| TENGASCO INC Item 1A Risk Factors 16 ITEM 1A RISK FACTORS In addition to the other information included in this Form 10-K, the following risk factors should be considered in evaluating the Company’s business and future prospects |
| The risk factors described below are not necessarily exhaustive and you are encouraged to perform your own investigation with respect to the Company and its business |
| You should also read the other information included in this Form 10-K, including the financial statements and related notes |
| The Company’s Growth and Development is Dependent Upon its Finding and Maintaining an Arrangement with an Institutional Lender The Company must make substantial capital expenditures for the acquisition, exploration and development of oil and gas reserves |
| Historically, the Company has paid for these expenditures with cash from operating activities, proceeds from debt and equity financings and asset sales |
| The Company’s ability to re-work existing wells, drill new wells and acquire new properties is dependent upon the Company’s ability to fund these expenditures |
| Unless the Company is able to obtain and maintain institutional financing, the Company will have to obtain the necessary funds to proceed with the Company’s operations from its operating revenues and other sources, such as equity investments or joint ventures with other companies |
| In addition, the Company’s revenues or cash flows could decline in the future because of a variety of reasons, including lower oil and gas prices or the inoperability of some or all of the Company’s existing wells |
| If the Company’s revenues or cash flows decrease or the Company is unable to maintain its institutional financing arrangements, the Company would be required to reduce production over time or would otherwise be adversely affected, which would adversely impact the Company’s ability to operate successfully |
| In the event that the Company is not the majority owner or operator of an oil and gas project, the Company may have no control over the timing or amount of capital expenditures required with the particular project |
| If the Company cannot fund the Company’s capital expenditures in such projects, the Company’s interests in such projects may be reduced or forfeited |
| The Company has a History of Significant Losses During the early stages of the development of its oil and gas business the Company has had a history of significant losses from operations and has an accumulated deficit of dlra32cmam297cmam496 and a working capital deficit of dlra1cmam334cmam744 as of December 31, 2005 |
| Although management has substantially reduced its cash operating expenses, these losses have had a material adverse impact on the operations of the Company’s business |
| In the event the Company experiences such losses in the future it may curtail the Company’s development activities or force the Company to sell some of its assets in an untimely fashion or on less than favorable terms |
| The Company’s future financial condition and results of operations will depend in part upon the prices obtainable for the Company’s oil and natural gas production and the costs of finding, acquiring, developing and producing reserves |
| Prices for oil and natural gas are subject to fluctuations in response to relatively minor changes in supply, market uncertainty and a variety of additional factors that are beyond the Company’s control |
| These factors include worldwide political instability (especially in the Middle East and other oil-producing regions), the foreign supply of oil and gas, the price of foreign imports, the level of drilling activity, the level of consumer product demand, government regulations and taxes, the price and availability of alternative fuels and the overall economic environment |
| A substantial or extended decline in oil and gas prices would have a material adverse effect on the Company’s financial position, results of operations, quantities of oil and gas that may be economically produced, and access to capital |
| Oil and natural gas prices have historically been and are likely to continue to be volatile |
| This volatility makes it difficult to estimate with precision the value of producing properties in acquisitions and to budget and project the return on exploration and development projects involving the Company’s oil and gas properties |
| In addition, unusually volatile prices often disrupt the market for oil and gas properties, as buyers and sellers have more difficulty agreeing on the purchase price of properties |
| Projecting the effects of commodity prices on production, and timing of development expenditures include many factors beyond the Company’s control |
| The future estimates of net cash flows from the Company’s proved reserves and their present value are based upon various assumptions about future production levels, prices, and costs that may prove to be incorrect over time |
| Any significant variance from assumptions could result in the actual future net cash flows being materially different from the estimates |
| Oil and Gas Operations Involve Substantial Costs and are Subject to Various Economic Risks |
| The Company’s 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 producing 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 the Company’s exploration, development and production activities to be unsuccessful |
| This could result in a total loss of the 17 _________________________________________________________________ Company’s investment in such well(s) or property |
| In addition, the cost and timing of drilling, completing and operating wells is often uncertain |
| The demand for qualified and experienced field personnel to drill wells and conduct field operations, geologists, geophysicists, engineers and other professionals in the oil and natural gas industry can fluctuate significantly, often in correlation with oil and natural gas prices, causing periodic shortages |
| There have also been shortages of drilling rigs and other equipment, as demand for rigs and equipment has increased along with the number of wells being drilled |
| These factors also cause significant increases in costs for equipment, services and personnel |
| Higher oil and natural gas prices generally stimulate increased demand and result in increased prices for drilling rigs, crews and associated supplies, equipment and services |
| These shortages or price increases could adversely affect the profit margin, cash flow and operating results or restrict the ability to drill wells and conduct ordinary operations |
