| PETROQUEST ENERGY INC ITEM 1A RISK FACTORS Risks Related to Our Business, Industry and Strategy Our future success depends upon our ability to find, develop, produce and acquire additional oil and natural gas reserves that are economically recoverable |
| As is generally the case in the Gulf Coast Basin where the majority of our current production is located, many of our producing properties are characterized by a high initial production rate, followed by a steep decline in production |
| In order to maintain or increase our reserves, we must constantly locate and develop or acquire new oil and natural gas reserves to replace those being depleted by production |
| We must do this even during periods of low oil and natural gas prices when it is difficult to raise the capital necessary to finance our exploration, development and acquisition activities |
| Without successful exploration, development or acquisition activities, our reserves and revenues will decline rapidly |
| We may not be able to find and develop or acquire additional reserves at an acceptable cost or have access to necessary financing for these activities, which would have a material adverse effect on our financial condition |
| Oil and natural gas prices are volatile, and a substantial and extended decline in the prices of oil and natural gas would likely have a material adverse effect on our financial condition |
| Our revenues, results of operations, profitability and future growth, and the carrying value of our oil and natural gas properties, depend to a large degree on prevailing oil and natural gas prices |
| Our ability to maintain or increase our borrowing capacity and to obtain additional capital on attractive terms also substantially depends upon oil and natural gas prices |
| Prices for oil and natural gas are subject to large fluctuations in response to a variety of other factors beyond our control |
| 9 _________________________________________________________________ [55]Table of Contents These factors include: • relatively minor changes in the supply of and the demand for oil and natural gas; • market uncertainty; • the level of consumer product demand; • weather conditions in the United States, such as hurricanes; • the condition of the United States and worldwide economies; • the actions of the Organization of Petroleum Exporting Countries; • domestic and foreign governmental regulation, including price controls adopted by the Federal Energy Regulatory Commission; • political instability in the Middle East and elsewhere; • the price of foreign imports of oil and natural gas; and • the price and availability of alternate fuel sources |
| At various times, excess domestic and imported supplies have depressed oil and natural gas prices |
| We cannot predict future oil and natural gas prices and such prices may decline |
| Declines in oil and natural gas prices may adversely affect our financial condition, liquidity, ability to meet our financial obligations and results of operations |
| Lower prices may also reduce the amount of oil and natural gas that we can produce economically and require us to record ceiling test write-downs when prices decline |
| Substantially all of our oil and natural gas sales are made in the spot market or pursuant to contracts based on spot market prices |
| Our sales are not made pursuant to long-term fixed price contracts |
| To attempt to reduce our price risk, we periodically enter into hedging transactions with respect to a portion of our expected future production |
| We cannot assure you that such transactions will reduce the risk or minimize the effect of any decline in oil or natural gas prices |
| Any substantial or extended decline in the prices of or demand for oil or natural gas would have a material adverse effect on our financial condition and results of operations |
| Factors beyond our control affect our ability to market oil and natural gas |
| The availability of markets and the volatility of product prices are beyond our control and represent a significant risk |
| The marketability of our production depends upon the availability and capacity of natural gas gathering systems, pipelines and processing facilities |
| The unavailability or lack of capacity of these systems and facilities could result in the shut-in of producing wells or the delay or discontinuance of development plans for properties |
| Our ability to market oil and natural gas also depends on other factors beyond our control |
| These factors include: • the level of domestic production and imports of oil and natural gas; • the proximity of natural gas production to natural gas pipelines; • the availability of pipeline capacity; • the demand for oil and natural gas by utilities and other end users; • the availability of alternate fuel sources; • the effect of inclement weather, such as hurricanes; • state and federal regulation of oil and natural gas marketing; and 10 _________________________________________________________________ [56]Table of Contents • federal regulation of natural gas sold or transported in interstate commerce |
| If these factors were to change dramatically, our ability to market oil and natural gas or obtain favorable prices for our oil and natural gas could be adversely affected |
| A substantial portion of our operations is exposed to the additional risk of tropical weather disturbances |
| A substantial portion of our production and reserves is located in Federal waters offshore, onshore South Louisiana and Texas |
| For example, production from our Ship Shoal 72 field, which is located offshore Louisiana, represented approximately 29prca of our total 2005 production |
