| ENERGY PARTNERS LTD Item 1A Risk Factors Risks Relating to the Oil and Natural Gas Industry Exploring for and producing oil and natural gas are high-risk activities with many uncertainties that could adversely affect our business, financial condition or results of operations |
| Our future success will depend on the success of our exploration and production activities |
| Our oil and natural gas exploration and production activities are subject to numerous risks beyond our control, including the risk that drilling will not result in commercially viable oil or natural gas production |
| Our decisions to purchase, explore, develop or otherwise exploit prospects or properties will depend in part on the evaluation of data obtained through geophysical and geological analyses, production data and engineering studies, the results of which are often inconclusive or subject to varying interpretations |
| Our cost of drilling, completing and operating wells is often uncertain before drilling commences |
| Overruns in budgeted expenditures are common risks that can make a particular project uneconomical |
| Further, many factors may curtail, delay or cancel drilling, including the following: • pressure or irregularities in geological formations; • shortages of or delays in obtaining equipment and qualified personnel; • equipment failures or accidents; • adverse weather conditions, such as hurricanes and tropical storms; • reductions in oil and natural gas prices; • title problems; • limitations in the market for oil and natural gas; and • cost of services to drill wells |
| We may incur substantial losses and be subject to substantial liability claims as a result of our oil and natural gas operations |
| Losses and liabilities arising from uninsured and underinsured events could materially and adversely affect our business, financial condition or results of operations |
| Our oil and natural gas exploration and production activities 14 _________________________________________________________________ [68]Table of Contents are subject to all of the operating risks associated with drilling for and producing oil and natural gas, including the possibility of: • environmental hazards, such as uncontrollable flows of oil, natural gas, brine, well fluids, toxic gas or other pollution into the environment, including groundwater and shoreline contamination; • abnormally pressured formations; • mechanical difficulties, such as stuck oil field drilling and service tools and casing collapse; • fires and explosions; • personal injuries and death; and • natural disasters, especially hurricanes and tropical storms in the Gulf of Mexico |
| Offshore operations are also subject to a variety of operating risks peculiar to the marine environment, such as capsizing, collisions and damage or loss from hurricanes, tropical storms or other adverse weather conditions |
| These conditions can cause substantial damage to facilities and interrupt production |
| Any of these risks could adversely affect our ability to conduct operations or result in substantial losses to our company |
| We maintain insurance at levels that we believe are consistent with industry practices and our particular needs, but we are not fully insured against all risks |
| We may elect not to obtain insurance for certain risks or to limit levels of coverage if we believe that the cost of available insurance is excessive relative to the risks involved |
| In this regard, the cost of available coverage has increased significantly as a result of losses experienced by third party insurers in the 2005 hurricane season in the Gulf of Mexico, in particular those resulting from Hurricanes Katrina and Rita |
| In addition, pollution and environmental risks generally are not fully insurable |
| If a significant accident or other event occurs and is not fully covered by insurance, it could adversely affect our cash flow and net income and could reduce or eliminate the funds available for exploration, exploitation and acquisitions or result in loss of equipment and properties |
| A substantial or extended decline in oil and natural gas prices may adversely affect our business, financial condition or results of operations and our ability to meet our capital expenditure requirements and financial commitments |
| The price we receive for our oil and natural gas production heavily influences our revenue, profitability, access to capital and future rate of growth |
| Oil and natural gas are commodities and, therefore, their prices are subject to wide fluctuations in response to relatively minor changes in supply and demand |
| Historically, the markets for oil and natural gas have been volatile |
| These markets will likely continue to be volatile in the future |
| The prices we receive for our production, and the levels of our production, depend on numerous factors beyond our control |
| These factors include: • changes in the global supply, demand and inventories of oil; • domestic natural gas supply, demand and inventories; • the actions of the Organization of Petroleum Exporting Countries, or OPEC; • the price and quantity of foreign imports of oil; • the price and availability of liquefied natural gas imports; • political conditions, including embargoes, in or affecting other oil-producing countries; • economic and energy infrastructure disruptions caused by actual or threatened acts of war, or terrorist activities, or national security measures deployed to protect the United States from such actual or threatened acts or activities; • economic stability of major oil and natural gas companies and the interdependence of oil and natural gas and energy trading companies; • the level of worldwide oil and natural gas exploration and production activity; 15 _________________________________________________________________ [69]Table of Contents • weather conditions, including energy infrastructure disruptions resulting from those conditions; • technological advances affecting energy consumption; and • the price and availability of alternative fuels |
| Lower oil and natural gas prices may not only decrease our revenues on a per unit basis, but also may reduce the amount of oil and natural gas that we can produce economically |
| A substantial or extended decline in oil and natural gas prices may materially and adversely affect our future business, financial condition, results of operations, liquidity, ability to finance planned capital expenditures or ability to pursue acquisitions |
| Further, oil prices and natural gas prices do not necessarily move together |
| Reserve estimates depend on many assumptions that may prove to be inaccurate |
