e10vqza
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q/A
(Amendment No. 1 to Form 10-Q filed August 3, 2005)
(Mark One)
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þ |
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Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended June 30, 2005 or
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o |
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Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For
the Transition period from
to
Commission File Number 0-13305
PARALLEL PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE
(State of other jurisdiction
of incorporation or organization)
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75-1971716
(I.R.S. Employer Identification
Number) |
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1004 N. Big Spring, Suite 400
Midland, Texas
(Address of principal executive offices)
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79701
(Zip Code) |
(432) 684-3727
(Registrants telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or
a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule
12b-2 of the Exchange Act. (Check one):
Large
accelerated filer o
Accelerated filer þ
Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
At August 1, 2005, 34,025,168 shares of the Registrants Common Stock, $0.01 par value, were
outstanding.
Explanatory Note
This
Amendment No. 1 to the Quarterly Report on Form 10-Q of Parallel Petroleum Corporation (Parallel, the Company,
we, our or us) for the quarterly
period ended June 30, 2005, which was
originally filed on August 3, 2005 (the Form 10-Q), is being filed to restate the financial statements and other
disclosure included therein. As part of the preparation of our financial statements for the year
ended December 31, 2005, we undertook a review of our accounting for oil and gas and interest rate
derivatives. We use derivative instruments as a means of reducing financial exposure to
fluctuating oil and gas prices and interest rates. We included changes from period to period in
the fair value of derivatives classified as cash flow hedges (Hedges) as increases or decreases
to Accumulated Other Comprehensive Income (AOCI) as allowed by Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (FAS 133).
This Hedge accounting treatment is allowed for certain derivatives, including the types of
derivatives used by us to reduce exposure to changes in oil and gas prices associated with the sale
of oil and gas production and fluctuations in interest rates. In order to qualify for Hedge
accounting treatment, specific standards and documentation requirements must be met. We believed
that we met those requirements and that our derivative accounting treatment was permitted under FAS
133. However, after a review of FAS 133 and our accounting policies and procedures related to our
derivative instruments, we determined that certain of our derivative instruments did not qualify
for Hedge accounting treatment under FAS 133. Specifically, we determined that documentation of
the relationship of hedged items and the derivative instruments being employed and designated as
Hedges was insufficient for derivative instruments entered into during periods subsequent to June
30, 2004; and that accounting for derivative instruments entered into during periods subsequent to
June 30, 2004 as cash flow Hedges was, therefore, inappropriate. Accordingly, we have restated our
Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004; our Consolidated Statements
of Operations for the three months and six months ended June 30, 2005; our Consolidated Statement
of Cash Flows for the six months ended June 20, 2005; and our Consolidated Statements of
Comprehensive Income (Loss) for the three and six months ended June 30, 2005 in the Form 10-Q to
reflect these revisions (see Note 11 to our consolidated financial statements for a reconciliation
of our restated results to previously reported results). We have also restated applicable
disclosures in ITEM 1. Notes to Consolidated Financial Statements and ITEM 2. MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Management has
concluded, based on the circumstances involving the restatement of the aforementioned financial
statements that as of December 31, 2005, a material weakness in internal control over financial
reporting existed with respect to the design of our controls over the proper recording and
disclosure of derivative instruments in accordance with FAS 133. See ITEM 4. CONTROLS AND
PROCEDURES.
This
Amendment No. 1 amends and restates the Form 10-Q in its entirety. This Amendment No. 1 does not
reflect events occurring after the original filing of the Form 10-Q, and does not modify or update
the disclosures therein in any way other than as required to reflect the amendments as previously
described and set forth hereinafter. In addition, the filing of this
amendment to the Form 10-Q shall not
be deemed an admission that the original filing, when made, included any untrue statement of
material fact or omitted to state a material fact necessary to make a statement made therein not
misleading. This Form 10-Q/A (Amendment No. 1) should be read in
conjunction with our filings made with the SEC subsequent to the
filing of the original Form 10-Q, including any amendments to those
filings.
(i)
INDEX
PART I. FINANCIAL INFORMATION
(ii)
PARALLEL PETROLEUM CORPORATION
Consolidated Balance Sheets
(dollars in thousands)
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June 30, |
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December 31, |
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2005 |
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2004 |
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(unaudited) |
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(restated) |
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(restated) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
3,756 |
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$ |
4,781 |
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Accounts receivable: |
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Oil and gas |
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7,866 |
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6,642 |
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Other, net of allowance for doubtful account of $9 |
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1,256 |
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|
389 |
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Affiliates |
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7 |
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7 |
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9,129 |
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7,038 |
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Other current assets |
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190 |
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179 |
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Deferred income tax asset |
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4,997 |
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2,531 |
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Total current assets |
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18,072 |
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14,529 |
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Property and equipment, at cost: |
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Oil and gas properties, full cost method (including $14,115 and $9,526 not
subject to depletion) |
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251,913 |
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229,245 |
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Other |
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2,361 |
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|
2,062 |
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254,274 |
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231,307 |
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Less accumulated depreciation, depletion and amortization |
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(83,837 |
) |
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(78,782 |
) |
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Net property and equipment |
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|
170,437 |
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152,525 |
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Restricted cash |
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149 |
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2,287 |
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Investment in Westfork Pipeline Company LP |
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1,572 |
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|
595 |
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Other assets, net of accumulated amortization of $724 and $581 |
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774 |
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|
735 |
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$ |
191,004 |
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$ |
170,671 |
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Liabilities and Stockholders Equity |
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Current liabilities: |
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Accounts payable and accrued liabilities |
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$ |
7,368 |
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$ |
5,568 |
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Asset retirement obligations |
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133 |
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150 |
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Derivative obligations |
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16,449 |
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7,965 |
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Total current liabilities |
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23,950 |
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13,683 |
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Revolving credit facility |
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62,000 |
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79,000 |
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Asset retirement obligations |
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2,118 |
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|
1,982 |
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Derivative obligations |
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27,209 |
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9,525 |
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Deferred income tax liability |
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1,780 |
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6,487 |
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Total long-term liabilities |
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93,107 |
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96,994 |
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Commitments and contingencies
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Stockholders equity: |
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Series A preferred stock par value $0.10 per share, authorized 50,000 shares |
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Preferred stock 6% convertible preferred stock par value of $0.10 per share
(liquidation preference of $10 per share), authorized 10,000,000 shares,
issued and outstanding 950,000, converted to common stock June, 2005 |
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95 |
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Common stock par value $0.01 per share, authorized 60,000,000 shares,
issued and outstanding 34,013,572 and 25,439,292 |
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340 |
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|
254 |
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Additional paid-in capital |
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76,528 |
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48,328 |
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Retained earnings |
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6,538 |
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18,759 |
|
Accumulated other comprehensive loss |
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(9,459 |
) |
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|
(7,442 |
) |
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Total stockholders equity |
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73,947 |
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59,994 |
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$ |
191,004 |
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$ |
170,671 |
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The accompanying notes are an integral part of these Consolidated Financial Statements.
(1)
PARALLEL PETROLEUM CORPORATION
Consolidated Statements of Operations
(unaudited)
(in thousands, except per share data)
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2005 |
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2004 |
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2005 |
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2004 |
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(restated) |
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(restated) |
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Oil and natural gas revenues: |
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Oil and natural gas sales |
|
$ |
15,004 |
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$ |
9,752 |
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$ |
27,973 |
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$ |
18,858 |
|
Loss on hedging and derivatives |
|
|
(2,741 |
) |
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|
(1,835 |
) |
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|
(5,296 |
) |
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(2,940 |
) |
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Total revenues |
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|
12,263 |
|
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|
7,917 |
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22,677 |
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|
15,918 |
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Cost and expenses: |
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Lease operating expense |
|
|
2,178 |
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|
2,014 |
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|
4,736 |
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|
|
3,543 |
|
Production taxes |
|
|
701 |
|
|
|
471 |
|
|
|
1,281 |
|
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|
949 |
|
General and administrative |
|
|
1,408 |
|
|
|
1,221 |
|
|
|
3,036 |
|
|
|
2,443 |
|
Depreciation, depletion and amortization |
|
|
2,773 |
|
|
|
1,969 |
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|
|
5,055 |
|
|
|
4,046 |
|
|
|
|
|
|
|
|
|
|
|
|
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Total costs and expenses |
|
|
7,060 |
|
|
|
5,675 |
|
|
|
14,108 |
|
|
|
10,981 |
|
|
|
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|
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Operating income |
|
|
5,203 |
|
|
|
2,242 |
|
|
|
8,569 |
|
|
|
4,937 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
Other income (expense), net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Change in fair market value of derivative
instruments |
|
|
(6,065 |
) |
|
|
|
|
|
|
(23,698 |
) |
|
|
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|
Gain (loss) on ineffective portion of hedges |
|
|
(150 |
) |
|
|
17 |
|
|
|
(860 |
) |
|
|
7 |
|
Interest and other income |
|
|
22 |
|
|
|
18 |
|
|
|
41 |
|
|
|
158 |
|
Interest expense |
|
|
(868 |
) |
|
|
(487 |
) |
|
|
(2,041 |
) |
|
|
(955 |
) |
Other expense |
|
|
(1 |
) |
|
|
(59 |
) |
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(2 |
) |
|
|
(85 |
) |
Equity in loss of Westfork Pipeline Company LP |
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(15 |
) |
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|
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(94 |
) |
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Total other expense, net |
|
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(7,077 |
) |
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|
(511 |
) |
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|
(26,654 |
) |
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|
(875 |
) |
|
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|
|
|
|
|
|
|
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|
Income (loss) before income taxes |
|
|
(1,874 |
) |
|
|
1,731 |
|
|
|
(18,085 |
) |
|
|
4,062 |
|
Income tax benefit (expense), deferred |
|
|
628 |
|
|
|
(628 |
) |
|
|
6,135 |
|
|
|
(1,477 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
(1,246 |
) |
|
|
1,103 |
|
|
|
(11,950 |
) |
|
|
2,585 |
|
Cumulative preferred stock dividend |
|
|
(128 |
) |
|
|
(144 |
) |
|
|
(271 |
) |
|
|
(287 |
) |
|
|
|
|
|
|
|
|
|
|
|
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|
Net income (loss) available to common
stockholders |
|
$ |
(1,374 |
) |
|
$ |
959 |
|
|
$ |
(12,221 |
) |
|
$ |
2,298 |
|
|
|
|
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|
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Net income (loss) per common share: |
|
|
|
|
|
|
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|
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|
|
|
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Basic |
|
$ |
(0.04 |
) |
|
$ |
0.04 |
|
|
$ |
(0.40 |
) |
|
$ |
0.09 |
|
|
|
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|
|
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|
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|
Diluted |
|
$ |
(0.04 |
) |
|
$ |
0.04 |
|
|
$ |
(0.40 |
) |
|
$ |
0.09 |
|
|
|
|
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|
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Weighted average common share outstanding: |
|
|
|
|
|
|
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|
|
|
|
|
|
|
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Basic |
|
|
31,967 |
|
|
|
25,246 |
|
|
|
30,341 |
|
|
|
25,235 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
Diluted |
|
|
31,967 |
|
|
|
28,330 |
|
|
|
30,341 |
|
|
|
28,296 |
|
|
|
|
|
|
|
|
|
|
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|
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|
The accompanying notes are an integral part of these Consolidated Financial Statements.
(2)
PARALLEL PETROLEUM CORPORATION
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2005 and 2004
(unaudited)
(dollars in thousands)
|
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|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
|
(restated) |
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(11,950 |
) |
|
$ |
2,585 |
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation, depletion and amortization |
|
|
5,055 |
|
|
|
4,046 |
|
Accretion of asset retirement obligation |
|
|
54 |
|
|
|
53 |
|
Deferred income tax |
|
|
(6,135 |
) |
|
|
1,477 |
|
Change in fair value of derivatives instruments |
|
|
23,696 |
|
|
|
|
|
Gain (loss) on ineffective portion of hedges |
|
|
860 |
|
|
|
(7 |
) |
Stock option expense |
|
|
70 |
|
|
|
84 |
|
Equity in loss of Westfork Pipeline Company, LP |
|
|
94 |
|
|
|
|
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Other assets, net |
|
|
123 |
|
|
|
(141 |
) |
Restricted cash |
|
|
(149 |
) |
|
|
|
|
Increase in accounts receivable |
|
|
(2,091 |
) |
|
|
(507 |
) |
Increase in other current assets |
|
|
(11 |
) |
|
|
(87 |
) |
Increase in accounts payable and accrued liabilities |
|
|
1,800 |
|
|
|
1,084 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
11,416 |
|
|
|
8,587 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Additions to oil and gas properties |
|
|
(25,431 |
) |
|
|
(14,590 |
) |
Use of restricted cash for acquisition of oil and gas properties |
|
|
2,287 |
|
|
|
|
|
Proceeds from disposition of oil and gas properties |
|
|
2,828 |
|
|
|
25 |
|
Additions to other property and equipment |
|
|
(299 |
) |
|
|
(516 |
) |
Settlements on derivatives |
|
|
(1,570 |
) |
|
|
|
|
Purchase of derivative instruments |
|
|
(35 |
) |
|
|
|
|
Investment in Westfork Pipeline Company LP |
|
|
(1,071 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(23,291 |
) |
|
|
(15,081 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Net borrowings (payments) on revolving credit facility |
|
|
(17,000 |
) |
|
|
(5,750 |
) |
Proceeds (net) from common stock issued |
|
|
27,743 |
|
|
|
|
|
Proceeds from exercise of stock options |
|
|
378 |
|
|
|
103 |
|
Deferred stock offering costs |
|
|
|
|
|
|
(7 |
) |
Payment of preferred stock dividend |
|
|
(271 |
) |
|
|
(287 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
10,850 |
|
|
|
(5,941 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(1,025 |
) |
|
|
(12,435 |
) |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period |
|
|
4,781 |
|
|
|
17,378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
3,756 |
|
|
$ |
4,943 |
|
|
|
|
|
|
|
|
Non-cash financing and investing activities: |
|
|
|
|
|
|
|
|
Oil and gas properties asset retirement obligations, net |
|
$ |
65 |
|
|
$ |
189 |
|
Conversion of preferred stock |
|
$ |
95 |
|
|
$ |
|
|
Other Transactions: |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
2,403 |
|
|
$ |
933 |
|
The accompany notes are an integral part of these Consolidated Financial Statements.
(3)
PARALLEL PETROLEUM CORPORATION
Consolidated Statements of Comprehensive Loss
(unaudited)
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
(restated) |
|
|
|
|
|
|
(restated) |
|
|
|
|
|
Net income (loss) |
|
$ |
(1,246 |
) |
|
$ |
1,103 |
|
|
$ |
(11,950 |
) |
|
$ |
2,585 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses on derivatives |
|
|
(1,060 |
) |
|
|
(3,782 |
) |
|
|
(8,473 |
) |
|
|
(8,125 |
) |
Reclassification adjustments for losses
on derivatives included in net income (loss) |
|
|
2,788 |
|
|
|
1,952 |
|
|
|
5,418 |
|
|
|
3,171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of derivatives |
|
|
1,728 |
|
|
|
(1,830 |
) |
|
|
(3,055 |
) |
|
|
(4,954 |
) |
Income tax benefit (expense) |
|
|
(588 |
) |
|
|
624 |
|
|
|
1,038 |
|
|
|
1,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss) |
|
|
1,140 |
|
|
|
(1,206 |
) |
|
|
(2,017 |
) |
|
|
(3,269 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
$ |
(106 |
) |
|
$ |
(103 |
) |
|
$ |
(13,967 |
) |
|
$ |
(684 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompany notes are an integral part of these Consolidated Financial Statements.
(4)
PARALLEL PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.
DESCRIPTION OF BUSINESS NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Parallel Petroleum Corporation was incorporated in Texas on November 26, 1979, and
reincorporated in the State of Delaware on December 18, 1984.
We are engaged in the acquisition, development and exploitation of long life oil and natural
gas reserves and, to a lesser extent, the exploration for new oil and natural gas reserves. Our
activities are focused in the Permian Basin of west Texas and New Mexico, Liberty County in east
Texas and the onshore Gulf Coast area of south Texas. We are actively evaluating, leasing and
drilling new projects located in New Mexico, the Fort Worth Basin of Texas, the Cotton Valley Reef
trend of east Texas and the Uinta Basin of Utah.
The financial information included herein is unaudited, except the balance sheet as of
December 31, 2004 which has been derived from our audited Consolidated Financial Statements as of
December 31, 2004, as restated (see Note 11). However, such information includes all adjustments
(consisting solely of normal recurring adjustments), which are, in the opinion of management,
necessary for a fair statement of the results of operations for the interim periods. The results of
operations for the interim period are not necessarily indicative of the results to be expected for
an entire year.
Certain information, accounting policies and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted in this Form 10-Q Report pursuant to
certain rules and regulations of the Securities and Exchange Commission. These financial statements
should be read in conjunction with the audited consolidated financial statements and notes included
in our Annual Report on Form 10-K for the year ended December 31, 2004.
Unless otherwise indicated or unless the context otherwise requires, all references to
Parallel, we, us, and our are to Parallel Petroleum Corporation and its consolidated
subsidiaries, Parallel L.P. and Parallel, L.L.C.
