........................................54 Section 6.07. Limitation on Speculative Hedging..................55 Section 6.08. Affiliate Transactions.............................55 Section 6.09. Compliance with ERISA..............................55 Section 6.10. Maintenance of Ownership of Subsidiaries...........56 Section 6.11 Sale-and-Leaseback.................................56 Section 6.12. Change of Business.................................56 Section 6.13. Current Ratio......................................56 Section 6.14. Tangible Net Worth.................................56 ARTICLE VII REMEDIES Section 7.01. Events of Default..................................57 Section 7.02. Optional Acceleration of Maturity..................59 Section 7.03. Automatic Acceleration of Maturity.................60 Section 7.04. Right of Set-off...................................60 Section 7.05. Actions Under Credit Documents.....................61 Section 7.06. Non-exclusivity of Remedies........................61 ARTICLE VIII THE AGENT AND THE ISSUING BANK Section 8.01. Authorization and Action...........................61 Section 8.02. Agent's Reliance, Etc..............................62 Section 8.03. The Agent and Its Affiliates.......................62 Section 8.04. Bank Credit Decision...............................62 -iii- Section 8.05. Indemnification....................................63 Section 8.06. Successor Agent and Issuing Bank...................63 ARTICLE IX MISCELLANEOUS Section 9.01. Amendments, Etc....................................64 Section 9.02. Notices, Etc.......................................65 Section 9.03. No Waiver; Remedies................................65 Section 9.04. Costs and Expenses.................................65 Section 9.05. Binding Effect.....................................65 Section 9.06. Bank Assignments and Participations................66 Section 9.07. Indemnification....................................68 Section 9.08. Execution in Counterparts..........................68 Section 9.09. Survival of Representations, Etc...................68 Section 9.10. Severability.......................................69 Section 9.11. Business Loans.....................................69 Section 9.12. Governing Law......................................69 EXHIBITS: Exhibit A - Form of Assignment and Acceptance Exhibit B - Form of Compliance Certificate Exhibit C - Form of Guaranty Exhibit D-1 - Form of Revolving Note Exhibit D-2 - Form of Term Note Exhibit E - Form of Notice of Borrowing Exhibit F - Form of Notice of Conversion or Continuation Exhibit G - Form of Letter of Credit Application Exhibit H-1 - Form of Borrower's General Counsel Opinion Exhibit H-2 - Form of Agent's Counsel Opinion -iv- SCHEDULES: Schedule 1 - Borrower, Agent, and Bank Information Schedule 4.07 - Existing Litigation Schedule 4.15(a) - Existing Environmental Concerns Schedule 4.15(b) - Designated Environmental Sites Schedule 6.01 - Permitted Existing Liens Schedule 6.02 - Permitted Existing Debt Schedule 6.08 - Affiliated Transactions -v- THIRD AMENDED AND RESTATED CREDIT AGREEMENT This Third Amended and Restated Credit Agreement dated as of July 30, 1997 is among Stone Energy Corporation, a Delaware corporation, the Banks (as defined below), and NationsBank of Texas, N.A., as Agent for the Banks. The Borrower, the Banks, and the Agent agree as follows: INTRODUCTION A. The Borrower, the Agent, and the Banks are parties to the Second Amended and Restated Credit Agreement dated as of September 26, 1996 (as the same has been amended, supplemented, or otherwise modified from time to time, the "Existing Credit Agreement"). B. The Borrower, the Agent, and the Banks have agreed to amend and restate the Existing Credit Agreement by entering into this Agreement. ARTICLE I DEFINITIONS AND ACCOUNTING TERMS Section 1.01. Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings (unless otherwise indicated, such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Acceptable Security Interest" means a Lien which (a) exists in favor of the Agent for the benefit of the Agent and the Banks and (b) is superior to all Liens or rights of any other Person in the Property encumbered thereby, except to the extent that the rights of another Person are permitted hereunder. "Adjusted Base Rate" means, for any day, the fluctuating rate per annum of interest equal to the greater of (a) the Base Rate in effect on such day and (b) the Federal Funds Rate in effect on such day plus 1.00%. "Advance" means any Revolving Advance or Term Advance. -1- "Affiliate" means, as to any Person, any other Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such Person or any Subsidiary of such Person. The term "control" (including the terms "controlled by" or "under common control with") means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of Voting Securities, by contract, or otherwise. "Agent" means NationsBank of Texas, N.A., in its capacity as an agent pursuant to Article VIII and any successor agent pursuant to Section 8.06. "Agent's Fee Letter" has the meaning specified in Section 2.07(b). "Agreement" means this Third Amended and Restated Credit Agreement, as the same may be amended, supplemented, and otherwise modified from time to time. "Applicable Lending Office" means, with respect to each Bank, such Bank's Domestic Lending Office in the case of a Base Rate Advance and such Bank's Eurodollar Lending Office in the case of a Eurodollar Rate Advance. "Applicable Margin" means, for any day: (a) so long as there is any principal amount outstanding under any Term Advance, the following percentages during the following periods during which such day falls: Applicable Margin Applicable Margin Base Rate Advances Eurodollar Rate Advances Through March 31, 1998 0.00% 1.50% From April 1, 1998 through June 30, 1998 0.50% 2.00% From July 1, 1998 through January 1, 1999 1.00% 2.50% (b) after the outstanding principal amount of all Term Advances has been repaid in full, the following percentages based upon the ratio of (i) the aggregate outstanding amount of Revolving Advances plus the Letter of Credit Exposure to (ii) the Borrowing Base, as of such day: -2- Ratio of Outstanding Revolving Advances to Applicable Margin Applicable Margin Borrowing Base Base Rate Advances Eurodollar Rate Advances < .60 0.00% 0.75% >= .60 and < .80 0.00% 1.00% >=.80 0.00% 1.25% "Assignment and Acceptance" means an assignment and acceptance entered into by a Bank and an Eligible Assignee, and accepted by the Agent, in substantially the form of the attached Exhibit A. "Banks" means the lenders listed on the signature pages of this Agreement and each Eligible Assignee that shall become a party to this Agreement pursuant to Section 9.06. "Base Rate" means a fluctuating interest rate per annum as shall be in effect from time to time equal to the rate of interest publicly announced by NationsBank of Texas, N.A., as its base rate, whether or not the Borrower has notice thereof. "Base Rate Advance" means an Advance which bears interest as provided in Section 2.08(a). "Borrower" means Stone Energy Corporation, a Delaware corporation. "Borrowing" means any Revolving Borrowing or Term Borrowing. "Borrowing Base" means, for any date of its determination by the Majority Banks or all of the Banks, as the case may be, in accordance with Section 2.02, the lending value of the Borrower's and its Subsidiaries' Oil and Gas Properties as of such date. "Business Day" means a day of the year on which banks are not required or authorized to close in Dallas, Texas and, if the applicable Business Day relates to any Eurodollar Rate Advances, on which dealings are carried on by banks in the London interbank market. "Capital Leases" means, as applied to any Person, any lease of any Property by such Person as lessee which would, in accordance with GAAP, be required to be classified and accounted for as a capital lease on the balance sheet of such Person. "Cash Collateral Account" means a special interest bearing cash collateral account pledged to the Agent for the ratable benefit of the Banks containing cash deposited pursuant -3- to Sections 2.04(b) or (c), 7.02(b), or 7.03(b) to be maintained at the Agent's office in accordance with Section 2.06(g) and bear interest or be invested in the Agent's reasonable discretion. "CERCLA" means the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, state and local analogs, and all rules and regulations and requirements thereunder in each case as now or hereafter in effect. "Class" has the meaning set forth in Section 1.04. "Code" means the Internal Revenue Code of 1986, as amended, and any successor statute. "Commitments" means, as to any Bank, its Revolving Commitment and its Term Commitment. "Compliance Certificate" means a compliance certificate in the form of the attached Exhibit B signed by a Responsible Officer of the Borrower. "Controlled Group" means all members of a controlled group of corporations and all trades (whether or not incorporated) under common control which, together with the Borrower, are treated as a single employer under Section 414 of the Code. "Convert," "Conversion," and "Converted" each refers to a conversion of Advances of one Type into Advances of another Type pursuant to Section 2.03(b). "Credit Documents" means this Agreement, the Notes, the Letter of Credit Documents, the Guaranties, the Security Documents, and each other agreement, instrument, or document executed at any time in connection with this Agreement. "Debt," for any Person, means without duplication: (a) indebtedness of such Person for borrowed money, including, without limitation, obligations under letters of credit and agreements relating to the issuance of letters of credit or acceptance financing; (b) obligations of such Person evidenced by bonds, debentures, notes or other similar instruments; (c) obligations of such Person to pay the deferred purchase price of property or services; -4- (d) obligations of such Person as lessee under Capital Leases; (e) obligations of such Person under direct or indirect guaranties in respect of, and obligations (contingent or otherwise) of such Person to purchase or otherwise acquire, or otherwise to assure a creditor against loss in respect of, indebtedness or obligations of others of the kinds referred to in clauses (a) through (d) above; (f) indebtedness or obligations of others of the kinds referred to in clauses (a) through (e) secured by any Lien on or in respect of any Property of such Person; and (g) all liabilities of such Person in respect of unfunded vested benefits under any Plan. "Debt Issuance" means the issuance of any convertible or subordinated debt permitted by Section 6.02(f). "Default" means (a) an Event of Default or (b) any event or condition which with notice or lapse of time or both would, unless cured or waived, become an Event of Default. "Dollar Equivalent" means for all purposes of this Agreement, the equivalent in another currency of an amount in Dollars to be determined by reference to the rate of exchange quoted by NationsBank of Texas, N.A., at 10:00 a.m. (Dallas, Texas, time) on the date of determination, for the spot purchase in the foreign exchange market of such amount of Dollars with such other currency. "Dollars" and "$" means lawful money of the United States of America. "Domestic Lending Office" means, with respect to any Bank, the office of such Bank specified as its "Domestic Lending Office" opposite its name on Schedule 1 or such other office of such Bank as such Bank may from time to time specify to the Borrower and the Agent. "Effective Date" means the date on which each of the conditions precedent in Section 3.01 have been met or waived. "Eligible Assignee" means any commercial bank organized under the laws of any country which is a member of the Organization for Economic Cooperation and Development and having primary capital (or its equivalent) of not less than $250,000,000.00 (or its Dollar Equivalent) and approved by the Agent in its sole discretion and the Borrower, which approval by the Borrower will not be unreasonably withheld. -5- "Environment" or "Environmental" shall have the meanings set forth in 43 U.S.C. ss. 9601(8) (1988). "Environmental Claim" means any third party (including governmental agencies and employees) action, lawsuit, claim, demand, regulatory action or proceeding, order, decree, consent agreement or notice of potential or actual responsibility or violation (including claims or proceedings under the Occupational Safety and Health Acts or similar laws or requirements relating to health or safety of employees) which seeks to impose liability under any Environmental Law. "Environmental Law" means all Legal Requirements arising from, relating to, or in connection with the Environment, health, or safety, including without limitation CERCLA, relating to (a) pollution, contamination, injury, destruction, loss, protection, cleanup, reclamation or restoration of the air, surface water, groundwater, land surface or subsurface strata, or other natural resources; (b) solid, gaseous or liquid waste generation, treatment, processing, recycling, reclamation, cleanup, storage, disposal or transportation; (c) exposure to pollutants, contaminants, hazardous, or toxic substances, materials or wastes; (d) the safety or health of employees; or (e) the manufacture, processing, handling, transportation, distribution in commerce, use, storage or disposal of hazardous, or toxic substances, materials or wastes. "Environmental Permit" means any permit, license, order, approval or other authorization under Environmental Law. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. "Eurocurrency Liabilities" has the meaning assigned to that term in Regulation D of the Federal Reserve Board (or any successor), as in effect from time to time. "Eurodollar Lending Office" means, with respect to any Bank, the office of such Bank specified as its "Eurodollar Lending Office" opposite its name on Schedule 1 (or, if no such office is specified, its Domestic Lending Office) or such other office of such Bank as such Bank may from time to time specify to the Borrower and the Agent. "Eurodollar Rate"means, for the Interest Period for each Eurodollar Rate Advance, the interest rate per annum (rounded upward to the nearest 1/100 of 1% per annum) appearing on Telerate Page 3750 (or any successor page) as the London interbank offered rate for deposits in Dollars at approximately 11:00 a.m. (London time) two Business Days before the first day of such Interest Period for a term comparable to such Interest Period. If for any reason such rate is not available, the term "Eurodollar Rate" shall mean, for the -6- Interest Period for each Eurodollar Rate Advance, the interest rate per annum (rounded upward to the nearest 1/100 of 1% per annum) appearing on Reuters Screen LIBO page as the London interbank offered rate for deposits in Dollars at approximately 11:00 a.m. (London time) two Business Days before the first day of such Interest Period for a term comparable to such Interest Period; provided, however, if more than one rate is specified on Reuters Screen LIBO page, the applicable rate shall be the arithmetic mean of all such rates. "Eurodollar Rate Advance" means an Advance which bears interest as provided in Section 2.08(b). "Eurodollar Rate Reserve Percentage" of any Bank for the Interest Period for any Eurodollar Rate Advance means the reserve percentage applicable during such Interest Period (or if more than one such percentage shall be so applicable, the daily average of such percentages for those days in such Interest Period during which any such percentage shall be so applicable) under regulations issued from time to time by the Federal Reserve Board for determining the maximum reserve requirement (including, without limitation, any emergency, supplemental or other marginal reserve requirement) for such Bank with respect to liabilities or assets consisting of or including Eurocurrency Liabilities having a term equal to such Interest Period. "Event of Default" has the meaning specified in Section 7.01. "Existing Letters of Credit" means the letters of credit outstanding on the date of this Agreement issued for the account of the Borrower or its Subsidiaries which are described in the attached Schedule 6.02, as the same may be amended, supplemented, and otherwise modified from time to time. "Existing Letter of Credit Exposure" means at any time, the sum of (a) the aggregate undrawn maximum face amount of each Existing Letter of Credit at such time, plus (b) the aggregate unpaid amount of all reimbursement obligations for payments made under Existing Letters of Credit at such time. "Expiration Date" means, with respect to any Letter of Credit, the date on which such Letter of Credit will expire or terminate in accordance with its terms. "Federal Funds Rate" means, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for any such -7- day on such transactions received by the Agent from three Federal funds brokers of recognized standing selected by it. "Federal Reserve Board" means the Board of Governors of the Federal Reserve System or any of its successors. "Financial Statements" means the balance sheet and statements of income, retained earnings and cash flow dated December 31, 1996 referred to in Section 4.05, copies of which have been delivered to the Agent and the Banks. "GAAP" means United States generally accepted accounting principles as in effect from time to time, applied on a basis consistent with the requirements of Section 1.03. "Governmental Authority" means any foreign governmental authority, the United States of America, any state of the United States of America and any subdivision of any of the foregoing, and any agency, department, commission, board, authority or instrumentality, bureau or court having jurisdiction over any Bank, the Borrower, or the Borrower's Subsidiaries or any of their respective Properties. "Guaranties" means each Guaranty in favor of the Agent for the ratable benefit of the Banks in the form of the attached Exhibit C executed by a Guarantor as required by Section 5.09, as the same may be amended, supplemented, or otherwise modified from time to time. "Guarantors" means each of the Borrower's Subsidiaries who hereafter executes a Guaranty under Section 5.09. "Hazardous Substance" means the substances identified as such pursuant to CERCLA and those regulated under any other Environmental Law, including without limitation pollutants, contaminants, petroleum, petroleum products, radionuclides, radioactive materials, and medical and infectious waste. "Hazardous Waste" means the substances regulated as such pursuant to any Environmental Law. "Interest Period" means, for each Eurodollar Rate Advance comprising part of the same Borrowing, the period commencing on the date of such Advance or the date of the Conversion of any Base Rate Advance into such an Advance and ending on the last day of the period selected by the Borrower pursuant to the provisions below or by Section 2.03 and, thereafter, each subsequent period commencing on the last day of the immediately preceding Interest Period and ending on the last day of the period selected by the Borrower pursuant to the provisions below or by Section 2.03. The duration of each such Interest Period shall -8- be one, two, three, or six months, in each case as the Borrower may, upon notice received by the Agent not later than 10:00 a.m. (Dallas, Texas, time) on, the third Business Day prior to the first day of such Interest Period select; provided, however, that: (a) the Borrower may not select any Interest Period for any Revolving Advance which ends after the Revolving Maturity Date and any Term Advance which ends after the Term Maturity Date; (b) Interest Periods commencing on the same date for Advances comprising part of the same Borrowing shall be of the same duration; (c) whenever the last day of any Interest Period would otherwise occur on a day other than a Business Day, the last day of such Interest Period shall be extended to occur on the next succeeding Business Day, provided that if such extension would cause the last day of such Interest Period to occur in the next following calendar month, the last day of such Interest Period shall occur on the next preceding Business Day; and (d) any Interest Period which begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of the calendar month in which it would have ended if there were a numerically corresponding day in such calendar month. "Interim Financial Statements" means the unaudited balance sheet and statements of income and cash flow dated as of March 31, 1997, referred to in Section 4.05. "Issuing Bank" means NationsBank of Texas, N.A., and any successor issuing bank pursuant to Section 8.06. "Legal Requirement" means any law, statute, ordinance, decree, requirement, order, judgment, rule, regulation (or official interpretation of any of the foregoing) of, and the terms of any license or permit issued by, any Governmental Authority, including, but not limited to, Regulations G, T, U, and X. "Letter of Credit" means, individually, any letter of credit issued by the Issuing Bank which is subject to this Agreement and "Letters of Credit" means all such letters of credit collectively, provided that the Existing Letters of Credit shall not be Letters of Credit hereunder until made Letters of Credit under this Agreement by the Issuing Bank at the time such Existing Letters of Credit are replaced or rolled over. -9- "Letter of Credit Application" means the Issuing Bank's standard form letter of credit application for either a commercial or standby letter of credit, as the case may be, which has been executed by the Borrower and accepted by the Issuing Bank in connection with the issuance of a Letter of Credit, which form or forms as of the date of this Agreement are in the form of the attached Exhibit G, as the same may be amended, supplemented, and otherwise modified from time to time. "Letter of Credit Documents" means all Letters of Credit, Letter of Credit Applications, and agreements, documents, and instruments entered into in connection with or relating thereto. "Letter of Credit Exposure" means, at any time, the sum of (a) the aggregate undrawn maximum face amount of each Letter of Credit at such time, plus (b) the aggregate unpaid amount of all Reimbursement Obligations at such time. "Letter of Credit Obligations" means any obligations of the Borrower under this Agreement in connection with the Letters of Credit, including the Reimbursement Obligations. "Lien" means any mortgage, lien, pledge, charge, deed of trust, security interest, or encumbrance to secure or provide for the payment of any obligation of any Person, whether arising by contract, operation of law, or otherwise (including, without limitation, the interest of a vendor or lessor under any conditional sale agreement, Capital Lease, or other title retention agreement). "Lien Grant Documents" means the following documents duly executed by all parties thereto, in form and substance satisfactory to the Agent: (a) mortgages, deeds of trust, financing statements, or other security instruments granting an Acceptable Security Interest in the Borrower's and its Subsidiaries' Oil and Gas Properties with a loan value of at least 80% of the most recent Borrowing Base determined by the Majority Banks or all of the Banks, as the case may be; (b) title opinions prepared by counsel approved by the Agent in form and substance satisfactory to the Agent evidencing that the Borrower's and its Subsidiaries' Oil and Gas Properties with a loan value of at least 80% of the most recent Borrowing Base determined by the Majority Banks or all of the Banks, as the case may be, are unencumbered except for title exceptions approved by the Agent; (c) favorable opinions of the Borrower's general counsel and such other counsel of the Borrower as the Agent may reasonably request covering the authorization and -10- enforceability of the Credit Documents and such other matters as any Bank through the Agent may reasonably request; (d) a certificate of the Secretary or an Assistant Secretary of the Borrower certifying the existence of the Borrower, a certificate of good standing for the Borrower, the certificate of incorporation of the Borrower, the bylaws of the Borrower, the resolutions of the Board of Directors of the Borrower authorizing the execution of the Credit Documents and related transactions, and the incumbency and signatures of the officers of the Borrower authorized to execute the Credit Documents and related documents; and (e) such other documents, certificates, letters in lieu of transfer orders, opinions of Borrower's counsel, agreements, lien searches as the Agent may reasonably request. "Liquid Investments" means: (a) debt securities issued or directly and fully guaranteed or insured by the United States government or any agency or instrumentality thereof, with maturities of no more than two years from the date of acquisition; (b) commercial paper of a domestic issuer rated at the date of acquisition not less than P1 by Moody's Investor Service, Inc., or A1 by Standard & Poor's Corporation; (c) certificates of deposit, demand deposits, Eurodollar time deposits, overnight bank deposits, and bankers' acceptances, with maturities of no more than two years from the date of acquisition, issued by any Bank or any bank or trust company organized under the laws of the United States or any state thereof whose deposits are insured by the Federal Deposit Insurance Corporation, and having capital and surplus aggregating at least $100,000,000.00; (d) corporate bonds, mortgaged-backed securities, and municipal bonds of a domestic issuer rated at the date of acquisition Aaa by Moody's Investor Service, Inc., or AAA by Standard & Poor's Corporation, with maturities of no more than two years from the date of acquisition; (e) repurchase agreements secured by debt securities of the type described in part (a) above, the market value of which, including accrued interest, is not less than 100% of the amount of the repurchase agreement, with maturities of no more than two years from the