UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For
The Fiscal Year Ended October 31, 2005
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
to
Commission File Number 0-8877
CREDO PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
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84-0772991 |
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(State or other jurisdiction
of incorporation or organization) |
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(I.R.S. Employer Identification
Number) |
1801 Broadway, Suite 900,
Denver, Colorado 80202-3837
(Address of principal executive offices and zip code)
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Registrant’s telephone number, including area code:
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(303) 297-2200 |
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Securities registered pursuant to Section 12(b) of the Act:
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None |
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Securities registered pursuant to Section 12(g) of the Act:
Common
Stock, $.10 Par Value
(Title of class and shares outstanding)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act: o
Yes þ
No
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act: o
Yes þ
No
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.
þ Yes
o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this form 10-K or
any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. (See definition of
“accelerated filer” and “large accelerated filer” in Rule 12b-2
of the Act.)
Large accelerated filer o Accelerated
filer o Non-accelerated
filer þ
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Act. o Yes
þ No
The aggregate market value of the voting and non-voting common equity held
by non-affiliates as of April 30, 2005, the end of the registrant’s
most recently completed second quarter was $68,204,000.
As of January 27, 2006, the registrant had 9,163,000 net shares of
common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Pursuant to instruction G (3) to Form 10-K, Items 10, 11, 12, 13 and 14
are omitted because the company will file a definitive proxy statement (the
“Proxy Statement”) pursuant to Regulation 14A under the Securities
Exchange Act of 1934 not later than 120 days after the close of the
fiscal year. The information required by such items will be included in the
Proxy Statement to be so filed for the company’s annual meeting of
shareholders to be held on or about March 23, 2006 and is hereby
incorporated by reference.
NON-GAAP FINANCIAL MEASURES
In this Annual Report on Form 10-K, the company uses the term “cash flow
from operating activities (before changes in operating assets and
liabilities)” which is considered a non-GAAP financial measure as defined
in SEC Regulation S-K Item 10 and should not be considered in
isolation or as a substitute for measures of performance prepared in
accordance with GAAP. See Item 7 Management’s Discussion and Analysis
of Financial Condition and Results of Operations for a definition of this
measure as used in this Annual Report on Form 10-K.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes certain statements that may be
deemed to be “forward-looking statements” within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements included in this
Annual Report on Form 10-K, other than statements of historical facts,
address matters that the company reasonably expects, believes or anticipates
will or may occur in the future. Forward-looking statements may relate to,
among other things:
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the company’s future financial position, including working
capital and anticipated cash flow; |
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amounts and nature of future capital expenditures; |
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operating costs and other expenses; |
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wells to be drilled or reworked; |
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oil and natural gas prices and demand; |
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existing fields, wells and prospects; |
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diversification of exploration; |
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estimates of proved oil and natural gas reserves; |
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reserve potential; |
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development and drilling potential; |
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expansion and other development trends in the oil and natural gas
industry; |
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the company’s business strategy; |
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production of oil and natural gas; |
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matters related to the Calliope Gas Recovery System; |
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effects of federal, state and local regulation; |
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insurance coverage; |
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employee relations; |
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investment strategy and risk; and |
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expansion and growth of the company’s business and operations. |
Although the company believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that
such expectations will prove to be correct. Disclosure of important factors
that could cause actual results to differ materially from the company’s
expectations, or cautionary statements, are included under “Risk
Factors” and elsewhere in this Annual Report on 10-K, including, without
limitation, in conjunction with the forward-looking statements. The
following factors, among others that could cause actual results to differ
materially from the company’s expectations, include:
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unexpected changes in business or economic conditions; |
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significant changes in natural gas and oil prices; |
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timing and amount of production; |
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unanticipated down-hole mechanical problems in wells or problems
related to producing reservoirs or infrastructure; |
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changes in overhead costs; |
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material events resulting in changes in estimates; and |
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competitive factors. |
All forward-looking statements speak only as of the date made. All
subsequent written and oral forward-looking statements attributable to the
company, or persons acting on the company’s behalf, are expressly
qualified in their entirety by the cautionary statements. Except as required
by law, the company undertakes no obligation to update any forward-looking
statement to reflect events or circumstances after the date on which it is
made or to reflect the occurrence of anticipated or unanticipated events or
circumstances.