NOTE 2. STOCKHOLDERS EQUITY
Options
In September, 2003, Parallel adopted the provisions of Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based Compensation Transition and Disclosure, an
amendment to SFAS No. 123, whereby certain transitional alternatives are available for a voluntary
change to the fair value based method of accounting for stock-based employee compensation.
Parallel used the prospective method which applied prospectively the fair value recognition method
to all employee and director awards granted, modified or settled after the beginning of the fiscal
year in which the fair value based method of accounting for stock-based compensation was adopted.
The potential impact of using the fair value method for all options, on a pro forma basis, is
presented in the table that follows.
For the three and six months ended June 30, 2005 and 2004, Parallel recognized compensation
expense of approximately $0.028 million and $0.07 million respectively associated with its stock
option grants. No options were granted during the quarter ended June 30, 2005 or the quarter ended
June 30, 2004.
The following table illustrates the effect on net income and earnings per share as if the fair
value based method had been applied to all outstanding and unvested awards in each period. The
fair value of each grant is estimated on the date of grant using the Black-Scholes option-pricing
model.
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
(dollars in thousands, except per share data) |
|
|
|
(restated) |
|
|
|
|
|
|
(restated) |
|
|
|
|
|
Net income, as reported |
|
$ |
(1,246 |
) |
|
$ |
1,103 |
|
|
$ |
(11,950 |
) |
|
$ |
2,585 |
|
Add: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense recorded in 2005 and 2004 |
|
|
28 |
|
|
|
42 |
|
|
|
70 |
|
|
|
84 |
|
Deduct: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of tax effects |
|
|
(23 |
) |
|
|
(48 |
) |
|
|
(71 |
) |
|
|
(95 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss) |
|
$ |
(1,241 |
) |
|
$ |
1,097 |
|
|
$ |
(11,951 |
) |
|
$ |
2,574 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic as reported |
|
$ |
(0.04 |
) |
|
$ |
0.04 |
|
|
$ |
(0.40 |
) |
|
$ |
0.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic pro forma |
|
$ |
(0.04 |
) |
|
$ |
0.04 |
|
|
$ |
(0.40 |
) |
|
$ |
0.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted as reported |
|
$ |
(0.04 |
) |
|
$ |
0.04 |
|
|
$ |
(0.40 |
) |
|
$ |
0.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted pro forma |
|
$ |
(0.04 |
) |
|
$ |
0.04 |
|
|
$ |
(0.40 |
) |
|
$ |
0.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of Equity Securities
On February 9, 2005, we sold 5,750,000 shares of our common stock, $.01 par value per share,
pursuant to a public offering at a price of $5.27 per share. Gross cash proceeds were $30.3
million, and net proceeds were approximately $27.7 million. The common shares were issued under
Parallels $100.0 million Universal Shelf Registration Statement on Form S-3 which became effective
in November 2004. The proceeds were used to reduce our bank debt under our revolving credit
facility described in Note 3 below.
Preferred Stock
On
May 4, 2005, notice was mailed that all 950,000 outstanding shares of
our 6% Preferred Stock would be redeemed on June 6, 2005. All of the holders of the Preferred Stock elected to
convert their shares of Preferred Stock into shares of Parallel common stock based on the
conversion rate of $10.00 divided by $3.50. The holders of the Preferred Stock received
approximately 2.8571 shares of common stock of Parallel for each share of Preferred Stock.
Dividends on the Preferred Stock ceased to accrue, and as of June 6, 2005 the Preferred Stock is no
longer outstanding.
NOTE 3. REVOLVING CREDIT FACILITY
We are a party to a Second Amended and Restated Credit Agreement, as amended (the Credit
Agreement), with Citibank Texas, N.A., BNP Paribas, Citibank, F.S.B. and Western National Bank.
The Credit Agreement provides for a revolving credit facility which means that we can borrow, repay
and reborrow funds drawn under the credit facility. The total amount that we can borrow and have
outstanding at any one time is limited to the lesser of $200.0 million or the borrowing base
established by our lenders. Our current borrowing base is $90.0 million. The principal amount
outstanding under the credit facility at June 30, 2005 was $62.0 million, excluding $0.49 million
reserved for our letters of credit. The amount of the borrowing base is based primarily upon the
estimated value of our oil and gas reserves. The borrowing base amount is redetermined by the
lenders semi-annually on or about April 1 and October 1 of each year or at other times required by
the lenders or at our request. If, as a result of the lenders redetermination of the borrowing
base, the outstanding principal amount of our loan exceeds the borrowing base, we must either
provide additional collateral to the lenders or repay the principal of the note in an amount equal
to the excess. Except for the principal payments that may be required because of our outstanding
loans being in excess of the borrowing base, interest only is payable monthly.
(6)
Loans made to us under this credit facility bear interest at Citibanks base rate or the LIBOR
rate, at our election. Generally, Citibanks base rate is equal to the prime rate published in
the Wall Street Journal. At June 30, 2005, Parallel had $4.0 million in base rate loans
outstanding under the credit facility.
The LIBOR rate is generally equal to the sum of (a) the rate designated as British Bankers
Association Interest Settlement Rates and offered on one, two, three, six or twelve month interest
periods for deposits of $1.0 million, and (b) a margin ranging from 2.25% to 2.75%, depending upon
the outstanding principal amount of the loans. If the principal amount outstanding is equal to or
greater than 75% of the borrowing base, the margin is 2.75%. If the principal amount outstanding is
equal to or greater than 50%, but less than 75% of the borrowing base, the margin is 2.50%. If the
principal amount outstanding is less than 50% of the borrowing base, the margin is 2.25%.
The interest rate we are required to pay on our borrowings, including the applicable margin,
may never be less than 4.50%. At June 30, 2005, our Libor interest rate was 5.62% on $31.0 million
and 5.78% on $27.0 million.
In the case of base rate loans, interest is payable on the last day of each month. In the case
of LIBOR loans, interest is payable on the last day of each applicable interest period.
If the total outstanding borrowings under the credit facility are less than the borrowing
base, an unused commitment fee is required to be paid to the lenders. The amount of the fee is .25%
of the daily average of the unadvanced amount of the borrowing base. The fee is payable quarterly.
If the borrowing base is increased, we are required to pay a fee of .375% on the amount of any
increase in the borrowing base.
Parallel, L.L.C., a subsidiary of Parallel Petroleum Corporation, guaranteed payment of the
loans.
Parallels obligations to the lenders are secured by substantially all of its oil and gas
properties.
All outstanding principal under the revolving credit facility is due and payable on December
20, 2008. The maturity date of our outstanding loans may be accelerated by the lenders upon the
occurrence of an event of default under the Credit Agreement.
The Credit Agreement contains various restrictive covenants and compliance requirements as follows:
|
|
|
at the end of each quarter, a current ratio (as defined in the credit agreement) of at least 1.1 to 1.0; |
|
|
|
|
for each period (as calculated in the Credit Agreement) ending on December 31, March
31, June 30 and September 30, a funded debt ratio (as defined in the Credit Agreement)
of not more than 3.70, 3.60 and 3.50, respectively, for December 31, 2005, 2006 and
2007; and |
|
|
|
|
at all times, adjusted consolidated net worth (as defined in the Credit Agreement) of
at least (a) $50.0 million, plus (b) seventy-five percent (75%) of the net proceeds from
any equity securities issued by Parallel, plus (c) fifty percent (50%) of consolidated
net income for each fiscal quarter, if positive, and zero percent (0%) if negative. |
As a result of the restatement of the financial statements concerning our accounting for
certain oil and natural gas and interest rate derivative instruments (see Note 11), we were not in
compliance with certain covenants in the Credit Agreement concerning financial reporting requirements. We have obtained waivers of our
non-compliance with these covenants from our lenders.
The Credit Agreement also contains restrictions on all retained earnings and net income for
payment of dividends on common stock.
If we have borrowing capacity under our Credit Agreement, we intend to borrow, repay and
reborrow under the revolving credit facility from time to time as necessary, subject to borrowing
base limitations, to fund:
|
|
|
interpretation and processing seismic survey data; |
|
|
|
|
lease acquisitions and drilling activities; |
|
|
|
|
acquisitions of producing properties or companies owning producing properties; and, |
(7)
|
|
|
general corporate purposes. |
Interest
expense for the six months ending June 30, 2005 was
approximately $1.9 million not
including approximately $0.050 million for interest capitalized associated with drilling projects.
NOTE 4. ACQUISITIONS
In September and October 2004, with two separate transactions, we purchased additional
non-operated working interest in the Fullerton Field properties. The net purchase price for these
transactions was approximately $20.9 million.
In October and December 2004, we purchased properties in the Carm-Ann San Andres and North
Means Queen Unit located in Andrews and Gaines counties, Texas. The combined net purchase price
was approximately $16.5 million. In the first quarter of 2005, we acquired additional interest in
these properties for a net purchase price of approximately $2.3 million.
The table below reflects our actual consolidated restated results of operations for the three
and six months ended June 30, 2005, compared to the consolidated pro forma results of operations
for the six months ended June 30, 2004, assuming these acquisitions were consummated on January 1,
2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
|
|
|
|
Pro Forma |
|
|
|
|
|
Pro Forma |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
|
(in thousands, except per share data) |
|
|
(restated) |
|
|
|
|
|
(restated) |
|
|
|
|
Oil and gas
revenue, net of hedge losses |
|
$ |
12,263 |
|
|
$ |
10,135 |
|
|
$ |
22,677 |
|
|
$ |
20,098 |
|
Operating income |
|
$ |
5,203 |
|
|
$ |
3,347 |
|
|
$ |
8,569 |
|
|
$ |
6,504 |
|
Net income (loss) available to common stockholders |
|
$ |
(1,374 |
) |
|
$ |
1,395 |
|
|
$ |
(12,221 |
) |
|
$ |
2,746 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.04 |
) |
|
$ |
0.06 |
|
|
$ |
(0.40 |
) |
|
$ |
0.11 |
|
Diluted |
|
$ |
(0.04 |
) |
|
$ |
0.06 |
|
|
$ |
(0.40 |
) |
|
$ |
0.11 |
|
NOTE 5. FULL COST CEILING TEST
We use the full cost method to account for our oil and gas producing activities. Under
the full cost method of accounting, the net book value of oil and gas properties, less related
deferred income taxes and asset retirement obligations, may not exceed a calculated ceiling. The
ceiling limitation is the discounted estimated after-tax future net cash flows from proved oil and
gas properties. In calculating future net cash flows, current prices and costs are generally held
constant indefinitely as adjusted for qualifying cash flow hedges. The net book value of oil and
gas properties, less related deferred income taxes over the ceiling, is compared to the ceiling on
a quarterly and annual basis. Any excess of the net book value, less related deferred income
taxes, is generally written off as an expense. Under rules and regulations of the SEC, the excess
above the ceiling is not written off if, subsequent to the end of the quarter or year but prior to
the release of the financial results, prices have increased sufficiently that such excess above the
ceiling would not have existed if the increased prices were used in the calculations.
At June 30, 2005, we had a cushion (i.e. the excess of the ceiling over our capitalized cost)
in excess of $140.0 million. As a result, we were not required to record a reduction of our oil and
gas properties under the full cost method of accounting at that time.
Under the full cost method of accounting, all costs incurred in the acquisition, exploration
and development of oil and natural gas properties, including a portion of our overhead, are
capitalized. In the six month periods ended June 30, 2005 and 2004, overhead costs capitalized
were approximately $0.597 million and $0.522 million respectively.
(8)
NOTE 6. DERIVATIVE INSTRUMENTS |
|
|
General
We enter into derivative contracts to provide a measure of stability in the cash flows
associated with our oil and gas production and interest rate payments and to manage exposure to
commodity price and interest rate risk. Our objective is to lock in a range of oil and gas prices
and to limit variability in our cash interest payments. Our line of credit agreement as of June
30, 2005,
required us to maintain derivative financial instruments which limit our exposure to
fluctuating commodity prices covering at least 50% of our estimated monthly production of oil and
natural gas extending 24 months into the future.
We designated all of our interest rate swaps, commodity collars and commodity swaps entered
into in 2002 through June 30, 2004 as cash flow hedges (hedges). The effective portion of the
unrealized gain or loss on cash flow hedges is recorded in other comprehensive income (loss) until
the forecasted transaction occurs. During the term of a cash flow hedge, the effective portion of
the quarterly change in the fair value of the derivatives is recorded in stockholders equity as
other comprehensive loss and then transferred to oil and gas revenues when the production is sold
and interest expense as the interest accrues. Ineffective portions of hedges (changes in fair
value resulting from changes in realized prices that do not match the changes in the hedge or
reference price) are recognized in other expense as they occur.
As of June 30, 2005, we have recorded unrealized losses of $14.3 million ($9.5 million, net of
tax) related to our derivative instruments designated as hedges, which represented the estimated
aggregate fair values of our open hedge contracts, as of that date. These unrealized losses are
presented in stockholders equity in the Consolidated Balance Sheet as accumulated other
comprehensive loss. During the twelve month period ending June 30, 2006, we expect approximately
$6.8 million, net of tax, in accumulated other comprehensive loss to be charged to earnings.
Derivative contracts not designated as hedges are marked-to-market at each period end and
the increases or decreases in fair values recorded to earnings. No derivative instruments entered
into subsequent to June 30, 2004 have been designated as cash flow hedges.
We are exposed to credit risk in the event of nonperformance by the counterparty to these
contracts, BNP Paribas. However, we periodically assess the creditworthiness of the counterparty
to mitigate this credit risk.
Interest Rate Sensitivity
We entered into fixed interest rate swap contracts with BNP Paribas based on the 90-day LIBOR
rates at the time of the contracts. These interest rate swaps are treated as cash flow hedges as
defined by Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended (SFAS 133), and are on $20.0 million of our
variable rate debt for all of 2005 and on $10.0 million of our variable rate debt for all of 2006.
We will continue to pay the variable interest rates for this portion of our borrowing under the
Credit Agreement, but due to the interest rate swaps, we have fixed the rate at 4.05%. As
of June 30, 2005, the fair market value of these interest rate swaps was an unrealized loss of
$27,000.
As of June 30, 2005, we had also employed additional fixed interest rate swap contracts with
BNP Paribas based on the 90-day LIBOR rates at the time of the contracts. However, these contracts
are accounted for by mark-to-market accounting as prescribed in SFAS 133. Nonetheless, we view
these contracts as additional protection against future interest rate volatility.
(9)
The table below recaps the nature of these interest rate swaps and the fair market value of
these contracts as of June 30, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional |
|
|
|
|
|
|
Fair |
|
Period of Time |
|
Amounts |
|
|
Fixed Interest Rates |
|
|
Market Value |
|
|
|
($ in millions) |
|
|
|
|
|
|
($ in thousands) |
|
July 1, 2005 thru December 31, 2005(1) |
|
$ |
20 |
|
|
|
4.05 |
% |
|
$ |
(33 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1, 2005 thru December 31, 2005 |
|
$ |
30 |
|
|
|
2.89 |
% |
|
$ |
124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2006 thru December 31, 2006(1) |
|
$ |
10 |
|
|
|
4.05 |
% |
|
$ |
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2006 thru December 31, 2006 |
|
$ |
40 |
|
|
|
3.76 |
% |
|
$ |
136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2007 thru December 31, 2007 |
|
$ |
50 |
|
|
|
4.30 |
% |
|
$ |
(83 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2008 thru December 30, 2008 |
|
$ |
50 |
|
|
|
4.74 |
% |
|
$ |
(246 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fair Market Value |
|
|
|
|
|
|
|
|
|
$ |
(96 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Designated as cash flow hedge. |
Commodity Price Sensitivity
Except for the two commodity swaps noted in the table below under Commodity Swaps that are
designated as hedges, all of our commodity derivatives are accounted for using mark-to-market
accounting as prescribed in SFAS 133.
Put Options. On April 7, 2005, we purchased put options or floors on volumes of
1,000 Mcf per day for a total of 214,000 Mcf during the seven month period from April 1, 2006
through October 31, 2006, at an average floor price of $5.50 per Mcf for a total consideration of
approximately $35,000.
Collars. Collars are contracts which combine both a put option or floor and a call
option or ceiling. These contracts may or may not involve payment or receipt of cash at
inception, depending on the ceiling and floor pricing.
A summary of our collar positions at June 30, 2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Houston |
|
|
|
|
|
|
|
|
|
|
NyMex |
|
|
|
|
|
|
Ship Channel |
|
|
|
|
|
|
Barrels |
|
|
Oil Prices |
|
|
M M Btu of |
|
|
Gas Prices |
|
|
|
|
Period of Time |
|
of Oil |
|
|
Floor |
|
|
Cap |
|
|
Natural Gas |
|
|
Floor |
|
|
Cap |
|
|
Fair Market Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands) |
|
July 1, 2005 thru October 31, 2005 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
246,000 |
|
|
$ |
5.00 |
|
|
$ |
7.26 |
|
|
$ |
(52 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1, 2005 thru December 31, 2005 |
|
|
36,800 |
|
|
$ |
36.00 |
|
|
$ |
49.60 |
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
(322 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2006 thru December 31, 2006 |
|
|
70,800 |
|
|
$ |
35.00 |
|
|
$ |
44.00 |
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
(1,023 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fair Market Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1,397 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity Swaps. Generally, swaps are an agreement to buy or sell a specified
commodity for delivery in the future at an agreed fixed price. Swap transactions convert a floating
or market price into a fixed price. For any particular swap transaction, the counterparty is
required to make a payment to us if the reference price for any settlement period is less than the
swap or fixed price for such contract, and we are required to make a payment to the counterparty if
the reference price for any settlement period is greater than the swap or fixed price for such
contract.
