| EDGE PETROLEUM CORP ITEM 1A RISK FACTORS Oil and gas drilling is a speculative activity and involves numerous risks and substantial and uncertain costs which could adversely affect us |
| Our growth will be materially dependent upon the success of our future drilling program |
| Drilling for oil and gas involves numerous risks, including the risk that no commercially productive oil or natural gas reservoirs will be encountered |
| The cost of drilling, completing and operating wells is substantial and uncertain, and drilling operations may be curtailed, delayed or cancelled as a result of a variety of factors beyond our control, including unexpected drilling conditions, pressure or irregularities in formations, equipment failures or accidents, adverse weather conditions, compliance with governmental requirements and shortages or delays in the availability of drilling rigs or crews and the delivery of equipment |
| Our future drilling activities may not be successful and, if unsuccessful, such failure will have an adverse effect on our future results of operations and financial condition |
| Our overall drilling success rate or our drilling success rate for activity within a particular geographic area may decline |
| We may ultimately not be able to lease or drill identified or budgeted prospects within our expected time frame, or at all |
| We may not be able to lease or drill a particular prospect because, in some cases, we identify a prospect or drilling location before seeking an option or lease rights in the prospect or location |
| Similarly, our drilling schedule may vary from our capital budget |
| The final determination with respect to the drilling of any scheduled or budgeted wells will be dependent on a number of factors, including: • the results of exploration efforts and the acquisition, review and analysis of the seismic data; • the availability of sufficient capital resources to us and the other participants for the drilling of the prospects; • the approval of the prospects by other participants after additional data has been compiled; • economic and industry conditions at the time of drilling, including prevailing and anticipated prices for oil and natural gas and the availability of drilling rigs and crews; • our financial resources and results; and • the availability of leases and permits on reasonable terms for the prospects |
| These projects may not be successfully developed and the wells, if drilled, may not encounter reservoirs of commercially productive oil or natural gas |
| “BUSINESS AND PROPERTIES – CORE AREAS OF OPERATION” Oil and natural gas prices are highly volatile in general and low prices negatively affect our financial results |
| Our revenue, profitability, cash flow, future growth and ability to borrow funds or obtain additional capital, as well as the carrying value of our properties, are substantially dependent upon prevailing prices of oil and natural gas |
| Our reserves are predominantly natural gas, therefore changes in natural gas prices may have a particularly large impact on our financial results |
| Lower oil and natural gas prices also may reduce the amount of oil and natural gas that we can produce economically |
| Historically, the markets for oil and natural gas have been volatile, and such markets are likely to continue to be volatile in the future |
| Prices for oil and natural gas are subject to wide fluctuation in response to relatively minor changes in the supply of and demand for oil and natural gas, market uncertainty and a variety of additional factors that are beyond our control |
| These factors include the level of consumer product demand, weather conditions, domestic and foreign governmental regulations, the price and availability of alternative fuels, political conditions, the foreign supply of oil and natural gas, the price of foreign imports and overall economic conditions |
| Declines in oil and natural gas prices may materially adversely affect our financial condition, liquidity, and ability to finance planned capital expenditures and results of operations |
| “BUSINESS AND PROPERTIES — OIL AND NATURAL GAS RESERVES” and “– MARKETING” We have in the past and may in the future be required to write down the carrying value of our oil and natural gas properties when oil and natural gas prices are depressed or unusually volatile |
| Whether we will be required to take such a charge will depend on the prices for oil and natural gas at the end of any quarter and the effect of reserve additions or revisions and capital expenditures during such quarter |
| If a write down is required, it would result in a charge to earnings, but would not impact cash flow from operating activities |
| 18 ______________________________________________________________________ We have hedged and may continue to hedge a portion of our production, which may result in our making cash payments or prevent us from receiving the full benefit of increases in prices for oil and gas |
| In order to reduce our exposure to short-term fluctuations in the price of oil and natural gas, we periodically enter into hedging arrangements |
| Our hedging arrangements apply to only a portion of our production and provide only partial price protection against declines in oil and natural gas prices |
| Such hedging arrangements may expose us to risk of financial loss in certain circumstances, including instances where production is less than expected, our customers fail to purchase contracted quantities of oil or natural gas or a sudden, unexpected event materially impacts oil or natural gas prices |
| In addition, our hedging arrangements may limit the benefit to us of increases in the price of oil and natural gas |
| “BUSINESS AND PROPERTIES – MARKETING” We depend on successful exploration, development and acquisitions to maintain reserves and revenue in the future |
| In general, the volume of production from oil and natural gas properties declines as reserves are depleted, with the rate of decline depending on reservoir characteristics |
| Except to the extent we acquire properties containing proved reserves or conduct successful exploration and development activities, or both, our proved reserves will decline |