| 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 and Texas operations in August and September of 2005, respectively, causing property damage to certain facilities, a substantial portion of which is expected to be covered by insurance |
| As a result, a portion of our oil and gas production was shut-in reducing our overall production volumes in the third and fourth quarters of 2005 |
| In addition, production from our Main Pass 74 field, which represented approximately 11prca of our 2004 production, was shut-in from September 2004 to January 2006 due to third party pipeline damage associated with Hurricane Ivan in September 2004 |
| In accordance with customary industry practices, we maintain insurance against some, but not all, of these risks |
| 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 |
| Shortage of rigs, equipment, supplies or personnel may restrict our operations |
| The oil and gas industry is cyclical, and at the present time, there is a shortage of drilling rigs, equipment, supplies and personnel |
| The costs and delivery times of rigs, equipment and supplies has increased in recent months as oil and natural gas prices have continued to rise |
| In addition, demand for, and wage rates of, qualified drilling rig crews have risen with increases in the number of active rigs in service |
| Shortages of drilling rigs, equipment, supplies or personnel could delay or restrict our exploration and development operations, which in turn could impair our financial condition and results of operations |
| Hedging production may limit potential gains from increases in commodity prices or result in losses |
| We enter into hedging arrangements from time to time to reduce our exposure to fluctuations in natural gas and oil prices and to achieve more predictable cash flow |
| These financial arrangements take the form of costless collars or swap contracts and are placed with major trading counterparties whom we believe represent minimum credit risks |
| We cannot assure you that these trading counterparties will not become credit risks in the future |
| Hedging arrangements expose us to risks in some circumstances, including situations when the counterparty to the hedging contract defaults on the contract obligations or there is a change in the expected differential between the underlying price in the hedging agreement and actual prices received |
| These hedging arrangements may limit the benefit we could receive from increases in the market or spot prices for natural gas and oil |
| For example, during 2005, oil and gas hedges reduced our total oil and gas sales by approximately dlra15dtta8 million |
| We cannot assure you that the hedging transactions we have entered into, or will enter into, will adequately protect us from fluctuations in natural gas and oil prices |
| We have a substantial amount of indebtedness, which may adversely affect our cash flow and our ability to operate our business, remain in compliance with debt covenants and make payments on our debt |
| As of December 31, 2005, the aggregate amount of our outstanding indebtedness was dlra158dtta3 million, which could have important consequences for you, including the following: • it may be more difficult for us to satisfy our obligations with respect to our 10 3/8prca senior notes due 2012, which we refer to as the our 10 3/8prca notes, and any failure to comply with the obligations of any of our debt agreements, including financial and other restrictive covenants, could result in an event of default under the indenture governing our 10 3/8prca notes and the agreements governing such other indebtedness; • the covenants contained in our debt agreements limit our ability to borrow money in the future for acquisitions, capital expenditures or to meet our operating expenses or other general corporate obligations; 11 _________________________________________________________________ [57]Table of Contents • we will need to use a substantial portion of our cash flows to pay principal and interest on our debt, approximately dlra15dtta6 million per year for interest on our 10 3/8prca notes alone, which will reduce the amount of money we have for operations, capital expenditures, expansion, acquisitions or general corporate or other business activities; • the amount of our interest expense may increase because certain of our borrowings are at variable rates of interest, which, if interest rates increase, could result in higher interest expense; • we may have a higher level of debt than some of our competitors, which may put us at a competitive disadvantage; • we may be more vulnerable to economic downturns and adverse developments in our industry or the economy in general, especially declines in oil and natural gas prices; and • our debt level could limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate |
| We may incur from time to time debt under our bank credit facility |
| The borrowing base limitation under our bank credit facility is periodically redetermined and upon such redetermination, we could be forced to repay a portion of our bank debt |
| We may not have sufficient funds to make such repayments |
| Our ability to meet our expenses and debt obligations will depend on our future performance, which will be affected by financial, business, economic, regulatory and other factors |
| We will not be able to control many of these factors, such as economic conditions and governmental regulation |
| We cannot be certain that our cash flow from operations will be sufficient to allow us to pay the principal and interest on our debt, including our 10 3/8prca notes, and meet our other obligations |