(10)
We have entered into oil and gas swap contracts with BNP Paribas. A recap for the period of
time, number of MMBtus, number of barrels, and swap prices are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nymex Oil |
|
|
Fair Market |
|
Period of Time |
|
Barrles of Oil |
|
|
Swap Price |
|
|
Value |
|
|
|
|
|
|
|
|
|
|
|
($ in thousands) |
|
July 1, 2005 thru December 31, 2005(1) |
|
|
184,000 |
|
|
$ |
23.31 |
|
|
$ |
(6,410 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1, 2005 thru December 31, 2005 |
|
|
128,800 |
|
|
$ |
39.96 |
|
|
$ |
(2,360 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2006 thru December 20, 2006(1) |
|
|
265,500 |
|
|
$ |
23.04 |
|
|
|
(9,241 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2006 thru December 20, 2006 |
|
|
182,500 |
|
|
$ |
36.36 |
|
|
|
(3,988 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2007 thru December 31, 2007 |
|
|
474,500 |
|
|
$ |
34.36 |
|
|
|
(10,511 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2008 thru December 31, 2008 |
|
|
439,200 |
|
|
$ |
33.37 |
|
|
|
(9,528 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair market value |
|
|
|
|
|
|
|
|
|
$ |
(42,038 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Designated as cash flow hedges. |
NOTE 7. NET INCOME PER COMMON SHARE
Basic earnings per share (EPS) exclude any dilutive effects of option, warrants and
convertible securities and is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted earnings per share are
computed similar to basic earnings per share. However, diluted earnings per share reflect the
assumed conversion of all potentially dilutive securities.
(11)
The following table provides the computation of basic and diluted earnings per share for the
three and six months ended June 30, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
(dollars in thousands, except per share data) |
|
|
|
(restated) |
|
|
|
|
|
|
(restated) |
|
|
|
|
|
Basic EPS Computation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) |
|
$ |
(1,246 |
) |
|
$ |
1,103 |
|
|
$ |
(11,950 |
) |
|
$ |
2,585 |
|
Preferred stock dividend |
|
|
(128 |
) |
|
|
(144 |
) |
|
|
(271 |
) |
|
|
(287 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) available to common stockholders |
|
$ |
(1,374 |
) |
|
$ |
959 |
|
|
$ |
(12,221 |
) |
|
$ |
2,298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
31,967 |
|
|
|
25,246 |
|
|
|
30,341 |
|
|
|
25,235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per share |
|
$ |
(0.04 |
) |
|
$ |
0.04 |
|
|
$ |
(0.40 |
) |
|
$ |
0.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS Computation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) |
|
$ |
(1,246 |
) |
|
$ |
1,103 |
|
|
$ |
(11,950 |
) |
|
$ |
2,585 |
|
Preferred stock dividend |
|
|
(128 |
) |
|
|
|
|
|
|
(271 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) available to common stockholders |
|
$ |
(1,374 |
) |
|
$ |
1,103 |
|
|
$ |
(12,221 |
) |
|
$ |
2,585 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
31,967 |
|
|
|
25,246 |
|
|
|
30,341 |
|
|
|
25,235 |
|
Employee stock options |
|
|
|
|
|
|
285 |
|
|
|
|
|
|
|
268 |
|
Warrants |
|
|
|
|
|
|
65 |
|
|
|
|
|
|
|
59 |
|
Preferred stock |
|
|
|
|
|
|
2,734 |
|
|
|
|
|
|
|
2,734 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares for diluted
earnings per share assuming conversion |
|
|
31,967 |
|
|
|
28,330 |
|
|
|
30,341 |
|
|
|
28,296 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) |
|
$ |
(0.04 |
) |
|
$ |
0.04 |
|
|
$ |
(0.40 |
) |
|
$ |
0.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 8: ASSET RETIREMENT OBLIGATIONS
On January 1, 2003, we adopted Statement of Financial Accounting Standards No. 143,
Accounting for Asset Retirement Obligations SFAS No. 143. SFAS No. 143 requires us to recognize
a liability for the present value of all obligations associated with the retirement of tangible
long-lived assets and to capitalize an equal amount as a cost of the related oil and gas
properties.
(12)
The following table summarizes our asset retirement obligation activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Beginning asset retirement obligation |
|
$ |
2,112 |
|
|
$ |
1,864 |
|
|
$ |
2,132 |
|
|
$ |
1,701 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions related to new properties |
|
|
113 |
|
|
|
59 |
|
|
|
130 |
|
|
|
231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deletions related to property disposals |
|
|
(2 |
) |
|
|
|
|
|
|
(65 |
) |
|
|
(42 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion expense |
|
|
28 |
|
|
|
20 |
|
|
|
54 |
|
|
|
53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending asset retirement obligation |
|
$ |
2,251 |
|
|
$ |
1,943 |
|
|
$ |
2,251 |
|
|
$ |
1,943 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 9. RECENTLY ANNOUNCED ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS No. 123(R)).
SFAS No. 123(R) requires an entity to recognize the grant-date fair value of stock options and
other equity-based compensation issued to employees in the income statement. SFAS No. 123(R)
initially was to be effective for the Company beginning July 1, 2005. On April 14, 2005, the
Securities and Exchange Commission announced a delay in the implementation of SFAS No. 123(R) until
the beginning of the fiscal year after June 15, 2005. The Company does not expect SFAS No. 123(R)
to have a material impact on its results of operations.
NOTE 10. COMMITMENTS AND CONTINGENCIES
From time to time, we are a party to ordinary routine litigation incidental to our
business. We are currently a defendant in one lawsuit incidental to our business. We do not
believe the ultimate outcome of this lawsuit will have a material adverse effect on our financial
condition or results of operations. We are not aware of any other threatened litigation and we
have not been a party to any bankruptcy, receivership, reorganization, adjustment or similar
proceeding.
Effective January 1, 2005, we established a 401(k) Plan and Trust for eligible employees.
Employees may not participate in the former SEP plan with the establishment of the 401(k) Plan and
Trust. As of the six months ending June 30, 2005 Parallel had made contributions to the 401(k)
Plan and Trust of approximately $0.077 million.
NOTE 11. RESTATEMENT
This amended quarterly report on Form 10-Q for the quarter ended June 30, 2005 includes
detailed disclosures relative to the restatement of the consolidated financial statements for the
three and six months ended June 30, 2005, and the consolidated balance sheet as of December 31,
2004.
During the course of our preparation of our December 31, 2005 Form 10-K, we identified errors
with respect to our use of hedge accounting for certain transactions under SFAS 133. Specifically,
we determined that our documentation of the relationship of hedged items and the derivative
instruments being employed and designated as hedges was insufficient when compared to the
documentation requirements in SFAS 133 for derivative instruments entered into during periods
subsequent to June 30, 2004, and that accounting for derivative instruments entered into during
periods subsequent to June 30, 2004 as cash flow hedges was, therefore, inappropriate.
(13)
Effects of the Restatement
The effect of the restatement on the consolidated balance sheet as of June 30, 2005 and as of
December 31, 2004 by line item is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2005 |
|
As of December 31, 2004 |
|
|
As previously |
|
|
|
|
|
As previously |
|
|
|
|
reported |
|
As restated |
|
reported |
|
As restated |
|
|
(in thousands) |
|
|
(unaudited) |
Condensed Consolidated Balance Sheet data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current assets |
|
$ |
225 |
|
|
$ |
190 |
|
|
$ |
179 |
|
|
$ |
179 |
|
Total current assets |
|
|
18,107 |
|
|
|
18,072 |
|
|
|
14,529 |
|
|
|
14,529 |
|
Other assets, net of accumulated
amortization of $724 and $581 |
|
|
612 |
|
|
|
774 |
|
|
|
735 |
|
|
|
735 |
|
Total assets |
|
|
190,877 |
|
|
|
191,004 |
|
|
|
170,671 |
|
|
|
170,671 |
|
Derivative obligation current |
|
|
16,322 |
|
|
|
16,449 |
|
|
|
7,965 |
|
|
|
7,965 |
|
Total current liabilities |
|
|
23,823 |
|
|
|
23,950 |
|
|
|
13,683 |
|
|
|
13,683 |
|
Derivative obligation long term |
|
|
27,209 |
|
|
|
27,209 |
|
|
|
9,525 |
|
|
|
9,525 |
|
Total long-term liabilities |
|
|
93,107 |
|
|
|
93,107 |
|
|
|
96,994 |
|
|
|
96,994 |
|
Retained earnings |
|
|
22,705 |
|
|
|
6,538 |
|
|
|
22,073 |
|
|
|
18,759 |
|
Accumulated other comprehensive loss |
|
|
(25,626 |
) |
|
|
(9,459 |
) |
|
|
(10,756 |
) |
|
|
(7,442 |
) |
Total liabilities and stockholders equity |
|
|
190,877 |
|
|
|
191,004 |
|
|
|
170,671 |
|
|
|
170,671 |
|
The effect of the restatement on the consolidated statements of operations for the three
and six months ended June 30, 2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, 2005 |
|
|
June 30, 2005 |
|
|
|
As previously |
|
|
|
|
|
|
As previously |
|
|
|
|
|
|
reported |
|
|
As restated |
|
|
reported |
|
|
As restated |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
|
|
(unaudited) |
|
|
(unaudited) |
|
Consolidated Statement of Operations data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on hedging and derivatives |
|
$ |
(3,645 |
) |
|
$ |
(2,741 |
) |
|
$ |
(6,857 |
) |
|
$ |
(5,296 |
) |
Total revenues |
|
|
11,359 |
|
|
|
12,263 |
|
|
|
21,116 |
|
|
|
22,677 |
|
Operating income |
|
|
4,241 |
|
|
|
5,203 |
|
|
|
6,890 |
|
|
|
8,569 |
|
Change in fair market value of derivatives |
|
|
|
|
|
|
(6,065 |
) |
|
|
|
|
|
|
(23,698 |
) |
Loss on ineffective portion of hedges |
|
|
(1,235 |
) |
|
|
(150 |
) |
|
|
(3,511 |
) |
|
|
(860 |
) |
Interest expense |
|
|
(796 |
) |
|
|
(868 |
) |
|
|
(1,934 |
) |
|
|
(2,041 |
) |
Total other expense, net |
|
|
(2,025 |
) |
|
|
(7,077 |
) |
|
|
(5,500 |
) |
|
|
(26,654 |
) |
Net income (loss) before income taxes |
|
|
2,216 |
|
|
|
(1,874 |
) |
|
|
1,390 |
|
|
|
(18,085 |
) |
Income tax benefit (expense), deferred |
|
|
(763 |
) |
|
|
628 |
|
|
|
(487 |
) |
|
|
6,135 |
|
Net income (loss) |
|
|
1,453 |
|
|
|
(1,246 |
) |
|
|
903 |
|
|
|
(11,950 |
) |
Net income (loss) available to common stockholders |
|
|
1,325 |
|
|
|
(1,374 |
) |
|
|
632 |
|
|
|
(12,221 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.04 |
|
|
$ |
(0.04 |
) |
|
$ |
0.02 |
|
|
$ |
(0.40 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.04 |
|
|
$ |
(0.04 |
) |
|
$ |
0.03 |
|
|
$ |
(0.40 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(14)
The effect of the restatement on the consolidated statement of cash flows for the six
months ended June 30, 2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
June 30, 2005 |
|
|
As previously |
|
|
|
|
reported |
|
As restated |
|
|
(in thousands) |
|
|
(unaudited) |
Condensed Consolidated Statement of Cash Flows data: |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
903 |
|
|
$ |
(11,950 |
) |
Deferred income tax expense (benefit) |
|
|
487 |
|
|
|
(6,135 |
) |
Change in fair value of derivative instruments |
|
|
|
|
|
|
23,696 |
|
Loss on ineffective portion of hedges |
|
|
3,511 |
|
|
|
860 |
|
Other assets, net |
|
|
123 |
|
|
|
123 |
|
Increase in other current assets |
|
|
(46 |
) |
|
|
(11 |
) |
Net cash provided by operating activities |
|
|
9,811 |
|
|
|
11,416 |
|
Settlements on derivatives |
|
|
|
|
|
|
(1,570 |
) |
Purchase of derivative instruments |
|
|
|
|
|
|
(35 |
) |
Net cash used in investing activities |
|
|
(21,686 |
) |
|
|
(23,291 |
) |
The effect of the restatement on the consolidated statements of comprehensive income
(loss) for the three and six months ended June 30, 2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, 2005 |
|
|
June 30, 2005 |
|
|
|
As previously |
|
|
|
|
|
|
As previously |
|
|
|
|
|
|
reported |
|
|
As restated |
|
|
reported |
|
|
As restated |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
|
|
(unaudited) |
|
|
(unaudited) |
|
Net loss |
|
$ |
1,453 |
|
|
$ |
(1,246 |
) |
|
$ |
903 |
|
|
$ |
(11,950 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses on derivatives |
|
|
(6,038 |
) |
|
|
(1,060 |
) |
|
|
(29,518 |
) |
|
|
(8,473 |
) |
Reclassification adjustments for losses
on derivatives included in net income (loss) |
|
|
3,676 |
|
|
|
2,788 |
|
|
|
6,988 |
|
|
|
5,418 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of derivatives |
|
|
(2,362 |
) |
|
|
1,728 |
|
|
|
(22,530 |
) |
|
|
(3,055 |
) |
Income tax benefit (expense) |
|
|
803 |
|
|
|
(588 |
) |
|
|
7,660 |
|
|
|
1,038 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive loss |
|
|
(1,559 |
) |
|
|
1,140 |
|
|
|
(14,870 |
) |
|
|
(2,017 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
$ |
(106 |
) |
|
$ |
(106 |
) |
|
$ |
(13,967 |
) |
|
$ |
(13,967 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The restatement also impacted or made changes to Notes 1, 2, 3, 4, 6 and 7 of these Notes
to Consolidated Financial Statements and resulted in adding this Note 11.
(15)
|
|
|
ITEM 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
The following discussion and analysis should be read in conjunction with our Consolidated
Financial Statements and the related notes.
OVERVIEW
Strategy
Our primary objective is to increase shareholder value of our common stock through increasing
reserves, production, cash flow and earnings. We have shifted the balance of our investments from
properties having high rates of production in early years to properties expected to produce more
consistently over a longer term. We attempt to reduce our financial risks by dedicating a smaller
portion of our capital to high risk projects, while reserving the majority of our available capital
for exploitation and development drilling opportunities. Obtaining positions in long-lived oil and
natural gas reserves are given priority over properties that might provide more cash flow in the
early years of production, but which have shorter reserve lives. We also attempt to further reduce
risk by emphasizing acquisition possibilities over high risk exploration projects.
Since the latter part of 2002, we have reduced our emphasis on high risk exploration efforts
and focused on established geologic trends where we utilize the engineering, operational, financial
and technical expertise of our entire staff. Although we anticipate participating in exploratory
drilling activities in the future, reducing financial, reservoir, drilling and geological risks and
diversifying our property portfolio are important criteria in the execution of our business plan.
In summary, our current business plan:
|
|
|
focuses on projects having less geological risk; |
|
|
|
|
emphasizes exploitation and enhancement activities; |
|
|
|
|
focuses on acquiring producing properties; and |
|
|
|
|
expands the scope of operations by diversifying our exploratory and
development efforts, both in and outside of our current areas of operation. |
Although the direction of our exploration and development activities has shifted from high
risk exploratory activities to lower risk development opportunities, we will continue our efforts,
as we have in the past, to maintain low general and administrative expenses relative to the size of
our overall operations, utilize advanced technologies, serve as operator in appropriate
circumstances, and reduce operating costs.
The extent to which we are able to implement and follow through with our business plan will be
influenced by:
|
|
|
the prices we receive for the oil and natural gas we produce; |
|
|
|
|
the results of reprocessing and reinterpreting our 3-D seismic data; |
|
|
|
|
the results of our drilling activities; |
|
|
|
|
the costs of obtaining high quality field services; |
|
|
|
|
our ability to find and consummate acquisition opportunities; and |
|
|
|
|
our ability to negotiate and enter into work to earn arrangements, joint venture or
other similar agreements on terms acceptable to us. |
Significant changes in the prices we receive for the oil and natural gas, or the occurrence of
unanticipated events beyond our control may cause us to defer or deviate from our business plan,
including the amounts we have budgeted for our activities.
