e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(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 September 30, 2008 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 000-13305
PARALLEL PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware
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75-1971716 |
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(State of other jurisdiction of
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(I.R.S. Employer Identification No.) |
incorporation or organization) |
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1004 N. Big Spring, Suite 400,
Midland, Texas
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79701 |
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(Address of Principal Executive Offices)
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(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,
a non-accelerated filer, or a smaller reporting company.
See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer þ |
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Accelerated filer o |
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Non-accelerated filer o
(Do not check if a smaller reporting company) |
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Smaller Reporting Company 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
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to
be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court. Yes o No o
As of October 30, 2008, the registrant had outstanding 41,597,161
shares of common stock.
PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PARALLEL PETROLEUM CORPORATION
Consolidated Balance Sheets
($ in thousands)
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September 30, |
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December 31, |
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2008 |
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2007 |
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(unaudited) |
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ASSETS
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Current assets: |
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Cash and cash equivalents |
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$ |
10,717 |
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$ |
7,816 |
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Accounts receivable: |
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Oil and
natural gas sales |
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28,263 |
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20,499 |
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Joint interest owners and other, net of allowance for
doubtful account of $50 |
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2,736 |
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2,460 |
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Affiliates and joint ventures |
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5 |
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3,970 |
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31,004 |
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26,929 |
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Other current assets |
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357 |
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449 |
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Derivatives |
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4,180 |
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151 |
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Deferred tax asset |
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5,894 |
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10,293 |
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Total current assets |
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52,152 |
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45,638 |
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Property and equipment, at cost: |
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Oil and natural gas properties, full cost method (including $128,464 and
$86,402 not subject to depletion) |
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830,290 |
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648,576 |
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Other |
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3,317 |
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2,877 |
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833,607 |
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651,453 |
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Less accumulated depreciation, depletion and amortization |
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(176,731 |
) |
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(145,482 |
) |
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Net property and equipment |
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656,876 |
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505,971 |
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Restricted cash |
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80 |
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78 |
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Investment in pipelines and gathering system ventures |
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332 |
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8,638 |
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Other assets, net of accumulated amortization of $1,469 and $1,193 |
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4,204 |
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2,768 |
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Derivatives |
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5,013 |
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$ |
718,657 |
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$ |
563,093 |
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The accompanying notes are an integral part of these Consolidated Financial Statements.
(1)
PARALLEL PETROLEUM CORPORATION
Consolidated Balance Sheets
($ in thousands)
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September 30, |
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December 31, |
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2008 |
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2007 |
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(unaudited) |
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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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$ |
58,868 |
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$ |
47,848 |
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Asset retirement obligations |
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780 |
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598 |
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Derivative obligations |
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21,506 |
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30,424 |
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Put premium obligations |
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464 |
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Total current liabilities |
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81,618 |
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78,870 |
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Long-term liabilities : |
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Revolving credit facility |
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162,500 |
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60,000 |
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Senior notes (principal amount $150,000) |
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145,758 |
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145,383 |
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Asset retirement obligations |
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5,058 |
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4,339 |
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Derivative obligations |
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19,357 |
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13,194 |
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Put premium obligations |
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2,906 |
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Deferred tax liability |
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36,323 |
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26,045 |
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Total long-term liabilities |
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371,902 |
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248,961 |
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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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Common stock par value $0.01 per share, authorized 60,000,000 shares,
issued and outstanding 41,597,161 and 41,252,644 |
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415 |
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412 |
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Additional paid-in capital |
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199,597 |
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196,457 |
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Retained earnings |
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65,125 |
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38,393 |
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Total stockholders equity |
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265,137 |
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235,262 |
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$ |
718,657 |
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$ |
563,093 |
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The accompanying notes are an integral part of these Consolidated Financial Statements.
(2)
PARALLEL PETROLEUM CORPORATION
Consolidated Statements of Operations
(unaudited)
(in thousands, except per share data)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2008 |
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2007 |
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2008 |
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2007 |
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Oil and natural gas revenues: |
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Oil and natural gas sales |
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$ |
56,201 |
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$ |
29,487 |
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$ |
156,217 |
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$ |
79,957 |
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Cost and expenses: |
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Lease operating expense |
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7,539 |
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6,445 |
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21,772 |
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16,420 |
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Production taxes |
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2,836 |
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1,448 |
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8,121 |
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3,696 |
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Production tax refund |
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(1,209 |
) |
General and administrative |
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3,125 |
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2,492 |
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8,958 |
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7,737 |
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Depreciation, depletion and amortization |
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11,551 |
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|
7,821 |
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|
31,386 |
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|
21,680 |
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Total costs and expenses |
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25,051 |
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18,206 |
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70,237 |
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48,324 |
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Operating income |
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31,150 |
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11,281 |
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85,980 |
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31,633 |
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Other income (expense), net: |
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Gain (loss) on derivatives not classified as hedges |
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65,661 |
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(4,556 |
) |
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(27,834 |
) |
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(11,161 |
) |
Interest and other income |
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20 |
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55 |
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|
85 |
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|
163 |
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Interest expense |
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|
(6,139 |
) |
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|
(5,429 |
) |
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(17,025 |
) |
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(13,449 |
) |
Cost of debt retirement |
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|
(102 |
) |
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|
(760 |
) |
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|
(102 |
) |
|
|
(760 |
) |
Other expense |
|
|
(11 |
) |
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|
(76 |
) |
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(12 |
) |
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|
(91 |
) |
Equity in gain (loss) of pipelines and gathering system ventures |
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|
(2 |
) |
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|
(69 |
) |
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380 |
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|
(663 |
) |
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Total other income (expense), net |
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59,427 |
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(10,835 |
) |
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(44,508 |
) |
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(25,961 |
) |
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Income before income taxes |
|
|
90,577 |
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|
446 |
|
|
|
41,472 |
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|
5,672 |
|
Income tax expense, deferred |
|
|
(31,900 |
) |
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(153 |
) |
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(14,740 |
) |
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(2,011 |
) |
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Net income |
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$ |
58,677 |
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|
$ |
293 |
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$ |
26,732 |
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$ |
3,661 |
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Net income per common share: |
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Basic |
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$ |
1.41 |
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|
$ |
0.01 |
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$ |
0.65 |
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|
$ |
0.10 |
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Diluted |
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$ |
1.41 |
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|
$ |
0.01 |
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|
$ |
0.64 |
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$ |
0.09 |
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Weighted average common shares outstanding: |
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Basic |
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|
41,566 |
|
|
|
38,033 |
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|
|
41,429 |
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|
|
37,791 |
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Diluted |
|
|
41,733 |
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|
|
38,767 |
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|
|
41,803 |
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|
|
38,806 |
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The accompanying notes are an integral part of these Consolidated Financial Statements.
(3)
PARALLEL PETROLEUM CORPORATION
Consolidated Statements of Stockholders Equity
Year-Ended December 31, 2007 and as of September 30, 2008
(unaudited)
(in thousands)
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Common stock |
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Additional |
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Total |
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Number of |
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paid-in |
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Retained |
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stockholders |
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shares |
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Amount |
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|
capital |
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earnings |
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|
equity |
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Balance |
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|
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|
December 31, 2007 |
|
|
41,253 |
|
|
$ |
412 |
|
|
$ |
196,457 |
|
|
$ |
38,393 |
|
|
$ |
235,262 |
|
Common stock issued to directors |
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|
22 |
|
|
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|
335 |
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|
|
|
|
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|
335 |
|
Warrants exercised, net of transaction costs |
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|
148 |
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|
1 |
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|
795 |
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|
796 |
|
Options exercised |
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|
174 |
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|
2 |
|
|
|
733 |
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|
|
|
|
|
|
735 |
|
Stock offering costs |
|
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|
|
|
|
|
|
|
|
368 |
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|
|
|
|
|
|
368 |
|
Stock option expense |
|
|
|
|
|
|
|
|
|
|
772 |
|
|
|
|
|
|
|
772 |
|
Tax benefit
of stock option exercise in excess of compensation |
|
|
|
|
|
|
|
|
|
|
137 |
|
|
|
|
|
|
|
137 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,732 |
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|
|
26,732 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
41,597 |
|
|
$ |
415 |
|
|
$ |
199,597 |
|
|
$ |
65,125 |
|
|
$ |
265,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
(4)
PARALLEL PETROLEUM CORPORATION
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2008 and 2007
(unaudited)
($ in thousands)
|
|
|
|
|
|
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|
|
2008 |
|
|
2007 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
26,732 |
|
|
$ |
3,661 |
|
Adjustments to reconcile net income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation, depletion and amortization |
|
|
31,386 |
|
|
|
21,680 |
|
Gain on sale of automobiles |
|
|
|
|
|
|
(25 |
) |
Accretion of asset retirement obligation |
|
|
275 |
|
|
|
243 |
|
Accretion of senior notes discount |
|
|
375 |
|
|
|
114 |
|
Deferred income tax expense |
|
|
14,740 |
|
|
|
2,011 |
|
Loss on derivatives not classified as hedges |
|
|
27,834 |
|
|
|
11,161 |
|
Amortization of deferred financing cost |
|
|
509 |
|
|
|
372 |
|
Cost of debt retirement |
|
|
102 |
|
|
|
760 |
|
Accretion of interest on put obligations |
|
|
45 |
|
|
|
|
|
Common stock issued in lieu of cash for directors fees |
|
|
335 |
|
|
|
96 |
|
Stock option expense |
|
|
772 |
|
|
|
161 |
|
Equity in (gain) loss of pipelines and gathering system ventures |
|
|
(380 |
) |
|
|
663 |
|
Bad debt expense |
|
|
|
|
|
|
(30 |
) |
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Other assets, net |
|
|
(1,409 |
) |
|
|
(146 |
) |
Restricted cash |
|
|
(2 |
) |
|
|
272 |
|
Accounts receivable |
|
|
(4,001 |
) |
|
|
3,438 |
|
Other current assets |
|
|
92 |
|
|
|
713 |
|
Accounts payable and accrued liabilities |
|
|
11,020 |
|
|
|
6,385 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
108,425 |
|
|
|
51,529 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Additions to oil and natural gas properties |
|
|
(172,381 |
) |
|
|
(110,015 |
) |
Proceeds from disposition of oil and natural gas properties
and other property and equipment |
|
|
|
|
|
|
1,711 |
|
Additions to other property and equipment |
|
|
(577 |
) |
|
|
(340 |
) |
Settlements on derivative instruments |
|
|
(36,306 |
) |
|
|
(9,875 |
) |
Net investment in pipelines and gathering system ventures |
|
|
(21 |
) |
|
|
(2,830 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(209,285 |
) |
|
|
(121,349 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Borrowings from bank line of credit |
|
|
102,500 |
|
|
|
68,500 |
|
Payments on bank line of credit |
|
|
|
|
|
|
(94,500 |
) |
Payment on term loan |
|
|
|
|
|
|
(50,000 |
) |
Senior notes (principal amount $150,000) |
|
|
|
|
|
|
145,186 |
|
Deferred financing cost |
|
|
(270 |
) |
|
|
(2,346 |
) |
Proceeds from exercise of stock options and warrants |
|
|
1,531 |
|
|
|
2,388 |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
103,761 |
|
|
|
69,228 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
2,901 |
|
|
|
(592 |
) |
Cash and cash equivalents at beginning of period |
|
|
7,816 |
|
|
|
5,910 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
10,717 |
|
|
$ |
5,318 |
|
|
|
|
|
|
|
|
(5)
PARALLEL PETROLEUM CORPORATION
Consolidated Statements of Cash Flows Continued
Nine Months Ended September 30, 2008 and 2007
(unaudited)
($ in thousands)
|
|
|
|
|
|
|
|
|
Non-cash financing and investing activities: |
|
|
|
|
|
|
|
|
Deferred purchase of derivative puts |
|
$ |
3,325 |
|
|
$ |
|
|
Oil and natural gas properties asset retirement obligations |
|
$ |
626 |
|
|
$ |
(505 |
) |
Property transfer: |
|
|
|
|
|
|
|
|
Transfer to oil and natural gas properties |
|
$ |
8,707 |
|
|
$ |
|
|
Transfer from equity investment |
|
$ |
(8,707 |
) |
|
$ |
|
|
Non-cash exchange of oil and natural gas properties |
|
|
|
|
|
|
|
|
Properties received in exchange |
|
$ |
|
|
|
$ |
6,463 |
|
Properties delivered in exchange |
|
$ |
|
|
|
$ |
(5,495 |
) |
Other transactions: |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
19,385 |
|
|
$ |
10,451 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
(6)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
NOTE 1. |
|
DESCRIPTION OF BUSINESS NATURE OF OPERATIONS AND BASIS OF PRESENTATION |
Parallel was incorporated in Texas on November 26, 1979, and reincorporated in the State of
Delaware on December 18, 1984.
Parallel Petroleum Corporation, or Parallel, is engaged in the acquisition, development and
exploitation of long-lived oil and natural gas reserves and, to a lesser extent, exploring for new
oil and natural gas reserves. The majority of our producing properties are in the:
|
|
|
Permian Basin of west Texas and New Mexico; and |
|
|
|
|
Fort Worth Basin of north Texas. |
The financial information included herein is unaudited. The balance sheet as of December 31,
2007 has been derived from our audited Consolidated Financial Statements as of December 31, 2007.
The unaudited financial 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 2007 amounts
have been conformed to the 2008 financial statement presentation.
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 Quarterly Report on Form 10-Q under
certain rules and regulations of the Securities and Exchange Commission. The financial statements
included in this report 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,
2007.
Unless otherwise indicated or unless the context otherwise requires, all references to we,
us, our, Parallel, or Company mean the registrant, Parallel Petroleum Corporation and,
where applicable, its former consolidated subsidiaries.
NOTE 2. STOCKHOLDERS EQUITY
Parallel accounts for stock based compensation in accordance with the Financial Accounting
Standards Board (FASB) Statement of Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment (SFAS 123(R)).
Options
For the three months ended September 30, 2008 and 2007, we recognized compensation expense of
approximately $545,000 and $101,000, respectively, with a tax benefit of approximately $185,000 and
$34,000, respectively. For the nine months ended September 30, 2008 and 2007, Parallel recognized
compensation expense of approximately $772,000 and $161,000, respectively, with a tax benefit of
approximately $263,000 and $55,000, respectively, associated with our stock option grants.
During June 2007, we revised our estimate of expected forfeitures of stock options granted to
directors due to the resignation of a director and the subsequent forfeiture of 40,000 stock
options held by the director. As a result, we revised our estimate of the grant date fair value of
shares expected to ultimately vest under our stock option plan by approximately $283,000. As a consequence, general and
administrative expenses during the three months ended June 30, 2007 were reduced by approximately
$154,000 which
(7)
includes a cumulative adjustment for amounts previously expensed and associated with
options estimated to be forfeited or surrendered.
The following table presents future stock-based compensation expense for our outstanding stock
options which we expect to recognize during the indicated vesting periods:
|
|
|
|
|
|
|
($ in thousands) |
|
Fourth quarter 2008 |
|
|
549 |
|
2009 |
|
|
1,534 |
|
2010 |
|
|
789 |
|
2011 and 2012 |
|
|
480 |
|
|
|
|
|
Total |
|
$ |
3,352 |
|
|
|
|
|
At September 30, 2008, options to purchase 293,000 shares of common stock were outstanding and
vested. At that same date, options to purchase 446,000 shares were outstanding and unvested.
During the nine months ended September 30, 2008, options to purchase 355,000 shares were granted to
officers and employees, options to purchase 174,000 shares of common stock were exercised and no
options expired or were forfeited.
The fair value of each option award is estimated on the date of grant. The fair value of
stock options granted prior to and remaining outstanding at September 30, 2008 and that covered
shares subject to future vesting at that date were determined using the Black-Scholes option
valuation method and the assumptions noted in the following table. Expected volatilities are based
on implied volatilities from traded options and historical volatility of our stock. The expected
term of the options granted used in the Black-Scholes model represent the period of time that
options granted are expected to be outstanding. Risk free rates are based on the U.S. Treasury,
Daily Treasury Yield Curve Rate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
2005 |
|
2001 |
Expected volatility |
|
|
46.50 |
% |
|
|
52.52 |
% |
|
|
54.20 |
% |
|
|
57.95 |
% |
Weighted-average volatility |
|
|
46.50 |
% |
|
|
52.52 |
% |
|
|
54.20 |
% |
|
|
57.95 |
% |
Expected dividends |
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
Expected term (in years) |
|
|
6.25 |
|
|
|
5.75 |
|
|
|
6.50 |
|
|
|
7.50 |
|
Risk-free rate |
|
|
3.81%-3.86 |
% |
|
|
4.89 |
% |
|
|
4.20 |
% |
|
|
5.05 |
% |
A summary of the stock option activity as of September 30, 2008 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Remaining |
|
|
|
|
|
|
|
|
|
|
Average Exercise |
|
|
Contractual |
|
|
Aggregate |
|
|
|
Options |
|
|
Price |
|
|
Term |
|
|
Intrinsic Value |
|
|
|
(in thousands) |
|
|
|
|
|
|
(years) |
|
|
($ in thousands) |
|
Outstanding December 31, 2007 |
|
|
558 |
|
|
$ |
7.03 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
355 |
|
|
$ |
21.02 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(174 |
) |
|
$ |
4.23 |
|
|
|
|
|
|
|
|
|
Surrendered |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding September 30, 2008 |
|
|
739 |
|
|
$ |
14.41 |
|
|
|
9.0 |
|
|
$ |
1,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2008 |
|
|
293 |
|
|
$ |
7.30 |
|
|
|
4.9 |
|
|
$ |
995 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands) |
Average weighted grant date fair value of options issued and unvested, September 30, 2008 |
|
$ |
4,383 |
|
Average weighted grant date fair value of options issued and outstanding, September 30, 2008 |
|
$ |
5,617 |
|
(8)
We have outstanding stock options granted under six separate plans. Options expire 10 years
from the date of grant and become exercisable at rates ranging from 10% each year up to 50% each
year. The exercise price cannot be less than the fair market value per share of common stock on
the date of grant.
For the nine months ended September 30, 2008 cash received from the exercise of stock options
was approximately $735,000 with an estimated $137,000 tax benefit.
Restricted Stock
On June 12, 2008, 10,000 shares of restricted stock were awarded to a non-employee director
under our 2008 Long-Term Incentive Plan. The fair value of the restricted stock award was based on
the last sales price of our common stock on the Nasdaq Global Market on the date of grant. For
the three and nine months ended September 30, 2008, we recognized compensation expense of
approximately $24,000 and $81,000, respectively for restricted stock. These shares vest in four
equal increments on June 12th of each year, commencing on June 12, 2008.
The following table presents future stock-based compensation expense for the restricted stock
award, which we expect to recognize during the indicated vesting periods:
|
|
|
|
|
|
|
($ in thousands) |
|
Fourth quarter 2008 |
|
|
24 |
|
2009 |
|
|
67 |
|
2010 |
|
|
29 |
|
2011 |
|
|
7 |
|
|
|
|
|
Total |
|
$ |
127 |
|
|
|
|
|
A summary of restricted stock activity as of September 30, 2008 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
|
|
|
|
|
Award Date |
|
|
Contractual |
|
|
|
Restricted Stock |
|
|
Fair Value |
|
|
Term |
|
|
|
|
|
|
|
|
|
|
|
(years) |
|
Outstanding December 31, 2007 |
|
|
|
|
|
$ |
|
|
|
|
|
|
Granted |
|
|
10,000 |
|
|
$ |
20.91 |
|
|
|
|
|
Vested |
|
|
(2,500 |
) |
|
$ |
20.91 |
|
|
|
|
|
Surrendered |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested shares at September 30, 2008 |
|
|
7,500 |
|
|
$ |
20.91 |
|
|
|
2.7 |
|
|
|
|
|
|
|
|
|
|
|
|
Stock Awards
For the three and nine months ended September 30, 2008, compensation expense related to stock
awards totaled approximately $94,000 and $254,000, respectively.
On June 12, 2008, each of our four non-employee directors was awarded 1,912 shares of common
stock under our 2008 Long-Term Incentive Plan. The fair value of the common stock awarded of
$20.91 per share was based on the last sales price of our common stock on the Nasdaq Global Market
on the date of grant. The shares vested 100% on the date of the grant.