PART I
General
CREDO Petroleum Corporation (“CREDO”) was incorporated in Colorado in
1978. CREDO and its wholly owned subsidiaries, SECO Energy Corporation and
United Oil Corporation (“SECO”, “United” and collectively “the
company”), are Denver, Colorado based independent oil and gas companies
which engage primarily in oil and gas exploration, development and
production activities in the Mid-Continent region of the United States. The
company has operating activities in nine states and has twelve employees.
CREDO is an active operator in Kansas, Wyoming, Colorado and Texas. United
is an active operator doing business primarily in Oklahoma, and SECO
primarily owns royalty interests in the Rocky Mountain region. References to
years as used in this report indicate fiscal years ended October 31.
The company effected a three-for-two stock split in each of fiscal 2005 and
2004. All share and per share amounts discussed and disclosed in this Annual
Report on Form 10-K reflect the effect of these stock splits. In addition,
the company effected a 20% stock dividend in fiscal 2003.
Business Activities
During 2005, the company made important strategic decisions and commitments
to new projects designed to sustain the company’s growth rate by expanding
and diversifying its business, both technically and geographically. These
new projects will also diversify the capital exposure, risk and reserve
potential of the company’s drilling activities. This includes
approximately equal commitments to conventional drilling and to the
company’s patented Calliope Gas Recovery System (“Calliope”)
operations.
The company’s goal is to create steady growth by adding production and
long-lived reserves at reasonable costs and risks. The strategy employed by
the company to achieve this goal involves conventional drilling and
increasing the number of Calliope installations.
Historically, the company’s primary drilling focus has been on the shelf
of the Northern Anadarko Basin of Oklahoma. The company will continue
generating prospects and drilling on this acreage concentrating on medium
depth properties generally ranging from 7,000 to 10,000 feet. Third party
industry participants are involved in most of the company’s operating
activities.
During 2005, the company significantly expanded both the volume and breadth
of its exploration program with new projects in South Texas and
north-central Kansas. Compared to drilling in Oklahoma, the South Texas
project involves higher costs and greater risks but significantly higher per
well reserve potential. The South Texas project is 3-D seismic driven with
well depths ranging from 10,000 to 15,500 feet. The north-central Kansas
project is geared to oil exploration and has excellent potential to add
significant reserves at moderate costs and risks. This project is also 3-D
seismic driven with well depths approximating 4,000 feet. Exploration teams
for both projects specialize in their respective geographic areas and have
been highly successful finding new reserves using 3-D seismic. The company
believes that both projects have the potential to generate significant
future production and reserve growth.
Over the past five years, the company has participated in developing,
testing, refining, and patenting Calliope. Calliope efficiently lifts fluids
from wellbores using pressure differentials, thus allowing gas previously
trapped by fluid build-up in the wellbore to flow to the surface. Calliope
is clearly different from all other fluid lift technologies because it does
not rely on bottom-hole pressure and has only one down-hole moving part.
Calliope is primarily applicable to mature natural gas wells in low
pressure, natural gas expansion reservoirs at depths below 8,000 feet. The
company has a 10 year unrestricted exclusive license for the Calliope
technology which can be extended, at the company’s option, to cover the
term of the latest patent. External sources of capital have not been
required for the
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development, refinement or installation of Calliope. At October 31,
2005, Calliope has been installed on 22 wells ranging in depth from 6,500
feet to 18,400 feet. The company has proven Calliope’s economic viability
and flexibility over a wide range of applications.
The company significantly expanded its Calliope operations in 2005 by moving
into Texas and Louisiana and has entered into discussions with other
companies regarding the formation of joint venture arrangements that utilize
Calliope. In addition, higher gas prices have facilitated a new Calliope
project to drill wells into low-pressure reservoirs containing substantial
stranded gas reserves. Calliope will then be used to recover those reserves.
This is expected to enhance the company’s control over monetizing
Calliope’s value while providing the opportunity to optimize Calliope’s
performance and broaden the range of reservoirs for Calliope applications.
The company acts as “operator” of approximately 108 wells pursuant to
standard industry operating agreements. The company owns interests in
approximately 1,400 wells of which approximately 1,150 wells, represent
small overriding royalty interests.
Markets and Customers
Marketing of the company’s oil and gas production is influenced by many
factors which are beyond the company’s control, the exact effect of which
cannot be accurately predicted. These factors include changes in supply and
demand, market prices, regulation, and actions of major foreign producers.
