| GASCO ENERGY INC Item 1 A Risk Factors |
| 8 ITEM 1A Risk Factors Due to the nature of the Companyapstas business and the present stage of exploration on its oil and gas prospects, the following risk factors apply to Gascoapstas operations: We have incurred losses since our inception and will continue to incur losses in the future |
| To date our operations have not generated sufficient operating cash flows to provide working capital for our ongoing overhead, the funding of our lease acquisitions and the exploration and development of our properties |
| Without adequate financing, we may not be able to successfully develop any prospects that we have or acquire and we may not achieve profitability from operations in the near future or at all |
| During the years ended December 31, 2005 and 2004, we incurred a net loss of dlra37cmam635 and dlra4cmam205cmam830, respectively |
| As of December 31, 2005, we had an accumulated deficit of dlra29cmam535cmam226 |
| Our failure to achieve profitability in the future could adversely affect the trading price of our common stock, our ability to raise additional capital and our ability to continue as a going concern |
| The volatility of natural gas and oil prices could have a material adverse effect on our business |
| A sharp decline in the price of natural gas and oil prices would result in a commensurate reduction in our income from the production of oil and gas |
| In the event prices fall substantially, we may not be able to realize a profit from our production and would continue to operate at a loss |
| In recent decades, there 8 have been periods of both worldwide overproduction and underproduction of hydrocarbons and periods of both increased and relaxed energy conservation efforts |
| Such conditions have resulted in periods of excess supply of, and reduced demand for, crude oil on a worldwide basis and for natural gas on a domestic basis |
| These periods have been followed by periods of short supply of, and increased demand for, crude oil and natural gas |
| The excess or short supply of crude oil has resulted in dramatic price fluctuations even during relatively short periods of seasonal market demand |
| Among the factors that can cause the price volatility are: o worldwide or regional demand for energy, which is affected by economic conditions; o the domestic and foreign supply of natural gas and oil; o weather conditions; o domestic and foreign governmental regulations; o political conditions in natural gas or oil producing regions; o the ability of members of the Organization of Petroleum Exporting Countries to agree upon and maintain oil prices and production levels; o the price and availability of alternative fuels |
| o acts of war, terrorism or vandalism; and o market manipulation |
| All of our natural gas production is currently located in, and all of our future natural gas production is anticipated to be located in, the Rocky Mountain Region of the United States |
| Factors that can cause price volatility for crude oil and natural gas within this region are: o the availability of gathering systems with sufficient capacity to handle local production; o seasonal fluctuations in local demand for production; o local and national gas storage capacity; o interstate pipeline capacity; and o the availability and cost of gas transportation facilities from the Rocky Mountain region |
| In addition, because of our size we do not own or lease firm capacity on any interstate pipelines |
| As a result, our transportation costs are particularly subject to short-term fluctuations in the availability of transportation 9 facilities |
| Our management believes that the steep discount in the prices it receives may be due to pipeline constraints out of the region, but there is no assurance that increased capacity will improve the prices to levels seen in other parts of the country in the future |
| Even if we acquire additional pipeline capacity, conditions may not improve due to other factors listed above |
| It is impossible to predict natural gas and oil price movements with certainty |
| Lower natural gas and oil prices may not only decrease our revenues on a per unit basis but also may reduce the amount of natural gas and oil that we can produce economically |
| A substantial or extended decline in natural gas and oil prices may materially and adversely affect our future business, financial condition, results of operations, liquidity and ability to finance planned capital expenditures |
| Further, oil prices and natural gas prices do not necessarily move together |
| Our oil and gas reserve information is estimated and may not reflect our actual reserves |
| Estimating accumulations of gas and oil is complex and is not exact because of the numerous uncertainties inherent in the process |
| The process relies on interpretations of available geological, geophysical, engineering and production data |
| The extent, quality and reliability of this technical data can vary |
| The process also requires certain economic assumptions, some of which are mandated by the SEC, such as gas and oil prices, drilling and operating expenses, capital expenditures, taxes and availability of funds |
| The accuracy of a reserve estimate is a function of: o the quality and quantity of available data; o the interpretation of that data; o the accuracy of various mandated economic assumptions; and o the judgment of the persons preparing the estimate |