On
July 1, 2008, each of our four non-employee directors were
awarded 1,153 shares of common stock under our 2004 Non-Employee
Director Stock Grant Plan. The fair value of common stock awarded of
$20.25 per share was based on the average of the high and low sales
price of our common stock on the Nasdaq Global Market on the date of
grant. The shares vested 100% on the date of the grant.
(9)
Warrants
On April 15, 2008, our registration statement relating to 300,030 shares of common stock
issuable upon the exercise of outstanding warrants was declared effective by the Securities and
Exchange Commission. The warrants were issued in our initial public offering in 1980, as a
component of units of common stock and warrants that were sold by us. Under terms of the warrants,
holders of the warrants were entitled to purchase one share of common stock for each warrant
exercised. The warrants were exercisable at $6.00 per share at any time on or before 5:00 p.m.,
Mountain Time, on May 15, 2008, at which time the warrants expired. Between April 15, 2008 and May
15, 2008 a total of 148,757 warrants were exercised for net proceeds of approximately $796,000.
NOTE 3. CREDIT FACILITIES
In the past, we have maintained two separate credit facilities. One of these credit facilities
is our Fourth Amended and Restated Credit Agreement, dated May 16, 2008, or Revolving Credit
Agreement, with a group of bank lenders that provide us with a revolving line of credit having a
borrowing base limitation of $230.0 million at September 30, 2008. The total amount that we can
borrow and have outstanding at any one time is limited to the lesser of $600.0 million or the
borrowing base established by the lenders. At September 30, 2008, the principal amount outstanding
under our revolving credit facility was $162.5 million, excluding $445,000 reserved for our letters
of credit.
Our second credit facility was a five year term loan facility provided to us under a Second
Lien Term Loan Agreement, or the Second Lien Agreement, with a group of banks and other lenders.
The Second Lien Agreement was paid in its entirety and terminated on July 31, 2007 with our payment
to the lenders of $50.2 million, including interest.
Revolving Credit Facility
Our Revolving Credit Agreement allows us to borrow, repay and reborrow amounts available under
the revolving credit facility. The amount of the borrowing base is based primarily upon the
estimated value of our oil and natural gas reserves. The borrowing base 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 loans exceeds the borrowing base, we must either
provide additional collateral to the lenders or repay the outstanding principal of our revolving
credit facility in an amount equal to the excess. Except for principal payments that may be
required because of our outstanding loans being in excess of the borrowing base, interest only is
payable monthly.
As of September 30, 2008, our group of bank lenders included Citibank, N.A., BNP Paribas,
Compass Bank, Comerica Bank, Bank of Scotland plc, Texas Capital Bank, N.A. and Western National Bank.
Descriptions of the principal
terms of the Revolving Credit Agreement, prior to its amendment on October 31, 2008, are set forth in
the following paragraphs.
Loans made to us under this revolving credit facility bear interest at the base rate of
Citibank, N.A. or the LIBOR rate, at our election. Generally, Citibanks base rate is equal to
its prime rate as announced by it from time to time.
The LIBOR rate is generally equal to the sum of (a) the rate designated as British Bankers
Association Interest Settlement Rates and offered in one, two, three, six or twelve month interest
periods for deposits of $1.0 million, and (b) a margin ranging from 2.00% to 2.50%, depending upon
the outstanding principal amount of our loan. If the principal amount outstanding is equal to or
greater than 75% of the borrowing base, the margin is 2.50%. If the principal amount outstanding is
equal to or greater
(10)
than 50%, but less than 75% of the borrowing base, the margin is 2.25%. If the principal
amount outstanding is less than 50% of the borrowing base, the margin is 2.00%.
The interest rate we are required to pay on our borrowings, including the applicable margin,
may never be less than 4.75%. At September 30, 2008, our base rate, plus the applicable margin, was
5.0% on $162.5 million, the outstanding principal amount of our revolving loan on that same date.
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; provided
that if the applicable interest period is longer than three months, interest is payable at
three-month intervals following the first day of such interest period.
If the total outstanding borrowings under the revolving credit facility are less than the
borrowing base, we are required to pay an unused commitment fee to the lenders in an amount equal
to .25% of the daily average of the unadvanced portion of the borrowing base. The fee is payable
quarterly.
If the borrowing base is increased, we are also required to pay a fee of .375% on the amount
of any increase.
The Revolving Credit Agreement contains various restrictive covenants, including (i)
maintenance of a minimum current ratio, (ii) maintenance of a maximum ratio of funded indebtedness
to earnings before interest, income taxes, depreciation, depletion and amortization, (iii)
maintenance of a minimum net worth, (iv) prohibition of payment of dividends and (v) restrictions
on incurrence of additional debt. We have pledged substantially all of our producing oil and
natural gas properties to secure the repayment of our indebtedness under the Revolving Credit
Agreement.
All outstanding principal and accrued and unpaid interest under the revolving credit facility
is due and payable on December 31, 2013. The maturity date of our outstanding loans may be
accelerated by the lenders upon the occurrence of an event of default under the Revolving Credit
Agreement.
As of September 30, 2008 we were in compliance with our Revolving Credit Agreement.
As a result of recent conditions in the capital markets and all of the surrounding
uncertainties, we concluded that it would be prudent to draw an additional $62.5 million under our line of
credit in order to assure availability of and access to these funds. However, in view of the
difficulties experienced by many banking institutions, it is possible that we could also become
exposed to certain risks faced by our bank lenders, including legal, political, regulatory,
operational and other risks. We depend on our ability to withdraw funds on short notice to meet our
obligations. A lenders insolvency or inability to continue participating in our syndicate of banks
in the ordinary course of business could have a material adverse effect on our financial condition
and results of operations. Our lender group at September 30, 2008 was made up of seven lenders, and no one lender held more
than 24% of the facility at September 30, 2008.
For information about the amendment of the Revolving Credit Agreement on October 31, 2008, see Note 12 Subsequent Events.
Senior Notes
On July 31, 2007, we completed a private offering of unsecured senior notes, or the senior
notes in the principal amount of $150.0 million. At September 30, 2008, the carrying value of our
senior notes was $145.8 million. The senior notes mature on August 1, 2014 and bear interest at
10.25%, per annum, which is payable semi-annually beginning on February 1, 2008. Prior to August 1,
2010, we may redeem up to 35% of the senior notes for a price equal to 110.250% of the original
principal amount of the senior notes with the proceeds of certain equity offerings. On or after
August 1, 2011 we may redeem all or some of the senior notes at a redemption price that will
decrease from 105.125% of the principal amount of the senior notes to 100% of the principal amount
on August 1, 2013. In addition, prior to August 1, 2011, we may redeem some or all of the senior
notes at a redemption price equal to 100% of the principal amount of the
senior notes to be redeemed, plus a make-whole premium, plus any accrued and unpaid interest.
Generally,
(11)
the make-whole premium is an amount equal to the greater of (a) 1% of the principal
amount of the senior notes being redeemed and (b) the excess of the present value of the redemption
price of such notes as of August 1, 2011 plus all required interest payments due through August 1,
2011 (computed at a discount rate equal to a specified U.S. Treasury Rate plus 50 basis points),
over the principal amount of the senior notes being redeemed.
The indenture governing the senior notes restricts our ability to: (i) borrow money; (ii)
issue redeemable and preferred stock; (iii) pay distributions or dividends; (iv) make investments;
(v) create liens without securing the senior notes; (vi) enter into agreements that restrict
dividends from subsidiaries; (vii) sell certain assets or merge with or into other companies;
(viii) enter into transactions with affiliates; (ix) guarantee indebtedness; and (x) enter into new
lines of business.
As of September 30, 2008 we were in compliance with our Senior Notes Agreement.
Interest Accrued
For the nine months ended September 30, 2008, the aggregate interest accrued under our
revolving credit facility and our senior notes was approximately $16.2 million. Bank fees and note
discount amortization was approximately $986,000 and interest capitalized was approximately $67,000
for the nine months ended September 30, 2008.
NOTE 4. PROPERTY EXCHANGE AND ACQUISITIONS
On February 23, 2007, we entered into a property exchange agreement with an unrelated third
party. As a result of the exchange, we acquired an additional 9,233 net undeveloped acres in our
New Mexico Wolfcamp project area with an estimated fair value of approximately $6.5 million. We
are the operator of wells drilled on this undeveloped acreage. Under the terms of the exchange
agreement, we assigned to the third party interests in 37 non-operated wells and 3,250 net
undeveloped non-operated acres in the New Mexico Wolfcamp project area, along with cash of
approximately $969,000. In accordance with the full cost method of accounting, no gain or loss was
recorded on the transaction.
On June 26, 2008 we exercised a preferential right and purchased the interests owned by an
unrelated third party, in our operated Diamond M properties in Scurry County, Texas, effective May
1, 2008. The purchase price, approximately $35.5 million, was financed with borrowings under our
revolving credit facility.
The acquired interest consisted of two components, including an 89% working interest in the
Base production and reserves and a 22.3% working interest in the production and reserves above the
Base. As used in our original trade agreement with the unrelated third party, the Base production
and reserves generally referred to and meant future production and reserves defined by an
established base production decline curve as of December 19, 2001. Prior to this acquisition, we
did not own an interest in the Base production and reserves but owned a 65.7% working interest in
the production and reserves above the Base. This acquisition resulted in an increase in our
current ownership in the Base production and reserves from zero to an approximate 89% working
interest (77% net revenue interest), and an increase in the production and reserves above the Base
from a 65.7% working interest to an 88% working interest (76% net revenue interest).
As described in Note 10 below, in June 2008 we acquired all of the assets of the Hagerman Gas
Gathering System Joint Venture.
NOTE 5. FULL COST CEILING TEST
We use the full cost method to account for our oil and natural gas producing activities. Under
the full cost method of accounting, the net book value of oil and natural gas properties, less
related deferred income taxes, may not exceed a calculated ceiling. The ceiling limitation is the
discounted estimated
(12)
after-tax future net cash flows from proved oil and natural gas properties.
The net book value of oil and natural gas properties, less related deferred income taxes, 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 Securities and Exchange Commission, the excess above the ceiling may not be 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 September 30, 2008, the net book value of our oil and gas properties, less related deferred
income taxes, was below the calculated ceiling. As a result, we were not required to record a
reduction of our oil and gas properties under the full cost method of accounting.
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 nine month periods ended September 30, 2008 and 2007, overhead costs
capitalized were approximately $1.3 million and $1.1 million, respectively.
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 natural 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
natural gas prices and to limit variability in our cash interest payments. In addition, our
revolving credit facility requires 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.
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.
We are exposed to credit risk in the event of nonperformance by the counterparties to these
contracts, BNP Paribas and Citibank, N.A. However, we periodically assess the creditworthiness of
the counterparties to mitigate this credit risk.
Adoption of SFAS No. 157
We adopted SFAS No. 157, Fair Value Measurements, effective January 1, 2008 for all
financial assets and liabilities. SFAS No. 157 provides standards and disclosures for assets and
liabilities that are measured and reported at fair value. In February 2008, the FASB issued FSP No.
157-2, which delayed the effective date of SFAS No. 157 by one year for nonfinancial assets and
liabilities. Beginning January 1, 2009, we will apply SFAS 157 fair value requirements to
nonfinancial assets and nonfinancial liabilities that are not recognized or disclosed on a
recurring basis. As defined in SFAS No. 157, fair value is the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date (exit price). SFAS No. 157 requires disclosure that establishes a framework
for measuring fair value and expands disclosure about fair value measurements. The statement
requires fair value measurements be classified and disclosed in one of the following categories:
|
Level 1: |
|
Unadjusted quoted prices in active markets that are accessible at
the measurement date for identical, unrestricted assets or liabilities. We
consider active markets as those in which transactions for the assets or
liabilities occur in sufficient frequency and volume to provide pricing
information on an ongoing basis. |
|
(13)
|
Level 2: |
|
Quoted prices in markets that are not active, or inputs which are
observable, either directly or indirectly, for substantially the full term of
the asset or liability. This category includes those derivative instruments
that we value using observable market data. Substantially all of these inputs
are observable in the marketplace throughout the full term of the derivative
instrument, can be derived from observable data, or supported by observable
levels at which transactions are executed in the marketplace. Instruments in
this category include non-exchange traded derivatives such as
over-the-counter commodity price swaps and interest rate swaps. |
|
|
Level 3: |
|
Measured based on prices or valuation models that require inputs
that are both significant to the fair value measurement and less observable
from objective sources (i.e., supported by little or no market activity). Our
valuation models are primarily industry-standard models that consider various
inputs including: (a) quoted forward prices for commodities, (b) time value,
(c) volatility factors and (d) current market and contractual prices for the
underlying instruments, as well as other relevant economic measures. Level 3
instruments primarily include derivative instruments, such as commodity price
collars and puts. Although we review our counterpartys valuation and assess
the reasonableness of our prices and valuation techniques, we do not have
sufficient corroborating market evidence to support classifying these price
collars and put assets and liabilities as Level 2. |
As required by SFAS No. 157, financial assets and liabilities are classified based on the
lowest level of input that is significant to the fair value measurement. Our assessment of the
significance of a particular input to the fair value measurement requires judgment, and may affect
the valuation of the fair value of assets and liabilities and their placement within the fair value
hierarchy levels. The following table summarizes the valuation of our derivative financial
instruments by SFAS No. 157 pricing levels as of September 30, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets |
|
|
|
|
|
|
|
|
|
|
|
|
for Identical |
|
|
Other Observable |
|
|
Unobservable |
|
|
Fair Value at |
|
|
|
Assets (Level 1) |
|
|
Inputs (Level 2) |
|
|
Inputs (Level 3) |
|
|
September 30, 2008 |
|
Interest Swaps |
|
$ |
|
|
|
$ |
(2,397 |
) |
|
$ |
|
|
|
$ |
(2,397 |
) |
Oil Puts |
|
$ |
|
|
|
$ |
|
|
|
$ |
5,867 |
|
|
$ |
5,867 |
|
Oil & Gas Collars |
|
$ |
|
|
|
$ |
|
|
|
$ |
(27,787 |
) |
|
$ |
(27,787 |
) |
Oil Swaps |
|
$ |
|
|
|
$ |
(7,353 |
) |
|
$ |
|
|
|
$ |
(7,353 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
(9,750 |
) |
|
$ |
(21,920 |
) |
|
$ |
(31,670 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The determination of the fair values above incorporates various factors required under SFAS
No. 157. These factors include not only the impact of our nonperformance risk but also the credit
standing of the counterparties involved in our derivative contracts.
(14)
The following table sets forth a reconciliation of changes in the fair value of financial
assets and
liabilities classified as level 3 in the fair value hierarchy (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, 2008 |
|
|
September 30, 2008 |
|
|
|
Derivative |
|
|
Derivative |
|
|
Derivative |
|
|
Derivative |
|
|
|
Collars |
|
|
Puts |
|
|
Collars |
|
|
Puts |
|
Beginning balance |
|
$ |
(88,018 |
) |
|
$ |
2,900 |
|
|
$ |
(15,852 |
) |
|
$ |
|
|
Total gains (losses) |
|
|
56,649 |
|
|
|
2,967 |
|
|
|
(20,840 |
) |
|
|
2,542 |
|
Settlements |
|
|
3,582 |
|
|
|
|
|
|
|
8,905 |
|
|
|
|
|
Purchases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,325 |
|
Transfers in and/or out of level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
(27,787 |
) |
|
$ |
5,867 |
|
|
$ |
(27,787 |
) |
|
$ |
5,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses) included in earnings relating
to derivatives still held as of September 30, 2008 (1) |
|
$ |
60,231 |
|
|
$ |
2,967 |
|
|
$ |
(11,935 |
) |
|
$ |
2,542 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Gains and losses (realized and unrealized) included in earnings for the three months and nine months ended
September 30, 2008 are reported in other income on the Consolidated Statement of Operations. |
During periods of market disruption, including periods of volatile oil and gas prices, rapid
credit contraction or illiquidity, it may be difficult to value certain of our derivative
instruments if trading becomes less frequent and/or market data becomes less observable. There may
be certain asset classes that were in active markets with observable data that become illiquid due
to the current financial environment. In such cases, more derivative instruments may fall to Level
3 and thus require more subjectivity and management judgment. As such, valuations may include
inputs and assumptions that are less observable or require greater estimation as well as valuation
methods which are more sophisticated or require greater estimation thereby resulting in valuations
with less certainty. Further, rapidly changing and unprecedented credit and equity market
conditions could materially impact the valuation of derivative instruments as reported within our
consolidated financial statements and the period-to-period changes in value could vary
significantly. Decreases in value may have a material adverse effect on our results of operations
or financial condition.
Interest Rate Sensitivity
We have employed fixed interest rate swap contracts with BNP Paribas and Citibank, N.A. based
on the 90-day LIBOR rates at the time of the contracts. These
contracts are accounted for by marked-to-market accounting as prescribed in SFAS 133. We view these contracts as protection against
future interest rate volatility. As of September 30, 2008, the fair market value of these interest
rate swaps was a liability of approximately $2.4 million.
The table below recaps the nature of these interest rate swaps and the fair market value of
these contracts as of September 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
Estimated |
|
|
|
Notional |
|
|
Fixed |
|
|
Fair |
|
Period of Time |
|
Amounts |
|
|
Interest Rates |
|
|
Market Value |
|
|
|
($ in millions) |
|
|
|
|
|
|
($ in thousands) |
|
October 1, 2008 thru December 31, 2008 |
|
$ |
100 |
|
|
|
4.86 |
% |
|
$ |
(264 |
) |
January 1, 2009 thru December 31, 2009 |
|
$ |
100 |
|
|
|
4.22 |
% |
|
|
(1,084 |
) |
January 1, 2010 thru December 31, 2010 |
|
$ |
100 |
|
|
|
4.71 |
% |
|
|
(822 |
) |
January 1, 2011 thru December 31, 2011 |
|
$ |
100 |
|
|
|
4.60 |
% |
|
|
(227 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total Fair Market Value |
|
|
|
|
|
|
|
|
|
$ |
(2,397 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
(15)
Commodity Price Sensitivity
All of our commodity derivatives are accounted for using marked-to-market accounting as
prescribed in SFAS 133.
Put Options. Puts are an option to sell an asset. For any put transaction, the
counterparty is required to make a payment to the Company if the reference floating price for any
settlement period is less than the put or floor price for such contract.
In June 2008, we entered into multiple put contracts with BNP Paribas. In lieu of making
premium payments for the puts at the time of entering into our put contracts, we deferred payment
until the settlement dates of the contracts. Future premium payments will be netted against any
payments that the counterparty may owe to us based on the floating price. Due to the deferral of
the premium payments, we will pay a total amount of premiums of $3.713 million which is $388,000
greater than if the premiums had been paid at the time of entering into the contracts. The
$388,000 difference is recorded as a discount to the put premium obligations and recognized as
interest expense over the terms of the contracts using the interest method. Through September 30,
2008, we have accrued $45,000 to interest expense. Accordingly, the balance of the put premium
obligations at September 30, 2008 including accrued interest is $3.370 million.
A summary of our put positions at September 30, 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
Barrels of |
|
|
|
|
|
|
Fair Market |
|
Period of Time |
|
Oil |
|
|
Floor |
|
|
Value |
|
|
|
|
|
|
|
|
|
|
|
($ in thousands) |
|
January 1, 2009 through December 31, 2009 |
|
|
109,500 |
|
|
$ |
100.00 |
|
|
$ |
1,470 |
|
January 1, 2010 through December 31, 2010 |
|
|
134,100 |
|
|
$ |
100.00 |
|
|
|
2,083 |
|
January 1, 2011 through December 31, 2011 |
|
|
146,000 |
|
|
$ |
100.00 |
|
|
|
2,314 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fair Market Value |
|
|
|
|
|
|
|
|
|
$ |
5,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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 September 30, 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
Barrels of |
|
NyMex Oil Prices |
|
Fair Market |
Period of Time |
|
Oil |
|
Floor |
|
Cap |
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands) |
October 1, 2008 thru December 31, 2008 |
|
|
87,400 |
|
|
$ |
63.42 |
|
|
$ |
83.86 |
|
|
|
(1,581 |
) |
January 1, 2009 thru December 31, 2009 |
|
|
620,500 |
|
|
$ |
63.53 |
|
|
$ |
80.21 |
|
|
|
(15,664 |
) |
January 1, 2010 thru October 31, 2010 |
|
|
486,400 |
|
|
$ |
63.44 |
|
|
$ |
78.26 |
|
|
|
(13,869 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MM Btu of |
|
|
WAHA Gas Prices |
|
|
|
|
|
|
|
Natural Gas |
|
|
Floor |
|
|
Cap |
|
|
|
|
|
October 1, 2008 through December 31, 2008 |
|
|
920,000 |
|
|
$ |
7.38 |
|
|
$ |
9.28 |
|
|
|
1,793 |
|
January 1, 2009 through December 31, 2009 |
|
|
3,285,000 |
|
|
$ |
7.06 |
|
|
$ |
9.93 |
|
|
|
1,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fair Market Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(27,787 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16)
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.