date of acquisition, issued by or acquired from or through any Bank or any bank or trust company organized under the laws of the United States or any state thereof and having capital and surplus aggregating at least $100,000,000.00; and -11- (f) money market funds; provided that (i) investments in any one issuer, excluding the United States government or any agency or instrumentality thereof, shall not exceed 20% of total fixed-income Liquid Investments based on market value at the time of acquisition, (ii) fixed-income holdings shall not exceed 5% of all Investments at any time, and (iii) certificates of deposit, commercial paper, corporate bonds, mortgaged-backed securities, or municipal bonds issued by any one issuer shall not exceed 5% of all Liquid Investments at any time. "Majority Banks" means, at any time, Banks holding at least 66-2/3% of the then aggregate unpaid principal amount of the Notes held by the Banks and the Letter of Credit Exposure of the Banks at such time, but in no event less than two Banks at any time when there are three or more Banks; provided that if no such principal amount or Letter of Credit Exposure is then outstanding, "Majority Banks" shall mean Banks having at least 66-2/3% of the aggregate amount of the Revolving Commitments at such time, but in no event less than two Banks at any time when there are three or more Banks. "Material Adverse Change" means (a) a material adverse change in the business, financial condition, or results of operations of the Borrower or any of its Subsidiaries, or (b) the occurrence and continuance of any event or circumstance which could reasonably be expected (i) to have a material adverse effect on the Borrower's or any Guarantor's ability to perform its obligations under this Agreement, any Note, any Guaranty, or any other Credit Document or (ii) to cause a Default. "Maximum Rate" means the maximum nonusurious interest rate under applicable law. "Mortgages" means any mortgages, deeds of trust, or other security instruments granting or purporting to grant Acceptable Security Interests in the Oil and Gas Properties of the Borrower and its Subsidiaries, as the same may be amended, supplemented, or otherwise modified from time to time. "Multiemployer Plan" means a "multiemployer plan" as defined in Section 4001(a)(3) of ERISA. "Net Income" means, for any Person and for any period of its determination, the net income of such Person determined in accordance with GAAP consistently applied, but excluding any gains and losses on sales and retirements of assets and any noncash write-down of assets. -12- "Net Worth" means, for any Person that is a corporation and as of any date of its determination, the consolidated total assets of such Person less the total liabilities of such Person, determined in accordance with GAAP consistently applied. "Note" means a Revolving Note or a Term Note. "Notice of Borrowing" means a notice of borrowing in the form of the attached Exhibit E signed by a Responsible Officer of the Borrower. "Notice of Conversion or Continuation" means a notice of conversion or continuation in the form of the attached Exhibit F signed by a Responsible Officer of the Borrower. "Obligations" means all principal, interest, fees, reimbursements, indemnifications, and other amounts payable by the Borrower to the Agent or the Banks under the Credit Documents. "Oil and Gas Properties" means fee, leasehold or other interests in or under mineral estates or oil, gas, and other liquid or gaseous hydrocarbon leases with respect to Properties situated in the United States or offshore from any state of the United States, including overriding royalty and royalty interests, leasehold estate interests, net profits interests, production payment interests and mineral fee interests, together with contracts executed in connection therewith and incidental rights belonging thereto. "Oil and Gas Reserve Report" means each engineering report covering the Borrower's consolidated Oil and Gas Properties provided to the Agent pursuant to Section 5.06(c). "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Permitted Liens" means the Liens permitted to exist pursuant to Section 6.01. "Person" means an individual, partnership, corporation (including a business trust), joint stock company, limited liability corporation or company, limited liability partnership, trust, unincorporated association, joint venture or other entity, or a government or any political subdivision or agency thereof or any trustee, receiver, custodian or similar official. "Plan" means an employee benefit plan (other than a Multiemployer Plan) maintained for employees of the Borrower or any member of the Controlled Group and covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code. -13- "Property" of any Person means any property or assets (whether real, personal, or mixed, tangible or intangible) of such Person. "Pro Rata Share" means, with respect to any Bank, either (a) the ratio (expressed as a percentage) of such Bank's Commitments at such time to the aggregate Commitments at such time or (b) if the Revolving Commitments have been terminated, the ratio (expressed as a percentage) of such Bank's aggregate outstanding Advances and Letter of Credit Exposure at such time to the aggregate outstanding Advances and Letter of Credit Exposure of all the Banks at such time. "Register" has the meaning set forth in paragraph (c) of Section 9.06. "Regulations G, T, U, and X" mean Regulations G, T, U, and X of the Federal Reserve Board, as the same is from time to time in effect, and all official rulings and interpretations thereunder or thereof. "Reimbursement Obligations" means all of the obligations of the Borrower to reimburse the Issuing Bank for amounts paid by the Issuing Bank under Letters of Credit as established by the Letter of Credit Applications and Section 2.06(d). "Release" shall have the meaning set forth in CERCLA or under any other Environmental Law. "Response" shall have the meaning set forth in CERCLA or under any other Environmental Law. "Responsible Officer" means, with respect to any Person, such Person's Chief Executive Officer, President, Chief Financial Officer, Chief Accounting Officer, and Vice Presidents. "Restricted Payment" means, with respect to any Person, any dividends or other distributions (in cash, property, or otherwise) on, or any payment for the purchase, redemption, or other acquisition of, any shares of any capital stock of such Person, other than dividends payable in such Person's stock. "Revolving Advance" means any advance by a Bank to the Borrower as part of a Revolving Borrowing and refers to a Base Rate Advance or a Eurodollar Rate Advance. "Revolving Borrowing" means, subject to Sections 2.03(c)(ii) and 2.04(e), a borrowing consisting of simultaneous Revolving Advances of the same Type made by each Bank pursuant to Section 2.03(a), continued by each Bank pursuant to Section 2.03(b), or -14- Converted by each Bank to Revolving Advances of a different Type pursuant to Section 2.03(b). "Revolving Commitment" means, for any Bank, the amount set opposite such Bank's name on the signature pages hereof as its Revolving Commitment, or if such Bank has entered into any Assignment and Acceptance, as set forth for such Bank as its Revolving Commitment in the Register maintained by the Agent pursuant to Section 9.06(c), as such amount may be reduced or terminated pursuant to Article VII. "Revolving Maturity Date" means the earlier of (a) July 30, 2000 or (b) the earlier termination in whole of the Revolving Commitments pursuant to Section 2.01(c) or Article VII. "Revolving Note" means a promissory note of the Borrower payable to the order of any Bank, in substantially the form of the attached Exhibit D-1, evidencing indebtedness of the Borrower to such Bank resulting from Revolving Advances owing to such Bank. "Security Documents" means the Mortgages and any other documents creating or purporting to create Liens in favor of the Agent securing the repayment of the Obligations. "Subsidiary" of a Person means any corporation or other entity of which more than 50% of the outstanding capital stock or other ownership interests having ordinary voting power to elect a majority of the board of directors or similar governing body of such corporation or other entity (irrespective of whether at such time capital stock or other ownership interests of any other class or classes of such corporation or other entity shall or might have voting power upon the occurrence of any contingency) is at the time directly or indirectly owned by such Person, by such Person and one or more Subsidiaries of such Person or by one or more Subsidiaries of such Person. "Tangible Net Worth" means, for any Person that is a corporation and as of the date of its determination, the consolidated Net Worth of such Person, excluding all consolidated intangible assets of such Person, as determined in accordance with GAAP consistently applied. "Term Advance" means any advance by a Bank to the Borrower as part of a Term Borrowing and refers to a Base Rate Advance or a Eurodollar Rate Advance. "Term Borrowing" means, subject to Sections 2.03(c)(ii) and 2.04(d), a borrowing consisting of simultaneous Term Advances of the same Type made by each Bank pursuant to Section 2.03(a), continued by each Bank pursuant to Section 2.03(b), or Converted by each Bank to Term Advances of a different Type pursuant to Section 2.03(b). -15- "Term Commitment" means, for each Bank, the amount set opposite such Bank's name on the signature pages of this Agreement as its Term Commitment or, if such Bank has entered into any Assignment and Acceptance after the Effective Date, set forth for such Bank as its Term Commitment in the Register maintained by the Agent pursuant to Section 9.06(c); provided, however, that after December 31, 1997, the Term Commitment for such Bank shall be zero. "Term Maturity Date" means January 1, 1999. "Term Note" means a promissory note of the Borrower payable to the order of any Bank in substantially the form of the attached Exhibit D-2, evidencing indebtedness of the Borrower to such Bank resulting from any Term Advance to such Bank. "Termination Event" means (a) a Reportable Event described in Section 4043 of ERISA and the regulations issued thereunder (other than a Reportable Event not subject to the provision for 30-day notice to the PBGC under such regulations), (b) the withdrawal of the Borrower or any of its Affiliates from a Plan during a plan year in which it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA, (c) the filing of a notice of intent to terminate a Plan or the treatment of a Plan amendment as a termination under Section 4041 of ERISA, (d) the institution of proceedings to terminate a Plan by the PBGC, or (e) any other event or condition which constitutes grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan. "Type" has the meaning set forth in Section 1.04. "Voting Securities" means with respect to any corporation, capital stock of the corporation having general voting power under ordinary circumstances to elect directors of such corporation (irrespective of whether at the time stock of any other class or classes shall have or might have special voting power or rights by reason of the happening of any contingency). Section 1.02. Computation of Time Periods. In this Agreement in the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each means "to but excluding". Section 1.03. Accounting Terms; Changes in GAAP. (a) All accounting terms not specifically defined in this Agreement shall be construed in accordance with GAAP applied on a consistent basis with those applied in the preparation of the Financial Statements. -16- (b) Unless otherwise indicated, all financial statements of the Borrower, all calculations for compliance with covenants in this Agreement and all calculations of any amounts to be calculated under the definitions in Section 1.01 shall be based upon the consolidated accounts of the Borrower and its Subsidiaries in accordance with GAAP (or in compliance with the regulations promulgated by the United States Securities and Exchange Commission regarding financial reporting) and consistent with the principles applied in preparing the Financial Statements. Section 1.04. Types of Advances. Advances are distinguished by "Type." The "Type" of an Advance refers to the determination whether such Advance is a Eurodollar Rate Advance or Base Rate Advance. Borrowings and Advances are also distinguished by "Class." The "Class" of a Borrowing or an Advance refers to the determination whether such Borrowing or Advance is a Revolving Borrowing or a Term Borrowing or a Revolving Advance or a Term Advance, as applicable. Section 1.05. Miscellaneous. Article, Section, Schedule, and Exhibit references are to Articles and Sections of and Schedules and Exhibits to this Agreement, unless otherwise specified. ARTICLE II CREDIT FACILITIES Section 2.01. Commitment for Advances. (a) Revolving Advances. Each Bank severally agrees, on the terms and conditions set forth in this Agreement, to make Revolving Advances to the Borrower from time to time on any Business Day during the period from the date of this Agreement until the Revolving Maturity Date in an aggregate outstanding amount up to but not to exceed an amount equal to (i) the lesser of such Bank's Revolving Commitment or such Bank's Pro Rata Share of the Borrowing Base less (ii) the sum of (A) such Bank's Pro Rata Share of the Letter of Credit Exposure, and (B) such Bank's Pro Rata Share of the Existing Letter of Credit Exposure provided that the sum of (1) the outstanding amount of all Revolving Advances made by such Bank, (2) such Bank's Pro Rata Share of the Letter of Credit Exposure, and (3) such Bank's Pro Rata Share of the Existing Letter of Credit Exposure shall not exceed such Bank's Revolving Commitment. Each Revolving Borrowing shall, in the case of Revolving Borrowings consisting of Base Rate Advances, be in an aggregate amount not less than $500,000.00 and in integral multiples of $100,000.00 in excess thereof, and in the case of Revolving Borrowings consisting of Eurodollar Rate Advances, be in an aggregate amount not less than $2,000,000.00 or in integral multiples of $1,000,000.00 in -17- excess thereof, and in each case shall consist of Revolving Advances of the same Type made on the same day by the Banks ratably according to their respective Revolving Commitments. Within the limits of each Bank's Revolving Commitment, and subject to the terms of this Agreement, the Borrower may from time to time borrow, prepay, and reborrow Revolving Advances. (b) Term Advances. Each Bank severally agrees, on the terms and conditions set forth in this Agreement, to make Term Advances to the Borrower from time to time on any Business Day during the period from the date of this Agreement until December 31, 1997 in an amount equal to such Bank's Term Commitment. Each Term Borrowing shall, in the case of Term Borrowings consisting of Base Rate Advances, be in an aggregate amount not less than $500,000.00 and in integral multiples of $100,000.00 in excess thereof, and in the case of Term Borrowings consisting of Eurodollar Rate Advances, be in an aggregate amount not less than $1,000,000.00 or in integral multiples of $1,000,000.00 in excess thereof, and in each case shall consist of Term Advances of the same Type made on the same day by the Banks ratably according to their respective Term Commitments. No amount of any Term Borrowing that has been repaid may be reborrowed. (c) Reduction of Revolving Commitment. The Borrower shall have the right, upon at least three Business Days' irrevocable notice to the Agent, to terminate in whole or reduce ratably in part the unused portion of the Revolving Commitments; provided that each partial reduction of the Revolving Commitments shall be in the aggregate amount of $5,000,000.00 or in integral multiples of $1,000,000.00 in excess thereof. Any reduction or termination of the Revolving Commitments pursuant to this Section 2.01(c) shall be permanent, with no obligation of the Banks to reinstate such Revolving Commitments and the commitment fees provided for in Section 2.07(a) shall thereafter be computed on the basis of the Revolving Commitments, as so reduced. (d) Notes. The indebtedness of the Borrower to each Bank resulting from the Revolving Advances owing to such Bank shall be evidenced by a Revolving Note of the Borrower in the maximum principal amount of such Bank's Revolving Commitment. The Borrower shall deliver to each Bank in exchange for such Bank's existing Revolving Note a new Revolving Note in the maximum principal amount required by the previous sentence on the date of the repayment in full of the Term Advances. The indebtedness of the Borrower to each Bank resulting from the Term Advances owing to such Bank shall be evidenced by a Term Note of the Borrower in the maximum principal amount of such Bank's Term Commitment payable to the order of such Bank. -18- Section 2.02. Borrowing Base. (a) The Borrowing Base as of the date of this Agreement has been set by the Majority Banks and acknowledged by the Borrower as $80,000,000.00. (b)(i) From the date hereof through the Revolving Maturity Date and subject to the further provisions of this Section 2.02, the Borrowing Base shall be redetermined by the Majority Banks within 30 days after the receipt of each Oil and Gas Reserve Report scheduled to be provided to the Agent pursuant to Sections 5.06(c)(i) and (c)(ii) on the basis of information, including such Oil and Gas Reserve Reports, supplied by Borrower in compliance with the provisions of this Agreement, including such additional data concerning pricing, quantities of production, purchasers of production, and other information and engineering and geological data with respect thereto as the Agent or any Bank may reasonably request, together with all other information then available to the Agent and the Banks. Notwithstanding the foregoing, the Majority Banks may, in the exercise of their good faith discretion, make redeterminations of the Borrowing Base (A) from time to time on the basis of information then available to the Agent and the Banks regarding the Borrower's Oil and Gas Properties, and (B) from time to time upon the occurrence of any Material Adverse Change. (ii) The Majority Banks may also redetermine the Borrowing Base after receiving notice of a proposed Debt Issuance based upon information available to the Banks from the most recent Borrowing Base redetermination. The Borrower shall give the Banks such notice at least 15 days before the closing of any Debt Issuance. Such redetermination shall be effective upon the date such Debt Issuance closes. (c) The Borrower may request the Majority Banks to redetermine the Borrowing Base by providing a written request to the Agent, but only two such requests may be made during any fiscal year of the Borrower. In connection with any such request, the Borrower shall provide the Agent and the Banks with an interim reserve report prepared by the Borrower together with such other information, including additional data concerning pricing, quantities of production, purchasers of production, and other information and engineering and geological data, as the Agent or any Bank may reasonably request. Within 30 days following the receipt of such interim reserve report and other information, the Majority Banks shall make a redetermination of the Borrowing Base. (d) Notwithstanding the foregoing paragraphs (b) and (c), at any time that any Term Advances are outstanding, the Borrowing Base may only be increased by agreement of all of the Banks. Additionally, if any Term Advances are outstanding on March 1, 1998, all of the Banks shall redetermine the Borrowing Base on or before March 15, 1998 based -19- on information then available to the Banks and the outstanding amount of the Term Advances. The Borrowing Base so determined shall be in effect until the next Borrowing Base redetermination under the other provisions of this Section 2.02. (e) Upon its redetermination of the Borrowing Base, each Bank shall notify the Agent in writing the Borrowing Base it has approved, and the Agent shall in turn notify the Borrower of such redetermination. Until the Borrower receives such notification from the Agent, the Borrowing Base most recently established shall remain in effect, and thereafter the new Borrowing Base as set forth in such notification shall be in effect. (f) The Borrowing Base shall represent the determination by the Majority Banks or, if paragraph (d) above applies, all of the Banks in their sole discretion, of the loan value of the Borrower's and its Subsidiaries unencumbered Oil and Gas Properties, but the Majority Banks or all of the Banks, as the case may be, shall make their determination in accordance with the applicable definitions and provisions herein contained, each such Bank's standard policies regarding energy lending, industry lending practices, consultation with the Agent and the other Banks (but without requiring the approval thereof), and consideration for the nature of the facilities established hereunder. The Borrower acknowledges that the determination of the Borrowing Base contains an equity cushion (market value in excess of loan value), which is acknowledged by Borrower to be essential for the adequate protection of the Agent and the Banks. (g) The Borrower shall also have the right to reduce the Borrowing Base once during the period from October 1 to March 31 and once during the period from April 1 to September 30 during each year by providing the Agent 30 days advance written of such reduction. The Agent shall promptly send to each Bank a copy of such notice and such reduction shall be effective on the date of the Agent's receipt of such notice. (h) As of the date of this Agreement, the Agent has provided the Borrower with the Agent's standard policies regarding energy lending. The Agent, but not any other Bank, agrees to provide the Borrower with written notice of any changes to such policies. Section 2.03. Method of Borrowing. (a) Notice. Each Borrowing shall be made pursuant to a Notice of Borrowing (or by telephone notice promptly confirmed in writing by a Notice of Borrowing), given not later than 10:00 a.m. (Dallas, Texas, time) (i) on the third Business Day before the date of the proposed Borrowing, in the case of a Eurodollar Rate Borrowing or (ii) on the Business Day of the proposed Borrowing, in the case of a Base Rate Borrowing, by the Borrower to the Agent, which shall in turn give to each Bank prompt notice of such proposed Borrowing by telecopier or telex. Each Notice of a Borrowing shall be given by telecopier or telex, -20- confirmed immediately in writing specifying the information required therein. In the case of a proposed Borrowing comprised of Eurodollar Rate Advances, the Agent shall promptly notify each Bank of the applicable interest rate under Section 2.08(b). Each Bank shall, before 10:00 a.m. (Dallas, Texas, time) on the date of such Borrowing, make available for the account of its Applicable Lending Office to the Agent at its address referred to in Section 9.02, or such other location as the Agent may specify by notice to the Banks, in same day funds, such Bank's Pro Rata Share of such Borrowing. After the Agent's receipt of such funds and upon fulfillment of the applicable conditions set forth in Article III, the Agent shall make such funds available to the Borrower at its account with the Agent. (b) Conversions and Continuations. The Borrower may elect to Convert or continue any Borrowing under this Section 2.03 by delivering an irrevocable Notice of Conversion or Continuation to the Agent at the Agent's office no later than 10:00 a.m. (Dallas, Texas, time) (i) on the date which is at least three Business Days in advance of the proposed Conversion or continuation date in the case of a Conversion to or a continuation of a Borrowing of the same Class comprised of Eurodollar Rate Advances and (ii) on the Business Day of the proposed conversion date in the case of a Conversion to a Borrowing of the same Class comprised of Base Rate Advances. Each such Notice of Conversion or Continuation shall be in writing or by telex or telecopier confirmed immediately in writing specifying the information required therein. Promptly after receipt of a Notice of Conversion or Continuation under this Section, the Agent shall provide each Bank with a copy thereof and, in the case of a Conversion to or a Continuation of a Borrowing comprised of Eurodollar Rate Advances, notify each Bank of the applicable interest rate under Section 2.08(b). (c) Certain Limitations. Notwithstanding anything in paragraphs (a) and (b) above: (i) at no time shall there be more than eight Interest Periods applicable to outstanding Eurodollar Rate Advances; (ii) if any Bank shall, at least one Business Day before the date of any requested Borrowing, Conversion, or continuation, notify the Agent that the introduction of or any change in or in the interpretation of any law or regulation makes it unlawful, or that any central bank or other Governmental Authority asserts that it is unlawful, for such Bank or its Eurodollar Lending Office to perform its obligations under this Agreement to make Eurodollar Rate Advances or to fund or maintain Eurodollar Rate Advances, the right of the Borrower to select Eurodollar Rate Advances from such Bank shall be suspended until such Bank shall notify the Agent that the circumstances causing such suspension no longer exist, and the -21- Advance made by such Bank in respect of such Borrowing, Conversion, or continuation shall be a Base Rate Advance; (iii) if the Agent is unable to determine the Eurodollar Rate for Eurodollar Rate Advances comprising any requested Borrowing, the right of the Borrower to select Eurodollar Rate Advances for such Borrowing or for any subsequent Borrowing shall be suspended until the Agent shall notify the Borrower and the Banks that the circumstances causing such suspension no longer exist, and each Advance comprising such Borrowing shall be a Base Rate Advance; (iv) if the Majority Banks shall, at least one Business Day