(16)
Operating Performance
Our operating performance is influenced by several factors, the most significant of which are
the prices we receive for our oil and natural gas and our production volumes. The world price for
oil has overall influence on the prices that we receive for our oil production. The prices
received for different grades of oil are based upon the world price for oil, which is then adjusted
based upon the particular grade. Typically, light oil is sold at a premium, while heavy grades of
crude are discounted. Natural gas prices we receive are influenced by:
|
|
|
seasonal demand; |
|
|
|
|
weather; |
|
|
|
|
hurricane conditions in the Gulf of Mexico; |
|
|
|
|
availability of pipeline transportation to end users; |
|
|
|
|
proximity of our wells to major transportation pipeline infrastructures; and |
|
|
|
|
to a lesser extent, world oil prices. |
Additional factors influencing our overall operating performance include:
|
|
|
production expenses; |
|
|
|
|
overhead requirements; and |
|
|
|
|
costs of capital. |
Our oil and natural gas exploration, development and acquisition activities require
substantial and continuing capital expenditures. Historically, the sources of financing to fund
our capital expenditures have included:
|
|
|
cash flow from operations; |
|
|
|
|
sales of our equity securities; |
|
|
|
|
bank borrowings; and |
|
|
|
|
industry joint ventures. |
For the three months ended June 30, 2005, the sale price we received for our crude oil
production (excluding hedges) averaged $46.97 per barrel compared with $35.70 per barrel for the
three months ended June 30, 2004. The average sales price we received for natural gas for the
three months ended June 30, 2005 (excluding hedges), was $6.78 per Mcf compared with $5.94 per Mcf
for the three months ended June 30, 2004. For information regarding prices received including our
hedges, refer to the selected operating data table in the Results of Operations on page 19. Hedge
costs for oil and natural gas was $2.7 million and $1.8 million for the three months ended June 30,
2005 and June 30, 2004 respectively. The hedge loss associated with the ineffective portion of our
hedges was $150,000 for the second quarter ended June 30, 2005. The ineffectiveness is caused by a
widening of the differential price of West Texas Intermediate Light and current designated sales of
West Texas Sour barrels. U. S. refineries are currently paying a premium for West Texas
Intermediate, which is the NyMex benchmark. The majority of our oil is West Texas Sour. Actual
gains or losses may increase or decrease until settlement of these contracts.
For the six months ended June 30, 2005, the sale price we received for our crude oil
production (excluding hedges) averaged $46.15 per barrel compared with $34.31 per barrel for the
six months ended June 30, 2004. The average sales price we received for natural gas for the six
months ended June 30, 2005 (excluding hedges), was $6.42 per Mcf compared with $5.55 per Mcf for
the six months ended June 30, 2004. For information regarding prices received including our
hedges, refer to the selected operating data table in the Results of Operations on page 19. Hedge
costs for oil and natural gas were $5.3 million and $2.9 million for the six months ended June 30,
2005 and June 30, 2004 respectively. The hedge loss associated with the ineffective portion of our
hedges was $860,000 for the six months ended June 30, 2005. The ineffectiveness is caused by a
widening of the differential price of
(17)
West Texas Intermediate Light and current designated sales of
West Texas Sour barrels. U. S. refineries are currently paying a premium for West Texas
Intermediate, which is the NyMex benchmark. The majority of our oil is West Texas Sour. Actual
gains or losses may increase or decrease until settlement of these contracts.
Our oil and natural gas producing activities are accounted for using the full cost method of
accounting. Under this accounting method, we capitalize all costs incurred in connection with the
acquisition of oil and natural gas properties and the exploration for and development of oil and
natural gas reserves. These costs include lease acquisition costs, geological and geophysical
expenditures, costs of drilling productive and non-productive wells,
and overhead expenses directly related to land and property acquisition and exploration and
development activities. Proceeds from the disposition of oil and natural gas properties are
accounted for as a reduction in capitalized costs, with no gain or loss recognized unless a
disposition involves a material change in reserves, in which case the gain or loss is recognized.
Depletion of the capitalized costs of oil and natural gas properties, including estimated
future development costs, is provided using the equivalent unit-of-production method based upon
estimates of proved oil and natural gas reserves and production, which are converted to a common
unit of measure based upon their relative energy content. Unproved oil and natural gas properties
are not amortized, but are individually assessed for impairment. The cost of any impaired property
is transferred to the balance of oil and gas properties being depleted. Depletion per BOE at June,
2005 and 2004 was $7.94 and $6.92 respectively.
Results of Operations
Our business activities are characterized by frequent, and sometimes significant, changes in our:
|
|
|
reserve base; |
|
|
|
|
sources of production; |
|
|
|
|
product mix (gas versus oil volumes); |
|
|
|
|
the prices we receive for our oil and gas production; |
(18)
Year-to-year or other periodic comparisons of the results of our operations can be difficult
and may not fully and accurately describe our condition. The following table shows selected
operating data for each of the three and six months ended June 30, 2005 and June 30, 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
6/30/2005 |
|
|
6/30/2004 |
|
|
6/30/2005 |
|
|
6/30/2004 |
|
|
|
(in thousands, except per unit data) |
|
|
|
(restated) |
|
|
|
|
|
|
(restated) |
|
|
|
|
|
Production Volumes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil (Bbls) |
|
|
218 |
|
|
|
166 |
|
|
|
425 |
|
|
|
327 |
|
Natural gas (Mcf) |
|
|
700 |
|
|
|
644 |
|
|
|
1,302 |
|
|
|
1,376 |
|
BOE(1) |
|
|
335 |
|
|
|
273 |
|
|
|
642 |
|
|
|
556 |
|
BOE per day |
|
|
3.7 |
|
|
|
3.0 |
|
|
|
3.5 |
|
|
|
3.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Prices: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil (per Bbl)(2) |
|
$ |
46.97 |
|
|
$ |
35.70 |
|
|
$ |
46.15 |
|
|
$ |
34.31 |
|
Natural gas (per Mcf)(2) |
|
$ |
6.78 |
|
|
$ |
5.94 |
|
|
$ |
6.42 |
|
|
$ |
5.55 |
|
BOE price (2) |
|
$ |
44.77 |
|
|
$ |
35.72 |
|
|
$ |
43.57 |
|
|
$ |
33.92 |
|
BOE price(3) |
|
$ |
36.60 |
|
|
$ |
29.00 |
|
|
$ |
35.32 |
|
|
$ |
28.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil |
|
$ |
10,259 |
|
|
$ |
5,928 |
|
|
$ |
19,618 |
|
|
$ |
11,218 |
|
Oil hedge |
|
|
(2,741 |
) |
|
|
(1,522 |
) |
|
|
(5,095 |
) |
|
|
(2,646 |
) |
Natural gas |
|
|
4,745 |
|
|
|
3,824 |
|
|
|
8,355 |
|
|
|
7,640 |
|
Natural gas hedge |
|
|
|
|
|
|
(313 |
) |
|
|
(201 |
) |
|
|
(294 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
12,263 |
|
|
$ |
7,917 |
|
|
$ |
22,677 |
|
|
$ |
15,918 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease operating expense |
|
$ |
2,178 |
|
|
$ |
2,014 |
|
|
$ |
4,736 |
|
|
$ |
3,543 |
|
Production taxes |
|
|
701 |
|
|
|
471 |
|
|
|
1,281 |
|
|
|
949 |
|
General and administrative: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
859 |
|
|
|
806 |
|
|
|
1,828 |
|
|
|
1,540 |
|
Public reporting |
|
|
549 |
|
|
|
415 |
|
|
|
1,208 |
|
|
|
903 |
|
Depreciation, depletion and amortization |
|
|
2,773 |
|
|
|
1,969 |
|
|
|
5,055 |
|
|
|
4,046 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,060 |
|
|
$ |
5,675 |
|
|
$ |
14,108 |
|
|
$ |
10,981 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
5,203 |
|
|
$ |
2,242 |
|
|
$ |
8,569 |
|
|
$ |
4,937 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
A BOE means one barrel of oil equivalent using the ratio of six Mcf of gas to one barrel of oil. |
|
(2) |
|
Unhedged price is the actual price received at the wellhead for our oil and natural gas. |
|
(3) |
|
Hedged price is the actual price received at the wellhead for our oil and natural gas plus or minus the settlements on our derivatives. |
(19)
RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2005 (AS RESTATED) AND 2004 :
Our oil and natural gas revenues and production product mix are displayed in the
following table for the three months ended June 30, 2005 (AS RESTATED) and June 30, 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
and Gas Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues (1) |
|
|
Production |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
(restated) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil (Bbls) |
|
|
61 |
% |
|
|
56 |
% |
|
|
65 |
% |
|
|
61 |
% |
Natural gas (Mcf) |
|
|
39 |
% |
|
|
44 |
% |
|
|
35 |
% |
|
|
39 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes hedge transactions |
The following table outlines the detail of our operating revenues for the following
periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Increase |
|
|
% Increase |
|
|
|
2005 |
|
|
2004 |
|
|
(Decrease) |
|
|
(Decrease) |
|
|
|
(in thousands except per unit data) |
|
|
|
(restated) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Production Volumes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil (Bbls) |
|
|
218 |
|
|
|
166 |
|
|
|
52 |
|
|
|
31 |
% |
Natural gas (Mcf) |
|
|
700 |
|
|
|
644 |
|
|
|
56 |
|
|
|
9 |
% |
BOE |
|
|
335 |
|
|
|
273 |
|
|
|
62 |
|
|
|
23 |
% |
BOE/Day |
|
|
3.7 |
|
|
|
3.0 |
|
|
|
0.7 |
|
|
|
23 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Price |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil (per Bbl)(1) |
|
$ |
46.97 |
|
|
$ |
35.70 |
|
|
$ |
11.27 |
|
|
|
32 |
% |
Natural gas (per Mcf)(1) |
|
$ |
6.78 |
|
|
$ |
5.94 |
|
|
$ |
0.84 |
|
|
|
14 |
% |
BOE price(1) |
|
$ |
44.77 |
|
|
$ |
35.72 |
|
|
$ |
9.05 |
|
|
|
25 |
% |
BOE price(2) |
|
$ |
36.60 |
|
|
$ |
29.00 |
|
|
$ |
7.60 |
|
|
|
26 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil |
|
$ |
10,259 |
|
|
$ |
5,928 |
|
|
$ |
4,331 |
|
|
|
73 |
% |
Oil hedges |
|
$ |
(2,741 |
) |
|
$ |
(1,522 |
) |
|
$ |
1,219 |
|
|
|
80 |
% |
Natural gas |
|
$ |
4,745 |
|
|
$ |
3,824 |
|
|
$ |
921 |
|
|
|
24 |
% |
Natural gas hedges |
|
$ |
|
|
|
$ |
(313 |
) |
|
$ |
313 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
12,263 |
|
|
$ |
7,917 |
|
|
$ |
4,346 |
|
|
|
55 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes hedge transactions. |
|
(2) |
|
Includes hedge transactions. |
Oil revenues, excluding hedges, increased $4.3 million or 73% for the three months
ended June 30, 2005 compared to the same period of 2004. Oil production volumes increased 31%
attributable to acquisitions and re-stimulations in the Fullerton San Andres Field, acquisitions in
the Carm-Ann San Andres Field/N. Means Queen Unit and the drilling of producing and injection wells
on our Diamond M Property. The increase in oil production increased revenue approximately $1.8
million for 2005. Wellhead average realized crude oil prices increased
(20)
$11.27 per Bbl or 32% to $46.97 per Bbl for 2005 compared to 2004. The increase in oil price
increased revenue approximately $2.5 million for 2005.
Natural gas revenues, excluding hedges, increased $0.9 million or 24% for the three months
ended June 30, 2005 compared to the same period of 2004. Natural gas production volumes increased
9% due to a Wilcox natural gas discovery in south Texas. The increase in natural gas volumes
increased revenue approximately $0.3 million for 2005. Average realized wellhead natural gas
prices increased 14% or $0.84 per Mcf to $6.78 per Mcf. The increase in natural gas prices had a
positive effect on revenues of approximately $0.6 million for the three months ending June 30,
2005.
Losses on oil hedges increased $1.2 million or 80% for 2005 compared to 2004 due to the
increase in oil prices. Natural gas hedge losses were $0.3 million in 2004. On a BOE basis,
hedges accounted for a realized loss of $8.17 per BOE in 2005 compared to $6.72 per BOE in 2004.
We have hedged certain oil and natural gas volumes to try and mitigate price changes in our oil and
natural gas movements and to meet the requirements under our loan facility. BOE per day increased
676 BOE or 23% for 2005 compared to the same period in 2004.
With our recently announced results in the Diamond M Canyon Reef Unit, the New Mexico Gas
Project, our onshore Gulf Coast Wilcox well and the Barnett Shale project, we expect increased
production volumes over the second quarter 2005 if initial rates are maintained.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost and
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
Increase |
|
|
% Increase |
|
|
|
2005 |
|
|
2004 |
|
|
(Decrease) |
|
|
(Decrease) |
|
|
|
(dollars in thousands) |
|
Lease operating expense |
|
$ |
2,178 |
|
|
$ |
2,014 |
|
|
$ |
164 |
|
|
|
8 |
% |
Production taxes |
|
|
701 |
|
|
|
471 |
|
|
|
230 |
|
|
|
49 |
% |
General and administrative: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
859 |
|
|
|
806 |
|
|
|
53 |
|
|
|
7 |
% |
Public reporting |
|
|
549 |
|
|
|
415 |
|
|
|
134 |
|
|
|
32 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general and administrative |
|
|
1,408 |
|
|
|
1,221 |
|
|
|
187 |
|
|
|
15 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, depletion and amortization |
|
|
2,773 |
|
|
|
1,969 |
|
|
|
804 |
|
|
|
41 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
7,060 |
|
|
$ |
5,675 |
|
|
$ |
1,385 |
|
|
|
24 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease operating costs increased approximately $0.2 million, or 8%, to $2.2 million during the
three months ended June 30, 2005 compared with $2.0 million for the same period of 2004. The
increase in lease operating expense is primarily due to our acquisitions in the Fullerton San
Andres Field and the Carm-Ann San Andres Field/N. Means Queen Unit, increased ad valorem taxes and
increased utility costs on our oil properties. Lifting costs were $6.50 per BOE in 2005 compared
to $7.38 per BOE in 2004 on a BOE basis. As we continue to exploit and develop our long-life
Permian Basin oil properties (Fullerton, Carm-Ann and Diamond M), we expect that lifting costs will
continue around the same level or decline due to increased efficiencies on oil properties and
increased development of gas properties which have lower lifting costs. The lifting costs per BOE
are also expected to be reduced by the development of natural gas properties in south Texas,
Barnett Shale and New Mexico.
Production taxes increased 49% or $0.2 million in 2005, associated with a wellhead increase in
revenues of $5.3 million. Production taxes in future periods will be a function of product mix,
production volumes and product prices.
General and administrative expenses in total increased 15% or $0.2 million in 2005 compared to
2004. Included in our total general and administrative expenses is public reporting cost which
increased 32% or $0.1 million for 2005. The SOX 404 costs continue to be a significant portion of
the increase in our public reporting
(21)
costs and we expect SOX 404 costs to continue through 2005. The remainder of the increase in
general and administrative costs is due to computer tech support and legal expense. General and
administrative expenses capitalized to the full cost pool were $0.3 million for 2005 compared to
$0.2 million in 2004. On a BOE basis, general and administrative costs were $2.56 per BOE in 2005
compared to $2.95 per BOE in 2004, while public reporting costs were $1.64 per BOE and $1.52 per
BOE for the same period. General and administrative expenses will increase in 2005 in association
with reporting requirements and operational support.
Depreciation, depletion and amortization expense increased 41% or $0.8 million for 2005
compared to 2004. Depletion per BOE was $8.28 for 2005 and $7.21 for 2004. This increase is
attributable to increased drilling costs and producing property purchases. Depletion costs are
highly correlated with production volumes and capital expenditures. Fiscal year 2005 depletion
costs will increase with increased production volumes and capital expenditures.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
Increase |
|
|
% Increase |
|
|
|
2005 |
|
|
2004 |
|
|
(Decrease) |
|
|
(Decrease) |
|
|
|
(dollars in thousands) |
|
|
|
(restated) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair market value of derivatives |
|
$ |
(6,065 |
) |
|
$ |
|
|
|
$ |
(6,065 |
) |
|
|
|
|
Loss on ineffective portion of hedges |
|
|
(150 |
) |
|
|
17 |
|
|
|
(167 |
) |
|
|
(982 |
)% |
Interest and other income |
|
|
22 |
|
|
|
18 |
|
|
|
4 |
|
|
|
22 |
% |
Interest expense, net |
|
|
(868 |
) |
|
|
(487 |
) |
|
|
381 |
|
|
|
78 |
% |
Other expense |
|
|
(1 |
) |
|
|
(59 |
) |
|
|
(58 |
) |
|
|
(98 |
)% |
Equity loss in Westfork Pipeline Company LP |
|
|
(15 |
) |
|
|
|
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(7,077 |
) |
|
$ |
(511 |
) |
|
$ |
6,566 |
|
|
|
1285 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The loss associated with the ineffective portion of our hedges increased $0.2 million for
2005 compared to 2004. Commodity prices continued to increase into the second quarter of 2005. The
spread between sweet and sour crude was wider for the second quarter of 2005 as compared to the
same period of 2004 resulting in an increased ineffectiveness. The actual gain or loss may increase or decrease until settlement of these contracts. Interest expense
increased with the increase of debt from approximately $34.0 million at June 30, 2004 to $62.0
million at June 30, 2005 along with an increase of our loan interest rate for 2005. Capitalized
interest on work in progress decreased interest expense by approximately $0.050 million. Our
equity investment in the construction phase of the Westfork Pipeline Company LP resulted in a loss
for the second quarter of 2005.
Income tax benefit was $0.6 million in 2005 compared to an expense of $0.6 million in 2004.
Income tax expense for 2005 will be dependent on our earnings and is expected to be approximately
35% of income before income taxes.
