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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the Fiscal Year ended December 31, 2005. |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period
from to . |
Commission File Number: 0-29370
Ultra Petroleum Corp.
(Exact Name of Registrant as Specified in Its Charter)
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Yukon Territory, Canada |
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N/A |
(Jurisdiction of Incorporation or Organization) |
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(I.R.S. Employer Identification No.) |
363 North Sam Houston Parkway East, Suite 1200
Houston, Texas 77060
(Address of Principal Executive Offices) (Zip Code)
281-876-0120
(Registrants Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class |
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Name of Each Exchange on Which Registered |
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Common Shares, without par value |
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American Stock Exchange |
Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. YES þ NO o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. YES o NO þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirement for the past
90 days. YES þ NO o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K is
not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any
amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer or a non-accelerated
filer. See definition of accelerated filer large
accelerated filer in
Rule 12b-2 of the
Exchange Act.
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2 of the
Act. YES o NO þ
The aggregate market value of the voting and non-voting common
equity held by non-affiliates of the registrant was
approximately $4,650,667,733 as of June 30, 2005 (based on
the last reported sales price of $30.36 of such stock on the
American Stock Exchange on such date).
As of February 28, 2006, there were 155,235,864 common
shares of the registrant outstanding.
Documents incorporated by reference: The definitive Proxy
Statement for the 2006 Annual Meeting of Stockholders, which
will be filed with the Securities and Exchange Commission within
120 days after December 31, 2005, is incorporated by
reference in Part III of this
Form 10-K.
TABLE OF CONTENTS
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Certain Definitions
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Terms used to describe quantities of oil and natural gas
and marketing |
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Bbl One stock tank barrel, or 42
U.S. gallons liquid volume, of crude oil or other liquid
hydrocarbons. |
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Bcf One billion cubic feet of natural gas. |
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Bcfe One billion cubic feet of natural gas
equivalent. |
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BOE One barrel of oil equivalent, converting
natural gas to oil at the ratio of 6 Mcf of natural gas to
1 Bbl of oil. |
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BTU British Thermal Unit. |
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CFD Caofaedian the Chinese
designation for the area in Bohai Bay area in the vicinity of
the 04/36 and 05/36 Blocks, offshore China. |
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Condensate An oil-like liquid produced in
association with natural gas production that condenses from
natural gas as it is produced and delivered into a separator or
similar equipment and collected in tanks at each well prior to
the delivery of such natural gas to the natural gas gathering
pipeline system. |
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ICP Indonesian Crude Price. |
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MBbl One thousand barrels. |
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Mcf One thousand cubic feet of natural gas. |
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Mcfe One thousand cubic feet of natural gas
equivalent, converting oil or condensate to natural gas at the
ratio of 1 Bbl of oil or condensate to 6 Mcf of
natural gas. |
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MMBbl One million barrels of oil or other
liquid hydrocarbons. |
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MMcf One million cubic feet of natural gas. |
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MBOE One thousand BOE. |
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MMBOE One million BOE. |
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MMBTU One million British Thermal Units. |
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Terms used to describe the Companys interests in
wells and acreage |
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Gross oil and gas wells or acres The
Companys gross wells or gross acres represent the total
number of wells or acres in which the Company owns a working
interest. |
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Net oil and gas wells or acres Determined by
multiplying gross oil and natural gas wells or acres
by the working interest that the Company owns in such wells or
acres represented by the underlying properties. |
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Terms used to assign a present value to the Companys
reserves |
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Standardized measure of discounted future net cash flows,
after income taxes The present value, discounted
at 10%, of the pre-tax future net cash flows attributable to
estimated net proved reserves. The Company calculates this
amount by assuming that it will sell the oil and gas production
attributable to the proved reserves estimated in its independent
engineers reserve report for the prices it received for
the production on the date of the report, unless it had a
contract to sell the production for a different price. The
Company also assumes that the cost to produce the reserves will
remain constant at the costs prevailing on the date of the
report. The assumed costs are subtracted from the assumed
revenues resulting in a stream of future net cash flows.
Estimated future income taxes, using rates in effect on the date
of the report, are deducted from the net cash flow stream. The
after-tax cash flows are discounted at 10% to result in the
standardized measure of the Companys proved reserves. |
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Standardized measure of discounted future net cash flows
before income taxes The discounted present value
of proved reserves is identical to the standardized measure
described above, except that estimated future income taxes are
not deducted in calculating future net cash flows. The Company
discloses the discounted present value without deducting
estimated income taxes to provide what it believes is a better
basis for comparison of its reserves to the producers who may
have different tax rates. |
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Terms used to classify the Companys reserve
quantities |
The Securities and Exchange Commission (SEC)
definition of proved oil and gas reserves, per
Article 4-10(a)(2) of
Regulation S-X, is
as follows:
Proved oil and gas reserves. Proved oil and gas reserves
are the estimated quantities of crude oil, natural 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, i.e., prices and costs as of the date the
estimate is made. Prices include consideration of changes in
existing prices provided only by contractual arrangements, but
not on escalations based upon future conditions.
(a) Reservoirs are considered proved if economic
producibility is supported by either actual production or
conclusive formation test. The area of a reservoir considered
proved includes (1) that portion delineated by drilling and
defined by gas-oil and/or oil-water contacts, if any; and
(2) the immediately adjoining portions not yet drilled, but
which can be reasonably judged as economically productive on the
basis of available geological and engineering data. In the
absence of information on fluid contacts, the lowest known
structural occurrence of hydrocarbons controls the lower proved
limit of the reservoir.
(b) Reserves which can be produced economically through
application of improved recovery techniques (such as fluid
injection) are included in the proved classification when
successful testing by a pilot project, or the operation of an
installed program in the reservoir, provides support for the
engineering analysis on which the project or program was based.
(c) Estimates of proved reserves do not include the
following: (1) oil that may become available from known
reservoirs but is classified separately as indicated
additional reserves; (2) crude oil, natural gas, and
natural gas liquids, the recovery of which is subject to
reasonable doubt because of uncertainty as to geology, reservoir
characteristics, or economic factors; (3) crude oil,
natural gas, and natural gas liquids, that may occur in
undrilled prospects; and (4) crude oil, natural gas, and
natural gas liquids, that may be recovered from oil shales,
coal, gilsonite and other such sources.
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Proved developed reserves Proved reserves
that can be expected to be recovered through existing wells with
existing equipment and operating methods. |
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Proved undeveloped reserves Proved reserves
that are expected to be recovered from new wells on undrilled
acreage, or from existing wells where a relatively major
expenditure is required. |
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Terms used to describe the legal ownership of the
Companys oil and gas properties |
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Working interest A real property interest
entitling the owner to receive a specified percentage of the
proceeds of the sale of oil and natural gas production or a
percentage of the production, but requiring the owner of the
working interest to bear the cost to explore for, develop and
produce such oil and natural gas. A working interest owner who
owns a portion of the working interest may participate either as
operator or by voting his percentage interest to approve or
disapprove the appointment of an operator and drilling and other
major activities in connection with the development and
operation of a property. |
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Terms used to describe seismic operations |
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Seismic data Oil and gas companies use
seismic data as their principal source of information to locate
oil and gas deposits, both to aid in exploration for new
deposits and to manage or enhance production from known
reservoirs. To gather seismic data, an energy source is used to
send sound |
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waves into the subsurface strata. These waves are reflected back
to the surface by underground formations, where they are
detected by geophones which digitize and record the reflected
waves. Computers are then used to process the raw data to
develop an image of underground formations. |
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2-D seismic
data
2-D seismic survey data
has been the standard acquisition technique used to image
geologic formations over a broad area.
2-D seismic data is
collected by a single line of energy sources which reflect
seismic waves to a single line of geophones. When processed,
2-D seismic data
produces an image of a single vertical plane of sub-surface data. |
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3-D seismic
data
3-D seismic data is
collected using a grid of energy sources, which are generally
spread over several miles. A
3-D survey produces a
three dimensional image of the subsurface geology by collecting
seismic data along parallel lines and creating a cube of
information that can be divided into various planes, thus
improving visualization. Consequently,
3-D seismic data is a
more reliable indicator of potential oil and natural gas
reservoirs in the area evaluated. |
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PART I
Ultra Petroleum Corp. (Ultra or the
Company) is an independent oil and gas company
engaged in the development, production, operation, exploration
and acquisition of oil and gas properties. The Company was
incorporated on November 14, 1979, under the laws of the
Province of British Columbia, Canada. The Company continued into
the Yukon Territory, Canada under Section 190 of the
Business Corporations Act (Yukon Territory) on
March 1, 2000. The Companys operations are focused
primarily in the Green River Basin of southwest Wyoming and
Bohai Bay, offshore China. From time to time, the Company
evaluates other opportunities for the acquisition, exploration
and development of oil and gas properties.
As of December 31, 2005, Ultra owns interests in
approximately 148,007 gross (78,688 net) acres in
Wyoming covering approximately 230 square miles. The
Company owns working interests in approximately 330 gross
productive wells in this area and is operator of 53% of the
330 gross wells. The Companys current domestic
operations are focused on developing and expanding a tight gas
sand project located in the Green River Basin in southwest
Wyoming. In 2005, the Companys Wyoming production was
approximately 87.4% of the Companys total oil and natural
gas production on an MCFE basis and 98.5% of the Companys
estimated net proved reserves were in Wyoming on an MCFE basis.
In 2005, capital expenditures in Wyoming comprised approximately
93% of the Companys total capital expenditures.
Following the acquisition of Pendaries Petroleum Ltd.
(Pendaries) on January 16, 2001, the Company
became active in oil and gas exploration and development
covering the 04/36 Block and the 05/36 Block (jointly the
Blocks) in Bohai Bay, China. The Company currently
holds an 18.18% exploration interest in the 04/36 Block. Upon
initiation of development, the interest reduced to an 8.91%
working interest in field development and production areas.
Originally, the Company held a 15.00% exploration interest in
the 05/36 Block which reduced, upon initiation of development,
to a 7.35% working interest for development and production
areas. In 2004, an extension of the 05/36 Block exploration term
was granted (from February 28, 2005 to February 28,
2006). One of the parties to the contract elected not to
participate in this extension of the exploration phase. The
Company chose to acquire this available exploration interest. As
a result, the Company holds a 23.08% exploration interest in the
05/36 Block, which will be reduced to 11.31% for areas that may
be developed in the current exploration acreage.
There are currently three fields (CFD 11-6, 12-1, 12-1S) under
development (located in close proximity and thus developed under
a single development plan) within the Blocks that have been
unitized because the fields are located in both the
04/36 and 05/36 Blocks. A Unitization Agreement was executed
that assigned the Company a 7.82% working interest in the
combined field unit. The Companys interest in the unit was
based upon the original 15.00% exploration interest in the 05/36
Block and an 18.18% exploration interest of the 04/36 Block. On
July 19, 2004, oil production began from the CFD 11-1 and
11-2 fields and on July 5, 2005, oil production began from
the CFD 11-3 and 11-5 fields. All four fields are located in the
04/36 Block. In 2005, the Company spent approximately 7% of its
total 2005 capital budget on developing these China fields, as
well as on engineering work focused on development of additional
fields and continuing exploration. A wholly-owned subsidiary of
Kerr-McGee Corporation is the operator of the Blocks. At the
time of the Pendaries acquisition, there were three oil
discoveries on the Blocks. Since then, six new discoveries have
been made. Four of these oil fields are developed and on
production and three additional fields are being developed.
The Company also owns interests in 26,868 gross
(24,610 net) acres in Pennsylvania. The Company drilled
1 gross (1.0 net) test well on this acreage during
2005. This well has been completed and is waiting on a pipeline
connection. Evaluation is ongoing to determine plans for future
activity in the area. In Texas, the Company owns a minor
non-operated interest in 1 gross (0.12 net) producing
well, plus the associated 80 gross (14 net) acres. The
Company is currently attempting to divest this property.
The Companys annual report on
Form 10-K,
quarterly reports on
Form 10-Q, and
current reports on
Form 8-K, as well
as any amendments to such reports and all other filings we make
pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 are available free of charge to the public
on the Companys website at www.ultrapetroleum.com. To
access the Companys SEC filings, select
Financials under the
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Investor Relations tab on the Companys website. The
Companys SEC filings are available on its website as soon
as they are posted to the EDGAR database on the SECs
website.
Business Strategy
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Green River Basin, Wyoming |
The Company will continue the ongoing program to identify,
develop and explore the acreage position now held in the tight
gas sand trend in the Green River Basin. The majority of the
wells in the 2006 drilling program will be targeting the sands
of the upper Cretaceous Lance Pool in the Pinedale and Jonah
fields. The Lance Pool, as administered by the Wyoming Oil and
Gas Conservation Commission (WOGCC), includes sands
of both the Lance (found at subsurface depths of approximately
8,000 to 12,000 feet) and Mesaverde (found at subsurface
depths of approximately 12,000 to 14,000 feet) in the
Pinedale and Jonah fields area of Sublette County, Wyoming. The
Company will continue to drill step-out and exploration wells on
its Green River Basin acreage positions in an ongoing
attempt to further define and expand the current known producing
area. In addition to the ongoing efforts in the Lance Pool
section, the Company is continuing to evaluate the deeper,
potentially productive, zones found on its acreage block below
the Lance Pool. All of the Companys drilling activity is
conducted utilizing its extensive integrated geological and
geophysical data set. This data set is being utilized to map the
potentially productive intervals, to identify areas for future
extension of the Lance fairway and to identify deeper objectives
which may warrant drilling.
In 2006, the Company plans to continue producing oil at the CFD
11-1, 11-2, 11-3 and 11-5 fields, continue development on the
CFD 11-6, 12-1 and 12-1S unitized fields and drill additional
exploration wells. The Company has nine discovered oil fields in
the Bohai Blocks. The first two fields, CFD 11-1 and 11-2, began
producing in July 2004, while the CFD 11-3 and 11-5 fields began
producing in July 2005. Three additional fields are currently
being developed and are scheduled to go on production during the
second half of 2006, bringing the total to seven producing
fields by the end of 2006. Two discoveries remain in the
appraisal stage.
The Company will continue to evaluate the initial test well
including production testing to sales. The Company continues to
acquire additional acreage, seismic and geologic data in the
area. Any decision as to future drilling on the prospect is
pending production testing of the initial well and ongoing
geological, geophysical and engineering studies.
Marketing and Pricing
The Company derives its revenues principally from the sale of
its natural gas and associated condensate production from wells
operated by the Company and others in the Green River Basin in
southwest Wyoming. To a lesser extent, the Company derives
revenues from the sale of its share of oil production from its
producing fields in the Bohai Bay area, offshore China. The
Companys revenues are determined, to a large degree, by
prevailing natural gas prices for production situated in the
Rocky Mountain Region of the United States; specifically,
southwest Wyoming, as well as prevailing prices for crude oil
produced in the Bohai Bay region of China. Energy commodity
prices in general, and the Companys regional prices in
particular, have been highly volatile in the past, and such high
levels of volatility are expected to continue in the future. The
Company cannot accurately predict or control the market prices
that it receives for the sale of its natural gas, condensate, or
oil production. However, the Company has, in the regular course
of its business, from time to time, hedged a portion of its
natural gas production primarily through the use of fixed price,
forward sales of physical gas, or through the limited use of
financial swaps with creditworthy financial counterparties. The
Company may elect to hedge additional portions of its forecast
natural gas production in the future, in much the same manner as
it has done previously. The Company has not, to date, hedged any
of its Chinese oil production; although, it may do so in the
future. For a more detailed description of the Companys
hedging activities, see Item 7A
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Quantitative and Qualitative Disclosures About Market Risk. The
Companys hedging policy limits amounts hedged to not more
than 50% of its forecast production without board approval. As a
result of its hedging activities, the Company may realize prices
that are less than the spot prices that it would have received.
The Company currently sells all of its natural gas production to
a diverse group of third-party, non-affiliated entities in a
portfolio of transactions of various durations (daily, monthly
and longer term). The Companys customers are situated in
the western United States primarily California and
the Pacific Northwest, as well as the Front Range area of
Colorado and in Utah. The sale of the Companys natural gas
is as produced, and the Company does not maintain
any significant inventories or imbalances of natural gas. The
Company maintains credit policies intended to mitigate the risk
of uncollectible accounts receivable. The Company does not have
any outstanding, uncollectible accounts for natural gas sales.
During 2005, the Company negotiated several significant new or
amended gathering and processing agreements with various
midstream service providers that gather, compress and/or process
natural gas owned or controlled by the Company from its
producing wells in the Pinedale Anticline and Jonah Fields in
southwest Wyoming. These agreements provide that the respective
midstream service providers expand the capacities of their
facilities in southwest Wyoming to accommodate growing volumes
from wells in which the Company owns an interest. Most of these
agreements or amendments contain multi-year commitments for
midstream services. In more than one instance, the Company was
able to substantially lower some of the fees that it pays for
such midstream services, in exchange for committing to these
longer term arrangements. The capacity of the midstream
infrastructure related to the Companys production
continues to be adequate to allow it to sell essentially all of
its available production.
During 2005, the Company realized natural gas prices that were
higher than those historically seen in the southwest Wyoming
region. The market price for natural gas in the Rockies
generally, and in southwest Wyoming specifically, is influenced
by a number of regional and national factors; all of which are
beyond the ability of the Company to control or to predict.
These factors include weather, natural gas supplies, natural gas
demand, and pipeline export capacity. A hotter than normal
summer, plus the impact of two major hurricanes (Katrina and
Rita) on natural gas production from the Gulf of Mexico, caused
natural gas prices in the Rocky Mountain Region, and other
parts of the country, to increase during the third and fourth
quarters of 2005.
Because production exceeds local demand for natural gas, the
Rocky Mountain Region is usually a net-exporter of natural gas.
Historically, natural gas production in southwest Wyoming has
sold at a discount relative to other U.S. natural gas
production sources or market areas. These regional pricing
differentials or discounts are typically referred to as
basis or basis differentials. The
Company has seen significant basis differentials for its Wyoming
production, versus the Henry Hub pricing reference point in
south Louisiana in the past. As a result, during that time
period, the Company realized prices that were significantly
lower than those received by companies with production in other
regions of the U.S. Significant increases in pipeline
capacity to transport production from the Rockies production
areas to markets in the West in recent years have served to
improve (i.e. lower) basis differentials for Wyoming natural gas
production. (Examples include: Kern River Pipeline
in service May 2003, and the Cheyenne Plains
Pipeline in service February 2005). These expansions
of pipeline export capacity have, in the past, reduced but not
eliminated the basis differential for natural gas prices in
southwest Wyoming when compared to prices at the Henry Hub
pricing reference point. There have been, from time to time,
numerous other proposed pipeline projects that have been
announced to transport Rockies and Wyoming natural gas
production to markets.
During 2005, the Company took a major step toward assuring that
the pipeline infrastructure to move the Companys natural
gas supplies away from southwest Wyoming will be expanded to
provide sufficient capacity to transport its natural gas
production and to provide for reasonable basis differentials for
its natural gas in the future. The Company agreed to become an
anchor shipper on the proposed Rockies Express Pipeline project,
sponsored by subsidiaries of Kinder Morgan and Sempra Energy.
The Rockies Express Pipeline, if built as proposed, would be the
largest natural gas transmission pipeline project of its type
built in the United States in
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more than 20 years, beginning at the Opal Processing Plant
in southwest Wyoming and traversing Wyoming and several other
states to an ultimate terminus in eastern Ohio. This project is
projected to cover more than 1,800 miles and is
contemplated to be a large-diameter (42), high-pressure
natural gas pipeline. The Rockies Express Pipeline, if built,
will be an interstate pipeline and would therefore be subject to
the jurisdiction of the United States Federal Energy Regulatory
Commission (FERC).
On December 19, 2005, the Company signed two Precedent
Agreements (Precedent Agreements) with Rockies
Express Pipeline, LLC and Entrega Gas Pipeline, LLC governing
how the parties will proceed through the design, regulatory
process and construction of the pipeline facilities and, subject
to certain conditions precedent, the Company will take firm
transportation service if and when the pipeline facilities are
constructed. Commencing upon completion of the pipeline
facilities, the Companys commitment involves capacity of
200,000 MMBtu per day of natural gas for a term of
10 years, and the Company will be obligated to pay to
Rockies Express Pipeline, LLC certain demand charges related to
its rights to hold this firm transportation capacity as an
anchor shipper. Based on current assumptions, current
projections regarding the cost of the expansion and the
participation of other shippers in the expansion (noting
specifically that these assumptions are likely to change
materially), the Company currently projects that annual demand
charges due may be approximately $70 million per year for
the term of the contract, exclusive of fuel and surcharges. The
Companys Board of Directors approved the Precedent
Agreements on February 6, 2006 and Kinder Morgan, as the
managing member of the Rockies Express Pipeline, LLC advised the
Company of their final approval of the Precedent Agreements, and
their intent to proceed with the construction of the Rockies
Express Pipeline on February 28, 2006. The pipeline
facilities are currently anticipated to be completed in stages
between 2007 and 2009. Although the Company is optimistic that
the Rockies Express Pipeline project will receive the necessary
regulatory approvals and be constructed in a timely manner,
there can be no assurances that the Rockies Express Pipeline
will be built, nor will there be any assurances that, if built,
it will prevent large basis differentials from occurring in the
future.