| The proved reserve information as of December 31, 2005, included herein is based on estimates prepared by Netherland, Sewell & Associates, Inc, independent petroleum engineers |
| The most accurate method of determining proved reserve estimates is based upon a decline analysis method, which consists of extrapolating future reservoir pressure and production from historical pressure decline and production data |
| The accuracy of the decline analysis method generally increases with the length of the production history |
| Since most of our wells had been producing less than five years as of December 31, 2005, their production history was relatively short, so other (generally less accurate) methods such as volumetric analysis and analogy to the production history of wells of other operators in the same reservoir were used in conjunction with the decline analysis method to determine our estimates of proved reserves |
| As our wells are produced over time and more data is available, the estimated proved reserves will be redetermined on an annual basis and may be adjusted based on that data |
| Actual future production, gas and oil prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable gas and oil reserves most likely will vary from our estimates |
| Any significant variance could materially affect the quantities and present value of our reserves |
| In addition, we may adjust estimates of proved reserves to reflect production 10 history, results of exploration and development and prevailing gas and oil prices |
| Our reserves may also be susceptible to drainage by operators on adjacent properties |
| It should not be assumed that the present value of future net cash flows included herein is the current market value of our estimated proved gas and oil reserves |
| In accordance with SEC requirements, we generally base the estimated discounted future net cash flows from proved reserves on prices and costs on the date of the estimate |
| Actual future prices and costs may be materially higher or lower than the prices and costs as of the date of the estimate |
| Future changes in commodity prices or our estimates and operational developments may result in impairment charges to our reserves |
| We may be required to write down the carrying value of our gas and oil properties when gas and oil prices are low or if there is substantial downward adjustments to the estimated proved reserves, increases in the estimates of development costs or deterioration in the exploration results |
| We follow the full cost method of accounting, under which, capitalized gas and oil property costs less accumulated depletion and net of deferred income taxes may not exceed an amount equal to the present value, discounted at 10prca, of estimated future net revenues from proved gas and oil reserves plus the cost, or estimated fair value, if lower of unproved properties |
| Should capitalized costs exceed this ceiling, an impairment would be recognized |
| The present value of estimated future net revenues is computed by applying current prices of gas and oil to estimated future production of proved gas and oil reserves as of period-end, less estimated future expenditures to be incurred in developing and producing the proved reserves assuming the continuation of existing economic conditions |
| Once an impairment of gas and oil properties is recognized, it is not reversible at a later date even if oil or gas prices increase |
| The development of oil and gas properties involves substantial risks that may result in a total loss of investment |
| The business of exploring for and producing oil and gas involves a substantial risk of investment loss that even a combination of experience, knowledge and careful evaluation may not be able to overcome |
| Drilling oil and gas wells involves the risk that the wells will be unproductive or that, although productive, the wells do not produce oil and/or gas in economic quantities |
| Other hazards, such as unusual or unexpected geological formations, pressures, fires, blowouts, loss of circulation of drilling fluids or other conditions may substantially delay or prevent completion of any well |
| Adverse weather conditions can also hinder drilling operations |
| A productive well may become uneconomic in the event water or other deleterious substances are encountered, which impair or prevent the production of oil and/or gas from the well |
| In addition, production from any well may be unmarketable if it is contaminated with water or other deleterious substances |
| 11 We may not be able to obtain adequate financing to continue our operations |
| We have relied in the past primarily on the sale of equity capital and farm-out and other similar types of transactions to fund working capital and the acquisition of our prospects and related leases |
| Failure to generate operating cash flow or to obtain additional financing could result in substantial dilution of our property interests, or delay or cause indefinite postponement of further exploration and development of our prospects with the possible loss of our properties |
| We will require significant additional capital to fund our future activities and to service current and any future indebtedness |
| In particular, we face uncertainties relating to our ability to generate sufficient cash flows from operations to fund the level of capital expenditures required for our oil and gas exploration and production activities and our obligations under various agreements with third parties relating to exploration and development of certain prospects |