We had basic net loss per share of $.04 and net earnings of $.04 and diluted net loss per
share of $.04 and net earnings of $.04 for 2005 and 2004, respectively. Basic weighted average
common shares outstanding increased from 25.2 million shares in 2004 to 32.0 million shares in
2005. The increase in common shares is due to the sale of 5,750,000 shares of common stock in a
public offering in February of 2005 and the redeemed preferred shares to common shares in June of
2005.
(22)
RESULTS
OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2005 (AS RESTATED) AND 2004 :
Our oil and natural gas revenues and production product mix are displayed in the following
table for the six months ended June 30, 2005 (as restated) and June 30, 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and
Gas Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues(1) |
|
|
Production |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
(restated) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil (Bbls) |
|
|
64 |
% |
|
|
54 |
% |
|
|
66 |
% |
|
|
59 |
% |
Natural gas (Mcf) |
|
|
36 |
% |
|
|
46 |
% |
|
|
34 |
% |
|
|
41 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes hedge transactions |
The following table outlines the detail of our operating revenues for the following
periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
Increase |
|
|
% Increase |
|
|
|
2005 |
|
|
2004 |
|
|
(Decrease) |
|
|
(Decrease) |
|
|
|
(in thousands except per unit data) |
|
|
|
(restated) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Production Volumes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil (Bbls) |
|
|
425 |
|
|
|
327 |
|
|
|
98 |
|
|
|
30 |
% |
Natural gas (Mcf) |
|
|
1,302 |
|
|
|
1,376 |
|
|
|
(74 |
) |
|
|
(5 |
)% |
BOE |
|
|
642 |
|
|
|
556 |
|
|
|
86 |
|
|
|
15 |
% |
BOE/Day |
|
|
3.5 |
|
|
|
3.1 |
|
|
|
0.4 |
|
|
|
13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Price |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil (per Bbl)(1) |
|
$ |
46.15 |
|
|
$ |
34.31 |
|
|
$ |
11.84 |
|
|
|
35 |
% |
Natural gas (per Mcf) (1) |
|
$ |
6.42 |
|
|
$ |
5.55 |
|
|
$ |
0.87 |
|
|
|
16 |
% |
BOE price(1) |
|
$ |
43.57 |
|
|
$ |
33.92 |
|
|
$ |
9.65 |
|
|
|
28 |
% |
BOE price(2) |
|
$ |
35.32 |
|
|
$ |
28.63 |
|
|
$ |
6.69 |
|
|
|
23 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil |
|
$ |
19,618 |
|
|
$ |
11,218 |
|
|
|
8,400 |
|
|
|
75 |
% |
Oil hedges |
|
$ |
(5,095 |
) |
|
$ |
(2,646 |
) |
|
|
2,449 |
|
|
|
93 |
% |
Natural gas |
|
$ |
8,355 |
|
|
$ |
7,640 |
|
|
|
715 |
|
|
|
9 |
% |
Natural gas hedges |
|
$ |
(201 |
) |
|
$ |
(294 |
) |
|
|
(93 |
) |
|
|
(32 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
22,677 |
|
|
$ |
15,918 |
|
|
|
6,759 |
|
|
|
42 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes hedge transactions. |
|
(2) |
|
Includes hedge transactions. |
Oil revenues, excluding hedges, increased $8.4 million or 75% for the six months ended
June 30, 2005 compared to the same period of 2004. Oil production volumes increased 30%
attributable to acquisitions and re-stimulations in the Fullerton San Andres Field, acquisitions in
the Carm-Ann San Andres Field/N. Means Queen Unit and the drilling of producing and injection wells
on our Diamond M Property. The increase in oil production increased revenue approximately $3.4
million for 2005. Wellhead average realized crude oil prices increased
(23)
$11.84 per Bbl or 35% to $46.15 per Bbl for 2005 compared to 2004. The increase in oil price
increased revenue approximately $5.0 million for 2005.
Natural gas revenues, excluding hedges, increased $0.7 million or 9% for the six months ended
June 30, 2005 compared to the same period of 2004. Natural gas production volumes decreased 5%
primarily due to natural production declines in our south Texas Yegua/Frio and Cook Mountain
projects. The decline in natural gas volumes decreased revenue approximately $0.4 million for
2005. Average realized wellhead natural gas prices increased 16% or $0.87 per Mcf to $6.42 per
Mcf. The increase in natural gas prices had a positive effect on revenues of approximately $1.1
million for the six months ending June 30, 2005.
Losses on oil hedges increased $2.4 million or 93% for 2005 compared to 2004 due to the
increase in oil prices. Natural gas hedge losses were $0.2 million in 2005 compared to a loss of
$0.3 million in 2004. On a BOE basis, hedges accounted for a realized loss of $8.25 per BOE in
2005 compared to $5.29 per BOE in 2004. We have hedged certain oil and natural gas volumes to try
and mitigate price changes in our oil and natural gas movements and to meet the requirements under
our loan facility.
With our recently announced results in the Diamond M Canyon Reef Unit, the New Mexico Gas
Project, our onshore Gulf Coast Wilcox well and the Barnett Shale project, we expect increased
production volumes over the second quarter 2005 if initial rates are maintained.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost and Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, |
|
|
Increase |
|
|
% Increase |
|
|
|
2005 |
|
|
2004 |
|
|
(Decrease) |
|
|
(Decrease) |
|
|
|
(dollars in thousands) |
|
Lease operating expense |
|
$ |
4,736 |
|
|
$ |
3,543 |
|
|
$ |
1,193 |
|
|
|
34 |
% |
Production taxes |
|
|
1,281 |
|
|
|
949 |
|
|
|
332 |
|
|
|
35 |
% |
General and administrative: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
1,828 |
|
|
|
1,540 |
|
|
|
288 |
|
|
|
19 |
% |
Public reporting |
|
|
1,208 |
|
|
|
903 |
|
|
|
305 |
|
|
|
34 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general and administrative |
|
|
3,036 |
|
|
|
2,443 |
|
|
|
593 |
|
|
|
24 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, depletion and amortization |
|
|
5,055 |
|
|
|
4,046 |
|
|
|
1,009 |
|
|
|
25 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
14,108 |
|
|
$ |
10,981 |
|
|
$ |
3,127 |
|
|
|
28 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease operating costs increased approximately $1.2 million, or 34%, to $4.7 million
during the six months ended June 30, 2005 compared with $3.5 million for the same period of 2004.
The increase in lease operating expense is primarily due to our acquisitions in the Fullerton San
Andres Field and the Carm-Ann San Andres Field/N. Means Queen Unit, increased ad valorem taxes and
increased utility costs on our oil properties. Lifting costs were $7.38 per BOE in 2005 compared
to $6.37 per BOE in 2004 on a BOE bases. As we continue to exploit and develop our long-life
Permian Basin oil properties (Fullerton, Carm-Ann and Diamond M), we expect that lifting costs will
continue around the same level or decline due to increased efficiencies on oil properties and
increased development of gas properties which have lower lifting costs. The lifting costs are also
expected to be reduced by the development of natural gas properties in south Texas, Barnett Shale
and New Mexico.
Production taxes increased 35% or $0.3 million in 2005, associated with a wellhead increase in
revenues of $9.1 million. Production taxes in future periods will be a function of product mix,
production volumes and product prices.
General and administrative expenses in total increased 24% or $0.6 million in 2005 compared to
2004. Included in our total general and administrative expenses is public reporting cost which
increased 34% or $0.3 million for 2005. The SOX 404 costs continue to be a significant portion of
the increase in our public reporting costs and we expect SOX 404 costs to continue through 2005.
The remainder of the increase in general and administrative costs is due to salary increases,
computer tech support and rent for increased building space. General and administrative expenses
capitalized to the full cost pool were $0.6 million for 2005 compared to $0.5 million in 2004. On
a BOE basis, general and administrative costs were $2.85 per BOE in 2005 compared to $2.77 per BOE
in
(24)
2004, while public reporting costs were $1.88 per BOE and $1.62 per BOE for the same period.
General and administrative expenses will increase in 2005 in association with reporting
requirements and operational support.
Depreciation, depletion and amortization expense increased 25% or $1.0 million for 2005
compared to 2004. Depletion per BOE was $7.87 for 2005 and $7.28 for 2004. This increase is
attributable to increased drilling costs and producing property purchases. Depletion costs are
highly correlated with production volumes and capital expenditures. Fiscal year 2005 depletion
costs will increase with increased production volumes and capital expenditures.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, |
|
|
Increase |
|
|
% Increase |
|
|
|
2005 |
|
|
2004 |
|
|
(Decrease) |
|
|
(Decrease) |
|
|
|
(restated) |
|
|
(dollars in thousands) |
|
|
|
|
Change in fair market value of derivatives |
|
$ |
(23,698 |
) |
|
$ |
|
|
|
$ |
(23,698 |
) |
|
|
|
|
Gain (loss) on ineffective portion of hedges |
|
|
(860 |
) |
|
|
7 |
|
|
|
(867 |
) |
|
|
(12386 |
)% |
Interest and other income |
|
|
41 |
|
|
|
158 |
|
|
|
(117 |
) |
|
|
(74 |
)% |
Interest expense, net |
|
|
(2,041 |
) |
|
|
(955 |
) |
|
|
1,086 |
|
|
|
114 |
% |
Other expense |
|
|
(2 |
) |
|
|
(85 |
) |
|
|
(83 |
) |
|
|
(98 |
)% |
Equity loss in Westfork Pipeline Company LP |
|
|
(94 |
) |
|
|
|
|
|
|
94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(26,654 |
) |
|
$ |
(875 |
) |
|
$ |
25,779 |
|
|
|
2946 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The loss associated with the ineffective portion of our hedges increased $0.9 million for
2005 compared to 2004. Commodity prices continued to increase into the second quarter of 2005. The
spread between sweet and sour crude was wider for 2005 as compared to the same period of 2004
resulting in an increased ineffectiveness. The actual gain or loss may
increase or decrease until settlement of these contracts. Interest expense increased with the
increase of debt from approximately $34.0 million at June 30, 2004 to $62.0 million at June 30,
2005 along with an increase of our loan interest rate for 2005. Capitalized interest on work in
progress decreased interest expense by approximately $0.050 million. Our equity investment in the
construction phase of the Westfork Pipeline Company LP resulted in a loss for 2005.
Income tax benefit was $6.1 million in 2005 compared to an expense of $1.5 million in 2004.
Income tax expense for 2005 will be dependent on our earnings and is expected to be approximately
35% of income before income taxes.
We had basic net loss per share of $.40 and net earnings of $.09 and diluted net loss per
share of $.40 and net earnings of $.09 for 2005 and 2004, respectively. Basic weighted average
common shares outstanding increased from approximately 25.0 million shares in 2004 to approximately
30.0 million shares in 2005. The increase in common shares is due to the sale of 5,750,000 shares
of common stock in a public offering in February of 2005 and the redeemed preferred shares to
common shares in June, 2005.
LIQUIDITY AND CAPITAL RESOURCES
Our capital resources consist primarily of cash flows from our oil and gas properties and
bank borrowings supported by our oil and gas reserves. Our level of earnings and cash flows depends
on many factors, including the prices we receive for oil and gas we produce.
Working capital decreased 795% or approximately $6.7 million as of June 30, 2005 compared with
31, 2004. Current liabilities exceeded current assets by $5.9 million at June 30, 2005.
The working capital decrease was primarily due to the increased current maturity of derivative
obligations of approximately $8.5 million.
We incurred net property costs of $21.7 million for the six months ended June 30, 2005
compared to $15.1 million for the same period in 2004. Our property expenditures were $23.1
million for the first six months of 2005, which was partially offset by restricted cash utilized
for property purchases and proceeds from non-strategic property dispositions. Included in our
property basis for the first six months of 2005 and 2004 were net asset retirement costs of
approximately $0.065 million and $0.189 million respectively (see Note 8 to Consolidated
(25)
Financial
Statements). Our property leasehold acquisition, development and enhancement activities were
financed by our revolving credit facility, the utilization of cash flows provided by operations,
cash on hand and proceeds from non strategic property sales and bank borrowings.
On February 9, 2005, we had gross cash proceeds of $30.3 million and net proceeds of
approximately $27.7 million from the sale of common stock (see Note 2 to Consolidated Financial
Statements). These proceeds and cash available were used to reduce our borrowings on the revolving
line of credit by approximately $29.0 million.
Stockholders equity is $73.9 million for June 30, 2005 compared to $60.0 million at December
31, 2004, an increase of 23%. The increase is attributable to the net proceeds of approximately
$27.7 million received from the sale of 5,750,000 shares of our common stock offset by
the increase in accumulated comprehensive loss of $2.0 million related to our derivative
instruments (see Note 6 to Consolidated Financial Statements) and net
loss of $12.2 million. Proceeds from the stock offering were used to reduce our long-term debt.
Based on our projected oil and gas revenues and related expenses, available bank borrowings
and expected cash derived from non-strategic asset divestitures, we believe that we will have
sufficient capital resources to fund normal operations and capital requirements, including interest
expense and principal reduction payments on bank debt, if required. We continually review and
consider alternative methods of financing.
Bank Borrowings
We are a party to a Second Amended and Restated Credit Agreement, as amended (the Credit
Agreement), with Citibank Texas, N.A. BNP Paribas, Citibank, F.S.B. and Western National Bank.
The Credit Agreement provides for a revolving credit facility which means that we can borrow, repay
and reborrow funds drawn under the credit facility. The total amount that we can borrow and have
outstanding at any one time is limited to the lesser of $200.0 million or the borrowing base
established by our lenders. Our current borrowing base is $90.0 million. The principal amount
outstanding under the credit facility at June 30, 2005 was $62.0 million, excluding $0.49 million
reserved for our letters of credit. The amount of the borrowing base is based primarily upon the
estimated value of our oil and gas reserves. The borrowing base amount is redetermined by the
lenders semi-annually on or about April 1 and October 1 of each year or at other times required by
the lenders or at our request. If, as a result of the lenders redetermination of the borrowing
base, the outstanding principal amount of our loan exceeds the borrowing base, we must either
provide additional collateral to the lenders or repay the principal of the note in an amount equal
to the excess. Except for the principal payments that may be required because of our outstanding
loans being in excess of the borrowing base, interest only is payable monthly.
Loans made to us under this credit facility bears interest at Citibanks base rate or the
LIBOR rate, at our election. Generally, Citibanks base rate is equal to the sum the prime rate
published in the Wall Street Journal. At June 30, 2005, Parallel had $4.0 million in base rate
loans outstanding under the credit facility.
The LIBOR rate is generally equal to the sum of (a) the rate designated as British Bankers
Association Interest Settlement Rates and offered on one, two, three, six or twelve month interest
periods for deposits of $1.0 million, and (b) a margin ranging from 2.25% to 2.75%, depending upon
the outstanding principal amount of the loans. If the principal amount outstanding is equal to or
greater than 75% of the borrowing base, the margin is 2.75%. If the principal amount outstanding is
equal to or greater than 50%, but less than 75% of the borrowing base, the margin is 2.50%. If the
principal amount outstanding is less than 50% of the borrowing base, the margin is 2.25%.
The interest rate we are required to pay on our borrowings, including the applicable margin,
may never be less than 4.50%. At June 30, 2005, our Libor interest rate was 5.62% on $31.0 million
and 5.78% on $27.0 million.
In the case of base rate loans, interest is payable on the last day of each month. In the case
of LIBOR loans, interest is payable on the last day of each applicable interest period.
If the total outstanding borrowings under the credit facility are less than the borrowing
base, an unused commitment fee is required to be paid to the lenders. The amount of the fee is .25%
of the daily average of the unadvanced amount of the borrowing base. The fee is payable quarterly.
If the borrowing base is increased, we are required to pay a fee of .375% on the amount of any
increase in the borrowing base.
(26)
Parallel, L.L.C., a subsidiary of Parallel Petroleum Corporation, guaranteed payment of the
loans.
Parallels obligations to the lenders are secured by substantially all of its oil and gas
properties.
All outstanding principal under the revolving credit facility is due and payable on December
20, 2008. The maturity date of our outstanding loans may be accelerated by the lenders upon the
occurrence of an event of default under the Credit Agreement.
The Credit Agreement contains various restrictive covenants and compliance requirements as follows:
|
|
|
at the end of each quarter, a current ratio (as defined in the credit agreement) of at least 1.1 to 1.0; |
|
|
|
|
for each period (as calculated in the Credit Agreement) ending on December 31, March
31, June 30 and September 30, a funded debt ratio (as defined in the Credit Agreement)
of not more than 3.70, 3.60 and 3.50, respectively, for December 31, 2005, 2006 and
2007; and |
|
|
|
|
at all times, adjusted consolidated net worth (as defined in the Credit Agreement)
of at least (a) $50.0 million, plus (b) seventy-five percent (75%) of the net proceeds
from any equity securities issued by Parallel, plus (c) fifty percent (50%) of
consolidated net income for each fiscal quarter, if positive, and zero percent (0%) if
negative. |
As a result of the restatement of the financial statements concerning our accounting for
certain oil and natural gas and interest rate derivative instruments (see Note 11), we were not in
compliance with certain covenants concerning financial reporting
requirements. We have obtained waivers of our non-complianed with
these covenants from our lenders.
The Credit Agreement also contains restrictions on all retained earnings and net income for
payment of dividends on common stock.
