| These factors include the following: Our actual production, revenues and expenditures related to our reserves are likely to differ from our estimates of proved reserves |
| We may experience production that is less than estimated and drilling costs that are greater than estimated in our reserve report |
| These differences may be material |
| The proved oil and gas reserve information included in this report are estimates |
| These estimates are based on reports prepared by independent reserve engineers and were calculated using oil and gas prices as of December 31, 2005 |
| These prices will change and may be lower at the time of production than those prices that prevailed at the end of 2005 |
| Reservoir engineering is a subjective process of estimating underground accumulations of oil and gas that cannot be measured in an exact manner |
| Estimates of economically recoverable oil and gas reserves and of future net cash flows necessarily depend upon a number of variable factors and assumptions, including: · historical production from the area compared with production from other similar producing areas; · the assumed effects of regulations by governmental agencies · assumptions concerning future oil and gas prices; and · assumptions concerning future operating costs, severance and excise taxes, development costs and workover and remedial costs |
| Because all reserve estimates are to some degree subjective, each of the following items may differ materially from those assumed in estimating proved reserves: · the quantities of oil and gas that are ultimately recovered; · the production and operating costs incurred; · the amount and timing of future development expenditures; and · future oil and gas sales prices |
| Furthermore, different reserve engineers may make different estimates of reserves and cash flows based on the same available data |
| Our actual production, revenues and expenditures with respect to reserves will likely be different from estimates and the differences may be material |
| The discounted future net cash flows included in this document should not be considered as the current market value of the estimated oil and gas reserves attributable to our properties |
| As required by the SEC, the standardized measure of discounted future net cash flows from proved reserves are generally 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 gas; · increases or decreases in consumption; and · changes in governmental regulations or taxation |
| 12 ______________________________________________________________________ [48]Table of Contents [49]Index to Financial Statements In addition, the 10prca discount factor, which is required by the SEC to be used to calculate discounted future net cash flows for reporting purposes, and which we use in calculation our pre-tax PV10 Value, 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 gas industry in general |
| Natural gas and oil prices are volatile, and low prices have had in the past and could have in the future a material adverse impact on our business |
| Our success will depend on the market prices of oil and natural gas |
| These market prices tend to fluctuate significantly in response to factors beyond our control |
| The prices we receive for our crude oil production are based on global market conditions |
| The general pace of global economic growth, the continued instability in the Middle East and other oil and gas producing regions and actions of the Organization of Petroleum Exporting Countries, or OPEC, and its maintenance of production constraints, as well as other economic, political, and environmental factors will continue to affect world supply and prices |
| Domestic natural gas prices fluctuate significantly in response to numerous factors including US economic conditions, weather patterns, other factors affecting demand such as substitute fuels, the impact of drilling levels on crude oil and natural gas supply, and the environmental and access issues that limit future drilling activities for the industry |
| We expect that commodity prices will continue to fluctuate significantly in the future |
| Changes in commodity prices significantly affect our capital resources, liquidity and expected operating results |
| Price changes directly affect revenues and can indirectly impact expected production by changing the amount of funds available to us to reinvest in exploration and development activities |
| Reductions in oil and natural gas prices not only reduce revenues and profits, but could also reduce the quantities of reserves that are commercially recoverable |
| Significant declines in prices could result in non-cash charges to earnings due to impairment |
| We use derivative financial instruments to hedge a portion of our exposure to changing commodity prices and we have hedged a targeted portion of our anticipated production for 2006 through 2007 |
| Our use of oil and gas price hedging contracts may limit future revenues from price increases and result in significant fluctuations in our net income |
| We use hedging transactions with respect to a portion of our oil and natural gas production to achieve more predictable cash flow and to reduce our exposure to price fluctuations |
| While the use of hedging transactions limits the downside risk of price declines, their use may also limit future revenues from price increases |
| Our results of operations may be negatively impacted by our financial derivative instruments and fixed price forward sales contracts in the future and these instruments may limit any benefit we would receive from increases in the prices for oil and natural gas |
| For the years ended December 31, 2005, 2004 and 2003, we realized a loss on settled financial derivatives of dlra18dtta0 million, dlra6dtta2 million and dlra2dtta9 million, respectively |
| For the year ended December 31, 2005, we recognized in earnings an unrealized loss on derivative instruments not qualifying for hedge accounting in the amount of dlra27dtta0 million For financial reporting purposes, this unrealized loss was combined with a dlra10dtta7 million realized loss in 2005 resulting in a total unrealized and realized loss on derivative instruments not qualifying for hedge accounting in the amount of dlra37dtta7 million in 2005 |
