| Any of the following factors could materially adversely affect our business, financial condition, operating results or liquidity and the trading price of our common stock, preferred stock or senior notes could decline |
| This information should be considered carefully, together with other information in this report and other reports and materials we file with the Securities and Exchange Commission |
| A decline in prices could adversely affect our financial position, financial results, cash flows, access to capital and ability to grow |
| Our revenues, operating results, profitability and future rate of growth depend primarily upon the prices we receive for the oil and gas we sell |
| Prices also affect the amount of cash flow available for capital expenditures and our ability to borrow money or raise additional capital |
| The amount we can borrow from banks is subject to periodic redeterminations based on prices specified by our bank group at the time of redetermination |
| In addition, we may have ceiling test write-downs in the future if prices fall significantly |
| Wide fluctuations in oil and gas prices may result from relatively minor changes in the supply of and demand for oil and natural gas, market uncertainty and other factors that are beyond our control, including: • worldwide and domestic supplies of oil and gas; • weather conditions; • the level of consumer demand; • the price and availability of alternative fuels; • the proximity and capacity of natural gas pipelines and other transportation facilities; • the price and level of foreign imports; • domestic and foreign governmental regulations and taxes; • the ability of the members of the Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls; • political instability or armed conflict in oil-producing regions; and • overall domestic and global economic conditions |
| These factors and the volatility of the energy markets make it extremely difficult to predict future oil and gas price movements with any certainty |
| Declines in oil and gas prices would not only reduce revenue, but could reduce the amount of oil and gas that we can produce economically and, as a result, could have a material adverse effect on our financial condition, results of operations and reserves |
| Further, oil and gas prices do not necessarily move in tandem |
| Because approximately 92prca of our reserves at December 31, 2005 are natural gas reserves, we are more affected by movements in natural gas prices |
| Our level of indebtedness may limit our financial flexibility |
| As of December 31, 2005, we had long-term indebtedness of approximately dlra5dtta5 billion, with dlra72dtta0 million drawn under our revolving bank credit facility |
| Our long-term indebtedness represented 47prca of our total book capitalization at December 31, 2005 |
| As of March 10, 2006, we had approximately dlra402 million outstanding under our revolving bank credit facility |
| Our level of indebtedness and preferred stock affects our operations in several ways, including the following: • a portion of our cash flows from operating activities must be used to service our indebtedness and pay dividends on our preferred stock and is not available for other purposes; • we may be at a competitive disadvantage as compared to peer companies that have less debt; • the covenants contained in the agreements governing our outstanding indebtedness and future indebtedness may limit our ability to borrow additional funds, pay dividends and make certain investments and may also affect our flexibility in planning for, and reacting to, changes in the economy and in our industry; • additional financing in the future for working capital, capital expenditures, acquisitions, general corporate or other purposes may have higher costs and more restrictive covenants; • changes in the credit ratings of our debt may negatively affect the cost, terms, conditions and availability of future financing, and lower ratings will increase the interest rate and fees we pay on our revolving bank credit facility; and • we may be more vulnerable to general adverse economic and industry conditions |
| 22 ______________________________________________________________________ [43]Table of Contents We may incur additional debt, including significant secured indebtedness, or issue additional series of preferred stock in order to make future acquisitions or to develop our properties |
| A higher level of indebtedness and/or additional preferred stock increases the risk that we may default on our obligations |
| Our ability to meet our debt obligations and to reduce our level of indebtedness depends on our future performance |
| General economic conditions, oil and gas prices and financial, business and other factors affect our operations and our future performance |
| We may not be able to generate sufficient cash flow to pay the interest on our debt, and future working capital, borrowings or equity financing may not be available to pay or refinance such debt |
| Factors that will affect our ability to raise cash through an offering of our capital stock or a refinancing of our debt include financial market conditions, the value of our assets and our performance at the time we need capital |
| In addition, our bank borrowing base is subject to periodic redetermination |
| A lowering of our borrowing base could require us to repay indebtedness in excess of the borrowing base, or we might need to further secure the lenders with additional collateral |
| Competition in the oil and natural gas industry is intense, and many of our competitors have greater financial and other resources than we do |
| We operate in the highly competitive areas of oil and natural gas acquisition, development, exploitation, exploration and production |