| Our failure to find the financial resources necessary to fund our planned activities and service our debt and other obligations could adversely affect our business |
| Delays in obtaining drilling permits could have a materially adverse effect on our ability to develop our properties in a timely manner |
| The average processing time at the Bureau of Land Management in Vernal, Utah for an application to drill on federal leases has been increasing and currently is approximately 270 days |
| Approximately 77prca of our gross acreage in Utah is located on federal leases |
| If we are delayed in procuring sufficient drilling permits for our federal properties, we will shift more of our drilling in Utah to our state leases, the permits for which require an average processing time of approximately 30 days |
| While such a shift in resources would not necessarily affect the rate of growth of our cash flow, it would result in a slower growth rate of our total proved reserves, because a higher percentage of the wells drilled on the state leases will be drilled on leases to which proved undeveloped reserves my already have been attributed |
| We may have difficulty managing growth in our business |
| Because of our small size, growth in accordance with our business plans, if achieved, will place a significant strain on our financial, technical, operational and management resources |
| As we expand our activities and increase the number of projects we are evaluating or in which we participate, there will be additional demands on our financial, technical and management resources |
| The failure to continue to upgrade our technical, administrative, operating and financial control systems or the occurrence of unexpected expansion difficulties, including the recruitment and retention of experienced managers, geoscientists and engineers, could have a material adverse effect on our business, financial condition and results of operations and our ability to timely execute our business plan |
| We compete with larger companies in acquiring properties and operating and drilling services |
| Our natural gas and petroleum exploration activities take place in a highly competitive and speculative business atmosphere |
| In seeking suitable natural gas and petroleum properties for acquisition, we compete with a number of other companies operating in our areas of interest, including large oil and gas companies and other independent operators with greater financial resources |
| We 12 do not believe that our competitive position in the petroleum and natural gas industry will be significant |
| We anticipate a competitive market for obtaining drilling rigs and services, and the manpower to operate them |
| The current high level of drilling activity in our areas of exploration may have a significant adverse impact on the timing and profitability of our operations |
| In addition, we are required to obtain drilling and right of way permits for our wells, and there is no assurance that such permits will be available on a timely basis or at all |
| We may suffer losses or incur liability for events that we or the operator of a property have chosen not to insure against |
| Although management believes the operator of any property in which we may acquire interests will acquire and maintain appropriate insurance coverage in accordance with standard industry practice, we may suffer losses from uninsurable hazards or from hazards, which we or the operator have chosen not to insure against because of high premium costs or other reasons |
| We may become subject to liability for pollution, fire, explosion, blowouts, cratering and oil spills against which we cannot insure or against which we may elect not to insure |
| Such events could result in substantial damage to oil and gas wells, producing facilities and other property and personal injury |
| The payment of any such liabilities may have a material adverse effect on our financial position |
| We may incur losses as a result of title deficiencies in the properties in which we invest |
| If an examination of the title history of a property that we have purchased reveals a petroleum and natural gas lease that has been purchased in error from a person who is not the owner of the mineral interest desired, our interest would be worthless |
| In such an instance, the amount paid for such petroleum and natural gas lease or leases would be lost |
| It is our practice, in acquiring petroleum and natural gas leases, or undivided interests in petroleum and natural gas leases, not to undergo the expense of retaining lawyers to examine the title to the mineral interest to be placed under lease or already placed under lease |
| Rather, we will rely upon the judgment of petroleum and natural gas lease brokers or landmen who perform the fieldwork in examining records in the appropriate governmental office before attempting to acquire a lease in a specific mineral interest |
| Prior to the drilling of a petroleum and natural gas well, however, it is the normal practice in the petroleum and natural gas industry for the person or company acting as the operator of the well to obtain a preliminary title review of the spacing unit within which the proposed petroleum and natural gas well is to be drilled to ensure there are no obvious deficiencies in title to the well |