| For the year ended December 31, 2004, we recognized in earnings an unrealized gain on derivative instruments in the amount of dlra2dtta3 million |
| This loss and gain were recognized because the natural gas hedges were deemed to be ineffective for 2005 and for the fourth quarter of 2004, and accordingly, the changes in fair value of such hedges could no longer be reflected in other comprehensive income, a component of stockholders’ equity |
| To the extent that the hedges are not deemed to be effective in the future, we will likewise be exposed to volatility in earnings resulting from changes in the fair value of our hedges |
| 13 ______________________________________________________________________ [50]Table of Contents [51]Index to Financial Statements Delays in development or production curtailment affecting our material properties may adversely affect our financial position and results of operations |
| The size of our operations and our capital expenditure budget limits the number of wells that we can develop in any given year |
| Complications in the development of any single material well may result in a material adverse affect on our financial condition and results of operations |
| In addition, a relatively small number of wells contribute a substantial portion of our production |
| If we were to experience operational problems resulting in the curtailment of production in any of these wells, our total production levels would be adversely affected, which would have a material adverse affect on our financial condition and results of operations |
| Because our operations require significant capital expenditures, we may not have the funds available to replace reserves, maintain production or maintain interests in our properties |
| We must make a substantial amount of capital expenditures for the acquisition, exploration and development of oil and natural gas reserves |
| Historically, we have paid for these expenditures with cash from operating activities, proceeds from debt and equity financings and asset sales |
| Our revenues or cash flows could be reduced because of lower oil and natural gas prices or for other reasons |
| If our revenues or cash flows decrease, we may not have the funds available to replace reserves or maintain production at current levels |
| If this occurs, our production will decline over time |
| Other sources of financing may not be available to us if our cash flows from operations are not sufficient to fund our capital expenditure requirements |
| Where we are not the majority owner or operator of an oil and gas property, such as the Lafitte field, we may have no control over the timing or amount of capital expenditures associated with the particular property |
| If we cannot fund such capital expenditures, our interests in some properties may be reduced or forfeited |
| We may have difficulty financing our planned growth |
| We have experienced and expect to continue to experience substantial capital expenditure and working capital needs, particularly as a result of our drilling program |
| In the future, we expect that we will require additional financing, in addition to cash generated from operations, to fund planned growth |
| We cannot be certain that additional financing will be available on acceptable terms or at all |
| In the event additional capital resources are unavailable, we may curtail drilling, development and other activities or be forced to sell some of our assets on an untimely or unfavorable basis |
| If we are not able to replace reserves, we may not be able to sustain production at present levels |
| 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 will decline over time |
| In addition, approximately 61prca 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 require significant capital expenditures and successful drilling operations |
| We may not be able to successfully find and produce reserves economically in the future |
| In addition, we may not be able to acquire proved reserves at acceptable costs |
| We may incur substantial impairment writedowns |
| If management’s estimates of the recoverable reserves on a property are revised downward or if oil and natural gas prices decline, it may be required to record additional non-cash impairment writedowns in the future, which would result in a negative impact to our financial position |
| We review our proved oil and gas properties for impairment on a depletable unit basis when circumstances suggest there is a need for such a review |
| To determine if a depletable unit is impaired, we compare the carrying value of the depletable unit to the undiscounted future net cash flows by applying management’s estimates of future oil and natural gas prices 14 ______________________________________________________________________ [52]Table of Contents [53]Index to Financial Statements to the estimated future production of oil and gas reserves over the economic life of the property |
| Future net cash flows are based upon our independent reservoir engineers’ estimates of proved reserves |
| In addition, other factors such as probable and possible reserves are taken into consideration when justified by economic conditions |
| For each property determined to be impaired, we recognize an impairment loss equal to the difference between the estimated fair value and the carrying value of the property on a depletable unit basis |
| Fair value is estimated to be the present value of expected future net cash flows |
| Any impairment charge incurred is recorded in accumulated depreciation, depletion, impairment and amortization to reduce our recorded basis in the asset |
| Each part of this calculation is subject to a large degree of judgment, including the determination of the depletable units’ estimated reserves, future cash flows and fair value |
| For the years ended December 31, 2005, 2004 and 2003, we recorded impairments of dlra0dtta3 million, dlra0 and dlra0dtta3 million, respectively |
| Management’s assumptions used in calculating oil and gas reserves or regarding the future cash flows or fair value of our properties are subject to change in the future |