If we have borrowing capacity under our Credit Agreement, we intend to borrow, repay and
reborrow under the revolving credit facility from time to time as necessary, subject to borrowing
base limitations, to fund:
|
|
|
interpretation and processing of 3-D seismic survey data; |
|
|
|
|
lease acquisitions and drilling activities; |
|
|
|
|
acquisitions of producing properties or companies owning producing properties; and, |
|
|
|
|
general corporate purposes. |
Interest expense for the six months ending June 30, 2005 was approximately $1.9 million not
including approximately $0.050 million for interest capitalized associated with drilling projects.
Sale of Equity Securities
On February 9, 2005, we sold 5,750,000 shares of our common stock, $.01 par value per share,
pursuant to a public offering at a price of $5.27 per share. Gross cash proceeds were $30.3
million, and net proceeds were approximately $27.7 million. The common shares were issued under
Parallels $100.0 million Universal Shelf Registration Statement on Form S-3 which became effective
in November 2004. The proceeds were used to reduce our long-term
debt.
Preferred Stock
On
May 4, 2005, notice was mailed that all 950,000 outstanding shares of
our 6% Preferred Stock would be redeemed on June 6, 2005. All of the holders of the Preferred Stock elected to
convert their shares of Preferred Stock into shares of Parallel common stock based on the
conversion rate of $10.00 divided by $3.50. The holders of the Preferred Stock will receive
approximately 2.8571 shares of common stock of Parallel for each share of Preferred Stock.
Dividends on the Preferred Stock ceased to accrue, and as of June 6, 2005 the Preferred Stock is no
longer outstanding.
(27)
Commodity Price Risk Management Transactions
The purpose of all of our derivative trades is to provide a measure of stability in cash flow
as a result of our daily activities associated with the selling of oil and gas production and
expenditures associated with the borrowings that we have secured through our bank borrowings. The
derivative trade arrangements we have employed include collars, costless collars, floors or
purchased puts, oil and natural gas swaps and interest rate swaps. In 2003, we designated our
derivative trades as cash flow hedges under the provisions of SFAS 133, as amended. Although our
purpose for entering into derivative trades has remained the same, contracts entered into after
June 30, 2004 were not designated as cash flow hedges.
Under cash flow hedge accounting for oil and natural gas production, the quarterly effective
portion of the change in fair value of the commodity derivatives is recorded in stockholders
equity as other comprehensive income (loss) and then transferred to revenue in the period the
related oil and gas production is sold. Ineffective portions of cash flow hedges (changes in the
fair value of derivative instruments due to changes in realized prices that do not match the
changes in the hedge price) are recognized in other expenses as they occur. While the cash flow
hedge contract is open, the ineffective gain or loss may increase or decrease until settlement of
the contract. As of June 30, 2005, we had designated as cash flow hedges, 1,000 Bbls per day of
production from April 1, 2005 through December 31, 2005 and 750 Bbls per day of production from
January 1, 2006 through December 20, 2006. All other commodity derivative trades are accounted for
by mark-to-market accounting whereby changes in fair value are charged to earnings. Changes in
the fair value of derivatives are recorded in our Consolidated Statements of Operations as these
changes occur in the Other income (expense), net section of this statement. To the extent these
trades relate to production in 2006 and beyond and oil prices increase, we report a loss currently,
but if there is no further change in prices, our revenue will be correspondingly higher (than if
there had been no price increase) when the production is sold.
Under cash flow hedge accounting for interest rates, the quarterly change in the fair value of
the derivative is recorded in stockholders equity as other comprehensive income (loss). The gain
or loss is transferred, on a contract by contract basis, to interest expense as the interest
accrues. Ineffective portions of cash flow hedges are recognized in other expense as they occur.
As of June 30, 2005, the floating interest rate on only $20.0 million of the bank borrowings in
2005 and $10.0 million of the bank borrowings in 2006 was hedged. All other interest rate swaps
that have been entered into are accounted for by mark-to-market accounting as prescribed by SFAS
133.
We are exposed to credit risk in the event of nonperformance by the counterparty in our
derivative trade instruments. However, we periodically assess the creditworthiness of the
counterparty to mitigate this credit risk.
Certain of our commodity price risk management arrangements have required us to deliver cash
collateral or other assurances of performance to the counterparties in the event that our payment
obligations with respect to our commodity price risk management transactions exceed certain levels.
Contractual Obligations, Commitments and Off-Balance Sheet Arrangements
We have contractual obligations and commitments that may affect our financial position.
However, based on our assessment of the provisions and circumstances of our contractual obligation
and commitments, we do not feel there would be an adverse effect on our consolidated results of
operations, financial condition or liquidity.
(28)
The following table is a summary of significant contractual obligations as of June 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligation Due in Period |
|
|
|
Six months |
|
|
|
|
|
|
|
|
|
ending |
|
|
|
|
|
|
|
|
|
December 31, |
|
|
Year ended December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After |
|
|
|
|
Contractual Cash Obligations |
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
5 years |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving Credit Facility (secured) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
62,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
62,000 |
|
Office Lease (Dinero Plaza) |
|
|
78 |
|
|
|
105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
183 |
|
Andrews and Snyder Field Offices(1) |
|
|
12 |
|
|
|
23 |
|
|
|
23 |
|
|
|
14 |
|
|
|
14 |
|
|
|
|
|
|
|
86 |
|
Asset retirement obligations(2) |
|
|
105 |
|
|
|
38 |
|
|
|
229 |
|
|
|
19 |
|
|
|
150 |
|
|
|
1,710 |
|
|
|
2,251 |
|
Derivative Obligations |
|
|
9,110 |
|
|
|
14,181 |
|
|
|
10,593 |
|
|
|
9,774 |
|
|
|
|
|
|
|
|
|
|
|
43,658 |
|
Drilling contract |
|
|
292 |
|
|
|
964 |
|
|
|
613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,869 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
9,597 |
|
|
$ |
15,311 |
|
|
$ |
11,458 |
|
|
$ |
71,807 |
|
|
$ |
164 |
|
|
$ |
1,710 |
|
|
$ |
110,047 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Snyder field office lease remains in effect until
the termination of our trade agreement with a third party working
interest owner in the Diamond M project. The Andrews
field lease expires in December 2007. The lease cost for these two
office facilities are billed to nonaffiliated third party working
interest owners under our joint operating agreements with these third
parties.
|
|
|
|
(2) |
|
Assets retirement obligations of oil and natural gas assets,
excluding salvage value and accretion.
|
Outlook
The oil and natural gas industry is capital intensive. We make, and anticipate that we will
continue to make, substantial capital expenditures in the exploration for, development and
acquisition of oil and natural gas reserves. Historically, our capital expenditures have been
financed primarily with:
|
|
|
internally generated cash from operations; |
|
|
|
|
proceeds from bank borrowings; and |
|
|
|
|
proceeds from sales of equity securities. |
The continued availability of these capital sources depends upon a number of variables, including:
|
|
|
our proved reserves; |
|
|
|
|
the volumes of oil and natural gas we produce from existing wells; |
|
|
|
|
the prices at which we sell oil and gas; and |
|
|
|
|
our ability to acquire, locate and produce new reserves. |
Each of these variables materially affects our borrowing capacity. We may from time to time
seek additional financing in the form of:
|
|
|
increased bank borrowings; |
|
|
|
|
sales of Parallels securities; |
|
|
|
|
sales of non-core properties; or |
|
|
|
|
other forms of financing. |
(29)
Except for the revolving credit facility we have with our bank lenders, we do not have
agreements for any future financing and there can be no assurance as to the availability or terms
of any such financing.
Inflation
Our drilling costs have escalated due to increased demand for drilling services in the
industry and we would expect this trend to continue, but our commodity prices have also increased
at the same time.
Critical Accounting Policies
This discussion should be read in conjunction with the financial statements and the
accompanying notes and Managements Discussion and Analysis of Financial Condition and Results of
Operations included in our Annual Report or Form 10-K for the year ended December 31, 2004, filed
with the Securities and Exchange Commission on March 15, 2005.
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS No. 123(R)).
SFAS No. 123(R) requires an entity to recognize the grant-date fair value of stock options and
other equity-based compensation issued to employees in the income statement. SFAS No. 123(R)
initially was effective for Parallel beginning July 1, 2005. On April 14, 2005, the Securities and
Exchange Commission announced a delay in the implementation of SFAS No. 123(R) until the beginning
of the fiscal year after June 15, 2005. We do not expect SFAS No. 123(R) to have a material impact
on its results of operations.
Restatement
As part of the preparation of our financial statements for the year ended December 31, 2005,
we undertook a review of our accounting for oil and gas and interest rate derivatives. We use
derivative instruments as a means of reducing financial exposure to fluctuating oil and gas prices
and interest rates. We included changes from period to period in the fair value of derivatives
classified as cash flow hedges (Hedges) as increases or decreases to Accumulated Other
Comprehensive Income (AOCI) as allowed by Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities (FAS 133). This Hedge accounting
treatment is allowed for certain derivatives, including the types of derivatives used by us to
reduce exposure to changes in oil and gas prices associated with the sale of oil and gas production
and fluctuations in interest rates. In order to qualify for Hedge accounting treatment, specific
standards and documentation requirements must be met. We believed that we met those requirements
and that our derivative accounting treatment was permitted under FAS 133. However, after a review
of FAS 133 and our accounting policies and procedures related to our derivative instruments, we
determined that certain of our derivative instruments did not qualify for Hedge accounting
treatment under FAS 133. Specifically, we determined that documentation of the relationship of
hedged items and the derivative instruments being employed and designated as Hedges was
insufficient for derivative instruments entered into during periods subsequent to June 30, 2004,
and that accounting for derivative instruments entered into during periods subsequent to June 30,
2004 as cash flow Hedges was, therefore, inappropriate. Accordingly, we have restated our
Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004; our Consolidated Statements
of Operations for the three and six months ended June 30, 2005; our Consolidated Statement of Cash
Flows for the six months ended June 30, 2005; and our Consolidated Statements of Comprehensive
Income (Loss) for the three and six months ended June 30, 2005 in the Form 10-Q to reflect these
revisions (see Note 11 to our consolidated financial statements for a reconciliation of our
restated results to previously reported results). We have also restated applicable disclosures in
ITEM 1. Notes to Consolidated Financial Statements and ITEM 2. MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Management has concluded, based on the
circumstances involving the restatement of the aforementioned financial statements that as of
December 31, 2005, a material weakness in internal control over financial reporting existed with
respect to the design of our controls over the proper recording and disclosure of derivative
instruments in accordance with FAS 133. See ITEM 4. CONTROLS AND PROCEDURES.
(30)
TRENDS AND PRICES
Changes in oil and gas prices significantly affect our revenues, cash flows and borrowing
capacity. Markets for oil and natural gas have historically been, and will continue to be,
volatile. Prices for oil and natural gas typically fluctuate in response to relatively minor
changes in supply and demand, market uncertainty, seasonal, political and other factors beyond our
control. We are unable to accurately predict domestic or worldwide political events or the effects
of other such factors on the prices we receive for our oil and natural gas.
Our capital expenditure budgets are highly dependent on future oil and natural gas prices and
will be consistent with internally generated cash flows.
During fiscal year 2004 the average realized sales price for our oil and natural gas was
$37.55 (unhedged) per BOE. For the six months ended June 30, 2005, our average realized price was
$43.57 (unhedged) per BOE.
FORWARD-LOOKING STATEMENTS
Cautionary Statement Regarding Forward-Looking Statements
Some
statements contained in this Quarterly Report on Form 10-Q/A are forward-looking
statements. These forward looking statements relate to, among others, the following:
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our future financial and operating performance and results; |
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our business strategy; |
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changes in prices and demand for oil and natural gas; |
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sources of funds necessary to conduct operations and complete acquisitions; |
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development costs; |
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number and location of planned wells; |
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our future commodity price risk management activities; and |
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our plans and forecasts. |
We have based these forward-looking statements on our current assumptions, expectations and
projections about future events.
We use the words may, will, expect, anticipate, estimate, believe, continue,
intend, plan, budget, present value, future or reserves or other similar words to
identify forward-looking statements. These statements also involve risks and uncertainties that
could cause our actual results or financial condition to materially differ for our expectations.
We believe the assumptions and expectations reflected in these forward-looking statements are
reasonable. However, we cannot give any assurance that our expectations will prove to be correct
or that we will be able to take any actions that are presently planned. All of these statements
involve assumptions of future events and risks and uncertainties. Risks and uncertainties
associated with forward-looking statements include, but are not limited to:
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fluctuations in prices of oil and natural gas; |
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demand for oil and natural gas; |
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losses due to potential or future litigation; |
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future capital requirements and availability of financing; |
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geological concentration of our reserves; |
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risks associated with drilling and operating wells; |
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competition; |
(31)
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general economic conditions; |
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governmental regulations; |
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receipt of amounts owed to us by purchasers of our production and counterparties to
our hedging contracts; |
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hedging decisions, including whether or not to hedge; |
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events similar to 911; |
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actions of third party co-owners of interests in properties in which we also own an interest; and |
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fluctuations in interest rates and availability of capital. |
For these and other reasons, actual results may differ materially from those projected or
implied. We believe it is important to communicate our expectations of future performance to our
investors. However, events may occur in the future that we are unable to accurately predict, or
over which we have no control. We caution you against putting undue reliance on forward-looking
statements or projecting any future results based on such statements.
Before you invest in our common stock, you should be aware that there are various risks
associated with an investment. We have described some of these risks under Risks Related to Our
Business beginning on page 20 of our Form 10-K for year ended December 31, 2004.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following quantitative and qualitative information is provided about market risks and
derivative instruments to which Parallel was a party at June 30, 2005, and from which Parallel may
incur future earnings, gains or losses from changes in market interest rates and oil and natural
gas prices.
Interest Rate Sensitivity as of June 30, 2005
Our only financial instruments sensitive to changes in interest rates are our bank debt and
interest rate swaps. As the interest rate is variable and reflects current market conditions, the
carrying value of our bank debt approximates the fair value. The table below shows principal cash
flows and related weighted average interest rates by expected maturity dates. Weighted average
interest rates were determined using weighted average interest paid and accrued in June, 2005. You
should read Note 3 to the Consolidated Financial Statements for further discussion of our debt that
is sensitive to interest rates.
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2005 |
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2006 |
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2007 |
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2008 |
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2009 |
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Total |
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($ in thousands) |
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Variable rate debt: |
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Revolving facility (secured) |
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$ |
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$ |
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$ |
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$ |
62,000 |
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$ |
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$ |
62,000 |
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Weighted average interest rate |
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5.73 |
% |
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5.73 |
% |
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5.73 |
% |
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5.73 |
% |
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At June 30, 2005, we had bank loans in the amount of approximately $62.0 million
outstanding on our revolving credit facility at an average interest rate of 5.88%. Under our
credit facility, we may elect an interest rate based upon the agent banks base lending rate or the
LIBOR rate, plus a margin ranging from 2.25% to 2.75% per annum, depending upon the outstanding
principal amount of the loans. The interest rate we are required to pay, including the applicable
margin, may never be less than 4.50%.
As of June 30, 2005, we had employed fixed interest rate swap contracts with BNP Paribas,
based on the 90-day LIBOR rates at the time of the contract. These interest rate swaps are treated
as a cash flow hedge as defined in SFAS 133, and are on
$20 million of our variable rate debt for
all of 2005 and on $10 million of our variable rate debt for all of 2006. We will continue to pay
the variable interest rates for this portion of our bank borrowings, but
(32)
due to the interest rate
swaps, we have fixed the rate at 4.05%. Under the terms of these contracts, in periods during
which the fixed interest rate stated in the agreement exceeds the variable rate (which is based on
the 90-day LIBOR rate), we pay to the counterparty an amount determined by applying this excess
fixed rate to the notional amount of the contract. In periods when the variable rate exceeds the
fixed rate stated in the respective swap contract, the counterparty pays an amount to us determined
by applying the excess of the variable rate over the stated fixed rate. As of June 30, 2005, the
fair market value of these interest rate swaps was an unrealized loss of $27,000.
As of June 30, 2005, we had also employed additional fixed interest rate swap contracts with
BNP Paribas based on the 90-day LIBOR rates at the time of the contracts. However, these contracts
are accounted for by mark-to-market accounting as prescribed in SFAS 133. Nonetheless, we view
these contracts as additional protection against future interest rate volatility.
A recap for the period of time, notional amounts, fixed interest rates, and fair market value
of these contracts at June 30, 2005 follows:
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Notional |
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Fair |
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Period of Time |
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Amounts |
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Fixed Interest Rates |
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Market Value |
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($ in millions) |
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($ in thousand) |
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July 1, 2005 thru December 31, 2005(1) |
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$20 |
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4.05% |
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$ |
(33 |
) |
July 1, 2005 thru December 31, 2005 |
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$30 |
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2.89% |
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$ |
124 |
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January 1, 2006 thru December 31, 2006(1) |
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$10 |
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4.05% |
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$ |
6 |
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January 1, 2006 thru December 31, 2006 |
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$40 |
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3.76% |
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$ |
136 |
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January 1, 2007 thru December 31, 2007 |
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$50 |
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4.30% |
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$ |
(83 |
) |
January 1, 2008 thru December 30, 2008 |
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$50 |
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4.74% |
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$ |
(246 |
) |
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Total Fair Market Value |
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$ |
(96 |
) |
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(1) |
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Designated as cash flow hedge. |
Commodity Price Sensitivity as of June 30, 2005
Our major market risk exposure is in the pricing applicable to our oil and natural gas
production. Market risk refers to the risk of loss from adverse changes in oil and natural gas
prices. Realized pricing is primarily driven by the prevailing domestic price for crude oil and
spot prices applicable to the region in which we produce natural gas. Historically, prices
received for oil and gas production have been volatile and unpredictable. We expect pricing
volatility to continue. Oil prices ranged from a low of $26.76 per barrel to a high of $52.82 per
barrel during 2004. Natural gas prices we received during 2004 ranged from a low of $2.31 per Mcf
to a high of $8.79 per Mcf.