| If we do not have enough money to service our debt, we may be required to refinance all or part of our existing debt, including our 10 3/8prca notes, sell assets, borrow more money or raise equity |
| We may not be able to refinance our debt, sell assets, borrow more money or raise equity on terms acceptable to us, if at all |
| We may incur substantially more debt, which may intensify the risks described above, including our ability to service our indebtedness |
| Together with our subsidiaries, we may be able to incur substantially more debt in the future in connection with our acquisition, development, exploitation and exploration of oil and natural gas producing properties |
| Although the indenture governing our 10 3/8prca notes contains restrictions on our incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and under certain circumstances, indebtedness incurred in compliance with these restrictions could be substantial |
| Also, these restrictions do not prevent us from incurring obligations that do not constitute indebtedness |
| As of December 31, 2005, we had dlra10 million outstanding under our bank credit facility and our borrowing base was dlra40 million |
| To the extent we add new indebtedness to our current indebtedness levels, the risks described above could substantially increase |
| To service our indebtedness, we will require a significant amount of cash |
| Our ability to generate cash depends on many factors beyond our control, and any failure to meet our debt obligations could harm our business, financial condition and results of operations |
| Our ability to make payments on and to refinance our indebtedness, including our 10 3/8prca notes, and to fund planned capital expenditures will depend on our ability to generate sufficient cash flow from operations in the future |
| This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control, including the prices that we receive for oil and natural gas |
| We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under our bank credit facility in an amount sufficient to enable us to pay principal and interest on our indebtedness, including our 10 3/8prca notes, or to fund our other liquidity needs |
| If our cash flow and capital resources are insufficient to fund our debt obligations, we may be forced to reduce our planned capital expenditures, sell assets, seek additional equity or debt capital or restructure our debt |
| We cannot assure you that any of these remedies could, if necessary, be effected on commercially reasonable terms, or at all |
| In addition, any failure to make scheduled payments of interest and principal on our outstanding indebtedness would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness on acceptable terms |
| Our cash flow and capital resources may be insufficient for payment of 12 _________________________________________________________________ [58]Table of Contents interest on and principal of our debt in the future, including payments on our 10 3/8prca notes, and any such alternative measures may be unsuccessful or may not permit us to meet scheduled debt service obligations, which could cause us to default on our obligations and could impair our liquidity |
| We face strong competition from larger oil and natural gas companies that may negatively affect our ability to carry on operations |
| We operate in the highly competitive areas of oil and natural gas exploration, development and production |
| Factors that affect our ability to compete successfully in the marketplace include: • the availability of funds and information relating to a property; • the standards established by us for the minimum projected return on investment; and • the transportation of natural gas |
| Our competitors include major integrated oil companies, substantial independent energy companies, affiliates of major interstate and intrastate pipelines and national and local natural gas gatherers, many of which possess greater financial and other resources than we do |
| If we are unable to successfully compete against our competitors, our business, prospects, financial condition and results of operation may be adversely affected |
| We may be unable to overcome risks associated with our drilling activity |
| Our drilling involves numerous risks, including the risk that we will drill a dry hole or otherwise not encounter commercially productive oil or natural gas reservoirs |
| We must incur significant expenditures to identify and acquire properties and to drill and complete wells |
| The costs of drilling and completing wells is often uncertain, and drilling operations may be curtailed, delayed or canceled as a result of a variety of factors, including unexpected drilling conditions, pressure or irregularities in formations, equipment failures or accidents, weather conditions and shortages or delays in the delivery of equipment and personnel |
| While we use advanced technology in our operations, this technology does not allow us to know conclusively prior to drilling a well that oil or natural gas is present or economically recoverable |
| The loss of key management or technical personnel could adversely affect our ability to operate |
| Our operations are dependent upon a relatively small group of key management and technical personnel, including Charles T Goodson, our Chairman, Chief Executive Officer and President, Dalton F Smith, III, our Senior Vice President-Business Development & Land, Stephen H Green, our Senior Vice President-Exploration, and Arthur M Mixon, our Senior Vice President-Operations |