Through its wholly-owned Sino-American Energy Corporation
subsidiary, the Company continued to market its share of oil
production from the CFD 11-1 and 11-2 fields during 2005. In
addition, the next two of its fields in Block 04/36 Bohai Bay,
offshore China (CFD 11-3 and 11-5), began producing oil in July
2005.
The sale of the Companys Chinese oil production (CFD
crude) is done on a tanker/cargo lifting basis. As the
Companys share of inventories on the CFD 11-1 and 11-2 and
11-3 and 11-5 fields Floating Production Storage and
Offloading Vessel (FPSO) become sufficient to
schedule a lifting (typically 200,000
300,000 barrels per cargo), the Company coordinates with
the operator and its markets to lift a cargo. By necessity, the
Company will, from time to time, carry inventories of crude oil
to accommodate the lifting schedules for its share of oil from
the FPSO. Each of the partners in the CFD 11-1/11-2 and
11-3/11-5 fields are responsible for the disposition of their
respective share of the CFD crude production. Kerr-McGee, as
operator of these fields, manages the lifting schedule for
production from these fields. The Company has sold most of its
share of the CFD crude production to an affiliate of its Chinese
partner, Chinese National Offshore Oil Corporation
(CNOOC) China, Ltd., at prices that reflect a slight
discount to the Indonesian Crude Price (ICP) Duri
monthly average price. In 2005, for the first time, the Company
sold some of its share of the CFD crude production outside of
China, and it continues to assess its opportunities to market
its share of the CFD crude production to other markets such as
Korea, Japan and Singapore. The Company does not have any
outstanding, uncollectible accounts for CFD crude oil sales as
of December 31, 2005.
Currently, the CFD crude is a heavy, sweet crude oil, with an
API gravity of approximately 19 degrees. The production from
these first four fields is from multiple productive reservoirs,
which have variability in the quality of oil. The Company
believes that the quality of the oil produced from these fields
will tend to improve as additional wells and reservoirs are
completed and placed into production. Due to its quality and
physical characteristics, refiners and other markets for the CFD
crude oil typically expect to be able to purchase CFD crude at
prices that are lower than light sweet crude oils like West
Texas Intermediate or Brent. Oil produced and sold from the four
CFD fields is typically priced based upon the monthly official
ICP for Duri field crude. The Duri crude, produced in Indonesia,
is of similar quality to the CFD crude produced in the Bohai Bay
area.
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The official ICP Duri price is a monthly weighted average of
three, independent daily assessments of the price of Duri crude,
reported by Platts Asian Petroleum Price Index published
by Seapac Services Limited, and RIM Intelligence Co. To the
monthly official ICP Duri marker price, a premium or discount is
added to reflect transportation and quality differentials for
the CFD crude relative to the Duri marker crude. The premium or
discount for the CFD crude (relative to the Duri price) is
negotiated monthly between the Company and its partners,
including CNOOC.
Environmental Matters
In 1998, the U.S. Bureau of Land Management
(BLM) initiated a requirement for an Environmental
Impact Statement (EIS) for the Pinedale Anticline
area in the Green River Basin. An EIS evaluates the effects that
an industrys activities will have on the environment in
which the activity is proposed. This EIS encompasses the area
north of the Jonah Field, including the Pinedale Anticline,
which is where most of the Companys exploration and
development is taking place. This environmental study included
an analysis of the geological and reservoir characteristics of
the area plus the necessary environmental studies related to
wildlife, surface use, socio-economic and air quality issues. On
July 27, 2000, the BLM issued its Record of Decision
(ROD) with respect to the final EIS. The ROD/ EIS
allows for the drilling of 700 producing surface locations
within the area covered by the EIS, but does not authorize the
drilling of particular wells. Ultra must submit applications to
the BLMs Pinedale field manager for permits to drill and
for other required authorizations, such as
rights-of-way for
pipelines, for each specific well or pipeline location.
Development activities in the Pinedale Anticline area, as on all
federal leaseholds, remain subject to regulatory agency
approval. In making its determination on whether to approve
specific drilling or development activities, the BLM applies the
requirements outlined in the ROD/ EIS.
The ROD/ EIS imposes limitations and restrictions on activities
in the Pinedale Anticline area, including limits on winter
drilling and completion activity, and proposes mitigation
guidelines, standard practices for industry activities and best
management practices for sensitive areas. The ROD/ EIS also
provides for annual reviews to compare actual environmental
impacts to the environmental impacts projected in the EIS and
provides for adjustments to mitigate such impacts, if necessary.
The review team is comprised of operators, local residents and
other affected persons. The Company cannot predict if or how
these changes may affect permitting, development and compliance
under the ROD/EIS. The BLMs field manager may also impose
additional limitations and mitigation measures as are deemed
reasonably necessary to mitigate the impact of drilling and
production operations in the area.
As of December 31, 2005, the Company had approximately
46 well locations with respect to which both the BLM and
the WOGCC have approved permits to drill on Company-operated
federal leases in the Pinedale Anticline and Jonah field areas.
To date, the Company has expended significant resources in order
to satisfy applicable environmental laws and regulations in the
Pinedale Anticline area and other areas of operation under the
jurisdiction of the BLM. The Companys future costs of
complying with these regulations may continue to be substantial.
Further, any additional limitations and mitigation measures
could further increase production costs, delay exploration,
development and production activities and curtail exploration,
development and production activities altogether.
The Company also co-owns leases on state and privately owned
lands in the vicinity of the Pinedale Anticline that do not fall
under the jurisdiction of the BLM and are not subject to the EIS
requirement.
In August 1999, the BLM required an Environmental Assessment
(EA) for the potential increased density drilling in
the Jonah Field area. An EA is a more limited environmental
study than is conducted under an EIS. The EA was required to
address the potential environmental impacts of developing the
field on a well density of two wells per 80 acre drilling
and spacing unit as opposed to the one well per 80 acre
drilling and spacing unit as was approved in the initial Jonah
Field EIS approved in 1998. The new EA was completed in June
2000. With the approval of this EA and the earlier approval by
the WOGCC for drilling of two wells per 80 acre
drilling and spacing unit, the Company was permitted to drill
infill wells at this well density on the 2,160 gross
(1,322 net) acres then owned by the Company in the Jonah
Field. Prior to these approvals, the
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Company had drilled 21 gross (7.7 net) wells in the
field. Since the increased density approvals, the Company has
drilled an additional 22 gross (14.0 net) wells in the
field. All 43 wells drilled by the Company in the Jonah
Field have been productive. Since this time various other
operators have received approval for the drilling of increased
density wells in pilot areas at well densities ranging from four
wells per 80 acre drilling and spacing unit to sixteen
wells per drilling and spacing unit. Results of all of these
pilot projects were utilized in acquiring approval from the
WOGCC in November 2004 to increase the overall density of
development for the Jonah Field to eight wells per 80 acre
drilling and spacing unit. The BLM is currently conducting a new
EIS covering the Jonah Field to assess the impacts of this
increased density development and define the parameters under
which this increased density development will be allowed to
proceed. The draft EIS was made available mid-February 2005.
After review and comment by all parties the BLM is now preparing
the final ROD. It is expected that the ROD for the new Jonah EIS
should be issued during the first half of 2006.
During 2003, 2004 and 2005, Ultra and other operators in the
Pinedale Field received approval from the WOGCC to drill
increased density pilot project wells in several areas of the
Pinedale Field. These pilot projects are designed to test the
feasibility of developing this field in well densities greater
than the currently approved one well per 40 acres. The
results of some of this work led to the WOGCC in July 2004
approving the development of the northern portion of the
anticline on a two wells per 40 acre density. The acreage
is operated by Questar Exploration and Production Company
(Questar), a working interest partner of the
Company, and the Company owns a working interest in the majority
of this acreage. This approval covers approximately
14,432 gross acres. Since this time, additional increased
density pilot wells have been drilled by Ultra and others on the
pilot areas within the Pinedale field. Based on the data
gathered through these pilot projects, the WOGCC approved
several additional Increased Density applications during 2005.
In August 2005, approval was granted for development of a
significant portion of the northern portion of the Pinedale
field for drilling on a four wells per 40 acre density.
This approval covers approximately 11,256 gross acres in
which Ultra owns an interest and are operated by Questar. In
November 2005, approval was granted for development of a
significant portion of the central Pinedale Field and
surrounding area on a two wells per 40 acre density.
This approval covers approximately 23,816 gross acres in
which Ultra owns an interest. Ultra operates the majority of the
acreage covered by this approval. Further drilling within these
areas and the other pilot areas approved for increased density
continues and the results of these are being evaluated to
determine the appropriate course of action as to the overall
development strategy for the Pinedale Field.
In April 2004, Questar asked the BLM to modify winter-access
restrictions to specifically allow them to operate on three
active pads with two drilling rigs per pad. This request
required an EA to weigh the negative impacts of winter activity
relative to the extensive mitigation measures proposed by
Questar. On November 9, 2004 they received approval in the
form of a Finding of No Significant Impact
(FONSI) from the BLM to phase in over the next year
their proposed year-round drilling program which allowed two
drilling rigs on one pad during the winter of 2004-2005. Questar
proposed mitigation measures including construction of a water
and condensate gathering system during the summer of 2005.
Questars proposal allows them to operate six rigs from
three active pads beginning in the winter of 2005-2006 through
the winter of 2013-2014 once they have completed implementation
of the proposed mitigation measures.
The BLM approved the Questar proposal after considering
extensive input from the participating agencies received during
the public comment process. Key components of the approval are:
1) One pad with two drilling rigs during the winter of
2004-2005; 2) three pads with two drilling rigs per pad in
the winter of 2005-2006 and thereafter through the winter of
2013/2014; 3) activities during the May-November period
will continue to be governed by the original Pinedale Anticline
EIS; 4) directional drilling with up to 16 wells per
pad resulting in only one-third of the drilling phase surface
disturbance contemplated under the original EIS;
5) construction of a produced water and condensate
gathering system in 2005; 6) funding for continued
monitoring of mule deer and other critical wildlife for the
duration of development activity; 7) use of
flareless-completion technology to reduce noise, air and visual
pollution during well-completion operations; 8) funding for
air-quality monitoring; and 9) wildlife habitat enhancement
as well as other monitoring and mitigation measures described in
the BLM decision record.
Questar has met their commitments under the terms of this
approval and is now proceeding with the winter drilling program
as proposed. Currently there are six Questar operated drilling
rigs operating within the
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area of this approval, two rigs on each of three separate winter
pads. These wells will be drilled to total depth, logged and
cased during the winter restriction period with completion
activity to commence in the spring with the lifting of the
normal seasonal wildlife restrictions.
In early 2005, Ultra, along with Anschutz and Shell
(Proponents) proposed to the BLM a winter access
demonstration project for the Mesa area of the Pinedale Field.
This area is normally subject to the winter big game stipulation
which prohibits drilling and completion activities in the area
from
November 15th until
April 30th.
Under the terms of the proposal, the Proponents would be able to
operate a total of six rigs, two each on three different winter
pads. During this winter demonstration project, the Proponents
plan to employ innovative technologies and practices for
operations to provide a more beneficial alternative to the
current wildlife restrictions. Upon successful completion of the
winter demonstration project, the Proponents intend to apply the
operations principles demonstrated to implement a long-term
development plan that will result in substantially less impact
to wildlife, habitat, and local communities than what is allowed
under the current Pinedale Anticline Project Area
(PAPA) ROD while providing assurance of year round
access from the BLM to permit the implementation of a
comprehensive development scenario for the Pinedale Field. An EA
was conducted by the BLM to evaluate the winter demonstration
project proposal and associated impacts and the Proponents
received approval in the form of a FONSI ruling from the BLM in
September 2005. The proponents began activities in the winter
demonstration project in November 2005 and are currently running
the six rigs as proposed. The FONSI ruling includes several
conditions of approval requiring monitoring and mitigation of
impacts on wildlife and monitoring and mitigation of rig engine
emissions and noise levels associated with project drilling
activities.
Subsequent to the FONSI ruling allowing implementation of the
winter demonstration project, the Proponents submitted a
development proposal for the Pinedale Field which includes broad
application of operations principles being evaluated in the
demonstration project area. The Proponents have now entered into
a Memorandum of Understanding with the BLM to commence the
preparation of a Supplemental Environmental Impact Statement
(SEIS) for year-round access in the Pinedale field.
The SEIS process is proceeding and impacts of the development
proposal will be analyzed to assess alternative considerations
and mitigation requirements that should be considered as
alternatives to those included in the proposal or in addition to
those measures now proposed. The proposed action includes
commitments to reduce surface disturbance by utilizing fewer
overall pads and drilling more directional wells than called for
in the PAPA ROD. Also, if approved, the Proponents proposal
commits to reduced air emissions. The Proponents have proposed
to apply technology to drilling rig engines to reduce emissions,
to reduce vehicle traffic by installing a liquids gathering
system as appropriate in the field, and by expanding the use of
telemetry to reduce production operations traffic requirements.
The Proponents have also proposed additional monitoring to
assess benefits of mitigation activities on the impacts of
development activities on the wildlife in the project area. The
proposal commits to offsite mitigation measures should the
monitoring indicate it is warranted. If approved, the
Proponents proposal commits to reduced reserve pit use and
to accelerated surface reclamation. The SEIS process calls for a
ROD in late 2006.
In September 2002, the Company received the Oil and Gas
Wildlife Stewardship award from the Wyoming Game and Fish
Department in recognition of its contribution to wildlife
management in the Pinedale area. During 2001, the Company
received the Agency/ Corporation of the Year award
from the Wyoming Wildlife Federation and the Regional
Administrators Award for Environmental Achievement
from the U.S. Environmental Protection Agency.
Regulation
The availability of a ready market for oil and gas production
depends upon numerous factors beyond the Companys control.
These factors may include state and federal regulation of oil
and gas production and transportation, as well as regulations
governing environmental quality and pollution control, state
limits on allowable rates of production by a well or proration
unit, the amount of oil and gas available for sale, the
availability of adequate pipeline and other transportation and
processing facilities and the marketing of
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competitive fuels. For example, a productive natural gas well
may be shut-in because of a lack of an available
natural gas pipeline in the areas in which the Company may
conduct operations. State and federal regulations are generally
intended to prevent waste of oil and gas, protect rights to
produce oil and gas between owners in a common reservoir,
control the amount of oil and gas produced by assigning
allowable rates of production and control contamination of the
environment. Pipelines and natural gas plants are also subject
to the jurisdiction of various federal, state and local agencies.
The Companys sales of natural gas are affected by the
availability, terms and costs of transportation both in the
gathering systems that transport from the wellhead to the
interstate pipelines and in the interstate pipelines themselves.
The rates, terms and conditions applicable to the interstate
transportation of natural gas by pipelines are regulated by the
FERC under the Natural Gas Act, as well as under
Section 311 of the Natural Gas Policy Act. Since 1985, the
FERC has implemented regulations intended to increase
competition within the natural gas industry by making natural
gas transportation more accessible to natural gas buyers and
sellers on an open-access, non-discriminatory basis. On
February 25, 2000, the FERC issued a statement of policy
and a final rule concerning alternatives to its traditional
cost-of-service
rate-making methodology to establish the rates interstate
pipelines may charge for services. The final rule revises the
FERCs pricing policy and current regulatory framework to
improve the efficiency of the market and further enhance
competition in natural gas markets. The FERC is also considering
a number of regulatory initiatives that could affect the terms
and costs of interstate transportation of natural gas by
interstate pipelines on behalf of natural gas shippers,
including policy inquiries about natural gas quality and
interchangeability, selective discounting of transportation
services by pipelines to shippers, and proposed rules governing
pipeline creditworthiness and collateral standards. Because
these regulatory initiatives have not been made final, the
approach the FERC will take and the potential impact on natural
gas suppliers are not clear.
The Companys sales of oil are also affected by the
availability, terms and costs of transportation. The rates,
terms, and conditions applicable to the interstate
transportation of oil by pipelines are regulated by the FERC
under the Interstate Commerce Act. The FERC has implemented a
simplified and generally applicable ratemaking methodology for
interstate oil pipelines to fulfill the requirements of
Title XVIII of the Energy Policy Act of 1992 comprised of
an indexing system to establish ceilings on interstate oil
pipeline rates.
In the event the Company conducts operations on federal, tribal
or state lands, such operations must comply with numerous
regulatory restrictions, including various operational
requirements and restrictions, nondiscrimination statutes and
royalty and related valuation requirements. In addition, certain
of such operations must be conducted pursuant to certain
on-site security
regulations, bonding requirements and applicable permits issued
by the BLM or Minerals Management Service, Bureau of Indian
Affairs, tribal or other applicable federal, state and/or Indian
Tribal agencies.
The Mineral Leasing Act of 1920 (Mineral Act)
prohibits direct or indirect ownership of any interest in
federal onshore oil and gas leases by a foreign citizen of a
country that denies similar or like privileges to
citizens of the United States. Such restrictions on citizens of
a non-reciprocal country include ownership or holding or
controlling stock in a corporation that holds a federal onshore
oil and gas lease. If this restriction is violated, the
corporations lease can be canceled in a proceeding
instituted by the United States Attorney General. Although
the regulations of the BLM (which administers the Mineral Act)
provide for agency designations of non-reciprocal countries,
there are presently no such designations in effect. The Company
owns interests in numerous federal onshore oil and gas leases.
It is possible that holders of the Companys equity
interests may be citizens of foreign countries, which at some
time in the future might be determined to be non-reciprocal
under the Mineral Act.
See Risk Factors for a discussion of the
risks involved in our international operations.
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Environmental Regulations |
General. The Companys activities in the United
States are subject to existing federal, state and local laws and
regulations governing environmental quality, oil spills and
pollution control and its activities in China are subject to the
laws and regulations of China. It is anticipated that, absent
the occurrence of an extraordinary event, compliance with
existing federal, state and local laws, rules and regulations
governing the
13
release of materials in the environment or otherwise relating to
the protection of the environment will not have a material
effect upon the Companys operations, capital expenditures,
earnings or competitive position.
The Companys activities with respect to exploration,
drilling and production from wells and natural gas facilities,
including the operation and construction of pipelines, plants
and other facilities for transporting, processing, treating or
storing oil, natural gas and other products, are subject to
stringent environmental regulation by state and federal
authorities, including the Environmental Protection Agency
(EPA). Such regulation can increase the cost of
planning, designing, installing and operating such facilities.
In most instances, the regulatory requirements relate to water
and air pollution control measures.
Solid and Hazardous Waste. The Company currently owns or
leases, and has in the past owned or leased, numerous properties
that have been used for the exploration and production of oil
and gas for many years. Although the Company utilized operating
and disposal practices that were standard in the industry at the
time, hydrocarbons or other solid wastes may have been disposed
of or released on or under the properties that the Company
currently owns or leases or properties that the Company has
owned or leased or on or under locations where such wastes have
been taken for disposal. In addition, many of these properties
have been operated by third parties over whom the Company had no
control as to such entities treatment of hydrocarbons or
other wastes or the manner in which such substances may have
been disposed of or released. State and federal laws applicable
to oil and gas wastes and properties have gradually become
stricter over time. Under new laws, the Company could be
required to remediate property, including ground water,
containing or impacted by previously disposed wastes (including
wastes disposed of or released by prior owners or operators) or
to perform remedial plugging operations to prevent future, or
mitigate existing, contamination.
The Company may generate wastes, including hazardous wastes that
are subject to the federal Resource Conservation and Recovery
Act (RCRA) and comparable state statutes. The EPA
and various state agencies have limited the disposal options for
certain wastes, including wastes designated as hazardous under
the RCRA and state analogs (Hazardous Wastes) and is
considering the adoption of stricter disposal standards for
non-hazardous wastes. Furthermore, certain wastes generated by
the Companys oil and gas operations that are currently
exempt from treatment as Hazardous Wastes may in the future be
designated as Hazardous Wastes under the RCRA or other
applicable statutes, and therefore be subject to more rigorous
and costly operating and disposal requirements.
Superfund. The federal Comprehensive Environmental
Response, Compensation and Liability Act (CERCLA),
also known as the Superfund law, generally imposes
joint and several liability for costs of investigation and
remediation and for natural resource damages, without regard to
fault or the legality of the original conduct, on certain
classes of persons with respect to the release into the
environment of substances designated under CERCLA as hazardous
substances (Hazardous Substances). These classes of
persons, or so-called potentially responsible parties
(PRP), include current and certain past owners and
operators of a facility where there has been a release or threat
of release of a Hazardous Substance and persons who disposed of
or arranged for the disposal of the Hazardous Substances found
at such a facility. CERCLA also authorizes the EPA and, in some
cases, third parties to take actions in response to threats to
the public health or the environment and to seek to recover from
the PRP the costs of such action. Although CERCLA generally
exempts petroleum from the definition of Hazardous
Substance, in the course of its operations, the Company has
generated and will generate wastes that fall within
CERCLAs definition of Hazardous Substances. The Company
may also be an owner or operator of facilities on which
Hazardous Substances have been released. The Company may be
responsible under CERCLA for all or part of the costs to clean
up facilities at which such substances have been released and
for natural resource damages. To its knowledge, the Company has
not been named a PRP under CERCLA nor have any prior owners or
operators of its properties been named as PRPs related to
their ownership or operation of such property.