During 2005, oil prices ranged from a low of $36.43 to a high of $55.27. Natural gas prices
we received during 2005, ranged from a low of $2.22 per Mcf to a high of $9.95 per Mcf. A
significant decline in the prices of oil or natural gas could have a material adverse effect on our
financial condition and results of operations.
We employ various derivative instruments in order to minimize our exposure to the
aforementioned commodity price volatility. As of June 30, 2005, we had employed costless collars,
collars, and swaps in order to protect against this price volatility. Although all of the
contracts that we have entered into are viewed as protection against this price volatility, all but two of these contracts are accounted for by the mark-to-market accounting method as prescribed in
SFAS 133.
As of June 30, 2005, we had commodity swap contracts designated as cash flow hedges totaling
1,000 Bbls per day for the remainder of 2005 at an average NYMEX swap price of $23.33 per Bbl and
an additional 750 Bbls per day from January 1, 2006 through December 20, 2006 at a NYMEX swap price
of $23.04 per Bbl.
A description of our active commodity derivative contracts as of June 30, 2005 follows:
(33)
Collars. Collars are contracts which combine both a put option or floor and a call
option or ceiling. These contracts may or may not involve payment or receipt of cash at
inception, depending on the ceiling and floor pricing.
A summary of our collar positions at June 30, 2005 is as follows:
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Houston |
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NyMex |
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Ship Channel |
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Barrels |
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Oil Prices |
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M M Btu of |
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Gas Prices |
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Period of Time |
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of Oil |
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Floor |
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Cap |
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Natural Gas |
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Floor |
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Cap |
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Fair Market Value |
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($ in thousands) |
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July 1, 2005 thru October 31, 2005 |
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$ |
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$ |
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246,000 |
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$ |
5.00 |
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$ |
7.26 |
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$ |
(52 |
) |
July 1, 2005 thru December 31, 2005 |
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36,800 |
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$ |
36.00 |
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$ |
49.60 |
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$ |
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$ |
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(322 |
) |
January 1, 2006 thru December 31,
2006 |
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70,800 |
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$ |
35.00 |
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$ |
44.00 |
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$ |
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$ |
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(1,023 |
) |
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Total Fair Market Value |
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$ |
(1,397 |
) |
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Commodity Swaps. Generally, swaps are an agreement to buy or sell a specified
commodity for delivery in the future, at an agreed fixed price. Swap transactions convert a
floating or market price into a fixed price. For any particular swap transaction, the counterparty
is required to make a payment to the Company if the reference price for any settlement period is
less than the swap or fixed price for such contract, and the Company is required to make a payment
to the counterparty if the reference price for any settlement period is greater than the swap or
fixed price for such contract.
We have entered into oil swap contracts with BNP Paribas. A recap for the period of time,
number of barrels, swap prices and fair market values as of June 30, 2005 for these swaps follows:
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Nymex Oil |
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Fair Market |
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Period of Time |
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Barrles of Oil |
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Swap Price |
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Value |
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($ in thousands) |
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July 1, 2005 thru December 31, 2005(1) |
|
184,000 |
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$23.31 |
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$ |
(6,410 |
) |
July 1, 2005 thru December 31, 2005 |
|
128,800 |
|
$39.96 |
|
$ |
(2,360 |
) |
January 1, 2006 thru December 20, 2006(1) |
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265,500 |
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$23.04 |
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|
(9,241 |
) |
January 1, 2006 thru December 20, 2006 |
|
182,500 |
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$36.36 |
|
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(3,988 |
) |
January 1, 2007 thru December 31, 2007 |
|
474,500 |
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$34.36 |
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(10,511 |
) |
January 1, 2008 thru December 31, 2008 |
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439,200 |
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$33.37 |
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(9,528 |
) |
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Total fair market value |
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$ |
(42,038 |
) |
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(1) |
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Designated as cash flow hedges. |
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to provide reasonable
assurance that information required to be disclosed by us in the reports that we file or submit to
the Securities and Exchange Commission under the Securities Exchange
Act of 1934, as amended (the Exchange Act), is
recorded, processed, summarized and reported within the time periods specified by the Commissions
rules and forms, and that information is accumulated and communicated to our management, including
our Chief Executive Officer, Larry C. Oldham (principal executive officer), and our Chief Financial Officer, Steven D. Foster (principal financial officer), as
appropriate to allow timely decisions regarding required disclosure.
(34)
As part of the preparation of our financial statements for the year ended December 31, 2005,
we undertook a review of our accounting for oil and gas and interest rate derivatives. We use
derivative instruments as a means of reducing financial exposure to fluctuating oil and gas prices
and interest rates. We included changes from period to period in the fair value of derivatives
classified as cash flow hedges (Hedges) as increases or decreases to Accumulated Other
Comprehensive Income (AOCI) as allowed by Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities (FAS 133). This Hedge accounting
treatment is allowed for certain derivatives, including the types of derivatives used by us to
reduce exposure to changes in oil and gas prices associated with the sale of oil and gas production
and fluctuations in interest rates. In order to qualify for Hedge accounting treatment, specific
standards and documentation requirements must be met. We believed that we met those requirements
and that our derivative accounting treatment was permitted under FAS 133. However, after a review
of FAS 133 and our accounting policies and procedures related to our derivative instruments, we
determined that certain of our derivative instruments did not qualify for Hedge accounting
treatment under FAS 133. Specifically, we determined that documentation of the relationship of
hedged items and the derivative instruments being employed and designated as Hedges was
insufficient for derivative instruments entered into during periods subsequent to June 30, 2004;
and that accounting for derivative instruments entered into during periods subsequent to June 30,
2004 as cash flow Hedges was, therefore, inappropriate. Accordingly, we have restated our
Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004, our Consolidated Statements
of Operations for the three and six months ended June 30, 2005; our Consolidated Statement of Cash
Flows for the six months ended June 30, 2005; and our Consolidated Statements of Comprehensive
Income (Loss) for the three and six months ended June 30, 2005 in this Amendment No. 1 to our Form
10-Q to reflect these revisions. We have also restated applicable disclosures in the footnotes to
such consolidated financial statements. Management has concluded, based on the circumstances
involving the restatement of the aforementioned financial statements that as of December 31, 2005,
a material weakness in internal control over financial reporting existed with respect to the design
of the Companys controls over the proper recording and disclosure of derivative instruments in
accordance with FAS 133.
In light of our decision to restate the financial statements and the identification of a
material weakness, we carried out an evaluation in accordance with Exchange Act Rules 13a-15 and
15d-15 and under the supervision and with the participation of management, including our Chief
Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls
and procedures as of the end of the period covered by this report. Based on that evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that, due to the aforementioned
material weakness, our disclosure controls and procedures were not effective as of June 30,
2005.
There has been no change in our internal controls over financial reporting that occurred
during the three months ended June 30, 2005 that has materially affected, or is reasonably likely
to material affect, our internal controls over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are a party to ordinary routine litigation incidental to our
business. We are currently a defendant in one lawsuit incidental to our business. We do not
believe the ultimate outcome of this lawsuit will have a material adverse effect on our financial
condition or results of operations. We are not aware of any other threatened litigation and we
have not been a party to any bankruptcy, receivership, reorganization, adjustment or similar
proceeding.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Sale of Unregistered Securities
At Parallels annual meeting of stockholders held on June 22, 2004, the stockholders approved
the Parallel Petroleum Corporation 2004 Non-Employee Director Stock Grant Plan. Upon approval of
the plan by the stockholders, we began paying an annual retainer fee to each non-employee Director
in the form of common stock having a value of $25,000. Only Directors of Parallel who are not
employees of Parallel or any of its subsidiaries are eligible to participate in the Plan. Under the
plan, each non-employee Director is entitled to receive an annual retainer fee consisting of shares
of common stock that will be automatically granted on the first day of July in each year. The
actual number of shares received is determined by dividing $25,000 by the average daily closing
price of the common stock on the Nasdaq Stock Market for the ten consecutive trading days
commencing fifteen trading days before the first day of July of each year ($8.622). Effective on
July 1, 2005, in accordance with the terms of
(35)
the plan, a total of 11,596 shares of common stock
were granted to four non-employee Directors as follows: Jeffrey G. Shrader 2,899 shares; Dewayne
E. Chitwood 2,899 shares; Martin B. Oring 2,899 shares; and Ray M. Poage 2,899 shares. The
shares of common stock were issued without registration under the Securities Act of 1933, as
amended, in reliance on the exemption provided by Section 4(2) of the Securities Act. Generally,
shares issued under this plan are not transferable as long as the non-employee Director holding the
shares remains a Director of the Company. Certificates evidencing the shares bear restrictive
legends.
Repurchase of Equity Securities
Neither we nor any affiliated purchaser repurchased any of our equity securities during the
second quarter ended June 30, 2005. However, as described under Note 2 on page 6 of this report,
the holders of our 6% convertible preferred stock exercised their right to convert all 950,000
outstanding shares of preferred stock into a total of 2,714,280 shares of our common stock
following our announcement on May 3, 2005 that we would redeem all of the preferred stock on June
6, 2005 at a price of $10.00 divided by $3.50 for each share of preferred stock. The holders of preferred stock
received approximately 2.8571 shares of common stock for each share of preferred stock, together
with accumulated and unpaid dividends up to June 6, 2005, the redemption date.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Our annual meeting of stockholders was held on June 21, 2005. At the meeting, the
following six persons were elected to serve as directors of Parallel for a term of one year
expiring in 2006 and until their respective successors are duly qualified and elected: (1) Thomas
R. Cambridge, (2) Dewayne E. Chitwood, (3) Larry C. Oldham, (4) Martin B. Oring, (5) Ray M. Poage, and (6) Jeffrey G. Shrader. Set forth
below is a tabulation of votes with respect to each nominee for director.
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|
BROKER |
NAME |
|
VOTES CAST FOR |
|
VOTES WITHHELD |
|
NON-VOTES |
Thomas R. Cambridge |
|
27,880,052 |
|
771,543 |
|
|
|
Dewayne E. Chitwood |
|
28,399,953 |
|
251,642 |
|
|
|
Larry C. Oldham |
|
28,403,085 |
|
248,510 |
|
|
|
Martin B. Oring |
|
28,498,133 |
|
153,462 |
|
|
|
Ray M. Poage |
|
28,499,963 |
|
151,632 |
|
|
|
Jeffrey G. Shrader |
|
27,976,600 |
|
674,995 |
|
|
|
Also, the stockholders voted upon and ratified the appointment of BDO Seidman, LLP to
serve as our independent public accountants for 2005. Set forth below is a tabulation of votes with
respect to the proposal to ratify the appointment of our independent public accountants:
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|
|
VOTES FOR |
|
VOTES AGAINST |
|
ABSTENTIONS |
28,607,389
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|
18,188
|
|
26,018 |
(36)
ITEM 6. EXHIBITS
The following exhibits are filed herewith or incorporated by reference, as indicated:
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No. |
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Description of Exhibit |
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3.1 |
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Certificate of Incorporation of Registrant (Incorporated by reference
to Exhibit 3.1 to Form 10-Q of the Registrant for the fiscal quarter
ended June 30, 2004) |
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3.2 |
|
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Bylaws of Registrant (Incorporated by reference to Exhibit 3 of the
Registrants Form 8-K, dated October 9, 2000, as filed with the
Securities and Exchange Commission on October 10, 2000) |
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3.3 |
|
|
Certificate of Formation of Parallel, L.L.C. (Incorporated by
reference to Exhibit No. 3.3 of the Registrants Registration
Statement on Form S-3, No. 333-119725 filed on October 13, 2004) |
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3.4 |
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Limited Liability Company Agreement of Parallel, L.L.C. (Incorporated
by reference to Exhibit No. 3.4 of the Registrants Statement on Form
S-3, No. 333-119725 filed on October 13, 2004) |
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3.5 |
|
|
Certificate of Limited Partnership of Parallel, L.P. (Incorporated by
reference to Exhibit No. 3.5 of the Registrants Registration
Statement on Form S-3, No. 333-119725 filed on October 13, 2004) |
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3.6 |
|
|
Agreement of Limited Partnership of Parallel, L.P. (Incorporated by
reference to Exhibit No. 3.6 of the Registrants Registration
Statement on Form S-3, No. 333-119725 filed on October 13, 2004) |
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4.1 |
|
|
Certificate of Designations, Preferences and Rights of Serial
Preferred Stock 6% Convertible Preferred Stock (Incorporated by
reference to Exhibit 4.1 of Form 10-Q of the Registrant for the fiscal
quarter ended June 30, 2004) |
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|
|
|
|
4.2 |
|
|
Certificate of Designation, Preferences and Rights of Series A
Preferred Stock (Incorporated by reference to Exhibit 4.2 of Form 10-K
of the Registrant for the fiscal year ended December 31, 2000) |
|
|
|
|
|
|
|
|
|
|
4.3 |
|
|
Rights Agreement, dated as of October 5, 2000, between the Registrant
and Computershare Trust Company, Inc., as Rights Agent (Incorporated
by reference to Exhibit 4.3 of Form 10-K of the Registrant for the
fiscal year ended December 31, 2000) |
|
|
|
|
|
|
|
|
|
|
4.4 |
|
|
Form of Indenture relating to senior debt securities of the Registrant
(Incorporated by reference to Exhibit No. 4.4 of the Registrants
Statement on Form S-3, No. 333-119725 filed on October 13, 2004) |
|
|
|
|
|
|
|
|
|
|
4.5 |
|
|
Form of Indenture relating to subordinated debt securities of the
Registrant (Incorporated by reference to Exhibit No. 4.5 of the
Registrants Registration Statement on Form S-3, No. 333-119725 filed
on October 13, 2004) |
|
|
|
|
|
|
|
|
|
|
4.6 |
|
|
Form of common stock certificate of the Registrant (Incorporated by
reference to Exhibit No. 4.6 of the Registrants Registration
Statement on Form S-3, No. 333-119725 filed on October 13, 2004) |
|
|
|
|
|
|
|
|
|
|
4.7 |
|
|
Warrant Purchase Agreement, dated November 20, 2001, between the
Registrant and Stonington Corporation (Incorporated by reference to
Exhibit 4.7 of Form 10-K of the Registrant for the fiscal year ended
December 31, 2004) |
(37)
|
|
|
4.8
|
|
Warrant Purchase Agreement, dated December 23, 2003, between the Registrant and
Stonington Corporation (Incorporated by reference to Exhibit 4.8 of Form 10-K of the
Registrant for the fiscal year ended December 31, 2004) |
|
|
|
|
|
Executive Compensation Plans and Arrangements (Exhibit No.s 10.1 through 10.8): |
|
|
|
10.1
|
|
1992 Stock Option Plan (Incorporated by reference to Exhibit 10.1 of Form 10-K of
the Registrant for the fiscal year ended December 31, 2004) |
|
|
|
10.2
|
|
Merrill Lynch, Pierce, Fenner & Smith Incorporated Prototype Simplified Employee
Pension Plan (Incorporated by reference to Exhibit 10.6 of the Registrants Form
10-K for the fiscal year ended December 31, 1995) |
|
|
|
*10.3
|
|
Non-Employee Directors Stock Option Plan |
|
|
|
10.4
|
|
1998 Stock Option Plan (Incorporated by reference to Exhibit 10.7 of Form 10-K of
the Registrant for the fiscal year ended December 31, 1998) |
|
|
|
10.5
|
|
Form of Incentive Award Agreements, dated December 12, 2001, between the Registrant
and Thomas R. Cambridge, Larry C. Oldham, Eric A. Bayley and John S. Rutherford
granting 2,394 Unit Equivalent Rights to Mr. Cambridge; 9,564 Unit Equivalent Rights
to Mr. Oldham; 2,869 Unit Equivalent Rights to Mr. Bayley; and 7,173 Unit Equivalent
Rights to Mr. Rutherford (Incorporated by reference to Exhibit 10.8 of Form 10-K of
the Registrant for the fiscal year ended December 31, 2001) |
|
|
|
10.6
|
|
2001 Non-Employee Directors Stock Option Plan (Incorporated by reference to Exhibit
10.7 of the Registrants Form 10-Q Report for the first fiscal quarter ended March
31, 2004) |
|
|
|
10.7
|
|
2004 Non-Employee Director Stock Grant Plan (Incorporated by reference to Exhibit
10.1 of the Registrants Form 8-K Report dated September 22, 2004) |
|
|
|
10.8
|
|
Incentive and Retention Plan (Incorporated by reference to Exhibit 10.1 of the
Registrants Form 8-K Report dated September 23, 2004 and filed with the Securities
and Exchange Commission on September 29, 2004) |
|
|
|
10.9
|
|
Certificate of Formation of First Permian, L.L.C. (Incorporated by reference to
Exhibit 10.1 of the Registrants Form 8-K Report dated June 30, 1999) |
|
|
|
10.10
|
|
Limited Liability Company Agreement of First Permian, L.L.C. (Incorporated by
reference to Exhibit 10.2 of the Registrants Form 8-K Report dated June 30, 1999) |
|
|
|
10.11
|
|
Amended and Restated Limited Liability Company Agreement of First Permian, L.L.C.