A recap for the period of time, number of barrels and swap prices are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
Number of |
|
NyMex Oil |
|
Fair Market |
Period of Time |
|
Barrels of Oil |
|
Swap Price |
|
Value |
|
|
|
|
|
|
|
|
|
|
($ in thousands) |
October 1, 2008 thru December 31, 2008
|
|
|
110,400 |
|
|
$ |
33.37 |
|
|
|
(7,353 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 7. NET INCOME PER COMMON SHARE
Basic earnings per share (EPS) exclude any dilutive effects of options, 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.
The following table provides the computation of basic and diluted earnings per share for the
three and nine months ended September 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(dollars in thousands, except per share data) |
|
|
|
|
|
Basic EPS Computation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
58,677 |
|
|
$ |
293 |
|
|
$ |
26,732 |
|
|
$ |
3,661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
41,566 |
|
|
|
38,033 |
|
|
|
41,429 |
|
|
|
37,791 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share |
|
$ |
1.41 |
|
|
$ |
0.01 |
|
|
$ |
0.65 |
|
|
$ |
0.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS Computation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
58,677 |
|
|
$ |
293 |
|
|
$ |
26,732 |
|
|
$ |
3,661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
41,566 |
|
|
|
38,033 |
|
|
|
41,429 |
|
|
|
37,791 |
|
Employee stock options |
|
|
167 |
|
|
|
521 |
|
|
|
300 |
|
|
|
749 |
|
Warrants |
|
|
|
|
|
|
213 |
|
|
|
74 |
|
|
|
266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares for diluted
earnings per share assuming conversion |
|
|
41,733 |
|
|
|
38,767 |
|
|
|
41,803 |
|
|
|
38,806 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share |
|
$ |
1.41 |
|
|
$ |
0.01 |
|
|
$ |
0.64 |
|
|
$ |
0.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17)
NOTE 8. ASSET RETIREMENT OBLIGATIONS
The following table summarizes our asset retirement obligation transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
Beginning asset retirement obligation |
|
$ |
5,606 |
|
|
$ |
4,842 |
|
|
$ |
4,937 |
|
|
$ |
5,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions related to new properties |
|
|
211 |
|
|
|
85 |
|
|
|
917 |
|
|
|
151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revisions in estimated cash flows |
|
|
(58 |
) |
|
|
(130 |
) |
|
|
(267 |
) |
|
|
(297 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deletions related to property disposals |
|
|
(9 |
) |
|
|
(74 |
) |
|
|
(24 |
) |
|
|
(358 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion expense |
|
|
88 |
|
|
|
79 |
|
|
|
275 |
|
|
|
243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending asset retirement obligation |
|
$ |
5,838 |
|
|
$ |
4,802 |
|
|
$ |
5,838 |
|
|
$ |
4,802 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 9. RECENTLY ANNOUNCED ACCOUNTING PRONOUNCEMENTS
We adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No.
48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109 (FIN
48), on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprises financial statements in accordance with FASB Statement 109,
Accounting for Income Taxes, and prescribes a recognition threshold and measurement process for
financial statement recognition and measurement of a tax position taken or expected to be taken in
a tax return. FIN 48 also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition.
Based on our evaluation, we have concluded that there are no significant uncertain tax
positions requiring recognition in our financial statements. Our evaluation was performed for the
tax years ended December 31, 2004, 2005, 2006 and 2007, the tax years which remain subject to
examination by major tax jurisdictions as of September 30, 2008.
We may from time to time be assessed interest or penalties by major tax jurisdictions,
although any such assessments historically have been minimal and immaterial to our financial
results.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157), which
defines fair value, establishes a framework for measuring fair value in accordance with generally
accepted accounting principles, and expands disclosures about fair value measurements. This
statement does not require any new fair value measurements but may require some entities to change
their measurement practices. We adopted SFAS No. 157 effective January 1, 2008 and the adoption
did not have a significant effect on our financial position or operating results.
In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and
Financial Liabilities, Including an Amendment of FASB Statement No. 115, (FAS 159) which became
effective on January 1, 2008. FAS 159 permits entities to measure eligible financial assets,
financial liabilities and firm commitments at fair value, on an instrument-by-instrument basis,
that are otherwise not permitted to be accounted for at fair value under other generally accepted
accounting principles. The fair value measurement election is irrevocable and subsequent changes in
fair value must be recorded in earnings. This statement, for us, became effective in the first
quarter of 2008 and it did not have any effect on our financial position or operating results as we
did not elect to apply the Fair Value Method.
(18)
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS
141(R)), which replaces FASB Statement No. 141. SFAS 141(R) establishes principles and
requirements for how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree
and the goodwill acquired. The statement also establishes disclosure requirements that will enable
users to evaluate the nature and financial effects of the business combination. SFAS 141(R) is
effective for acquisitions that occur in an entitys fiscal year that begins after December 15,
2008, which will be our fiscal year 2009. The impact, if any, will depend on the nature and size of
business combinations that we consummate after the effective date.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statementsan amendment of ARB No. 51 (SFAS 160). SFAS 160 requires that accounting
and reporting for minority interests will be recharacterized as noncontrolling interests and
classified as a component of equity. SFAS 160 also establishes reporting requirements that provide
sufficient disclosures that clearly identify and distinguish between the interests of the parent
and the interests of the noncontrolling owners. SFAS 160 applies to all entities that prepare
consolidated financial statements, except not-for-profit organizations, but will affect only those
entities that have an outstanding noncontrolling interest in one or more subsidiaries or that
deconsolidate a subsidiary. This statement is effective as of the beginning of our first fiscal year beginning after December 15, 2008,
which will be our fiscal year 2009. Based upon our balance sheet, the statement would have no
impact.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities, an amendment of FASB Statement No. 133 (SFAS 161). This statement is intended
to improve transparency in financial reporting by requiring enhanced disclosures of an entitys
derivative instruments and hedging activities and their effects on the entitys financial position,
financial performance, and cash flows. SFAS 161 applies to all derivative instruments within the
scope of SFAS 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133), as
well as related hedged items, bifurcated derivatives, and nonderivative instruments that are
designated and qualify as hedging instruments. Entities with instruments subject to SFAS 161 must
provide more robust qualitative disclosures and expanded quantitative disclosures. SFAS 161 is
effective prospectively for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application permitted. We are currently evaluating
the disclosure implications of this statement.
NOTE 10. INVESTMENT IN GAS GATHERING SYSTEMS
As of September 30, 2008 we had total equity investments of $332,000 in the West Fork Pipeline
II, L.P. Our current investment percentage in this limited partnership is 23.25848%. For the
three months ended September 30, 2008 we recorded a loss of approximately $(2,000), compared to no
gain or loss in West Fork Pipeline II, for the three month period ended September 30, 2007. For
the nine months ended September 30, 2008, we recorded a loss of approximately $(1,000) compared to
a gain of $5,000 in the West Fork Pipeline II, for the nine month period ended September 30, 2007.
In June 2008, we acquired all of the assets of the Hagerman Gas Gathering System Joint
Venture, or the Joint Venture, in connection with winding up and terminating the Joint Venture.
The winding up of the Joint Venture commenced on June 19, 2008. At the time of the winding up of
the Joint Venture, the investment was transferred into oil and natural gas properties and
subsequent results have been included in our operating income and not as an equity gain (loss) item
in our Consolidated Statement of Operations.
For the three months ended September 30, 2008, we recorded an equity loss of $(2,000),
compared to a loss of $(69,000) in the West Fork Pipeline II and Hagerman Gas Gathering System
Joint Venture for the three months ended September 30, 2007. For the nine months ended September
30, 2008, we recorded a gain of $380,000, compared to a loss of $(663,000) in the West Fork
Pipeline II and Hagerman Gas Gathering System Joint Venture for the nine months ended September 30,
2007. The increase in income from period to period is the result of greater gas volumes flowing
through the Hagerman Gas Gathering System Joint Venture in 2008, as compared to 2007.
(19)
NOTE 11. COMMITMENTS AND CONTINGENCIES
From time to time, we are party to ordinary routine litigation incidental to our business.
On April 14, 2008, we were added as a defendant to a lawsuit filed in 2007, styled Brady
Briscoe vs. Capstar Drilling, L.P. (Capstar), Cause No. 21,287, in the 259th District Court of
Jones County, Texas. The plaintiff has alleged that he was injured as the result of an accident
while he was working, as an employee of an unrelated third party, on a drilling rig operated by
Capstar. Capstar was conducting drilling operations for us. The plaintiff has asserted general
allegations of negligence as to Capstar and, specifically, a failure to properly equip its drilling
rig, further alleging that we were in charge of the drilling rig and the operational details of the
plaintiffs work. The plaintiff has sued for an amount of actual damages of up to $15.0 million,
together with pre-judgment interest, post-judgment interest and exemplary damages. Capstar
recently settled with the plaintiff and Capstar has been dismissed from the lawsuit. If judgment
is entered against us, we would be entitled to a credit for the amount that the plaintiff has
already received from Capstar.
Even though we cannot predict the ultimate outcome of this matter, we believe we have
meritorious defenses and intend to vigorously contest this lawsuit. We have not established a
reserve with respect to the plaintiffs claims.
On March 24, 2008, a lawsuit was filed in the 24th District Court of Jackson
County, Texas, against us and twenty-two other defendants in Cause No. 07-6-13069, styled Tony
Kubenka, Carolyn Kubenka, Dennis J. Kallus, David J. Kallus, Mary L. Kallus, Patricia Kallus, Nova
Deleon, Janie Figuerova, and Larkin Thedford, Plaintiffs v. Tri-C Resources, Inc., Marie S. Adian,
Laura E. Adian, Glenn A. Fiew, Lynn Kramer, Debra Boysen, Carol J. Gleason, Alana Sue Curlee,
Connie W. Marthiljohni, Claire E. Adian, Zachary D. Adian, Donald R. Starkweather, Inc., D.A.
Webernick, Danette Bundick, Johnny A. Webernick, Donna Gail Glover, Sherry Shulze, William H.
Webernick, Jr., TAC Resources, Inc., New Century Exploration, Inc., Allegro Investments, Inc.,
Parallel Petroleum Corporation and Welper Interests, LP.
The nine plaintiffs in this lawsuit have named us and the other working interest owners,
including Tri-C Resources, Inc., the operator, as defendants. The plaintiffs in this lawsuit allege
that they are royalty owners under oil and gas leases which are part of a pooled gas unit (the
unit) located in Jackson County,
Texas, and that the defendants, including us, are owners of the leasehold estate under the
plaintiffs leases and others forming the unit. Plaintiffs also assert that one of the leases
(other than plaintiffs leases) forming part of the unit has terminated and, as a result, the
defendants have not properly computed the royalties due to plaintiffs from unit production and have
failed to properly pay royalties due to them. Plaintiffs have sued for an unspecified amount of
damages, including exemplary damages, under theories of breach of contract (including breach of
express and implied covenants of their leases) and conversion, and seek an accounting, a
declaratory judgment to declare the rights of the parties under the leases, and attorneys fees,
interest and court costs.
If a judgment adverse to the defendants were entered, as a working interest owner in the
leases comprising the unit, we believe our liability would be proportionate to the ownership of the
other working interest owners in the leases. We have filed an answer denying any liability.
Although an initial exchange of discovery has occurred, we cannot predict the ultimate outcome of
this matter, we believe we have meritorious defenses and intend to vigorously contest this lawsuit.
We have not established a reserve with respect to plaintiffs claims.
We received a Notice of Proposed Adjustment from the Internal Revenue Service, or the
Service in May 2007 advising us of proposed adjustments to federal income tax of approximately
$2.0 million for the years 2004 and 2005. Subsequent discussions with the Service placed the
issues contested in a development status. In November 2007, the Service issued a letter on the
matter giving the company 30 days to agree or disagree with a final examination report. The final
examination report reflected revisions of the previous proposed adjustments resulting in a reduced
$1.1 million of additional income tax and
(20)
interest charges. The decrease in proposed tax was the
result of information supplied by us to the examiner as well as discussions of the applicable tax
statutes and regulations. In December 2007, we filed a protest documenting our complete
disagreement with the adjustments proposed on the final examination report and requested a
conference with the appeals office of the Service. The examination office of the Service filed a
response to our protest in February 2008 with the appeals office. On June 4, 2008, our
representatives met with the Services Appeals Officer to review specific issues related to our
calculation of net income from oil and gas and the associated treatment of certain deductions.
During this meeting we were advised that a request to issue an advisory opinion had been
submitted to the National Office of the Service. Pending issuance of this advisory opinion, we will
submit an amendment to our initial protest in further support of our position. We intend to
vigorously contest the adjustment proposed by the Service and believe that we will ultimately
prevail in our position. We have not recorded a liability for tax, interest, or penalties related
to this matter based on our analysis. If a liability for additional income tax should later be
determined to be
more likely than not, we anticipate the adjustment to increase the federal income tax
liability would be offset by an increase to a deferred tax asset and would not result in a charge
to earnings. Any interest or penalties resulting from a subsequent determination of increased tax
liability would require a charge to earnings. We believe that the effects of this matter would not
have a material effect on our results of operations for the fiscal quarter in which we actually
incur or establish a reserve account for interest or penalties.
We are also presently a named defendant in one other lawsuit arising out of our operations in
the normal course of business, which we believe is not material.
We are not aware of any legal or governmental proceedings against us, or contemplated to be
brought against us, under the various environmental protection statutes to which we are subject,
nor have we 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. For
the three months ended September 30, 2008 and September 30, 2007 we made contributions to the
401(k) Plan and Trust of approximately $79,000 and $67,000, respectively. For the nine months
ended September 30, 2008 and September 30, 2007, we made contributions to the 401(k) Plan and Trust
of approximately $231,000 and $201,000, respectively.
NOTE 12. SUBSEQUENT EVENTS
As of September 30, 2008 the principal amount outstanding under our revolving credit facility
was $162.5 million. In response to recent market conditions and to strengthen our liquidity, we
drew a total of $62.5 million under our Revolving Credit Agreement in four separate borrowings from
October 10, 2008 through October 20, 2008, bringing our total principal amount outstanding to
$225.0 million at October 20, 2008. The majority of the $62.5 million
has been temporarily invested in a demand deposit money market account. Accordingly, $5.0
million is available under the revolving credit facility. Our accounts with Citibank, N.A. are
insured at the basic FDIC deposit insurance coverage limits of $250,000. We believe the
possibility of a loss of our accounts with Citibank, N.A. is minimal.
On October 31, 2008, we entered into a First Amendment to our Fourth Amended and Restated
Credit Agreement. Generally, the amendment increases our annual interest rate by one-fourth of one
percent (.25%). Loans made to us under our revolving credit facility bear interest at the base rate of Citibank, N.A. or the LIBOR
rate, at our election. The base rate is generally equal to the sum of (a) Citibanks prime rate as announced by it from time to time and (b) a specified Base Rate Margin,
the amount of which depends upon the outstanding principal amount of our loans. The LIBOR rate
is generally equal to the sum of (a) the rate designated as British Bankers Association
Interest Settlement Rates and offered in one, two, three, six or twelve month interest
periods for deposits of $1.0 million, and (b) a specified Libor Margin percentage, the amount of which depends upon the outstanding principal amount
of our loans. In the First Amendment, the Base Rate Margin was amended from zero percent per annum to:
(21)
|
|
|
one-fourth of one percent (.25%) when the borrowing base usage is equal to or
greater than 75%; and |
|
|
|
|
zero percent when the borrowing base usage is less than 75%. |
|
|
In addition, the Libor Margin was amended to mean: |
|
|
|
|
2.75% when the borrowing base usage is equal to or greater than 75%; |
|
|
|
|
2.50% per annum when the borrowing base usage is equal to greater than 50% but less
than 75%; and |
|
|
|
|
2.25% per annum when the borrowing base usage is less than 50%. |
The amendment also established our borrowing base at $230 million, which is the same as our
previous borrowing base.
Our bank lenders at October 31, 2008 include Citibank, N.A., BNP Paribas, Compass Bank, Bank
of Scotland plc, Bank of America, N.A., Texas Capital Bank, N.A., Western National Bank and West
Texas National Bank. None of the bank lenders held more than 21% of the facility at October 31, 2008.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with managements
discussion and analysis contained in our 2007 Annual Report on Form 10-K, as well as the unaudited
consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q.
OVERVIEW
Strategy
Conduct Exploitation Activities on Our Existing Assets. We seek to maximize economic return on
our existing assets by maximizing production rates and ultimate recovery, while managing
operational efficiency to minimize direct lifting costs. Development and production growth
activities include infill and extension drilling of new wells, re-completion, pay adds and
re-stimulation of existing wells and implementation and management of enhanced oil recovery
projects such as waterflood operations. Operational efficiencies and cost reduction measures
include optimization of surface facilities, such as fluid handling systems, gas compression or
artificial lift installations. Efficiencies are also increased through aggressive monitoring and
management of electrical power consumption, injection water quality programs, chemical and
corrosion prevention programs and the use of production surveillance equipment and software. In all
instances, a proactive approach is taken to achieve the desired result while ensuring minimal
environmental impact.
Use of Horizontal Drilling and Fracture Stimulation Activities in Gas Resource Plays. We
believe the use of horizontal drilling and fracture stimulations has enabled us to develop reserves
economically, such as our Barnett Shale and Wolfcamp Carbonate gas projects.
Use of Advanced Technologies and Production Techniques. We believe that 3-D seismic surveys,
horizontal drilling, fracture stimulation and other advanced technologies and production techniques
are useful tools that help improve normal drilling operations and enhance our production and
returns. We believe that our use of these technologies and production techniques in exploring for,
developing and exploiting oil and natural gas properties can reduce drilling risks, lower finding
costs, provide for more efficient production of oil and natural gas from our properties and
increase the probability of locating and producing reserves that might not otherwise be discovered.
(22)
Acquire Long-Lived Properties with Enhancement Opportunities. Our acquisition strategy is
focused on leveraging our geographical expertise in our core areas of operation and seeking assets
located in and around these areas. We selectively evaluate acquisition opportunities and expect
that they will continue to play a role in increasing our reserve base and future drilling
inventory. When identifying target assets, we focus primarily on reserve quality and assets in new
development plays with upside potential. Through this approach, we have traditionally targeted
smaller asset acquisitions which allow us to absorb, enhance and exploit properties without taking
on significant integration risk.
Conduct Exploratory Activities. Although we do not emphasize exploratory drilling, we will
selectively undertake exploratory projects that have known geological and reservoir characteristics
that are in close proximity to existing wells so data from the existing wells can be correlated
with seismic data on or near the prospect being evaluated, and that could have a potentially
meaningful impact on our reserves.
The extent to which we are able to implement and follow through with our business strategy is
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 ventures
or other similar arrangements on terms acceptable to us. |
Significant changes in the prices we receive for the oil and natural gas we produce, or the
occurrence of unanticipated events beyond our control, may cause us to defer or deviate from our
business strategy, including the amounts we have budgeted for our activities.