National Environmental Policy Act. The federal National
Environmental Policy Act provides that, for those federal
actions that are major federal actions significantly affecting
the quality of the human environment, the federal agency taking
such action must follow certain steps in evaluating the
environmental impacts of the federal action. This evaluation
generally takes the form of an EIS. In the EIS, the agency is
required to evaluate alternatives to the proposed action and the
environmental impacts of the alternatives.
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Actions such as drilling on federal lands, to the extent the
drilling requires federal approval, likely trigger the
requirements of the National Environmental Policy Act, with few
exceptions. Certain of the Companys activities may trigger
these requirements. The requirements of the National
Environmental Policy Act may result in increased costs,
significant delays and the imposition of restrictions or
obligations, including the restriction or prohibition of
drilling, upon the Companys activities.
Oil Pollution Act. The Oil Pollution Act of 1990
(OPA), which amends and augments oil spill
provisions of the Clean Water Act (CWA), imposes
certain duties and liabilities on certain responsible
parties related to the prevention of oil spills and
damages resulting from such spills in or threatening
United States waters or adjoining shorelines. A liable
responsible party includes the owner or operator of
a facility, vessel or pipeline that is a source of an oil
discharge or that poses the substantial threat of discharge or,
in the case of offshore facilities, the lessee or permittee of
the area in which a discharging facility is located. The OPA
assigns joint and several liability, without regard to fault, to
each liable party for oil removal costs and a variety of public
and private damages. Although defenses and limitations exist to
the liability imposed by OPA, they are limited. In the event of
an oil discharge or substantial threat of discharge, we may be
liable for costs and damages.
Air Emissions. The Companys operations are subject
to local, state and federal regulations for the control of
emissions from sources of air pollution. Federal and state laws
require new and modified sources of air pollutants to obtain
permits prior to commencing construction. Major sources of air
pollutants are subject to more stringent, federally imposed
requirements including additional permits. Federal and state
laws designed to control hazardous (toxic) air pollutants,
might require installation of additional controls.
Administrative enforcement actions for failure to comply
strictly with air pollution regulations or permits are generally
resolved by payment of monetary fines and correction of any
identified deficiencies. Alternatively, regulatory agencies
could bring lawsuits for civil penalties or require the Company
to forego construction, modification or operation of certain air
emission sources.
Clean Water Act. The CWA imposes restrictions and strict
controls regarding the discharge of wastes, including produced
waters and other oil and natural gas wastes, into waters of the
United States, a term broadly defined. These controls have
become more stringent over the years, and it is probable that
additional restrictions will be imposed in the future. Permits
must be obtained to discharge pollutants into federal waters.
The CWA provides for civil, criminal and administrative
penalties for unauthorized discharges of pollutants and of oil
and hazardous substances. It imposes substantial potential
liability for the costs of removal or remediation associated
with discharges of oil or hazardous substances. State laws
governing discharges to water also provide varying civil,
criminal and administrative penalties and impose liabilities in
the case of a discharge of petroleum or its derivatives, or
other hazardous substances, into state waters. In addition, the
EPA has promulgated regulations that may require the Company to
obtain permits to discharge storm water runoff, including
discharges associated with construction activities. In the event
of an unauthorized discharge of wastes, the Company may be
liable for penalties and costs.
Endangered Species Act. The Endangered Species Act
(ESA) was established to provide a means to conserve
the ecosystems upon which endangered and threatened species
depend, to provide a program for conservation of these
endangered and threatened species, and to take the appropriate
steps that are necessary to bring any endangered or threatened
species to the point where measures provided for in the ESA are
no longer necessary. The Company conducts operations on federal
oil and gas leases that have species, such as sage grouse or
other sensitive species, that potentially could be listed as
threatened or endangered under the ESA. If a species is listed
as threatened or endangered, the U.S. Fish and Wildlife
Service must also designate the species critical habitat
and suitable habitat as part of the effort to ensure survival of
the species. A critical habitat or suitable habitat designation
could result in further material restrictions to federal land
use and may materially delay or prohibit land access for oil and
gas development. If the Company were to have a portion of its
leases designated as critical or suitable habitat, it may
adversely impact the value of the affected leases.
OSHA and other Regulations. The Company is subject to the
requirements of the federal Occupational Safety and Health Act
(OSHA) and comparable state statutes. The OSHA
hazard communication standard, the EPA community
right-to-know
regulations under Title III of CERCLA and similar state
15
statutes require us to organize and/or disclose information
about hazardous materials used or produced in its operations.
The Company believes that it is in substantial compliance with
current applicable environmental laws and regulations and that
continued compliance with existing requirements will not have a
material adverse impact on the Company.
Employees
As of December 31, 2005, the Company had 57 full time
employees, including officers.
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There are inherent limitations in all control systems, and
misstatements due to error or fraud that could seriously harm
our business may occur and not be detected. |
Our management, including our Chief Executive Officer and Chief
Financial Officer, does not expect that our internal controls
and disclosure controls will prevent all possible error and all
fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. In addition,
the design of a control system must reflect the fact that there
are resource constraints and the benefit of controls must be
relative to their costs. Because of the inherent limitations in
all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of
fraud, if any, in our Company have been detected. These inherent
limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur
because of simple error or mistake. Further, controls can be
circumvented by the individual acts of some persons or by
collusion of two or more persons. The design of any system of
controls is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that
any design will succeed in achieving its stated goals under all
potential future conditions. Over time, a control may be
inadequate because of changes in conditions or the degree of
compliance with the policies or procedures may deteriorate.
Because of inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be
detected. A failure of our controls and procedures to detect
error or fraud could seriously harm our business and results of
operations.
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Our reserve information represents estimates that may turn
out to be incorrect if the assumptions upon which these
estimates are based are inaccurate. Any material inaccuracies in
these reserve estimates or underlying assumptions will
materially affect the quantities and present value of our
reserves. |
There are numerous uncertainties inherent in estimating
quantities of proved reserves and projected future rates of
production and timing of development expenditures, including
many factors beyond the control of the Company. The reserve data
and standardized measures set forth herein represent only
estimates. Reserve engineering is a subjective process of
estimating underground accumulations of oil and gas that cannot
be measured in an exact way and the accuracy of any reserve
estimate is a function of the quality of available data and of
engineering and geological interpretation and judgment. As a
result, estimates of different engineers often vary. In
addition, results of drilling, testing and production subsequent
to the date of an estimate may justify revision of such
estimates. Accordingly, reserve estimates are often different
from the quantities of oil and gas that are ultimately
recovered. Further, the estimated future net revenues from
proved reserves and the present value thereof are based upon
certain assumptions, including geologic success, prices, future
production levels and costs that may not prove correct over
time. Predictions of future production levels are subject to
great uncertainty, and the meaningfulness of such estimates is
highly dependent upon the accuracy of the assumptions upon which
they are based. Historically, oil and gas prices have fluctuated
widely.
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Competitive industry conditions may negatively affect our
ability to conduct operations. |
The Company competes with numerous other companies in virtually
all facets of its business. The competitors in development,
exploration, acquisitions and production include major
integrated oil and gas companies as well as numerous
independents, including many that have significantly greater
resources.
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Therefore, competitors may be able to pay more for desirable
leases and evaluate, bid for and purchase a greater number of
properties or prospects than the financial or personnel
resources of the Company permit. The ability of the Company to
increase reserves in the future will be dependent on its ability
to select and acquire suitable prospects for future exploration
and development.
Factors that affect our ability to compete in the marketplace
include:
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our access to the capital necessary to drill wells and acquire
properties; |
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our ability to acquire and analyze seismic, geological and other
information relating to a property; |
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our ability to retain the personnel necessary to properly
evaluate seismic and other information relating to a
property; and |
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the location of, and our ability to access platforms, pipelines
and other facilities used to produce and transport oil and gas
production; |
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Factors beyond our control affect our ability to market
production and our financial results. |
The ability to market oil and natural gas depends on numerous
factors beyond the Companys control. These factors include:
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the extent of domestic production and imports of oil and natural
gas; |
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the availability of pipeline capacity; |
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the effects of inclement weather; |
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the demand for oil and natural gas by utilities and other end
users; |
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the availability of alternative fuel sources; |
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the proximity of natural gas production to natural gas pipelines; |
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state and federal regulations of oil and natural gas
marketing; and |
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federal regulation of natural gas sold or transported in
interstate commerce. |
Because of these factors, the Company may be unable to market
all of the oil and natural gas that it produces, including oil
and natural gas that may be produced from the Bohai Bay
properties in China. In addition, the Company may be unable to
obtain favorable prices for the oil and natural gas it produces.
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We may experience a temporary decline in revenues if we
lose one of our significant customers. |
In 2005, the Company had three significant customers, CNOOC,
Occidental Energy Marketing, Inc. and Sempra Energy Trading,
that individually accounted for 10% or more of the
Companys total natural gas and oil sales. To the extent
these or any other significant customer reduces the volume of
its oil or gas purchases from us, we could experience a
temporary interruption in sales of, or a lower price for, our
oil and natural gas.
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A decrease in oil and gas prices may adversely affect our
results of operations and financial condition. |
The Companys revenues are determined, to a large degree,
by prevailing natural gas prices for production situated in the
Rocky Mountain Region of the United States, specifically,
southwest Wyoming, as well as prevailing prices for crude oil
produced in the Bohai Bay region of China. Energy commodity
prices in general, and the Companys regional prices in
particular, have been highly volatile in the past, and such high
levels of volatility are expected to continue in the future. The
Company cannot accurately predict or control the market prices
that it receives for the sale of its natural gas, condensate, or
oil production.
Prices for oil and gas are subject to large fluctuations in
response to relatively minor changes in the supply of and demand
for oil and gas, market uncertainty and a variety of additional
factors beyond the Companys control. These factors include
but are not limited to weather conditions in the United States,
the condition of the United States economy, the actions of the
Organization of Petroleum Exporting Countries, governmental
17
regulation, political stability in the Middle East and
elsewhere, the foreign supply of oil and gas, the price of
foreign oil and gas imports and the availability of alternate
fuel sources and transportation interruption. Any substantial
and extended decline in the price of oil or gas could have an
adverse effect on the carrying value of the Companys
proved reserves, borrowing capacity, the Companys ability
to obtain additional capital, and the Companys revenues,
profitability and cash flows from operations.
Volatile oil and gas prices make it difficult to estimate the
value of producing properties for acquisition and divestiture
and often cause disruption in the market for oil and gas
producing properties, as buyers and sellers have difficulty
agreeing on such value. Price volatility also makes it difficult
to budget for and project the return on acquisitions and
development and exploitation projects.
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A price decrease may more adversely affect the price
received for the Companys Wyoming production than
production in other U.S. regions. |
The price of natural gas in the southwest Wyoming region is
critical to the Companys business. The market price for
this natural gas differs from the market indices for natural gas
in the Gulf Coast region of the United States due potentially to
insufficient pipeline capacity and/or low demand in the summer
months for natural gas in the Rocky Mountain region of the
United States. Therefore, a price decrease may more adversely
affect the price received for the Companys Wyoming
production than production in the other U.S. regions. There
have been, from time to time, numerous proposed pipeline
projects, including the Rockies Express Pipeline, that have been
announced to transport Rockies and Wyoming natural gas
production to markets. There can be no assurance that such
infrastructure will be built or that if built, it will prevent
large basis differentials from occurring in the future.
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Compliance with environmental and other government
regulations could be costly and could negatively impact
production. |
The Companys operations are subject to numerous laws and
regulations governing the discharge of materials into the
environment or otherwise relating to environmental protection.
These laws and regulations may:
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require that the Company acquire permits before commencing
drilling; |
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restrict the substances that can be released into the
environment in connection with drilling and production
activities; |
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limit or prohibit drilling activities on protected areas such as
wetlands or wilderness areas; |
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require remedial measures to mitigate pollution from former
operations, such as plugging abandoned wells; and |
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require governmental approval of the overall development plan
prior to the start of development of fields in China. |
Under these laws and regulations, the Company could be liable
for personal injury and
clean-up costs and
other environmental and property damages, as well as
administrative, civil and criminal penalties. The Company
maintains limited insurance coverage for sudden and accidental
environmental damages, but does not maintain insurance coverage
for the full potential liability that could be caused by sudden
and accidental environmental damages. Accordingly, the Company
may be subject to liability or may be required to cease
production from properties in the event of environmental damages.
A significant percentage of the Companys United States
operations are conducted on federal lands. These operations are
subject to a variety of
on-site security
regulations as well as other permits and authorizations issued
by the BLM, the Wyoming Department of Environmental Quality and
other agencies. A portion of the Companys acreage is
affected by winter lease stipulations that prohibit exploration,
drilling and completing activities generally from
November 15th to
April 30th,
but allow production activities all year round. To drill wells
in Wyoming, the Company is required to file an Application for
Permit to Drill with the WOGCC. Drilling on acreage controlled
by the federal government requires the filing of a similar
application
18
with the BLM. These permitting requirements may adversely affect
the Companys ability to complete its drilling program at
the cost and in the time period currently anticipated. On
large-scale projects, lessees may be required to perform an EIS
to assess the environmental impact of potential development,
which can delay project implementation and/or result in the
imposition of environmental restrictions that could have a
material impact on cost or scope.
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We may not be able to replace our reserves or generate
cash flows if we are unable to raise capital. We will be
required to make substantial capital expenditures to develop our
existing reserves and to discover new oil and gas
reserves. |
The Companys ability to continue exploration and
development of its properties and to replace reserves may be
dependent upon its ability to continue to raise significant
additional financing, including debt financing that may be
significant, or obtain some other arrangements with industry
partners in lieu of raising financing. Any arrangements that may
be entered into could be expensive to the Company. There can be
no assurance that the Company will be able to raise additional
capital in light of factors such as the market demand for its
securities, the state of financial markets for independent oil
and gas companies (including the markets for debt), oil and gas
prices and general market conditions. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and
Capital Resources for a discussion of the Companys
capital budget.
The Company expects to continue using its bank credit facility
to borrow funds to supplement its available cash flow. The
amount the Company may borrow under the credit facility may not
exceed a borrowing base determined by the lenders based on their
projections of the Companys future production, future
production costs and taxes, commodity prices and other factors.
The Company cannot control the assumptions the lenders use to
calculate the borrowing base. The lenders may, without the
Companys consent, adjust the borrowing base at any time.
If the Companys borrowings under the credit facility
exceed the borrowing base, the lenders may require that the
Company repay the excess. If this were to occur, the Company may
have to sell assets or seek financing from other sources. The
Company can make no assurances that it would be successful in
selling assets or arranging substitute financing. For a
description of the bank credit facility and its principal terms
and conditions, see Managements Discussion and
Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources.
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The Companys operations may be interrupted by severe
weather, particularly in the Rocky Mountain region. |
The Companys operations are conducted principally in the
Rocky Mountain region of the United States. The weather in this
area can be extreme and can cause interruption in the
Companys exploration and production operations. Moreover,
especially severe weather can result in damage to facilities
entailing longer operational interruptions and significant
capital investment. Likewise, the Companys Rocky Mountain
operations are subject to disruption from winter storms and
severe cold, which can limit operations involving fluids and
impair access to the Companys facilities. A portion of the
Companys acreage is affected by winter lease stipulations
that restrict the period of time during which operations may be
conducted on the leases. The Companys leases that are
affected by the winter stipulations prohibit drilling and
completing activities from
November 15th to
April 30th,
but allow production activities all year round.
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Our focus on exploration projects increases the risks
inherent in our oil and gas activities. |
The Company has historically invested a significant portion of
its capital budget in drilling exploratory wells in search of
unproved oil and gas reserves. The Company cannot be certain
that the exploratory wells it drills will be productive or that
it will recover all or any portion of its investments. In order
to increase the chances for exploratory success, the Company
often invests in seismic or other geoscience data to assist it
in identifying potential drilling objectives. Additionally, the
cost of drilling, completing and testing exploratory wells is
often uncertain at the time of the Companys initial
investment. Depending on complications encountered while
drilling, the final cost of the well may significantly exceed
that which the Company originally estimated. The Company uses
the full cost method of accounting for exploration and
development
19
activities as defined by the SEC. Under this method of
accounting, the costs of unsuccessful, as well as successful,
exploration and development activities are capitalized as
properties and equipment and are then depleted using the unit of
production method based on the Companys proved reserves.
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Unless we are able to replace reserves which we have
produced, our cash flows and production will decrease over
time. |
The Companys future success may depend on its ability to
find, develop and acquire additional oil and gas reserves that
are economically recoverable. Without successful exploration,
development or acquisition activities, the Companys
reserves and production will decline. The Company can give no
assurance that it will be able to find, develop or acquire
additional reserves at acceptable costs.
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We are exposed to operating hazards and uninsured risks
that could adversely impact our results of operations and cash
flow. |
The oil and gas business involves a variety of operating risks,
including fire, explosion, pipe failure, casing collapse,
abnormally pressured formations, and environmental hazards such
as oil spills, natural gas leaks, and discharges of toxic gases.
The occurrence of any of these events with respect to any
property operated or owned (in whole or in part) by the Company
could have a material adverse impact on the Company. The Company
and the operators of its properties maintain insurance in
accordance with customary industry practices and in amounts that
management believes to be reasonable. However, insurance
coverage is not always economically feasible and is not obtained
to cover all types of operational risks. The occurrence of a
significant event that is not fully insured could have a
material adverse effect on the Companys financial
condition.
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There are risks associated with our drilling activity that
could impact the results of our operations. |
The Companys oil and gas operations are subject to all of
the risks and hazards typically associated with drilling for,
and production and transportation of, oil and gas. These risks
include the necessity of spending large amounts of money for
identification and acquisition of properties and for drilling
and completion of wells. In the drilling of exploratory or
development wells, failures and losses may occur before any
deposits of oil or gas are found. The presence of unanticipated
pressure or irregularities in formations, blow-outs or accidents
may cause such activity to be unsuccessful, resulting in a loss
of the Companys investment in such activity. If oil or gas
is encountered, there can be no assurance that it can be
produced in quantities sufficient to justify the cost of
continuing such operations or that it can be marketed
satisfactorily.
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Our decision to drill a prospect is subject to a number of
factors and we may decide to alter our drilling schedule or not
drill at all. |
This report includes certain descriptions of the Companys
future drilling plans with respect to its prospects. A prospect
is an area which the Companys geoscientists have
identified what they believe, based on available seismic and
geological information, to be indications of hydrocarbons. The
Companys prospects are in various stages of review.
Whether or not the Company ultimately drills a prospect may
depend on the following factors:
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receipt of additional seismic data or reprocessing of existing
data; |
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material changes in oil or gas prices; |
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the costs and availability of drilling equipment; |
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success or failure of wells drilled in similar formations or
which would use the same production facilities; |
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availability and cost of capital; |
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changes in the estimates of costs to drill or complete wells; |
20
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the approval of partners to participate in the drilling or, in
the case of CNOOC, approval of expenditures for budget purposes; |
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the Companys ability to attract other industry partners to
acquire a portion of the working interest to reduce exposure to
costs and drilling risks; |
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decisions of the Companys joint working interest
owners; and |
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the BLMs interpretation of an EIS and the results of the
permitting process. |
The Company will continue to gather data about its prospects,
and it is possible that additional information may cause the
Company to alter its drilling schedule or determine that a
prospect should not be pursued at all.
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If oil and gas prices decrease, we may be required to take
writedowns of the carrying value of our oil and gas
properties. |
The Company follows the full cost method of accounting for its
oil and gas properties. A separate cost center is maintained for
expenditures applicable to each country in which the Company
conducts exploration and/or production activities. Under such
method, the net book value of properties on a country-by-country
basis, less related deferred income taxes, may not exceed a
calculated ceiling. The ceiling is the estimated
after tax future net revenues from proved oil and gas
properties, discounted at 10% per year. In calculating
discounted future net revenues, oil and gas prices in effect at
the time of the calculation are held constant, except for
changes which are fixed and determinable by existing contracts.
The net book value is compared to the ceiling on a quarterly
basis. The excess, if any, of the net book value above the
ceiling is required to be written off as an expense. Under SEC
full cost accounting rules, any write-off recorded may not be
reversed even if higher oil and gas prices increase the ceiling
applicable to future periods. Future price decreases could
result in reductions in the carrying value of such assets and an
equivalent charge to earnings.