before the date of any requested Borrowing, notify the Agent that the Eurodollar Rate for Eurodollar Rate Advances comprising such Borrowing will not adequately reflect the cost to such Banks of making or funding their respective Eurodollar Rate Advances, as the case may be, for such Borrowing, the right of the Borrower to select Eurodollar Rate Advances for such Borrowing or for any subsequent Borrowing shall be suspended until the Agent shall notify the Borrower and the Banks that the circumstances causing such suspension no longer exist, and each Advance comprising such Borrowing shall be a Base Rate Advance; and (v) if the Borrower shall fail to select the duration or continuation of any Interest Period for any Eurodollar Rate Advances in accordance with the provisions contained in the definition of "Interest Period" in Section 1.01 and paragraph (b) above, the Agent shall forthwith so notify the Borrower and the Banks and such Advances shall be made available to the Borrower on the date of such Borrowing as Base Rate Advances or, if an existing Advance, Convert into Base Rate Advances. (d) Notices Irrevocable. Each Notice of Borrowing and Notice of Conversion or Continuation shall be irrevocable and binding on the Borrower. In the case of any Borrowing which the related Notice of Borrowing specifies is to be comprised of Eurodollar Rate Advances, the Borrower shall indemnify each Bank against any loss, out-of-pocket cost, or expense incurred by such Bank as a result of any failure by the Borrower to fulfill on or before the date specified in such Notice of Borrowing for such Borrowing the applicable conditions set forth in Article III including, without limitation, any loss (including any loss of anticipated profits), cost, or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Bank to fund the Advance to be made by such Bank as part of such Borrowing when such Advance, as a result of such failure, is not made on such date. (e) Agent Reliance. Unless the Agent shall have received notice from a Bank before the date of any Borrowing that such Bank shall not make available to the Agent such -22- Bank's Pro Rata Share of such Borrowing, the Agent may assume that such Bank has made its Pro Rata Share of such Borrowing available to the Agent on the date of such Borrowing in accordance with paragraph (a) of this Section 2.03 and the Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Bank shall not have so made its Pro Rata Share of such Borrowing available to the Agent, such Bank and the Borrower severally agree to immediately repay to the Agent on demand such corresponding amount, together with interest on such amount, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Agent, at (i) in the case of the Borrower, the interest rate applicable on such day to Advances comprising such Borrowing and (ii) in the case of such Bank, the Federal Funds Rate for such day. If such Bank shall repay to the Agent such corresponding amount and interest as provided above, such corresponding amount so repaid shall constitute such Bank's Advance as part of such Borrowing for purposes of this Agreement even though not made on the same day as the other Advances comprising such Borrowing. (f) Bank Obligations Several. The failure of any Bank to make the Advance to be made by it as part of any Borrowing shall not relieve any other Bank of its obligation, if any, to make its Advance on the date of such Borrowing. No Bank shall be responsible for the failure of any other Bank to make the Advance to be made by such other Bank on the date of any Borrowing. Section 2.04. Prepayment of Advances. (a) Optional. The Borrower may prepay Advances, after giving by 10:00 a.m. (Dallas, Texas, time) (i) in the case of Eurodollar Rate Advances, at least two Business Days' or (ii) in case of Base Rate Advances, same Business Day's, irrevocable prior written notice to the Agent stating the proposed date and aggregate principal amount of such prepayment. If any such notice is given, the Borrower shall prepay Advances comprising part of the same Borrowing in whole or ratably in part in an aggregate principal amount equal to the amount specified in such notice, together with accrued interest to the date of such prepayment on the principal amount prepaid and amounts, if any, required to be paid pursuant to Section 2.11 as a result of such prepayment being made on such date; provided, however, that each partial prepayment with respect to: (A) any Borrowing comprised of Base Rate Advances shall be made in $100,000.00 multiples and in an aggregate principal amount such that after giving effect thereto such Borrowing shall have a principal amount outstanding of at least $500,000.00 and (B) any Borrowing comprised of Eurodollar Rate Advances shall be made in $1,000,000.00 multiples and in an aggregate principal amount such that after giving effect thereto such Borrowing shall have a principal amount outstanding of at least $2,000,000.00. Full prepayments of any Borrowing are permitted without restriction of amounts. -23- (b) Borrowing Base Deficiency. If the aggregate outstanding amount of Revolving Advances plus the Letter of Credit Exposure plus the Existing Letter of Credit Exposure ever exceeds the Borrowing Base, the Borrower shall, within ten days after receipt of written notice of such condition from the Agent elect by written notice to the Agent to take one or more of the following actions to remedy the Borrowing Base deficiency: (i) prepay Revolving Advances and, if the Advances have been repaid in full, make deposits into the Cash Collateral Account to provide cash collateral for the Letter of Credit Exposure, such that the Borrowing Base deficiency is cured within ten days after the Borrower's written election; (ii) add additional Oil and Gas Properties acceptable to the Majority Banks to the Borrowing Base such that the Borrowing Base deficiency is cured within 30 days after the Borrower's written election and, if any Oil and Gas Properties are so added to the Borrowing Base after March 31, 1998 and the Term Advances have not been repaid in full, provide the Agent for the benefit of the Banks an Acceptable Security Interest in at least 80% of the total Borrowing Base value of the Oil and Gas Properties included in the Borrowing Base most recently determined after such addition and deliver Lien Grant Documents for such Oil and Gas Properties; or (iii) pay the deficiency in monthly installments in amounts satisfactory to the Majority Banks for the prepayment of Revolving Advances and, if the Revolving Advances have been repaid in full, make deposits into the Cash Collateral Account to provide cash collateral for the Letter of Credit Exposure such that the Borrowing Base deficiency is eliminated in a period satisfactory to the Majority Banks, but in no event to exceed six months, by irrevocably dedicating an amount of the monthly cash flow from the Borrower's and its Subsidiaries' Oil and Gas Properties to the prepayment of Revolving Advances and cash collateralization of the Letter of Credit Exposure; Each prepayment pursuant to this Section 2.04(b) shall be accompanied by accrued interest on the amount prepaid to the date of such prepayment and amounts, if any, required to be paid pursuant to Section 2.11 as a result of such prepayment being made on such date. (c) Reduction of Revolving Commitments. On the date of each reduction of the aggregate Revolving Commitments pursuant to Section 2.01(c), the Borrower agrees to make a prepayment in respect of the outstanding amount of the Revolving Advances and the Letter of Credit Exposure to the extent, if any, that the aggregate unpaid principal amount of all Revolving Advances plus the sum of the Letter of Credit Exposure and the Existing Letter of Credit Exposure exceeds the Revolving Commitments, as so reduced. Any amount paid -24- under the preceding sentence in respect of Letter of Credit Exposure and Existing Letter of Credit Exposure shall be held as cash collateral under Section 2.06(g). Each prepayment pursuant to this Section 2.04(c) shall be accompanied by accrued interest on the amount prepaid to the date of such prepayment and amounts, if any, required to be paid pursuant to Section 2.11 as a result of such prepayment being made on such date. (d) Term Advances. The Borrower shall repay the Term Advances by an amount equal to the net cash proceeds received by the Borrower from the sale of any of the Borrower's capital stock (other than any common stock sold in connection with sales to its employees or directors pursuant to any employee or director stock option plan, employee compensation arrangement, or other employee benefit plan) or from any Debt Issuance, upon receipt of such proceeds, whether at closing of such sale or Debt Issuance or thereafter. Each prepayment pursuant to this Section 2.04(d) shall be accompanied by accrued interest on the amount prepaid to the date of such prepayment and amounts, if any, required to be paid pursuant to Section 2.11 as a result of such prepayment being made on such date. (e) Illegality. If any Bank shall notify the Agent and the Borrower that the introduction of or any change in or in the interpretation of any law or regulation makes it unlawful, or that any central bank or other governmental authority asserts that it is unlawful for such Bank or its Eurodollar Lending Office to perform its obligations under this Agreement to maintain any Eurodollar Rate Advances of such Bank then outstanding hereunder, (i) the Borrower shall, no later than 10:00 a.m. (Dallas, Texas, time) (A) if not prohibited by law, on the last day of the Interest Period for each outstanding Eurodollar Rate Advance made by such Bank or (B) if required by such notice, on the second Business Day following its receipt of such notice prepay all of the Eurodollar Rate Advances made by such Bank then outstanding, together with accrued interest on the principal amount prepaid to the date of such prepayment and amounts, if any, required to be paid pursuant to Section 2.11 as a result of such prepayment being made on such date, (ii) such Bank shall simultaneously make a Base Rate Advance to the Borrower on such date in an amount equal to the aggregate principal amount of the Eurodollar Rate Advances prepaid to such Bank, and (iii) the right of the Borrower to select Eurodollar Rate Advances from such Bank for any subsequent Borrowing shall be suspended until such Bank gives notice referred to above shall notify the Agent that the circumstances causing such suspension no longer exist. (f) No Additional Right; Ratable Prepayment. The Borrower shall have no right to prepay any principal amount of any Advance except as provided in this Section 2.04, and all notices given pursuant to this Section 2.04 shall be irrevocable and binding upon the Borrower. Each payment of any Advance pursuant to this Section 2.04 shall be made in a manner such that all Advances comprising part of the same Borrowing are paid in whole or ratably in part. -25- Section 2.05. Repayment of Advances. (a) The Borrower shall repay to the Agent for the ratable benefit of the Banks the outstanding principal amount of each Revolving Advance on the Revolving Maturity Date. (b) The Borrower shall repay to the Agent for the ratable benefit of the Banks the outstanding principal amount of the Term Advances on the Term Maturity Date. Section 2.06. Letters of Credit. (a) Commitment. From time to time from the date of this Agreement until the Revolving Maturity Date, at the request of the Borrower, the Issuing Bank shall, on the terms and conditions hereinafter set forth, issue, increase, or extend the expiration date of Letters of Credit for the account of the Borrower on any Business Day or convert an Existing Letter of Credit to a Letter of Credit upon its renewal. No Letter of Credit shall be issued, increased, or extended and no Existing Letters of Credit shall convert to Letters of Credit: (i) unless such issuance, increase, extension or conversion would not cause the Letter of Credit Exposure plus the Existing Letter of Credit Exposure to exceed the lesser of (A) $30,000,000.00 or (B) the lesser of (1) the aggregate Revolving Commitments less the aggregate outstanding principal amount of all Revolving Advances or (2) the Borrowing Base less the aggregate outstanding principal amount of all Revolving Advances; (ii) unless such Letter of Credit has an Expiration Date not later than the earlier of (A) 12 months after the date of issuance thereof (or, if extendable beyond such period, unless such Letter of Credit is cancelable upon at least 30 days' notice given by the Issuing Bank to the beneficiary of such Letter of Credit) or (B) the Revolving Maturity Date; (iii) unless such Letter of Credit Documents are in form and substance acceptable to the Issuing Bank in its sole discretion; (iv) unless such Letter of Credit is a standby letter of credit not supporting the repayment of indebtedness for borrowed money of any Person; and (v) unless the Borrower has delivered to the Issuing Bank a completed and executed Letter of Credit Application. (b) Participations. Upon the date of the issuance or increase of a Letter of Credit or the conversion of an Existing Letter of Credit to a Letter of Credit, the Issuing Bank shall -26- be deemed to have sold to each other Bank and each other Bank shall have been deemed to have purchased from the Issuing Bank a participation in the related Letter of Credit Obligations equal to such Bank's Pro Rata Share at such date and such sale and purchase shall otherwise be in accordance with the terms of this Agreement. The Issuing Bank shall promptly notify each such participant Bank by telex, telephone, or telecopy of each Letter of Credit issued, increased, or extended or converted and the actual dollar amount of such Bank's participation in such Letter of Credit. (c) Issuing. Each Letter of Credit shall be issued, increased, or extended or converted from an Existing Letter of Credit pursuant to a Letter of Credit Application (or by telephone notice promptly confirmed in writing by a Letter of Credit Application), given not later than 10:00 a.m. (Dallas, Texas, time) on the fifth Business Day before the date of the proposed issuance, increase, or extension of the Letter of Credit or conversion of the Existing Letter of Credit, and the Agent shall give to each Bank prompt notice of thereof by telex, telephone, or telecopy. Each Letter of Credit Application shall be given by telecopier or telex, confirmed immediately in writing, specifying the information required therein. After the Agent's receipt of such Letter of Credit Application and upon fulfillment of the applicable conditions set forth in Article III, the Agent shall issue, increase, or extend such Letter of Credit or convert such Existing Letter of Credit for the account of the Borrower. Each Letter of Credit Application shall be irrevocable and binding on the Borrower. (d) Reimbursement. The Borrower hereby agrees to pay on demand to the Issuing Bank an amount equal to any amount paid by the Issuing Bank under any Letter of Credit. In the event the Issuing Bank makes a payment pursuant to a request for draw presented under a Letter of Credit and such payment is not promptly reimbursed by the Borrower upon demand, the Issuing Bank shall give the Agent notice of the Borrower's failure to make such reimbursement and the Agent shall promptly notify each Bank of the amount necessary to reimburse the Issuing Bank. Upon such notice from the Agent, each Bank shall promptly reimburse the Issuing Bank for such Bank's Pro Rata Share of such amount, and such reimbursement shall be deemed for all purposes of this Agreement to be a Revolving Advance to the Borrower transferred at the Borrower's request to the Issuing Bank. If such reimbursement is not made by any Bank to the Issuing Bank on the same day on which the Agent notifies such Bank to make reimbursement to the Issuing Bank hereunder, such Bank shall pay interest on its Pro Rata Share thereof to the Issuing Bank at a rate per annum equal to the Federal Funds Rate. The Borrower hereby unconditionally and irrevocably authorizes, empowers, and directs the Agent and the Banks to record and otherwise treat such reimbursements to the Issuing Bank as Base Rate Advances under a Revolving Borrowing requested by the Borrower to reimburse the Issuing Bank which have been transferred to the Issuing Bank at the Borrower's request. -27- (e) Obligations Unconditional. The obligations of the Borrower under this Agreement in respect of each Letter of Credit shall be unconditional and irrevocable, and shall be paid strictly in accordance with the terms of this Agreement under all circumstances, including, without limitation, the following circumstances: (i) any lack of validity or enforceability of any Letter of Credit Documents; (ii) any amendment or waiver of, or any consent to, departure from any Letter of Credit Documents; (iii) the existence of any claim, set-off, defense, or other right which the Borrower may have at any time against any beneficiary or transferee of such Letter of Credit (or any Persons for whom any such beneficiary or any such transferee may be acting), the Issuing Bank, or any other person or entity, whether in connection with this Agreement, the transactions contemplated in this Agreement or in any Letter of Credit Documents, or any unrelated transaction; (iv) any statement or any other document presented under such Letter of Credit proving to be forged, fraudulent, invalid, or insufficient in any respect or any statement therein being untrue or inaccurate in any respect to the extent the Issuing Bank would not be liable therefor pursuant to the following paragraph (f); or (v) payment by the Issuing Bank under such Letter of Credit against presentation of a draft or certificate which does not comply with the terms of such Letter of Credit; provided, however, that nothing contained in this paragraph (e) shall be deemed to constitute a waiver of any remedies of the Borrower in connection with the Letters of Credit or the Borrower's rights under Section 2.06(f) below. (f) Liability of Issuing Bank. The Borrower assumes all risks of the acts or omissions of any beneficiary or transferee of any Letter of Credit with respect to its use of such Letter of Credit. Neither the Issuing Bank nor any of its officers or directors shall be liable or responsible for: (i) the use which may be made of any Letter of Credit or any acts or omissions of any beneficiary or transferee in connection therewith; -28- (ii) the validity, sufficiency, or genuineness of documents, or of any endorsement thereon, even if such documents should prove to be in any or all respects invalid, insufficient, fraudulent, or forged; (iii) payment by the Issuing Bank against presentation of documents which do not comply with the terms of a Letter of Credit, including failure of any documents to bear any reference or adequate reference to the relevant Letter of Credit; or (iv) any other circumstances whatsoever in making or failing to make payment under any Letter of Credit (INCLUDING THE ISSUING BANK'S OWN NEGLIGENCE), except that the Borrower shall have a claim against the Issuing Bank, and the Issuing Bank shall be liable to the Borrower, to the extent of any direct, as opposed to consequential, damages suffered by the Borrower which the Borrower proves were caused by (A) the Issuing Bank's willful misconduct or gross negligence in determining whether documents presented under a Letter of Credit comply with the terms of such Letter of Credit or (B) the Issuing Bank's willful failure to make lawful payment under any Letter of Credit after the presentation to it of a draft and certificate strictly complying with the terms and conditions of such Letter of Credit. In furtherance and not in limitation of the foregoing, the Issuing Bank may accept documents that appear on their face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary. (g) Cash Collateral Account. (i) If the Borrower is required to deposit funds in the Cash Collateral Account pursuant to Sections 2.04(b) or (c), 7.02(b), or 7.03(b), then the Borrower and the Agent shall establish the Cash Collateral Account and the Borrower shall execute any documents and agreements, including the Agent's standard form assignment of deposit accounts, that the Agent requests in connection therewith to establish the Cash Collateral Account and grant the Agent a first priority security interest in such account and the funds therein. The Borrower hereby pledges to the Agent and grants the Agent a security interest in the Cash Collateral Account, whenever established, all funds held in the Cash Collateral Account from time to time, and all proceeds thereof as security for the payment of the Obligations. (ii) So long as no Event of Default exists, (A) the Agent may apply the funds held in the Cash Collateral Account only to the reimbursement of any Letter of Credit Obligations, and (B) the Agent shall release to the Borrower at the Borrower's written request any funds held in the Cash Collateral Account in an -29- amount up to but not exceeding the excess, if any (immediately prior to the release of any such funds), of the total amount of funds held in the Cash Collateral Account over the Letter of Credit Exposure. During the existence of any Event of Default, the Agent may apply any funds held in the Cash Collateral Account to the Obligations in any order determined by the Agent, regardless of any Letter of Credit Exposure which may remain outstanding. The Agent may in its sole discretion at any time release to the Borrower any funds held in the Cash Collateral Account. (iii) The Agent shall exercise reasonable care in the custody and preservation of any funds held in the Cash Collateral Account and shall be deemed to have exercised such care if such funds are accorded treatment substantially equivalent to that which the Agent accords its own property, it being understood that the Agent shall not have any responsibility for taking any necessary steps to preserve rights against any parties with respect to any such funds. Section 2.07. Fees. (a) Commitment Fees. (i) The Borrower agrees to pay to the Agent for the account of each Bank a commitment fee of .375% per annum on the average daily amount by which such Bank's Pro Rata Share of the Borrowing Base exceeds the sum of such Bank's outstanding Revolving Advances and such Bank's Pro Rata Share of the Letter of Credit Exposure, from the date of this Agreement until the Revolving Maturity Date. (ii) The commitment fees shall be due and payable quarterly in arrears on the last day of each March, June, September, and December during the term of this Agreement and on the Revolving Maturity Date. (b) Agent Fees. The Borrower agrees to pay to the Agent for the benefit of the Agent the fees described in the letter dated July 30, 1997, from the Agent to the Borrower (the "Agent's Fee Letter"). (c) Bank Fees. The Borrower agrees to pay to the Agent for the ratable benefit of the Banks (i) on the Effective Date, a $75,000.00 facility fee and (ii) on March 31, 1998 if any Term Advances remain outstanding on such date, a $150,000.00 facility fee. (d) Letter of Credit Fees. The Borrower agrees to pay to the Agent for the pro rata benefit of the Banks a fee for each Letter of Credit issued hereunder equal to 1.00% per annum on the face amount of such Letter of Credit, but with minimum annual fee of $750.00 on each Letter of Credit. Each such fee shall be payable annually in advance on the date of -30- the issuance, increase or extension of the Letter of Credit, but, in the case of an increase or extension only, on the amount of such increase or for the period of such extension. Section 2.08. Interest. The Borrower shall pay interest on the unpaid principal amount of each Advance made by each Bank from the date of such Advance until such principal amount shall be paid in full, at the following rates per annum: (a) Base Rate Advances. If such Advance is a Base Rate Advance, a rate per annum equal at all times to the Adjusted Base Rate in effect from time to time plus the Applicable Margin in effect from time to time, payable in arrears on the last day of March, June, September, and December and on the date such Base Rate Advance shall be paid in full, provided that any amount of principal which is not paid when due (whether at stated maturity, by acceleration, or otherwise) shall bear interest from the date on which such amount is due until such amount is paid in full, payable on demand, at a rate per annum equal at all times to the Adjusted Base Rate in effect from time to time plus the Applicable Margin plus 3.00% per annum. (b) Eurodollar Rate Advances. If such Advance is a Eurodollar Rate Advance, a rate per annum equal at all times during the Interest Period for such Advance to the Eurodollar Rate for such Interest Period plus the Applicable Margin in effect from time to time, payable on the last day of such Interest Period, and, in the case of six-month Interest Periods, on the day which occurs during such Interest Period three months from the first day of such Interest Period, provided that any amount of principal which is not paid when due (whether at stated maturity, by acceleration, or otherwise) shall bear interest from the date on which such amount is due until such amount is paid in full, payable on demand, at a rate per annum equal at all times to the Adjusted Base Rate in effect from time to time plus the Applicable Margin plus 3.00% per annum. (c) Additional Interest on Eurodollar Rate Advances. The Borrower shall pay to each Bank, so long as any such Bank shall be required under regulations of the Federal Reserve Board to maintain reserves with respect to liabilities or assets consisting of or including Eurocurrency Liabilities, additional interest on the unpaid principal amount of each Eurodollar Rate Advance of such Bank, from the effective date of such Advance until such principal amount is paid in full, at an interest rate per annum equal at all times to the remainder obtained by subtracting (A) the Eurodollar Rate for the Interest Period for such Advance from (B) the rate obtained