| We face intense competition from both major and other independent oil and natural gas companies in each of the following areas: • seeking to acquire desirable producing properties or new leases for future exploration, and • seeking to acquire the equipment and expertise necessary to develop and operate our properties |
| Many of our competitors have financial and other resources substantially greater than ours, and some of them are fully integrated oil companies |
| These companies may be able to pay more for development prospects and productive oil and natural gas properties and may be able to define, evaluate, bid for and purchase a greater number of properties and prospects than our financial or human resources permit |
| Our ability to develop and exploit our oil and natural gas properties and to acquire additional properties in the future will depend upon our ability to successfully conduct operations, evaluate and select suitable properties and consummate transactions in this highly competitive environment |
| Significant capital expenditures are required to replace our reserves |
| Our exploration, development and acquisition activities require substantial capital expenditures |
| Historically, we have funded our capital expenditures through a combination of cash flows from operations, our revolving bank credit facility and debt and equity issuances |
| Future cash flows are subject to a number of variables, such as the level of production from existing wells, prices of oil and gas, and our success in developing, acquiring and producing new reserves |
| If revenue were to decrease as a result of lower oil and gas prices or decreased production, and our access to capital were limited, we would have a reduced ability to replace our reserves |
| If our cash flow from operations is not sufficient to fund our capital expenditure budget, we may not be able to access additional bank debt, debt or equity or other methods of financing on an economic basis to meet these requirements |
| If we are not able to replace reserves, we may not be able to sustain production |
| Our future success depends largely upon our ability to find, develop or acquire additional oil and gas reserves that are economically recoverable |
| Unless we replace the reserves we produce through successful development, exploration or acquisition activities, our proved reserves and production will decline over time |
| In addition, approximately 35prca of our total estimated proved reserves (by volume) at December 31, 2005 were undeveloped |
| By their nature, estimates of undeveloped reserves are less certain |
| Recovery of such reserves will 23 ______________________________________________________________________ [44]Table of Contents require significant capital expenditures and successful drilling operations |
| Our reserve estimates reflect that our production rate on producing properties will decline approximately 24prca from 2006 to 2007 |
| Thus, our future oil and natural gas reserves and production and, therefore, our cash flow and income are highly dependent on our success in efficiently developing and exploiting our current reserves and economically finding or acquiring additional recoverable reserves |
| The actual quantities and present value of our proved reserves may prove to be lower than we have estimated |
| This report contains estimates of our proved reserves and the estimated future net revenues from our proved reserves |
| These estimates are based upon various assumptions, including assumptions required by the SEC relating to oil and gas prices, drilling and operating expenses, capital expenditures, taxes and availability of funds |
| The process involves significant decisions and assumptions in the evaluation of available geological, geophysical, engineering and economic data for each reservoir |
| Therefore, these estimates are inherently imprecise |
| Actual future production, oil and gas prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable oil and gas reserves most likely will vary from these estimates |
| Such variations may be significant and could materially affect the estimated quantities and present value of our proved reserves |
| In addition, we may adjust estimates of proved reserves to reflect production history, results of exploration and development drilling, prevailing oil and gas prices and other factors, many of which are beyond our control |
| Our properties may also be susceptible to hydrocarbon drainage from production by operators on adjacent properties |
| At December 31, 2005, approximately 35prca of our estimated proved reserves (by volume) were undeveloped |
| Recovery of undeveloped reserves requires significant capital expenditures and successful drilling operations |
| These reserve estimates include the assumption that we will make significant capital expenditures to develop the reserves, including dlra1dtta8 billion in 2006 |
| You should be aware that the estimated costs may not be accurate, development may not occur as scheduled and results may not be as estimated |
| You should not assume that the present values referred to in this report represent the current market value of our estimated oil and natural gas reserves |
| In accordance with SEC requirements, the estimates of our present values are based on prices and costs as of the date of the estimates |
| The December 31, 2005 present value is based on weighted average oil and natural gas wellhead prices of dlra56dtta41 per barrel of oil and dlra8dtta76 per mcf of natural gas |
| Actual future prices and costs may be materially higher or lower than the prices and costs as of the date of an estimate |