| Frequently, as a result of such examinations, certain curative work must be done to correct deficiencies in the marketability of the title, and such curative work entails expense |
| The work might include obtaining affidavits of heirship or causing an estate to be administered |
| Several factors beyond our control may adversely affect our ability to market the oil and gas that we discover |
| These factors include the proximity, capacity 13 and availability of oil and gas pipelines and processing equipment, market fluctuations of prices, taxes, royalties, land tenure, allowable production and environmental protection |
| The extent of these factors cannot be accurately predicted, but any one or a combination of these factors may result in our inability to sell our oil and gas at prices that would result in an adequate return on our invested capital |
| If this pipeline were to become unavailable, we would incur additional costs to secure a substitute facility in order to deliver the gas that we produce |
| In addition, although we currently have access to firm transportation for the majority of our current gas production, there is no assurance that we will be able to procure additional transportation on terms satisfactory to us, or at all, as we increase our production through our drilling program |
| We could become subject to certain Questar Pipeline Company Gas Requirements |
| We currently deliver all of our gathered gas into a Questar Pipeline Company ( "e Questar "e ) main line transportation system |
| Questar is currently evaluating their gas quality requirements to transport gas on their system |
| These requirements could and most likely, would be imposed on all companies delivering gas into their main line |
| If Questar should require companies to meet more strict quality requirements, there is no assurance that we could meet the new requirements in the short term future |
| It is possible that we would need to make significant capital expenditures to meet the new gas quality requirements and/or to transport our gas |
| During this process and/or adding new transportation facilities, our production could be severely curtailed or even shut -in completely |
| Environmental costs and liabilities and changing environmental regulation could materially affect our cash flow Our operations are subject to stringent federal, state and local laws and regulations relating to environmental protection |
| These laws and regulations may require the acquisition of permits or other governmental approvals, limit or prohibit our operations on environmentally sensitive lands, and place burdensome restrictions on the management and disposal of wastes |
| Failure to comply with these laws may result in the assessment of administrative, civil and criminal penalties, the imposition of remedial obligations, and the issuance of injunctions that may delay or prevent our operations |
| Any stringent changes to these environmental laws and regulations may result in increased costs to us with respect to the disposal of wastes, the performance of remedial activities, and the incurrence of capital expenditures |
| We are subject to complex governmental regulations which may adversely affect the cost of our business |
| Petroleum and natural gas exploration, development and production are subject to various types of regulation by local, state and federal agencies |
| We may be required to make large expenditures to comply with these regulatory requirements |
| Legislation affecting the petroleum and natural gas industry is under constant review for amendment and expansion |
| Also, numerous departments and agencies, both federal and state, are authorized by statute to issue and have issued rules and regulations binding on the petroleum and natural gas industry and its individual members, some of which carry substantial penalties 14 for failure to comply |
| Any increases in the regulatory burden on the petroleum and natural gas industry created by new legislation would increase our cost of doing business and, consequently, adversely affect our profitability |
| A major risk inherent in drilling is the need to obtain drilling and right of way permits from local authorities |
| Delays in obtaining drilling and/or right of way permits, the failure to obtain a drilling and/or right of way permit for a well or a permit with unreasonable conditions or costs could have a materially adverse effect on our ability to effectively develop our properties |
| Our competitors may have greater resources which could enable them to pay a higher price for properties and to better withstand periods of low market prices for hydrocarbons |
| The petroleum and natural gas industry is intensely competitive, and we compete with other companies, which have greater resources |
| Many of these companies not only explore for and produce crude petroleum and natural gas but also carry on refining operations and market petroleum and other products on a regional, national or worldwide basis |
| Such companies may be able to pay more for productive petroleum and natural gas properties and exploratory prospects or define, evaluate, bid for and purchase a greater number of properties and prospects than our financial or human resources permit |
| In addition, such companies may have a greater ability to continue exploration activities during periods of low hydrocarbon market prices |