| Our future oil and natural gas production is, therefore, highly dependent upon our level of success in finding or acquiring additional reserves |
| In addition, we are dependent on finding partners for our exploratory activity |
| To the extent that others in the industry do not have the financial resources or choose not to participate in our exploration activities, we could be adversely affected |
| We are subject to substantial operating risks that may adversely affect the results of our operations |
| The oil and natural gas business involves certain operating hazards such as well blowouts, mechanical failures, explosions, uncontrollable flows of oil, natural gas or well fluids, fires, formations with abnormal pressures, pollution, releases of toxic gas and other environmental hazards and risks |
| We could suffer substantial losses as a result of any of these events |
| We are not fully insured against all risks incident to our business |
| As a result, our operating risks for those wells and our ability to influence the operations for these wells are less subject to our control |
| Operators of these wells may act in ways that are not in our best interests |
| See ITEMS 1 AND 2 |
| “BUSINESS AND PROPERTIES – OPERATING HAZARDS AND INSURANCE” We cannot control the activities on properties we do not operate and are unable to ensure their proper operation and profitability |
| As a result, we have limited ability to exercise influence over, and control the risks associated with, operations of these properties |
| The failure of an operator of our wells to adequately perform operations, an operator’s breach of the applicable agreements or an operator’s failure to act in ways that are in our best interest could reduce our production and revenues |
| The success and timing of our drilling and development activities on properties operated by others therefore depend upon a number of factors outside of our control, including the operator’s • timing and amount of capital expenditures; • expertise and financial resources; • inclusion of other participants in drilling wells; and • use of technology |
| The loss of key personnel could adversely affect us |
| We depend to a large extent on the services of certain key management personnel, including our executive officers and other key employees, the loss of any of which could have a material adverse effect on our operations |
| We believe that our success is also dependent upon our ability to continue to employ and retain skilled technical personnel |
| 19 ______________________________________________________________________ “SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS – EXECUTIVE OFFICERS OF THE REGISTRANT” and “-SIGNIFICANT EMPLOYEES” Our operations have significant capital requirements which, if not met, will hinder operations |
| We have experienced and expect to continue to experience substantial working capital needs due to our active exploration, development and acquisition programs |
| Additional financing may be required in the future to fund our growth |
| We may not be able to obtain such additional financing, and financing under existing or new credit facilities may not be available in the future |
| In the event such capital resources are not available to us, our drilling and other activities may be curtailed |
| “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – LIQUIDITY AND CAPITAL RESOURCES” High demand for field services and equipment and the ability of suppliers to meet that demand may limit our ability to drill and produce our oil and natural gas properties |
| This is causing escalating prices, delays in drilling and other exploration activities, the possibility of poor services coupled with potential damage to downhole reservoirs and personnel injuries |
| Such pressures will likely increase the actual cost of services, extend the time to secure such services and add costs for damages due to any accidents sustained from the over use of equipment and inexperienced personnel |
| Government regulation and liability for environmental matters may adversely affect our business and results of operations |
| Oil and natural gas operations are subject to various federal, state and local government regulations, which may be changed from time to time |
| Matters subject to regulation include discharge permits for drilling operations, drilling bonds, reports concerning operations, the spacing of wells, unitization and pooling of properties and taxation |
| From time to time, regulatory agencies have imposed price controls and limitations on production by restricting the rate of flow of oil and natural gas wells below actual production capacity in order to conserve supplies of oil and natural gas |
| There are federal, state and local laws and regulations primarily relating to protection of human health and the environment applicable to the development, production, handling, storage, transportation and disposal of oil and natural gas, by-products thereof and other substances and materials produced or used in connection with oil and natural gas operations |
| In addition, we may be liable for environmental damages caused by previous owners of property we purchase or lease |
| As a result, we may incur substantial liabilities to third parties or governmental entities |
| The implementation of new, or the modification of existing, laws or regulations could have a material adverse effect on us |
| See ITEMS 1 AND 2 |
| “BUSINESS AND PROPERTIES – INDUSTRY REGULATIONS” We may have difficulty managing any future growth and the related demands on our resources and may have difficulty in achieving future growth |
| We have experienced growth in the past through the expansion of our drilling program and, more recently, acquisitions |
| This expansion was curtailed in 1998 and 1999, but resumed in 2000 and increased in subsequent years |
| Further expansion is anticipated in 2006 both through increased drilling efforts and possible acquisitions |
| Any future growth may place a significant strain on our financial, technical, operational and administrative resources |