Oil price fluctuations can be extremely volatile as was demonstrated when,
during 2003, the posted price for West Texas intermediate fell below $25.00
per barrel and then rose to over $60.00 per barrel late in 2005.
Natural gas price decontrol, the advent of an active spot market for natural
gas, changes in supply and demand for natural gas, and weather patterns
cause natural gas prices to be subject to significant fluctuations. The
company presently sells virtually all of its natural gas under one to five
year contracts with major pipeline companies. The sales price is typically
based on monthly index prices for the applicable pipeline. Title to the
natural gas normally passes to the pipeline at meters located near the
wells. The index prices are reduced by certain pipeline charges.
Most of the company’s natural gas production is located in northwestern
Oklahoma. There has been significant consolidation among natural gas
pipelines in this area, thereby reducing the number of available purchasers.
In many instances, there may be only one viable pipeline option, which
enables the pipeline to charge higher rates.
Over the past few years there has been increasing concern that a
supply/demand imbalance has developed in domestic natural gas based on
increasing demand and lower deliverability. This, together with rising oil
prices, political unrest and uncertainty in certain major producing regions,
supply vulnerability to natural disasters, such as hurricanes, and active
speculation in the natural gas futures market has caused natural gas prices
to become increasingly volatile. The company expects strong natural gas
prices to continue for several years but cannot reasonably predict the
extent or timing of natural gas price fluctuations.
As discussed elsewhere in this Annual Report on Form 10-K, the company
periodically hedges the price of a portion of its estimated natural gas
production in the form of forward short positions and collars on the NYMEX
futures market.
Oil production is sold to crude oil purchasing companies at competitive spot
field prices. Crude oil and condensate production are readily marketable,
and the company is generally not dependent on a single purchaser. Crude oil
prices are subject to world-wide supply and demand, and are primarily
dependent upon available supplies which can vary significantly depending on
production and pricing policies of OPEC and other major producing countries
and on significant events in major producing regions. Political unrest and
market uncertainty in the Middle East, Africa, South America and former
Soviet Union, OPEC’s renewed cooperation in managing the price of its
produced oil, and increased demand from countries with developing economies,
such as China and India, have resulted in higher world-wide oil prices
during the past several years.
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Information concerning the company’s major customers is included in Note
(8) to the Consolidated Financial Statements.
Competition and Regulation
The oil and gas industry is highly competitive. As a small independent, the
company must compete against companies with substantially larger financial,
human and other resources in all aspects of its business.
Oil and gas drilling and production operations are regulated by various
federal, state and local agencies. These agencies issue binding rules and
regulations which carry penalties, often substantial, for failure to comply.
The company anticipates its aggregate burden of federal, state and local
regulation will continue to increase particularly in the area of rapidly
changing environmental laws and regulations. The company also believes that
its present operations substantially comply with applicable regulations. To
date, such regulations have not had a material effect on the company’s
operations, or the costs thereof. There are no known environmental or other
regulatory matters related to the company’s operations which are
reasonably expected to result in material liability to the company. The
company does not believe that capital expenditures related to environmental
control facilities or other regulatory matters will be material in 2006. The
company cannot predict what subsequent legislation or regulations may be
enacted or what effect they might have on the company’s business.
In evaluating the company, careful consideration should be given to the
following risk factors, in addition to the other information included or
incorporated by reference in this Annual Report on Form 10-K. Each of these
risk factors could adversely affect the company’s business, operating
results and financial condition, as well as adversely affect the value of an
investment in the company’s common stock.
Volatility of oil and natural gas prices could adversely affect the
company’s profitability and financial condition.
The company’s performance in terms of revenues, operating results,
profitability, future rate of growth and the carrying value of its oil and
natural gas properties is significantly impacted by prevailing market prices
for oil and natural gas. Any substantial or extended decline in the price of
oil or natural gas could have a material adverse effect on the company. It
could reduce the company’s operating cash flow as well as the value and,
to a lesser degree, the quantity of its oil and natural gas reserves.