| The rate of production from oil and natural gas properties generally declines as reserves are depleted |
| Except to the extent that the Company acquires additional properties containing proved reserves, conducts successful exploration and development drilling, successfully applies new technologies or identifies additional behind-pipe zones or secondary recovery reserves, the Company’s proved reserves will decline materially as reserves are produced |
| Future oil and natural gas production is, therefore, highly dependent upon the level of success in acquiring or finding additional reserves |
| In addition, wells that are profitable may not achieve a targeted rate of return |
| The Company relies on seismic data and other technologies in identifying prospects and in conducting exploration activities |
| The seismic data and other technologies used do not allow them to know conclusively prior to drilling a well whether oil or natural gas is present or may be produced economically |
| The ultimate cost of drilling, completing and operating a well can adversely affect the economics of a project |
| Further drilling operations may be curtailed, delayed or canceled as a result of numerous factors, including unexpected drilling conditions, title problems, pressure or irregularities in formations, equipment failures or accidents, adverse weather conditions, environmental and other governmental requirements and the cost of, or shortages or delays in the availability of, drilling rigs, equipment and services |
| 18 _________________________________________________________________ The Company has Significant Costs to Conform to Government Regulation of the Oil and Gas Industry |
| The Company’s exploration, production and marketing operations are regulated extensively at the federal, state and local levels |
| The Company has made and will continue to make large expenditures in its efforts to comply with the requirements of environmental and other regulations |
| Further, the oil and gas regulatory environment could change in ways that might substantially increase these costs |
| Hydrocarbon-producing states regulate conservation practices and the protection of correlative rights |
| These regulations affect the Company’s operations and limit the quantity of hydrocarbons it may produce and sell |
| In addition, at the federal level, the Federal Energy Regulatory Commission regulates interstate transportation of natural gas under the Natural Gas Act |
| Other regulated matters include marketing, pricing, transportation and valuation of royalty payments |
| The Company has Significant Costs Related to Environmental Matters |
| The Company’s operations are subject to numerous and frequently changing laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection |
| The Company owns or leases, and has owned or leased, properties that have been leased for the exploration and production of oil and gas and these properties and the wastes disposed on these properties may be subject to the Comprehensive Environmental Response, Compensation and Liability Act, the Oil Pollution Act of 1990, the Resource Conservation and Recovery Act, the Federal Water Pollution Control Act and similar state laws |
| Under such laws, the Company could be required to remove or remediate wastes or property contamination |
| Laws and regulations protecting the environment have generally become more stringent and, may in some cases, impose “strict liability” for environmental damage |
| Strict liability means that the Company may be held liable for damage without regard to whether it was negligent or otherwise at fault |
| Environmental laws and regulations may expose the Company to liability for the conduct of or conditions caused by others or for acts that were in compliance with all applicable laws at the time they were performed |
| Failure to comply with these laws and regulations may result in the imposition of administrative, civil and criminal penalties |
| The Company’s ability to conduct continued operations is subject to satisfying applicable regulatory and permitting controls |
| The Company’s current permits and authorizations and ability to get future permits and authorizations may be susceptible, on a going forward basis, to increased scrutiny, greater complexity resulting in increased costs or delays in receiving appropriate authorizations |
| 19 _________________________________________________________________ Insurance Does Not Cover All Risks |
| Exploration for and production of oil and natural gas can be hazardous, involving unforeseen occurrences such as blowouts, cratering, fires and loss of well control, which can result in damage to or destruction of wells or production facilities, injury to persons, loss of life, or damage to property or the environment |
| Although the Company maintains insurance against certain losses or liabilities arising from its operations in accordance with customary industry practices and in amounts that management believes to be prudent, insurance is not available to the Company against all operational risks |
| The Company is Not Competitive with Respect to Acquisitions or Personnel |
| The oil and gas business is highly competitive |
| In seeking any suitable oil and gas properties for acquisition, or drilling rig operators and related personnel and equipment, the Company may not be able to compete with most other companies, including large oil and gas companies and other independent operators with greater financial and technical resources and longer history and experience in property acquisition and operation |
| The Company Depends on Key Personnel, Whom it May Not be Ableto Retain or Recruit |
| Members of present management and certain Company employees have substantial expertise in the areas of endeavor presently conducted and to be engaged in by the Company |
| The Company does not know whether it would be able to recruit and hire qualified persons upon acceptable terms |
| The Company does not maintain “Key Person” insurance for any of the Company’s key employees |
| General Economic Conditions |
| Virtually all of the Company’s operations are subject to the risks and uncertainties of adverse changes in general economic conditions, the outcome of pending and/or potential legal or regulatory proceedings, changes in environmental, tax, labor and other laws and regulations to which the Company is subject, and the condition of the capital markets utilized by the Company to finance its operations |