| Our ability to grow will depend upon a number of factors, including our ability to identify and acquire new exploratory prospects, our ability to develop existing prospects, our ability to continue to retain and attract skilled personnel, the results of our drilling program and acquisition efforts, hydrocarbon prices and access to capital |
| We may not be successful in achieving or managing growth and any such failure could have a material adverse effect on us |
| We face strong competition from larger oil and natural gas companies |
| The oil and gas industry is highly competitive |
| We encounter competition from oil and natural gas companies in all areas of our operations, including the acquisition of exploratory prospects and productive oil and natural gas properties |
| Our competitors range in size from the major integrated oil and natural gas companies to numerous independent oil and natural gas companies, individuals and drilling and income programs |
| Many of these competitors are large, well-established companies with substantially larger operating staffs and greater capital resources than ours |
| We may not be able to conduct our operations successfully, evaluate and select suitable 20 ______________________________________________________________________ properties, consummate transactions, and obtain technical, managerial and other professional personnel in this highly competitive environment |
| Specifically, these larger competitors may be able to pay more for exploratory prospects, productive oil and natural gas properties and competent personnel 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 |
| In addition, such competitors may be able to expend greater resources on the existing and changing technologies that we believe are and will be increasingly important to attaining success in the industry |
| Such competitors may also be in a better position to secure oilfield services and equipment on a timely basis or on favorable terms |
| See ITEMS 1 AND 2 |
| “BUSINESS AND PROPERTIES – COMPETITION” The oil and natural gas reserve data included in or incorporated by reference in this document are estimates based on assumptions that may be inaccurate and existing economic and operating conditions that may differ from future economic and operating conditions |
| Reservoir engineering is a subjective and inexact process of estimating underground accumulations of oil and natural gas that cannot be measured in an exact manner and is based upon assumptions that may vary considerably from actual results |
| Accordingly, reserve estimates may be subject to downward or upward adjustment |
| Actual production, revenue and expenditures with respect to our reserves will likely vary from estimates, and such variances may be material |
| The information regarding discounted future net cash flows included in this report should not be considered as the current market value of the estimated oil and natural gas reserves attributable to our properties |
| As required by the SEC, the estimated discounted future net cash flows from proved reserves are based on prices and costs as of the date of the estimate, while actual future prices and costs may be materially higher or lower |
| Actual future net cash flows also will be affected by factors such as the amount and timing of actual production, supply and demand for oil and natural gas, increases or decreases in consumption, and changes in governmental regulations or taxation |
| In addition, the 10prca discount factor, which is required by Financial Accounting Standards Board in Statement of Financial Accounting Standards Nodtta 69, Disclosures About Oil and Natural Gas Producing Activities to be used in calculating discounted future net cash flows for reporting purposes, is not necessarily the most appropriate discount factor based on interest rates in effect from time to time and risks associated with us or the oil and natural gas industry in general |
| “BUSINESS AND PROPERTIES – OIL AND NATURAL GAS RESERVES” Our credit facility has substantial operating restrictions and financial covenants and we may have difficulty obtaining additional credit, which could adversely affect operations |
| Over the past few years, increases in commodity prices, in proved reserve amounts and the resultant increase in estimated discounted future net revenue, has allowed us to increase our available borrowing amounts |
| Our credit facility is secured by a pledge of substantially all of our assets and has covenants that limit additional borrowings, sales of assets and the distributions of cash or properties and that prohibit the payment of dividends and the incurrence of liens |
| The revolving credit facility also requires that specified financial ratios be maintained |
| The restrictions of our credit facility and the difficulty in obtaining additional debt financing may have adverse consequences on our operations and financial results, including our ability to obtain financing for working capital, capital expenditures, our drilling program, purchases of new technology or other purposes |
| In addition, such financing may be on terms unfavorable to us and we may be required to use a substantial portion of our cash flow to make debt service payments, which will reduce the funds that would otherwise be available for operations and future business opportunities |
| Further, a substantial decrease in our operating cash flow or an increase in our expenses could make it difficult for us to meet debt service requirements and require us to modify operations and we may become more vulnerable to downturns in our business or the economy generally |
| Our ability to obtain and service indebtedness will depend on our future performance, including our ability to manage cash flow and working capital, which are in turn subject to a variety of factors beyond our control |
| Our business may not generate cash flow at or above anticipated levels or we may not be able to borrow funds in amounts sufficient to enable us to service indebtedness, make anticipated capital expenditures or finance our drilling program |