| Any changes in consumption by oil and natural gas purchasers or in governmental regulations or taxation will also affect actual future net cash flows |
| The timing of both the production and the expenses from the development and production of oil and natural gas properties will affect both the timing of actual future net cash flows from our proved reserves and their present value |
| In addition, the 10prca discount factor, which is required by the SEC to be used in calculating discounted future net cash flows for reporting purposes, is not necessarily the most accurate discount factor |
| The effective interest rate at various times and the risks associated with our business or the oil and gas industry in general will affect the accuracy of the 10prca discount factor |
| Acquisitions may prove to be worth less than we paid because of uncertainties in evaluating recoverable reserves and potential liabilities |
| Our recent growth is due in part to acquisitions of exploration and production companies, producing properties and undeveloped leasehold |
| We expect acquisitions will also contribute to our future growth |
| Successful acquisitions require an assessment of a number of factors, including estimates of recoverable reserves, 24 ______________________________________________________________________ [45]Table of Contents exploration potential, future oil and gas prices, operating costs and potential environmental and other liabilities |
| Such assessments are inexact and their accuracy is inherently uncertain |
| In connection with our assessments, we perform a review of the acquired properties which we believe is generally consistent with industry practices |
| However, such a review will not reveal all existing or potential problems |
| In addition, our review may not permit us to become sufficiently familiar with the properties to fully assess their deficiencies and capabilities |
| We do not inspect every well |
| Even when we inspect a well, we do not always discover structural, subsurface and environmental problems that may exist or arise |
| We are generally not entitled to contractual indemnification for pre-closing liabilities, including environmental liabilities |
| Normally, we acquire interests in properties on an “as is” basis with limited remedies for breaches of representations and warranties |
| As a result of these factors, we may not be able to acquire oil and gas properties that contain economically recoverable reserves or be able to complete such acquisitions on acceptable terms |
| We were not entitled to contractual indemnification for the majority of pre-closing liabilities, including environmental liabilities, in our recent acquisition of CNR We acquired CNR on an “as is” basis with very limited remedies for breaches of representations and warranties |
| We might incur significant liabilities relating to CNR in the future which we have not yet identified or cannot quantify at this time |
| As new owners, we may not effectively consolidate and integrate acquired operations, particularly when we make significant acquisitions outside our historical operating areas |
| Significant acquisitions present operational and administrative challenges that may prove more difficult than anticipated |
| The failure to consolidate functions and integrate procedures, personnel and operations in an effective and timely manner may adversely affect our business and results of operations, at least temporarily |
| Significant acquisitions can change the nature of our operations and business depending upon the character of the acquired properties, which may have substantially different operating and geological characteristics or be in different geographic locations than our existing properties |
| To the extent that we acquire properties substantially different from the properties in our primary operating areas or acquire properties that require different technical expertise, we may not be able to realize the economic benefits of these acquisitions as efficiently as in our prior acquisitions |
| As a result of our recent acquisition of CNR, we now have a significant presence in the Appalachian Basin, principally in West Virginia, eastern Kentucky, eastern Ohio and southern New York |
| We have not previously developed or explored for oil and natural gas in this part of the US Exploration and development drilling may not result in commercially productive reserves |
| We do not always encounter commercially productive reservoirs through our drilling operations |
| The new wells we drill or participate in may not be productive and we may not recover all or any portion of our investment in wells we drill or participate in |
| The seismic data and other technologies we use do not allow us to know conclusively prior to drilling a well that oil or gas is present or may be produced economically |
| The cost of drilling, completing and operating a well is often uncertain, and cost factors can adversely affect the economics of a project |
| Our efforts will be unprofitable if we drill dry wells or wells that are productive but do not produce enough reserves to return a profit after drilling, operating and other costs |
| Further, our drilling operations may be curtailed, delayed or canceled as a result of a variety of factors, including: • increases in the cost of, or shortages or delays in the availability of, drilling rigs and equipment; • unexpected drilling conditions; • title problems; • pressure or irregularities in formations; • equipment failures or accidents; • adverse weather conditions; and 25 ______________________________________________________________________ [46]Table of Contents • compliance with environmental and other governmental requirements |
| Future price declines may result in a write-down of our asset carrying values |