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 the quantities of oil and natural gas that we
are able to produce. 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. |
(23)
Additional factors influencing our overall operating performance include:
|
|
|
production expenses; |
|
|
|
|
overhead requirements; |
|
|
|
|
costs of capital; and |
|
|
|
|
effects of derivative contracts. |
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 and debt securities; |
|
|
|
|
bank borrowings; and |
|
|
|
|
industry joint ventures. |
For the three months ended September 30, 2008 (the Current Quarter), the sale price we
received for our crude oil production averaged $115.19 per barrel, compared with $69.45 per barrel
for the three months ended September 30, 2007 (the Comparable Quarter). The average sales price
we received for natural gas for the Current Quarter was $8.54 per Mcf, compared with $5.81 per Mcf
for the Comparable Quarter. For information regarding prices received, refer to the selected
operating data table under -Results of Operations on page 25.
For the nine months ended September 30, 2008 (the Current Period), the sale price we
received for our crude oil production averaged $109.52 per barrel, compared with $59.98 per barrel
for the nine months ended September 30, 2007 (the Comparable Period). The average sales price we
received for natural gas for the Current Period was $8.78 per Mcf, compared with $6.14 per Mcf for
the Comparable Period. For information regarding prices received, refer to the selected operating
data table under -Results of Operations on page 25.
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 the
relationship between capitalized costs and 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 natural gas properties being depleted.
(24)
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); and |
|
|
|
|
the prices we receive for our oil and natural gas production. |
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 nine months ended September 30, 2008 and September 30,
2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
9/30/2008 |
|
|
9/30/2007 |
|
|
9/30/2008 |
|
|
9/30/2007 |
|
|
|
|
|
|
|
(in thousands, except per unit data) |
|
|
|
|
|
Production Volumes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil (Bbls) |
|
|
274 |
|
|
|
254 |
|
|
|
758 |
|
|
|
797 |
|
Natural gas (Mcf) |
|
|
2,886 |
|
|
|
2,043 |
|
|
|
8,338 |
|
|
|
5,243 |
|
BOE(1) |
|
|
755 |
|
|
|
595 |
|
|
|
2,148 |
|
|
|
1,671 |
|
BOE per day |
|
|
8.2 |
|
|
|
6.5 |
|
|
|
7.8 |
|
|
|
6.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Prices: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil (per Bbl) |
|
$ |
115.19 |
|
|
$ |
69.45 |
|
|
$ |
109.52 |
|
|
$ |
59.98 |
|
Natural gas (per Mcf) |
|
$ |
8.54 |
|
|
$ |
5.81 |
|
|
$ |
8.78 |
|
|
$ |
6.14 |
|
BOE price |
|
$ |
74.45 |
|
|
$ |
49.62 |
|
|
$ |
72.73 |
|
|
$ |
47.86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil |
|
$ |
31,552 |
|
|
$ |
17,619 |
|
|
$ |
83,043 |
|
|
$ |
47,786 |
|
Natural gas |
|
|
24,649 |
|
|
|
11,868 |
|
|
|
73,174 |
|
|
|
32,171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
56,201 |
|
|
$ |
29,487 |
|
|
$ |
156,217 |
|
|
$ |
79,957 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease operating expense |
|
$ |
7,539 |
|
|
$ |
6,445 |
|
|
$ |
21,772 |
|
|
$ |
16,420 |
|
Production taxes |
|
|
2,836 |
|
|
|
1,448 |
|
|
|
8,121 |
|
|
|
3,696 |
|
Production tax refund |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,209 |
) |
General and administrative |
|
|
3,125 |
|
|
|
2,492 |
|
|
|
8,958 |
|
|
|
7,737 |
|
Depreciation, depletion and amortization |
|
|
11,551 |
|
|
|
7,821 |
|
|
|
31,386 |
|
|
|
21,680 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
25,051 |
|
|
$ |
18,206 |
|
|
$ |
70,237 |
|
|
$ |
48,324 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
31,150 |
|
|
$ |
11,281 |
|
|
$ |
85,980 |
|
|
$ |
31,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
A BOE means one barrel of oil equivalent using the ratio of six Mcf of gas to one
barrel of oil. |
(25)
RESULTS OF OPERATIONS
For the Three Months Ended September 30, 2008 and 2007:
Our oil and natural gas revenues and production product mix are displayed in the following
table for the Current and Comparable Quarters.
Oil and Gas Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
Production |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Oil (Bbls) |
|
|
56 |
% |
|
|
60 |
% |
|
|
36 |
% |
|
|
43 |
% |
Natural gas (Mcf) |
|
|
44 |
% |
|
|
40 |
% |
|
|
64 |
% |
|
|
57 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows our production volumes, product sales prices and operating revenues
for the indicated periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Increase |
|
|
% Increase |
|
|
|
2008 |
|
|
2007 |
|
|
(Decrease) |
|
|
(Decrease) |
|
|
|
|
|
|
|
(in thousands except per unit data) |
|
|
|
|
|
Production Volumes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil (Bbls) |
|
|
274 |
|
|
|
254 |
|
|
|
20 |
|
|
|
8 |
% |
Natural gas (Mcf) |
|
|
2,886 |
|
|
|
2,043 |
|
|
|
843 |
|
|
|
41 |
% |
BOE (1) |
|
|
755 |
|
|
|
595 |
|
|
|
160 |
|
|
|
27 |
% |
BOE/Day |
|
|
8.2 |
|
|
|
6.5 |
|
|
|
1.7 |
|
|
|
26 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Price |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil (per Bbl) |
|
$ |
115.19 |
|
|
$ |
69.45 |
|
|
$ |
45.74 |
|
|
|
66 |
% |
Natural gas (per Mcf) |
|
$ |
8.54 |
|
|
$ |
5.81 |
|
|
$ |
2.73 |
|
|
|
47 |
% |
BOE price |
|
$ |
74.45 |
|
|
$ |
49.62 |
|
|
$ |
24.83 |
|
|
|
50 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil |
|
$ |
31,552 |
|
|
$ |
17,619 |
|
|
$ |
13,933 |
|
|
|
79 |
% |
Natural gas |
|
|
24,649 |
|
|
|
11,868 |
|
|
|
12,781 |
|
|
|
108 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
56,201 |
|
|
$ |
29,487 |
|
|
$ |
26,714 |
|
|
|
91 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
A BOE means one barrel of oil equivalent using the ratio of six Mcf of gas to one
barrel of oil. |
Oil revenues
Average wellhead realized crude oil prices increased $45.74 per Bbl, or 66%, to $115.19 per
Bbl in the Current Quarter, over the Comparable Quarter. This price increase resulted in increased
revenues by approximately $12.5 million for the Current Quarter, as compared to the Comparable
Quarter. Oil production increased by approximately 20,000 Bbls due primarily to new wells and the
additional interest acquired in the Diamond M area, where volumes increased approximately 37,000
Bbls in the Current Quarter. This increase was partially offset with natural declines in the
Andrews and Fullerton areas. The increase in production resulted in increased revenues of
approximately $1.4 million in the Current Quarter over the Comparable Quarter.
Natural gas revenues
Average realized wellhead natural gas prices increased $2.73 per Mcf, or 47%, to $8.54 per Mcf
in the Current Quarter, over the Comparable Quarter. This price increase accounted for an increase
in revenue of approximately $7.9 million. Natural gas production increased by approximately 843,000
Mcf primarily due to
(26)
new wells in the New Mexico Wolfcamp, Barnett Shale and the additional
interest acquired in the Diamond M Deep areas in the Current Quarter. In June 2008, we acquired
additional interests in the Diamond M Deep which also added to our natural gas revenues. The
increase in production was offset with natural declines in the south Texas, Andrews and other
Permian areas. The overall increase in natural gas volumes increased revenue approximately $4.9
million for the Current Quarter.
Cost and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Increase |
|
|
% Increase |
|
|
|
2008 |
|
|
2007 |
|
|
(Decrease) |
|
|
(Decrease) |
|
|
|
|
|
|
|
($ in thousands) |
|
|
|
|
|
Lease operating expense |
|
$ |
7,539 |
|
|
$ |
6,445 |
|
|
$ |
1,094 |
|
|
|
17 |
% |
Production taxes |
|
|
2,836 |
|
|
|
1,448 |
|
|
|
1,388 |
|
|
|
96 |
% |
General and administrative |
|
|
3,125 |
|
|
|
2,492 |
|
|
|
633 |
|
|
|
25 |
% |
Depreciation, depletion and amortization |
|
|
11,551 |
|
|
|
7,821 |
|
|
|
3,730 |
|
|
|
48 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
25,051 |
|
|
$ |
18,206 |
|
|
$ |
6,845 |
|
|
|
38 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease operating expense
Lease operating expense increased approximately $1.1 million or 17%, to $7.5 million during
the Current Quarter compared to $6.4 million for the Comparable Quarter. The increase in expense
was due to higher electricity, water injection and well repair costs associated with the increased
production in the New Mexico Wolfcamp and Barnett Shale areas and the additional Diamond M
interests acquired in June 2008. Overall costs and volumes increased from the additional interest
acquired in the Diamond M area and from the new wells drilled in the New Mexico Wolfcamp and
Barnett Shale areas. Lifting costs (excluding production taxes) per BOE decreased to $9.99 for the
Current Quarter compared to $10.84 per BOE in the Comparable Quarter due to increased production.
Ad valorem taxes increased in the Current Quarter by approximately $231,000 over the Comparable
Quarter due to an overall increase in our producing property values.
Production taxes
Production taxes increased $1.4 million for the Current Quarter, as compared to the Comparable
Quarter. Production taxes were 5.0% of revenue for the Current Quarter compared to 4.9% of revenue
for the Comparable Quarter. The increase is related to higher natural gas production and higher
tax rates in the New Mexico area. Production taxes in future periods will be a function of product
mix, production volumes, product prices and tax rates.
General and administrative
General and administrative expenses increased 25%, or $633,000, for the Current Quarter, over
the Comparable Quarter. This increase was primarily due to increased stock based compensation
expense of approximately $466,000 and an increase in staffing and salary cost of approximately
$188,000 over the Comparable Quarter. This increase over the Comparable Quarter was partially
offset by lower franchise taxes, and fees associated with consulting and related services in the
Current Quarter. On a BOE basis, general and administrative costs were $4.14 per BOE in the
Current Quarter, as compared to $4.19 per BOE in the Comparable Quarter.
Depreciation, depletion and amortization
Depreciation depletion and amortization expense increased 48%, or $3.7 million, in the Current
Quarter, over the Comparable Quarter. Total depreciation, depletion and amortization per BOE was
$15.30 for the Current Quarter and $13.14 for the Comparable Quarter. This increase is primarily
attributable to an overall increase in actual and anticipated drilling costs. Increased cost
levels affect both the depletable amounts of capitalized costs in 2008 and the depletion
attributable to amounts of estimated future
(27)
development costs on proved undeveloped properties. Our
drilling over the past year and our future drilling plans are focused on our natural gas resource
projects which have higher associated per BOE drilling and development costs due to the nature of
the wellbores. These factors, when combined with the increase in the absolute level of our capital
expenditures during this time period, have led to a significant increase in our depletion rate per
BOE.
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Increase |
|
|
% Increase |
|
|
|
2008 |
|
|
2007 |
|
|
(Decrease) |
|
|
(Decrease) |
|
|
|
|
|
|
|
($ in thousands) |
|
|
|
|
|
Gain (loss) on derivatives not classified as hedges |
|
$ |
65,661 |
|
|
$ |
(4,556 |
) |
|
$ |
70,217 |
|
|
|
(1,541 |
)% |
Interest and other income |
|
|
20 |
|
|
|
55 |
|
|
|
(35 |
) |
|
|
(64 |
)% |
Interest expense, net |
|
|
(6,139 |
) |
|
|
(5,429 |
) |
|
|
(710 |
) |
|
|
13 |
% |
Cost of debt retirement |
|
|
(102 |
) |
|
|
(760 |
) |
|
|
658 |
|
|
|
(87 |
)% |
Other expense |
|
|
(11 |
) |
|
|
(76 |
) |
|
|
65 |
|
|
|
(86 |
)% |
Equity in loss of pipelines
and gathering system ventures |
|
|
(2 |
) |
|
|
(69 |
) |
|
|
67 |
|
|
|
(97 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
59,427 |
|
|
$ |
(10,835 |
) |
|
$ |
70,262 |
|
|
|
(648 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on derivatives not classified as hedges
We recorded a gain of $65.7 million in the Current Quarter for derivatives not classified as
hedges, as compared to a loss of $(4.6) million for the Comparable Quarter. The greatest impact of
the change in fair market valuation was within our crude oil contracts due to the significant
decrease in oil prices throughout the Current Quarter. We settled in cash a net payment of $13.5 million
in derivative contracts during the Current Quarter. See Note 6 to Consolidated Financial
Statements.
Interest expense
Interest expense increased approximately $710,000. The Current Quarter resulted in a higher
interest expense of approximately $664,000 primarily due to higher average outstanding debt
balances over the Comparable Quarter. Capitalized interest for the Current Quarter was
approximately $23,000 and $47,000 for the Comparable Quarter. Our weighted average interest rate
decreased to 7.63% for the Current Quarter, from 9.27% for the Comparable Quarter.
In the Comparable Quarter we wrote off the unamortized bank fees of $(760,000) associated with
the Second Lien Term Loan that was retired in July 2007.
Equity in loss of pipelines and gathering system ventures
For the Current Quarter, our equity investments recorded a loss of $(2,000), compared to a
loss of $(69,000) for the Comparable Quarter. This increase in earnings of approximately $67,000
was primarily due to the equity investments in the Hagerman Gas Gathering System Joint Venture
being operated at a loss in the Comparable Quarter.
In June 2008, we acquired all of the assets of the Hagerman Gas Gathering System Joint
Venture. The results of operations of the Hagerman Gas Gathering System are now included in our
operating income and not as an equity gain / loss item in our Consolidated Statement of Operations.
See Note 10 to Consolidated Financial Statements.
Income taxes, deferred
Income tax expense was approximately $31.9 million in the Current Quarter, as compared to
(28)
approximately $153,000 in the Comparable Quarter. Income tax expense for 2008 will be dependent on
our earnings and is expected to be approximately 35% of income before income taxes.
Basic and diluted net income
We had basic and diluted net income per share of $1.41 and $0.01 for the Current Quarter and
the Comparable Quarter, respectively. Basic weighted average common shares outstanding increased
from 38.0 million shares in the Comparable Quarter to 41.6 million shares in the Current Quarter.
Diluted weighted average common shares outstanding increased from 38.8 million shares in the
Comparable Quarter to 41.7 million shares in the Current Quarter. The increase in common shares
was primarily due to our public offering of 3.0 million shares of common stock in December 2007,
the exercise of employee and nonemployee stock options in 2007 and 2008 and the exercise of
warrants during 2008.
RESULTS OF OPERATIONS
For the Nine Months Ended September 30, 2008 and 2007:
Percentages of our revenues and production, by product mix, are shown in the following table
for the Current Period and Comparable Period.
Oil and Gas Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
Production |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Oil (Bbls) |
|
|
53 |
% |
|
|
60 |
% |
|
|
35 |
% |
|
|
48 |
% |
Natural gas (Mcf) |
|
|
47 |
% |
|
|
40 |
% |
|
|
65 |
% |
|
|
52 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows our production volumes, product sale prices and operating revenues
for the following periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
Increase |
|
|
% Increase |
|
|
|
2008 |
|
|
2007 |
|
|
(Decrease) |
|
|
(Decrease) |
|
|
|
|
|
|
|
(in thousands except per unit data) |
|
|
|
|
|
Production Volumes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil (Bbls) |
|
|
758 |
|
|
|
797 |
|
|
|
(39 |
) |
|
|
(5 |
)% |
Natural gas (Mcf) |
|
|
8,338 |
|
|
|
5,243 |
|
|
|
3,095 |
|
|
|
59 |
% |
BOE (1) |
|
|
2,148 |
|
|
|
1,671 |
|
|
|
477 |
|
|
|
29 |
% |
BOE/Day |
|
|
7.8 |
|
|
|
6.1 |
|
|
|
1.7 |
|
|
|
28 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Price |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil (per Bbl) |
|
$ |
109.52 |
|
|
$ |
59.98 |
|
|
$ |
49.54 |
|
|
|
83 |
% |
Natural gas (per Mcf) |
|
$ |
8.78 |
|
|
$ |
6.14 |
|
|
$ |
2.64 |
|
|
|
43 |
% |
BOE price |
|
$ |
72.73 |
|
|
$ |
47.86 |
|
|
$ |
24.87 |
|
|
|
52 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil |
|
$ |
83,043 |
|
|
$ |
47,786 |
|
|
$ |
35,257 |
|
|
|
74 |
% |
Natural gas |
|
|
73,174 |
|
|
|
32,171 |
|
|
|
41,003 |
|
|
|
127 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
156,217 |
|
|
$ |
79,957 |
|
|
$ |
76,260 |
|
|
|
95 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
A BOE means one barrel of oil equivalent using the ratio of six Mcf of gas to one
barrel of oil. |
(29)
Oil revenues
Average wellhead realized crude oil prices increased $49.54 per Bbl, or 83%, to $109.52 per
Bbl in the Current Period over the Comparable Period. This price increase caused an increase in
revenue of approximately $37.6 million. Oil production decreased by approximately 39,000 Bbls this
was primarily due from natural declines in the Fullerton, Andrews and other Permian and south Texas
areas where volumes declined 17,000 Bbls, 35,000 Bbls, 6,000 Bbls and 8,000 Bbls, respectively.
Production declines were partially offset with new wells and the additional interests acquired in
the Diamond M area in June 2008, where volumes show an increase of approximately 31,000 Bbls. The
decrease in production caused a decrease in revenues of approximately $(2.3) million for the
Current Period.
Natural gas revenues
Average realized natural gas prices increased $2.64 per Mcf, or 43%, to $8.78 per Mcf in the
Current Period, over the Comparable Period. The price increase caused an increase in revenue of
approximately $22.0 million. Natural gas production increased 59% which was attributable to new
wells in our New Mexico and Barnett Shale areas increasing production approximately 3.4 Bcf,
partially offset by natural declines in our other producing areas. The increase in natural gas
volumes increased revenues approximately $19.0 million in the Current Period.
Cost and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
Increase |
|
|
% Increase |
|
|
|
2008 |
|
|
2007 |
|
|
(Decrease) |
|
|
(Decrease) |
|
|
|
|
|
|
|
($ in thousands) |
|
|
|
|
|
Lease operating expense |
|
$ |
21,772 |
|
|
$ |
16,420 |
|
|
$ |
5,352 |
|
|
|
33 |
% |
Production taxes |
|
|
8,121 |
|
|
|
3,696 |
|
|
|
4,425 |
|
|
|
120 |
% |
Production tax refund |
|
|
|
|
|
|
(1,209 |
) |
|
|
1,209 |
|
|
|
N/A |
|
General and administrative |
|
|
8,958 |
|
|
|
7,737 |
|
|
|
1,221 |
|
|
|
16 |
% |
Depreciation, depletion and amortization |
|
|
31,386 |
|
|
|
21,680 |
|
|
|
9,706 |
|
|
|
45 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
70,237 |
|
|
$ |
48,324 |
|
|
$ |
21,913 |
|
|
|
45 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease operating expense
Lease operating costs increased approximately $5.4 million, or 33%, to $21.8 million during
the Current Period, from $16.4 million in the Comparable Period. Lifting cost (excluding
production taxes) increased to $10.14 per BOE for the Current Period, compared to $9.83 per BOE in
the Comparable Period. The increase was due primarily to higher workover expenses from casing
repairs in the Fullerton area and an increase in overall cost from new wells in the New Mexico
Wolfcamp, Barnett Shale areas and the additional Diamond M interests acquired in June 2008. Ad
valorem taxes increased in the Current Period by approximately $929,000 over the Comparable Period
due to an overall increase in our producing property values.
Production taxes
Production tax increased $4.4 million, in the Current Period, over the Comparable Period
primarily due to a $76.3 million increase in revenue. Production taxes were 5.2% of revenue for
the Current Period compared to 4.6% of revenue for the Comparable Period. The increase is related
to higher natural gas production and higher tax rates in the New Mexico area. Production taxes in
future periods will be a function of product mix, production volumes, product prices and tax
rates.