by dividing such Eurodollar Rate by a percentage equal to 100% minus the Eurodollar Rate Reserve Percentage of such Bank for such Interest Period, payable on each date on which interest is payable on such Advance. Such additional interest payable to any Bank shall be determined by such Bank and notified to the Borrower through the Agent (such notice to include the calculation of such additional interest, which calculation shall be conclusive in the absence of manifest error). -31- (d) Usury. (i) If, with respect to any Bank, the effective rate of interest contracted for under the Credit Documents, including the stated rates of interest and fees contracted for hereunder and any other amounts contracted for under the Credit Documents which are deemed to be interest, at any time exceeds the Maximum Rate, then the outstanding principal amount of the loans made by such Bank hereunder shall bear interest at a rate which would make the effective rate of interest for such Bank under the Credit Documents equal the Maximum Rate until the difference between the amounts which would have been due at the stated rates and the amounts which were due at the Maximum Rate (the "Lost Interest") has been recaptured by such Bank. (ii) If, when the loans made hereunder are repaid in full, the Lost Interest has not been fully recaptured by such Bank pursuant to the preceding paragraph, then, to the extent permitted by law, for the loans made hereunder by such Bank the interest rates charged under Section 2.08 hereunder shall be retroactively increased such that the effective rate of interest under the Credit Documents was at the Maximum Rate since the effectiveness of this Agreement to the extent necessary to recapture the Lost Interest not recaptured pursuant to the preceding sentence and, to the extent allowed by law, the Borrower shall pay to such Bank the amount of the Lost Interest remaining to be recaptured by such Bank. (iii) NOTWITHSTANDING the foregoing or any other term in this Agreement and the Credit Documents to the contrary, it is the intention of each Bank and the Borrower to conform strictly to any applicable usury laws. Accordingly, if any Bank contracts for, charges, or receives any consideration which constitutes interest in excess of the Maximum Rate, then any such excess shall be canceled automatically and, if previously paid, shall at such Bank's option be applied to the outstanding amount of the loans made hereunder by such Bank or be refunded to the Borrower. Section 2.09. Payments and Computations. (a) Payment Procedures. The Borrower shall make each payment under this Agreement and under the Notes not later than 10:00 a.m. (Dallas, Texas, time) on the day when due in Dollars to the Agent at 901 Main Street, 49th Floor, Dallas, Texas 75202 (or such other location as the Agent shall designate in writing to the Borrower), in same day funds. The Agent shall promptly thereafter cause to be distributed like funds relating to the payment of principal, interest or fees ratably (other than amounts payable solely to the Agent, the Issuing Bank, or a specific Bank pursuant to Section 2.07(b), 2.08(c), 2.11, 2.12, 2.13, -32- 8.05, or 9.07, but after taking into account payments effected pursuant to Section 9.04) to the Banks for the account of their respective Applicable Lending Offices, and like funds relating to the payment of any other amount payable to any Bank or the Issuing Bank to such Bank for the account of its Applicable Lending Office, in each case to be applied in accordance with the terms of this Agreement. (b) Computations. All computations of interest based on the Base Rate shall be made by the Agent on the basis of a year of 365 or 366 days, as the case may be, and all computations of interest based on the Eurodollar Rate and the Federal Funds Rate and of fees shall be made by the Agent, on the basis of a year of 360 days, in each case for the actual number of days (including the first day, but excluding the last day) occurring in the period for which such interest or fees are payable. Each determination by the Agent of an interest rate or fee shall be conclusive and binding for all purposes, absent manifest error. (c) Non-Business Day Payments. Whenever any payment shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest or fees, as the case may be; provided, however, that if such extension would cause payment of interest on or principal of Eurodollar Rate Advances to be made in the next following calendar month, such payment shall be made on the next preceding Business Day. (d) Agent Reliance. Unless the Agent shall have received written notice from the Borrower prior to the date on which any payment is due to the Banks that the Borrower shall not make such payment in full, the Agent may assume that the Borrower has made such payment in full to the Agent on such date and the Agent may, in reliance upon such assumption, cause to be distributed to each Bank on such date an amount equal to the amount then due such Bank. If and to the extent the Borrower shall not have so made such payment in full to the Agent, each Bank shall repay to the Agent forthwith on demand such amount distributed to such Bank, together with interest, for each day from the date such amount is distributed to such Bank until the date such Bank repays such amount to the Agent, at the Federal Funds Rate for such day. Section 2.10. Sharing of Payments, Etc. If any Bank shall obtain any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) on account of the Advances or Letter of Credit Obligations made by it in excess of its Pro Rata Share of payments on account of the Advances or Letter of Credit Obligations obtained by all the Banks, such Bank shall notify the Agent and forthwith purchase from the other Banks such participations in the Advances made by them or Letter of Credit Obligations held by them as shall be necessary to cause such purchasing Bank to share the excess payment ratably with each of them; provided, however, that if all or any portion of such excess -33- payment is thereafter recovered from such purchasing Bank, such purchase from each Bank shall be rescinded and such Bank shall repay to the purchasing Bank the purchase price to the extent of such Bank's ratable share (according to the proportion of (a) the amount of the participation sold by such Bank to the purchasing Bank as a result of such excess payment to (b) the total amount of such excess payment) of such recovery, together with an amount equal to such Bank's ratable share (according to the proportion of (a) the amount of such Bank's required repayment to the purchasing Bank to (b) the total amount of all such required repayments to the purchasing Bank) of any interest or other amount paid or payable by the purchasing Bank in respect of the total amount so recovered. The Borrower agrees that any Bank so purchasing a participation from another Bank pursuant to this Section 2.10 may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off) with respect to such participation as fully as if such Bank were the direct creditor of the Borrower in the amount of such participation. Section 2.11. Breakage Costs. If (a) any payment of principal of any Eurodollar Rate Advance is made other than on the last day of the Interest Period for such Advance, whether as a result of any payment pursuant to Section 2.04, the acceleration of the maturity of the Notes pursuant to Article VII, or otherwise, or (b) the Borrower fails to make a principal or interest payment with respect to any Eurodollar Rate Advance on the date such payment is due and payable, the Borrower shall, within 10 days of any written demand sent by any Bank to the Borrower through the Agent, pay to the Agent for the account of such Bank any amounts required to compensate such Bank for any additional losses, out-of-pocket costs or expenses which it may reasonably incur as a result of such payment or nonpayment, including, without limitation, any loss (including loss of anticipated profits), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by any Bank to fund or maintain such Advance. Section 2.12. Increased Costs. (a) Eurodollar Rate Advances. If, due to either (i) the introduction of or any change (other than any change by way of imposition or increase of reserve requirements included in the Eurodollar Rate Reserve Percentage) in or in the interpretation of any law or regulation or (ii) the compliance with any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law), there shall be any increase in the cost to any Bank of agreeing to make or making, funding, or maintaining Eurodollar Rate Advances, then the Borrower shall from time to time, upon demand by such Bank (with a copy of such demand to the Agent), immediately pay to the Agent for the account of such Bank additional amounts sufficient to compensate such Bank for such increased cost. A certificate as to the amount of such increased cost and detailing the calculation of such cost submitted to the Borrower and the Agent by such Bank shall be conclusive and binding for all purposes, absent manifest error. -34- (b) Capital Adequacy. If any Bank or the Issuing Bank determines in good faith that compliance with any law or regulation or any guideline or request from any central bank or other governmental authority (whether or not having the force of law) affects or would affect the amount of capital required or expected to be maintained by such Bank or the Issuing Bank or any corporation controlling such Bank or the Issuing Bank and that the amount of such capital is increased by or based upon the existence of such Bank's commitment to lend or the Issuing Bank's commitment to issue the Letters of Credit and other commitments of this type, then, upon 30 days' prior written notice by such Bank or the Issuing Bank (with a copy of any such demand to the Agent), the Borrower shall immediately pay to the Agent for the account of such Bank or to the Issuing Bank, as the case may be, from time to time as specified by such Bank or the Issuing Bank, additional amounts sufficient to compensate such Bank or the Issuing Bank, in light of such circumstances, (i) with respect to such Bank, to the extent that such Bank reasonably determines such increase in capital to be allocable to the existence of such Bank's commitment to lend under this Agreement and (ii) with respect to the Issuing Bank, to the extent that the Issuing Bank reasonably determines such increase in capital to be allocable to the issuance or maintenance of the Letters of Credit. A certificate as to such amounts and detailing the calculation of such amounts submitted to the Borrower by such Bank or the Issuing Bank shall be conclusive and binding for all purposes, absent manifest error. (c) Letters of Credit. If any change in any law or regulation or in the interpretation thereof by any court or administrative or Governmental Authority charged with the administration thereof shall either (i) impose, modify, or deem applicable any reserve, special deposit, or similar requirement against letters of credit issued by, or assets held by, or deposits in or for the account of, the Issuing Bank or (ii) impose on the Issuing Bank any other condition regarding the provisions of this Agreement relating to the Letters of Credit or any Letter of Credit Obligations, and the result of any event referred to in the preceding clause (i) or (ii) shall be to increase the cost to the Issuing Bank of issuing or maintaining any Letter of Credit (which increase in cost shall be determined by the Issuing Bank's reasonable allocation of the aggregate of such cost increases resulting from such event), then, upon demand by the Issuing Bank, the Borrower shall pay to the Issuing Bank, from time to time as specified by the Issuing Bank, additional amounts which shall be sufficient to compensate the Issuing Bank for such increased cost. A certificate as to such increased cost incurred by the Issuing Bank, as a result of any event mentioned in clause (i) or (ii) above, and detailing the calculation of such increased costs submitted by the Issuing Bank to the Borrower, shall be conclusive and binding for all purposes, absent manifest error. Section 2.13. Taxes. (a) No Deduction for Certain Taxes. Any and all payments by the Borrower shall be made, in accordance with Section 2.09, free and clear of and without deduction for any -35- and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of each Bank, the Issuing Bank, and the Agent, taxes imposed on its income, and franchise taxes imposed on it, by the jurisdiction under the laws of which such Bank, the Issuing Bank, or the Agent (as the case may be) is organized or any political subdivision of the jurisdiction (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes") and, in the case of each Bank and the Issuing Bank, Taxes by the jurisdiction of such Bank's Applicable Lending Office or any political subdivision of such jurisdiction. If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable to any Bank, the Issuing Bank, or the Agent, (i) the sum payable shall be increased as may be necessary so that, after making all required deductions (including deductions applicable to additional sums payable under this Section 2.13), such Bank, the Issuing Bank, or the Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made; provided, however, that if the Borrower's obligation to deduct or withhold Taxes is caused solely by such Bank's, the Issuing Bank's, or the Agent's failure to provide the forms described in paragraph (d) of this Section 2.13 and such Bank, the Issuing Bank, or the Agent could have provided such forms, no such increase shall be required; (ii) the Borrower shall make such deductions; and (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law. (b) Other Taxes. In addition, the Borrower agrees to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies which arise from any payment made or from the execution, delivery or registration of, or otherwise with respect to, this Agreement, the Notes, or the other Credit Documents (hereinafter referred to as "Other Taxes"). (c) Indemnification. THE BORROWER INDEMNIFIES EACH BANK, THE ISSUING BANK, AND THE AGENT FOR THE FULL AMOUNT OF TAXES OR OTHER TAXES (INCLUDING, WITHOUT LIMITATION, ANY TAXES OR OTHER TAXES IMPOSED BY ANY JURISDICTION ON AMOUNTS PAYABLE UNDER THIS SECTION 2.13) PAID BY SUCH BANK, THE ISSUING BANK, OR THE AGENT (AS THE CASE MAY BE) AND ANY LIABILITY (INCLUDING INTEREST AND EXPENSES) ARISING THEREFROM OR WITH RESPECT THERETO, WHETHER OR NOT SUCH TAXES OR OTHER TAXES WERE CORRECTLY OR LEGALLY ASSERTED. EACH PAYMENT REQUIRED TO BE MADE BY THE BORROWER IN RESPECT OF THIS INDEMNIFICATION SHALL BE MADE TO THE AGENT FOR THE BENEFIT OF ANY PARTY CLAIMING SUCH INDEMNIFICATION WITHIN 30 DAYS FROM THE DATE THE BORROWER RECEIVES WRITTEN DEMAND THEREFOR FROM THE AGENT ON BEHALF OF ITSELF AS AGENT, THE ISSUING BANK, OR ANY SUCH -36- BANK. IF ANY BANK, THE AGENT, OR THE ISSUING BANK RECEIVES A REFUND IN RESPECT OF ANY TAXES PAID BY THE BORROWER UNDER THIS PARAGRAPH (C), SUCH BANK, THE AGENT, OR THE ISSUING BANK, AS THE CASE MAY BE, SHALL PROMPTLY PAY TO THE BORROWER THE BORROWER'S SHARE OF SUCH REFUND. (d) Foreign Bank Withholding Exemption. Each Bank and Issuing Bank that is not incorporated under the laws of the United States of America or a state thereof agrees that it shall deliver to the Borrower and the Agent (i) two duly completed copies of United States Internal Revenue Service Form 1001 or 4224 or successor applicable form, as the case may be, certifying in each case that such Bank is entitled to receive payments under this Agreement and the Notes payable to it, without deduction or withholding of any United States federal income taxes, (ii) if applicable, an Internal Revenue Service Form W-8 or W-9 or successor applicable form, as the case may be, to establish an exemption from United States backup withholding tax, and (iii) any other governmental forms which are necessary or required under an applicable tax treaty or otherwise by law to reduce or eliminate any withholding tax, which have been reasonably requested by the Borrower. Each Bank which delivers to the Borrower and the Agent a Form 1001 or 4224 and Form W-8 or W-9 pursuant to the next preceding sentence further undertakes to deliver to the Borrower and the Agent two further copies of the said letter and Form 1001 or 4224 and Form W-8 or W-9, or successor applicable forms, or other manner of certification, as the case may be, on or before the date that any such letter or form expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent letter and form previously delivered by it to the Borrower and the Agent, and such extensions or renewals thereof as may reasonably be requested by the Borrower and the Agent certifying in the case of a Form 1001 or 4224 that such Bank is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes. If an event (including without limitation any change in treaty, law or regulation) has occurred prior to the date on which any delivery required by the preceding sentence would otherwise be required which renders all such forms inapplicable or which would prevent any Bank from duly completing and delivering any such letter or form with respect to it and such Bank advises the Borrower and the Agent that it is not capable of receiving payments without any deduction or withholding of United States federal income tax, and in the case of a Form W-8 or W-9, establishing an exemption from United States backup withholding tax, such Bank shall not be required to deliver such letter or forms. The Borrower shall withhold tax at the rate and in the manner required by the laws of the United States with respect to payments made to a Bank failing to timely provide the requisite Internal Revenue Service forms. -37- ARTICLE III CONDITIONS OF LENDING Section 3.01. Conditions Precedent to Amendment and Restatement. This Agreement shall be effective and the Existing Credit Agreement shall be amended and restated as provided in this Agreement on the date the following conditions precedent are met. (a) Documentation. On or before the day on which the initial Borrowing is made or the initial Letters of Credit are issued, the Agent shall have received the following duly executed by all the parties thereto, in form and substance satisfactory to the Agent and the Banks, and, where applicable, in sufficient copies for each Bank: (i) This Agreement and the Notes; (ii) A favorable opinion of the Borrower's general counsel, dated as of July 30, 1997, and substantially in the form of the attached Exhibit H-1 covering the matters discussed in such Exhibit and such other matters as any Bank through the Agent may reasonably request; (iii) A favorable opinion of Bracewell & Patterson, L.L.P., counsel to the Agent, dated as of July 30, 1997, and substantially in the form of the attached Exhibit H-2; (iv) A certificate of the Secretary or an Assistant Secretary of the Borrower certifying the existence of the Borrower, a certificate of good standing for the Borrower, the certificate of incorporation of the Borrower, the bylaws of the Borrower, the resolutions of the Board of Directors of the Borrower authorizing this Agreement and related transactions, and the incumbency and signatures of the officers of the Borrower authorized to execute this Agreement and related documents; and (v) Such other documents, governmental certificates, agreements, and lien searches as the Agent or any Bank may reasonably request. (b) Payment of Fees. On the date of this Agreement, the Borrower shall have paid the fees required by Section 2.07(b) and (c) and all costs and expenses which have been invoiced and are payable pursuant to Section 9.04. -38- Section 3.02. Condition to Initial Term Advances. As a condition to the making of the initial Term Advances only, the Borrower shall have delivered, in a form satisfactory to the Agent, evidence that the purchase of the properties provided for under the Purchase and Sale Agreement dated as of July 2, 1997 among Total Minatome Corporation, Forest Oil Corporation, and Aviara Energy Corporation, as sellers, and the Borrower, as buyer, was consummated contemporaneously with the making of such Term Advances. Section 3.03. Conditions Precedent to All Borrowings. The obligation of each Bank to make an Advance on the occasion of each Borrowing and of the Issuing Bank to issue, increase, or extend any Letter of Credit or to convert an Existing Letter of Credit to a Letter of Credit shall be subject to the further conditions precedent that on the date of such Borrowing or the issuance, increase, or extension of such Letter of Credit or conversion of such Existing Letter of Credit: (a) the following statements shall be true (and each of the giving of the applicable Notice of Borrowing or Letter of Credit Application and the acceptance by the Borrower of the proceeds of such Borrowing or the issuance, increase, or extension of such Letter of Credit or the conversion of such Existing Letter of Credit shall constitute a representation and warranty by the Borrower that on the date of such Borrowing, the issuance, increase, or extension of such Letter of Credit or the conversion of such Existing Letter of Credit, such statements are true): (i) the representations and warranties contained in Article IV, the Security Documents, and the Guaranties are correct in all material respects on and as of the date of such Borrowing or the date of the issuance, increase, or extension of such Letter of Credit or the conversion of such Existing Letter of Credit, before and after giving effect to such Borrowing or to the issuance, increase, or extension of such Letter of Credit or the conversion of such Existing Letter of Credit and to the application of the proceeds from such Borrowing, as though made on and as of such date and (ii) no Default has occurred and is continuing or would result from such Borrowing or from the application of the proceeds therefrom, from the issuance, increase, or extension of such Letter of Credit or from the conversion of such Existing Letter of Credit; and (b) the Agent shall have received such other approvals, opinions, or documents reasonably deemed necessary or desirable by any Bank as a result of circumstances occurring after the date of this Agreement, as any Bank through the Agent may reasonably request. -39- ARTICLE IV REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants as follows: Section 4.01. Corporate Existence; Subsidiaries. The Borrower is a corporation duly organized, validly existing, and in good standing under the laws of Delaware and in good standing and qualified to do business in each jurisdiction where its ownership or lease of property or conduct of its business requires such qualification and where a failure to be qualified could reasonably be expected to cause a Material Adverse Change. Each Guarantor is a corporation duly organized, validly existing, and in good standing under the laws of its jurisdiction of incorporation and in good standing and qualified to do business in each jurisdiction where its ownership or lease of property or conduct of its business requires such qualification and where a failure to be qualified could reasonably be expected to cause a Material Adverse Change. The Borrower has no Subsidiaries other than The Stone Petroleum Corporation or Subsidiaries which have executed a Guaranty in compliance with Section 5.09. The Stone Petroleum Corporation has transferred substantially all of its assets to the Borrower and has adopted a plan of liquidation which has been substantially completed. Section 4.02. Corporate Power. The execution, delivery, and performance by the Borrower of this Agreement, the Notes, and the other Credit Documents to which it is a party and by the Guarantors of the Guaranties and the consummation of the transactions contemplated hereby and thereby (a) are within the Borrower's and the Guarantor's corporate powers, (b) have been duly authorized by all necessary corporate action, (c) do not contravene (i) the Borrower's or any Guarantor's certificate or articles, as the case may be, of incorporation or by-laws or (ii) any law or any contractual restriction binding on or affecting the Borrower or any Guarantor, and (d) will not result in or require the creation or imposition of any Lien prohibited by this Agreement. At the time of each Borrowing, such Borrowing and the use of the proceeds of such Borrowing will be within the Borrower's corporate powers, will have been duly authorized by all necessary corporate action, (a) will not contravene (i) the Borrower's certificate of incorporation or by-laws or (ii) any law or any contractual restriction binding on or affecting the Borrower and (b) will not result in or require the creation or imposition of any Lien prohibited by this Agreement. Section 4.03. Authorization and Approvals. No authorization or approval or other action by, and no notice to or filing with, any Governmental Authority is required for the due execution, delivery, and performance by the Borrower of this Agreement, the Notes, or the other Credit Documents to which the Borrower is a party or by each Guarantor of its -40- Guaranty or the consummation of the transactions contemplated thereby. At the time of each Borrowing, no authorization or approval or other action by, and no notice to or filing with, any Governmental Authority will be required for such Borrowing or the use of the proceeds of such Borrowing. Section 4.04. Enforceable Obligations. This Agreement, the Notes, and the other Credit Documents to which the Borrower is a party have been duly executed and delivered by the Borrower and the Guaranties have been duly executed and delivered by the Guarantors. Each Credit Document is the legal, valid, and binding obligation of the Borrower and each Guarantor which is a party to it enforceable against the Borrower and each such Guarantor in accordance with its terms, except as such enforceability may be limited by any applicable bankruptcy, insolvency, reorganization, moratorium, or similar law affecting creditors' rights generally and by general principles of equity. Section 4.05. Financial