| In addition, we employ numerous other highly technical personnel, including geologists and geophysicists that are essential to our operations |
| We cannot assure you that such individuals will remain with us for the immediate or foreseeable future |
| The unexpected loss of the services of one or more of any of these key management or technical personnel could have a detrimental effect on our operations |
| There is presently a shortage of qualified geologists and geophysicists necessary to fill our requirements and the requirements of the oil and gas industry, and the market for such individuals is highly competitive |
| Our inability to hire or retain the services of such individuals could have a detrimental effect on our operations |
| You should not place undue reliance on reserve information because reserve information represents estimates |
| This document contains estimates of historical oil and natural gas reserves, and the historical estimated future net cash flows attributable to those reserves, prepared by Ryder Scott Company, LP, our independent petroleum and geological engineers |
| Our estimate of proved reserves is based on the quantities of oil, gas and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions |
| 13 _________________________________________________________________ [59]Table of Contents There are, however, numerous uncertainties inherent in estimating quantities of proved reserves and cash flows from such reserves, including factors beyond our control and the control of Ryder Scott |
| Reserve engineering is a subjective process of estimating underground accumulations of oil and natural gas that cannot be measured in an exact manner |
| The accuracy of an estimate of quantities of reserves, or of cash flows attributable to these reserves, is a function of: • the available data; • assumptions regarding future oil and natural gas prices; • estimated expenditures for future development and exploitation activities; and • engineering and geological interpretation and judgment |
| Reserves and future cash flows may also be subject to material downward or upward revisions based upon production history, development and exploitation activities and oil and natural gas prices |
| Actual future production, revenue, taxes, development expenditures, operating expenses, quantities of recoverable reserves and the value of cash flows from those reserves may vary significantly from the assumptions and estimates in this prospectus |
| In calculating reserves on an Mcfe basis, oil and natural gas liquids were converted to natural gas equivalent at the ratio of six Mcf of natural gas to one Bbl of oil or natural gas liquid |
| Approximately 31prca of our estimated proved reserves at December 31, 2005 are undeveloped and 32prca are developed, non-producing |
| Estimates of undeveloped and non-producing reserves, by their nature, are less certain |
| Recovery of undeveloped reserves requires significant capital expenditures and successful drilling operations |
| The reserve data assumes that we will make significant capital expenditures to develop and produce our reserves |
| Although we have prepared estimates of our oil and natural gas reserves and the costs associated with these reserves in accordance with industry standards, we cannot assure you that the estimated costs are accurate, that development will occur as scheduled or that the actual results will be as estimated |
| You should not assume that the present value of future net revenues referred to in this prospectus is the current market value of our estimated oil and natural gas reserves |
| In accordance with Commission requirements, the estimated discounted future net cash flows from proved reserves are based on prices and costs as of 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 |
| Any changes in consumption by natural gas purchasers or in governmental regulations or taxation may also affect actual future net cash flows |
| The timing of both the production and the expenses from the development and production of oil and natural gas properties will affect the timing of actual future net cash flows from proved reserves and their present value |
| In addition, the 10prca discount factor, which is required by the Commission to be used in calculating discounted future net cash flows for reporting purposes, is not necessarily the most accurate discount factor |
| The effective interest rate at various times and the risks associated with our operations or the oil and natural gas industry in general will affect the accuracy of the 10prca discount factor |
| We may be unable to successfully identify, execute or effectively integrate future acquisitions, which may negatively affect our results of operations |
| Acquisitions of oil and gas businesses and properties have been an important element of our business, and we will continue to pursue acquisitions in the future |
| In the last several years, we have pursued and consummated acquisitions that have provided us opportunities to grow our production and reserves |
| Although we regularly engage in discussions with, and submit proposals to, acquisition candidates, suitable acquisitions may not be available in the future on reasonable terms |
| If we do identify an appropriate acquisition candidate, we may be unable to successfully negotiate the terms of an acquisition, finance the acquisition or, if the acquisition occurs, effectively integrate the acquired business into our existing business |