Historically, the markets for oil and natural gas have been volatile, and
they are likely to continue to be volatile. Relatively minor changes in
supply or demand can have a significant effect on oil and natural gas
prices. Some of the factors affecting oil and natural gas prices which are
beyond the company’s control include:
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worldwide and domestic supplies of oil and natural gas; |
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worldwide and domestic demand for oil and natural gas; |
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the ability of the members of OPEC to agree to and maintain oil
price and production controls; |
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political instability or armed conflict in oil or natural gas
producing regions; |
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worldwide and domestic economic conditions; |
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the availability of transportation facilities; |
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weather patterns; and |
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actions of governmental authorities. |
Competition for opportunities to replace and increase production and
reserves is intense and could adversely affect the company.
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Table of Contents
Properties produce at a declining rate over time. In order to maintain
current production rates the company must add new oil and natural gas
reserves to replace those being depleted by production. Competition within
the oil and natural gas industry is intense and many of the company’s
competitors have financial and other resources substantially greater than
those available to the company. This could place the company at a
disadvantage with respect to accessing opportunities to maintain, or
increase, its oil and natural gas reserve base.
In the event that the company does not have adequate cash flow to fund
operations, it may be required to use debt or equity financing.
The company makes, and will continue to make, significant expenditures to
find, acquire, develop and produce oil and natural gas reserves. If oil and
natural gas prices decrease, or if operating difficulties are encountered
that result in cash flow from operations being less than expected, the
company may have to reduce capital expenditures unless additional funds are
raised through debt or equity financing. Debt or equity financing or cash
generated by operations may not be available to the company in sufficient
amounts or on acceptable terms to meet these requirements.
Future cash flows and the availability of financing will be subject to a
number of variables, such as:
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the company’s success in locating and producing new reserves; |
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the level of production from existing wells; and |
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prices of oil and natural gas; |
Issuing equity securities to satisfy the company’s financing requirements
could cause substantial dilution to existing stockholders. Debt financing
could make the company more vulnerable to competitive pressures and economic
downturns.
Reserve quantities and values are subject to many variables and estimates
and actual results may vary.
This Annual Report on Form 10-K contains estimates of the company’s proved
oil and natural gas reserves and the estimated future net revenues from
those reserves. Any significant negative variance in these estimates could
have a material adverse effect on the company’s future performance.
Reserve estimates are based on various assumptions, including assumptions
required by the SEC relating to oil and natural gas prices, drilling and
operating expenses, capital expenditures, taxes and availability of funds.
The process of estimating reserves is complex. This process requires
significant decisions and assumptions in the evaluation of available
geological, geophysical, engineering and economic data.
Reserve estimates are dependent on many variables, and therefore, as more
information becomes available, it is reasonable to expect that there will be
changes to the estimates. Actual future production, oil and natural gas
prices, revenues, taxes, development expenditures, operating expenses and
quantities of recoverable oil and natural gas reserves will most likely vary
from those estimated. Any significant variance could materially affect the
estimated quantities and present value of reserves disclosed by the company.
In addition, estimates of proved reserves will be adjusted in the future to
reflect production history, results of exploration and development,
prevailing oil and natural gas prices and other factors, many of which are
beyond the company’s control.
As of October 31, 2005, approximately 11% of the company’s estimated
proved reserves are classified as proved undeveloped. Estimation of proved
undeveloped reserves and proved developed non-producing reserves is
generally based on volumetric calculations rather than the performance data
used to estimate reserves for producing properties. Recovery of proved
undeveloped reserves generally requires significant capital expenditures and
successful drilling operations. Revenues from proved developed non-producing
and proved undeveloped reserves will not be realized until some time in the
future. The reserve estimate includes an estimate of the capital
expenditures required to develop these reserves as well as the
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timing of such expenditures. Although the company has prepared estimates of
its proved undeveloped reserves and the associated development costs in
accordance with industry standards, they are based on estimates, and actual
results may vary.
You should not interpret the present value of estimated reserves, or PV-10,
as the current market value of reserves attributable to the company’s
properties. The 10% discount factor, which we are required to use to
calculate PV-10 for reporting purposes, is not necessarily the most
appropriate discount factor given actual interest rates and risks to which
the company’s business or the oil and natural gas industry in general are
subject. The company has based the PV-10 on prices and costs as of the date
of the reserve estimate, in accordance with applicable regulations. Actual
future prices and costs may be materially higher or lower. In addition to
the price volatility factors discussed above, factors that will affect
actual future net cash flows, include:
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the amount and timing of actual production; |
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curtailments or increases in consumption by oil and natural gas
purchasers; and |
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changes in governmental regulations or taxation. |
As a result, the company’s actual future net cash flows could be
materially different from the estimates included in this Annual Report on
Form 10-K.