Statements. The audited consolidated balance sheet of the Borrower and its Subsidiaries as at December 31, 1996, and the related audited consolidated statements of income, cash flow, and retained earnings of the Borrower and its Subsidiaries for the fiscal year then ended, copies of which have been furnished to each Bank, and the consolidated balance sheet of the Borrower and its Subsidiaries as at March 31, 1997, and the related consolidated statements of income and cash flow of the Borrower and its Subsidiaries for the three months then ended, copies of which have been furnished to the Agent, fairly present, subject, in the case of the balance sheet as at March 31, 1997, and said statements of income and cash flow for the three months then ended, to year-end audit adjustments, the consolidated financial condition of the Borrower and its Subsidiaries as at such dates and the consolidated results of the operations of the Borrower and its Subsidiaries for the periods ended on such dates, and such consolidated balance sheets and consolidated statements of income, cash flow, and retained earnings were prepared in accordance with GAAP (or in compliance with the regulations promulgated by the United States Securities and Exchange Commission). Since the date of the Financial Statements, no Material Adverse Change has occurred. Section 4.06. True and Complete Disclosure. All factual information (excluding estimates) heretofore or contemporaneously furnished by or on behalf of the Borrower or any of its Subsidiaries in writing to any Bank or the Agent for purposes of or in connection with this Agreement, any other Credit Document or any transaction contemplated hereby or thereby is (taken as a whole) true and accurate in all material respects on the date as of which such information is dated or certified and does not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements contained therein not misleading as of the date of this Agreement. All projections, estimates, and pro forma financial information furnished by the Borrower were prepared on the basis of assumptions, -41- data, information, tests, or conditions believed to be reasonable at the time such projections, estimates, and pro forma financial information were furnished. Section 4.07. Litigation. Set forth on Schedule 4.07 is an accurate description of all of the Borrower's and its Subsidiaries' pending litigation existing on the date of this Agreement which could reasonably be expected to cause a Material Adverse Change. There is no pending or, to the best knowledge of the Borrower, threatened action or proceeding affecting the Borrower or any of its Subsidiaries before any court, Governmental Agency or arbitrator, which could reasonably be expected to cause a Material Adverse Change or which purports to affect the legality, validity, binding effect, or enforceability of this Agreement, any Note, or any other Credit Document. Section 4.08. Use of Proceeds. All Advances and Letters of Credit shall be used to finance the acquisition of oil and gas reserves and for general corporate purposes of the Borrower and its Subsidiaries, but in no event for the payment of dividends or other distributions or advances to the shareholders of the Borrower. The Borrower is not engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U). No proceeds of any Advance will be used to purchase or carry any margin stock in violation of Regulation G, T, U or X. Section 4.09. Investment Company Act. Neither the Borrower nor any of its Subsidiaries is an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. Section 4.10. Public Utility Holding Company Act. Neither the Borrower nor any of its Subsidiaries is a "holding company," or a "Subsidiary company" of a "holding company," or an "affiliate" of a "holding company" or of a "Subsidiary company" of a "holding company," within the meaning of the Public Utility Holding Company Act of 1935, as amended. Section 4.11. Taxes. Proper and accurate (in all material respects) federal, state, local, and foreign tax returns, reports and statements required to be filed (after giving effect to any extension granted in the time of filing) by or on behalf of the Borrower, its Subsidiaries, or any member of the Controlled Group (hereafter collectively called the "Tax Group") have been duly filed on a timely basis or appropriate extensions have been obtained with appropriate governmental agencies in all jurisdictions in which such returns, reports, and statements are required to be filed, except where the failure to so file would not be reasonably expected to cause a Material Adverse Change; and all taxes (which are material in amount) and other impositions due and payable have been timely paid prior to the date on which any fine, penalty, interest, late charge, or loss may be added thereto for non-payment thereof, except where contested in good faith by appropriate proceedings. The reserves for -42- accrued taxes reflected in the financial statements delivered to the Banks under this Agreement are adequate in the aggregate for the payment of all unpaid taxes, whether or not disputed, for the period ended as of the date thereof and for any period prior thereto, and for which the Tax Group may be liable in its own right, as withholding agent or as a transferee of the assets of, or successor to, any Person, except for such taxes or reserves therefor, the failure to pay or provide for which does not and could not cause a Material Adverse Change. Timely payment of all material sales and use taxes required by applicable law has been made by the Borrower and all other members of the Tax Group. Section 4.12. Pension Plans. All Plans are in compliance in all material respects with all applicable provisions of ERISA. No Termination Event has occurred with respect to any Plan, and each Plan has complied with and been administered in all material respects with applicable provisions of ERISA and the Code. No "accumulated funding deficiency" (as defined in Section 302 of ERISA) has occurred and there has been no excise tax imposed under Section 4971 of the Code. No Reportable Event has occurred with respect to any Multiemployer Plan, and each Multiemployer Plan has complied with and been administered in all material respects with applicable provisions of ERISA and the Code. The present value of all benefits vested under each Plan (based on the assumptions used to fund such Plan) did not, as of the last annual valuation date applicable thereto, exceed the value of the assets of such Plan allocable to such vested benefits. Neither the Borrower nor any member of the Controlled Group has had a complete or partial withdrawal from any Multiemployer Plan for which there is any withdrawal liability. As of the most recent valuation date applicable thereto, neither the Borrower nor any member of the Controlled Group would become subject to any liability under ERISA if the Borrower or any member of the Controlled Group has received notice that any Multiemployer Plan is insolvent or in reorganization. Based upon GAAP existing as of the date of this Agreement and current factual circumstances, the Borrower has no reason to believe that the annual cost during the term of this Agreement to the Borrower or any member of the Controlled Group for post-retirement benefits to be provided to the current and former employees of the Borrower or any member of the Controlled Group under Plans that are welfare benefit plans (as defined in Section 3(a) of ERISA) could, in the aggregate, reasonably be expected to cause a Material Adverse Change. Section 4.13. Condition of Property; Casualties. The Borrower and each of the Guarantors has good and indefeasible title to all of its Properties as is customary in the oil and gas industry in all material respects, free and clear of all Liens except for Permitted Liens. The material Properties used or to be used in the continuing operations of the Borrower and each of its Subsidiaries are in good repair, working order and condition. Since the date of the Financial Statements, neither the business nor the material properties of the Borrower and each of its Subsidiaries, taken as a whole, has been materially and adversely affected as a result of any fire, explosion, earthquake, flood, drought, windstorm, accident, strike or other labor disturbance, embargo, requisition or taking of property or cancellation -43- of contracts, permits, or concessions by a Governmental Authority, riot, activities of armed forces, or acts of God or of any public enemy. Section 4.14. No Burdensome Restrictions; No Defaults. Neither the Borrower nor any of its Subsidiaries is a party to any indenture, loan, or credit agreement or any lease or other agreement or instrument or subject to any charter or corporate restriction or provision of applicable law or governmental regulation which could reasonably be expected to cause a Material Adverse Change. The Borrower and the Guarantors are not in default under or with respect to any contract, agreement, lease, or other instrument to which the Borrower or any Guarantor is a party and which could reasonably be expected to cause a Material Adverse Change. Neither the Borrower nor any Guarantor has received any notice of default under any material contract, agreement, lease, or other instrument to which the Borrower or such Guarantor is a party. No Default has occurred and is continuing. Section 4.15.Environmental Condition. (a) Permits, Etc. Except as set forth on Schedule 4.15(a), the Borrower and its Subsidiaries (i) have obtained all Environmental Permits necessary for the ownership and operation of their respective Properties and the conduct of their respective businesses; (ii) have been and are in material compliance with all terms and conditions of such Environmental Permits and with all other material requirements of applicable Environmental Laws; (iii) have not received notice of any material violation or alleged violation of any Environmental Law or Environmental Permit; and (iv) are not subject to any actual or contingent Environmental Claim, which could reasonably be expected to cause a Material Adverse Change. (b) Certain Liabilities. Except as set forth on Schedule 4.15(b), to the Borrower's actual knowledge, none of the present or previously owned or operated Property of the Borrower or of any of its present or former Subsidiaries, wherever located, (i) has been placed on or proposed to be placed on the National Priorities List, the Comprehensive Environmental Response Compensation Liability Information System list, or their state or local analogs, or have been otherwise investigated, designated, listed, or identified as a potential site for removal, remediation, cleanup, closure, restoration, reclamation, or other response activity under any Environmental Laws; (ii) is subject to a Lien, arising under or in connection with any Environmental Laws, that attaches to any revenues or to any Property owned or operated by the Borrower or any of its Subsidiaries, wherever located, which could reasonably be expected to cause a Material Adverse Change; or (iii) has been the site of any Release of Hazardous Substances or Hazardous Wastes from present or past operations which has caused at the site or at any third-party site any condition that has resulted in or could reasonably be expected to result in the need for Response that would cause a Material Adverse Change. -44- (c) Certain Actions. Without limiting the foregoing, (i) all necessary notices have been properly filed, and no further action is required under current Environmental Law as to each Response or other restoration or remedial project undertaken by the Borrower, or its present or former Subsidiaries on any of their presently or formerly owned or operated Property and (ii) the present and, to the Borrower's best knowledge, future liability, if any, of the Borrower and its Subsidiaries which could reasonably be expected to arise in connection with requirements under Environmental Laws will not result in a Material Adverse Change. Section 4.16. Permits, Licenses, Etc. The Borrower and its Subsidiaries possess all permits, licenses, patents, patent rights or licenses, trademarks, trademark rights, trade names rights and copyrights which are material to the conduct of its business. The Borrower and its Subsidiaries manage and operate their business in all material respects in accordance with all applicable Legal Requirements and good industry practices. Section 4.17. Gas Contracts. Neither the Borrower nor any of its Subsidiaries, as of the date hereof, (a) is obligated in any material respect by virtue of any prepayment made under any contract containing a "take-or-pay" or "prepayment" provision or under any similar agreement to deliver hydrocarbons produced from or allocated to any of the Borrower's consolidated Oil and Gas Properties at some future date without receiving full payment therefor at the time of delivery, or (b) has produced gas, in any material amount, subject to, and none of the Borrower's consolidated Oil and Gas Properties is subject to, balancing rights of third parties or subject to balancing duties under governmental requirements, except as to such matters for which the Borrower or its relevant Subsidiary has established monetary reserves adequate in amount in accordance with GAAP to satisfy such obligations and has segregated such reserves from its other accounts. ARTICLE V AFFIRMATIVE COVENANTS So long as any Note or any amount under any Credit Document shall remain unpaid, any Letter of Credit shall remain outstanding, or any Bank shall have any Commitment hereunder, the Borrower agrees, unless the Majority Banks shall otherwise consent in writing, to comply with the following covenants. Section 5.01.Compliance with Laws, Etc. The Borrower shall comply, and cause each of its Subsidiaries to comply, in all material respects with all Legal Requirements. Without limiting the generality and coverage of the foregoing, the Borrower shall comply, and shall cause each of its Subsidiaries to comply, in all material respects, with all -45- Environmental Laws and all laws, regulations, or directives with respect to equal employment opportunity and employee safety in all jurisdictions in which the Borrower, or any of its Subsidiaries do business; provided, however, that this Section 5.01 shall not prevent the Borrower, or any of its Subsidiaries from, in good faith and with reasonable diligence, contesting the validity or application of any such laws or regulations by appropriate legal proceedings. Section 5.02. Maintenance of Insurance. The Borrower shall maintain, and cause each of its Subsidiaries to maintain, insurance with responsible and reputable insurance companies or associations in such amounts and covering such risks as are usually carried by companies engaged in similar businesses and owning similar properties in the same general areas in which the Borrower or such Subsidiary operates, provided that the Borrower or such Subsidiary may self-insure to the extent and in the manner normal for similarly situated companies of like size, type and financial condition that are part of a group of companies under common control. Section 5.03. Preservation of Corporate Existence, Etc. The Borrower shall preserve and maintain, and cause each of its Subsidiaries to preserve and maintain, its corporate existence, rights, franchises, and privileges in the jurisdiction of its incorporation, and qualify and remain qualified, and cause each such Subsidiary to qualify and remain qualified, as a foreign corporation in each jurisdiction in which qualification is necessary or desirable in view of its business and operations or the ownership of its properties, and, in each case, where failure to qualify or preserve and maintain its rights and franchises could reasonably be expected to cause a Material Adverse Change; provided, however, that nothing herein contained shall prevent any transaction permitted by Section 6.04. Section 5.04. Payment of Taxes, Etc. The Borrower shall pay and discharge, and cause each of its Subsidiaries to pay and discharge, before the same shall become delinquent, (a) all taxes, assessments, and governmental charges or levies imposed upon it or upon its income or profits or Property that are material in amount, prior to the date on which penalties attach thereto and (b) all lawful claims that are material in amount which, if unpaid, might by law become a Lien upon its Property; provided, however, that neither the Borrower nor any such Subsidiary shall be required to pay or discharge any such tax, assessment, charge, levy, or claim which is being contested in good faith and by appropriate proceedings, and with respect to which reserves in conformity with GAAP have been provided. Section 5.05. Visitation Rights. At any reasonable time and from time to time, upon reasonable notice, the Borrower shall, and shall cause its Subsidiaries to, permit the Agent and any Bank or any of its agents or representatives thereof, to (a) examine and make copies of and abstracts from the records and books of account of, and visit and inspect at its reasonable discretion the properties of, the Borrower and any such Subsidiary, and -46- (b) discuss the affairs, finances and accounts of the Borrower and any such Subsidiary with any of their respective officers or directors; provided however, the Agent or the Bank for whose benefit such inspection and visitation is made assumes sole responsibility for the condition of any property of the Borrower or its Subsidiaries so visited and inspected, the access and egress thereto (including, but not limited to wharves, docks, and helicopter landing areas), and any vice or defect therein or thereon, and assumes all responsibility for and hereby releases and indemnifies the Borrower, its Affiliates, and their officers, directors, employees, and agents against any claim for damage or injury to or by the Agent or such Bank (or the representatives thereof) or to the Borrower's or its Subsidiaries' property which may be occasioned by such inspection and visitation of the Borrower's or its Subsidiaries' property. Section 5.06.Reporting Requirements.The Borrower shall furnish to the Agent and each Bank: (a) Annual Financials. As soon as available and in any event not later than 120 days after the end of each fiscal year of the Borrower, a copy of the annual audit report for such year for the Borrower and its Subsidiaries, including therein consolidated balance sheet of the Borrower and its Subsidiaries as of the end of such fiscal year and consolidated statements of income, cash flows, and retained earnings of the Borrower and its Subsidiaries for such fiscal year, in each case certified by Arthur Andersen & Co. or other independent certified public accountants of national standing and including any management letters delivered by such accountants to the Borrower in connection with such audit together with a certificate of such accounting firm to the Agent and the Banks stating that, in the course of the regular audit of the business of the Borrower and its Subsidiaries, which audit was conducted by such accounting firm in accordance with generally accepted auditing standards, such accounting firm has obtained no knowledge that a Default has occurred and is continuing, or if, in the opinion of such accounting firm, a Default has occurred and is continuing, a statement as to the nature thereof, together with a Compliance Certificate executed by the Chief Financial Officer or Chief Accounting Officer of the Borrower; (b) Quarterly Financials. As soon as available and in any event not later than 90 days after the end of each of the first three quarters of each fiscal year of the Borrower, the unaudited consolidated balance sheet of Borrower and its Subsidiaries as of the end of such quarter and the consolidated statements of income and cash flows of the Borrower and its Subsidiaries for the period commencing at the end of the previous year and ending with the end of such quarter, all in reasonable detail and duly certified with respect to such consolidated statements (subject to year-end audit adjustments) by the Chief Financial Officer or Chief Accounting Officer of the Borrower as having been prepared in accordance with GAAP (or in compliance with the regulations promulgated by the United States -47- Securities and Exchange Commission), together with a Compliance Certificate executed by the Chief Financial Officer or Chief Accounting Officer of the Borrower; (c) Oil and Gas Reserve Reports. (i) As soon as available but in any event on or before March 31 of each year, an engineering report in form and substance meeting the requirements of the Securities and Exchange Commission for financial reporting purposes, certified by Atwater Consultants, Ltd., Cawley, Gillespie and Associates, Inc., or other firm of independent consulting petroleum engineers approved by the Agent, as fairly setting forth (A) the proved and producing, shut in, behind pipe, and undeveloped oil and gas reserves (separately classified as such) attributable to the Borrower's consolidated Oil and Gas Properties as of the last day of the previous year, (B) the aggregate present value, determined on the basis of stated pricing assumptions, of the future net income with respect to such Oil and Gas Properties, discounted at a stated per annum discount rate, and (C) projections of the annual rate of production, gross income, and net income with respect to such Oil and Gas Properties. (ii) As soon as available but in any event on or before September 30 of each year beginning with September 30, 1998, an internal engineering report in form and substance satisfactory to the Agent setting forth (A) the proved and producing, shut in, behind pipe, and undeveloped oil and gas reserves (separately classified as such) attributable to the Borrower's consolidated Oil and Gas Properties as of June 30 of such year (B) the aggregate present value, determined on the basis of stated pricing assumptions, of the future net income with respect to such Oil and Gas Properties, discounted at a stated per annum discount rate and (C) projections of the annual rate of production, gross income, and net income with respect to such Oil and Gas Properties. (iii) The Agent and the Banks acknowledge that the Oil and Gas Reserve Reports contain certain proprietary information including geological and geophysical data, maps, models, and interpretations necessary for determining the Borrowing Base and the creditworthiness of the Borrower and the Guarantors. The Agent and the Banks agree to maintain the confidentiality of such information except as required by law. The Agent and the Banks may share such information with potential transferees of their interests under this Agreement if such transferees agree to maintain the confidentiality of such information. (d) Defaults. As soon as possible and in any event within five days after the occurrence of each Default known to a Responsible Officer of the Borrower or any of its Subsidiaries which is continuing on the date of such statement, a statement of the Chief -48- Financial Officer of the Borrower setting forth the details of such Default and the actions which the Borrower has taken and proposes to take with respect thereto; (e) Securities Law Filings. Except as provided in paragraphs (a) and (b) above, promptly and in any event within 15 days after the sending or filing thereof, copies of all proxy material, reports and other information which the Borrower or any of its Subsidiary sends to or files with the United States Securities and Exchange Commission or sends to any shareholder of the Borrower; (f) Termination Events. As soon as possible and in any event (i) within 30 days after the Borrower or any member of the Controlled Group knows or has reason to know that any Termination Event described in clause (a) of the definition of Termination Event with respect to any Plan has occurred, and (ii) within 10 days after the Borrower or any of its Affiliates knows or has reason to know that any other Termination Event with respect to any Plan has occurred, a statement of the Chief Financial Officer of the Borrower describing such Termination Event and the action, if any, which the Borrower or such Affiliate proposes to take with respect thereto; (g) Termination of Plans. Promptly and in any event within two Business Days after receipt thereof by the Borrower or any member of the Controlled Group from the PBGC, copies of each notice received by the Borrower or any such member of the Controlled Group of the PBGC's intention to terminate any Plan or to have a trustee appointed to administer any Plan; (h) Other ERISA Notices. Promptly and in any event within five Business Days after receipt thereof by the Borrower or any member of the Controlled Group from a Multiemployer Plan sponsor, a copy of each notice received by the Borrower or any member of the Controlled Group concerning the imposition or amount of withdrawal liability pursuant to Section 4202 of ERISA; (i) Environmental Notices. Promptly upon the receipt thereof by the Borrower or any of its Subsidiaries, a copy of any form of notice, summons or citation received from the EPA, or any other Governmental Authority, concerning (i) violations or alleged violations of Environmental Laws, which seeks to impose liability therefor, (ii) any action or omission on the part of the Borrower or any of its present or former Subsidiaries in connection with Hazardous Waste or Hazardous Substances which could reasonably result in the imposition of liability therefor, including without limitation any notice of potential responsibility under CERCLA, or (iii) concerning the filing of a Lien upon, against or in connection with the Borrower, its present or former Subsidiaries, or any of their leased or owned Property, wherever located; -49- (j) Other Governmental Notices. Promptly and in any event within five Business Days after receipt thereof by the Borrower or any Subsidiary, a copy of any notice, summons, citation, or proceeding seeking to modify in any material respect, revoke, or suspend any material contract, license, or Agreement with any Governmental