| Negotiations of potential acquisitions and the integration of acquired business operations may require a disproportionate amount of management’s attention and our resources |
| Even if we complete additional acquisitions, continued acquisition financing may not be available or available on reasonable terms, any new businesses may not generate revenues comparable to our existing business, the anticipated cost efficiencies or synergies may not be realized and these businesses may not be integrated successfully or operated profitably |
| The success of any acquisition will depend on a number of factors, including the ability to estimate accurately the recoverable volumes of reserves, rates of future production and future net revenues attainable from the reserves and to assess possible environmental liabilities |
| Our inability to successfully identify, execute or effectively integrate future acquisitions may negatively affect our results of operations |
| 14 _________________________________________________________________ [60]Table of Contents Even though we perform a due diligence review (including a review of title and other records) of the major properties we seek to acquire that we believe is consistent with industry practices, these reviews are inherently incomplete |
| It is generally not feasible for us to perform an in-depth review of every individual property and all records involved in each acquisition |
| However, even an in-depth review of records and properties may not necessarily reveal existing or potential problems or permit us to become familiar enough with the properties to assess fully their deficiencies and potential |
| Even when problems are identified, we may assume certain environmental and other risks and liabilities in connection with the acquired businesses and properties |
| The discovery of any material liabilities associated with our acquisitions could harm our results of operations |
| In addition, acquisitions of businesses may require additional debt or equity financing, resulting in additional leverage or dilution of ownership |
| Our bank credit facility contains certain covenants that limit, or which may have the effect of limiting, among other things acquisitions, capital expenditures, the sale of assets and the incurrence of additional indebtedness |
| We may not be able to obtain adequate financing to execute our operating strategy |
| Our ability to execute our operating strategy is highly dependent on our having access to capital |
| We have historically addressed our long-term liquidity needs through the use of bank credit facilities, second lien term credit facilities, the issuance of equity and debt securities and the use of cash provided by operating activities |
| We will continue to examine the following alternative sources of long-term capital: • borrowings from banks or other lenders; • the issuance of debt securities; • the sale of common stock, preferred stock or other equity securities; • joint venture financing; and • production payments |
| The availability of these sources of capital will depend upon a number of factors, some of which are beyond our control |
| These factors include general economic and financial market conditions, oil and natural gas prices, our credit ratings, interest rates, market perceptions of us or the oil and gas industry, our market value and operating performance |
| We may be unable to execute our operating strategy if we cannot obtain capital from these sources |
| Restrictive debt covenants could limit our growth and our ability to finance our operations, fund our capital needs, respond to changing conditions and engage in other business activities that may be in our best interests |
| Our bank credit facility and the indenture governing our 10 3/8prca notes contain a number of significant covenants that, among other things, restrict our ability to: • dispose of assets; • incur or guarantee additional indebtedness and issue certain types of preferred stock; • pay dividends on our capital stock; • create liens on our assets; • enter into sale and leaseback transactions; • enter into specified investments or acquisitions; • repurchase, redeem or retire our capital stock or subordinated debt; • merge or consolidate, or transfer all or substantially all of our assets and the assets of our subsidiaries; • engage in specified transactions with subsidiaries and affiliates; or 15 _________________________________________________________________ [61]Table of Contents • other corporate activities |
| Also, our bank credit facility and the indenture governing our 10 3/8prca notes require us to maintain compliance with specified financial ratios and satisfy certain financial condition tests |
| Our ability to comply with these ratios and financial condition tests may be affected by events beyond our control, and we cannot assure you that we will meet these ratios and financial condition tests |
| These financial ratio restrictions and financial condition tests could limit our ability to obtain future financings, make needed capital expenditures, withstand a future downturn in our business or the economy in general or otherwise conduct necessary corporate activities |
| We may also be prevented from taking advantage of business opportunities that arise because of the limitations that the restrictive covenants under our bank credit facility and the indenture governing our 10 3/8prca notes impose on us |
| A breach of any of these covenants or our inability to comply with the required financial ratios or financial condition tests could result in a default under our bank credit facility and our 10 3/8prca notes |