A production tax refund was received in June 2007 in the amount of $1.2 million for gas
production taxes on non-operated wells in the Wilcox area of south Texas for production during the
period from March 2005 through January 2007. These refunds were received by the operator of these
wells after the operators
(30)
application for tax abatement was approved by state regulatory
agencies. The reduction in our production tax expense was recognized only when approval of the
application for tax abatement was granted by the state.
General and Administrative
Total general and administrative expenses increased 16%, or approximately $1.2 million, in the
Current Period, over the Comparable Period. This increase was primarily due to increased stock
based compensation expense of approximately $857,000, and an increase in staffing and salary cost
of approximately $604,000 over the Comparable Period. General and administrative expenses
capitalized to the full cost pool were $1.3 million in the Current Period compared to $1.1 million
in the Comparable Period. On a BOE basis, general and administrative costs decreased to $4.17 per
BOE in the Current Period from $4.63 per BOE in the Comparable Period.
Depreciation, depletion and amortization
Depreciation, depletion and amortization expense increased 45%, or $9.7 million, in the
Current Period, over the Comparable Period. Total depreciation, depletion and amortization expense
per BOE was $14.61 for the Current Period and $12.98 for the Comparable Period. This increase is
primarily attributable to an overall increase in actual and anticipated drilling costs and related
oilfield service costs. Increased cost levels affect both the depletable amounts of capitalized
costs in 2008 and the depletion attributable to amounts of estimated future development costs on
proved undeveloped properties. Our drilling over the past year and our future drilling plans are
focused on our natural gas resource projects which have higher associated per BOE drilling and
development costs than our drilling projects in the Permian Basin of west Texas and onshore gulf
coast of south Texas due to the use of horizontal drilling and multi-stage stimulation techniques.
These factors, when combined with the increase in the absolute level of our capital expenditures
during this time period, have led to a significant increase in our depletion rate per BOE.
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
Increase |
|
|
% Increase |
|
|
|
2008 |
|
|
2007 |
|
|
(Decrease) |
|
|
(Decrease) |
|
|
|
|
|
|
|
($ in thousands) |
|
|
|
|
|
Loss on derivatives not classified as hedges |
|
$ |
(27,834 |
) |
|
$ |
(11,161 |
) |
|
$ |
(16,673 |
) |
|
|
149 |
% |
Interest and other income |
|
|
85 |
|
|
|
163 |
|
|
|
(78 |
) |
|
|
(48 |
)% |
Interest expense, net |
|
|
(17,025 |
) |
|
|
(13,449 |
) |
|
|
(3,576 |
) |
|
|
27 |
% |
Cost of debt retirement |
|
|
(102 |
) |
|
|
(760 |
) |
|
|
658 |
|
|
|
(87 |
)% |
Other expense |
|
|
(12 |
) |
|
|
(91 |
) |
|
|
79 |
|
|
|
(87 |
)% |
Equity in gain (loss) of pipelines
and gathering system ventures |
|
|
380 |
|
|
|
(663 |
) |
|
|
1,043 |
|
|
|
(157 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(44,508 |
) |
|
$ |
(25,961 |
) |
|
$ |
(18,547 |
) |
|
|
71 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on derivatives not classified as hedges
We recorded a loss of $(27.8) million in the Current Period for derivatives not classified as
hedges, as compared to a loss of $(11.2) million for the Comparable Period. The greatest impact
was a result of lower fair market value for our settled tranches during the Current Period
compared to the fair market value recorded at the beginning of the
Current Period and an increase in crude oil prices during the Current Period for unsettled tranches. We also added
new contracts during the Current Period that showed a gain to partially offset the loss. We settled in cash
a net payment of $36.3 million in derivative contracts during the Current Period. See Note 6 to
Consolidated Financial Statements.
(31)
Interest expense
Interest expense increased approximately $3.6 million. The Current Period included higher
interest expense of approximately $2.7 million primarily due to higher average outstanding debt
balances over the Comparable Period. Capitalized interest for the Current Period was approximately
$67,000 and $393,000 for the Comparable Period. Our weighted average interest rate decreased to
8.32% for the Current Period, from 8.79% for the Comparable Period.
In the Comparable Period we wrote-off the unamortized bank fees of $(760,000) associated with
the Second Lien Term Loan that was retired in July 2007.
Equity in gain (loss) of pipelines and gathering system ventures
For the Current Period, our equity investments recorded a gain of $380,000. This gain
compares to a loss of $(663,000) for the Comparable Period. This increase in earnings of
approximately $1.0 million is the result of increased volumes flowing through the Hagerman Gas
Gathering System Joint Venture during the first part of the Current Period.
In June 2008, we acquired all of the assets of the Hagerman Gas Gathering System. The results
of operations of the Hagerman Gas Gathering System are now included in our operating income and not
as an equity gain/loss item in our Consolidated Statement of Operations. See Note 10 to
Consolidated Financial Statements.
Income taxes, deferred
Income tax expense was $14.7 million in the Current Period, compared to an expense of $2.0
million in the Comparable Period. Income tax expense for 2008 will be dependent on our earnings
and is expected to be approximately 35% of income before income taxes.
Basic and diluted net income
We had basic net income per share of $0.65 and $0.10 and diluted net income per share of $0.64
and $0.09 for 2008 and 2007, respectively. Basic weighted average common shares outstanding
increased from approximately 37.8 million shares in the Comparable Period to approximately 41.4
million shares in Current Period. Diluted weighted average common shares outstanding increased from
approximately 38.8 million shares in the Comparable Period to approximately 41.8 million shares in
the Current Period. The increase was primarily due to our public offering of 3.0 million shares of
common stock in December 2007, the exercise of employee and nonemployee stock options in 2007 and
2008 and warrant exercises in 2008.
LIQUIDITY AND CAPITAL RESOURCES
Our capital resources consist primarily of cash flows from our oil and natural gas properties
and bank borrowings supported by our oil and natural gas reserves. Our level of earnings and cash
flows depend on many factors, including the prices we receive for oil and natural gas we produce.
Our
working
capital deficit decreased approximately $(3.8) million as of September 30, 2008,
compared with December 31, 2007. Current liabilities exceeded current assets by approximately $29.5
million at September 30, 2008. The working capital deficit decrease was due to a decrease in current derivative
obligations of approximately $(8.9) million, an increase in accounts receivable of
approximately $4.1 million and an increase in derivative assets of approximately $4.0
million partially offset by an increase in accounts payable of approximately $11.0
million and a decrease in deferred tax assets of approximately $(4.4) million.
We incurred net property costs of approximately $173.0 million for the nine months ended
September 30, 2008, compared to $111.5 million for the same period in 2007. The increase is
primarily
(32)
related to drilling activity in the Barnett Shale and in the New Mexico Wolfcamp areas,
as well as acquisitions in our core properties. Included in our property basis for the nine months
of 2008 and 2007 were net changes in asset retirement costs of approximately $626,000 and
$(505,000), respectively. See Note 8 to Consolidated Financial Statements.
Our capital investment budget will be funded from our estimated operating cash flows and our
bank borrowings. If our cash flows and bank borrowings are not sufficient to fund all of our
estimated capital expenditures, we may fund any shortfall with proceeds from the sale of our debt
or equity securities, reduce our capital budget or effect a combination of these alternatives. The
amount and timing of our expenditures are subject to change based upon market conditions, results
of expenditures, new opportunities and other factors. In response to recent market conditions, we
have revised our 2008 capital expenditures downward from $171.6 million to $153.9 million.
If our revenues or the borrowing base under our revolving credit facility decrease as a result
of lower oil and natural gas prices, operating difficulties, declines in reserves or for any other
reason, we may have limited ability to obtain the capital necessary to undertake or complete future
drilling projects. We may, from time to time, seek additional financing, either in the form of
increased bank borrowings, sale of debt or equity securities or other forms of financing and there
can be no assurance as to the availability of any additional financing upon terms acceptable to us.
To strengthen our liquidity in the current market environment we drew an additional $62.5 million
against the revolving credit facility during the month of October 2008. See Note 12 Subsequent
Events.
Stockholders equity at September 30, 2008 was $265.1 million, as compared to $235.3 million
at December 31, 2007. The increase is primarily attributable to our net income of approximately
$26.7 million.
Bank Borrowings
In the past, we have maintained two separate credit facilities. One of these credit facilities
is our Fourth Amended and Restated Credit Agreement, dated May 16, 2008, or Revolving Credit
Agreement, with a group of bank lenders which provide us with a revolving line of credit having a
borrowing base limitation of $230.0 million at September 30, 2008. The total amount that we can
borrow and have outstanding at any one time is limited to the lesser of $600.0 million or the
borrowing base established by the lenders. At September 30, 2008, the principal amount outstanding
under our revolving credit facility was $162.5 million, excluding $445,000 reserved for our letters
of credit.
Our second credit facility was a five year term loan facility provided to us under a Second
Lien Term Loan Agreement, or the Second Lien Agreement, with a group of banks and other lenders.
The Second Lien Agreement was paid off and terminated on July 31, 2007 with our payment to the
lenders of $50.2 million, including interest.
Revolving Credit Facility
Our Revolving Credit Agreement allows us to borrow, repay and reborrow amounts available under
the revolving credit facility. The amount of the borrowing base is based primarily upon the
estimated value of our oil and natural gas reserves. The borrowing base 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 loans exceeds the borrowing base, we must either
provide additional collateral to the lenders or repay the outstanding principal of our revolving
credit facility in an amount equal to the excess. Except for principal payments that may be
required because of our outstanding loans being in excess of the borrowing base, interest only is
payable monthly.
As of September 30, 2008, our group of bank lenders included Citibank, N.A., BNP Paribas,
Compass Bank, Comerica Bank, Bank of Scotland plc, Texas Capital Bank, N.A. and Western National Bank.
(33)
Loans made to us under this revolving credit facility bear interest at the base rate of
Citibank, N.A. or the LIBOR rate, at our election. Generally, Citibanks base rate is equal to
its prime rate as announced by it from time to time.
The LIBOR rate is generally equal to the sum of (a) the rate designated as British Bankers
Association Interest Settlement Rates and offered in one, two, three, six or twelve month interest
periods for deposits of $1.0 million, and (b) a margin ranging from 2.00% to 2.50%, depending upon
the outstanding principal amount of our loan. If the principal amount outstanding is equal to or
greater than 75% of the borrowing base, the margin is 2.50%. If the principal amount outstanding is
equal to or greater than 50%, but less than 75% of the borrowing base, the margin is 2.25%. If the
principal amount outstanding is less than 50% of the borrowing base, the margin is 2.00%.
The interest rate we are required to pay on our borrowings, including the applicable margin,
may never be less than 4.75%. At September 30, 2008, our base rate, plus the applicable margin, was
5.0% on $162.5 million, the outstanding principal amount of our revolving loan on that same date.
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; provided
that if the applicable interest period is longer than three months, interest is payable at
three-month intervals following the first day of such interest period.
If the total outstanding borrowings under the revolving credit facility are less than the
borrowing base, we are required to pay an unused commitment fee to the lenders in an amount equal
to .25% of the daily average of the unadvanced portion of the borrowing base. The fee is payable
quarterly.
If the borrowing base is increased, we are also required to pay a fee of .375% on the amount
of any increase.
The Revolving Credit Agreement contains various restrictive covenants, including (i)
maintenance of a minimum current ratio, (ii) maintenance of a maximum ratio of funded indebtedness
to earnings before interest, income taxes, depreciation, depletion and amortization, (iii)
maintenance of a minimum net worth, (iv) prohibition of payment of dividends and (v) restrictions
on incurrence of additional debt. We have pledged substantially all of our producing oil and
natural gas properties to secure the repayment of our indebtedness under the Revolving Credit
Agreement.
All outstanding principal and accrued and unpaid interest under the revolving credit facility
is due and payable on December 31, 2013. The maturity date of our outstanding loans may be
accelerated by the lenders upon the occurrence of an event of default under the Revolving Credit
Agreement.
As of September 30, 2008 we were in compliance with our Revolving Credit Agreement.
As a result of recent conditions in the capital markets and all of the surrounding
uncertainties, we concluded that it would be prudent to draw an
additional $62.5 million under our line of
credit in order to assure availability of and access to these funds. However, in view of the
difficulties experienced by many banking institutions, it is possible that we could also become
exposed to certain risks faced by our bank lenders, including legal, political, regulatory,
operational and other risks. We depend on our ability to withdraw funds on short notice to meet our
obligations. A lenders insolvency or inability to continue participating in our syndicate of banks
in the ordinary course of business could have a material adverse effect on our financial condition
and results of operations. Our lender group at September 30, 2008 was made up of seven
lenders, and no one lender held more than 24% of the facility at September 30, 2008.
(34)
On October 31, 2008, we entered into a First Amendment to our Fourth Amended and Restated
Credit Agreement. Generally, the amendment increases our annual interest rate by one-fourth of one
percent (.25%). Loans made to us under our revolving credit facility bear interest at the base rate of
Citibank, N.A. or the LIBOR rate, at our election. The base rate is generally equal to the sum
of (a) Citibanks prime rate as announced by it from time to time and (b) a specified Base Rate
Margin, the amount of which depends upon the outstanding principal
amount of our loans. The
LIBOR rate is generally equal to the sum of (a) the rate designated as British Bankers
Association Interest Settlement Rates and offered in one, two, three, six or twelve month
interest periods for deposits of $1.0 million, and (b) a specified Libor Margin percentage, the
amount of which depends upon the outstanding principal amount of our loans.
In the First Amendment, the Base Rate Margin was amended from zero percent per annum to:
|
|
|
one-fourth of one percent (.25%) when the borrowing base usage is equal to or
greater than 75%; and |
|
|
|
|
zero percent when the borrowing base usage is less than 75%. |
|
|
In addition, the Libor Margin was amended to mean: |
|
|
|
|
2.75% when the borrowing base usage is equal to or greater than 75%; |
|
|
|
|
2.50% per annum when the borrowing base usage is equal to greater than 50% but less
than 75%; and |
|
|
|
|
2.25% per annum when the borrowing base usage is less than 50%. |
The amendment also established our borrowing base at $230 million, which is the same as our
previous borrowing base.
Our bank lenders at October 31, 2008 include Citibank, N.A., BNP Paribas, Compass Bank, Bank
of Scotland plc, Bank of America, N.A., Texas Capital Bank, N.A., Western National Bank and West Texas
National Bank. None of the bank lenders held more than 21% of
the facility at October 31, 2008.
Senior Notes
On July 31, 2007, we completed a private offering of unsecured senior notes, or the senior
notes, in the principal amount of $150.0 million. At September 30, 2008, the carrying value of our
senior notes was $145.8 million. The senior notes mature on August 1, 2014 and bear interest at
10.25%, per annum, which is payable semi-annually beginning on February 1, 2008. Prior to August 1,
2010, we may redeem up to 35% of the senior notes for a price equal to 110.250% of the original
principal amount of the senior notes with the proceeds of certain equity offerings. On or after
August 1, 2011 we may redeem all or some of the senior notes at a redemption price that will
decrease from 105.125% of the principal amount of the senior notes to 100% of the principal amount
on August 1, 2013. In addition, prior to August 1, 2011, we may redeem some or all of the senior
notes at a redemption price equal to 100% of the principal amount of the senior notes to be
redeemed, plus a make-whole premium, plus any accrued and unpaid interest. Generally, the
make-whole premium is an amount equal to the greater of (a) 1% of the principal amount of the
senior notes being redeemed and (b) the excess of the present value of the redemption price of such
notes as of August 1, 2011 plus all required interest payments due through August 1, 2011 (computed
at a discount rate equal to a specified U.S. Treasury Rate plus 50 basis points), over the
principal amount of the senior notes being redeemed.
The indenture governing the senior notes restricts our ability to: (i) borrow money; (ii)
issue redeemable and preferred stock; (iii) pay distributions or dividends; (iv) make investments;
(v) create liens without securing the senior notes; (vi) enter into agreements that restrict
dividends from subsidiaries; (vii) sell certain assets or merge with or into other companies;
(viii) enter into transactions with affiliates; (ix) guarantee indebtedness; and (x) enter into new
lines of business.
As of September 30, 2008 we were in compliance with our Senior Notes Agreement.
(35)
Interest Accrued
For the Current Period, the aggregate interest accrued under our Revolving Credit Agreement
and our senior notes was approximately $16.2 million. Bank fees and note discount amortization was
approximately $986,000 for the Current Period and interest capitalized was approximately $67,000.
Commodity Price Risk Management Transactions and Effects of Derivative Instruments
The purpose of our derivative transactions is to provide a measure of stability in our cash
flows. The derivative trade arrangements we have employed include collars, costless collars,
floors or purchased puts, and oil, natural gas and interest rate swaps.
At September 30, 2008 we had no derivatives in place that were designated as cash flow hedges.
All commodity derivative contracts at September 30, 2008 were accounted for by mark-to-market
accounting whereby changes in fair value were charged to earnings. Changes in the fair values of
derivatives are recorded in our Consolidated Statements of Operations as these changes occur in
Other income (expense), net. To the extent these trades relate to production in 2008 and beyond,
and oil prices increase, we will report a loss currently, but if there are no further changes in
prices, our revenue will be correspondingly higher (than if there had been no price increase) when
the production is sold.
All interest rate swaps that we have entered into for 2008 and beyond are accounted for by
mark-to-market accounting as prescribed in SFAS 133.
We are exposed to credit risk in the event of nonperformance by the counterparties to our
derivative trade instruments. However, we periodically assess the creditworthiness of the
counterparties to mitigate this credit risk.
We adopted SFAS No. 157 Fair Value Measurement effective January 1, 2008 to measure fair
value of our derivatives which had no significant effect on our financial position or operating
results.
During periods of market disruption, including periods of volatile oil and gas prices, rapid
credit contraction or illiquidity, it may be difficult to value certain of our derivative
instruments if trading becomes less frequent and/or market data becomes less observable. There may
be certain asset classes that were in active markets with observable data that become illiquid due
to the current financial environment. In such cases, more derivative instruments may fall to
Level 3 and thus require more subjectivity and management judgment. As such, valuations may include
inputs and assumptions that are less observable or require greater estimation as well as valuation
methods which are more sophisticated or require greater estimation thereby resulting in valuations
with less certainty. Further, rapidly changing and unprecedented credit and equity market
conditions could materially impact the valuation of derivative instruments as reported within our
consolidated financial statements and the period-to-period changes in value could vary
significantly. Decreases in value may have a material adverse effect on our results of operations
or financial condition.
Management of risk requires, among other things, policies and procedures to record properly
and verify a number of transactions and events. We have devoted resources to develop our risk
management policies and procedures and expect to continue to do so in the future. Nonetheless, our
policies and procedures may not be comprehensive. Many of our methods for managing risk and
exposures are based upon the use of observed historical market behavior or statistics based on
historical models. As a result, these methods may not fully predict future exposures, which can be
significantly greater than our historical measures indicate. Other risk management methods depend
upon the evaluation of information regarding markets, or other matters that is publicly available
or otherwise accessible to us. This information may not always be accurate, complete, up-to-date or
properly evaluated and our risk management policies and procedures may leave us exposed to
unidentified or unanticipated risk, which could negatively affect our
business. See Quantitative and Qualitative Disclosures About Market Risk under Item 3 in
this Form 10-Q and in our 2007 Form 10-K.
(36)
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 obligations
and commitments, we do not believe there will be an adverse effect on our consolidated results of
operations, financial condition or liquidity.