| Any change could cause impairment expense to be recorded, impacting our net income or loss and our basis in the related asset |
| Any change in reserves directly impacts our estimate of future cash flows from the property, as well as the property’s fair value |
| Additionally, as management’s views related to future prices change, the change will affect the estimate of future net cash flows and the fair value estimates |
| Changes in either of these amounts will directly impact the calculation of impairment |
| A majority of our production, revenue and cash flow from operating activities are derived from assets that are concentrated in a geographic area |
| Approximately 97prca of our estimated proved reserves at December 31, 2005 and a similar percentage of our production during 2005 were associated with our Cotton Valley Trend and South Louisiana properties |
| Accordingly, if the level of production from these properties substantially declines, it could have a material adverse effect on our overall production level and our revenue |
| The oil and gas business involves many uncertainties, economic risks and operating risks that can prevent us from realizing profits and can cause substantial losses |
| Our oil and gas operations are subject to the economic risks typically associated with exploration, development and production activities, including the necessity of significant expenditures to locate and acquire properties and to drill exploratory wells |
| In conducting exploration and development activities, the presence of unanticipated pressure or irregularities in formations, miscalculations or accidents may cause our exploration, development and production activities to be unsuccessful |
| This could result in a total loss of our investment in a particular property |
| If exploration efforts are unsuccessful in establishing proved reserves and exploration activities cease, the amounts accumulated as unproved costs would be charged against earnings as impairments |
| In addition, the cost and timing of drilling, completing and operating wells is often uncertain |
| The nature of the oil and gas business involves certain operating hazards such as well blowouts, cratering, explosions, uncontrollable flows of oil, gas or well fluids, fires, formations with abnormal pressures, pollution, releases of toxic gas and other environmental hazards and risks |
| As a result, substantial liabilities to third parties or governmental entities may be incurred |
| The payment of these amounts could reduce or eliminate the funds available for exploration, development or acquisitions |
| These reductions in funds could result in a loss of our properties |
| Additionally, some of our oil and gas operations are located in areas that are subject to weather disturbances such as hurricanes |
| Some of these disturbances can be severe enough to cause substantial damage to facilities and possibly interrupt production |
| In accordance with customary industry practices, we maintain insurance against some, but not all, of such risks and losses |
| The occurrence of an event that is not fully covered by insurance could have a material adverse effect on our financial position and results of operations |
| 15 ______________________________________________________________________ [54]Table of Contents [55]Index to Financial Statements Our debt instruments impose restrictions on us that may affect our ability to successfully operate our business |
| Our senior credit facility and our second lien term loan contain customary restrictions, including covenants limiting our ability to incur additional debt, grant liens, make investments, consolidate, merge or acquire other businesses, sell assets, pay dividends and other distributions and enter into transactions with affiliates |
| We also are required to meet specified financial ratios under the terms of our credit facility and term loan |
| As of December 31, 2005, we were in compliance with all the financial covenants of our credit facility and term loan |
| These restrictions may make it difficult for us to successfully execute our business strategy or to compete in our industry with companies not similarly restricted |
| We may be unable to identify liabilities associated with the properties that we acquire or obtain protection from sellers against them |
| The acquisition of properties requires us to assess a number of factors, including recoverable reserves, development and operating costs and potential environmental and other liabilities |
| Such assessments are inexact and inherently uncertain |
| In connection with the assessments, we perform a review of the subject properties, but such a review will not reveal all existing or potential problems |
| We cannot necessarily observe structural and environmental problems, such as pipeline corrosion, when an inspection is made |
| We may not be able to obtain contractual indemnities from the seller for liabilities that we 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 |
| The incurrence of an unexpected liability could have a material adverse effect on our financial position and results of operations |
| We are subject to complex laws and regulations, including environmental regulations that can adversely affect the cost, manner or feasibility of doing business |
| Development, production and sale of natural gas and oil in the US are subject to extensive laws and regulations, including environmental laws and regulations |
| We may be required to make large expenditures to comply with environmental and other governmental regulations |
| Matters subject to regulation include: · discharge permits for drilling operations; · bonds for ownership, development and production of oil and gas properties; · reports concerning operations; and · taxation |
| In addition, our operations are subject to stringent federal, state and local environmental laws and regulations governing the discharge of materials into the environment and environmental protection |
| Governmental authorities enforce compliance with these laws and regulations and the permits issued under them, oftentimes requiring difficult and costly actions |