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We are not the operator, and have limited influence over
the operations, of our Bohai Bay properties. |
Because the Company is not the operator and holds a minority
interest, it cannot control the pace of exploration or
development in the Bohai Bay properties or major decisions
affecting the drilling of wells or the plan for development and
production, although contract provisions give the Company
certain consent rights in some matters. Kerr-McGees
influence, as operator, over these matters can affect the pace
at which the Company spends money on this project. If Kerr-McGee
were to shift its focus from this project, the pace of
development could slow down or stop altogether. On the other
hand, if Kerr-McGee were to decide to accelerate development of
this project, the Company could be required to fund its share of
costs at a faster pace than anticipated, which might exceed its
ability to raise funds. If, because of this, the Company were
unable to pay its share of costs, it could lose or be forced to
sell its interest in the Bohai Bay properties or be forced to
not participate in the exploration or development of specific
prospects or fields, potentially diminishing the value of its
Bohai Bay assets.
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Political, economic or legal factors associated with our
ownership of properties in China could impact the results of our
operations. |
Ownership of property interests and production operations in
areas outside the United States are subject to various risks
inherent in foreign operations. These risks may include:
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loss of revenue, property and equipment as a result of
expropriation, nationalization, war or insurrections; |
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increases in taxes and governmental royalties; |
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renegotiation of contracts with governmental entities and
quasi-governmental agencies; |
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change in laws and policies governing operations of foreign
based companies; |
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labor problems; |
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other uncertainties arising out of foreign government
sovereignty over its international operations; and |
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currency restrictions and exchange rate fluctuations. |
Tensions between China and its neighbors or various western
countries, regional political or military disruption, changes in
internal Chinese leadership, social or political disruptions
within China, a downturn in the Chinese economy, or a change in
Chinese laws or attitudes toward foreign investment could make
China an unfavorable environment in which to invest. Although
all the foreign interest owners in the Bohai Bay properties have
the right to sell production in the world market, the regulation
of the concession by China, and the likely participation by
CNOOC as a large working interest owner, make Chinese internal
and external affairs important to the investment in the Bohai
Bay property. If any of these negative events were to occur, it
could lead to a decision that there is an intolerable level of
risk in continuing with the investment, or the Company may be
unable to attract equity investors or lenders, or satisfy any
then existing lenders.
In the event of a dispute arising from foreign operations, the
Company may be subject to the exclusive jurisdiction of foreign
courts or may not be successful in subjecting foreign persons to
the jurisdiction of courts in the United States or a potentially
more favorable country.
In addition, the Companys China PSC terminates after
15 years of production, unless extended as provided for,
which may be prior to the end of the productive life of the
fields.
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Our operations in China have special operational risks
that may negatively affect the value of those assets. |
Offshore operations, such as the Companys Bohai Bay
properties, are subject to a variety of operating risks specific
to the marine environment, such as capsizing, collisions and/or
loss from storms or other adverse weather conditions. These
conditions can cause substantial damage to facilities and
interrupt production. As a result, the Company could incur
substantial liabilities that could result in financial losses or
failures. China has many regulations similar to those addressed
in Item 1, Environmental Regulation, that may expose the
Company to liability. Offshore projects, like the China field
developments, are typically large, complex construction projects
that are potentially subject to delays which may cause delays in
achieving production and profitability.
Forward-Looking Statements
This report contains or incorporates by reference
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended,
Section 21E of the Securities Exchange Act of 1934 and the
Private Securities Litigation Reform Act of 1995. All statements
other than statements of historical facts included in this
document, including without limitation, statements in
Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations regarding our
financial position, estimated quantities and net present values
of reserves, business strategy, plans and objectives of the
Companys management for future operations, covenant
compliance and those statements preceded by, followed by or that
otherwise include the words believe,
expects, anticipates,
intends, estimates,
projects, target, goal,
plans, objective, should, or
similar expressions or variations on such expressions are
forward-looking
statements. The Company can give no assurances that the
assumptions upon which such
forward-looking
statements are based will prove to be correct.
Forward-looking statements include statements regarding:
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our oil and gas reserve quantities, and the discounted present
value of those reserves; |
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the amount and nature of our capital expenditures; |
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drilling of wells; |
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the timing and amount of future production and operating costs; |
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business strategies and plans of management; and |
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prospect development and property acquisitions. |
Some of the risks which could affect our future results and
could cause results to differ materially from those expressed in
our forward-looking statements include:
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general economic conditions; |
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the volatility of oil and natural gas prices; |
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the uncertainty of estimates of oil and natural gas reserves; |
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the impact of competition; |
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the availability and cost of seismic, drilling and other
equipment; |
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operating hazards inherent in the explorations for and
production of oil and natural gas; |
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difficulties encountered during the explorations for and
production of oil and natural gas; |
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difficulties encountered in delivering oil and natural gas to
commercial markets; |
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changes in customer demand and producers supply; |
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the uncertainty of our ability to attract capital; |
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compliance with, or the effect of changes in, the extensive
governmental regulations regarding the oil and natural gas
business; |
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actions of operators of our oil and gas properties; and |
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weather conditions. |
The information contained in this report, including the
information set forth under the heading Risk
Factors, identifies additional factors that could affect
our operating results and performance. We urge you to carefully
consider these factors and the other cautionary statements in
this report. Our forward-looking statements speak only as of the
date made, and we have no obligation to update these
forward-looking statements.
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Item 1B. |
Unresolved Staff Comments. |
None
Location and Characteristics
The Company is dependent on oil and gas leases in Wyoming and
two petroleum contracts in China in order to explore for and
produce oil and gas. The leases in Wyoming are primarily federal
leases with 10-year
lease terms until establishment of production. Production on the
lease extends the lease terms until cessation of that
production. There are approximately 93,865 gross
(42,298 net) acres currently held by production in Wyoming.
The China petroleum contracts are for a maximum of 30 years
and are divided into 3 periods; exploration, development and
production. The exploration period is for approximately
7 years and work is to be performed and expenditures are to
be incurred to delineate the extent and amount of hydrocarbons,
if any, for each block. The development period occurs when a
field is discovered and commences on the date of approval of the
Ministry of Energy. There is no limit on the time allowed to
develop a field other than the combined maximum of
30 years. The production period of any oil and gas field in
a block is a period of 15 consecutive years beginning on the
date of commencement of commercial production from the field,
unless extended.
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Green River Basin, Wyoming |
As of December 31, 2005, the Company owned developed oil
and gas leases totaling 12,552 gross (5,284 net) acres
in the Green River Basin of Sublette County, Wyoming which
represents 99.7% of the Companys total domestic developed
net acreage. The Company owns undeveloped oil and gas leases
totaling 135,455 gross (73,404 net) acres in the Green
River Basin of Sublette County, Wyoming which represents 74.9%
of the Companys total domestic undeveloped net acreage.
The Companys acreage in the Green River Basin primarily
covers the Pinedale Anticline with several other undeveloped
acreage blocks north and west of the Pinedale Anticline as well
as acreage in the Jonah Field. Holding costs of leases in
Wyoming not held by production were approximately $122,530 for
the fiscal year ended December 31, 2005. The primary target
on the Companys Wyoming acreage is the tight gas sands of
the upper Cretaceous Lance Pool formation.
Exploratory Wells. During the year-ended
December 31, 2005, the Company participated in the drilling
and completion of a total of 18 gross (8.62 net)
productive exploratory wells on the Green River Basin
properties. At December 31, 2005, there were 11 gross
(4.28 net) additional exploratory wells that commenced
during the year that were either still drilling, had drilling
operations suspended or are in various stages of completion.
Development Wells. During the year-ended
December 31, 2005, the Company participated in the drilling
and completion of 60 gross (23.68 net) productive
development wells in the Pinedale Field area. At
December 31, 2005, there were 19 gross (6.28 net)
additional development wells that commenced during 2005 that
were either still drilling, had drilling operations suspended or
are in various stages of completion. Additionally, 2 gross
(1.28 net) wells in Jonah field had drilling operations
commenced during 2005 that were either still drilling, had
drilling operations suspended or are in various stages of
completion. For purposes of this report, development wells are
wells identified as proven, undeveloped locations by the
Companys independent petroleum engineering firm
Netherland, Sewell & Associates, Inc. at the previous
year-end reserve evaluation. When drilled, these locations will
be counted as development wells.
Block 04/36: The Petroleum Sharing Contract
(PSC) covering this block became effective
October 1, 1994. Negotiations with the Chinese government
in 2005 resulted in an extension of the third exploration term
to September 2007. As the PSC now stands, the exploration period
will end at the end of September 2007. Barring another
extension, at that time, all acreage not under appraisal,
development or production must be relinquished. The Company
holds an 18.18% exploration interest in the exploration portion
of the block and an 8.91% working interest in the CFD 11-1 and
11-2 and the CFD 11-3 and 11-5 producing oil fields. This block
covers 413,623 gross (75,197 net) acres under the
exploration phase and 40,377 gross (3,598 net) acres
under development, or approximately 66% of the Companys
total gross international acreage.
Block 05/36: The PSC covering this block became effective
March 1, 1996. Negotiations with CNOOC at the end of 2005
resulted in a two year extension of the third exploration term
to February 28, 2008 when, barring an extension, all
acreage not under appraisal, development or production must be
relinquished. The extension granted by CNOOC must be ratified by
the Chinese Government which we anticipate will happen during
2006. The Company holds a 23.08% exploration interest in this
block which covers 218,079 gross (50,376 net) acres
under the exploration phase and 15,221 gross
(1,119 net) acres under development. This acreage
constitutes approximately 34% of the Companys total gross
international acreage.
Exploration/ Appraisal Activity: In 2005, the Company
participated in drilling 1 exploration well (0.18 net)
which failed to find commercial quantities of oil. The primary
target formations on the Blocks are the Upper and Lower
Minghuazhen, Guantao and Dongying formations.
Development Activity: In July 2004, the Company started
production at the CFD 11-1 and 11-2 fields on the 04/36 Block.
Production well drilling at these fields continued through 2005
and will continue into the first half of 2006. The Company has
participated in drilling a total of 47 production wells at the
CFD 11-1 and CFD 11-2 fields. In July 2005, the Company
commenced production at the CFD 11-3 and 11-5 fields on the
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04/36 Block. The Company has participated in drilling a total of
6 production wells at the CFD 11-3 and CFD 11-5 fields. The four
field production complex currently consists of 53 producing
wells, three production platforms and an anchored FPSO vessel.
Upon declaration of commerciality of a field or area by CNOOC,
the Companys share of all expenses within that area is
decreased by 51%, with the participation by CNOOC. For example,
the Companys 18.18% exploration interest is reduced to an
8.91% working interest in the fields on production in the 04/36
Block. Upon initiation of production, the sharing of production
is determined by the language of the PSC which states that for
each individual field: 1) a Chinese National Industrial Tax
and Royalty are applied to 100% of the gross volumes of oil,
2) Lease Operating Expenses (LOE) are then
taken out of the remainder oil and 3) after these
deductions, 62.5% of the remaining production stream is
dedicated to Exploration and Development Cost Recovery for the
participants. The Exploration Cost Recovery shall be recovered
without interest, while the Development Cost Recovery shall be
calculated with a fixed annual interest rate of 9% uplift, and
4) the remaining 37.5% of production goes to the
remainder oil category which is divided into a
share oil for CNOOC and an allocable remainder
oil for the contractors determined by a sliding scale
(determined by yearly production), X factor. Project
profit is subject to Chinese corporate tax.
There are three new fields, the CFD 11-6, CFD 12-1 and CFD 12-1S
that are currently being developed. The CFD 11-6 field area is
on the 04/36 Block. The CFD 12-1 and CFD 12-1S field areas are
on the 05/36 Block. These development areas are located in close
proximity and thus will be developed as a single unit within the
Blocks. The development areas have been unitized because the
fields are within both the 04/36 and 05/36 Blocks where
different parties have different levels of interest. The unit
allows for an equitable distribution of production known to
exist within the known areas of the fields to the various
parties. On May 27, 2005, a Unitization Agreement was
signed that assigned the Company a 7.82% working interest in the
combined field unit.
On October 16, 2003, a 15 year contract which provides
for extension for up to an additional 10 years, was signed
by the operator to lease the FPSO. The Company ratified the
contract for its net share. The FPSO is a 110,000
150,000 dead weight tons, double-hull FPSO with a
900,000 1,100,000 barrels storage capacity,
with single point mooring and a processing plant capable of
processing 60,000 barrels oil per day (expandable to
80,000 barrels oil per day). The FPSO service agreement
calls for a day rate lease payment and a sliding scale per
barrel payment that decreases based on cumulative barrels
processed.
The Company owns 26,868 gross (24,610 net) acres in
Pennsylvania, which represents 25.1% of the Companys total
domestic undeveloped net acreage. Holding costs of leases in
Pennsylvania not held by production were approximately $247,000
for the fiscal year ended December 31, 2005.
Exploratory Wells. During the year ended
December 31, 2005, the Company participated in the drilling
and completion of a total of 1 gross (1.0 net)
successful exploratory well on the Pennsylvania properties.
Based on the test results, Ultra is preparing to lay a pipeline
to connect this well to sales. It is anticipated that this
connection should be completed during the first half of 2006.
During the year ended, December 31, 2005, the Company
divested itself of a portion of its Texas properties. The
Company sold one gross (0.66 net) operated well along with
the associated 640 gross (369 net) acres. The Company
is currently attempting to divest itself of its remaining
interest in Texas which consist of 1 gross (0.12 net)
non-operated producing well, plus the associated 80 gross
(14.0 net) acres. This represents 0.3% of the
Companys total developed net acreage.
25
Oil and Gas Reserves
The following table sets forth the Companys quantities of
domestic proved reserves, for the years-ended December 31,
2005, 2004 and 2003 as estimated by independent petroleum
engineers Netherland, Sewell & Associates, Inc. The
table summarizes the Companys domestic proved reserves,
the estimated future net revenues from these reserves and the
standardized measure of discounted future net cash flows
attributable thereto at December 31, 2005, 2004 and 2003.
In accordance with Ultras three-year planning and
budgeting cycle, proved undeveloped reserves included in this
table include only economic locations that are forecast to be on
production before January 1, 2009. Proved undeveloped
reserves represent 66.6% of total proved reserves.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Proved Undeveloped Reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas (MMcf)
|
|
|
1,264,632 |
|
|
|
899,315 |
|
|
|
664,295 |
|
|
Oil (MBbl)
|
|
|
10,117 |
|
|
|
7,195 |
|
|
|
5,314 |
|
Proved Developed Reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas (MMcf)
|
|
|
635,591 |
|
|
|
514,686 |
|
|
|
359,072 |
|
|
Oil (MBbl)
|
|
|
5,087 |
|
|
|
4,195 |
|
|
|
3,028 |
|
Total Proved Reserves (MMcfe)
|
|
|
1,991,447 |
|
|
|
1,482,341 |
|
|
|
1,073,419 |
|
Estimated future net cash flows, before income tax
|
|
$ |
12,067,267 |
|
|
$ |
5,889,630 |
|
|
$ |
4,456,478 |
|
Standardized measure of discounted future net cash flows, before
income taxes(1)
|
|
$ |
5,311,312 |
|
|
$ |
2,438,837 |
|
|
$ |
1,784,314 |
|
Future income tax
|
|
$ |
1,809,228 |
|
|
$ |
823,372 |
|
|
$ |
648,801 |
|
Standardized measure of discounted future net cash flows, after
income tax
|
|
$ |
3,502,084 |
|
|
$ |
1,615,465 |
|
|
$ |
1,135,513 |
|
|
|
(1) |
Management believes that the presentation of the standardized
measure of discounted future net cash flows, before income
taxes, of estimated proved reserves, discounted at 10% per
annum, may be considered a non-GAAP financial measure as defined
in Item 10(e) of Regulation S-K, therefore the Company has
included this reconciliation of the measure to the most directly
comparable GAAP financial measure (Standardized measure of
discounted future net cash flows, after income taxes).
Management believes that the presentation of the standardized
measure of future net cash flows before income taxes, provides
useful information to investors because it is widely used by
professional analysts and sophisticated investors in evaluating
oil and gas companies. Because many factors that are unique to
each individual company may impact the amount of future income
taxes to be paid, the use of the pre-tax measure provides
greater comparability when evaluating companies. It is relevant
and useful to investors for evaluating the relative monetary
significance of the Companys oil and natural gas
properties. Further, investors may utilize the measure as a
basis for comparison of the relative size and value of the
Companys reserves to other companies. The standardized
measure of discounted future net cash flows, before income
taxes, is not a measure of financial or operating performance
under GAAP, nor is it intended to represent the current market
value of the estimated oil and natural gas reserves owned by the
Company. Standardized measure of discounted future net cash
flows, before income taxes, should not be considered in
isolation or as a substitute for the standardized measure of
discounted future net cash flows as defined under GAAP. |
26
The following table sets forth the Companys quantities of
proved reserves in China, for the year-ending December 31,
2005, as estimated by independent petroleum engineers Ryder
Scott Company. In accordance with the Companys new
field reserve booking policy, proved reserves were booked
after production commenced. The table summarizes the
Companys proved reserves in China, the estimated future
net revenues from these reserves and the standardized measure of
discounted future net cash flows attributable thereto at
December 31, 2005. In accordance with Ultras
three-year planning and budgeting cycle, proved undeveloped
reserves included in this table include only economic locations
that are forecast to be on production before January 1,
2009. Proved undeveloped reserves represent 50.9% of total
proved reserves.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 |
|
|
| |
|
| |
|
|
|
|
(In thousands) |
Proved Undeveloped Reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas (MMcf)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil (MBbl)
|
|
|
2,577 |
|
|
|
3,231 |
|
|
|
|
|
Proved Developed Reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas (MMcf)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil (MBbl)
|
|
|
2,484 |
|
|
|
4,356 |
|
|
|
|
|
Total Proved Reserves (MMcfe)
|
|
|
30,366 |
|
|
|
45,526 |
|
|
|
|
|
Estimated future net cash flows, before income tax
|
|
$ |
166,931 |
|
|
$ |
137,762 |
|
|
$ |
|
|
Standardized measure of discounted future net cash flows, before
income taxes(1)
|
|
$ |
134,271 |
|
|
$ |
103,518 |
|
|
$ |
|
|
Future Income Tax
|
|
|
59,861 |
|
|
|
49,647 |
|
|
|
|
|
Standardized measure of discounted future net cash flows, after
income tax
|
|
$ |
74,410 |
|
|
$ |
53,871 |
|
|
$ |
|
|
|
|
(1) |
Management believes that the presentation of the standardized
measure of discounted future net cash flows, before income
taxes, of estimated proved reserves, discounted at 10% per
annum, may be considered a non-GAAP financial measure as defined
in Item 10(e) of Regulation S-K, therefore the Company has
included this reconciliation of the measure to the most directly
comparable GAAP financial measure (Standardized measure of
discounted future net cash flows, after income taxes).
Management believes that the presentation of the standardized
measure of future net cash flows, before income taxes, provides
useful information to investors because it is widely used by
professional analysts and sophisticated investors in evaluating
oil and gas companies. Because many factors that are unique to
each individual company may impact the amount of future income
taxes to be paid, the use of the pre-tax measure provides
greater comparability when evaluating companies. It is relevant
and useful to investors for evaluating the relative monetary
significance of the Companys oil and natural gas
properties. Further, investors may utilize the measure as a
basis for comparison of the relative size and value of the
Companys reserves to other companies. The standardized
measure of discounted future net cash flows, before income
taxes, is not a measure of financial or operating performance
under GAAP, nor is it intended to represent the current market
value of the estimated oil and natural gas reserves owned by the
Company. Standardized measure of discounted future net cash
flows, before income taxes, should not be considered in
isolation or as a substitute for the standardized measure of
discounted future net cash flows as defined under GAAP. |
27
The following table sets forth the Companys quantities of
total proved reserves both domestically and in China, for the
years-ended December 31, 2005, 2004 and 2003 as estimated
by independent petroleum engineers Netherland, Sewell &
Associates, Inc. and Ryder Scott Company. The table summarizes
the Companys total proved reserves, the estimated future
net revenues from these reserves and the standardized measure of
discounted future net cash flows attributable thereto at
December 31, 2005, 2004 and 2003. In accordance with
Ultras three-year planning and budgeting cycle, proved
undeveloped reserves included in this table include only
economic locations that are forecast to be on production before
January 1, 2009. Proved undeveloped reserves represent
66.3% of total proved reserves.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Proved Undeveloped Reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas (MMcf)
|
|
|
1,264,632 |
|
|
|
899,315 |
|
|
|
664,295 |
|
|
Oil (MBbl)
|
|
|
12,694 |
|
|
|
10,426 |
|
|
|
5,314 |
|
Proved Developed Reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas (MMcf)
|
|
|
635,591 |
|
|
|
514,686 |
|
|
|
359,072 |
|
|
Oil (MBbl)
|
|
|
7,571 |
|
|
|
8,551 |
|
|
|
3,028 |
|
Total Proved Reserves (MMcfe)
|
|
|
2,021,813 |
|
|
|
1,527,867 |
|
|
|
1,073,419 |
|
Estimated future net cash flows, before income tax
|
|
$ |
12,234,198 |
|
|
$ |
6,027,392 |
|
|
$ |
4,456,478 |
|
Standardized measure of discounted future net cash flows, before
income taxes(1)
|
|
$ |
5,445,583 |
|
|
$ |
2,542,355 |
|
|
$ |
1,784,314 |
|
Future income tax
|
|
$ |
1,869,089 |
|
|
$ |
873,019 |
|
|
$ |
648,801 |
|
Standardized measure of discounted future net cash flows, after
income tax
|
|
$ |
3,576,494 |
|
|
$ |
1,669,336 |
|
|
$ |
1,135,513 |
|
|
|
(1) |
Management believes that the presentation of the standardized
measure of discounted future net cash flows, before income
taxes, of estimated proved reserves, discounted at 10% per
annum, may be considered a non-GAAP financial measure as defined
in Item 10(e) of Regulation S-K, therefore the Company has
included this reconciliation of the measure to the most directly
comparable GAAP financial measure (Standardized measure of
discounted future net cash flows, after income taxes).