Authority; (k) Material Changes. Prompt written notice of any condition or event of which the Borrower has knowledge, which condition or event has resulted or may reasonably be expected to result in (i) a Material Adverse Change or (ii) a breach of or noncompliance with any material term, condition, or covenant of any material contract to which the Borrower or any of its Subsidiaries is a party or by which they or their properties may be bound; (l) Disputes, Etc. Prompt written notice of any claims, proceedings, or disputes, or to the knowledge of the Borrower threatened, or affecting the Borrower, or any of its Subsidiaries which, if adversely determined, could reasonably be expected to cause a Material Adverse Change, or any material labor controversy of which the Borrower or any of its Subsidiaries has knowledge resulting in or reasonably considered to be likely to result in a strike against the Borrower or any of its Subsidiaries; and (m) Other Information. Such other information respecting the business or Properties, or the condition or operations, financial or otherwise, of the Borrower, or any of its Subsidiaries, as any Bank through the Agent may from time to time reasonably request. The Agent agrees to provide the Banks with copies of any material notices and information delivered solely to the Agent pursuant to the terms of this Agreement. Section 5.07. Maintenance of Property. Borrower shall, and shall cause each of its Subsidiaries to, maintain their owned, leased, or operated property, equipment, buildings, and fixtures in good condition and repair; and shall abstain, and cause each of its Subsidiaries to abstain from, and not knowingly or willfully permit the commission of waste or other injury, destruction, or loss of natural resources, or the occurrence of pollution, contamination, or any other condition in, on or about the owned or operated property involving the Environment that could reasonably be expected to result in Response activities the costs of which would exceed the accrual established by Borrower or by any of its Subsidiaries for those purposes. Section 5.08. New Subsidiaries. Upon the creation of any Subsidiary after the date of this Agreement, the Borrower shall cause such Subsidiary to execute and deliver to the Agent (a) a Guaranty with such changes as the Agent may reasonably request and (b) evidence of corporate authority to enter into such Guaranty as the Agent may reasonably request, including, without limitation, a legal opinion regarding the enforceability of such Guaranty. -50- Section 5.09. Collateral. (a) If any Term Advances are outstanding on March 15, 1998, the Borrower shall deliver Lien Grant Documents to the Agent so that the Agent will have for the benefit of the Banks an Acceptable Security Interest in at least 80% of the Borrowing Base value of the Borrower and its Subsidiaries' Oil and Gas Properties included in the Borrowing Base most recently determined upon the filing of any of the Security Documents included in such Lien Grant Documents. The Agent agrees that it shall not record or file any of the Security Documents delivered to the Agent pursuant to this paragraph unless any Term Advances are outstanding on March 31, 1998. (b) If at any time after March 31, 1998 the Term Advances have not been repaid in full and the Agent for the benefit of the Banks does not have an Acceptable Security Interest in at least 80% of the Borrowing Base value of the Borrower's and its Subsidiaries' Oil and Gas Properties included in the Borrowing Base most recently determined, the Borrower shall grant the Agent an Acceptable Security Interest in at least 80% of the Borrowing Base value of the Borrower's and its Subsidiaries' Oil and Gas Properties included in the Borrowing Base most recently determined. (c) If at any time after March 31, 1998 the Term Advances have not been repaid in full and the Agent for the benefit of the Banks does not have an Acceptable Security Interest in at least 80% of the Borrowing Base value of the Borrower's and its Subsidiaries' Oil and Gas Properties, the Borrower shall, upon the Majority Bank's request, grant the Agent an Acceptable Security Interest in at least 80% of the Borrowing Base value of the Borrower's and its Subsidiaries' Oil and Gas Properties. (d) The Borrower agrees that, at any time after the Agent is permitted to record or file the Security Documents, it shall promptly execute and deliver all further agreements, and take all further action, that may be necessary or that the Agent may reasonably request, in order to obtain an Acceptable Security Interest under the Security Documents. Section 5.10. Hedging Transactions. If any Term Advances are outstanding on March 31, 1998, the Borrower shall enter into hedging transactions as reasonably agreed upon by the Agent and the Borrower within 30 days of such date with respect to up to 75% of the production from Oil and Gas Properties included in the Borrowing Base. ARTICLE VI NEGATIVE COVENANTS -51- So long as any Note or any amount under any Credit Document shall remain unpaid, any Letter of Credit shall remain outstanding, or any Bank shall have any Commitment, the Borrower agrees, unless the Majority Banks otherwise consent in writing, to comply with the following covenants. Section 6.01. Liens, Etc. The Borrower shall not create, assume, incur, or suffer to exist, or permit any of its Subsidiaries to create, assume, incur, or suffer to exist, any Lien on or in respect of any of its Property whether now owned or hereafter acquired, or assign any right to receive income, except that the Borrower and its Subsidiaries may create, incur, assume, or suffer to exist: (a) Liens securing the Obligations; (b) Liens specified in the attached Schedule 6.01 on the Property owned by the Borrower and its Subsidiaries which is specified therein securing only the Debt disclosed to be secured by such Liens therein; (c) Liens securing purchase money indebtedness permitted under Section 6.02(c), provided that each such Lien encumbers only the property acquired in connection with the creation of any such purchase money indebtedness; (d) Liens for taxes, assessments, or other governmental charges or levies not yet due or that (provided foreclosure, distraint, sale, or other similar proceedings shall not have been initiated) are being contested in good faith by appropriate proceedings, and such reserve as may be required by GAAP shall have been made therefor; (e) Liens in favor of vendors, carriers, warehousemen, repairmen, mechanics, workmen, materialmen, construction, or similar Liens arising by operation of law in the ordinary course of business in respect of obligations that are not yet due or that are being contested in good faith by appropriate proceedings, provided such reserve as may be required by GAAP shall have been made therefor; (f) Liens to operators and non-operators under joint operating agreements arising in the ordinary course of the business of the Borrower or the relevant Subsidiary to secure amounts owing, which amounts are not yet due or are being contested in good faith by appropriate proceedings, if such reserve as may be required by GAAP shall have been made therefor; (g) easements, rights-of-way, restrictions, and other similar encumbrances, and minor defects in the chain of title that are customarily accepted in the oil and gas financing industry, none of which interfere with the ordinary conduct of the business of Borrower or -52- the relevant Subsidiary or materially detract from the value or use of the Property to which they apply; and (h) Liens of record under terms and provisions of the leases, unit agreements, assignments, and other transfer of title documents in the chain of title under which the Borrower or the relevant Subsidiary acquired the Property, which have been disclosed to the Agent. Section 6.02.Debts, Guaranties, and Other Obligations. The Borrower shall not, and shall not permit any of its Subsidiaries to, create, assume, suffer to exist, or in any manner become or be liable in respect of, any Debt except: (a) Debt of the Borrower and its Subsidiaries under the Credit Documents; (b) Debt of the Borrower existing on the date of this Agreement and disclosed in the attached Schedule 6.02 and any extensions, rearrangements, and modifications thereof which do not increase the principal amount thereof or the interest rate charged thereon above a market rate of interest; (c) Debt existing in connection with Property or assets acquired by the Borrower after date of this Agreement not to exceed $2,500,000.00 in outstanding principal amount (excluding gas balancing liabilities assumed in the acquisition of Oil and Gas Properties) and in connection with the purchase of the Borrower's office building located at 625 E. Kaliste Saloom Rd., Lafayette, LA 70508 not to exceed $3,250,000.00 in outstanding principal amount; (d) Debt for borrowed money owed by any Subsidiary of the Borrower to the Borrower; (e) Debt in the form of obligations for the deferred purchase price of property or services incurred in the ordinary course of business which are not yet due and payable or are being contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP have been established; and (f) up to $125,000,000.00 of unsecured convertible or subordinated Debt with terms no more restrictive than the terms contained in this Agreement, a final maturity of no earlier than July 30, 2001, and other terms acceptable to the Agent and the Majority Banks. Section 6.03. Agreements Restricting Liens and Distributions. The Borrower shall not, nor shall it permit any of its Subsidiaries to, enter into any agreement (other than a Credit Document) which (a) except with respect to specific Property encumbered to secure -53- payment of Debt related to such Property, imposes restrictions upon the creation or assumption of any Lien upon its Properties, revenues or assets, whether now owned or hereafter acquired or (b) limits Restricted Payments to or any advance by any of the Borrower's Subsidiaries to the Borrower. Section 6.04. Merger or Consolidation; Asset Sales. The Borrower shall not, and shall not permit any of its Subsidiaries to: (a) merge or consolidate with or into any other Person, except that the Borrower may merge with any of its wholly-owned Subsidiaries and any of the Borrower's wholly-owned Subsidiaries may merge with another of the Borrower's wholly-owned Subsidiaries, provided that immediately after giving effect to any such proposed transaction no Default would exist and, in the case of any such merger to which the Borrower is a party, the Borrower is the surviving corporation; or (b) sell, lease, transfer, or otherwise dispose of any of its Property outside of the ordinary course of business, except (i) sales of assets outside the ordinary course of business in an aggregate amount for any fiscal year not to exceed $1,000,000.00 and (ii) sales of assets outside the ordinary course of business which the Borrower has provided the Agent and the Banks with 10 days' advance notice of, provided that such proposed sales will not in the judgment of the Majority Banks cause the aggregate outstanding amount of the Revolving Advances plus the sum of the Letter of Credit Exposure and the Existing Letter of Credit Exposure to exceed the Borrowing Base, after removing such assets from the Borrowing Base by subtracting from the Borrowing Base the value of the assets proposed to be sold as determined from the most recent information compiled by the Agent and the Banks in connection with the most recent redetermination of the Borrowing Base, and the Borrower agrees that immediately following any such sale the Majority Banks will redetermine the Borrowing Base by so subtracting the value of such assets sold from the Borrowing Base. Section 6.05. Restricted Payments. The Borrower shall not, and shall not permit any of its Subsidiaries to, make or pay any Restricted Payment other than Restricted Payments from a Subsidiary of the Borrower to the Borrower. Section 6.06. Investments. The Borrower shall not, and shall not permit any of its Subsidiaries to, make or permit to exist any loans, advances, or capital contributions to, or make any investment in, or purchase or commit to purchase any stock or other securities or evidences of indebtedness of or interests in any Person, except: (a) Liquid Investments; -54- (b) trade and customer accounts receivable which are for goods furnished or services rendered in the ordinary course of business and are payable in accordance with customary trade terms; (c) ordinary course of business contributions, loans, or advances to, or investments in, (i) a directly or indirectly wholly-owned Subsidiary of the Borrower, or (ii) the Borrower; (d) oil and gas farm-ins, oil and gas development joint ventures and limited partnerships, and similar transactions, in each case in the ordinary course of business; and (e) investments not covered by clauses (a) through (d) above in an aggregate outstanding amount not to exceed $2,000,000.00. Section 6.07. Limitation on Speculative Hedging. The Borrower shall not, and shall not permit any of its Subsidiaries to, purchase, assume, or hold a speculative position in any commodities market or futures market. Borrower may continue its current production swap hedging program policy to reduce price risk on quantities less than its total production. Section 6.08. Affiliate Transactions. Except as expressly permitted elsewhere in this Agreement or otherwise approved in writing by the Agent, and except as required or contemplated under the partnership agreements existing on the date of this Agreement between the Borrower and its Subsidiaries and their Affiliates as described in Schedule 6.08, the Borrower shall not, and shall not permit any of its Subsidiaries to, make, directly or indirectly: (a) any investment in any Affiliate (other than a wholly-owned Subsidiary of the Borrower); (b) any transfer, sale, lease, assignment, or other disposal of any assets to any such Affiliate or any purchase or acquisition of assets from any such Affiliate; or (c) any arrangement or other transaction directly or indirectly with or for the benefit of any such Affiliate (including without limitation, guaranties and assumptions of obligations of an Affiliate); provided that the Borrower and its Subsidiaries may enter into any arrangement or other transaction with any such Affiliate providing for the leasing of property, the rendering or receipt of services or the purchase or sale of inventory and other assets in the ordinary course of business if the monetary or business consideration arising therefrom would be substantially as advantageous to the Borrower and its Subsidiaries as the monetary or business consideration which it would obtain in a comparable arm's length transaction with a Person not such an Affiliate. Section 6.09. Compliance with ERISA. The Borrower shall not, and shall not permit any of its Subsidiaries to, (a) terminate, or permit any Affiliate to terminate, any Plan so as to result in any material (in the opinion of the Majority Banks) liability of the Borrower or any of its Affiliates to the PBGC or (b) permit to exist any occurrence of any Reportable -55- Event (as defined in Title IV of ERISA), or any other event or condition, which presents a material (in the opinion of the Majority Banks) risk of such a termination by the PBGC of any Plan. Section 6.10. Maintenance of Ownership of Subsidiaries. Except as permitted by Section 6.04, the Borrower shall not, and shall not permit any of its Subsidiaries to, sell or otherwise dispose of any shares of capital stock of any of the Borrower's Subsidiaries or permit any Subsidiary to issue, sell, or otherwise dispose of any shares of its capital stock or the capital stock of any of the Borrower's Subsidiaries. Section 6.11 Sale-and-Leaseback. The Borrower shall not, nor shall it permit any of its Subsidiaries to, sell or transfer to a Person (other than the Borrower or a Subsidiary of the Borrower) any property, whether now owned or hereafter acquired, if at the time or thereafter the Borrower or a Subsidiary of the Borrower shall lease as lessee such property or any part thereof or other property which the Borrower or a Subsidiary of the Borrower intends to use for substantially the same purpose as the property sold or transferred except such transactions (a) incident to transactions permitted by Section 6.04(b), and (b) from which arise lease obligations and other rental obligations not exceeding $1,000,000.00 during any fiscal year of the Borrower. Section 6.12. Change of Business. The Borrower shall not, nor shall it permit any of its Subsidiaries to, materially change the character of their business as presently and normally conducted or engage in any type of business not related to their business as presently and normally conducted. Section 6.13. Current Ratio. The Borrower shall not permit the ratio of the Borrower's consolidated current assets to the Borrower's consolidated current liabilities to be less than 1.00 to 1.00 as of the last day of any fiscal quarter. Section 6.14. Tangible Net Worth. The Borrower shall not permit the consolidated Tangible Net Worth of the Borrower to be less than the sum of (a) $55,000,000.00, plus (b) an amount equal to 50% of the cumulative consolidated quarterly Net Income of the Borrower from June 30, 1994, through the end of the Borrower's most recently ended fiscal quarter, but excluding consolidated Net Income for any fiscal quarter in which consolidated Net Income is not positive, plus (c) an amount equal to 100% of the net cash proceeds from any sale of stock or other equity interests in the Borrower since June 30, 1994. -56- ARTICLE VII REMEDIES Section 7.01. Events of Default. The occurrence of any of the following events shall constitute an "Event of Default" under any Credit Document: (a) Payment. The Borrower shall fail to pay when due (i) any interest or fees payable hereunder or under the Notes within five days after the same becomes due and payable or (ii) any principal, reimbursements, indemnifications, or other amounts (other than interest and fees described in clause (i)) payable hereunder or under any other Credit Document; (b) Representation and Warranties. Any representation or warranty made or deemed to be made (i) by the Borrower in this Agreement or in any other Credit Document, (ii) by the Borrower (or any of its officers) in connection with this Agreement or any other Credit Document, or (iii) by any Subsidiary of the Borrower in any Credit Document shall prove to have been incorrect in any material respect when made or deemed to be made; (c) Covenant Breaches. (i)The Borrower shall (A) fail to perform or observe any covenant contained in Section 5.01, 5.02, 5.05, 5.06, 5.07, 5.08, 5.09 or Article VI of this Agreement or (B) fail to perform or observe any other term or covenant set forth in this Agreement or in any other Credit Document which is not covered by clause (i)(A) above or any other provision of this Section 7.01 if such failure shall remain unremedied for 30 days after the earlier of written notice of such default shall have been given to such Person by the Agent or any Bank or such Person's actual knowledge of such default or (ii) any Guarantor shall fail to perform or observe any covenant contained in its Guaranty; (d) Cross-Defaults. (i) The Borrower or any its Subsidiaries shall fail to pay any principal of or premium or interest on its Debt which is outstanding in a principal amount of at least $500,000.00 individually or when aggregated with all such Debt of the Borrower or its Subsidiaries so in default (but excluding Debt evidenced by the Notes) when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Debt; (ii) any other event shall occur or condition shall exist under any agreement or instrument relating to Debt which is outstanding in a principal amount of at least $500,000.00 individually or when aggregated with all such Debt of the Borrower and its Subsidiaries so in default, and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such event or condition is to accelerate, or to permit the acceleration of, the maturity of such Debt; or (iii) any such Debt shall be declared to be due and payable, or -57- required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof; (e) Insolvency. The Borrower or any of its Subsidiaries shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against the Borrower or any of its Subsidiaries seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee or other similar official for it or for any substantial part of its property and, in the case of any such proceeding instituted against the Borrower or any such Subsidiary, either such proceeding shall remain undismissed for a period of 30 days or any of the actions sought in such proceeding shall occur; or the Borrower or any of its Subsidiaries shall take any corporate action to authorize any of the actions set forth above in this paragraph (e); (f) Judgments. Any judgment or order for the payment of money in excess of $500,000.00 shall be rendered against the Borrower or any of its Subsidiaries and either (i) enforcement proceedings shall have been commenced by any creditor upon such judgment or order or (ii) there shall be any period of 30 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; (g) Termination Events. Any Termination Event with respect to a Plan shall have occurred, and, 30 days after notice thereof shall have been given to the Borrower by the Agent, (i) such Termination Event shall not have been corrected and (ii) the then present value of such Plan's vested benefits exceeds the then current value of assets accumulated in such Plan by more than the amount of $500,000.00 (or in the case of a Termination Event involving the withdrawal of a "substantial employer" (as defined in Section 4001(a)(2) of ERISA), the withdrawing employer's proportionate share of such excess shall exceed such amount); (h) Plan Withdrawals. The Borrower or any member of the Controlled Group as employer under a Multiemployer Plan shall have made a complete or partial withdrawal from such Multiemployer Plan and the plan sponsor of such Multiemployer Plan shall have notified such withdrawing employer that such employer has incurred a withdrawal liability in an annual amount exceeding $500,000.00; (i) Borrowing Base. Any failure to cure any Borrowing Base deficiency in accordance with Section 2.04, including any failure of the dedicated cash flow from the -58- production of the Borrower's and its Subsidiaries' Oil and Gas Properties to cure the Borrowing Base deficiency within the time period specified by and in accordance with Section 2.04(b); (j) Guaranties. Any provision of any Guaranty shall for any reason cease to be valid and binding on the applicable Guarantor or the applicable Guarantor shall so state in writing; (k) Security Documents. Any Security Document shall at any time and for any reason cease to create the Lien on the property purported to be subject to such agreement in accordance with the terms of such agreement, or cease to be in full force and effect, or shall be contested by the Borrower or any Guarantor; (l) Change of Control. (i) As a result of one or more transactions after the date of this Agreement, any "person" or "group" of persons shall have "beneficial ownership" of more than 20% of the outstanding common stock of the Borrower (within the meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended, and the applicable rules and regulations thereunder), provided that the relationships among the officers and directors of the Borrower and among the respective shareholders of the Borrower on the date of this Agreement shall not be deemed to constitute all or any combination of them as a "group" or (ii) during any period of 12 consecutive months, beginning with and after the date of this Agreement, individuals who at the beginning of such 12-month period were directors of the Borrower shall cease for any reason to constitute a majority of the board of directors of the Borrower at any time during such period; or (m) Management. If any two of James H. Stone, D. Peter Canty, Michael L. Finch, or James H. Prince shall cease to serve actively as officers of the Borrower by reason of resignation, action by the board of directors or owners of the Borrower, or otherwise (other than by death or permanent disability.) Section 7.02. Optional Acceleration of Maturity. If any Event of Default (other than an Event of Default pursuant to paragraph (e) of Section 7.01) shall have occurred and be continuing, then, and in any such event, (a) the Agent (i) shall at the request, or may with the consent, of the Majority Banks, by notice to the Borrower, declare the obligation of each Bank and the Issuing Bank to make extensions of credit hereunder, including making Advances and issuing Letters of Credit, to be terminated, whereupon the same shall forthwith terminate, and (ii) shall at the request, or may with the consent, of the Majority Banks, by notice to the Borrower, declare all principal, interest, fees, reimbursements, indemnifications, and all other amounts payable under this Agreement, the Notes, and the other Credit Documents to be forthwith due and -59- payable, whereupon all such amounts shall become and be forthwith due and payable in full, without notice of intent to demand, demand, presentment for payment, notice of nonpayment, protest, notice of protest, grace, notice of dishonor, notice of intent to accelerate, notice of acceleration, and all other notices, all of which are hereby expressly waived by the Borrower; (b) the Borrower shall, on demand of the Agent at the request or with the consent of the Majority Banks, deposit with the Agent into the Cash Collateral Account an amount of cash equal to the Letter of Credit Exposure as security for the Obligations; and (c) the Agent shall at the request of, or may with the consent of, the Majority Banks proceed to enforce its rights and remedies under the Security Documents, the Guaranties, and any other Credit Document for the ratable benefit of the Banks by appropriate proceedings. Section 7.03. Automatic Acceleration of Maturity. If