| Our ability to acquire additional properties and to discover reserves in the future will be dependent upon our ability to evaluate and select suitable properties and to consummate transactions in a highly competitive environment |
| Because our reserves and production are concentrated in a small number of properties, production problems or significant changes in reserve estimates related to any property could have a material impact on our business |
| Our current reserves and production primarily come from producing properties in Utah |
| If mechanical problems, depletion or other events reduced a substantial portion of the production, our cash flows would be adversely affected |
| If the actual reserves associated with our fields are less than our estimated reserves, our results of operations and financial condition could be adversely affected |
| Financial difficulties encountered by our partners or third-party operators could adversely affect the exploration and development of our prospects |
| Liquidity and cash flow problems encountered by our partners or the co-owners of our properties may prevent or delay the drilling of a well or the development of a project |
| Our partners and working interest co-owners may be unwilling or unable to pay their share of the costs of projects as they become due |
| In the case of a farm-out partner, we would have to find a new farm-out partner or obtain alternative funding in order to complete the exploration and development of the prospects subject to the farm-out agreement |
| We cannot assure you that we would be able to obtain the capital necessary to fund either of these contingencies or that we would be able to find a new farm-out partner |
| 15 Shortages of supplies, equipment and personnel may adversely affect our operations |
| Our ability to conduct operations in a timely and cost effective manner depends on the availability of supplies, equipment and personnel |
| Shortages can delay operations and materially increase operating and capital costs |
| Hedging our production may result in losses |
| We currently have no hedging agreements in place |
| However, we may in the future enter into arrangements to reduce our exposure to fluctuations in the market prices of oil and natural gas |
| We may enter into oil and gas hedging contracts in order to increase credit availability |
| Hedging will expose us to risk of financial loss in some circumstances, including if: o production is less than expected; o the other party to the contract defaults on its obligations; or o there is a change in the expected differential between the underlying price in the hedging agreement and actual prices received |
| In addition, hedging may limit the benefit we would otherwise receive from increases in the prices of oil and gas |
| Further, if we do not engage in hedging, we may be more adversely affected by changes in oil and gas prices than our competitors who engage in hedging |
| Our success depends on our key management personnel, the loss of any of whom could disrupt our business |
| The success of our operations and activities is dependent to a significant extent on the efforts and abilities of our management |
| The loss of services of any of our key managers could have a material adverse effect on our business |
| We have not obtained "e key man "e insurance for any of our management |
| Erickson is the Chief Executive Officer, Mr |
| The loss of their services may adversely affect our business and prospects |
| Our officers and directors are engaged in other businesses which may result in conflicts of interest Certain of our officers and directors also serve as directors of other companies or have significant shareholdings in other companies |
| For example, our chairman, Marc A Bruner, is the largest shareholder of Galaxy Energy Corporation ( "e Galaxy "e ) |
| Bruner is involved in identifying and acquiring large land packages for exploitation and development by Galaxy |
| Bruner also serves as the Chairman and Chief Operating Officer of Falcon Oil and Gas, Ltd |
| Falconapstas current drilling activities include projects in Romania and Hungary |
| In addition, another of our directors, C Tony Lotito, is a Director of Galaxy, and currently serves as the Executive Vice President, Chief Financial Officer, Secretary-Treasurer and a member of the Board of Directors of GSL Energy Corporation, which is majority owned by Mr |
| 16 To the extent that such other companies participate in ventures in which we may participate, or compete for prospects or financial resources with us, these officers and directors will have a conflict of interest in negotiating and concluding terms relating to the extent of such participation |
| In the event that such a conflict of interest arises at a meeting of the board of directors, a director who has such a conflict must disclose the nature and extent of his interest to the board of directors and abstain from voting for or against the approval of such participation or such terms |
| In accordance with the laws of the State of Nevada, our directors are required to act honestly and in good faith with a view to the best interests of Gasco |
| In determining whether or not we will participate in a particular program and the interest therein to be acquired by it, the directors will primarily consider the degree of risk to which we may be exposed and our financial position at that time |