The company’s reserve quantities and values are concentrated in a
relative few properties and fields.
The company’s reserves, and reserve values, are concentrated in 54
properties which represent 28% of the company’s total properties but a
disproportionate 76% of the discounted value (at 10%) of the company’s
reserves. Individual wells on which Calliope is installed comprise 22% of
these significant properties and 32% of the discounted reserve value of such
properties. Relatively new wells comprise 22% of these significant
properties and 24% of the discounted reserve value of such properties.
Estimates of reserve quantities and values for these properties must be
viewed as being subject to significant change as more data about the
properties becomes available. Such properties include wells with limited
production histories and properties with proved undeveloped or proved
non-producing reserves. In addition, Calliope is generally installed on
mature wells. As such, they contain older down-hole equipment that is more
subject to failure than new equipment. The failure of such equipment,
particularly casing, can result in complete loss of a well.
Competition for materials and services is intense and could adversely
affect the company.
Major oil companies, independent producers, and institutional and individual
investors are actively seeking oil and gas properties throughout the world,
along with the equipment, labor and materials required to develop and
operate properties. Shortages for equipment, labor or materials may result
in increased costs or the inability to obtain such resources as needed. Many
of the company’s competitors have financial and technological resources
which exceed those available to the company.
The company’s hedging arrangements involve credit risk and may limit
future revenues from price increases.
To manage the company’s exposure to price risks associated with the sale
of natural gas, the company periodically enters into hedging transactions
for a portion of its estimated natural gas production. These transactions
may limit the company’s potential gains if natural gas prices were to rise
substantially over the price established by the hedge. In addition, such
transactions may expose the company to the risk of financial loss in certain
circumstances, including instances in which:
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the company’s production is less than expected; |
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the contractual counterparties fail to perform under the
contracts; or |
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a sudden, unexpected event, materially impacts natural gas prices. |
The terms of the company’s hedging agreements may also require that it
furnish cash collateral, letters of credit or other forms of performance
assurance in the event that mark-to-market calculations result in settlement
obligations by the company to the counterparties, which would encumber the
company’s liquidity and capital resources.
In addition, hedging transactions using derivative instruments involve basis
risk. Basis risk in a hedging contract occurs when the index upon which the
contract is based is more or less variable than the index upon which the
hedged asset is based, thereby making the hedge less effective.
The marketability of the company’s natural gas production is dependent
upon infrastructure, such as gathering systems, pipelines and processing
facilities, that the company does not own or control.
The marketability of the company’s natural gas production depends in part
upon the availability, proximity and capacity of natural gas gathering
systems, pipelines and processing facilities necessary to move the
company’s natural gas production to market. The company does not own this
infrastructure and is dependent on other companies to provide it.
Oil and natural gas operations are inherently risky.
The oil and natural gas business involves a variety of risks, including the
risks of operating hazards such as fires, explosions, cratering, blow-outs,
and encountering formations with abnormal pressures. The occurrence of any
of these risks could result in losses. We maintain insurance against some,
but not all, of these risks. Management believes that the level of insurance
against these risks is reasonable and is in accordance with industry
practices. The occurrence of a significant event, however, that is not fully
insured could have a material adverse effect on our financial position and
results of operations.
The company’s operations are subject to a variety of contractual,
regulatory and other constraints.
The production and sale of oil and natural gas are subject to a variety of
federal, state and local government regulations. These include:
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the prevention of waste; |
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the discharge of materials into the environment; |
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the conservation of oil and natural gas; |
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pollution; |
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permits for drilling operations; |
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drilling bonds; |
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reports concerning operations; |
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the spacing of wells; and |
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the unitization and pooling of properties. |
Because current regulations covering the company’s operations are subject
to change at any time, and despite its belief that it is in substantial
compliance with applicable environmental and other government laws and
regulations, the company may incur significant costs for future compliance.
Increases in taxes on energy sources may adversely affect the company’s
operations.
Federal, state and local governments which have jurisdiction in areas where
the company operates impose taxes on the oil and natural gas products sold.