| We utilize the full cost method of accounting for costs related to our oil and gas properties |
| Under this method, all such costs (for both productive and nonproductive properties) are capitalized and amortized on an aggregate basis over the estimated lives of the properties using the unit-of-production method |
| However, these capitalized costs are subject to a ceiling test which limits such pooled costs to the aggregate of the present value of future net revenues attributable to proved oil and gas reserves discounted at 10prca plus the lower of cost or market value of unproved properties |
| The full cost ceiling is evaluated at the end of each quarter using the prices for oil and gas at that date, adjusted for the impact of derivatives accounted for as cash flow hedges |
| A significant decline in oil and gas prices from current levels, or other factors, without other mitigating circumstances, could cause a future write-down of capitalized costs and a non-cash charge against future earnings |
| Our hedging activities may reduce the realized prices received for our oil and gas sales and require us to provide collateral for hedging liabilities |
| In order to manage our exposure to price volatility in marketing our oil and gas, we enter into oil and gas price risk management arrangements for a portion of our expected production |
| Commodity price hedging may limit the prices we actually realize and therefore reduce oil and gas revenues in the future |
| The fair value of our oil and gas derivative instruments outstanding as of December 31, 2005 was a liability of approximately dlra945dtta8 million |
| In addition, our commodity price risk management transactions may expose us to the risk of financial loss in certain circumstances, including instances in which: • our production is less than expected; • there is a widening of price differentials between delivery points for our production and the delivery point assumed in the hedge arrangement; or • the counterparties to our contracts fail to perform under the contracts |
| Some of our commodity price and interest rate risk management arrangements require us to deliver cash collateral or other assurances of performance to the counterparties in the event that our payment obligations exceed certain levels |
| As of December 31, 2005, we were required to post a total of dlra50 million of collateral with our counterparties through letters of credit issued under our bank credit facility with respect to commodity price and financial risk management transactions |
| As of March 10, 2006, we were required to post dlra50 million of collateral with our counterparties through letters of credit |
| Future collateral requirements are uncertain and will depend on arrangements with our counterparties and highly volatile natural gas and oil prices |
| Lower oil and gas prices could negatively impact our ability to borrow |
| Our amended and restated revolving bank credit facility limits our borrowings to the lesser of the borrowing base (currently dlra2dtta5 billion) and the commitment (currently dlra2dtta0 billion) |
| The borrowing base is determined periodically at the discretion of the banks and is based in part on oil and gas prices |
| Additionally, some of our indentures contain covenants limiting our ability to incur indebtedness in addition to that incurred under our bank credit facility |
| These indentures limit our ability to incur additional indebtedness unless we meet one of two alternative tests |
| The first alternative is based on our adjusted consolidated net tangible assets (as defined in all of our indentures), which is determined using discounted future net revenues from proved oil and gas reserves as of the end of each year |
| The second alternative is based on the ratio of our adjusted consolidated EBITDA (as defined in the relevant indentures) to our adjusted consolidated interest expense over a trailing twelve-month period |
| As of the date of this report, we are permitted to incur significant additional indebtedness under both of these debt incurrence tests |
| Lower oil and gas prices in the future could reduce our adjusted consolidated EBITDA, as well as our adjusted consolidated net tangible assets, and thus could reduce our ability to incur additional indebtedness |
| 26 ______________________________________________________________________ [47]Table of Contents Oil and gas drilling and producing operations can be hazardous and may expose us to environmental liabilities |
| Oil and gas operations are subject to many risks, including well blowouts, cratering and explosions, pipe failure, fires, formations with abnormal pressures, uncontrollable flows of oil, natural gas, brine or well fluids, and other environmental hazards and risks |
| Our drilling operations involve risks from high pressures and from mechanical difficulties such as stuck pipes, collapsed casings and separated cables |
| If any of these risks occur, we could sustain substantial losses as a result of: • injury or loss of life; • severe damage to or destruction of property, natural resources and equipment; • pollution or other environmental damage; • clean-up responsibilities; • regulatory investigations and penalties; and • suspension of operations |
| Our liability for environmental hazards includes those created either by the previous owners of properties that we purchase or lease or by acquired companies prior to the date we acquire them |
| We maintain insurance against some, but not all, of the risks described above |
| Our insurance may not be adequate to cover casualty losses or liabilities |
| Also, in the future we may not be able to obtain insurance at premium levels that justify its purchase |