| It may be difficult to enforce judgments predicated on the federal securities laws on some of our board members who are not US residents |
| Two of our directors reside outside the United States and maintain a substantial portion of their assets outside the United States |
| As a result it may be difficult or impossible to effect service of process within the United States upon such persons, to bring suit in the United States or to enforce, in the US courts, any judgment obtained there against such persons predicated upon any civil liability provisions of the US federal securities laws |
| Foreign courts may not entertain original actions against our directors or officers predicated solely upon US federal securities laws |
| Furthermore, judgments predicated upon any civil liability provisions of the US federal securities laws may not be directly enforceable in foreign countries |
| Risks Related to Our Capital Stock Our common stock has experienced, and may continue to experience, price volatility and a low trading volume |
| The trading price of our common stock has been and may continue to be subject to large fluctuations, which may result in losses to investors |
| Our stock price may increase or decrease in response to a number of events and factors, including: o the results of our exploratory drilling; o trends in our industry and the markets in which we operate; o changes in the market price of the commodities we sell; o changes in financial estimates and recommendations by securities analysts; o acquisitions and financings; o quarterly variations in operating results; 17 o the operating and stock price performance of other companies that investors may deem comparable; and o purchases or sales of blocks of our common stock |
| This volatility may adversely affect the price of our common stock regardless of our operating performance |
| Shares eligible for future sale may cause the market price for our common stock to drop significantly, even if our business is doing well |
| If our existing shareholders sell our common stock in the market, or if there is a perception that significant sales may occur, the market price of our common stock could drop significantly |
| In such case, our ability to raise additional capital in the financial markets at a time and price favorable to us might be impaired |
| In addition, our board of directors has the authority to issue additional shares of our authorized but unissued common stock without the approval of our shareholders |
| Additional issuance of common stock would dilute the ownership percentage of existing shareholders and may dilute the earnings per share of our common stock |
| As of December 31, 2005, we had 84cmam967cmam792 shares of common stock issued and outstanding |
| As of such date, there were 9cmam292cmam266 shares of common stock issuable upon exercise of outstanding options and conversion of our Series B Convertible Preferred Stock ( "e Preferred Stock "e ) |
| Additional options may be granted to purchase 3cmam237cmam612 shares of common stock under our stock option plan and an additional 155cmam450 shares of common stock are issuable under our restricted stock plan |
| As of December 31 of each year, the number of shares of common stock issuable under our stock option plan automatically increases so that the total number of shares of common stock issuable under such plan is equal to 10prca of the total number of shares of common stock outstanding on such date |
| Assuming all of the notes are converted at the applicable conversion prices, the number of shares of our common stock outstanding would increase by approximately 16cmam250cmam000 shares to approximately 101cmam217cmam792 shares (this number assumes no exercise of the options or rights described above or conversion of the Preferred Stock) |
| We have not previously paid dividends on our common stock and we do not anticipate doing so in the foreseeable future |
| Any future decision to pay a dividend and the amount of any dividend paid, if permitted, will be made at the discretion of our board of directors |
| We have anti-takeover provisions in our certificate of incorporation and by-laws that may discourage a change of control |
| Our articles of incorporation and bylaws contain several provisions that could delay or make more difficult the acquisition of us through a hostile tender offer, open market purchases, proxy contest, merger or other takeover attempt that a stockholder might consider in his or her best interest, including those attempts that might result in a premium over the market price of our common stock |
| 18 Under the terms of our articles of incorporation and as permitted under Nevada law, we have elected not to be subject to Nevadaapstas anti-takeover law |
| This law provides that specified persons who, together with affiliates and associates, own, or within three years did own, 15prca or more of the outstanding voting stock of a corporation could not engage in specified business combinations with the corporation for a period of three years after the date on which the person became an interested stockholder |
| With the approval of our stockholders, we may amend our articles of incorporation in the future to become governed by the anti-takeover law |
| This provision would then have an anti-takeover effect for transactions not approved in advance by our board of directors, including discouraging takeover attempts that might result in a premium over the market price for the shares of our common stock |