| If we are unable to generate sufficient cash flow from operations or to borrow sufficient funds in the future to service our debt, we may be required to curtail portions of our drilling program, sell assets, reduce capital expenditures, refinance all or a portion of our existing debt or obtain additional financing |
| We may not be able to refinance our debt or obtain additional financing, particularly in view of current industry conditions, the restrictions on our ability to incur debt under our existing debt arrangements, and the fact that substantially all of our assets are currently pledged to secure obligations under our bank credit facility |
| “MANAGEMENT’S 21 ______________________________________________________________________ DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – LIQUIDITY AND CAPITAL RESOURCES” and “– CREDIT FACILITY” We may not have enough insurance to cover all of the risks we face |
| In accordance with customary industry practices, we maintain insurance coverage against some, but not all, potential losses in order to protect against the risks we face |
| We do not carry business interruption insurance |
| We may elect not to carry insurance if our management believes that the cost of available insurance is excessive relative to the risks presented |
| In addition, we cannot insure fully against pollution and environmental risks |
| The occurrence of an event not fully covered by insurance could have a material adverse effect on our financial condition and results of operations |
| Our acquisition program may be unsuccessful |
| Acquisitions have become increasingly important to our business strategy in recent years |
| The successful acquisition of producing properties requires an assessment of recoverable reserves, future oil and natural gas prices, operating costs, potential environmental and other liabilities and other factors |
| Such assessments, even when performed by experienced personnel, are necessarily inexact and their accuracy inherently uncertain |
| Our review of subject properties will not reveal all existing or potential problems, deficiencies and capabilities |
| We may not always perform inspections on every well, and may not be able to observe structural and environmental problems even when we undertake an inspection |
| Even when problems are identified, the seller may be unwilling or unable to provide effective contractual protection against all or part of such problems |
| Any acquisition of property interests by us may not be successful and, if unsuccessful, such failure may have an adverse effect on our future results of operations and financial condition |
| We do not intend to pay dividends and our ability to pay dividends is restricted |
| We currently intend to retain any earnings for the future operation and development of our business and do not currently anticipate paying any dividends in the foreseeable future |
| We are currently restricted from paying dividends by our existing credit facility agreement |
| Any future dividends also may be restricted by our then-existing loan agreements |
| “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – LIQUIDITY AND CAPITAL RESOURCES” and Note 10 to our consolidated financial statements |
| Our reliance on third parties for gathering and distributing could curtail future exploration and production activities |
| The marketability of our production depends upon the proximity of our reserves to, and the capacity of, third-party facilities and services, including oil and natural gas gathering systems, pipelines, trucking or terminal facilities, and processing facilities |
| The unavailability or lack of capacity of such services and facilities could result in the shut-in of producing wells or the delay or discontinuance of development plans for properties |
| A shut-in or delay or discontinuance could adversely affect our financial condition |
| In addition, federal and state regulation of oil and natural gas production and transportation affect our ability to produce and market our oil and natural gas on a profitable basis |
| Provisions of Delaware law and our charter and bylaws may delay or prevent transactions that would benefit stockholders |
| Our Certificate of Incorporation and Bylaws and the Delaware General Corporation Law contain provisions that may have the effect of delaying, deferring or preventing a change of control of the company |
| These provisions, among other things, provide for a classified Board of Directors with staggered terms, restrict the ability of stockholders to take action by written consent, authorize the Board of Directors to set the terms of Preferred Stock, and restrict our ability to engage in transactions with stockholders with 15prca or more of outstanding voting stock |
| Because of these provisions, persons considering unsolicited tender offers or other unilateral takeover proposals may be more likely to negotiate with our board of directors rather than pursue non-negotiated takeover attempts |
| As a result, these provisions may make it more difficult for our stockholders to benefit from transactions that are opposed by an incumbent board of directors |
| 22 ______________________________________________________________________ Miller’s former use of Arthur Andersen LLP as its independent public accountants may limit your ability to seek potential recoveries from them related to their work |
| Arthur Andersen LLP, independent public accountants, audited the consolidated balance sheet of Miller and its subsidiary as of December 31, 2001, and the related consolidated statements of operations, equity and cash flows for the year ending December 31, 2001 |
| On June 15, 2002, Arthur Andersen was convicted on a federal obstruction of justice charge, which was overturned in 2005 |
| On June 27, 2002, Miller dismissed Arthur Andersen and engaged Plante & Moran, PLLC Arthur Andersen has ceased operations shortly after the conviction |
| As a result, any recovery any Edge stakeholder may have from Arthur Andersen related to the claims that such stakeholder may assert related to the financial statements audited by Arthur Andersen, misstatements or omissions, if any, in this Form 10-K, will be limited by the financial circumstances of Arthur Andersen |