Management believes that the presentation of the standardized
measure of future net cash flows, before income taxes, provides
useful information to investors because it is widely used by
professional analysts and sophisticated investors in evaluating
oil and gas companies. Because many factors that are unique to
each individual company may impact the amount of future income
taxes to be paid, the use of the pre-tax measure provides
greater comparability when evaluating companies. It is relevant
and useful to investors for evaluating the relative monetary
significance of the Companys oil and natural gas
properties. Further, investors may utilize the measure as a
basis for comparison of the relative size and value of the
Companys reserves to other companies. The standardized
measure of discounted future net cash flows, before income
taxes, is not a measure of financial or operating performance
under GAAP, nor is it intended to represent the current market
value of the estimated oil and natural gas reserves owned by the
Company. Standardized measure of discounted future net cash
flows, before income taxes, should not be considered in
isolation or as a substitute for the standardized measure of
discounted future net cash flows as defined under GAAP. |
28
Production Volumes, Average Sales Prices and Average
Production Costs
The following table sets forth certain information regarding the
production volumes and average sales prices received for and
average production costs associated with the Companys sale
of oil and natural gas for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas (Mcf)
|
|
|
61,722,349 |
|
|
|
43,667,384 |
|
|
|
27,621,759 |
|
|
|
Oil (Bbl) US
|
|
|
464,330 |
|
|
|
349,673 |
|
|
|
211,591 |
|
|
|
Oil (Bbl) China
|
|
|
1,556,280 |
|
|
|
624,560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (Mcfe)
|
|
|
73,846,009 |
|
|
|
49,512,782 |
|
|
|
28,891,305 |
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural Gas sales
|
|
$ |
422,091,034 |
|
|
$ |
224,207,694 |
|
|
$ |
114,840,558 |
|
|
|
Oil sales US
|
|
|
26,639,931 |
|
|
|
14,659,219 |
|
|
|
6,740,539 |
|
|
|
Oil sales China
|
|
|
67,762,036 |
|
|
|
20,179,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
|
516,493,001 |
|
|
|
259,046,447 |
|
|
|
121,581,097 |
|
Lease Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production costs US*
|
|
|
9,047,390 |
|
|
|
6,286,715 |
|
|
|
3,627,639 |
|
|
|
Production costs China*
|
|
|
7,352,000 |
|
|
|
2,286,000 |
|
|
|
|
|
|
|
Severance/production taxes WY
|
|
|
52,689,060 |
|
|
|
28,151,661 |
|
|
|
13,767,668 |
|
|
|
Severance/production taxes China
|
|
|
3,388,089 |
|
|
|
1,009,098 |
|
|
|
|
|
|
|
Gathering
|
|
|
17,125,147 |
|
|
|
13,135,809 |
|
|
|
7,828,372 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Lease Operating Expenses
|
|
$ |
89,601,686 |
|
|
$ |
50,869,283 |
|
|
$ |
25,223,679 |
|
Realized Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas ($/Mcf)
|
|
$ |
6.84 |
|
|
$ |
5.13 |
|
|
$ |
4.16 |
|
|
|
Oil ($/Bbl) US
|
|
$ |
57.37 |
|
|
$ |
41.92 |
|
|
$ |
31.86 |
|
|
|
Oil ($/Bbl) China
|
|
$ |
43.54 |
|
|
$ |
32.31 |
|
|
$ |
|
|
Operating Costs per Mcfe
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production costs Total
|
|
$ |
0.22 |
|
|
$ |
0.17 |
|
|
$ |
0.13 |
|
|
|
Severance/production taxes
|
|
$ |
0.76 |
|
|
$ |
0.59 |
|
|
$ |
0.48 |
|
|
|
Gathering
|
|
$ |
0.23 |
|
|
$ |
0.27 |
|
|
$ |
0.27 |
|
|
|
DD&A
|
|
$ |
0.79 |
|
|
$ |
0.61 |
|
|
$ |
0.56 |
|
|
|
Interest
|
|
$ |
0.04 |
|
|
$ |
0.08 |
|
|
$ |
0.10 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Costs per Mcfe
|
|
$ |
2.04 |
|
|
$ |
1.72 |
|
|
$ |
1.54 |
|
|
|
* |
Average production costs include lifting costs and remedial
workover expenses. |
29
Productive Wells
As of December 31, 2005, the Companys total gross and
net wells were as follows:
|
|
|
|
|
|
|
|
|
|
Productive Wells* |
|
Gross Wells | |
|
Net Wells | |
|
|
| |
|
| |
Domestic
|
|
|
|
|
|
|
|
|
|
Natural Gas and Condensate
|
|
|
332.00 |
|
|
|
140.84 |
|
China
|
|
|
|
|
|
|
|
|
|
China Oil
|
|
|
53.00 |
|
|
|
4.73 |
|
|
|
|
|
|
|
|
|
TOTAL
|
|
|
385.00 |
|
|
|
145.57 |
|
|
|
* |
Productive wells are producing wells plus shut-in wells the
Company deems capable of production. A gross well is a well in
which a working interest is owned. The number of net wells
represents the sum of fractional working interests the Company
owns in gross wells. |
Oil and Gas Acreage
As of December 31, 2005, the Company had total gross and
net developed and undeveloped oil and gas leasehold acres in the
United States as set forth below. The developed acreage is
stated on the basis of spacing units designated by state
regulatory authorities. The acreage and other additional
information concerning the Companys oil and gas operations
are presented in the following tables.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed Acres | |
|
Undeveloped Acres | |
|
|
| |
|
| |
|
|
Gross | |
|
Net | |
|
Gross | |
|
Net | |
|
|
| |
|
| |
|
| |
|
| |
Wyoming
|
|
|
12,552 |
|
|
|
5,284 |
|
|
|
135,455 |
|
|
|
73,404 |
|
Pennsylvania
|
|
|
|
|
|
|
|
|
|
|
26,868 |
|
|
|
24,610 |
|
Texas
|
|
|
80 |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All States
|
|
|
12,632 |
|
|
|
5,298 |
|
|
|
162,323 |
|
|
|
98,014 |
|
As of December 31, 2005, the Company had total gross and
net developed and undeveloped oil and gas leasehold acres in the
Bohai Bay, China as set forth below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed Acres | |
|
Undeveloped Acres | |
|
|
| |
|
| |
|
|
Gross | |
|
Net | |
|
Gross | |
|
Net | |
|
|
| |
|
| |
|
| |
|
| |
Block 04/36
|
|
|
40,377 |
|
|
|
3,598 |
|
|
|
413,623 |
|
|
|
75,197 |
|
Block 05/36
|
|
|
15,221 |
|
|
|
1,119 |
|
|
|
218,079 |
|
|
|
50,376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Bohai Acreage
|
|
|
55,598 |
|
|
|
4,717 |
|
|
|
631,702 |
|
|
|
125,573 |
|
30
Drilling Activities
For each of the three fiscal years ended December 31, 2005,
2004 and 2003, the number of gross and net wells drilled by the
Company was as follows:
|
|
|
Wyoming Green River Basin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
Gross | |
|
Net | |
|
Gross | |
|
Net | |
|
Gross | |
|
Net | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Development Wells
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Productive
|
|
|
60.00 |
|
|
|
23.68 |
|
|
|
34.00 |
|
|
|
14.48 |
|
|
|
24.00 |
|
|
|
6.88 |
|
|
Dry
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
60.00 |
|
|
|
23.68 |
|
|
|
34.00 |
|
|
|
14.48 |
|
|
|
24.00 |
|
|
|
6.88 |
|
At year end there were 21 gross (7.56 net) additional
development wells that were either drilling, had drilling
operations suspended or were in various stages of completion.
This includes wells in both the Pinedale and Jonah fields.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
Gross | |
|
Net | |
|
Gross | |
|
Net | |
|
Gross | |
|
Net | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Exploratory Wells
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Productive
|
|
|
18.00 |
|
|
|
8.62 |
|
|
|
32.00 |
|
|
|
14.00 |
|
|
|
24.00 |
|
|
|
9.86 |
|
|
Dry
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
1.00 |
|
|
|
0.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
18.00 |
|
|
|
8.62 |
|
|
|
32.00 |
|
|
|
14.00 |
|
|
|
25.00 |
|
|
|
10.18 |
|
At year end there were 11 gross (4.28 net) additional
exploratory wells that were either drilling, had drilling
operations suspended or were in various stages of completion.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
Gross | |
|
Net | |
|
Gross | |
|
Net | |
|
Gross | |
|
Net | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Exploratory Wells
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Productive
|
|
|
1.00 |
|
|
|
1.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
Dry
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1.00 |
|
|
|
1.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
Gross | |
|
Net | |
|
Gross | |
|
Net | |
|
Gross | |
|
Net | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Exploratory Wells
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Productive
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
Dry
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
1.00 |
|
|
|
0.73 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
1.00 |
|
|
|
0.73 |
|
|
|
0.00 |
|
|
|
0.00 |
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
Gross | |
|
Net | |
|
Gross | |
|
Net | |
|
Gross | |
|
Net | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Development Wells
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Productive
|
|
|
17.00 |
|
|
|
1.52 |
|
|
|
36.00 |
|
|
|
3.21 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
Dry
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
17.00 |
|
|
|
1.52 |
|
|
|
36.00 |
|
|
|
3.21 |
|
|
|
0.00 |
|
|
|
0.00 |
|
Exploratory Wells
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Productive and Successful Appraisal*
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
6.00 |
|
|
|
1.03 |
|
|
Dry
|
|
|
1.00 |
|
|
|
0.18 |
|
|
|
1.00 |
|
|
|
0.18 |
|
|
|
4.00 |
|
|
|
0.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1.00 |
|
|
|
0.18 |
|
|
|
1.00 |
|
|
|
0.18 |
|
|
|
10.00 |
|
|
|
1.69 |
|
|
|
* |
A successful appraisal well is a well that is drilled into a
formation shown to be productive of oil or gas by an earlier
well for the purpose of obtaining more information about the
reservoir. |
Item 3. Legal Proceedings.
The Company is currently involved in various routine disputes
and allegations incidental to its business operations. While it
is not possible to determine the ultimate disposition of these
matters, the Company believes that the resolution of all such
pending or threatened litigation is not likely to have a
material adverse effect on the Companys financial
position, or results of operations.
Item 4. Submission of Matters to a Vote of Security
Holders.
No matters were submitted to a vote of the Companys
security holders during the fourth quarter of the fiscal year
ended December 31, 2005.
PART II
|
|
Item 5. |
Market for Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities. |
The common shares of the Company have been listed and posted for
trading on the American Stock Exchange (AMEX) since
January 17, 2001 under the symbol UPL and were
traded on the Toronto Stock Exchange (TSX) from
September 30, 1998 to March 31, 2004 under the symbol
UP. The following table sets forth the high and low
intra-day sales prices on the AMEX and TSX for 2005 and 2004 as
reported by each exchange, respectively. The prices are adjusted
for a 2 for 1 stock split effective May 10, 2005.
AMERICAN STOCK EXCHANGE (US$)
|
|
|
|
|
|
|
|
|
2005 |
|
High | |
|
Low | |
|
|
| |
|
| |
First Quarter
|
|
$ |
29.17 |
|
|
$ |
22.20 |
|
Second Quarter
|
|
$ |
30.50 |
|
|
$ |
21.48 |
|
Third Quarter
|
|
$ |
57.89 |
|
|
$ |
30.36 |
|
Fourth Quarter
|
|
$ |
60.32 |
|
|
$ |
45.10 |
|
32
AMERICAN STOCK EXCHANGE (US$)
|
|
|
|
|
|
|
|
|
2004 |
|
High | |
|
Low | |
|
|
| |
|
| |
First Quarter
|
|
$ |
15.65 |
|
|
$ |
10.25 |
|
Second Quarter
|
|
$ |
19.00 |
|
|
$ |
13.80 |
|
Third Quarter
|
|
$ |
25.50 |
|
|
$ |
17.53 |
|
Fourth Quarter
|
|
$ |
27.83 |
|
|
$ |
21.69 |
|
TORONTO STOCK EXCHANGE (CDN$)
|
|
|
|
|
|
|
|
|
2004 |
|
High | |
|
Low | |
|
|
| |
|
| |
First Quarter
|
|
$ |
20.13 |
|
|
$ |
14.83 |
|
Second Quarter
|
|
$ |
|
|
|
$ |
|
|
Third Quarter
|
|
$ |
|
|
|
$ |
|
|
Fourth Quarter
|
|
$ |
|
|
|
$ |
|
|
On February 28, 2006 the last reported sales price of the
common stock on the AMEX was $52.04 per share. As of
February 28, 2006 there were approximately 456 holders of
record of the common stock.
The Company has not declared or paid and does not anticipate
declaring or paying any dividends on its common stock in the
near future. The Company intends to retain its cash flow from
operations for the future operation and development of its
business. In addition, the Companys current credit
facility limits payment of dividends on its common stock.
33
|
|
Item 6. |
Selected Financial Data. |
The selected consolidated financial information presented below
for the years ended December 31, 2005, 2004, 2003, 2002 and
2001 is derived from the Consolidated Financial Statements of
the Company. The earnings per share information (Basic income
per common share and Diluted income per common share) have been
updated to reflect the 2 for 1 stock split on May 10, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per share data) | |
Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas sales
|
|
$ |
422,091 |
|
|
$ |
224,208 |
|
|
$ |
114,841 |
|
|
$ |
38,503 |
|
|
$ |
38,204 |
|
|
|
Oil sales
|
|
|
94,402 |
|
|
|
34,839 |
|
|
|
6,740 |
|
|
|
3,839 |
|
|
|
2,997 |
|
|
|
Interest and other
|
|
|
612 |
|
|
|
91 |
|
|
|
37 |
|
|
|
23 |
|
|
|
393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$ |
517,105 |
|
|
$ |
259,138 |
|
|
$ |
121,618 |
|
|
$ |
42,365 |
|
|
$ |
41,594 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production expenses and taxes
|
|
|
89,602 |
|
|
|
50,869 |
|
|
|
25,224 |
|
|
|
11,411 |
|
|
|
9,023 |
|
|
|
Depreciation, depletion and amortization
|
|
|
58,103 |
|
|
|
30,249 |
|
|
|
16,216 |
|
|
|
9,712 |
|
|
|
6,687 |
|
|
|
General and administrative
|
|
|
11,484 |
|
|
|
6,152 |
|
|
|
5,733 |
|
|
|
4,199 |
|
|
|
3,894 |
|
|
|
Stock compensation
|
|
|
2,859 |
|
|
|
924 |
|
|
|
1,018 |
|
|
|
1,211 |
|
|
|
337 |
|
|
|
Interest
|
|
|
3,286 |
|
|
|
3,783 |
|
|
|
2,851 |
|
|
|
2,691 |
|
|
|
1,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
165,333 |
|
|
|
91,977 |
|
|
|
51,042 |
|
|
|
29,224 |
|
|
|
21,628 |
|
|
Income before income taxes
|
|
|
351,772 |
|
|
|
167,160 |
|
|
|
70,576 |
|
|
|
13,141 |
|
|
|
19,966 |
|
|
Income tax provision deferred
|
|
|
123,472 |
|
|
|
58,010 |
|
|
|
25,254 |
|
|
|
5,059 |
|
|
|
2,087 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
228,300 |
|
|
$ |
109,150 |
|
|
$ |
45,323 |
|
|
$ |
8,082 |
|
|
$ |
17,879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per common share
|
|
$ |
1.49 |
|
|
$ |
0.73 |
|
|
$ |
0.31 |
|
|
$ |
0.05 |
|
|
$ |
0.13 |
|
|
Diluted income per common share
|
|
$ |
1.41 |
|
|
$ |
0.68 |
|
|
$ |
0.29 |
|
|
$ |
0.05 |
|
|
$ |
0.12 |
|
Statement of Cash Flows Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$ |
414,353 |
|
|
$ |
175,343 |
|
|
$ |
90,051 |
|
|
$ |
21,490 |
|
|
$ |
34,136 |
|
|
|
Investing activities
|
|
|
(306,547 |
) |
|
|
(165,014 |
) |
|
|
(103,622 |
) |
|
|
(64,360 |
) |
|
|
(59,862 |
) |
|
|
Financing activities
|
|
|
(80,344 |
) |
|
|
4,770 |
|
|
|
13,988 |
|
|
|
42,908 |
|
|
|
25,961 |
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
44,395 |
|
|
$ |
16,933 |
|
|
$ |
1,834 |
|
|
$ |
1,418 |
|
|
$ |
1,379 |
|
|
Working capital (deficit)
|
|
|
42,713 |
|
|
|
(9,969 |
) |
|
|
(22,057 |
) |
|
|
(4,415 |
) |
|
|
(6,635 |
) |
|
Oil and gas properties
|
|
|
702,663 |
|
|
|
474,634 |
|
|
|
307,864 |
|
|
|
207,362 |
|
|
|
155,221 |
|
|
Total assets
|
|
|
847,266 |
|
|
|
537,186 |
|
|
|
345,770 |
|
|
|
221,874 |
|
|
|
167,583 |
|
|
Total long-term debt
|
|
|
|
|
|
|
102,000 |
|
|
|
99,000 |
|
|
|
86,000 |
|
|
|
43,000 |
|
|
Other long-term obligations
|
|
|
20,577 |
|
|
|
9,735 |
|
|
|
5,120 |
|
|
|
3,859 |
|
|
|
3,193 |
|
|
Deferred income taxes, net
|
|
|
155,746 |
|
|
|
85,035 |
|
|
|
33,446 |
|
|
|
10,033 |
|
|
|
4,974 |
|
|
Total shareholders equity
|
|
|
571,201 |
|
|
|
267,992 |
|
|
|
149,453 |
|
|
|
104,067 |
|
|
|
95,320 |
|
|
|
Item 7. |
Managements Discussion and Analysis of Financial
Condition and Results of Operations. |
The following discussion of the financial condition and
operating results of the Company should be read in conjunction
with the consolidated financial statements and related notes of
the Company. Except as
34
otherwise indicated all amounts are expressed in
U.S. dollars. We operate in one segment, natural gas and
oil exploration and development with two geographical segments,
the United States and China.
The Company currently generates the majority of its revenue,
earnings and cash flow from the production and sales of natural
gas and oil from its property in southwest Wyoming. The price of
natural gas in the southwest Wyoming region is a critical factor
to the Companys business. The price of natural gas in
southwest Wyoming historically has been volatile. The average
annual realizations for the period 2001-2005 have ranged from
$2.33 to $8.64 per Mcf. This volatility could be very
detrimental to the Companys financial performance. The
Company seeks to limit the impact of this volatility on its
results by entering into forward sales and derivative contracts
for natural gas in southwest Wyoming. The average realization
for the Companys natural gas during calendar 2005 was
$6.84 per Mcf, basis Opal, Wyoming, including the effect of
hedges. For the quarter ended December 31, 2005, the
average realization for the Companys natural gas was
$8.49 per Mcf, basis Opal, Wyoming, including the effect of
hedges.
On July 18, 2004 the Company initiated production at the
first two fields of the nine fields discovered on its oil
properties offshore Bohai Bay, China. Production from these
fields is characterized as a heavy, sweet crude. The Company
sold its first cargos of oil in September 2004. During the
twelve-month period ended December 31, 2005, the Company
sold 1,556,280 barrels of its Chinese oil production at a
price based on the official ICP posting for Duri field crude,
less a discount for location and quality differences. These
sales were made to an affiliate of CNOOC at an average price of
$43.54 USD per barrel for the year ended December 31, 2005.
For the quarter ended December 31, 2005, the Company sold
393,084 barrels of its Chinese crude for an average price
of $48.16 USD per barrel. There can and will be differences in
timing between the sale of the Companys crude oil cargos
and the Companys pro-rata share of production. As a result
of these timing differences, the Company may, from time to time,
carry inventories or imbalances of crude oil. As of
February 28, 2006, the Duri price was approximately $54.56
USD (before discount) per barrel.
The Company expects to sell at least one cargo of its Chinese
crude oil production approximately every two months during 2006.
The Company has the right to export and sell its crude at market
prices into the international markets, and is evaluating options
to do so in the future. Other markets for the Companys
Chinese oil may potentially be developed in South Korea, Japan,
Singapore or other countries.