The following table is a summary of significant contractual obligations as of September 30,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligation Due in Period |
|
|
|
Three months |
|
|
|
|
|
|
|
|
|
|
|
|
ending |
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
Years ending December 31, |
|
|
After |
|
|
|
|
Contractual Cash Obligations |
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
5 years |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving Credit Facility (secured)(1) |
|
$ |
2,042 |
|
|
$ |
8,125 |
|
|
$ |
8,125 |
|
|
$ |
8,125 |
|
|
$ |
8,147 |
|
|
$ |
170,625 |
|
|
$ |
205,189 |
|
Senior Notes (unsecured)(2) |
|
|
|
|
|
|
15,375 |
|
|
|
15,375 |
|
|
|
15,375 |
|
|
|
15,375 |
|
|
|
180,750 |
|
|
|
242,250 |
|
Office Lease (Dinero Plaza) |
|
|
67 |
|
|
|
271 |
|
|
|
107 |
|
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
476 |
|
Asset retirement obligations(3) |
|
|
662 |
|
|
|
223 |
|
|
|
44 |
|
|
|
91 |
|
|
|
33 |
|
|
|
4,785 |
|
|
|
5,838 |
|
Derivative Obligations |
|
|
9,198 |
|
|
|
16,748 |
|
|
|
14,691 |
|
|
|
226 |
|
|
|
|
|
|
|
|
|
|
|
40,863 |
|
Put premium obligations(4) |
|
|
|
|
|
|
646 |
|
|
|
1,378 |
|
|
|
1,689 |
|
|
|
|
|
|
|
|
|
|
|
3,713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
11,969 |
|
|
$ |
41,388 |
|
|
$ |
39,720 |
|
|
$ |
25,537 |
|
|
$ |
23,555 |
|
|
$ |
356,160 |
|
|
$ |
498,329 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Outstanding principal of $162.5 million due December 31, 2013 and estimated
interest obligation calculated using the interest rate at September 30, 2008 of 5.0%.
See Note 12 Subsequent Events. |
|
(2) |
|
Outstanding principal of $150.0 million due August 1, 2014 and interest
obligation calculated at an interest rate of 10.25%. |
|
(3) |
|
Assets retirement obligations of oil and natural gas assets, excluding salvage value and
accretion. |
|
(4) |
|
The put premium obligations above rep resent the undiscounted obligation to our counterparty. We
have recognized $45,000 of interest for the nine months ended September 30, 2008 and will
recognize $343,000 interest associated with the put premium obligations over the remaining life of the
contracts. |
At
September 30, 2008, we had no off-balance sheet debt or other off-balance sheet
arrangements.
Trends and Outlook
Our business is influenced by trends that affect the oil and gas industry. In particular,
recent declines in oil and natural gas prices and recent economic trends could adversely affect our
business, liquidity, results of operations and financial conditions.
Our business is increasingly subject to the adverse trends that have taken place in the global
capital markets recently. The recent events in the credit and stock markets indicate a high
likelihood of a continuation of, and probable further expansion of, the economic weakness in the
U.S. economy that began over one year ago. The spillover of deepening fears about our banking
system may adversely impact investor confidence in us, our banking relationships, and the liquidity
and financial condition of third parties with whom we conduct
operations.
We expect to face the continuing challenges of weakness in the U.S. real estate market and
increased mortgage delinquencies, investor anxiety over the U.S. economy, rating agency downgrades
of various financial issuers, unresolved issues with structured investment vehicles, deleveraging
of financial institutions and hedge funds and dislocation in the inter-bank market. If significant,
continued volatility, changes in interest rates, defaults, market liquidity, declines in equity
prices, and the strengthening or
(37)
weakening of foreign currencies against the U.S. dollar,
individually or in tandem, could have a material adverse effect on our liquidity, results of
operations, financial condition or cash flows through realized losses, and impairments.
In response to current market conditions, we have:
|
|
|
revised our 2008 capital expenditures downward from $171.6 million to $153.9
million, of which: |
|
|
|
$14.2 million is associated with a 9 gross (9.0 net) well decrease in
our previously planned drilling activity in the New Mexico Wolfcamp
project; |
|
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|
$2.3 million is associated with the deferral of 3 gross (2.6 net) wells
in the Diamond M Canyon Reef project due to the unavailability of a
drilling rig until November 15, 2008; and |
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|
|
$1.2 million is associated with the deferral of 3 gross (2.9 net) wells
in the Utah/Colorado project due to delays in permitting; |
|
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|
adopted a less aggressive capital expenditure budget of $118.8 million for 2009; |
|
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|
drawn an additional $62.5 million under our Revolving Credit Agreement and invested
the majority of the $62.5 million in a demand deposit money market account for the purpose of strengthening our
liquidity; and |
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|
requested that our bank lenders not increase our borrowing base at the present time
because of the associated interest rate and fee increases that our lenders advised us
would accompany any such borrowing base increase. |
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:
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internally generated cash from operations; |
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|
proceeds from bank borrowings; and |
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|
proceeds from sales of equity and debt securities. |
The continued availability of these capital sources depends upon a number of variables,
including:
|
|
|
our proved reserves; |
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|
the volumes of oil and natural gas we produce from existing wells; |
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|
|
the prices at which we sell oil and natural gas; |
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|
our ability to acquire, locate and produce new reserves; and |
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|
events occurring within the global capital markets. |
Each of these variables materially affects our borrowing capacity. We may from time to time
seek additional financing in the form of:
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|
|
increased bank borrowings; |
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|
|
additional sales of our debt or equity securities; |
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|
sales of non-core properties; |
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|
other forms of financing; or |
(38)
|
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|
a combination of the above. |
Except for the revolving credit facility we have with our bank lenders, we do not currently
have any agreements for any future financing and there can be no assurance as to the availability
or terms of any such future financing.
Oil and Natural Gas Price Trends
Changes in oil and natural gas prices significantly affect our revenues, financial condition,
cash flows and borrowing capacity. Markets for oil and natural gas have historically been volatile
and we expect this trend to continue. 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. Although we are unable to accurately predict the prices we
receive for our oil and natural gas, any significant or sustained declines in oil or natural gas
prices may materially adversely affect our financial condition, liquidity, ability to obtain
financing and operating results. Lower oil or natural gas prices also may reduce the amount of oil
or natural gas that we can produce economically. A decline in oil or natural gas prices could have
a material adverse effect on the estimated value and estimated quantities of our oil and natural
gas reserves, our ability to fund our operations and our financial condition, cash flow, results of
operations and access to capital. See Note 12 Subsequent Events.
Our capital expenditure budgets are highly dependent on future oil and natural gas prices.
For the nine months ended September 30, 2007, the average realized sales price for our oil and
natural gas was $47.86 per BOE. For the nine months ended September 30, 2008, our average realized
price was $72.73 per BOE.
Production Trends
Like all other oil and gas exploration and production companies, we experience natural
production declines. We recognize that oil and gas production from a given well naturally
decreases over time and that a downward trend in our overall production could occur unless these
natural declines are offset by additional production from drilling, workover or recompletion
activity, or acquisitions of producing properties. If any production declines we experience are
other than a temporary trend, and if we cannot economically replace our reserves, our results of
operations may be materially adversely affected and our stock price may decline. Our future growth
will depend upon our ability to continue to add oil and natural gas reserves in excess of
production at a reasonable cost.
While we have achieved increased production and revenue in our New Mexico Wolfcamp and Barnett
Shale projects as a result of our significant investments in these areas, production growth in our
Barnett Shale investments has been restricted due to limited pipeline capacity.
In recent periods, we have concentrated our drilling and development efforts on our resource
natural gas projects in our Barnett Shale and New Mexico Wolfcamp projects. Due to limited
development, our production has decreased in accordance with normal decline curves for our
principal Permian Basin oil properties and south Texas gas properties.
Lease Operating Expense Trends
The level of drilling, workover and maintenance activity in the primary areas in which we
operate and produce continues at a historically high level. Service rates charged by oil field
service companies have increased significantly during recent periods and electrical cost has also
increased. These increased cost levels have affected our per BOE lease operating expense. While
we do not expect the rate of increase of service costs to continue at the same pace as in recent
periods, further increases are possible and could significantly impact our lease operating expense.
(39)
Interest Expense Trends
On July 31, 2007 we completed a private offering of $150.0 million of senior notes that bear
interest at 10.25%. As a result of the issuance of the notes and the increase in our current
borrowings, we expect a corresponding increase in our annual interest expense. An increase in
interest rates will also negatively impact our interest expense.
Recent Accounting Pronouncements
We adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No.
48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109 (FIN
48), on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprises financial statements in accordance with FASB Statement 109,
Accounting for Income Taxes, and prescribes a recognition threshold and measurement process for
financial statement recognition and measurement of a tax position taken or expected to be taken in
a tax return. FIN 48 also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition.
Based on our evaluation, we have concluded that there are no significant uncertain tax
positions requiring recognition in our financial statements. Our evaluation was performed for the
tax years ended December 31, 2004, 2005, 2006 and 2007, the tax years which remain subject to
examination by major tax jurisdictions as of September 30, 2008.
We may from time to time be assessed interest or penalties by major tax jurisdictions,
although any such assessments historically have been minimal and immaterial to our financial
results.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157), which
defines fair value, establishes a framework for measuring fair value in accordance with generally
accepted accounting principles, and expands disclosures about fair value measurements. This
statement does not require any new fair value measurements but may require some entities to change
their measurement practices. We adopted SFAS No. 157 effective January 1, 2008 and the adoption
did not have a significant effect on our financial position or operating results.
In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and
Financial Liabilities, Including an Amendment of FASB Statement No. 115, (FAS 159) which became
effective on January 1, 2008. FAS 159 permits entities to measure eligible financial assets,
financial liabilities and firm commitments at fair value, on an instrument-by-instrument basis,
that are otherwise not permitted to be accounted for at fair value under other generally accepted
accounting principles. The fair value measurement election is irrevocable and subsequent changes in
fair value must be recorded in earnings. This statement, for us, became effective in the first
quarter of 2008 and it did not have any effect on our financial position or operating results as we
did not elect to apply the Fair Value Method.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS
141(R)), which replaces FASB Statement No. 141. SFAS 141(R) establishes principles and
requirements for how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree
and the goodwill acquired. The statement also establishes disclosure requirements that will enable
users to evaluate the nature and financial effects of the business combination. SFAS 141(R) is
effective for acquisitions that occur in an entitys fiscal year that begins after December 15,
2008, which will be our fiscal year 2009. The impact, if any, will depend on the nature and size of
business combinations that we consummate after the effective date.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated
(40)
Financial Statementsan amendment of ARB No. 51 (SFAS 160). SFAS 160 requires that accounting
and reporting for minority interests will be recharacterized as noncontrolling interests and
classified as a component of equity. SFAS 160 also establishes reporting requirements that provide
sufficient disclosures that clearly identify and distinguish between the interests of the parent
and the interests of the noncontrolling owners. SFAS 160 applies to all entities that prepare
consolidated financial statements, except not-for-profit organizations, but will affect only those
entities that have an outstanding noncontrolling interest in one or more subsidiaries or that
deconsolidate a subsidiary. This statement is effective as of the beginning of an entitys first
fiscal year beginning after December 15, 2008, which will be our fiscal year 2009. Based upon our
balance sheet, the statement would have no impact.
In
March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities, an amendment of FASB Statement No. 133 (SFAS 161). This statement is intended
to improve transparency in financial reporting by requiring enhanced disclosures of an entitys
derivative instruments and hedging activities and their effects on the entitys financial position,
financial performance, and cash flows. SFAS 161 applies to all derivative instruments within the
scope of SFAS 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133), as
well as related hedged items, bifurcated derivatives, and nonderivative instruments that are
designated and qualify as hedging instruments. Entities with instruments subject to SFAS 161 must
provide more robust qualitative disclosures and expanded quantitative disclosures. SFAS 161 is
effective prospectively for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application permitted. We are currently evaluating
the disclosure implications of this statement.
Critical Accounting Policies
Our critical accounting policies are included and discussed in our Annual Report on Form 10-K
for the year ended December 31, 2007, as filed with the Securities and Exchange Commission on
February 20, 2008. These critical accounting policies 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 on Form 10-K for the
year ended December 31, 2007.
FORWARD-LOOKING STATEMENTS
Cautionary Statement Regarding Forward-Looking Statements
Some statements contained in this Quarterly Report on Form 10-Q 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 drilling plans and ability to secure drilling rigs to effectuate our plans; |
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production volumes; |
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our business strategy; |
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market prices; |
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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. |
(41)
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 from 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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difficult and adverse conditions in the global and domestic capital and credit
markets; |
|
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|
continued volatility and further deterioration of the capital and credit markets; |
|
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|
|
uncertainty about the effectiveness of the U.S. governments plan to purchase large
amounts of illiquid, mortgage-backed and other securities from financial institutions; |
|
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|
|
the impairment of financial institutions; |
|
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|
|
exposure to financial and capital market risk; |
|
|
|
|
changes in general economic conditions, including the performance of financial
markets and interest rates, which may affect our ability to raise capital and generate
operating cash flow; |
|
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|
unanticipated changes in industry trends; |
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|
fluctuations in prices of oil and natural gas; |
|
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|
dependent on key personnel; |
|
|
|
|
reliance on technological development and technology development programs; |
|
|
|
|
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; |
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|
general economic conditions; |
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|
governmental regulations and liability for environmental matters; |
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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 |
(42)
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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 Item 1A. Risk Factors
on page 48 of this Quarterly Report and under Risks Related to Our Business beginning on page 13
of our Form 10-K for the year ended December 31, 2007.
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 we were a party at September 30, 2008, and from which we may incur
future earnings, gains or losses from changes in market interest rates and oil and natural gas
prices.
Interest Rate Sensitivity as of September 30, 2008
Although we are currently protected from interest rate volatility up to $250.0 million through
our senior notes and our interest rate swaps, we are exposed to interest rate volatility on lending
above this level. Our only financial instruments sensitive to changes in interest rates are our
bank debt and interest rate swaps. As the interest rate is variable and reflects current market
conditions, the carrying value of our bank debt approximates the fair value. The table below shows
principal cash flows and related interest rates by expected maturity dates. Refer to Note 3 of the
Consolidated Financial Statements for further discussion of our debt that is sensitive to interest
rates.
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|
|
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|
2012 and |
|
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|
|
2008 |
|
2009 |
|
2010 |
|
2011 |
|
after |
|
Total |
|
|
|
|
|
|
($ in thousands, except interest rates) |
|
|
|
|
Revolving Credit Facility (secured) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
162,500 |
|
|
$ |
162,500 |
|
Average interest rate |
|
|
5.00 |
% |
|
|
5.00 |
% |
|
|
5.00 |
% |
|
|
5.00 |
% |
|
|
5.00 |
% |
|
|
|
|
Senior notes |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
150,000 |
|
|
$ |
150,000 |
|
Average interest rate |
|
|
10.25 |
% |
|
|
10.25 |
% |
|
|
10.25 |
% |
|
|
10.25 |
% |
|
|
10.25 |
% |
|
|
|
|
At September 30, 2008, we had outstanding bank loans in the aggregate principal amount of
$162.5 million at a base interest rate of 5.0%, including applicable margin. Under our revolving
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 2.00% to 2.50% 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 4.75%. A change in the interest rate of one percent could cause an
approximate $600,000 change in interest expense on an annual basis on the current amount of
borrowings, when factoring in the interest rate protection we have with our interest rate swaps.
At September 30, 2008, we had outstanding senior notes in the aggregate principal amount of
$150.0 million bearing interest at a rate of 10.25% per annum. The carrying value of our 10.25%
senior notes at September 30, 2008 was approximately $145.8 million. Interest on our senior notes
and their carrying value are not affected by changes in interest rates.
We have employed fixed interest rate swap contracts with BNP Paribas and Citibank, N.A. based
on the 90-day LIBOR rates at the time of the contract. These contracts are accounted for by
mark-to-market accounting as prescribed in SFAS 133. As of September 30, 2008, the fair market
value of these interest rate swaps was a liability of approximately $2.4 million.
(43)
A recap for the period of time, notional amounts, fixed interest rates, and fair market value
of these contracts at September 30, 2008 follows:
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|
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|
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|
|
|
|
|
|
Weighted Average |
|
|
Estimated |
|
|
|
Notional |
|
|
Fixed |
|
|
Fair |
|
Period of Time |
|
Amounts |
|
|
Interest Rates |
|
|
Market Value |
|
|
|
($ in millions) |
|
|
|
|
|
|
($ in thousands) |
|
October 1, 2008 thru December 31, 2008 |
|
$ |
100 |
|
|
|
4.86 |
% |
|
$ |
(264 |
) |
January 1, 2009 thru December 31, 2009 |
|
$ |
100 |
|
|
|
4.22 |
% |
|
|
(1,084 |
) |
January 1, 2010 thru December 31, 2010 |
|
$ |
100 |
|
|
|
4.71 |
% |
|
|
(822 |
) |
January 1, 2011 thru December 31, 2011 |
|
$ |
100 |
|
|
|
4.60 |
% |
|
|
(227 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total Fair Market Value |
|
|
|
|
|
|
|
|
|
$ |
(2,397 |
) |
|
|
|
|
|
|
|
|
|
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|
|
Commodity Price Sensitivity
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 natural gas production have been volatile and unpredictable. We expect
pricing volatility to continue. NYMEX closing oil prices ranged from a low of $56.59 per barrel to
a high of $83.32 per barrel during the nine months ended September 30, 2007. NYMEX closing natural
gas prices during the nine months ended September 30, 2007 ranged from a low of $5.38 per Mcf to a
high of $8.19 per Mcf. During the nine months ended September 30, 2008 NYMEX closing oil prices
ranged from a low of $87.14 to a high of $145.29. NYMEX closing natural gas prices during the nine
months ended September 30, 2008 ranged from a low of $7.22 per Mcf to a high of $13.58 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 September 30, 2008, we had employed costless
collars, puts 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
contracts are accounted for by the mark-to-market accounting method as prescribed in SFAS 133.
At September 30, 2008 we had crude oil collar, put and swap derivative contracts in place
covering future oil production of approximately 1.7 million barrels. Crude oil futures prices have
continued to decrease since September 30, 2008. If prices stay at current levels, the settlement
price will be within the price range of the collar contracts, thus allowing for no cash payment at
settlement date for either the company or our counterparties. In addition at current price levels,
the settlement price will cause our counterparty to pay us at settlement date for our put
contracts. However, we will continue to make payment at settlement date for our swap contracts.
The swap contracts are set to expire at December 31, 2008.
At September 30, 2008 we had natural gas collar derivative contracts in place covering future
natural gas production of approximately 4.2 Bcf. Natural gas futures prices have continued to
decrease since September 30, 2008 and if prices stay at current levels, the company anticipates
that we will either make no cash payment or we will receive payment from our counterparties for
these natural gas derivative contracts at settlement date.
Changes in commodity prices will affect the fair value of our derivative contracts as recorded
on our balance sheet during future periods and, consequently, our reported net earnings. The
changes in the recorded fair value of the commodity derivatives are marked to market through
earnings. If commodity prices decrease, this commodity price change will have a positive impact to
our earnings. Conversely, if
(44)
commodity prices increase, this commodity price change will have a
negative effect on earnings. Each derivative contract is evaluated separately to determine its own
fair value. Due to the current volatility of both crude oil and natural gas prices, we are
currently unable to estimate the effects on earnings in future periods, but based on the volume of
our future oil and gas production covered by commodity derivative contracts, the effects may be
material.
Descriptions of our active commodity derivative contracts as of September 30, 2008 are set
forth below:
Put Options. Puts are an option to sell an asset. For any put transaction, the
counterparty is required to make a payment to the Company if the reference floating price for any
settlement period is less than the put or floor price for such contract.
In June 2008, we entered into multiple put contracts with BNP Paribas. In lieu of making
premium payments for the puts at the time of entering into our put contracts, we deferred payment
until the settlement dates of the contracts. Future premium payments will be netted against any
payments that the counterparty may owe to us based on the floating price. Due to the deferral of
the premium payments, we will pay a total amount of premiums of $3.713 million which is $388,000
greater than if the premiums had been paid at the time of entering into the contracts. The
$388,000 difference is recorded as a discount to the put premium obligations and recognized as
interest expense over the terms of the contracts using the interest method. Through September 30,
2008, we have accrued $45,000 to interest expense. Accordingly, the balance of the put premium
obligations at September 30, 2008 including accrued interest is $3.370 million.