| Any material inaccuracies in these reserve estimates or underlying assumptions will materially affect the quantities and present value of our reserves |
| The process of estimating oil and natural gas reserves is complex |
| It requires interpretations of available technical data and many assumptions, including assumptions relating to economic factors |
| Any significant inaccuracies in these interpretations or assumptions could materially affect the estimated quantities and present value of reserves shown in this Report |
| In order to assist in the preparation of our estimates, we must project production rates and timing of development expenditures |
| We must also analyze available geological, geophysical, production and engineering data |
| The extent, quality and reliability of these data can vary |
| The process also requires economic assumptions about matters such as oil and natural gas prices, drilling and operating expenses, capital expenditures, taxes and availability of funds |
| Therefore, estimates of oil and natural gas reserves are inherently imprecise |
| Actual future production, oil and natural gas prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable oil and natural gas reserves most likely will vary from our estimates |
| It cannot be assumed that the present value of future net revenues from our proved reserves referred to in this Report is the current market value of our estimated oil and natural gas reserves |
| In accordance with SEC requirements, we base the estimated discounted future net cash flows from our proved reserves on prices and costs on the date of the estimate |
| Actual future prices and costs may differ materially from those used in the present-value estimate |
| Market conditions or operational impediments may hinder our access to oil and natural gas markets or delay our production |
| Market conditions or the unavailability of satisfactory oil and natural gas transportation arrangements may hinder our access to oil and natural gas markets or delay our production |
| The availability of a ready market for our oil and natural gas production depends on a number of factors, including the demand for and supply of oil and natural gas and the proximity of reserves to pipelines and terminal facilities |
| Our ability to market our production depends in substantial part on the availability and capacity of gathering systems, pipelines and processing facilities owned and operated by third parties |
| Our failure to obtain such services on acceptable terms could harm our business |
| We may be required to shut in wells for lack of a market or because of inadequacy or unavailability of oil or natural gas pipeline or gathering system capacity |
| If that were to occur, we would be unable to realize revenue from those wells until production arrangements were made to deliver to market |
| Risks Relating to Energy Partners, Ltd |
| A significant part of the value of our production and reserves is concentrated in two areas |
| Because of this concentration, any production problems or inaccuracies in reserve estimates related to these areas could impact our business adversely |
| During 2005, 39prca of our net daily production came from our Greater Bay Marchand area and approximately 40prca of our proved reserves were located in the fields that comprise this area |
| In addition, 20prca of our net daily production came from our East Bay field and approximately 34prca of our proved reserves were located on this 16 _________________________________________________________________ [70]Table of Contents property |
| If mechanical problems, storms or other events were to curtail a substantial portion of this production, our cash flow could be affected adversely |
| If the actual reserves associated with these properties are less than our estimated reserves, our business, financial condition or results of operations could be adversely affected |
| Relatively short production life for Gulf of Mexico and Gulf Coast onshore regions properties subjects us to higher reserve replacement needs |
| Producing oil and natural gas reservoirs generally are characterized by declining production rates that vary depending upon reservoir characteristics and other factors |
| High production rates generally result in recovery of a relatively higher percentage of reserves from properties during the initial few years of production |
| All of our operations are presently in the Gulf of Mexico and Gulf Coast onshore regions |
| Production from reservoirs in the Gulf of Mexico region generally declines more rapidly than from reservoirs in many other producing regions of the world |
| As of December 31, 2005, our independent petroleum engineers estimate, on average, 65prca of our total proved reserves will be produced within 5 years |
| As a result, our reserve replacement needs from new investments are relatively greater than those of producers who recover lower percentages of their reserves over a similar time period, such as producers who have a portion of their reserves outside the Gulf of Mexico in areas where the rate of reserve production is lower |
| We may not be able to develop, exploit, find or acquire additional reserves to sustain our current production levels or to grow |
| There can be no assurance that we will be able to grow production at rates we have experienced in the past |
| 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 |
| Rapid growth may place significant demands on our resources |
| We have experienced rapid growth in our operations and expect that expansion of our operations will continue |
| Our rapid growth has placed, and our anticipated future growth will continue to place, a significant demand on our managerial, operational and financial resources due to: • the need to manage relationships with various strategic partners and other third parties; • difficulties in hiring and retaining skilled personnel necessary to support our business; • complexities in integrating acquired businesses and personnel; • the need to train and manage our employee base; and • pressures for the continued development of our financial and information management systems |
| If we have not made adequate allowances for the costs and risks associated with these demands or if our systems, procedures or controls are not adequate to support our operations, our business could be harmed |
| Properties that we buy may not produce as projected, and we may be unable to fully identify liabilities associated with the properties or obtain protection from sellers against them |
| Our strategy includes acquisitions |