The Company has grown its natural gas and oil production
significantly over the past five years and management believes
it has the ability to continue growing production by drilling
already identified locations on its leases in Wyoming and by
bringing into production the already discovered oil fields in
China. The Company delivered 25% production growth on an Mcfe
basis during the quarter ended December 31, 2005 as
compared to the same quarter in 2004 and 49% production growth
for the year-ended December 31, 2005 compared to the same
period in 2004. Management expects to deliver additional
production growth during 2006 by drilling and bringing into
production additional wells in Wyoming and bringing into
production additional fields in China.
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2002 |
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2003 |
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2004 |
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2005 |
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Production Bcfe
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17.4 |
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28.9 |
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49.5 |
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73.8 |
The Company conducts operations in both the United States and
China. Separate cost centers are maintained for each country in
which the Company has operations. Substantially all of the oil
and gas activities are conducted jointly with others and,
accordingly, amounts presented reflect only the Companys
proportionate interest in such activities. Inflation has not had
a material impact on the Companys results of operations
and is not expected to have a material impact on the
Companys results of operations in the future.
Critical Accounting Policies
The discussion and analysis of the Companys financial
condition and results of operations is based upon consolidated
financial statements, which have been prepared in accordance
with U.S. Generally Accepted Accounting Principles
(GAAP). In addition, application of GAAP requires
the use of estimates, judgments and assumptions that affect the
reported amounts of assets and liabilities as of the date of the
financial
35
statements as well as the revenues and expenses reported during
the period. Changes in these estimates, judgments and
assumptions will occur as a result of future events, and,
accordingly, actual results could differ from amounts estimated.
Use of Estimates. The more significant areas requiring
the use of assumptions, judgments and estimates relate to
volumes of oil and gas reserves used in calculating depletion,
the amount of future net revenues used in computing the ceiling
test limitations and the amount of abandonment obligations used
in such calculations. Assumptions, judgments and estimates are
also required in determining impairments of undeveloped
properties and the valuation of deferred tax assets.
Oil and Gas Reserves. The Company emphasizes that the
volumes of reserves are estimates which, by their nature, are
subject to revision. The estimates are made using all available
geological and reservoir data as well as production performance
data. These estimates are currently made annually by independent
petroleum engineers and reviewed by the Companys
engineers. The reserves are periodically reviewed and revised,
either upward or downward, if warranted based upon additional
data. Revisions are necessary due to changes in assumptions
based on, among other things, reservoir performance, prices,
economic conditions and governmental restrictions. Estimates of
proved crude oil and natural gas reserves significantly affect
the Companys depreciation, depletion and amortization
(DD&A) expense. For example, if estimates of
proved reserves decline, the Companys DD&A rate will
increase, resulting in a decrease in net income. A decline in
estimates of proved reserves could also result in a full cost
ceiling write-down (see discussion below).
The present value of oil and gas properties represents the
estimated future net cash flows from proved oil and gas
reserves, discounted using a prescribed 10% discount rate
(PV 10). Proved oil and gas reserves are the
estimated quantities of natural gas, crude oil, condensate and
natural gas liquids that geological and engineering data
demonstrate with reasonable certainty can be recovered in future
years from known reservoirs under existing economic and
operating conditions. Reserves are considered proved
if they can be produced economically as demonstrated by either
actual production or conclusive formation tests. Proved
developed oil and gas reserves can be expected to be
recovered through existing wells with existing equipment and
operating methods.
Due to the volatility of commodity prices, the oil and gas
prices on the last day of the period significantly impact the
calculation of the PV 10. The present value of future net cash
flows does not purport to be an estimate of the fair market
value of the Companys proved reserves. An estimate of fair
value would also take into account, among other things,
anticipated changes in future prices and costs, the expected
recovery of reserves in excess of proved reserves and a discount
factor more representative of the time value of money and the
risks inherent in producing oil and gas.
Full Cost Method of Accounting. The Company uses the full
cost method of accounting for its oil and gas operations.
Separate cost centers are maintained for each country in which
the Company incurs costs. All costs incurred in the acquisition,
exploration and development of properties (including costs of
surrendered and abandoned leaseholds, delay lease rentals, dry
holes and overhead related to exploration and development
activities) are capitalized. Effective with the adoption of
Statement of Financial Accounting Standard (SFAS)
No. 143, Accounting for Asset Retirement
Obligations, the carrying amount of oil and gas properties
includes estimated asset retirement costs recorded based on the
fair value of the asset retirement obligation when incurred. The
sum of net capitalized costs and estimated future development
costs of oil and gas properties for each full cost center are
depleted using the
units-of-production
method. Changes in estimates of reserves, future development
costs or asset retirement obligations are accounted for
prospectively in our depletion calculation.
Investments in unproved properties are not depleted pending the
determination of the existence of proved reserves. Unproved
properties are assessed periodically to ascertain whether
impairment has occurred. Unproved properties whose costs are
individually significant are assessed individually by
considering the primary lease terms of the properties, the
holding period of the properties, and geographic and geologic
data obtained relating to the properties. Where it is not
practicable to individually assess the amount of impairment of
properties for which costs are not individually significant,
such properties are grouped for purposes of
36
assessing impairment. The amount of impairment assessed is added
to the costs to be amortized in the appropriate full cost pool.
Companies that use the full cost method of accounting for oil
and gas exploration and development activities are required to
perform a ceiling test calculation each quarter. The full cost
ceiling test is an impairment test prescribed by SEC
Regulation S-X
Rule 4-10. The ceiling test is performed quarterly on a
country-by-country basis. The ceiling limits such pooled costs
to the aggregate of the present value of future net revenues
attributable to proved crude oil and natural gas reserves
discounted at 10% plus the lower of cost or market value of
unproved properties less any associated tax effects. If such
capitalized costs exceed the ceiling, the Company will record a
write-down to the extent of such excess as a non-cash charge to
earnings. Any such write-down will reduce earnings in the period
of occurrence and result in lower DD&A expense in future
periods. A write-down may not be reversed in future periods,
even though higher oil and natural gas prices may subsequently
increase the ceiling.
The Company did not have any write-downs related to the full
cost ceiling limitation in 2005, 2004 or 2003. As of
December 31, 2005, the ceiling limitation exceeded the
carrying value of the Companys oil and gas properties.
Estimates of discounted future net cash flows at
December 31, 2005 were based on average natural gas prices
of approximately $8.00 per MCF in the U.S. and on average
liquids prices of approximately $60.81 per barrel in the
U.S. In China, estimates of discounted future net cash
flows on crude oil were based on a net realized price of
$48.74 per barrel. A reduction in oil and gas prices and/or
estimated quantities of oil and gas reserves would reduce the
ceiling limitation and could result in a ceiling test write-down.
Asset Retirement Obligation. The Companys asset
retirement obligations (ARO) consist primarily of
estimated costs of dismantlement, removal, site reclamation and
similar activities associated with its oil and gas properties.
SFAS No. 143 requires that the discounted fair value
of a liability for an ARO be recognized in the period in which
it is incurred with the associated asset retirement cost
capitalized as part of the carrying cost of the oil and gas
asset. The recognition of an ARO requires that management make
numerous estimates, assumptions and judgments regarding such
factors as the existence of a legal obligation for an ARO,
estimated probabilities, amounts and timing of settlements; the
credit-adjusted, risk-free rate to be used; inflation rates, and
future advances in technology. In periods subsequent to initial
measurement of the ARO, the Company must recognize
period-to-period
changes in the liability resulting from the passage of time and
revisions to either the timing or the amount of the original
estimate of undiscounted cash flows. Increases in the ARO
liability due to passage of time impact net income as accretion
expense. The related capitalized cost, including revisions
thereto, is charged to expense through DD&A.
Entitlements Method of Accounting for Oil and Gas Sales.
The Company generally sells natural gas, condensate and crude
oil under both long-term and short-term agreements at prevailing
market prices. The Company recognizes revenues when the products
are delivered, which occurs when the customer has taken title
and has assumed the risks and rewards of ownership, prices are
fixed or determinable and collectibility is reasonably assured.
The Company accounts for oil and gas sales using the
entitlements method. Under the entitlements method,
revenue is recorded based upon the Companys ownership
share of volumes sold, regardless of whether it has taken its
ownership share of such volumes. The Company records a
receivable or a liability to the extent it receives less or more
than its share of the volumes and related revenue. Under the
alternative sales method of accounting for oil and
gas sales, revenue would be recorded based on volumes taken by
the Company or allocated to it by third parties, regardless of
whether such volumes are more or less than its ownership share
of volumes produced. Reserve estimates would be adjusted to
reflect any over- produced or under-produced positions.
Receivables or payables would be recognized on a companys
balance sheet only to the extent that remaining reserves are not
sufficient to satisfy volumes over- or under-produced.
Make-up provisions and
ultimate settlements of volume imbalances are generally governed
by agreements between the Company and its partners with respect
to specific properties or, in the absence of such agreements,
through negotiation. The value of volumes over- or
under-produced can change based on changes in commodity prices.
The Company prefers the entitlements method of accounting for
oil and gas sales because it allows for recognition of revenue
based on its actual share of jointly owned production, results in
37
better matching of revenue with related operating expenses, and
provides balance sheet recognition of the estimated value of
product imbalances.
Valuation of Deferred Tax Assets. The Company uses the
asset and liability method of accounting for income taxes. Under
this method, future income tax assets and liabilities are
determined based on differences between the financial statement
carrying values and their respective income tax basis (temporary
differences).
To assess the realization of deferred tax assets, management
considers whether it is more likely than not that some portion
or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon
the generation of future taxable income during the periods in
which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities,
projected future taxable income and tax planning strategies in
making this assessment. As of December 31, 2004, the
Company had U.S. federal regular tax net operating loss
carryforwards (NOLs) of approximately
$16.7 million which were fully utilized to offset
U.S. taxable income in 2005.
Commodity Derivative Instruments and Hedging Activities.
The Company may, from time to time, enter into commodity
derivative contracts and/or fixed-price physical contracts to
manage its exposure to oil and natural gas price volatility. The
Company has, in the past, primarily utilized fixed price forward
sales of physical gas when it hedges some portion of its Wyoming
natural gas production. These transactions are generally placed
with major financial institutions or with counter-parties of
high credit quality that present minimal credit risks to the
Company. The Company may also secure payments under these types
of transactions by requiring the counterparty to provide
letter(s) of credit. On a less frequent basis, the Company may
enter into commodity derivative contracts to manage price
volatility. To the extent that it does enter into such
derivative transactions, the Company expects that the oil and
natural gas reference prices of these commodity derivatives
contracts will be based upon crude oil and/or natural gas
futures contracts which, when adjusted for location basis
differentials, will have a high degree of historical correlation
with actual prices the Company receives. Under
SFAS No. 133, all derivative instruments are recorded
on the balance sheet at fair value. Changes in the
derivatives fair value are recognized currently in
earnings unless specific hedge accounting criteria are met. For
qualifying cash flow hedges, the gain or loss on the derivative
is deferred in Accumulated Other Comprehensive Income (Loss) to
the extent the hedge is effective. For qualifying fair value
hedges, the gain or loss on the derivative is offset by the
related results of the hedged item in the income statement.
Gains and losses on hedging instruments included in Accumulated
Other Comprehensive Income (Loss) on the balance sheet are
reclassified to Oil and Natural Gas Sales Revenue in the period
that the related production is delivered. Derivative contracts
that do not qualify for hedge accounting treatment are recorded
as derivative assets and liabilities at market value in the
consolidated balance sheet, and the associated unrealized gains
and losses are recorded as current expense or income in the
consolidated statement of operations. The Company currently does
not have any derivative contracts related to the marketing of
its natural gas or oil production in effect, the last one having
expired on December 31, 2005.
Legal, Environmental and Other Contingencies. A provision
for legal, environmental and other contingencies is charged to
expense when the loss is probable and the cost can be reasonably
estimated. Determining when expenses should be recorded for
these contingencies and the appropriate amounts for accrual is a
complex estimation process that includes the subjective judgment
of management. In many cases, managements judgment is
based on interpretation of laws and regulations, which can be
interpreted differently by regulators and/or courts of law. The
Companys management closely monitors known and potential
legal, environmental and other contingencies and periodically
determines when the Company should record losses for these items
based on information available to the Company.
Share-Based Payment Arrangements. In December 2004, the
Financial Accounting Standards Board (FASB) issued
SFAS No. 123R, Share-Based Payments
(SFAS No. 123R). SFAS No. 123R
is a revision of SFAS No. 123, Accounting for
Stock Based Compensation, and supersedes APB Opinion
No. 25 (APB Opinion 25). Among other items,
SFAS No. 123R eliminates the use of APB Opinion 25 and the
intrinsic value method of accounting, and requires companies to
recognize the cost of employee services received in exchange for
awards of equity instruments, based on the grant date fair value
of those awards, in the financial statements. Pro forma
disclosure is no longer an alternative under the new standard.
The
38
Company will adopt SFAS No. 123R as of the required
effective date for calendar year companies, which is
January 1, 2006.
SFAS No. 123R permits companies to adopt its
requirements using either a modified prospective
method, or a modified retrospective method. Under
the modified prospective method, compensation cost
is recognized in the financial statements beginning with the
effective date, based on the requirements of
SFAS No. 123R for all share-based payments granted
after that date, and based on the requirements of
SFAS No. 123 for all unvested awards granted prior to
the effective date of SFAS No. 123R. Under the
modified retrospective method, the requirements are
the same as under the modified prospective method,
but also permit entities to restate financial statements of
previous periods based on proforma disclosures made in
accordance with SFAS No. 123. At December 31,
2005, all stock options granted to date were fully vested.
The Company currently utilizes a standard option pricing model
(i.e., Black-Scholes) to measure the fair value of stock options
granted to Employees. While SFAS No. 123R permits
entities to continue to use such a model, the standard also
permits the use of a more complex binomial, or
lattice model. Based upon research done by the
Company on the alternative models available to value option
grants, and in conjunction with the type and number of stock
options expected to be issued in the future, the Company has
determined that it will continue to use the Black-Scholes model
for option valuation as of the current time.
SFAS No. 123R includes several modifications to the
way that income taxes are recorded in the financial statements.
The expense for certain types of option grants is only
deductible for tax purposes at the time that the taxable event
takes place, which could cause variability in the Companys
effective tax rates recorded throughout the year.
SFAS No. 123R does not allow companies to
predict when these taxable events will take place.
Furthermore, it requires that the benefits associated with the
tax deductions in excess of recognized compensation cost be
reported as a financing cash flow, rather than as an operating
cash flow as required under current literature. This requirement
will reduce net operating cash flows and increase net financing
cash flows in periods after the effective date. These future
amounts cannot be estimated, because they depend on, among other
things, when employees exercise stock options.
Results of Operations Year Ended
December 31, 2005 Compared to Year Ended December 31,
2004
Oil and gas revenues increased to $516.5 million for the
year ended December 31, 2005 from $259.0 million for
the same period in 2004. This increase was attributable to an
increase in both the Companys production volumes and
prices received for that production coupled with a full
years production from the China asset. During 2005, the
Companys production increased to 61.7 Bcf of natural
gas and 464.3 thousand barrels of condensate in Wyoming and
1.6 million barrels of crude oil in China, up from 2004
levels of 43.7 Bcf of natural gas and 349.7 thousand
barrels of condensate in Wyoming and 624.6 thousand barrels of
crude oil in China . This 49% increase on an Mcfe basis was
attributable to the Companys successful drilling
activities during 2005 and 2004 in Wyoming and initiation of
production in China during July 2004. During the year ended
December 31, 2005, the average product prices received were
$6.84 per Mcf and $57.37 per barrel of condensate in
Wyoming and $43.54 per barrel for crude oil in China,
compared to $5.13 per Mcf and $41.92 per barrel of
condensate in Wyoming and $32.31 per barrel of crude oil in
China for the same period in 2004.
In Wyoming, direct lease operating costs increased to
$9.0 million in 2005 from $6.3 million in 2004 due
largely to higher production volumes. On a unit of production
basis, LOE costs were flat at $0.14 per Mcfe in 2005 when
compared to 2004. Production taxes in Wyoming during the year
ended December 31, 2005 were $52.7 million compared to
$28.2 million in 2004, or $0.82 per Mcfe in 2005,
compared to $0.62 per Mcfe in 2004. Production taxes in
Wyoming are calculated based on a percentage of revenue from
production. Therefore, higher prices received increased
production taxes on a per unit basis. Gathering fees in Wyoming
for the year ended December 31, 2005 increased to
$17.1 million, or $0.27 per Mcfe in 2005 from
$13.1 million, or $0.29 per Mcfe, in 2004 as a result
of higher production volumes.
In Wyoming, DD&A expenses increased to $48.5 million
during the year ended December 31, 2005 from
$27.3 million for the same period in 2004, attributable to
increased production volumes and a higher depletion
39
rate due to forecasted increased future development costs. On a
unit basis, DD&A expense in Wyoming increased to
$0.75 per Mcfe in 2005 from $0.60 per Mcfe in 2004.
In China, production costs were $7.4 million in 2005, or
$0.79 per Mcfe or $4.72 per BOE, compared with
$2.3 million in 2004, or $0.61 per Mcfe or
$3.66 per BOE. Severance taxes in China during the year
ended December 31, 2005 were $3.4 million compared to
$1.0 million in 2004, or $0.36 per Mcfe
($2.18 per BOE) in 2005 compared to $0.27 per Mcfe
($1.62 per BOE) in 2004. The increase in severance taxes
relates to a full year of production during 2005 compared to
half year in 2004. In China, DD&A expense was
$9.6 million or $1.03 per Mcfe or $6.20 per BOE,
in 2005 compared to $2.9 million, or $0.77 per Mcfe or
$4.65 per BOE in 2004. Production commenced in China during
July 2004.
Interest expense decreased to $3.3 million in 2005 from
$3.8 million in 2004. This decrease was largely
attributable to the decrease in borrowings under the senior
credit facility and was partially offset by increased interest
rates during 2005.
Deferred income tax expense increased to $123.5 million in
2005 from $58.0 million in 2004. This increase was
primarily attributable to an increase in net income from
continuing operations combined with an increase in the tax rate.
Deferred income taxes were booked at the rate of 35.1% for the
year ended December 31, 2005 as compared to a rate of 34.7%
in 2004. The Company was not liable for current payment of any
material amount of income taxes for the period ending
December 31, 2005.
Results of Operations Year Ended
December 31, 2004 Compared to Year Ended December 31,
2003
Oil and gas revenues increased to $259.0 million for the
year ended December 31, 2004 from $121.6 million for
the same period in 2003. This increase was attributable to an
increase in both the Companys production and prices
received for that production as well as the production from the
China assets beginning in July 2004. During this period the
Companys production increased to 43.7 Bcf of natural
gas and 349.7 thousand barrels of condensate in Wyoming and
624.6 thousand barrels of crude oil in China, up from
27.6 Bcf of natural gas and 211.6 thousand barrels of
condensate for the same period in 2003. This 71% increase on an
Mcfe basis was attributable to the Companys successful
drilling activities during 2004 and 2003. During the year ended
December 31, 2004 the average product prices were
$5.13 per Mcf and $41.92 per barrel of condensate in
Wyoming and $32.31 per barrel for crude oil in China,
compared to $4.16 per Mcf and $31.86 per barrel of
condensate in Wyoming for the same period in 2003. The China
production began in July 2004.
In Wyoming, direct lease operating costs increased to
$6.3 million in 2004 from $3.6 million in 2003 due to
higher production. On a unit of production basis, LOE costs were
$0.14 per Mcfe in 2004, as compared to $0.13 per Mcfe
in 2003. Production taxes in Wyoming during 2004 were
$28.2 million, compared to $13.8 million in 2003, or
$0.62 per Mcfe in 2004, compared to $0.48 per Mcfe in
2003. Production taxes are calculated based on a percentage of
revenue from production. Therefore, higher prices received
increased the cost on a per unit basis. Gathering fees in
Wyoming increased to $13.1 million in 2004 from
$7.8 million in 2003, attributable to higher production
volumes.
In Wyoming, DD&A expenses increased to $27.3 million
during the year ended December 31, 2004 from
$16.2 million for the same period in 2003, attributable to
increased production volumes and a higher depletion rate,
attributable to forecasted increased future development costs.
On a unit basis, DD&A increased to $0.60 per Mcfe in
2004 from $0.56 per Mcfe in 2003.
In China, production costs were $2.3 million in 2004, or
$0.61 per Mcfe or $3.66 per BOE. Severance taxes in
China during the year ended December 31, 2004 were
$1.0 million, or $0.27 per Mcfe ($1.62 per BOE).
DD&A was $2.9 million or $0.77 per Mcfe or
$4.65 per BOE in 2004.. Production in China started during
July 2004.
Interest expense increased to $3.8 million during 2004 from
$2.8 million in 2003. This increase was attributable to the
increase in borrowings under the senior credit facility combined
with increasing interest rates.
40
Deferred income tax expense for the period increased to
$58.0 million in 2004 from $25.3 million in 2003. This
increase was attributable to an increase in net income from
continuing operations. Deferred income taxes were booked at the
rate of 34.7% as compared to a rate of 35.8% in 2003. The
Company was not liable for current payment of any material
amount of income taxes for the period ending December 31,
2004.