any Event of Default pursuant to paragraph (e) of Section 7.01 shall occur, (a) (i) the obligation of each Bank and the Issuing Bank to make extensions of credit hereunder, including making Advances and issuing Letters of Credit, shall terminate, and (ii) all principal, interest, fees, reimbursements, indemnifications, and all other amounts payable under this Agreement, the Notes, and the other Credit Documents shall become and be forthwith due and payable in full, without notice of intent to demand, demand, presentment for payment, notice of nonpayment, protest, notice of protest, grace, notice of dishonor, notice of intent to accelerate, notice of acceleration, and all other notices, all of which are hereby expressly waived by the Borrower; (b) the Borrower shall deposit with the Agent into the Cash Collateral Account an amount of cash equal to the outstanding Letter of Credit Exposure as security for the Obligations; and (c) the Agent shall at the request of, or may with the consent of, the Majority Banks proceed to enforce its rights and remedies under the Security Documents, the Guaranties, and any other Credit Document for the ratable benefit of the Banks by appropriate proceedings. Section 7.04. Right of Set-off. Upon the occurrence and during the continuance of any Event of Default, the Agent and each Bank is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by the Agent or such Bank to or for the credit or the account of the Borrower against any and all of the obligations of the Borrower now or hereafter -60- existing under this Agreement, the Notes held by the Agent or such Bank, and the other Credit Documents, irrespective of whether or not the Agent or such Bank shall have made any demand under this Agreement, such Notes, or such other Credit Documents, and although such obligations may be unmatured. The Agent and each Bank agrees to promptly notify the Borrower after any such set-off and application made by the Agent or such Bank, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of the Agent and each Bank under this Section 7.04 are in addition to any other rights and remedies (including, without limitation, other rights of set-off) which the Agent or such Bank may have. Notwithstanding the foregoing, First National Bank of Commerce may not set off and apply any accounts held by the Affiliate of First National Bank of Commerce in Lafayette so long as the funds in such accounts represent unpaid amounts due to royalty and working interest holders (including limited partnerships sponsored by the Borrower and its Subsidiaries) and other segregated funds of the Borrower and its Subsidiaries (but not any general corporate funds of the Borrower or its Subsidiaries). Section 7.05. Actions Under Credit Documents. Following an Event of Default, the Agent shall at the request, or may with the consent, of the Majority Banks, take any and all actions permitted under the other Credit Documents, including enforcing it rights under the Security Documents and the Guaranties for the ratable benefit of the Banks. Section 7.06. Non-exclusivity of Remedies. No remedy conferred upon the Agent is intended to be exclusive of any other remedy, and each remedy shall be cumulative of all other remedies existing by contract, at law, in equity, by statute or otherwise. ARTICLE VIII THE AGENT AND THE ISSUING BANK Section 8.01. Authorization and Action. Each Bank hereby appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Agent by the terms hereof and of the other Credit Documents, together with such powers as are reasonably incidental thereto. As to any matters not expressly provided for by this Agreement or any other Credit Document (including, without limitation, enforcement or collection of the Notes), the Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Majority Banks, and such instructions shall be binding upon all Banks and all holders of Notes; provided, however, that the Agent shall not be required to take any action which exposes the Agent to personal liability or which is contrary to this Agreement, any other Credit Document, or applicable law. -61- Section 8.02. Agent's Reliance, Etc. Neither the Agent nor any of its directors, officers, agents, or employees shall be liable for any action taken or omitted to be taken (INCLUDING THE AGENT'S OWN NEGLIGENCE) by it or them under or in connection with this Agreement or the other Credit Documents, except for its or their own gross negligence or willful misconduct. Without limitation of the generality of the foregoing, the Agent: (a) may treat the payee of any Note as the holder thereof until the Agent receives written notice of the assignment or transfer thereof signed by such payee and in form satisfactory to the Agent; (b) may consult with legal counsel (including counsel for the Borrower), independent public accountants, and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants, or experts; (c) makes no warranty or representation to any Bank and shall not be responsible to any Bank for any statements, warranties, or representations made in or in connection with this Agreement or the other Credit Documents; (d) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Agreement or any other Credit Document on the part of the Borrower or its Subsidiaries or to inspect the property (including the books and records) of the Borrower or its Subsidiaries; (e) shall not be responsible to any Bank for the due execution, legality, validity, enforceability, genuineness, sufficiency, or value of this Agreement or any other Credit Document; and (f) shall incur no liability under or in respect of this Agreement or any other Credit Document by acting upon any notice, consent, certificate, or other instrument or writing (which may be by telecopier or telex) believed by it to be genuine and signed or sent by the proper party or parties. Section 8.03. The Agent and Its Affiliates. With respect to its Commitments, the Advances made by it and the Notes issued to it, the Agent shall have the same rights and powers under this Agreement as any other Bank and may exercise the same as though it were not the Agent. The term "Bank" or "Banks" shall, unless otherwise expressly indicated, include the Agent in its individual capacity. The Agent and its Affiliates may accept deposits from, lend money to, act as trustee under indentures of, and generally engage in any kind of business with, the Borrower or any of its Subsidiaries, and any Person who may do business with or own securities of the Borrower or any such Subsidiary, all as if the Agent were not an agent hereunder and without any duty to account therefor to the Banks. Section 8.04. Bank Credit Decision. Each Bank acknowledges that it has, independently and without reliance upon the Agent or any other Bank and based on the Financial Statements and the Interim Financial Statements and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Bank also acknowledges that it shall, independently and without reliance upon the Agent or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement. -62- Section 8.05. Indemnification. THE BANKS SEVERALLY AGREE TO INDEMNIFY THE AGENT AND THE ISSUING BANK AND EACH AFFILIATE THEREOF AND THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES, AND AGENTS (TO THE EXTENT NOT REIMBURSED BY THE BORROWER), ACCORDING TO THEIR RESPECTIVE PRO RATA SHARES FROM AND AGAINST ANY AND ALL LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES, OR DISBURSEMENTS OF ANY KIND OR NATURE WHATSOEVER WHICH MAY BE IMPOSED ON, INCURRED BY, OR ASSERTED AGAINST THE AGENT AND THE ISSUING BANK IN ANY WAY RELATING TO OR ARISING OUT OF THIS AGREEMENT OR ANY ACTION TAKEN OR OMITTED BY THE AGENT OR THE ISSUING BANK UNDER THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT (INCLUDING THE AGENT'S AND THE ISSUING BANK'S OWN NEGLIGENCE), PROVIDED THAT NO BANK SHALL BE LIABLE FOR ANY PORTION OF SUCH LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES, OR DISBURSEMENTS RESULTING FROM THE AGENT'S AND THE ISSUING BANK'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. WITHOUT LIMITATION OF THE FOREGOING, EACH BANK AGREES TO REIMBURSE THE AGENT PROMPTLY UPON DEMAND FOR ITS RATABLE SHARE OF ANY OUT-OF-POCKET EXPENSES (INCLUDING COUNSEL FEES) INCURRED BY THE AGENT IN CONNECTION WITH THE PREPARATION, EXECUTION, DELIVERY, ADMINISTRATION, MODIFICATION, AMENDMENT, OR ENFORCEMENT (WHETHER THROUGH NEGOTIATIONS, LEGAL PROCEEDINGS, OR OTHERWISE) OF, OR LEGAL ADVICE IN RESPECT OF RIGHTS OR RESPONSIBILITIES UNDER, THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT, TO THE EXTENT THAT THE AGENT IS NOT REIMBURSED FOR SUCH BY THE BORROWER. Section 8.06. Successor Agent and Issuing Bank. The Agent or the Issuing Bank may resign at any time by giving written notice thereof to the Banks and the Borrower and may be removed at any time with or without cause by the Majority Banks upon receipt of written notice from the Majority Banks to such effect. Upon receipt of notice of any such resignation or removal, the Majority Banks shall have the right to appoint a successor Agent or Issuing Bank only with the consent of the Borrower, which consent shall not be unreasonably withheld. If no successor Agent or Issuing Bank shall have been so appointed by the Majority Banks with the consent of the Borrower, and shall have accepted such appointment, within 30 days after the retiring Agent's or Issuing Bank's giving of notice of resignation or the Majority Banks' removal of the retiring Agent or Issuing Bank, then the retiring Agent or Issuing Bank may, on behalf of the Banks and the Borrower, appoint a successor Agent or Issuing Bank, which shall be, in the case of a successor agent, a -63- commercial bank organized under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $500,000,000.00 and, in the case of the Issuing Bank, a Bank. Upon the acceptance of any appointment as Agent or Issuing Bank by a successor Agent or Issuing Bank, such successor Agent or Issuing Bank shall thereupon succeed to and become vested with all the rights, powers, privileges, and duties of the retiring Agent or Issuing Bank, and the retiring Agent or Issuing Bank shall be discharged from its duties and obligations under this Agreement and the other Credit Documents, except that the retiring Issuing Bank shall remain the Issuing Bank with respect to any Letters of Credit outstanding on the effective date of its resignation or removal and the provisions affecting the Issuing Bank with respect to such Letters of Credit shall inure to the benefit of the retiring Issuing Bank until the termination of all such Letters of Credit. After any retiring Agent's or Issuing Bank's resignation or removal hereunder as Agent or Issuing Bank, the provisions of this Article VIII shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent or Issuing Bank under this Agreement and the other Credit Documents. ARTICLE IX MISCELLANEOUS Section 9.01. Amendments, Etc. No amendment or waiver of any provision of this Agreement, the Notes, or any other Credit Document, nor consent to any departure by the Borrower or any Guarantor therefrom, shall in any event be effective unless the same shall be in writing and signed by the Majority Banks and the Borrower, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no amendment, waiver, or consent shall, unless in writing and signed by all the Banks, do any of the following: (a) waive any of the conditions specified in Section 3.01, 3.02, or 3.03, (b) increase the Revolving Commitment or the Term Commitment of the Banks, (c) reduce the principal of, or interest on, the Notes or any fees or other amounts payable hereunder or under any other Credit Document, (d) postpone any date fixed for any payment of principal of, or interest on, the Notes or any fees or other amounts payable hereunder or extend the Revolving Maturity Date or the Term Maturity Date, (e) change the percentage of Banks which shall be required for the Banks or any of them to take any action hereunder or under any other Credit Document, (f) amend Section 2.10 or this Section 9.01, (g) amend the definition of "Majority Banks," (h) release any Guarantor from its obligations under any Guaranty, or (i) release any collateral securing the Obligations; and provided, further, that no amendment, waiver or consent shall, unless in writing and signed by the Agent or the Issuing Bank in addition to the Banks required above to take such action, affect the rights or duties of the Agent or the Issuing Bank, as the case may be, under this Agreement or any other Credit Document. -64- Section 9.02. Notices, Etc. All notices and other communications shall be in writing (including, without limitation, telecopy or telex) and mailed by certified mail, return receipt requested, telecopied, telexed, hand delivered, or delivered by a nationally recognized overnight courier, at the address for the appropriate party specified in Schedule 1 or at such other address as shall be designated by such party in a written notice to the other parties. All such notices and communications shall, when so mailed, telecopied, telexed, or hand delivered or delivered by a nationally recognized overnight courier, be effective when received if mailed, when telecopy transmission is completed, when confirmed by telex answer-back, or when delivered by such messenger or courier, respectively, except that notices and communications to the Agent pursuant to Article II or VIII shall not be effective until received by the Agent. Section 9.03. No Waiver; Remedies. No failure on the part of any Bank, the Agent, or the Issuing Bank to exercise, and no delay in exercising, any right hereunder or under any Note shall operate as a waiver thereof; nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. Section 9.04. Costs and Expenses. The Borrower agrees to pay on demand (a) all reasonable out-of-pocket costs and expenses of the Agent in connection with the preparation, execution, delivery, administration, modification, and amendment of this Agreement, the Notes, the Guaranties, and the other Credit Documents including, without limitation, the reasonable fees and out-of-pocket expenses of counsel for the Agent with respect to advising the Agent as to its rights and responsibilities under this Agreement, and (b) all out-of-pocket costs and expenses, if any, of the Agent, the Issuing Bank, and each Bank (including, without limitation, reasonable counsel fees and expenses of the Agent, the Issuing Bank, and each Bank) in connection with the enforcement (whether through negotiations, legal proceedings, or otherwise) of this Agreement, the Notes, the Guaranties, and the other Credit Documents. Section 9.05. Binding Effect. This Agreement shall become effective when it shall have been executed by the Borrower and the Agent, and when the Agent shall have, as to each Bank, either received a counterpart hereof executed by such Bank or been notified by such Bank that such Bank has executed it and thereafter shall be binding upon and inure to the benefit of the Borrower, the Agent, the Issuing Bank, and each Bank and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights or delegate its duties under this Agreement or any interest in this Agreement without the prior written consent of each Bank. -65- Section 9.06. Bank Assignments and Participations. (a) Assignments. Any Bank may assign to one or more banks or other entities all or any portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitments, the Advances owing to it, the Notes held by it, and the participation interest in the Letter of Credit Obligations held by it); provided, however, that (i) each such assignment shall be of a constant, and not a varying, percentage of all of such Bank's rights and obligations under this Agreement, (ii) the amount of the Commitments and Advances of such Bank being assigned pursuant to each such assignment (determined as of the date of the Assignment and Acceptance with respect to such assignment) shall be, if to an entity other than a Bank, not less than $5,000,000.00 and shall be an integral multiple of $1,000,000.00, (iii) each such assignment shall be to an Eligible Assignee, (iv) the parties to each such assignment shall execute and deliver to the Agent, for its acceptance and recording in the Register, an Assignment and Acceptance, together with the Notes subject to such assignment, and (v) each Eligible Assignee (other than the Eligible Assignee of the Agent) shall pay to the Agent a $2,500 administrative fee. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, which effective date shall be at least three Business Days after the execution thereof, (A) the assignee thereunder shall be a party hereto for all purposes and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, have the rights and obligations of a Bank hereunder and (B) such Bank thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of such Bank's rights and obligations under this Agreement, such Bank shall cease to be a party hereto). (b) Term of Assignments. By executing and delivering an Assignment and Acceptance, the Bank thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than as provided in such Assignment and Acceptance, such Bank makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency of value of this Agreement or any other instrument or document furnished pursuant hereto; (ii) such Bank makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or the Guarantors or the performance or observance by the Borrower or the Guarantors of any of their obligations under this Agreement or any other instrument or document furnished pursuant hereto; (iii) such assignee confirms that it has received a copy of this Agreement, together with copies of the financial statements referred to in Section 4.05 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision -66- to enter into such Assignment and Acceptance; (iv) such assignee will, independently and without reliance upon the Agent, such Bank or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (v) such assignee appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Agent by the terms hereof, together with such powers as are reasonably incidental thereto; and (vi) such assignee agrees that it will perform in accordance with their terms all of the obligations which by the terms of this Agreement are required to be performed by it as a Bank. (c) The Register. The Agent shall maintain at its address referred to in Section 9.02 a copy of each Assignment and Acceptance delivered to and accepted by it and a register for the recordation of the names and addresses of the Banks and the Commitments of, and principal amount of the Advances owing to, each Bank from time to time (the "Register"). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and the Borrower, the Agent, the Issuing Bank, and the Banks may treat each Person whose name is recorded in the Register as a Bank hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrower or any Bank at any reasonable time and from time to time upon reasonable prior notice. (d) Procedures. Upon its receipt of an Assignment and Acceptance executed by a Bank and an Eligible Assignee, together with the Notes subject to such assignment, the Agent shall, if such Assignment and Acceptance has been completed and is in substantially the form of the attached Exhibit A, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register, and (iii) give prompt notice thereof to the Borrower. Within five Business Days after its receipt of such notice, the Borrower shall execute and deliver to the Agent in exchange for the surrendered Notes (A) a new Revolving Note to the order of such Eligible Assignee in an amount equal to the Revolving Commitment assumed by it pursuant to such Assignment and Acceptance and a new Term Note to the order of such Eligible Assignee in an amount equal to the outstanding principal amount of the Term Advances assigned to such Eligible Assignee and (B) if such Bank has retained any Revolving Commitment hereunder, a new Revolving Note to the order of such Bank in an amount equal to the Revolving Commitment retained by it hereunder and a new Term Note to the order of such Bank in an amount equal to the outstanding principal amount of the Term Advances retained by such Bank. Such new Notes shall be dated the effective date of such Assignment and Acceptance and shall otherwise be in substantially the form of the attached Exhibit D-1 and D-2, respectively. (e) Participations. Each Bank may sell participations to one or more banks or other entities in or to all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitments, the Advances owing to -67- it, its participation interest in the Letter of Credit Obligations, and the Notes held by it); provided, however, that (i) such Bank's obligations under this Agreement (including, without limitation, its Commitments to the Borrower hereunder) shall remain unchanged, (ii) such Bank shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) such Bank shall remain the holder of any such Notes for all purposes of this Agreement, (iv) the Borrower, the Agent, and the Issuing Bank and the other Banks shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement, and (v) such Bank shall not require the participant's consent to any matter under this Agreement, except for change in the principal amount of the Notes, reductions in fees or interest, releasing any collateral, or extending the Revolving Maturity Date or the Term Maturity Date. The Borrower hereby agrees that participants shall have the same rights under Sections 2.11, 2.12, 2.13(c), and 9.07 as a Bank to the extent of their respective participations. Section 9.07. Indemnification. THE BORROWER SHALL INDEMNIFY THE AGENT, THE BANKS, THE ISSUING BANK, AND EACH AFFILIATE THEREOF AND THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES, AND AGENTS FROM, AND DISCHARGE, RELEASE, AND HOLD EACH OF THEM HARMLESS AGAINST, ANY AND ALL LOSSES, LIABILITIES, CLAIMS, OR DAMAGES WHICH MAY BE IMPOSED ON, INCURRED BY, OR ASSERTED AGAINST THEM IN ANY WAY RELATING TO OR ARISING OUT OF THIS AGREEMENT OR ANY ACTION TAKEN OR OMITTED BY THEM UNDER THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT (INCLUDING ANY SUCH LOSSES, LIABILITIES, CLAIMS, DAMAGES, OR EXPENSE INCURRED BY REASON OF THE PERSON BEING INDEMNIFIED'S OWN NEGLIGENCE), BUT EXCLUDING ANY SUCH LOSSES, LIABILITIES, CLAIMS, DAMAGES, OR EXPENSES INCURRED BY REASON OF THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE PERSON TO BE INDEMNIFIED. Section 9.08. Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Section 9.09. Survival of Representations, Etc. All representations and warranties contained in this Agreement or made in writing by or on behalf of the Borrower in connection herewith shall survive the execution and delivery of this Agreement and the Credit Documents, the making of the Advances and any investigation made by or on behalf of the Banks, none of which investigations shall diminish any Bank's right to rely on such representations and warranties. All obligations of the Borrower provided for in Sections 2.11, 2.12, 2.13(c), 9.04, and 9.07 and all of the obligations of the Banks in Section -68- 8.05 shall survive any termination of this Agreement and repayment in full of the Obligations. Section 9.10. Severability. In case one or more provisions of this Agreement or the other Credit Documents shall be invalid, illegal or unenforceable in any respect under any applicable law, the validity, legality, and enforceability of the remaining provisions contained herein or therein shall not be affected or impaired thereby. Section 9.11. Business Loans. The Borrower warrants and represents that the Loans evidenced by the Notes are and shall be for business, commercial, investment, or other similar purposes and not primarily for personal, family, household, or agricultural use, as such terms are used in Chapter One ("Chapter One") of the Texas Credit Code. At all such times, if any, as Chapter One shall establish a Maximum Rate, the Maximum Rate shall be the "indicated rate ceiling" (as such term is defined in Chapter One) from time to time in effect. Section 9.12. Governing Law. This Agreement, the Notes and the other Credit Documents shall be governed by, and construed and enforced in accordance with, the laws of the State of Texas. Without limiting the intent of the parties set forth above, (a) Chapter 15, Subtitle 3, Title 79, of the Revised Civil Statutes of Texas, 1925, as amended (relating to revolving loans and revolving tri-party accounts), shall not apply to this Agreement, the Notes, or the transactions contemplated hereby and (b) to the extent that any Bank may be subject to Texas law limiting the amount of interest payable for its account, such Bank shall utilize the indicated (weekly) rate ceiling from time to time in effect as provided in Article 5069-1.04 of the Revised Civil Statutes of Texas, as amended. Each Letter of Credit shall be governed by the Uniform Customs and Practice for Documentary Credits, International Chamber of Commerce Publication No. 500 (1993 version). THE BORROWER, THE BANKS, THE ISSUING BANK AND THE AGENT HEREBY IRREVOCABLY WAIVE ANY AND ALL RIGHT TO TRIAL BY JURY IN RESPECT OF ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, ANY OTHER CREDIT DOCUMENT, OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY, AND IRREVOCABLY SUBMIT TO THE NONEXCLUSIVE JURISDICTION OF THE COURTS OF HARRIS COUNTY, TEXAS, AND THE SOUTHERN DISTRICT OF TEXAS FOR THE RESOLUTION OF ANY DISPUTES UNDER THIS AGREEMENT AND THE CREDIT DOCUMENTS, AND HEREBY IRREVOCABLY WAIVE ANY CLAIM THAT SUCH JURISDICTION IS IMPRACTICAL OR INCONVENIENT. THIS WRITTEN AGREEMENT AND THE CREDIT DOCUMENTS, AS DEFINED IN THIS AGREEMENT, REPRESENT THE FINAL AGREEMENT -69- AMONG 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 AMONG THE PARTIES. -70- EXECUTED as of the date first above written. BORROWER: STONE ENERGY CORPORATION Name: /s/ Micheal L. Finch ---------------------- Title: Executive Vice President Name: /s/ James H. Prince ---------------------- Title: Vice President AGENT: NATIONSBANK OF TEXAS, N.A. Name: /s/ Paul A. Squires ----------------------- Title: Senior Vice President -71- BANKS: NATIONSBANK OF TEXAS, N.A. REVOLVING COMMITMENT $37,500,000.00 Name: /s/ Paul A. Squires TERM COMMITMENT ------------------- $18,750,000.00 Title: Senior Vice President FIRST NATIONAL BANK OF COMMERCE REVOLVING COMMITMENT $18,750,000.00 Name: /s/ David R. Reid TERM COMMITMENT ------------------ $9,375,000.00 Title: Sr. Vice President HIBERNIA NATIONAL BANK REVOLVING COMMITMENT $18,750,000.00 Name:/s/ Lyndsay Job TERM COMMITMENT ------------------ $9,375,000.00 Title:Senior Vice President -72- BANKBOSTON, N.A. REVOLVING COMMITMENT $25,000,000.00 Name: /s/ George W. Passela TERM COMMITMENT -------------------- $12,500,000.00 Title: Managing Director TOTAL REVOLVING COMMITMENTS $100,000,000.00 TOTAL TERM COMMITMENTS $50,000,000.00 MILERJ\60877\004973 HOUSTON\733573.4 7/29/97--10:34 am -73- EX-10 3 STONE ENERGY 1993 STOCK OPTION PLAN, AS AMENDED Exhibit 10.9 STONE ENERGY CORPORATION 1993 STOCK OPTION PLAN [As Amended and Restated Effective as of May 15, 1997] I. Purpose of the Plan The STONE ENERGY CORPORATION 1993 STOCK OPTION PLAN (the "Plan") is intended to provide a means whereby certain employees of STONE ENERGY CORPORATION, a Delaware corporation (the "Company"), and its subsidiaries may develop a sense of proprietorship and personal involvement in the development and financial success of the Company, and to encourage them to remain with and devote their best efforts to the business of the Company, thereby advancing the interests of the Company and its stockholders. Accordingly, the Company may grant to certain employees ("Optionees") the option ("Option") to purchase shares of the common stock of the Company ("Stock"), as hereinafter set forth. Options granted under the Plan may be either incentive stock options, within the meaning of section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code"), ("Incentive Stock Options") or options which do not constitute Incentive Stock Options. The Plan as set forth herein constitutes an amendment and restatement of the Plan as previously adopted by the Company, and shall supersede and replace in its entirety such previously adopted plan. This amendment and restatement of the Plan shall be effective as of May 15, 1997, provided this amendment and restatement of the Plan is approved by the stockholders of the Company on such date at the Company's 1997 Annual Meeting of Stockholders. If this amendment and restatement of the Plan is not so approved by the stockholders, then no Options shall be granted under the Plan on or after May 15, 1997. II. Administration The Plan shall be administered by a committee (the "Committee") of, and appointed by, the Board of Directors of the Company (the "Board"), and the Committee shall be comprised solely of two or more directors who are both (a) outside directors (within the meaning of section 162(m) of the Code and applicable interpretive authority thereunder), and (b) nonemployee directors (within the meaning of Rule 16b-3, as currently in effect or as hereinafter modified or amended ("Rule 16b-3"), promulgated under the Securities Exchange Act of 1934, as amended (the "1934 Act")). The Committee shall have sole authority to select the Optionees from among those individuals eligible hereunder and to establish the number of shares which may be issued under each Option; provided, however, that, notwithstanding any provision in the Plan to the contrary, the maximum number of shares that may be subject to Options granted under the Plan to an individual Optionee during any calendar year may not exceed 50,000 (subject to adjustment in the same manner as provided in Paragraph VIII hereof with respect to shares of Stock subject to Options then outstanding). The limitation set forth in the preceding sentence shall be applied in a manner which will permit compensation generated under the Plan to constitute "performance-based" compensation for purposes of section 162(m) of the Code, including, without limitation, counting against such maximum number of shares, to the extent required under section 162(m) of the Code and applicable interpretive authority thereunder, any shares subject to Options that are canceled or repriced. In -1- selecting the Optionees from among individuals eligible hereunder and in establishing the number of shares that may be issued under each Option, the Committee may take into account the nature of the services rendered by such individuals, their present and potential contributions to the Company's success and such other factors as the Committee in its discretion shall deem relevant. The Committee is authorized to interpret the Plan and may from time to time adopt such rules and regulations, consistent with the provisions of the Plan, as it may deem advisable to carry out the Plan. All decisions made by the Committee in selecting the Optionees, in establishing the number of shares which may be issued under each Option and in construing the provisions of the Plan shall be final. III. Option Agreements (a) Each Option shall be evidenced by a written agreement between the Company and the Optionee ("Option Agreement") which shall contain such terms and conditions as may be approved by the Committee. The terms and conditions of the respective Option Agreements need not be identical. Specifically, an Option Agreement may provide for the surrender of the right to purchase shares under the Option in return for a payment in cash or shares of Stock or a combination of cash and shares of Stock equal in value to the excess of the fair market value of the shares with respect to which the right to purchase is surrendered over the option price therefor ("Stock Appreciation Rights"), on such terms and conditions as the Committee in its sole discretion may prescribe; provided, that, except as provided in Subparagraph VIII(c) hereof, the Committee shall retain final authority (i) to determine whether an Optionee shall be permitted, or (ii) to approve an election by an Optionee, to receive cash in full or partial settlement of Stock Appreciation Rights. Moreover, an Option Agreement may provide for the payment of the option price, in whole or in part, by the delivery of a number of shares of Stock (plus cash if necessary) having a fair market value equal to such option price. Further, an Option Agreement may provide for a "cashless exercise" of the Option pursuant to procedures established by the Committee (as the same may be amended from time to time). (b) For all purposes under the Plan, the fair market value of a share of Stock on a particular date shall be equal to the mean of the high and low sales prices of the Stock (i) reported by the National Market System of NASDAQ on that date or (ii) if the Stock is listed on a national stock exchange, reported on the stock exchange composite tape on that date; or, in either case, if no prices are reported on that date, on the last preceding date on which such prices of the Stock are so reported. If the Stock is traded over the counter at the time a determination of its fair market value is required to be made hereunder, its fair market value shall be deemed to be equal to the average between the reported high and low or closing bid and asked prices of Stock on the most recent date on which Stock was publicly traded. In the event Stock is not publicly traded at the time a determination of its value is required to be made hereunder, the determination of its fair market value shall be made by the Committee in such manner as it deems appropriate. (c) Each Option and all rights granted thereunder shall not be transferable other than by will or the laws of descent and distribution or pursuant to a qualified domestic relations order as -2- defined by the Code or Title I of the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder, and shall be exercisable during the Optionee's lifetime only by the Optionee or the Optionee's guardian or legal representative. IV. Eligibility of Optionee Options may be granted only to individuals who are employees (including officers and directors who are also employees) of the Company or any parent or subsidiary corporation (as defined in section 424 of the Code) of the Company at the time the Option is granted; provided, however, that members of the Committee shall not be eligible to be granted Options. Options may be granted to the same individual on more than one occasion. No Incentive Stock Option shall be granted to an individual if, at the time the Option is granted, such individual owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or of its parent or subsidiary corporation, within the meaning of section 422(b)(6) of the Code, unless (i) at the time such Option is granted the option price is at least 110% of the fair market value of the Stock subject to the Option and (ii) such Option by its terms is not exercisable after the expiration of five years from the date of grant. To the extent that the aggregate fair market value (determined at the time the respective Incentive Stock Option is granted) of stock with respect to which Incentive Stock Options are exercisable for the first time by an individual during any calendar year under all incentive stock option plans of the Company and its parent and subsidiary corporations exceeds $100,000, such excess Incentive Stock Options shall be treated as Options which do not constitute Incentive Stock Options. The Committee shall determine, in accordance with applicable provisions of the Code, Treasury Regulations and other administrative pronouncements, which of an Optionee's Incentive Stock Options will not constitute Incentive Stock Options because of such limitation and shall notify the Optionee of such determination as soon as practicable after such determination. V. Shares Subject to the Plan The aggregate number of shares which may be issued under Options granted under the Plan shall not exceed 1,170,000 shares of Stock. Such shares may consist of authorized but unissued shares of Stock or previously issued shares of Stock reacquired by the Company. Any of such shares which remain unissued and which are not subject to outstanding Options at the termination of the Plan shall cease to be subject to the Plan, but, until termination of the Plan, the Company shall at all times make available a sufficient number of shares to meet the requirements of the Plan. Should any Option hereunder expire or terminate prior to its exercise in full, the shares theretofore subject to such Option may again be subject to an Option granted under the Plan to the extent permitted under Rule 16b-3. The aggregate number of shares which may be issued under the Plan shall be subject to adjustment in the same manner as provided in Paragraph VIII hereof with respect to shares of Stock subject to Options then outstanding. Exercise of an Option in any manner, including an exercise involving a Stock Appreciation Right, shall result in a decrease in the number of shares of Stock which may thereafter be available, both for purposes of the Plan and for sale to any one individual, by the number of shares as to which the Option is exercised. Separate stock certificates shall be issued by the Company for those shares acquired pursuant to the exercise of an -3- Incentive Stock Option and for those shares acquired pursuant to the exercise of any Option which does not constitute an Incentive Stock Option. VI. Option Price The purchase price of Stock issued under each Option shall be determined by the Committee, but such purchase price shall not be less than the fair market value of Stock subject to the Option on the date the Option is granted. VII. Term of Plan The Plan originally became effective on July 8, 1993 (the "Original Effective Date"). This amendment and restatement of the Plan shall be effective as provided in Paragraph I. Except with respect to Options then outstanding, if not sooner terminated under the provisions of Paragraph IX, the Plan shall terminate upon and no further Options shall be granted after the expiration of ten years from the Original Effective Date. VIII. Recapitalization or Reorganization (a) The existence of the Plan and the Options granted hereunder shall not affect in any way the right or power of the Board or the stockholders of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in the Company's capital structure or its business, any merger or consolidation of the Company, any issue of debt or equity securities, the dissolution or liquidation of the Company or any sale, lease, exchange or other disposition of all or any part of its assets or business or any other corporate act or proceeding. (b) The shares with respect to which Options may be granted are shares of Stock as presently constituted, but if, and whenever, prior to the expiration of an Option theretofore granted, the Company shall effect a subdivision or consolidation of shares of Stock or the payment of a stock dividend on Stock without receipt of consideration by the Company, the number of shares of Stock with respect to which such Option may thereafter be exercised (i) in the event of an increase in the number of outstanding shares shall be proportionately increased, and the purchase price per share shall be proportionately reduced, and (ii) in the event of a reduction in the number of outstanding shares shall be proportionately reduced, and the purchase price per share shall be proportionately increased. (c) If the Company recapitalizes, reclassifies its capital stock, or otherwise changes its capital structure (a "recapitalization"), the number and class of shares of Stock covered by an Option theretofore granted shall be adjusted so that such Option shall thereafter cover the number and class of shares of stock and securities to which the Optionee would have been entitled pursuant to the terms of the recapitalization if, immediately prior to the recapitalization, the Optionee had been the holder of record of the number of shares of Stock then covered by such Option. If (i) the Company shall not be the surviving entity in any merger, consolidation or other reorganization (or survives -4- only as a subsidiary of an entity), (ii) the Company sells, leases or exchanges all or substantially all of its assets to any other person or entity, (iii) the Company is to be dissolved and liquidated, (iv) any person or entity, including a "group" as contemplated by Section 13(d)(3) of the 1934 Act, acquires or gains ownership or control (including, without limitation, power to vote) of more than 50% of the outstanding shares of the Company's voting stock (based upon voting power), or (v) as a result of or in connection with a contested election of directors, the persons who were directors of the Company before such election shall cease to constitute a majority of the Board (each such event is referred to herein as a "Corporate Change"), no later than (a) ten days after the approval by the stockholders of the Company of such merger, consolidation, reorganization, sale, lease or exchange of assets or dissolution or such election of directors or (b) thirty days after a change of control of the type described in Clause (iv), the Committee, acting in its sole discretion without the consent or approval of any Optionee, shall act to effect one or more of the following alternatives, which may vary among individual Optionees and which may vary among Options held by any individual Optionee: (1) accelerate the time at which Options then outstanding may be exercised so that such Options may be exercised in full for a limited period of time on or before a specified date (before or after such Corporate Change) fixed by the Committee, after which specified date all unexercised Options and all rights of Optionees thereunder shall terminate, (2) require the mandatory surrender to the Company by selected Optionees of some or all of the outstanding Options held by such Optionees (irrespective of whether such Options are then exercisable under the provisions of the Plan) as of a date, before or after such Corporate Change, specified by the Committee, in which event the Committee shall thereupon cancel such Options and the Company shall pay to each Optionee an amount of cash per share equal to the excess, if any, of the amount calculated in Subparagraph (d) below (the "Change of Control Value") of the shares subject to such Option over the exercise price(s) under such Options for such shares, (3) make such adjustments to Options then outstanding as the Committee deems appropriate to reflect such Corporate Change (provided, however, that the Committee may determine in its sole discretion that no adjustment is necessary to Options then outstanding) or (4) provide that the number and class of shares of Stock covered by an Option theretofore granted shall be adjusted so that such Option shall thereafter cover the number and class of shares of stock or other securities or property (including, without limitation, cash) to which the Optionee would have been entitled pursuant to the terms of the agreement of merger, consolidation or sale of assets and dissolution if, immediately prior to such merger, consolidation or sale of assets and dissolution, the Optionee had been the holder of record of the number of shares of Stock then covered by such Option. (d) For the purposes of clause (2) in Subparagraph (c) above, the "Change of Control Value" shall equal the amount determined in clause (i), (ii) or (iii), whichever is applicable, as follows: (i) the per share price offered to stockholders of the Company in any such merger, consolidation, reorganization, sale of assets or dissolution transaction, (ii) the price per share offered to stockholders of the Company in any tender offer or exchange offer whereby a Corporate Change takes place, or (iii) if such Corporate Change occurs other than pursuant to a tender or exchange offer, the fair market value per share of the shares into which such Options being surrendered are exercisable, as determined by the Committee as of the date determined by the Committee to be the date of cancellation and surrender of such Options. In the event that the consideration offered to stockholders of the Company in any transaction described in this Subparagraph (d) or Subparagraph -5- (c) above consists of anything other than cash, the Committee shall determine the fair cash equivalent of the portion of the consideration offered which is other than cash. (e) Any adjustment provided for in Subparagraphs (b) or (c) above shall be subject to any required stockholder action. (f) Except as hereinbefore expressly provided, the issuance by the Company of shares of stock of any class or securities convertible into shares of stock of any class, for cash, property, labor or services, upon direct sale, upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, and in any case whether or not for fair value, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number of shares of Stock subject to Options theretofore granted or the purchase price per share. IX. Amendment or Termination of the Plan The Board in its discretion may terminate the Plan at any time with respect to any shares for which Options have not theretofore been granted. The Board shall have the right to alter or amend the Plan or any part thereof from time to time; provided, that no change in any Option theretofore granted may be made which would impair the rights of the Optionee without the consent of such Optionee; and provided, further, that the Board may not, without the approval of the stockholders of the Company, make any alteration or amendment which would (a) increase the aggregate number of shares which may be issued pursuant to the provisions of the Plan or (b) change the class of individuals eligible to receive Options under the Plan. X. Securities Laws (a) The Company shall not be obligated to issue any Stock pursuant to any Option granted under the Plan at any time when the offering of the shares covered by such Option have not been registered under the Securities Act of 1933 and such other state and federal laws, rules or regulations as the Company or the Committee deems applicable and, in the opinion of legal counsel for the Company, there is no exemption from the registration requirements of such laws, rules or regulations available for the offering and sale of such shares. (b) It is intended that the Plan and any grant of an Option made to a person subject to Section 16 of the 1934 Act meet the requirements of Rule 16b-3 so that any transaction under the Plan involving a grant, award, or other acquisition from the Company or disposition to the Company is exempt from Section 16(b) of the 1934 Act. If any provision of the Plan or any such Option would result in any such transaction not being exempt from Section 16(b) of the 1934 Act, such provision or Option shall be construed or deemed amended so that such transaction will be exempt from Section 16(b) of the 1934 Act. VEHOU02:63914.1 3/6/97 -6- EX-23 4 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS Exhibit 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our report, dated March 2, 1998, on our audits of the consolidated financial statements of Stone Energy Corporation as of December 31, 1997 and 1996 and for each of the three years in the period ended December 31, 1997 included in this Annual Report on Form 10-K for the year ended December 31, 1997, into the Company's previously filed Registration Statement on Form S-8 (Registration No. 33-67332). ARTHUR ANDERSEN LLP New Orleans, Louisiana March 20, 1998 EX-23 5 CONSENT OF INDEPENDENT PETROLEUM ENGINEERS Exhibit 23.2 CONSENT OF INDEPENDENT PETROLEUM ENGINEERS We do hereby consent to the use of our name in "Item 2. Properties" of the Annual Report on Form 10-K of Stone Energy Corporation (the "Company") for the year ended December 31, 1997 (the "Form 10-K"), and the incorporation by reference of the Form 10-K into the Company's Registration Statement on Form S-8 (Registration No. 33-67332), and the incorporation by reference of the Form 10-K into the Company's Registration Statement on Form S-3 (Registration No. 33- 72236). ATWATER CONSULTANTS, LTD. By: /s/ O.R. Carter ------------------------ O.R. Carter Co-Chairman, Board of Directors New Orleans, Louisiana March 13, 1998 EX-23 6 CONSENT OF INDEPENDENT PETROLEUM ENGINEERS Exhibit 23.3 CONSENT OF INDEPENDENT PETROLEUM ENGINEERS We do hereby consent to the use of our name in "Item 2. Properties" of the Annual Report on Form 10-K of Stone Energy Corporation (the "Company") for the year ended December 31, 1997 (the "Form 10-K"), the incorporation by reference of the Form 10-K into the Company's Registration Statement on Form S-8 (Registration No. 33-67332), and the incorporation by reference of the Form 10-K into the Company's Registration Statement on Form S-3 (Registration No. 33-72236). Cawley, Gillespie & Associates, Inc. By: /s/ Aaron Cawley -------------------------- Aaron Cawley, P.E. Executive Vice President Fort Worth, Texas March 11, 1998 EX-27.1 7 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the consolidated balance sheet of Stone Energy Corporation as of December 31, 1997 and the related consolidated statement of operations for the year ended December 31, 1997 and is qualified in its entirety by reference to such financial statements included in Stone Energy Corporation's annual report on Form 10-K. Note that earnings per share data for the year ended December 31, 1997 has been reflected in accordance with SFAS 128. 1,000 Year DEC-31-1997 JAN-01-1997 DEC-31-1997 10,304 19,940 22,202 0 0 53,151 12,281 2,708 354,144 44,823 100,000 0 0 150 156,487 354,144 69,079 70,987 0 42,921 4,736 0 4,916 18,414 6,495 11,919 0 0 0 11,919 0.79 0.78
EX-27.2 8 FINANCIAL DATA SCHEDULE-RESTATED
5 This schedule contains summary financial information extracted from the consolidated balance sheet of Stone Energy Corporation as of December 31, 1996 and the related consolidated statement of opertions for the year ended December 31, 1996 and is qualified in its entirety by reference to such financial statments included in Stone Energy Corporation's annual report on Form 10-K. Note that this Financial Data Schedule has been restated to reflect earnings per share data for the year ended December 31, 1996 in accordance with SFAS 128. 1,000 Year DEC-31-1996 JAN-01-1996 DEC-31-1996 9,864 10,331 12,466 0 0 33,225 6,922 2,137 209,406 26,542 0 0 0 150 144,291 209,406 55,839 57,965 0 32,015 4,437 0 3,574 17,939 6,906 11,033 0 0 0 11,033 0.90 0.90
EX-27.3 9 FINANCIAL DATA SCHEDULE-RESTATED
5 The purpose of this restated financial data schedule is to submit earnings per share data for the interim periods for the fiscal year ended December 31, 1997, in accordance with SFAS 128. 1,000 3-MOS 6-MOS 9-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 JAN-01-1997 JAN-01-1997 JAN-01-1997 MAR-31-1997 JUN-30-1997 SEP-30-1997 8,097 10,396 5,008 23,459 16,003 26,340 10,293 11,443 13,913 0 0 0 0 0 0 41,866 38,274 45,668 7,264 7,513 10,724 2,262 2,390 2,524 236,282 253,556 325,142 32,648 35,546 40,905 0 0 100,000 0 0 0 0 0 0 150 150 150 147,783 149,380 152,162 236,282 253,556 325,142 15,809 29,005 44,608 16,237 29,899 45,857 0 0 0 8,910 18,276 27,653 1,053 2,075 3,151 0 0 0 426 1,103 2,551 5,848 8,445 12,502 2,252 3,252 4,814 3,596 5,193 7,688 0 0 0 0 0 0 0 0 0 3,596 5,193 7,688 0.24 0.35 0.51 0.24 0.34 0.50
EX-27.4 10 FINANCIAL DATA SCHEDULE-RESTATED
5 The purpose of this restated financial data schedule is to submit earnings per share data for the interim periods for the fiscal year ended December 31, 1996, in accordance with SFAS 128. 1,000 3-MOS 6-MOS 9-MOS DEC-31-1996 DEC-31-1996 DEC-31-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996 MAR-31-1996 JUN-30-1996 SEP-30-1996 5,316 7,593 6,686 11,639 15,992 20,124 8,910 9,171 10,621 0 0 0 0 0 0 26,422 33,396 37,667 8,050 8,116 6,582 4,238 4,300 2,019 142,802 162,294 201,037 17,212 27,113 27,647 0 0 0 0 0 0 0 0 0 118 118 118 70,071 72,960 74,980 142,802 162,294 201,037 14,687 28,391 41,248 15,093 29,496 42,747 0 0 0 8,008 16,073 24,286 991 1,940 2,734 0 0 0 790 1,537 2,496 5,304 9,946 13,231 2,042 3,829 5,093 3,262 6,117 8,138 0 0 0 0 0 0 0 0 0 3,262 6,117 8,138 0.28 0.52 0.69 0.28 0.51 0.68
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