Historically, there has been on-going consideration by federal, state and
local officials concerning a variety of energy tax proposals. Such matters
are beyond the company’s ability to accurately predict or control.
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The company is highly dependent on the services of one of its officers.
The company is highly dependent on the services of James T. Huffman, our
President and Chief Executive Officer. The loss of Mr. Huffman could
have a material adverse effect on the company.
General
The company’s drilling activities are primarily located along the shelf of
the Northern Anadarko Basin of Oklahoma and in the Oklahoma Panhandle where
the company owns interests in 73,000 gross acres. Specifically, drilling
expenditures have been focused on prospects located in Harper, Ellis and
Beaver Counties, Oklahoma. Wells target the Morrow and Chester formations
between 7,000 and 10,000 feet. Since 2001, the company has participated in
drilling 59 wells on the prospects with interests ranging up to 69%. Of
those wells, 46 were completed as producers and 13 were dry holes. Several
of the wells are exceptional for the area, and 11 of the wells are included
in the company’s Significant Properties (see definition below). Several of
the prospects have ample room for additional drilling and the company
believes that more good wells will be drilled.
The company owns the exclusive right to the Calliope Gas Recovery System.
The company believes it has proven that Calliope will add 0.5 to 2.0 Bcf of
proved gas reserves to many dead and uneconomic wells. The company also
believes there are presently more than 1,000 wells that meet its general
criteria for Calliope candidate wells and thousands more that will meet its
general Calliope criteria in the future.
Calliope operations are currently focused in Oklahoma where the company has
a significant field operations infrastructure. Most Calliope wells are
located in the Northern Anadarko Basin of Oklahoma. To date, Calliope has
been installed on 22 wells ranging in depth from 6,500 to 18,400 feet. All
of the wells were either dead or uneconomic at the time Calliope was
installed. Twelve Calliope wells are included in the company’s Significant
Properties. Recently, the company has expanded its Calliope operations into
Texas and Louisiana.
For additional information regarding current year activities, including oil
and gas production, refer to “Management’s Discussion and Analysis of
Financial Condition and Results of Operations”.
Significant Properties, Estimated Proved Oil and Gas Reserves, and Future
Net Revenues
The company’s reserves, and reserve values, are concentrated in 54
properties (“Significant Properties”). Some of the Significant
Properties are individual wells and others are multi-well properties. At
year-end, Significant Properties represent 28% of the company’s total
properties but a disproportionate 76% of the discounted value (at 10%) of
the company’s reserves. Individual Calliope wells comprise 22% of the
Significant Properties and represent 32% of the discounted reserve value of
such properties. Wells drilled on the prospects discussed above (Item 2.
Properties, General) comprise 22% of the Significant Properties and
represent 24% of the discounted reserve value of such properties.
Estimates of reserve quantities and values for certain Significant
Properties must be viewed as being subject to significant change as more
data about the properties becomes available. Such properties include wells
with limited production histories (including post Calliope installation
wells) and properties with proved undeveloped or proved non-producing
reserves. In addition, Calliope wells are generally mature wells. As such,
they contain older down-hole equipment that is more subject to failure than
new equipment. The failure of such equipment, particularly casing, can
result in complete loss of a well.
11
McCartney Engineering, Inc., an independent petroleum engineering firm,
estimated proved reserves for the company’s properties which represented
63% in 2005, 61% in 2004, and 64% in 2003 of the total estimated future
value of estimated reserves. Remaining reserves were estimated by the
company in all years. At October 31, 2005, natural gas represented 87%
and crude oil represented 13% of total reserves denominated in equivalent
Mcf’s using a six Mcf of gas to one barrel of oil conversion ratio.
The following table sets forth, as of October 31 of the indicated year,
information regarding the company’s proved reserves which is based on the
assumptions set forth in Note (8) to the Consolidated Financial
Statements where additional reserve information is provided. The average
price used to calculate estimated future net revenues was $55.59, $50.43 and
$28.64 per barrel of oil and $10.26, $5.84, and $3.99 per Mcf of gas as of
October 31, 2005, 2004, and 2003, respectively. Amounts do not include
estimates of future Federal and state income taxes.