| The successful acquisition of producing properties requires assessments of many factors, which are inherently inexact and may be inaccurate, including: • the amount of recoverable reserves and the rates at which those reserves will be produced; • future oil and natural gas prices; • estimates of operating costs; • estimates of future development costs; • estimates of the costs and timing of plugging and abandonment; and • potential environmental and other liabilities |
| Our assessments will not reveal all existing or potential problems, nor will they permit us to become familiar enough with the properties to evaluate fully their deficiencies and capabilities |
| In the course of our due diligence, we 17 _________________________________________________________________ [71]Table of Contents may not inspect every well, platform or pipeline |
| We cannot necessarily observe structural and environmental problems, such as pipeline corrosion or groundwater contamination, when an inspection is conducted |
| We may not be able to obtain contractual indemnities from the seller for liabilities that it created |
| We may be required to assume the risk of the physical condition of the properties in addition to the risk that the properties may not perform in accordance with our expectations |
| Substantial acquisitions, development programs or other transactions could require significant external capital and could change our risk and property profile |
| In order to finance acquisitions of additional producing properties or finance the development of any discoveries made through any expanded exploratory program that might be undertaken, we may need to alter or increase our capitalization substantially through the issuance of additional debt or equity securities, the sale of production payments or other means |
| These changes in capitalization may significantly affect our risk profile |
| Additionally, significant acquisitions or other transactions can change the character of our operations and business |
| The character of the new properties may be substantially different in operating or geological characteristics or geographic location than our existing properties |
| Furthermore, we may not be able to obtain external funding for any such transactions or to obtain additional external funding on terms acceptable to us |
| The unavailability or high cost of drilling rigs, equipment, supplies, personnel and oilfield services could adversely affect our ability to execute on a timely basis our exploration and development plans within our budget |
| All of our operations are in the Gulf of Mexico and Gulf Coast onshore regions |
| Shortages or the high cost of drilling rigs, equipment, supplies or personnel could delay or adversely affect our exploration and development plans, which could have a material adverse effect on our business, financial condition or results of operations |
| Periodically, as a result of increased drilling activity or a decrease in the supply of equipment, materials and services, we have experienced increases in associated costs, including those related to drilling rigs, equipment, supplies and personnel and the services and products of other vendors to the industry |
| Increased drilling activity in the Gulf of Mexico and in other offshore areas around the world also decreases the availability of offshore rigs in the Gulf of Mexico |
| We cannot offer assurance that costs will not increase again or that necessary equipment and services will be available to us at economical prices |
| Provisions in our organizational documents and under Delaware law could delay or prevent a change in control of our company, which could adversely affect the price of our common stock |
| The existence of some provisions in our organizational documents and under Delaware law could delay or prevent a change in control of our company, which could adversely affect the price of our common stock |
| The provisions in our certificate of incorporation and bylaws that could delay or prevent an unsolicited change in control of our company include: • the board of directors’ ability to issue shares of preferred stock and determine the terms of the preferred stock without approval of common stockholders; and • a prohibition on the right of stockholders to call meetings and a limitation on the right of stockholders to act by written consent and to present proposals or make nominations at stockholder meetings |
| In addition, Delaware law imposes some restrictions on mergers and other business combinations between us and any holder of 15prca or more of our outstanding common stock |
| The loss of key personnel could adversely affect us |
| To a large extent, we depend on the services of our chairman and chief executive officer, Richard A Bachmann, our president and chief operating officer, Phillip A Gobe, and other senior management personnel |
| Bachmann or Gobe or other senior management personnel could have an adverse effect on our operations |
| We do not maintain any insurance against the loss of any of these individuals |
| 18 _________________________________________________________________ [72]Table of Contents The exploration and production business is highly competitive, and our success will depend largely on our ability to attract and retain experienced geoscientists and other professional staff |
| Competition in the oil and natural gas industry is intense, which may adversely affect us |
| We operate in a highly competitive environment for acquiring oil and natural gas properties, marketing oil and natural gas and securing trained personnel |
| Many of our competitors possess and employ financial, technical and personnel resources substantially greater than ours, which can be particularly important in Gulf of Mexico and Gulf Coast onshore activities |
| Those companies may be able to pay more for productive oil and natural gas properties and exploratory prospects and to define, evaluate, bid for and purchase a greater number of properties and prospects than our financial or personnel resources permit |
| Our ability to acquire additional prospects and to discover reserves in the future will depend on our ability to evaluate and select suitable properties and to consummate transactions in a highly competitive environment |
| Also, there is substantial competition for capital available for investment in the oil and natural gas industry |
| We cannot make assurances that we will be able to compete successfully in the future in acquiring prospective reserves, developing reserves, marketing hydrocarbons, attracting and retaining quality personnel and raising additional capital |
| If we are unable to compete successfully in these areas in the future, our future revenues and growth may be diminished or restricted |