Liquidity and Capital Resources
During the year-ended December 31, 2005, the Company relied
on cash provided by operations and borrowings under its senior
credit facility to finance its capital expenditures. The Company
participated in the drilling of 110 wells in Wyoming and
continued to participate in the development process in the China
blocks, including the ongoing drilling of development wells. For
the year-ended December 31, 2005 net capital
expenditures were $282.7 million. At December 31,
2005, the Company reported a cash position of $44.4 million
compared to $16.9 million at December 31, 2004.
Working capital at December 31, 2005 was $42.7 million
as compared to $(10.0) million at December 31, 2004.
As of December 31, 2005, the Company had no outstanding
bank indebtedness and other long-term obligations of
$20.6 million comprised of items payable in more than one
year, primarily related to production taxes.
The Companys positive cash provided by operating
activities, along with availability under its senior credit
facility, are projected to be sufficient to fund the
Companys budgeted capital expenditures for 2006, which are
currently projected to be $425.0 million. Of the
$425.0 million budget, the Company plans to spend
approximately $400.0 million in Wyoming and approximately
$20.0 million in China with the balance allocated to
evaluating other areas. With the $400.0 million budgeted
for Wyoming, the Company plans to drill or participate in an
estimated 160 gross wells in 2006, of which approximately
25% will be for exploration wells and the remaining will be for
development wells. Of the $20.0 million budgeted for China,
approximately 33% will be for exploratory/appraisal activity and
the balance will be for development activity. The Company
currently has no budget for acquisitions in 2006.
The Company (through its subsidiary) participates in a revolving
credit facility with a group of banks led by JP Morgan Chase
Bank, N.A. The agreement specifies a maximum loan amount of
$500 million, an aggregate borrowing base of
$800 million and a commitment amount of $200 million
at November 14, 2005. The commitment amount may be
increased up to the lesser of the borrowing base amount or
$500 million at any time at the request of the Company.
Each bank shall have the right, but not the obligation, to
increase the amount of their commitment as requested by the
Company. In the event that the existing banks increase their
commitment to an amount less than the requested commitment
amount, then it would be necessary to bring additional banks
into the facility. At December 31, 2005, the Company had no
amounts outstanding and $200 million unused and available
under the current committed amount.
The credit facility matures on May 1, 2010. The note bears
interest at either (A) the banks prime rate plus a
margin of zero percent (0.00%) to three-quarters of one percent
(0.75%) based on the percentage of available credit drawn or at
(B) LIBOR plus a margin of one percent (1.00%) to one and
three-quarters of one percent (1.75%) based on the percentage of
available credit drawn. For purposes of calculating interest,
the available credit is equal to the borrowing base. An average
annual commitment fee of 0.25% to 0.375%, depending on the
percentage of available credit drawn, is charged quarterly for
any unused portion of the commitment amount. The Companys
total commitment fees were $354,017, $374,096 and $249,788 for
the years ended December 31, 2005, 2004 and 2003,
respectively.
The borrowing base is subject to periodic (at least semi-annual)
review and re-determination by the banks and may be decreased or
increased depending on a number of factors, including the
Companys proved reserves and the banks forecast of
future oil and gas prices. If the borrowing base is reduced to
an amount less than the balance outstanding, the Company has
sixty days from the date of written notice of the reduction in
the borrowing base to pay the difference. Additionally, the
Company is subject to quarterly reviews of compliance with the
covenants under the bank facility including minimum coverage
ratios relating to interest, working capital and advances to
Sino-American Energy Corporation. In the event of a default
under the covenants, the Company may not be able to access funds
otherwise available under the facility. As of December 31,
2005, the Company was in compliance with required ratios of the
bank facility.
41
The debt outstanding under the credit facility is secured by a
majority of the Companys proved domestic oil and gas
properties.
During the year ended December 31, 2005, net cash provided
by operating activities was $414.4 million as compared to
$175.3 million for the year ended December 31, 2004.
The increase in cash provided by operating activities was
primarily due to the increase in earnings which was due to
higher production levels and higher prices received for that
production.
During the year ended December 31, 2005, cash used in
investing activities was $306.5 million as compared to
$165.0 million for the year ended December 31, 2004.
The change is primarily attributable to increased activity for
drilling and completion operations in Wyoming. The
$288.9 million used in oil and gas property expenditures
consists of $282.7 million incurred for drilling and
completion activities in 2005, and $6.2 million
attributable to the timing of capital expenditures incurred but
not yet paid.
During the year ended December 31, 2005, cash used in
financing activities was $80.3 million as compared to cash
provided by financing activities of $4.8 million for the
year ended December 31, 2004. The change is primarily
attributable to debt repayment under the senior credit facility
offset by proceeds from employee stock option exercises.
Contractual Obligations
The following table summarizes our contractual obligations as of
December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period: |
|
|
|
|
|
|
|
Less Than | |
|
|
|
More Than |
|
|
Total | |
|
One Year | |
|
1-3 Years | |
|
3-5 Years | |
|
5 Years |
|
|
| |
|
| |
|
| |
|
| |
|
|
Long-term debt
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Drilling contracts
|
|
|
108,410,500 |
|
|
|
|
|
|
|
104,610,500 |
|
|
|
3,800,000 |
|
|
|
|
|
Operating leases
|
|
|
132,020 |
|
|
|
132,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Office space lease
|
|
|
813,583 |
|
|
|
367,329 |
|
|
|
446,254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$ |
109,356,103 |
|
|
$ |
499,349 |
|
|
$ |
105,056,754 |
|
|
$ |
3,800,000 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2005, the Company had committed to
drilling obligations with certain rig contractors that will
continue into 2009. The mentioned drilling rigs were contracted
to fulfill the 2006-2008 drilling program initiatives in Wyoming.
On October 16, 2003 the operator of the Companys
properties in China, Kerr-McGee, signed a 15 year contract,
which provides for up to an additional 10 years, to lease
the FPSO. The Company ratified the contract for its net share
which is 8.91%. The FPSO service agreement calls for a day rate
lease payment and a sliding scale per barrel processing fee that
decreases based on cumulative barrels processed. The lease
contains a cancellation fee for the Company based on a sliding
time-scale (cancellation fee decreases with time) which as of
December 31, 2005 was $3.3 million net to the
Companys 8.91% interest. The Company considers it very
unlikely that a lease cancellation situation will occur. Due to
the terms of the lease, the Company cannot estimate with any
degree of accuracy the costs it may incur during the life of the
lease. The Companys net share for the costs of the FPSO in
2005 was approximately $1.8 million.
In May 2003, the Company amended its prior office lease in
Englewood, Colorado, which it has committed to through June
2008. The Companys total remaining commitment of this
lease is $677,791 at December 31, 2005 ($265,485 in 2006,
$273,530 in 2007 and $138,776 in 2008). In December 2003, the
Company signed a lease for office space in Houston, Texas, which
it has committed to through April 2007 for a total remaining
commitment of $135,792 ($101,844 in 2006 and $33,948 in 2007) at
December 31, 2005. The total remaining commitment for both
offices is $813,583.
During 2005, the Company took a major step toward assuring that
the pipeline infrastructure to move the Companys natural
gas supplies away from southwest Wyoming will be expanded to
provide sufficient capacity to transport its natural gas
production and to provide for reasonable basis differentials for
its natural gas in the
42
future. The Company agreed to become an anchor shipper on the
proposed Rockies Express Pipeline project, sponsored by
subsidiaries of Kinder Morgan and Sempra Energy. The Rockies
Express Pipeline, if built as proposed, would be the largest
natural gas transmission pipeline project of its type built in
the United States in more than 20 years, beginning at the
Opal Processing Plant in southwest Wyoming and traversing
Wyoming and several other states to an ultimate terminus in
eastern Ohio. This project is projected to cover more than
1,800 miles and is contemplated to be a large- diameter
(42), high-pressure natural gas pipeline. The Rockies
Express Pipeline, if built, will be an interstate pipeline and
would therefore be subject to the jurisdiction of the United
States Federal Energy Regulatory Commission (FERC).
On December 19, 2005, the Company signed two Precedent
Agreements with Rockies Express Pipeline, LLC and Entrega Gas
Pipeline LLC governing how the parties will proceed through the
design, regulatory process and construction of the pipeline
facilities and, subject to certain conditions precedent, the
Company will take firm transportation service if and when the
pipeline facilities are constructed. Commencing upon completion
of the pipeline facilities, the Companys commitment
involves capacity of 200,000 MMBtu per day of natural gas
for a term of 10 years, and the Company will be obligated
to pay to Rockies Express certain demand charges related to its
rights to hold this firm transportation capacity as an anchor
shipper. Based on current assumptions, current projections
regarding the cost of the expansion and the participation of
other shippers in the expansion (noting specifically that these
assumptions are likely to change materially), the Company
currently projects that annual demand charges due may be
approximately $70 million per year for the term of the
contract, exclusive of fuel and surcharges. The Companys
Board of Directors approved the Precedent Agreements on
February 6, 2006 and Kinder Morgan, as the Managing Member
of the Rockies Express Pipeline LLC advised the Company of their
final approval of the Precedent Agreements, and their intent to
proceed with the construction of the Rockies Express Pipeline on
February 28, 2006. The pipeline facilities are currently
anticipated to be completed in stages between 2007 and 2009.
Although the Company is optimistic that the Rockies Express
Pipeline project will receive the necessary regulatory approvals
and be constructed in a timely manner, there can be no
assurances that the Rockies Express Pipeline will be built, nor
will there be any assurances that, if built, it will prevent
large basis differentials from occurring in the future.
Additionally, in maintaining its acreage base that is not held
by production, the Company incurs certain expenses, including
delay rental costs. From year to year, the Companys
acreage base varies, sometimes dramatically, rendering it
impossible to forecast with any accuracy what the amount of
these delay rental costs will be. In 2005, delay rental costs
for all of the Companys leases not held by production were
$289,660.
|
|
Item 7A. |
Quantitative and Qualitative Disclosures About Market
Risk. |
The Companys major market risk exposure is in the pricing
applicable to its natural gas and oil production. Realized
pricing is currently driven primarily by the prevailing price
for the Companys Wyoming natural gas production.
Historically, prices received for natural gas production have
been volatile and unpredictable. Pricing volatility is expected
to continue. Natural gas price realizations ranged from a
monthly low of $5.50 per Mcf to a monthly high of
$8.64 per Mcf during 2005. Realized natural gas prices are
derived from the financial statements which include the effects
of hedging and natural gas balancing.
The Company may, from time to time, use derivative instruments
as one way to manage its exposure to commodity prices. The
Company has periodically entered into fixed price to index price
swap agreements in order to hedge a portion of its production.
The purpose of the swaps is to provide a measure of stability to
the Companys cash flows in an environment of volatile oil
and gas prices. The derivatives reduce the Companys
exposure on the hedged volumes to decreases in commodity prices
and limit the benefit the Company might otherwise have received
from any increases in commodity prices on the hedged volumes.
The Company recognizes all derivative instruments as assets or
liabilities on the balance sheet at fair value. The accounting
treatment of the changes in fair value as specified in
SFAS No. 133 is dependent upon whether or not a
derivative instrument is designated as a hedge. For derivatives
designated as cash flow hedges, changes in fair value, to the
extent the hedge is effective, are recognized in Other
Comprehensive Income (Loss) on the balance sheet until the
hedged item is recognized in earnings as oil and gas revenue.
For all other derivatives, changes in fair value are recognized
in earnings as income or expense. As of December 31, 2005,
the Company no longer assesses the future liability of cash flow
hedges as all agreements qualifying as such have expired.
43
During 2005, the Company recognized costs associated with
financially settled swaps to counterparties totaling $9,286,000
as its net realization from hedging activities. This total
includes $999,900 for the first quarter of 2005, $1,440,800 for
the second quarter of 2005, $2,090,600 for the third quarter of
2005, and $4,754,700 for the fourth quarter of 2005.
At December 31, 2005, the Company had no open derivative
contracts to manage price risk on its natural gas production.
The Company also utilizes fixed price forward natural gas sales
at southwest Wyoming delivery points to hedge its commodity
exposure. In addition to the derivative contracts discussed
above, the Company had the following physical delivery contracts
in place at December 31, 2005. (The Companys average
net interest in physical natural gas sales is approximately 80%.)
|
|
|
|
|
|
|
|
|
|
|
Volume | |
|
Average | |
Contract Period |
|
MMBTU/Day | |
|
Price/MMbtu | |
|
|
| |
|
| |
Calendar 2006
|
|
|
70,000 |
|
|
$ |
5.86 |
|
As of February 28, 2006, the Companys fixed price
forward natural gas sales contracts represented net volumes
equal to approximately 24% of the Companys currently
forecasted natural gas production for Calendar 2006.
44
|
|
Item 8. |
Financial Statements and Supplementary Data. |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Ultra Petroleum Corp.:
We have audited the accompanying consolidated balance sheets of
Ultra Petroleum Corp. and subsidiaries as of December 31,
2005 and 2004, and the related consolidated statements of
operations and retained earnings, shareholders equity and
cash flows for each of the years in the three-year period ended
December 31, 2005. These consolidated financial statements
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Ultra Petroleum Corp. and subsidiaries as of
December 31, 2005 and 2004, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2005, in accordance
with U.S. generally accepted accounting principles.
As explained in Note 1 to the consolidated financial
statements, the Company adopted Statement of Financial
Accounting Standards No. 143, Accounting for Asset
Retirement Obligations, effective January 1, 2003.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of the Companys internal control over
financial reporting as of December 31, 2005, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report
dated March 30, 2006 expressed an unqualified opinion on
managements assessment of, and an adverse opinion on the
effective operation of, internal control over financial
reporting.
Denver, Colorado
March 30, 2006
45
ULTRA PETROLEUM CORP.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(Expressed in U.S. dollars) | |
ASSETS |
Current assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
44,394,775 |
|
|
$ |
16,932,661 |
|
|
Restricted cash
|
|
|
213,899 |
|
|
|
211,961 |
|
|
Accounts receivable
|
|
|
75,656,031 |
|
|
|
35,749,287 |
|
|
Deferred tax asset
|
|
|
|
|
|
|
1,327,489 |
|
|
Inventory
|
|
|
22,062,585 |
|
|
|
5,180,024 |
|
|
Prepaid drilling costs and other current assets
|
|
|
128,044 |
|
|
|
1,725,843 |
|
|
|
|
|
|
|
|
Total current assets
|
|
|
142,455,334 |
|
|
|
61,127,265 |
|
Oil and gas properties, using the full cost method of accounting
|
|
|
|
|
|
|
|
|
|
Proved
|
|
|
612,960,790 |
|
|
|
385,794,926 |
|
|
Unproved
|
|
|
89,702,465 |
|
|
|
88,839,460 |
|
Capital assets
|
|
|
2,147,528 |
|
|
|
1,424,367 |
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$ |
847,266,117 |
|
|
$ |
537,186,018 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
Current liabilities
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$ |
49,297,861 |
|
|
$ |
14,238,836 |
|
|
Fair value of derivative instruments
|
|
|
|
|
|
|
3,739,406 |
|
|
Current taxes payable
|
|
|
3,564,990 |
|
|
|
|
|
|
Capital cost accrual
|
|
|
46,879,289 |
|
|
|
53,118,385 |
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
99,742,140 |
|
|
|
71,096,627 |
|
Long-term debt
|
|
|
|
|
|
|
102,000,000 |
|
Deferred income tax liability
|
|
|
155,746,465 |
|
|
|
86,362,741 |
|
Other long-term obligations
|
|
|
20,576,574 |
|
|
|
9,734,904 |
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
|
Common stock no par value; authorized
unlimited; issued and outstanding 155,075,864 and
150,234,936 at December 31, 2005 and 2004, respectively
|
|
|
178,806,030 |
|
|
|
106,513,852 |
|
|
Treasury stock
|
|
|
(1,193,650 |
) |
|
|
(1,193,650 |
) |
|
Accumulated other comprehensive loss
|
|
|
|
|
|
|
(2,616,767 |
) |
|
Retained earnings
|
|
|
393,588,558 |
|
|
|
165,288,311 |
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
571,200,938 |
|
|
|
267,991,746 |
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 11)
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
|
|
$ |
847,266,117 |
|
|
$ |
537,186,018 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
Approved on behalf of the Board:
|
|
/s/ Michael D. Watford, Director |
/s/ James E. Nielson, Director |
46
ULTRA PETROLEUM CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED
EARNINGS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(Expressed in U.S. Dollars) | |
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas sales
|
|
$ |
422,091,034 |
|
|
$ |
224,207,694 |
|
|
$ |
114,840,558 |
|
|
Oil sales
|
|
|
94,401,967 |
|
|
|
34,838,753 |
|
|
|
6,740,539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
516,493,001 |
|
|
|
259,046,447 |
|
|
|
121,581,097 |
|
|
|
|
|
|
|
|
|
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production expenses and taxes
|
|
|
89,601,686 |
|
|
|
50,869,283 |
|
|
|
25,223,679 |
|
|
Depletion, depreciation and amortization
|
|
|
58,102,871 |
|
|
|
30,249,061 |
|
|
|
16,215,714 |
|
|
General and administrative
|
|
|
14,342,178 |
|
|
|
7,075,720 |
|
|
|
6,751,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
162,046,735 |
|
|
|
88,194,064 |
|
|
|
48,190,760 |
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME
|
|
|
354,446,266 |
|
|
|
170,852,383 |
|
|
|
73,390,337 |
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
612,153 |
|
|
|
90,760 |
|
|
|
36,889 |
|
|
Interest expense
|
|
|
(3,286,087 |
) |
|
|
(3,783,070 |
) |
|
|
(2,850,916 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,673,934 |
) |
|
|
(3,692,310 |
) |
|
|
(2,814,027 |
) |
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAXES
|
|
|
351,772,332 |
|
|
|
167,160,073 |
|
|
|
70,576,310 |
|
Income tax provision
|
|
|
123,472,085 |
|
|
|
58,010,278 |
|
|
|
25,253,671 |
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
|
228,300,247 |
|
|
|
109,149,795 |
|
|
|
45,322,639 |
|
RETAINED EARNINGS, beginning of year
|
|
|
165,288,311 |
|
|
|
56,138,516 |
|
|
|
10,815,877 |
|
|
|
|
|
|
|
|
|
|
|
RETAINED EARNINGS, end of year
|
|
$ |
393,588,558 |
|
|
$ |
165,288,311 |
|
|
$ |
56,138,516 |
|
|
|
|
|
|
|
|
|
|
|
NET INCOME PER COMMON SHARE BASIC
|
|
$ |
1.49 |
|
|
$ |
0.73 |
|
|
$ |
0.31 |
|
|
|
|
|
|
|
|
|
|
|
NET INCOME PER COMMON SHARE DILUTED
|
|
$ |
1.41 |
|
|
$ |
0.68 |
|
|
$ |
0.29 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic
|
|
|
153,100,067 |
|
|
|
149,735,666 |
|
|
|
148,198,106 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding diluted
|
|
|
161,943,400 |
|
|
|
161,205,534 |
|
|
|
157,037,878 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
47
ULTRA PETROLEUM CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
|
|
|
|
|
|
|
|
Other | |
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive | |
|
|
|
Total | |
|
|
Shares | |
|
Common | |
|
Retained | |
|
Income | |
|
Treasury | |
|
Shareholders | |
|
|
Issued | |
|
Stock | |
|
Earnings | |
|
(Loss) | |
|
Stock | |
|
Equity | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Balances at December 31, 2002
|
|
|
147,973,336 |
|
|
$ |
95,098,690 |
|
|
$ |
10,815,877 |
|
|
$ |
(653,875 |
) |
|
$ |
(1,193,650 |
) |
|
$ |
104,067,042 |
|
|
Stock options exercised
|
|
|
886,000 |
|
|
|
988,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
988,247 |
|
|
Employee stock plan grants
|
|
|
236,000 |
|
|
|
1,148,630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,148,630 |
|
|
Fair value of non-employee stock option grants
|
|
|
|
|
|
|
212,654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
212,654 |
|
Comprehensive earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
45,322,639 |
|
|
|
|
|
|
|
|
|
|
|
45,322,639 |
|
|
Change in derivative instruments fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,286,482 |
) |
|
|
|
|
|
|
(2,286,482 |
) |
Total comprehensive earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,036,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2003
|
|
|
149,095,336 |
|
|
|
97,448,221 |
|
|
|
56,138,516 |
|
|
|
(2,940,357 |
) |
|
|
(1,193,650 |
) |
|
|
149,452,730 |
|
|
Stock options exercised
|
|
|
1,106,600 |
|
|
|
1,770,099 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,770,099 |
|
|
Employee stock plan grants
|
|
|
33,000 |
|
|
|
560,175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
560,175 |
|
|
Fair value of non-employee stock option grants
|
|
|
|
|
|
|
100,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,550 |
|
|
Tax benefit of stock options exercised
|
|
|
|
|
|
|
6,634,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,634,807 |
|
Comprehensive earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
109,149,795 |
|
|
|
|
|
|
|
|
|
|
|
109,149,795 |
|
|
Change in derivative instruments fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
323,590 |
|
|
|
|
|
|
|
323,590 |
|
Total comprehensive earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109,473,385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2004
|
|
|
150,234,936 |
|
|
|
106,513,852 |
|
|
|
165,288,311 |
|
|
|
(2,616,767 |
) |
|
|
(1,193,650 |
) |
|
|
267,991,746 |
|
|
Stock options exercised
|
|
|
4,793,700 |
|
|
|
20,266,680 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,266,680 |
|
|
Employee stock plan grants
|
|
|
47,228 |
|
|
|
1,389,380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,389,380 |
|
|
Fair value of non-employee stock option grants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit of stock options exercised
|
|
|
|
|
|
|
50,636,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,636,118 |
|
Comprehensive earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
228,300,247 |
|
|
|
|
|
|
|
|
|
|
|
228,300,247 |
|
|
Change in derivative instruments fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,616,767 |
|
|
|
|
|
|
|
2,616,767 |
|
Total comprehensive earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
230,917,014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2005
|
|
|
155,075,864 |
|
|
$ |
178,806,030 |
|
|
$ |
393,588,558 |
|
|
$ |
|
|
|
$ |
(1,193,650 |
) |
|
$ |
571,200,938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
48
ULTRA PETROLEUM CORP.