| Failure to comply with these laws, regulations and permits may result in the assessment of administrative, civil and criminal penalties, the imposition of remedial obligations, and the issuance of injunctions limiting or prohibiting some or all of our operations |
| There is inherent risk of incurring significant environmental costs and liabilities in our business |
| Joint and several strict liability may be incurred in connection with discharges or releases of petroleum hydrocarbons and wastes on, under or from our properties and from facilities where our wastes have been taken for disposal |
| Private parties affected by such discharges or releases may also have the right to pursue legal actions to enforce compliance as well as seek damages for personal injury or property damage |
| In addition, changes in environmental laws and regulations occur frequently, and any such changes that result in more stringent and costly requirements could have a material adverse effect on our business |
| 16 ______________________________________________________________________ [56]Table of Contents [57]Index to Financial Statements Competition in the oil and gas industry is intense, and we are smaller and have a more limited operating history than some of our competitors |
| We compete with major and independent oil and natural gas companies for property acquisitions |
| We also compete for the equipment and labor required to operate and to develop these properties |
| Some of our competitors have substantially greater financial and other resources than us |
| In addition, larger competitors may be able to absorb the burden of any changes in federal, state and local laws and regulations more easily than we can, which would adversely affect our competitive position |
| These competitors may be able to pay more for oil and natural gas properties and may be able to define, evaluate, bid for and acquire a greater number of properties than we can |
| Our ability to acquire additional properties and develop new and existing properties in the future will depend on our ability to conduct operations, to evaluate and select suitable properties and to consummate transactions in this highly competitive environment |
| Our success depends on our management team and other key personnel, the loss of any of whom could disrupt our business operations |
| Our success will depend on our ability to retain and attract experienced engineers, geoscientists and other professional staff |
| We depend to a large extent on the efforts, technical expertise and continued employment of these personnel and members of our management team |
| If a significant number of them resign or become unable to continue in their present role and if they are not adequately replaced, our business operations could be adversely affected |
| Some of our operations are exposed to the additional risk of tropical weather disturbances |
| Some of our production and reserves are located in South Louisiana |
| Operations in this area are subject to tropical weather disturbances |
| Some of these disturbances can be severe enough to cause substantial damage to facilities and possibly interrupt production |
| For example, Hurricanes Katrina and Rita impacted our South Louisiana operations in the third quarter of 2005 causing the shut-in of our Burrwood/West Delta 83 and Lafitte fields in late August and the shut-in of our Second Bayou field in late September |
| We estimate that approximately 6cmam000 and 4cmam000 Mcfe per day of net production for the third and fourth quarters of 2005, respectively, was shut-in as a result of the hurricanes |
| The fourth quarter amount represents 25prca of pre-hurricane South Louisiana production volumes |
| As of December 31, 2005, we had restored approximately 90prca of our pre-hurricane volumes in South Louisiana, with the remaining pre-hurricane production volumes being temporarily shut-in awaiting completion of facility and well repairs |
| Damage to our facilities due to the two hurricanes was substantially covered by insurance |
| In accordance with customary industry practices, we maintain insurance against some, but not all, of these risks |
| For more information on the impact of Hurricanes Katrina and Rita on our operations, see Item 7 |
| ” Losses could occur for uninsured risks or in amounts in excess of existing insurance coverage |
| We cannot assure you that we will be able to maintain adequate insurance in the future at rates we consider reasonable or that any particular types of coverage will be available |
| An event that is not fully covered by insurance could have a material adverse effect on our financial position and results of operations |
| Terrorist attacks or similar hostilities may adversely impact our results of operations |
| The impact that future terrorist attacks or regional hostilities (particularly in the Middle East) may have on the energy industry in general, and on us in particular, is unknown |
| Uncertainty surrounding military strikes or a sustained military campaign may affect our operations in unpredictable ways, including disruptions of fuel supplies and markets, particularly oil, and the possibility that infrastructure facilities, including pipelines, production facilities, processing plants and refineries, could be direct targets of, or indirect casualties of, an act of terror or war |
| Moreover, we have incurred additional costs since the terrorist attacks of September 11, 2001 to safeguard certain of our assets and we may be required to incur significant additional costs in the future |
| 17 ______________________________________________________________________ [58]Table of Contents [59]Index to Financial Statements The terrorist attacks on September 11, 2001 and the changes in the insurance markets attributable to such attacks have made certain types of insurance more difficult for us to obtain |
| There can be no assurance that insurance will be available to us without significant additional costs |
| Instability in the financial markets as a result of terrorism or war could also affect our ability to raise capital |