A summary of our put positions at September 30, 2008 is as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
Barrels of |
|
|
|
|
|
|
Fair Market |
|
Period of Time |
|
Oil |
|
|
Floor |
|
|
Value |
|
|
|
|
|
|
|
|
|
|
|
($ in thousands) |
|
January 1, 2009 through December 31, 2009 |
|
|
109,500 |
|
|
$ |
100.00 |
|
|
$ |
1,470 |
|
January 1, 2010 through December 31, 2010 |
|
|
134,100 |
|
|
$ |
100.00 |
|
|
|
2,083 |
|
January 1, 2011 through December 31, 2011 |
|
|
146,000 |
|
|
$ |
100.00 |
|
|
|
2,314 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fair Market Value |
|
|
|
|
|
|
|
|
|
$ |
5,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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 September 30, 2008 is as follows:
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|
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|
|
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|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
Barrels of |
|
NyMex Oil Prices |
|
Fair Market |
Period of Time |
|
Oil |
|
Floor |
|
Cap |
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands) |
October 1, 2008 thru December 31, 2008 |
|
|
87,400 |
|
|
$ |
63.42 |
|
|
$ |
83.86 |
|
|
|
(1,581 |
) |
January 1, 2009 thru December 31, 2009 |
|
|
620,500 |
|
|
$ |
63.53 |
|
|
$ |
80.21 |
|
|
|
(15,664 |
) |
January 1, 2010 thru October 31, 2010 |
|
|
486,400 |
|
|
$ |
63.44 |
|
|
$ |
78.26 |
|
|
|
(13,869 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
M M Btu of |
|
|
WAHA Gas Prices |
|
|
|
|
|
|
|
Natural Gas |
|
|
Floor |
|
|
Cap |
|
|
|
|
|
October 1, 2008 through December 31, 2008 |
|
|
920,000 |
|
|
$ |
7.38 |
|
|
$ |
9.28 |
|
|
|
1,793 |
|
January 1, 2009 through December 31, 2009 |
|
|
3,285,000 |
|
|
$ |
7.06 |
|
|
$ |
9.93 |
|
|
|
1,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fair Market Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(27,787 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(45)
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.
A recap for the period of time, number of barrels, swap prices and fair market values as of
September 30, 2008 for these swaps follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
Number of |
|
|
NyMex Oil |
|
|
Fair Market |
|
Period of Time |
|
Barrels of Oil |
|
|
Swap Price |
|
|
Value |
|
|
|
|
|
|
|
|
|
|
|
($ in thousands) |
|
October 1, 2008 thru December 31, 2008 |
|
|
110,400 |
|
|
$ |
33.37 |
|
|
|
(7,353 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
ITEM 4. CONTROLS AND PROCEDURES
As
of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness
of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934, as amended) was evaluated by our management, with the participation of our
Chief Executive Officer, Larry C. Oldham (principal executive officer), and our Chief Financial
Officer, Steven D. Foster (principal financial officer), in accordance with rules of the Securities
Exchange Act of 1934, as amended. Based on that evaluation, Mr. Oldham and Mr. Foster have
concluded that our disclosure controls and procedures were effective as of September 30, 2008 to
provide reasonable assurance that information required to be disclosed in our reports filed or
submitted under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to
management and recorded, processed, summarized and reported within the time periods specified in
the SECs rules and forms.
There were no changes in our internal control over financial reporting that occurred during
our last fiscal quarter that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are party to ordinary routine litigation incidental to our business.
On April 14, 2008, we were added as a defendant to a lawsuit filed in 2007, styled Brady
Briscoe vs. Capstar Drilling, L.P. (Capstar), Cause No. 21,287, in the 259th District Court of
Jones County, Texas. The plaintiff has alleged that he was injured as the result of an accident
while he was working, as an employee of an unrelated third party, on a drilling rig operated by
Capstar. Capstar was conducting drilling operations for us. The plaintiff has asserted general
allegations of negligence as to Capstar and, specifically, a failure to properly equip its drilling
rig, further alleging we were in charge of the drilling rig and the operational details of the
plaintiffs work. The plaintiff has sued for an amount of actual damages of up to $15.0 million,
together with pre-judgment interest, post-judgment interest and exemplary damages. Capstar
recently settled with the plaintiff and Capstar has been dismissed from the lawsuit. If judgment
is entered against us, we would be entitled to a credit for the amount that the plaintiff has
already received from Capstar.
(46)
Even though we cannot predict the ultimate outcome of this matter, we believe we have
meritorious defenses and intend to vigorously contest this lawsuit. We have not established a
reserve with respect to the plaintiffs claims.
On March 24, 2008, a lawsuit was filed in the 24th District Court of Jackson
County, Texas, against us and twenty-two other defendants in Cause No. 07-6-13069, styled Tony
Kubenka, Carolyn Kubenka, Dennis J. Kallus, David J. Kallus, Mary L. Kallus, Patricia Kallus, Nova
Deleon, Janie Figuerova, and Larkin Thedford, Plaintiffs v. Tri-C Resources, Inc., Marie S. Adian,
Laura E. Adian, Glenn A. Fiew, Lynn Kramer, Debra Boysen, Carol J. Gleason, Alana Sue Curlee,
Connie W. Marthiljohni, Claire E. Adian, Zachary D. Adian, Donald R. Starkweather, Inc., D.A.
Webernick, Danette Bundick, Johnny A. Webernick, Donna Gail Glover, Sherry Shulze, William H.
Webernick, Jr., TAC Resources, Inc., New Century Exploration, Inc., Allegro Investments, Inc.,
Parallel Petroleum Corporation and Welper Interests, LP.
The nine plaintiffs in this lawsuit have named us and the other working interest owners,
including Tri-C Resources, Inc., the operator, as defendants. The plaintiffs in this lawsuit allege
that they are royalty owners under oil and gas leases which are part of a pooled gas unit (the
unit) located in Jackson County, Texas, and that the defendants, including us, are owners of the
leasehold estate under the plaintiffs leases and others forming the unit. Plaintiffs also assert
that one of the leases (other than plaintiffs leases) forming part of the unit has terminated and,
as a result, the defendants have not properly computed the royalties due to plaintiffs from unit
production and have failed to properly pay royalties due to them. Plaintiffs have sued for an
unspecified amount of damages, including exemplary damages, under theories of breach of contract
(including breach of express and implied covenants of their leases) and conversion, and seek an
accounting, a declaratory judgment to declare the rights of the parties under the leases, and
attorneys fees, interest and court costs.
If a judgment adverse to the defendants was entered, as a working interest owner in the leases
comprising the unit, we believe our liability would be proportionate to the ownership of the other
working interest owners in the leases. We have filed an answer denying any liability. Although an
initial exchange of discovery has occurred, we cannot predict the ultimate outcome of this matter,
we believe we have meritorious defenses and intend to vigorously contest this lawsuit. We have not
established a reserve with respect to plaintiffs claims.
We received a Notice of Proposed Adjustment from the Internal Revenue Service, or the
Service in May 2007 advising us of proposed adjustments to federal income tax of approximately
$2.0 million for the years 2004 and 2005. Subsequent discussions with the Service placed the
issues contested in a development status. In November 2007, the Service issued a letter on the
matter giving the company 30 days to agree or disagree with a final examination report. The final
examination report reflected revisions of the previous proposed adjustments resulting in a reduced
$1.1 million of additional income tax and interest charges. The decrease in proposed tax was the
result of information supplied by us to the examiner as well as discussions of the applicable tax
statutes and regulations. In December 2007, we filed a protest documenting our complete
disagreement with the adjustments proposed on the final examination report and requested a
conference with the appeals office of the Service. The examination office of the Service filed a
response to our protest in February 2008 with the appeals office. On June 4, 2008, our
representatives met with the Services Appeals Officer to review specific issues related to our
calculation of net income from oil and gas and the associated treatment of certain deductions.
During this meeting we were advised that a request to issue an advisory opinion had been
submitted to the National Office of the Service. Pending issuance of this advisory opinion, we will
submit an amendment to our initial protest in further support of our position. We intend to
vigorously contest the adjustment proposed by the Service and believe that we will ultimately
prevail in our position. We have not recorded a liability for tax, interest, or penalties related
to this matter based on our analysis. If a liability for additional income tax should later be
determined to be more likely than not, we anticipate the adjustment to increase the federal income
tax liability would be offset by an increase to a deferred tax asset and would not result in a
charge to earnings. Any interest or penalties resulting from a subsequent determination of
increased tax liability would require a charge to earnings. We believe that the effects of this
matter would not have a material effect on our results of
(47)
operations for the fiscal quarter in
which we actually incur or establish a reserve account for interest or penalties.
We are also presently a named defendant in one other lawsuit arising out of our operations in
the normal course of business, which we believe is not material.
We are not aware of any legal or governmental proceedings against us, or contemplated to be
brought against us, under the various environmental protection statutes to which we are subject,
nor have we been a party to any bankruptcy, receivership, reorganization, adjustment or similar
proceeding.
ITEM 1A. RISK FACTORS
You should review and consider the information regarding certain factors which could
materially affect our business, financial condition or future results set forth under Part I, Item
1A Risk Factors in our annual Report on Form 10-K for 2007. Except as set forth below, there have
been no material changes during the quarter ended September 30, 2008, to the Risk Factors set forth
in Part I, Item 1A of our Annual Report on Form 10-K for 2007.
General economic conditions could adversely impact our capital expenditure program which would
affect our results of operations.
A further slowdown in the U.S. economy or other economic conditions affecting capital markets,
such as declining oil and gas prices, failing or weakened financial institutions, inflation,
deteriorating business conditions, interest rates and tax rates, may adversely affect our business
and financial condition by reducing overall public confidence in our financial strength, by causing
us to further reduce our capital expenditure program and curtail planned drilling activities or by
causing the oil field service sector of the domestic oil and gas industry to reduce equipment,
labor and services that would otherwise be available to us. Further, some of our properties are operated by third parties whom we depend upon for
timely performance of drilling and other contractual obligations and, in some cases, for
distribution to us of our proportionate share of revenues from sales of oil and gas we produce. If
current economic conditions adversely impact our third party operators, we are exposed to the risk
that drilling operations or revenue disbursements to us could be delayed. This trickle down
effect could significantly harm our business, financial condition and results of operation.
Adverse capital and credit market conditions may significantly affect our ability to meet
liquidity needs, access to capital and cost of capital.
The capital and credit markets have been experiencing extreme volatility and disruption for
more than twelve months. In recent weeks, the volatility and disruption have reached unprecedented
levels. In some cases, the markets have exerted downward pressure on availability of liquidity and
credit capacity for certain issuers.
We need liquidity to pay our operating expenses and interest on our debt. Without sufficient
liquidity, we could be forced to curtail our operations, and our business will suffer. The
principal sources of our liquidity have been cash flow from our operations, bank borrowings and
proceeds from the sale of our debt and equity securities.
If cash flow from operations and bank borrowings do not satisfy our needs, we may have to seek
additional financing. The availability of additional financing will depend on a variety of factors
such as market conditions, the general availability of credit, the volume of trading activities,
the overall availability of credit to the exploration and production segment of the oil and gas
industry, our credit ratings and credit capacity, and the possibility that our lenders could
develop a negative perception of our long or short-term financial prospects if the level of our
business activity decreases due to a market downturn. Similarly, our access to funds may be
impaired if rating agencies take negative actions against us. Our internal sources of
(48)
liquidity
may prove to be insufficient, and in such case, we may not be able to successfully obtain additional
financing on favorable terms, or at all.
Disruptions, uncertainty or volatility in the capital and credit markets may also limit our
access to capital required to operate our business, most significantly our drilling operations.
Such market conditions may limit our ability to: replace, in a timely manner, oil and gas reserves
that we produce; meet maturing liabilities; generate revenue to meet liquidity needs; and access
the capital necessary to grow our business. As such, we may be forced to delay raising capital,
issue more debt or equity securities than we prefer, or bear an unattractive cost of capital which
could decrease our profitability and significantly impair financing alternatives available to us.
Our results of operations, financial condition, cash flows and capital position could be materially
adversely affected by disruptions in the financial markets.
Difficult conditions in the global capital markets and the economy generally may materially
adversely affect our business and results of operations and we do not expect these conditions to
improve in the near future.
Our results of operations are materially affected by conditions in the domestic capital
markets and the economy generally. The stress experienced by domestic capital markets that began in
the second half of 2007 has continued and substantially increased during the third quarter of 2008.
Recently, concerns over inflation, energy costs, geopolitical issues, the availability and cost of
credit, the U.S. mortgage market and a declining real estate market in the U.S. have contributed to
increased volatility and diminished expectations for the economy and the markets going forward.
These factors, combined with volatile oil and gas prices, declining business and consumer
confidence and increased unemployment, have precipitated an economic slowdown and fears of a
possible recession. In addition, the fixed-income markets are experiencing a period of extreme
volatility which has negatively impacted market liquidity conditions.
Initially, the concerns on the part of market participants were focused on the subprime
segment of the mortgage-backed securities market. However, these concerns have since expanded to
include a broad range of mortgage-and asset-backed and other fixed income securities, including
those rated investment grade, the U.S. and international credit and interbank money markets
generally, and a wide range of financial institutions and markets, asset classes and sectors. As a
result, capital markets have experienced decreased liquidity, increased price volatility, credit
downgrade events, and increased probabilities of default. These events and the continuing market
upheavals may have an adverse effect on us because our liquidity and ability to fund our capital
expenditures is dependent in part upon our bank borrowings and access to the public capital
markets. Our revenues are likely to decline in such circumstances. In addition, in the event of
extreme prolonged market events, such as the global credit crisis, we could incur significant
losses. Even in the absence of a market downturn, we are exposed to substantial risk of loss due to
market volatility.
Factors such as business investment, government spending, the volatility and strength of the
capital markets, and inflation all affect the business and economic environment and, ultimately,
the profitability of our business. In an economic downturn characterized by higher unemployment,
lower corporate earnings and lower business investment, our operations could be negatively
impacted. Purchasers of our oil and gas production may delay or be unable to make timely payments
to us. Adverse changes in the economy could affect earnings negatively and could have a material
adverse effect on our business, results of operations and financial condition. The current mortgage
crisis has also raised the possibility of future legislative and regulatory actions in addition to
the recent enactment of the Emergency Economic Stabilization Act of 2008 (the EESA) that could
further impact our business. We cannot predict whether or when such actions may occur, or what
impact, if any, such actions could have on our business, results of operations and financial
condition.
There can be no assurance that actions of the U.S. Government, Federal Reserve and other
governmental and regulatory bodies for the purpose of stabilizing the financial markets will
achieve the intended effect.
(49)
In response to the financial crises affecting the banking system and financial markets and
going concern threats to investment banks and other financial institutions, on October 3, 2008,
President Bush signed the EESA into law. Pursuant to the EESA, the U.S. Treasury has the authority
to, among other things, purchase up to $700 billion of mortgage-backed and other securities from
financial institutions for the purpose of stabilizing the financial markets. The Federal
Government, Federal Reserve and other governmental and regulatory bodies have taken or are
considering taking other actions to address the financial crisis. There can be no assurance as to
what impact such actions will have on the financial markets, including the extreme levels of
volatility currently being experienced. Such continued volatility could materially and adversely
affect our business, financial condition and results of operations, or the trading price of our
common stock.
The impairment of financial institutions could adversely affect us.
We have exposure to many different industries and counterparties, and routinely execute
transactions with counterparties in the commercial banking industry. Many of these transactions
expose us to credit risk in the event of default of our counterparty. In addition, with respect to
our secured bank borrowings, our credit risk may be exacerbated when the collateral held by our
lenders cannot be realized upon or is liquidated at prices not sufficient to recover the full
amount of the loan due to it.
If the counterparties to the derivative instruments we use to hedge our business risks default
or fail to perform, we may be exposed to risks we had sought to mitigate, which could materially
adversely affect our financial condition and results of operations.
We use derivative instruments to mitigate our risks in various circumstances. We enter into a
variety of derivative instruments, including swaps, puts and collars with a number of
counterparties. See Item 7A, Quantitative and Qualitative Disclosures About Market Risk in our
2007 Form 10-K. If our counterparties fail or refuse to honor their obligations under these
derivative instruments, our hedges of the related risk will be ineffective. This is a more
pronounced risk to us in view of the recent stresses suffered by financial institutions. Such
failure could have a material adverse effect on our financial condition and results of operations.
We cannot provide assurance that our counterparties will honor their obligations now or in the
future. A counterpartys insolvency, inability or unwillingness to make payments required under
terms of derivative instruments with us could have a material adverse effect on our financial
condition and results of operations. At the date of filing this Form 10-Q Report with the
Securities and Exchange Commission, our counterparties included Citibank, N.A. and BNP Paribas. As
of September 30, 2008, we had a net derivative liability to Citibank, N.A. of $21.6 million and a
net derivative liability to BNP Paribas of $13.4 million.
The fluctuation and volatility of oil and natural gas prices may adversely affect our
business, the value of our mineral properties, our revenues and profitability.
Our business, the value of our oil and natural gas properties and our revenues and
profitability are substantially dependent on prevailing prices of oil and natural gas. Our ability
to borrow and to obtain additional capital on attractive terms is also substantially dependent upon
oil and natural gas prices. Volatile oil and natural gas prices make it difficult to estimate the
value of producing properties for acquisition and often causes disruption in the market for
acquiring oil and natural gas producing properties, as buyers and sellers have difficulty agreeing
on such value. Price volatility also makes it difficult to budget for acquisitions, development and
exploitation projects. From September 30, 2006 thru September 30, 2008, oil prices have fluctuated
from a low of approximately $51 to a high of approximately $145 per barrel for oil traded on the
New York Mercantile Exchange (NYMEX). Subsequent to June 30, 2008, the prices of oil and natural
gas traded on NYMEX have declined significantly. Between June 30, 2008 and October 27, 2008, oil
prices have fallen 55% from $140 per barrel to $63.22 per barrel, and gas prices have fallen 54%
from $13.35 per Mcf to $6.12 per Mcf. If commodity prices continue to decline to the point of
reaching or falling below breakeven profitability levels, our financial condition and results of
operation would be materially
(50)
and adversely affected. In addition, any further and extended decline
in the price of oil and natural gas could have an adverse effect on our business, the value of our
properties, our borrowing capacity, revenues, profitability and cash flows from operations.