dated as of May 31, 2000 (Incorporated by reference to Exhibit 10.16 of Form 10-K of
the Registrant for the fiscal year ended December 31, 2000) |
|
|
|
10.12
|
|
Credit Agreement, dated June 30, 1999, by and among First Permian, L.L.C., Parallel
Petroleum Corporation, Baytech, Inc., and Bank One, Texas, N.A. (Incorporated by
reference to Exhibit 10.6 of the Registrants Form 8-K Report dated June 30, 1999) |
|
|
|
10.13
|
|
Limited Guaranty, dated June 30, 1999, by and among First Permian, L.L.C., Parallel
Petroleum Corporation and Bank One, Texas, N.A. (Incorporated by reference to
Exhibit 10.7 of the Registrants Form 8-K Report dated June 30, 1999) |
(38)
|
|
|
10.14
|
|
Second Restated Credit Agreement, dated October 25, 2000, among
First Permian, L.L.C., Bank One, Texas, N.A., and Bank One Capital
Markets, Inc. (Incorporated by reference to Exhibit 10.22 of Form
10-K of the Registrant for the fiscal year ended December 31, 2000) |
|
|
|
10.15
|
|
Loan Agreement, dated as of January 25, 2002, between the Registrant
and First American Bank, SSB (Incorporated by reference to Exhibit
10.25 of Form 10-K of the Registrant for the fiscal year ended
December 31, 2001) |
|
|
|
10.16
|
|
Purchase and Sale Agreement, dated as of November 27, 2002, among
JMC Exploration, Inc., Arkoma Star L.L.C., Parallel, L.P. and
Texland Petroleum, Inc. (Incorporated by reference to Exhibit 10.1
of Form 8-K of the Registrant, dated December 20, 2002) |
|
|
|
10.17
|
|
First Amended and Restated Credit Agreement, dated December 20,
2002, by and among Parallel Petroleum Corporation, Parallel, L.P.,
Parallel, L.L.C., First American Bank, SSB, Western National Bank
and BNP Paribas (Incorporated by reference to Exhibit 10.2 of Form
8-K of the Registrant, dated December 20, 2002) |
|
|
|
10.18
|
|
Guaranty dated December 20, 2002, between Parallel, L.L.C. and First
American Bank, SSB, as Agent (Incorporated by reference to Exhibit
10.3 of Form 8-K of the Registrant, dated December 20, 2002) |
|
|
|
10.19
|
|
First Amendment to First Amended and Restated Credit Agreement,
dated as of September 12, 2003, by and among Parallel Petroleum
Corporation, Parallel, L.P., Parallel, L.L.C., First American Bank,
SSB, Western National Bank, and BNP Paribas (Incorporated by
reference to Exhibit 10.29 of Form 10-Q of the Registrant for the
quarter ended September 30, 2003) |
|
|
|
10.20
|
|
Second Amended and Restated Credit Agreement, dated September 27,
2004, by and among Parallel Petroleum Corporation, Parallel, L.P.,
Parallel, L.L.C., First American Bank, SSB, BNP Paribas, Citibank,
F.S.B. and Western National Bank (Incorporated by reference to
Exhibit 10.1 of the Registrants Form 8-K Report dated September 27,
2004 and filed with the Securities and Exchange Commission on
October 1, 2004) |
|
|
|
10.21
|
|
Agreement of Limited Partnership of West Fork Pipeline Company LP
(Incorporated by reference to Exhibit 10.21 of Form 10-K of the
Registrant for the fiscal year ended December 31, 2004) |
|
|
|
10.22
|
|
First Amendment to Second Amended and Restated Credit Agreement,
dated as of December 27, 2004, by and among Parallel Petroleum
Corporation, Parallel, L.P., Parallel, L.L.C., First American Bank,
SSB, BNP Paribas, Citibank, F.S.B. and Western National Bank
(Incorporated by reference to Exhibit 10.1 of the Registrants Form
8-K Report dated December 30, 2004 and filed with the Securities and
Exchange Commission on December 30, 2004) |
|
|
|
10.23
|
|
Second Amendment to Second Amended and Restated Credit Agreement,
dated as of April 1, 2005, by and among Parallel Petroleum
Corporation, Parallel, L.P., Parallel, L.L.C., First American Bank,
SSB, BNP Paribas, Citibank, F.S.B. and Western National Bank
(Incorporated by reference to Exhibit 10.1 of the Registrants Form
8-K Report dated April 4, 2005 and filed with the Securities and
Exchange Commission on April 8, 2005) |
|
|
|
14
|
|
Code of Ethics (Incorporated by reference to Exhibit No. 14 of the
Registrants Form 10-K Report for the fiscal year ended December 31,
2003 and filed with the Securities and Exchange Commission on March
22, 2004) |
(39)
|
|
|
21
|
|
Subsidiaries (Incorporated by reference to Exhibit No. 21 of the
Registrants Form 10-K Report for the fiscal year ended December 31,
2003 and filed with the Securities and Exchange Commission on March
22, 2004) |
|
|
|
*31.1
|
|
Certification of Principal Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the Sarbanes
Oxley Act of 2002 |
|
|
|
*31.2
|
|
Certification of Principal Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the Sarbanes
Oxley Act of 2002 |
|
|
|
*32.1
|
|
Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes -
Oxley Act of 2002. |
|
|
|
*32.2
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes -
Oxley Act of 2002. |
(40)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
PARALLEL PETROLEUM CORPORATION |
|
|
|
Date:
May 9, 2006
|
|
BY: /s/ Larry C. Oldham |
|
|
Larry C. Oldham |
|
|
President and Chief Executive Officer |
|
|
|
Date: May 9, 2006
|
|
BY: /s/ Steven D. Foster |
|
|
Steven D. Foster, |
|
|
Chief Financial Officer |
INDEX TO EXHIBITS
|
|
|
No |
|
Description of Exhibit |
|
|
|
3.1
|
|
Certificate of Incorporation of Registrant (Incorporated by reference
to Exhibit 3.1 to Form 10-Q of the Registrant for the fiscal quarter
ended June 30, 2004) |
|
|
|
3.2
|
|
Bylaws of Registrant (Incorporated by reference to Exhibit 3 of the
Registrants Form 8-K, dated October 9, 2000, as filed with the
Securities and Exchange Commission on October 10, 2000) |
|
|
|
3.3
|
|
Certificate of Formation of Parallel, L.L.C. (Incorporated by
reference to Exhibit No. 3.3 of the Registrants Registration
Statement on Form S-3, No. 333-119725 filed on October 13, 2004) |
|
|
|
3.4
|
|
Limited Liability Company Agreement of Parallel, L.L.C. (Incorporated
by reference to Exhibit No. 3.4 of the Registrants Statement on Form
S-3, No. 333-119725 filed on October 13, 2004) |
|
|
|
3.5
|
|
Certificate of Limited Partnership of Parallel, L.P. (Incorporated by
reference to Exhibit No. 3.5 of the Registrants Registration
Statement on Form S-3, No. 333-119725 filed on October 13, 2004) |
|
|
|
3.6
|
|
Agreement of Limited Partnership of Parallel, L.P. (Incorporated by
reference to Exhibit No. 3.6 of the Registrants Registration
Statement on Form S-3, No. 333-119725 filed on October 13, 2004) |
|
|
|
4.1
|
|
Certificate of Designations, Preferences and Rights of Serial
Preferred Stock 6% Convertible Preferred Stock (Incorporated by
reference to Exhibit 4.1 of Form 10-Q of the Registrant for the fiscal
quarter ended June 30, 2004) |
|
|
|
4.2
|
|
Certificate of Designation, Preferences and Rights of Series A
Preferred Stock (Incorporated by reference to Exhibit 4.2 of Form 10-K
of the Registrant for the fiscal year ended December 31, 2000) |
|
|
|
4.3
|
|
Rights Agreement, dated as of October 5, 2000, between the Registrant
and Computershare Trust Company, Inc., as Rights Agent (Incorporated
by reference to Exhibit 4.3 of Form 10-K of the Registrant for the
fiscal year ended December 31, 2000) |
|
|
|
4.4
|
|
Form of Indenture relating to senior debt securities of the Registrant
(Incorporated by reference to Exhibit No. 4.4 of the Registrants
Statement on Form S-3, No. 333-119725 filed on October 13, 2004) |
|
|
|
4.5
|
|
Form of Indenture relating to subordinated debt securities of the
Registrant (Incorporated by reference to Exhibit No. 4.5 of the
Registrants Registration Statement on Form S-3, No. 333-119725 filed
on October 13, 2004) |
|
|
|
4.6
|
|
Form of common stock certificate of the Registrant (Incorporated by
reference to Exhibit No. 4.6 of the Registrants Registration
Statement on Form S-3, No. 333-119725 filed on October 13, 2004) |
|
|
|
4.7
|
|
Warrant Purchase Agreement, dated November 20, 2001, between the
Registrant and Stonington Corporation (Incorporated by reference to
Exhibit 4.7 of Form 10-K of the Registrant for the fiscal year ended
December 31, 2004) |
|
|
|
|
|
|
4.8
|
|
Warrant Purchase Agreement, dated December 23, 2003, between the Registrant and
Stonington Corporation (Incorporated by reference to Exhibit 4.8 of Form 10-K
of the Registrant for the fiscal year ended December 31, 2004) |
|
|
|
|
|
Executive Compensation Plans and Arrangements (Exhibit No.s 10.1 through 10.8): |
|
|
|
10.1
|
|
1992 Stock Option Plan (Incorporated by reference to Exhibit 10.1 of Form 10-K
of the Registrant for the fiscal year ended December 31, 2004) |
|
|
|
10.2
|
|
Merrill Lynch, Pierce, Fenner & Smith Incorporated Prototype Simplified
Employee Pension Plan (Incorporated by reference to Exhibit 10.6 of the
Registrants Form 10-K for the fiscal year ended December 31, 1995) |
|
|
|
*10.3
|
|
Non-Employee Directors Stock Option Plan |
|
|
|
10.4
|
|
1998 Stock Option Plan (Incorporated by reference to Exhibit 10.7 of Form 10-K
of the Registrant for the fiscal year ended December 31, 1998) |
|
|
|
10.5
|
|
Form of Incentive Award Agreements, dated December 12, 2001, between the
Registrant and Thomas R. Cambridge, Larry C. Oldham, Eric A. Bayley and John S.
Rutherford granting 2,394 Unit Equivalent Rights to Mr. Cambridge; 9,564 Unit
Equivalent Rights to Mr. Oldham; 2,869 Unit Equivalent Rights to Mr. Bayley;
and 7,173 Unit Equivalent Rights to Mr. Rutherford (Incorporated by reference
to Exhibit 10.8 of Form 10-K of the Registrant for the fiscal year ended
December 31, 2001) |
|
|
|
10.6
|
|
2001 Non-Employee Directors Stock Option Plan (Incorporated by reference to
Exhibit 10.7 of the Registrants Form 10-Q Report for the first fiscal quarter
ended March 31, 2004) |
|
|
|
10.7
|
|
2004 Non-Employee Director Stock Grant Plan (Incorporated by reference to
Exhibit 10.1 of the Registrants Form 8-K Report dated September 22, 2004) |
|
|
|
10.8
|
|
Incentive and Retention Plan (Incorporated by reference to Exhibit 10.1 of the
Registrants Form 8-K Report dated September 23, 2004 and filed with the
Securities and Exchange Commission on September 29, 2004) |
|
|
|
10.9
|
|
Certificate of Formation of First Permian, L.L.C. (Incorporated by reference to
Exhibit 10.1 of the Registrants Form 8-K Report dated June 30, 1999) |
|
|
|
10.10
|
|
Limited Liability Company Agreement of First Permian, L.L.C. (Incorporated by
reference to Exhibit 10.2 of the Registrants Form 8-K Report dated June 30,
1999) |
|
|
|
10.11
|
|
Amended and Restated Limited Liability Company Agreement of First Permian,
L.L.C. dated as of May 31, 2000 (Incorporated by reference to Exhibit 10.16 of
Form 10-K of the Registrant for the fiscal year ended December 31, 2000) |
|
|
|
10.12
|
|
Credit Agreement, dated June 30, 1999, by and among First Permian, L.L.C.,
Parallel Petroleum Corporation, Baytech, Inc., and Bank One, Texas, N.A.
(Incorporated by reference to Exhibit 10.6 of the Registrants Form 8-K Report
dated June 30, 1999) |
|
|
|
|
|
|
10.13
|
|
Limited Guaranty, dated June 30, 1999, by and among First Permian,
L.L.C., Parallel Petroleum Corporation and Bank One, Texas, N.A.
(Incorporated by reference to Exhibit 10.7 of the Registrants Form
8-K Report dated June 30, 1999) |
|
|
|
10.14
|
|
Second Restated Credit Agreement, dated October 25, 2000, among
First Permian, L.L.C., Bank One, Texas, N.A., and Bank One Capital
Markets, Inc. (Incorporated by reference to Exhibit 10.22 of Form
10-K of the Registrant for the fiscal year ended December 31, 2000) |
|
|
|
10.15
|
|
Loan Agreement, dated as of January 25, 2002, between the Registrant
and First American Bank, SSB (Incorporated by reference to Exhibit
10.25 of Form 10-K of the Registrant for the fiscal year ended
December 31, 2001) |
|
|
|
10.16
|
|
Purchase and Sale Agreement, dated as of November 27, 2002, among
JMC Exploration, Inc., Arkoma Star L.L.C., Parallel, L.P. and
Texland Petroleum, Inc. (Incorporated by reference to Exhibit 10.1
of Form 8-K of the Registrant, dated December 20, 2002) |
|
|
|
10.17
|
|
First Amended and Restated Credit Agreement, dated December 20,
2002, by and among Parallel Petroleum Corporation, Parallel, L.P.,
Parallel, L.L.C., First American Bank, SSB, Western National Bank
and BNP Paribas (Incorporated by reference to Exhibit 10.2 of Form
8-K of the Registrant, dated December 20, 2002) |
|
|
|
10.18
|
|
Guaranty dated December 20, 2002, between Parallel, L.L.C. and First
American Bank, SSB, as Agent (Incorporated by reference to Exhibit
10.3 of Form 8-K of the Registrant, dated December 20, 2002) |
|
|
|
10.19
|
|
First Amendment to First Amended and Restated Credit Agreement,
dated as of September 12, 2003, by and among Parallel Petroleum
Corporation, Parallel, L.P., Parallel, L.L.C., First American Bank,
SSB, Western National Bank, and BNP Paribas (Incorporated by
reference to Exhibit 10.29 of Form 10-Q of the Registrant for the
quarter ended September 30, 2003) |
|
|
|
10.20
|
|
Second Amended and Restated Credit Agreement, dated September 27,
2004, by and among Parallel Petroleum Corporation, Parallel, L.P.,
Parallel, L.L.C., First American Bank, SSB, BNP Paribas, Citibank,
F.S.B. and Western National Bank (Incorporated by reference to
Exhibit 10.1 of the Registrants Form 8-K Report dated September 27,
2004 and filed with the Securities and Exchange Commission on
October 1, 2004) |
|
|
|
10.21
|
|
Agreement of Limited Partnership of West Fork Pipeline Company LP
(Incorporated by reference to Exhibit 10.21 of Form 10-K of the
Registrant for the fiscal year ended December 31, 2004) |
|
|
|
10.22
|
|
First Amendment to Second Amended and Restated Credit Agreement,
dated as of December 27, 2004, by and among Parallel Petroleum
Corporation, Parallel, L.P., Parallel, L.L.C., First American Bank,
SSB, BNP Paribas, Citibank, F.S.B. and Western National Bank
(Incorporated by reference to Exhibit 10.1 of the Registrants Form
8-K Report dated December 30, 2004 and filed with the Securities and
Exchange Commission on December 30, 2004) |
|
|
|
10.23
|
|
Second Amendment to Second Amended and Restated Credit Agreement,
dated as of April 1, 2005, by and among Parallel Petroleum
Corporation, Parallel, L.P., Parallel, L.L.C., First American Bank,
SSB, BNP Paribas, Citibank, F.S.B. and Western National Bank
(Incorporated by reference to Exhibit 10.1 of the Registrants Form
8-K Report dated April 4, 2005 and filed with the Securities and
Exchange Commission on April 8, 2005) |
|
|
|
|
|
|
14
|
|
Code of Ethics (Incorporated by reference to Exhibit No. 14 of the
Registrants Form 10-K Report for the fiscal year ended December 31,
2003 and filed with the Securities and Exchange Commission on March
22, 2004) |
|
|
|
21
|
|
Subsidiaries (Incorporated by reference to Exhibit No. 21 of the
Registrants Form 10-K Report for the fiscal year ended December 31,
2003 and filed with the Securities and Exchange Commission on March
22, 2004) |
|
|
|
*31.1
|
|
Certification of Principal Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the Sarbanes
Oxley Act of 2002 |
|
|
|
*31.2
|
|
Certification of Principal Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the Sarbanes
Oxley Act of 2002 |
|
|
|
*32.1
|
|
Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes -
Oxley Act of 2002. |
|
|
|
*32.2
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes -
Oxley Act of 2002. |