| A default, if not cured or waived, could result in acceleration of all indebtedness outstanding under our bank credit facility and our 10 3/8prca notes |
| The accelerated debt would become immediately due and payable |
| If that should occur, we may not be able to pay all such debt or to borrow sufficient funds to refinance it |
| Even if new financing were then available, it may not be on terms that are acceptable to us |
| We may not be able to fund our planned capital expenditures |
| We spend and will continue to spend a substantial amount of capital for the development, exploration, acquisition and production of oil and natural gas reserves |
| If low oil and natural gas prices, operating difficulties or other factors, many of which are beyond our control, cause our revenues or cash flows from operations to decrease, we may be limited in our ability to spend the capital necessary to continue our drilling program |
| We may be forced to raise additional debt or equity proceeds to fund such expenditures |
| We cannot assure you that additional debt or equity financing or cash generated by operations will be available to meet these requirements |
| Operating hazards may adversely affect our ability to conduct business |
| Our operations are subject to risks inherent in the oil and natural gas industry, such as: • unexpected drilling conditions including blowouts, cratering and explosions; • uncontrollable flows of oil, natural gas or well fluids; • equipment failures, fires or accidents; • pollution and other environmental risks; and • shortages in experienced labor or shortages or delays in the delivery of equipment |
| These risks could result in substantial losses to us from injury and loss of life, damage to and destruction of property and equipment, pollution and other environmental damage and suspension of operations |
| Our offshore operations are also subject to a variety of operating risks peculiar to the marine environment, such as hurricanes or other adverse weather conditions and more extensive governmental regulation |
| These regulations may, in certain circumstances, impose strict liability for pollution damage or result in the interruption or termination of operations |
| Losses and liabilities from uninsured or underinsured drilling and operating activities could have a material adverse effect on our financial condition and operations |
| We maintain several types of insurance to cover our operations, including maritime employer’s liability and comprehensive general liability |
| Amounts over base coverages are provided by primary and excess umbrella liability policies with maximum limits of dlra50 million |
| We also maintain operator’s extra expense coverage, which covers the control of drilled or producing wells as well as redrilling expenses and pollution coverage for wells out of control |
| There have been substantial insurance claims made by the oil and gas industry as a result of hurricane damages incurred during 2005 in the Gulf Coast Basin |
| Accordingly, we expect that our insurance costs in 2006 will increase significantly |
| We may not be able to maintain adequate insurance in the future at rates we consider reasonable, or we could 16 _________________________________________________________________ [62]Table of Contents experience losses that are not insured or that exceed the maximum limits under our insurance policies |
| If a significant event that is not fully insured or indemnified occurs, it could materially and adversely affect our financial condition and results of operations |
| Environmental compliance costs and environmental liabilities could have a material adverse effect on our financial condition and operations |
| Our operations are subject to numerous federal, state and local laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection |
| These laws and regulations may: • require the acquisition of permits before drilling commences; • restrict the types, quantities and concentration of various substances that can be released into the environment from drilling and production activities; • limit or prohibit drilling activities on certain lands lying within wilderness, wetlands and other protected areas; • require remedial measures to mitigate pollution from former operations, such as plugging abandoned wells; and • impose substantial liabilities for pollution resulting from our operations |
| The trend toward stricter standards in environmental legislation and regulation is likely to continue |
| The enactment of stricter legislation or the adoption of stricter regulations could have a significant impact on our operating costs, as well as on the oil and natural gas industry in general |
| Our operations could result in liability for personal injuries, property damage, oil spills, discharge of hazardous materials, remediation and clean-up costs and other environmental damages |
| We could also be liable for environmental damages caused by previous property owners |
| As a result, substantial liabilities to third parties or governmental entities may be incurred which could have a material adverse effect on our financial condition and results of operations |
| We maintain insurance coverage for our operations, including limited coverage for sudden and accidental environmental damages, but this insurance may not extend to the full potential liability that could be caused by sudden and accidental environmental damages and further may not cover environmental damages that occur over time |
| Accordingly, we may be subject to liability or may lose the ability to continue exploration or production activities upon substantial portions of our properties if certain environmental damages occur |