ITEM 6. EXHIBITS
(a) Exhibits
The following exhibits are filed herewith or incorporated by reference, as indicated:
|
|
|
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 10.1 of the Registrants Current
Report on Form 8-K filed on November 30, 2007) |
|
|
|
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 Designations, 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 1 of Form 8-A of the
Registrant filed with the Securities and Exchange Commission on October 10, 2000) |
|
|
|
4.4
|
|
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) |
|
|
|
4.5
|
|
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) |
|
|
|
4.6
|
|
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) |
(51)
|
|
|
No. |
|
Description of Exhibit |
|
|
|
4.7
|
|
Purchase Warrant Agreement, dated as of October 1, 1980, between the Registrant and American
Stock Transfer, Inc. (Incorporated by reference to Exhibit 4.7 of Form 10-K of the Registrant
for the fiscal year ended December 31, 2006) |
|
|
|
4.8
|
|
First Amendment to Warrant Agreement, dated as of February 22, 2007, among the Registrant,
Computershare Shareholder Services, Inc. and Computershare Trust Company, N.A. (Incorporated
by reference to Exhibit 4.8 of Form 10-K of the Registrant for the fiscal year ended December
31, 2006) |
|
|
|
4.9
|
|
Form of Rule 144A 101/4% Senior Note due 2014 (Incorporated by reference to Exhibit 4.2 to the
Registrants Current Report on Form 8-K filed on August 1, 2007) |
|
|
|
4.10
|
|
Form of IAI 101/4% Senior Note due 2014 (Incorporated by reference to Exhibit 4.3 to the
Registrants Current Report on Form 8-K filed on August 1, 2007) |
|
|
|
4.11
|
|
Form of Regulation S 101/4% Senior Note due 2014 (Incorporated by reference to Exhibit 4.4 to
the Registrants Current Report on Form 8-K filed on August 1, 2007) |
|
|
|
4.12
|
|
Indenture, dated as of July 31, 2007, among the Registrant as Issuer and Wells Fargo Bank,
National Association as Trustee (Incorporated by reference to Exhibit 4.1 to the Registrants
Current Report on Form 8-K filed on August 1, 2007) |
|
|
|
4.13
|
|
Registration Rights Agreement, dated as of July 31, 2007, by and among the Registrant,
Jefferies & Company, Inc., Merrill Lynch, Pierce, Fenner and Smith Incorporated and BNP
Paribas Securities Corp. (Incorporated by reference to Exhibit 10.2 to the Registrants
Current Report on Form 8-K filed on August 1, 2007) |
|
|
|
4.14
|
|
Purchase Agreement, dated as of July 26, 2007, by and among the Registrant, Jefferies &
Company, Inc., Merrill Lynch, Pierce, Fenner and Smith Incorporated and BNP Paribas Securities
Corp. (Incorporated by reference to Exhibit 4.2 to the Registrants Current Report on Form 8-K
filed on August 1, 2007) |
|
|
|
4.15
|
|
Form of 101/4% Unrestricted Senior Note due 2014 (Incorporated by reference to Exhibit 4.13 of
Form S-4 of the Registrant, Registration No. 333-148465) |
|
|
|
|
|
Executive Compensation Plans and Arrangements (Exhibit No.s 10.1 through 10.11): |
|
|
|
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 (Incorporated by reference to Exhibit 10.3 of the
Registrants Form 10-Q of the Registrant for the fiscal quarter ended June 30, 2005) |
|
|
|
10.4
|
|
1998 Stock Option Plan (Incorporated by reference to Exhibit 10.4 of Form 10-K of the
Registrant for the fiscal year ended December 31, 2006) |
|
|
|
10.5
|
|
2001 Non-Employee Directors Stock Option Plan (Incorporated by reference to Exhibit 10.7 of
the Registrants Form 10-Q Report for the fiscal quarter ended March 31, 2004) |
(52)
|
|
|
No. |
|
Description of Exhibit |
|
|
|
10.6
|
|
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) |
|
|
|
10.7
|
|
Incentive and Retention Plan (Incorporated by reference to Exhibit 10.7 of Form 10-K of the
Registrant for the fiscal year ended December 31, 2006) |
|
|
|
10.8
|
|
2008 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.1 of the Registrants
Form 8-K Report dated March 27, 2008) |
|
|
|
10.9
|
|
Form of Nonqualified Stock Option Agreement for nonqualified stock options granted under the
Registrants 2008 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.2 of the
Registrants Current Report on Form 8-K filed on June 18, 2008) |
|
|
|
10.10
|
|
Form of Outside Director Stock Award Agreement for stock awards granted under the
Registrants 2008 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.3 of the
Registrants Current Report on Form 8-K filed on June 18, 2008) |
|
|
|
10.11
|
|
Form of Outside Director Restricted Stock Agreement for restricted stock grants under the
Registrants 2008 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.4 of the
Registrants Current Report on Form 8-K filed on June 18, 2008) |
|
|
|
10.12
|
|
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) |
|
|
|
10.13
|
|
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) |
|
|
|
10.14
|
|
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) |
|
|
|
10.15
|
|
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) |
|
|
|
10.16
|
|
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) |
|
|
|
10.17
|
|
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) |
|
|
|
10.18
|
|
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) |
(53)
|
|
|
No. |
|
Description of Exhibit |
|
|
|
10.19
|
|
Third Amendment to Second Amended and Restated Credit Agreement (Incorporated by reference
to Exhibit 10.1 of the Registrants Form 8-K Report dated October 4, 2005 and filed with the
Securities and Exchange Commission on October 20, 2005) |
|
|
|
10.20
|
|
Purchase and Sale Agreement, dated as of October 14, 2005, among Parallel, L.P., Lynx
Production Company, Inc., Elton Resources, Inc., Cascade Energy Corporation, Chelsea Energy,
Inc., William P. Sutter, Trustee, William P. Sutter Trust, J. Leroy Bell, E. L. Brahaney,
Brent Beck, Cavic Interests, LLC and Stanley Talbott (Incorporated by reference to Exhibit
10.2 of the Registrants Form 8-K Report dated October 14, 2005 and filed with the Securities
and Exchange Commission on October 20, 2005) |
|
|
|
10.21
|
|
Ancillary Agreement to Purchase and Sale Agreement, dated October 14, 2005, between
Parallel, L.P. and Lynx Production Company, Inc. (Incorporated by reference to Exhibit 10.3 of
the Registrants Form 8-K Report dated October 14, 2005 and filed with the Securities and
Exchange Commission on October 20, 2005) |
|
|
|
10.22
|
|
Guarantee of Parallel, L.P., dated October 13, 2004 (Incorporated by reference to Exhibit
10.4 of the Registrants Form 8-K Report dated October 14, 2005 and filed with the Securities
and Exchange Commission on October 20, 2005) |
|
|
|
10.23
|
|
ISDA Master Agreement, dated as of October 13, 2005, between Parallel, L.P. and Citibank,
N.A. (Incorporated by reference to Exhibit 10.5 of the Registrants Form 8-K Report dated
October 14, 2005 and filed with the Securities and Exchange Commission on October 20, 2005) |
|
|
|
10.24
|
|
Third Amended and Restated Credit Agreement, dated as of December 23, 2005, among Parallel
Petroleum Corporation, Parallel, L.P., Parallel, L.L.C. and Citibank Texas, N.A., BNP Paribas,
CitiBank F.S.B., Western National Bank, Compass Bank, Comerica Bank, Bank of Scotland and
Fortis Capital Corp. (Incorporated by reference to Exhibit No. 10.1 of the Registrants Form
8-K Report, dated December 23, 2005, as filed with the Securities and Exchange Commission on
December 30, 2005) |
|
|
|
10.25
|
|
Second Lien Term Loan Agreement, dated November 15, 2005, among Parallel Petroleum
Corporation, Parallel, L.P., BNP Paribas and Citibank Texas, N.A. (Incorporated by reference
to Exhibit No. 10.4 of the Registrants Form 8-K Report, dated November 15, 2005, as filed
with the Securities and Exchange Commission on November 21, 2005) |
|
|
|
10.26
|
|
Intercreditor and Subordination Agreement, dated November 15, 2005, among Citibank Texas,
N.A., BNP Paribas, Parallel Petroleum Corporation, Parallel, L.P. and Parallel, L.L.C.
(Incorporated by reference to Exhibit No. 10.5 of the Registrants Form 8-K Report, dated
November 15, 2005, as filed with the Securities and Exchange Commission on November 21, 2005) |
|
|
|
10.27
|
|
Guaranty, dated as of December 23, 2005, made by Parallel, L.L.C. to and in favor of
Citibank Texas, N.A. (Incorporated by reference to Exhibit 10.23 of Form 10-K of the
Registrant for the fiscal year ended December 31, 2006) |
|
|
|
10.28
|
|
Third Amended and Restated Pledge Agreement, dated as of December 23, 2005, between
Parallel, L.L.C. and Citibank Texas, N.A. (Incorporated by reference to Exhibit 10.24 of Form
10-K of the Registrant for the fiscal year ended December 31, 2006) |
|
|
|
10.29
|
|
Second Lien Guarantee and Collateral Agreement, dated as of November 15, 2005, made by
Parallel Petroleum Corporation and Parallel, L.P. to and in favor of BNP Paribas (Incorporated
by reference to Exhibit 10.25 of Form 10-K of the Registrant for the fiscal year ended
December 31, 2006) |
(54)
|
|
|
No. |
|
Description of Exhibit |
|
|
|
10.30
|
|
Third Amendment to Third Amended and Restated Credit Agreement, dated as of July 31, 2007,
among the Registrant, Citibank, N.A., BNP Paribas, Western National Bank, Compass Bank,
Comerica Bank, Bank of Scotland, and Fortis Capital Corp. (Incorporated by reference to
Exhibit 10.3 of the Registrants Current Report on Form 8-K filed on August 1, 2007) |
|
|
|
10.31
|
|
Fourth Amendment to Third Amended and Restated Credit Agreement, dated as of November 30,
2007, among the Registrant, Citibank, N.A., BNP Paribas, Western National Bank, Compass Bank,
Comerica Bank, Bank of Scotland, and Fortis Capital Corp. (Incorporated by reference to
Exhibit 10.27 of Form S-4 of the Registrant, Registration No. 333-148465) |
|
|
|
10.32
|
|
Hagerman Gas Gathering System Joint Venture Agreement, dated as of January 16, 2007, among
the Registrant, Feagan Gathering Company and Capstone Oil and Gas Company, L.P. (Incorporated
by reference to Exhibit 10.28 of Form 10-K of the Registrant for the fiscal year ended
December 31, 2007) |
|
|
|
10.33
|
|
Fourth Amended and Restated Credit Agreement, dated as of May 16, 2008, among the
Registrant, Citibank, N.A., BNP Paribas, Western National Bank, Compass Bank, Comerica Bank,
Bank of Scotland plc, and Texas Capital Bank, N.A. (Incorporated by reference to Exhibit 10.1
of the Registrants Current Report on Form 8-K filed on May 22, 2008) |
|
|
|
*10.34
|
|
First Amendment to Fourth Amended and Restated Credit Agreement, dated as of October 31,
2008, by and among Parallel Petroleum Corporation, Citibank, N.A., BNP Paribas, Western
National Bank, Compass Bank, Bank of Scotland plc, Texas Capital Bank, N.A., Bank of America,
N.A. and West Texas National Bank |
|
|
|
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) |
|
|
|
*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. |
(55)
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
|
|
|
BY: /s/ Larry C. Oldham
|
|
Date: November 3, 2008 |
Larry C. Oldham |
|
|
President and Chief Executive Officer |
|
|
|
|
|
Date: November 3, 2008 |
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 10.1 of the Registrants Current
Report on Form 8-K filed on November 30, 2007) |
|
|
|
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 Designations, 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 1 of Form 8-A of the
Registrant filed with the Securities and Exchange Commission on October 10, 2000) |
|
|
|
4.4
|
|
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) |
|
|
|
4.5
|
|
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) |
|
|
|
4.6
|
|
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) |
|
|
|
4.7
|
|
Purchase Warrant Agreement, dated as of October 1, 1980, between the Registrant and American
Stock Transfer, Inc. (Incorporated by reference to Exhibit 4.7 of Form 10-K of the Registrant
for the fiscal year ended December 31, 2006) |
|
|
|
4.8
|
|
First Amendment to Warrant Agreement, dated as of February 22, 2007, among the Registrant,
Computershare Shareholder Services, Inc. and Computershare Trust Company, N.A. |
|
|
|
No. |
|
Description of Exhibit |
|
|
|
|
|
(Incorporated by reference to Exhibit 4.8 of Form 10-K of the Registrant for the fiscal year
ended December 31, 2006) |
|
|
|
4.9
|
|
Form of Rule 144A 101/4% Senior Note due 2014 (Incorporated by reference to Exhibit 4.2 to the
Registrants Current Report on Form 8-K filed on August 1, 2007) |
|
|
|
4.10
|
|
Form of IAI 101/4% Senior Note due 2014 (Incorporated by reference to Exhibit 4.3 to the
Registrants Current Report on Form 8-K filed on August 1, 2007) |
|
|
|
4.11
|
|
Form of Regulation S 101/4% Senior Note due 2014 (Incorporated by reference to Exhibit 4.4 to
the Registrants Current Report on Form 8-K filed on August 1, 2007) |
|
|
|
4.12
|
|
Indenture, dated as of July 31, 2007, among the Registrant as Issuer and Wells Fargo Bank,
National Association as Trustee (Incorporated by reference to Exhibit 4.1 to the Registrants
Current Report on Form 8-K filed on August 1, 2007) |
|
|
|
4.13
|
|
Registration Rights Agreement, dated as of July 31, 2007, by and among the Registrant,
Jefferies & Company, Inc., Merrill Lynch, Pierce, Fenner and Smith Incorporated and BNP
Paribas Securities Corp. (Incorporated by reference to Exhibit 10.2 to the Registrants
Current Report on Form 8-K filed on August 1, 2007) |
|
|
|
4.14
|
|
Purchase Agreement, dated as of July 26, 2007, by and among the Registrant, Jefferies &
Company, Inc., Merrill Lynch, Pierce, Fenner and Smith Incorporated and BNP Paribas Securities
Corp. (Incorporated by reference to Exhibit 4.2 to the Registrants Current Report on Form 8-K
filed on August 1, 2007) |
|
|
|
4.15
|
|
Form of 101/4% Unrestricted Senior Note due 2014 (Incorporated by reference to Exhibit 4.13 of
Form S-4 of the Registrant, Registration No. 333-148465) |
|
|
|
|
|
Executive Compensation Plans and Arrangements (Exhibit No.s 10.1 through 10.11): |
|
|
|
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 (Incorporated by reference to Exhibit 10.3 of the
Registrants Form 10-Q of the Registrant for the fiscal quarter ended June 30, 2005) |
|
|
|
10.4
|
|
1998 Stock Option Plan (Incorporated by reference to Exhibit 10.4 of Form 10-K of the
Registrant for the fiscal year ended December 31, 2006) |
|
|
|
10.5
|
|
2001 Non-Employee Directors Stock Option Plan (Incorporated by reference to Exhibit 10.7 of
the Registrants Form 10-Q Report for the fiscal quarter ended March 31, 2004) |
|
|
|
10.6
|
|
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) |
|
|
|
10.7
|
|
Incentive and Retention Plan (Incorporated by reference to Exhibit 10.7 of Form 10-K of the
Registrant for the fiscal year ended December 31, 2006) |
|
|
|
No. |
|
Description of Exhibit |
|
|
|
10.8
|
|
2008 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.1 of the Registrants
Form 8-K Report dated March 27, 2008) |
|
|
|
10.9
|
|
Form of Nonqualified Stock Option Agreement for nonqualified stock options granted under the
Registrants 2008 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.2 of the
Registrants Current Report on Form 8-K filed on June 18, 2008) |
|
|
|
10.10
|
|
Form of Outside Director Stock Award Agreement for stock awards granted under the
Registrants 2008 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.3 of the
Registrants Current Report on Form 8-K filed on June 18, 2008) |
|
|
|
10.11
|
|
Form of Outside Director Restricted Stock Agreement for restricted stock grants under the
Registrants 2008 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.4 of the
Registrants Current Report on Form 8-K filed on June 18, 2008) |
|
|
|
10.12
|
|
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) |
|
|
|
10.13
|
|
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) |
|
|
|
10.14
|
|
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) |
|
|
|
10.15
|
|
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) |
|
|
|
10.16
|
|
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) |
|
|
|
10.17
|
|
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) |
|
|
|
10.18
|
|
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) |
|
|
|
10.19
|
|
Third Amendment to Second Amended and Restated Credit Agreement (Incorporated by reference
to Exhibit 10.1 of the Registrants Form 8-K Report dated October 4, 2005 and filed with the
Securities and Exchange Commission on October 20, 2005) |
|
|
|
No. |
|
Description of Exhibit |
|
|
|
10.20
|
|
Purchase and Sale Agreement, dated as of October 14, 2005, among Parallel, L.P., Lynx
Production Company, Inc., Elton Resources, Inc., Cascade Energy Corporation, Chelsea Energy,
Inc., William P. Sutter, Trustee, William P. Sutter Trust, J. Leroy Bell, E. L. Brahaney,
Brent Beck, Cavic Interests, LLC and Stanley Talbott (Incorporated by reference to Exhibit
10.2 of the Registrants Form 8-K Report dated October 14, 2005 and filed with the Securities
and Exchange Commission on October 20, 2005) |
|
|
|
10.21
|
|
Ancillary Agreement to Purchase and Sale Agreement, dated October 14, 2005, between
Parallel, L.P. and Lynx Production Company, Inc. (Incorporated by reference to Exhibit 10.3 of
the Registrants Form 8-K Report dated October 14, 2005 and filed with the Securities and
Exchange Commission on October 20, 2005) |
|
|
|
10.22
|
|
Guarantee of Parallel, L.P., dated October 13, 2004 (Incorporated by reference to Exhibit
10.4 of the Registrants Form 8-K Report dated October 14, 2005 and filed with the Securities
and Exchange Commission on October 20, 2005) |
|
|
|
10.23
|
|
ISDA Master Agreement, dated as of October 13, 2005, between Parallel, L.P. and Citibank,
N.A. (Incorporated by reference to Exhibit 10.5 of the Registrants Form 8-K Report dated
October 14, 2005 and filed with the Securities and Exchange Commission on October 20, 2005) |
|
|
|
10.24
|
|
Third Amended and Restated Credit Agreement, dated as of December 23, 2005, among Parallel
Petroleum Corporation, Parallel, L.P., Parallel, L.L.C. and Citibank Texas, N.A., BNP Paribas,
CitiBank F.S.B., Western National Bank, Compass Bank, Comerica Bank, Bank of Scotland and
Fortis Capital Corp. (Incorporated by reference to Exhibit No. 10.1 of the Registrants Form
8-K Report, dated December 23, 2005, as filed with the Securities and Exchange Commission on
December 30, 2005) |
|
|
|
10.25
|
|
Second Lien Term Loan Agreement, dated November 15, 2005, among Parallel Petroleum
Corporation, Parallel, L.P., BNP Paribas and Citibank Texas, N.A. (Incorporated by reference
to Exhibit No. 10.4 of the Registrants Form 8-K Report, dated November 15, 2005, as filed
with the Securities and Exchange Commission on November 21, 2005) |
|
|
|
10.26
|
|
Intercreditor and Subordination Agreement, dated November 15, 2005, among Citibank Texas,
N.A., BNP Paribas, Parallel Petroleum Corporation, Parallel, L.P. and Parallel, L.L.C.
(Incorporated by reference to Exhibit No. 10.5 of the Registrants Form 8-K Report, dated
November 15, 2005, as filed with the Securities and Exchange Commission on November 21, 2005) |
|
|
|
10.27
|
|
Guaranty, dated as of December 23, 2005, made by Parallel, L.L.C. to and in favor of
Citibank Texas, N.A. (Incorporated by reference to Exhibit 10.23 of Form 10-K of the
Registrant for the fiscal year ended December 31, 2006) |
|
|
|
10.28
|
|
Third Amended and Restated Pledge Agreement, dated as of December 23, 2005, between
Parallel, L.L.C. and Citibank Texas, N.A. (Incorporated by reference to Exhibit 10.24 of Form
10-K of the Registrant for the fiscal year ended December 31, 2006) |
|
|
|
10.29
|
|
Second Lien Guarantee and Collateral Agreement, dated as of November 15, 2005, made by
Parallel Petroleum Corporation and Parallel, L.P. to and in favor of BNP Paribas (Incorporated
by reference to Exhibit 10.25 of Form 10-K of the Registrant for the fiscal year ended
December 31, 2006) |
|
|
|
10.30
|
|
Third Amendment to Third Amended and Restated Credit Agreement, dated as of July 31, 2007,
among the Registrant, Citibank, N.A., BNP Paribas, Western National Bank, Compass Bank, |
|
|
|
No. |
|
Description of Exhibit |
|
|
|
|
|
Comerica Bank, Bank of Scotland, and Fortis Capital Corp. (Incorporated by reference to
Exhibit 10.3 of the Registrants Current Report on Form 8-K filed on August 1, 2007) |
|
|
|
10.31
|
|
Fourth Amendment to Third Amended and Restated Credit Agreement, dated as of November 30,
2007, among the Registrant, Citibank, N.A., BNP Paribas, Western National Bank, Compass Bank,
Comerica Bank, Bank of Scotland, and Fortis Capital Corp. (Incorporated by reference to
Exhibit 10.27 of Form S-4 of the Registrant, Registration No. 333-148465) |
|
|
|
10.32
|
|
Hagerman Gas Gathering System Joint Venture Agreement, dated as of January 16, 2007, among
the Registrant, Feagan Gathering Company and Capstone Oil and Gas Company, L.P. (Incorporated
by reference to Exhibit 10.28 of Form 10-K of the Registrant for the fiscal year ended
December 31, 2007) |
|
|
|
10.33
|
|
Fourth Amended and Restated Credit Agreement, dated as of May 16, 2008, among the
Registrant, Citibank, N.A., BNP Paribas, Western National Bank, Compass Bank, Comerica Bank,
Bank of Scotland plc, and Texas Capital Bank, N.A. (Incorporated by reference to Exhibit 10.1
of the Registrants Current Report on Form 8-K filed on May 22, 2008) |
|
|
|
*10.34
|
|
First Amendment to Fourth Amended and Restated Credit Agreement, dated as of October 31,
2008, by and among Parallel Petroleum Corporation, Citibank, N.A., BNP Paribas, Western
National Bank, Compass Bank, Bank of Scotland plc, Texas Capital Bank, N.A., Bank of America,
N.A. and West Texas National Bank |
|
|
|
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) |
|
|
|
*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. |