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|
Estimated Future |
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|
Oil |
|
Gas |
|
Estimated Future |
|
Net Revenues |
| Year |
|
(bbls)* |
|
(Mcf)* |
|
Net Revenues |
|
Discounted at 10% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
386,000 |
|
|
|
15,516,000 |
|
|
$ |
136,878,000 |
|
|
$ |
81,209,000 |
|
|
2004
|
|
|
407,000 |
|
|
|
15,273,000 |
|
|
$ |
77,612,000 |
|
|
$ |
44,551,000 |
|
|
2003
|
|
|
385,000 |
|
|
|
13,786,000 |
|
|
$ |
45,165,000 |
|
|
$ |
28,024,000 |
|
|
|
|
| * |
|
The percentage of total reserves classified as proved developed was
approximately 89% in 2005, 93% in 2004 and 99% in 2003. |
Production, Average Sales Prices and Average Production Costs
The company’s net production quantities and average price realizations per
unit for the indicated years are set forth below. Price realizations are net
of any hedging gains or losses.
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|
| |
|
2005 |
|
2004 |
|
2003 |
| Product |
|
Volume |
|
Price |
|
Volume |
|
Price |
|
Volume |
|
Price |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas (Mcf)
|
|
|
1,830,000 |
|
|
$ |
6.16 |
|
|
|
1,710,000 |
|
|
$ |
4.60 |
|
|
|
1,449,000 |
|
|
$ |
4.50 |
|
|
Oil (bbls)
|
|
|
37,000 |
|
|
$ |
50.90 |
|
|
|
41,000 |
|
|
$ |
36.57 |
|
|
|
35,000 |
|
|
$ |
27.68 |
|
Average production costs, including production taxes, per equivalent Mcf of
production (using a six Mcf of gas to one barrel of oil conversion ratio)
were $1.35, $1.06, and $0.97 per Mcfe in 2005, 2004, and 2003, respectively.
Productive Wells and Developed Acreage
Developed acreage at October 31, 2005 totaled 26,000 net and 118,000
gross acres. At October 31, 2005, the company owned working interests
in 75.45 net (257 gross) wells consisting of 16.23 net (43 gross) oil wells
and 59.22 net (214 gross) natural gas wells. In addition, the company owned
royalty and production payment interests in approximately 1,150 wells,
primarily coal bed methane located in Wyoming. In 2005, the company sold or
abandoned 1.30 net (4 gross) wells. In the same period, the company drilled
and acquired interests in 7.22 net (31 gross) wells in which it did not
previously own an interest.
Undeveloped Acreage
The following table sets forth the number of undeveloped acres (primarily
located in the Mid-Continent and Rocky Mountain Regions) which will expire
during the next five years (and thereafter) unless production is established
in the interim. Undeveloped acres “held-by-production” represent the
undeveloped portions of producing leases which will not expire until
commercial production ceases.
12
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| |
|
Royalty |
|
Working |
| |
|
Interest
Acreage |
|
Interest
Acreage |
| Expiration |
|
|
|
|
|
|
|
|
| Year Ending |
|
|
|
|
|
|
|
|
| October
31 |
|
Gross |
|
Net |
|
Gross |
|
Net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
3,100 |
|
|
|
— |
|
|
|
17,800 |
|
|
|
7,200 |
|
|
2007
|
|
|
2,700 |
|
|
|
— |
|
|
|
20,300 |
|
|
|
8,200 |
|
|
2008
|
|
|
— |
|
|
|
— |
|
|
|
10,100 |
|
|
|
3,600 |
|
|
2009
|
|
|
— |
|
|
|
— |
|
|
|
700 |
|
|
|
200 |
|
|
2010
|
|
|
3,300 |
|
|
|
100 |
|
|
|
5,000 |
|
|
|
1,000 |
|
|
Thereafter
|
|
|
1,000 |
|
|
|
500 |
|
|
|
4,000 |
|
|
|
1,600 |
|
|
Held-By-Production
|
|
|
151,200 |
|
|
|
8,000 |
|
|
|
11,800 |
|
|
|
2,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
161,300 |
|
|
|
8,600 |
|
|
|
69,700 |
|
|
|
24,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In general, “royalty” interests are non-operated interests which are not
burdened by costs of exploration or lease operations, while “working
interests” have operating rights and participate in such costs.
Drilling
The following tables set forth the number of gross and net oil and gas wells
in which the company has participated and the results thereof for the
periods indicated.
|