| The Oil Pollution Act of 1990 imposes a variety of regulations on “responsible parties” related to the prevention of oil spills |
| The implementation of new, or the modification of existing, environmental laws or regulations, including regulations promulgated pursuant to the Oil Pollution Act, could have a material adverse impact on us |
| Ownership of working interests and overriding royalty interests in certain of our properties by certain of our officers and directors potentially creates conflicts of interest |
| Certain of our executive officers and directors or their respective affiliates are working interest owners or overriding royalty interest owners in certain properties |
| In their capacity as working interest owners, they are required to pay their proportionate share of all costs and are entitled to receive their proportionate share of revenues in the normal course of business |
| As overriding royalty interest owners they are entitled to receive their proportionate share of revenues in the normal course of business |
| There is a potential conflict of interest between us and such officers and directors with respect to the drilling of additional wells or other development operations with respect to these properties |
| Lower oil and natural gas prices may cause us to record ceiling test write-downs |
| We use the full cost method of accounting to account for our oil and natural gas operations |
| Accordingly, we capitalize the cost to acquire, explore for and develop oil and natural gas properties |
| Under full cost accounting rules, the net capitalized costs of oil and natural gas properties may not exceed a “ceiling limit” which is based upon the present value of estimated future net cash flows from proved reserves, discounted at 10prca, plus the lower of cost or fair market value of unproved properties |
| If at the end of any fiscal period we determine that the net capitalized costs of oil and natural gas properties exceed the ceiling limit, we must charge the amount of the excess to earnings in the period then ended |
| This is called 17 _________________________________________________________________ [63]Table of Contents a “ceiling test write-down |
| ” This charge does not impact cash flow from operating activities, but does reduce our stockholders’ equity |
| The risk that we will be required to write down the carrying value of oil and natural gas properties increases when oil and natural gas prices are low or volatile |
| In addition, write-downs may occur if we experience substantial downward adjustments to our estimated proved reserves |
| Risks Relating to Our Outstanding Common Stock Our stock price could be volatile, which could cause you to lose part or all of your investment |
| The stock market has from time to time experienced significant price and volume fluctuations that may be unrelated to the operating performance of particular companies |
| In particular, the market price of our common stock, like that of the securities of other energy companies, has been and may be highly volatile |
| Factors such as announcements concerning changes in prices of oil and natural gas, the success of our acquisition, exploration and development activities, the availability of capital, and economic and other external factors, as well as period-to-period fluctuations and financial results, may have a significant effect on the market price of our common stock |
| From time to time, there has been limited trading volume in our common stock |
| In addition, there can be no assurance that there will continue to be a trading market or that any securities research analysts will continue to provide research coverage with respect to our common stock |
| It is possible that such factors will adversely affect the market for our common stock |
| Provisions in certificate of incorporation, bylaws and shareholder rights plan could delay or prevent a change in control of our company, even if that change would be beneficial to our stockholders |
| Certain provisions of our certificate of incorporation, bylaws and shareholder rights plan may delay, discourage, prevent or render more difficult an attempt to obtain control of our company, whether through a tender offer, business combination, proxy contest or otherwise |
| These provisions include: • the charter authorization of “blank check” preferred stock; • provisions that directors may be removed only for cause, and then only on approval of holders of a majority of the outstanding voting stock; • a restriction on the ability of stockholders to call a special meeting and take actions by written consent; and • provisions regulating the ability of our stockholders to nominate directors for election or to bring matters for action at annual meetings of our stockholders |
| In November 2001, our board of directors adopted a shareholder rights plan, pursuant to which uncertificated preferred stock purchase rights were distributed to our stockholders at a rate of one right for each share of common stock held of record as of November 19, 2001 |
| The rights plan is designed to enhance the board’s ability to prevent an acquirer from depriving stockholders of the long-term value of their investment and to protect stockholders against attempts to acquire us by means of unfair or abusive takeover tactics |
| However, the existence of the rights plan may impede a takeover not supported by our board, including a takeover that may be desired by a majority of our stockholders or involving a premium over the prevailing stock price |