CONSOLIDATED STATEMENTS OF CASH FLOW
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
228,300,247 |
|
|
$ |
109,149,795 |
|
|
$ |
45,322,639 |
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depletion, depreciation and amortization
|
|
|
58,102,871 |
|
|
|
30,249,061 |
|
|
|
16,215,714 |
|
|
|
Deferred income taxes
|
|
|
69,270,977 |
|
|
|
57,748,452 |
|
|
|
25,253,671 |
|
|
|
Tax benefit of stock options exercised
|
|
|
50,636,118 |
|
|
|
|
|
|
|
|
|
|
|
Stock compensation
|
|
|
2,858,515 |
|
|
|
923,623 |
|
|
|
1,018,220 |
|
|
Net changes in working capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
(1,938 |
) |
|
|
(1,292 |
) |
|
|
(1,363 |
) |
|
|
Accounts receivable
|
|
|
(39,906,744 |
) |
|
|
(16,400,426 |
) |
|
|
(7,950,378 |
) |
|
|
Inventory
|
|
|
(518,576 |
) |
|
|
(275,424 |
) |
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
1,597,799 |
|
|
|
(14,106 |
) |
|
|
(1,237,458 |
) |
|
|
Accounts payable and accrued liabilities
|
|
|
32,518,107 |
|
|
|
(10,169,082 |
) |
|
|
10,168,164 |
|
|
|
Other long-term obligations
|
|
|
7,931,130 |
|
|
|
3,870,179 |
|
|
|
1,261,403 |
|
|
|
Taxation payable
|
|
|
3,564,990 |
|
|
|
261,826 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
414,353,496 |
|
|
|
175,342,606 |
|
|
|
90,050,612 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and gas property expenditures
|
|
|
(282,668,055 |
) |
|
|
(195,598,484 |
) |
|
|
(115,837,250 |
) |
|
|
Change in capital costs accrual
|
|
|
(6,239,096 |
) |
|
|
22,501,473 |
|
|
|
26,541,083 |
|
|
|
Inventory
|
|
|
(16,054,472 |
) |
|
|
9,037,557 |
|
|
|
(13,589,270 |
) |
|
|
Purchase of capital assets
|
|
|
(1,585,819 |
) |
|
|
(954,702 |
) |
|
|
(737,021 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash (used in) investing activities
|
|
|
(306,547,442 |
) |
|
|
(165,014,156 |
) |
|
|
(103,622,458 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings of long-term debt, gross
|
|
|
22,000,000 |
|
|
|
44,000,000 |
|
|
|
43,000,000 |
|
|
|
Payments on long-term debt, gross
|
|
|
(124,000,000 |
) |
|
|
(41,000,000 |
) |
|
|
(30,000,000 |
) |
|
|
Proceeds from issuance of common stock
|
|
|
20,266,680 |
|
|
|
1,770,099 |
|
|
|
988,247 |
|
|
|
Stock issued for compensation
|
|
|
1,389,380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(80,343,940 |
) |
|
|
4,770,099 |
|
|
|
13,988,247 |
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
27,462,114 |
|
|
|
15,098,549 |
|
|
|
416,401 |
|
Cash and cash equivalents, beginning of year
|
|
|
16,932,661 |
|
|
|
1,834,112 |
|
|
|
1,417,711 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$ |
44,394,775 |
|
|
$ |
16,932,661 |
|
|
$ |
1,834,112 |
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
3,393,279 |
|
|
$ |
3,783,070 |
|
|
$ |
2,850,916 |
|
|
|
Income taxes
|
|
$ |
326,502 |
|
|
$ |
153,905 |
|
|
$ |
|
|
|
|
Non-cash tax benefit of stock options exercised
|
|
$ |
50,636,118 |
|
|
$ |
6,634,807 |
|
|
$ |
|
|
See accompanying notes to consolidated financial statements.
49
ULTRA PETROLEUM CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars unless otherwise noted)
Years ended December 31, 2005, 2004 and 2003
DESCRIPTION OF THE BUSINESS
Ultra Petroleum Corp. (the Company) is an
independent oil and gas company engaged in the acquisition,
exploration, development, and production of oil and gas
properties. The Company is incorporated under the laws of the
Yukon Territory, Canada. The Companys principal business
activities are in the Green River Basin of southwest Wyoming and
Bohai Bay, China.
|
|
1. |
SIGNIFICANT ACCOUNTING POLICIES: |
(a) Basis of presentation and principles of
consolidation: The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries UP
Energy Corporation, Ultra Resources, Inc. and Sino-American
Energy Corporation. The Company presents its financial
statements in accordance with U.S. Generally Accepted
Accounting Principles (GAAP). All material
inter-company transactions and balances have been eliminated
upon consolidation.
(b) Accounting principles: The consolidated
financial statements are prepared in accordance with accounting
principles generally accepted in the United States.
(c) Cash and cash equivalents: We consider all
highly liquid investments with an original maturity of three
months or less to be cash equivalents.
(d) Restricted cash: Restricted cash represents cash
received by the Company from production sold where the final
division of ownership of the production is unknown or in
dispute. Wyoming law requires that these funds be held in a
federally insured bank in Wyoming.
(e) Capital assets: Capital assets are recorded at
cost and depreciated using the declining-balance method based on
a seven-year useful life.
(f) Oil and gas properties: The Company uses the
full cost method of accounting for exploration and development
activities as defined by the Securities and Exchange Commission
(SEC). Separate cost centers are maintained for each
country in which the Company incurs costs. Under this method of
accounting, the costs of unsuccessful, as well as successful,
exploration and development activities are capitalized as
properties and equipment. This includes any internal costs that
are directly related to exploration and development activities
but does not include any costs related to production, general
corporate overhead or similar activities. Effective with the
adoption of Statement of Financial Accounting Standard
(SFAS) No. 143 in 2003, the carrying amount of
oil and gas properties also includes estimated asset retirement
costs recorded based on the fair value of the asset retirement
obligation when incurred. Gain or loss on the sale or other
disposition of oil and gas properties is not recognized, unless
the gain or loss would significantly alter the relationship
between capitalized costs and proved reserves of oil and gas
attributable to a country.
The sum of net capitalized costs and estimated future
development costs of oil and gas properties are amortized using
the units-of-production
method based on the proven reserves as determined by independent
petroleum engineers. Oil and gas reserves and production are
converted into equivalent units based on relative energy
content. Operating fees received related to the properties in
which the Company owns an interest are netted against expenses.
Fees received in excess of costs incurred are recorded as a
reduction to the full cost pool. Effective with the adoption of
SFAS No. 143, asset retirement obligations are
included in the base costs for calculating depletion.
Oil and gas properties include costs that are excluded from
capitalized costs being amortized. These amounts represent
investments in unproved properties and major development
projects. The Company excludes these costs on a
country-by-country basis until proved reserves are found or
until it is determined that the costs are impaired. All costs
excluded are reviewed, at least quarterly, to determine if
impairment has
50
ULTRA PETROLEUM CORP
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
occurred. The amount of any impairment is transferred to the
capitalized costs being amortized (the depreciation, depletion
and amortization (DD&A) pool) or a charge is
made against earnings for those international operations where a
reserve base has not yet been established. For international
operations where a reserve base has not yet been established, an
impairment requiring a charge to earnings may be indicated
through evaluation of drilling results, relinquishing drilling
rights or other information.
Companies that use the full cost method of accounting for oil
and gas exploration and development activities are required to
perform a ceiling test calculation each quarter. The full cost
ceiling test is an impairment test prescribed by SEC
Regulation S-X
Rule 4-10. The ceiling test is performed quarterly on a
country-by-country basis. The ceiling limits such pooled costs
to the aggregate of the present value of future net revenues
attributable to proved crude oil and natural gas reserves
discounted at 10% plus the lower of cost or market value of
unproved properties less any associated tax effects. If such
capitalized costs exceed the ceiling, the Company will record a
write-down to the extent of such excess as a non-cash charge to
earnings. Any such write-down will reduce earnings in the period
of occurrence and result in lower DD&A expense in future
periods. A write-down may not be reversed in future periods,
even though higher oil and natural gas prices may subsequently
increase the ceiling. The effect of implementing
SFAS No. 143 had no effect on the ceiling test
calculation as the future cash outflows associated with settling
asset retirement obligations are excluded from this calculation.
(g) Inventories: Crude oil products and materials
and supplies inventories are carried at the lower of current
market value or cost. Inventory costs include expenditures and
other charges directly and indirectly incurred in bringing the
inventory to its existing condition and location and the Company
uses the weighted average method of recording its inventory.
Selling expenses and general and administrative expenses are
reported as period costs and excluded from inventory cost.
Inventories of materials and supplies are valued at cost or
less. Crude oil product inventory at December 31, 2005 and
2004 includes depletion and lease operating expenses
(LOE) of $1,456,400 and $628,311, respectively,
associated with the Companys crude oil production in
China. Drilling and completion supplies inventory of
$20.6 million primarily includes the cost of pipe that will
be utilized during the 2006 drilling program.
(h) Derivative transactions: The Company has entered
into commodity price risk management transactions to manage its
exposure to natural gas price volatility. These transactions are
in the form of fixed price forward natural gas sales contracts
with financial institutions and other creditworthy
counterparties. These transactions have been designated by the
Company as cash flow hedges. As such, unrealized gains and
losses related to the change in fair market value of the
derivative contracts are recorded in other comprehensive income
in the balance sheet to the extent the hedges are effective.
(i) Income taxes: Income taxes are accounted for
under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax basis and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
(j) Earnings per share: Basic earnings per share is
computed by dividing net earnings attributable to common stock
by the weighted average number of common shares outstanding
during each period. Diluted earnings per share is computed by
adjusting the average number of common shares outstanding for
the dilutive effect, if any, of common stock equivalents. The
Company uses the treasury stock method to determine the dilutive
effect.
51
ULTRA PETROLEUM CORP
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table provides a reconciliation of the components
of basic and diluted net income per common share for the years
ended December 31, 2005, 2004 and 2003: (The earnings per
share information (Basic income per common share and Diluted
income per common share) have been updated to reflect the 2 for
1 stock split on May 10, 2005).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Net income
|
|
$ |
228,300,247 |
|
|
$ |
109,149,795 |
|
|
$ |
45,322,639 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding during the period
|
|
|
153,100,067 |
|
|
|
149,735,666 |
|
|
|
148,198,106 |
|
Effect of dilutive instruments
|
|
|
8,843,333 |
|
|
|
11,469,868 |
|
|
|
8,839,772 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding during the period
including the effects of dilutive instruments
|
|
|
161,943,400 |
|
|
|
161,205,534 |
|
|
|
157,037,878 |
|
Basic earnings per share
|
|
$ |
1.49 |
|
|
$ |
0.73 |
|
|
$ |
0.31 |
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$ |
1.41 |
|
|
$ |
0.68 |
|
|
$ |
0.29 |
|
|
|
|
|
|
|
|
|
|
|
Number of shares not included in dilutive earnings per share
that would have been anti-dilutive because the exercise price
was greater than the average market price of the common shares
|
|
|
540,000 |
|
|
|
|
|
|
|
27,260 |
|
|
|
|
|
|
|
|
|
|
|
(k) Use of estimates: Preparation of consolidated
financial statements in accordance with accounting principles
generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(l) Reclassifications: Certain amounts in the
financial statements of the prior years have been reclassified
to conform to the current year financial statement presentation.
(m) Accounting for stock-based compensation:
SFAS No. 123 defines a fair value method of accounting
for employee stock options and similar equity instruments.
SFAS No. 123 allows for the continued measurement of
compensation cost for such plans (see Note 6) using the
intrinsic value based method prescribed by APB Opinion
No. 25 (APB Opinion 25), Accounting for
Stock Issued to Employees, provided that pro forma results
of operations are disclosed for those options granted. The
Company accounts for stock options granted to employees and
directors of the Company under the intrinsic value method and no
compensation expense is recognized when the exercise price of
options equals or is greater than the fair market value of the
underlying stock on the date of grant. Had the Company reported
compensation costs as
52
ULTRA PETROLEUM CORP
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
determined by the fair value method of accounting for option
grants to employees and directors, net income and net income per
common share would approximate the following pro forma amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
228,300,247 |
|
|
$ |
109,149,795 |
|
|
$ |
45,322,639 |
|
|
Deduct: Fair value of stock options issued, net of tax
|
|
|
(13,511,140 |
) |
|
|
(17,714,486 |
) |
|
|
(1,522,968 |
) |
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
$ |
214,789,107 |
|
|
$ |
91,435,309 |
|
|
$ |
43,799,671 |
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
1.49 |
|
|
$ |
0.73 |
|
|
$ |
0.31 |
|
|
|
Pro forma
|
|
$ |
1.40 |
|
|
$ |
0.61 |
|
|
$ |
0.30 |
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
1.41 |
|
|
$ |
0.68 |
|
|
$ |
0.29 |
|
|
|
Pro forma
|
|
$ |
1.33 |
|
|
$ |
0.57 |
|
|
$ |
0.28 |
|
For purposes of pro forma disclosures, the estimated fair value
of options is amortized to expense over the options
vesting period. The weighted-average fair value of each option
granted is estimated on the date of grant using the
Black-Scholes option pricing model with the following
assumptions: at December 31, 2005 expected volatility of
34.8% to 44.9% and a risk free rate of 4.18% to 4.41%; at
December 31, 2004 expected volatility of 38.4% and a risk
free rate of 3.713%; and at December 31, 2003, expected
volatility of 25.0% and a risk free rate of 4.35%. At
December 31, 2005 options have expected lives of
1.9 years, at December 31, 2004 options had expected
lives of 6.5 years, and December 31, 2003 options had
expected lives of 10 years. At December 31, 2005, all
stock options issued to date have fully vested.
In the fourth quarter of 2004, the Financial Accounting
Standards Board (FASB) issued SFAS No. 123
(revised 2004), or SFAS No. 123R, Share-Based Payment,
which replaces SFAS No. 123 and supersedes APB Opinion
25. SFAS No. 123R eliminates the option to use APB
Opinion 25s intrinsic value method of accounting and
requires recording expense for stock compensation based on a
fair value based method. After a phase-in period for
SFAS No. 123R, pro forma disclosure will no longer be
allowed. In the first quarter of 2005, the SEC issued Staff
Accounting Bulletin No. 107 which provided further
clarification on the implementation of SFAS No. 123R.
Alternative phase-in methods are allowed under Statement
No. 123R and the Companys effective date for
implementation of SFAS No. 123R is January 1,
2006. The Company expects it will use the modified-prospective
phase-in method that requires entities to recognize compensation
costs in financial statements issued after the date of adoption
for all share-based payments granted, modified or settled after
the date of adoption as well as for any awards that were granted
prior to the adoption date for which the required service has
not yet been performed. The Company does not believe that any of
the alternative phase-in methods would have a materially
different effect on the Companys Consolidated Statement of
Operations or Balance Sheet.
(n) Revenue Recognition. Within the Companys
United States segment, natural gas revenues are recorded on the
entitlement method. Under the entitlement method, revenue is
recorded when title passes based on the Companys net
interest. The Company records its entitled share of revenues
based on estimated production volumes. Subsequently, these
estimated volumes are adjusted to reflect actual volumes that
are supported by third party pipeline statements or cash
receipts. Since there is a ready market for natural gas, the
Company sells the majority of its products soon after production
at various locations at which time title and
53
ULTRA PETROLEUM CORP
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
risk of loss pass to the buyer. Natural gas imbalances occur
when the Company sells more or less than its entitled ownership
percentage of total natural gas production. Any amount received
in excess of the Companys share is treated as a liability.
If the Company receives less than its entitled share, the
underproduction is recorded as a receivable. At
December 31, 2005 the Company had a net natural gas
imbalance liability of $0.5 million and at
December 31, 2004, the Company had a net natural gas
imbalance receivable of $2.0 million.
In China, revenues are recognized when production is sold to a
purchaser at a fixed or determinable price, when delivery has
occurred and title is transferred.
(o) Accumulated Other Comprehensive Earnings (Loss):
Other comprehensive earnings (loss) is a term used to define
revenues, expenses, gains and losses that under generally
accepted accounting principles are reported as separate
components of Shareholders Equity instead of net earnings
(loss). The loss depicted on the balance sheet as other
comprehensive loss is associated with unrealized losses related
to the change in fair value of derivative instruments designated
as cash flow hedges.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Net income
|
|
$ |
228,300,247 |
|
|
$ |
109,149,795 |
|
|
$ |
45,322,639 |
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on derivative instruments, net of tax
|
|
|
|
|
|
|
(2,616,767 |
) |
|
|
(2,940,357 |
) |
Effect of dilutive instruments
|
|
$ |
228,300,247 |
|
|
$ |
106,533,028 |
|
|
$ |
42,382,282 |
|
|
|
|
|
|
|
|
|
|
|
(p) Impact of recently issued accounting
pronouncements: In December 2004, the FASB issued a revised
SFAS No. 123 (SFAS 123R).
SFAS 123R requires compensation costs related to
share-based payments to be recognized in the income statement
over the vesting period. The amount of the compensation cost
will be measured based on the grant-date fair value of the
instrument issued. SFAS 123R is effective as of
January 1, 2006, for all awards granted or modified after
that date and for those awards granted prior to that date that
have not vested. Beginning January 1, 2006 the Company will
begin expensing share based compensation. All outstanding awards
issued prior to this date have fully vested. Stock compensation
expensed in 2005, 2004 and 2003 has been included within the
general and administrative line item of the Companys
income statement. For the years ended December 31, 2005,
2004 and 2003, stock compensation expense was $2,858,515,
$923,623 and $1,018,220, respectively.
As of January 1, 2006, the Company will be required to
adopt SFAS No. 154, Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20 and SFAS
No. 3 (SFAS No. 154). SFAS
No. 154 requires retrospective application of voluntary
changes in accounting principles, unless it is impracticable.
The Company does not expect this standard to have a material
impact on its financial statements.
|
|
2. |
ASSET RETIREMENT OBLIGATIONS: |
In June 2001, the FASB issued SFAS No. 143,
Accounting for Asset Retirement Obligations
(SFAS No. 143). SFAS No. 143 requires the
Company to record the fair value of an asset retirement
obligation as a liability in the period in which it incurs a
legal obligation associated with the retirement of tangible
long-lived assets that result from the acquisition,
construction, development and/or normal use of the assets. As of
December 31, 2005, the Company has recorded a liability of
$3,601,348 ($2,845,724 U.S. and $755,624 China) to account for
future obligations associated with its assets in both the United
States and China. As of December 31, 2004, the liability
was $744,512 ($321,505 U.S. and $423,007 China).
54
ULTRA PETROLEUM CORP
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the activities for the
Companys asset retirement obligations for the year ended
December 31, 2005:
|
|
|
|
|
|
|
December 31, | |
|
|
2005 | |
|
|
| |
Asset retirement obligations at beginning of period
|
|
$ |
744,512 |
|
Accretion expense
|
|
|
47,519 |
|
Liabilities incurred
|
|
|
844,977 |
|
Liabilities settled
|
|
|
(53,705 |
) |
Revisions of estimated liabilities
|
|
|
2,018,045 |
|
|
|
|
|
Asset retirement obligations at end of period
|
|
|
3,601,348 |
|
Less: current asset retirement obligations
|
|
|
|
|
|
|
|
|
Long-term asset retirement obligations
|
|
$ |
3,601,348 |
|
|
|
|
|
|
|
3. |
OIL AND GAS PROPERTIES: |
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Developed Properties:
|
|
|
|
|
|
|
|
|
|
Acquisition, equipment, exploration, drilling and environmental
costs Domestic
|
|
$ |
700,425,880 |
|
|
$ |
435,095,908 |
|
|
Acquisition, equipment, exploration, drilling and environmental
costs China
|
|
|
43,890,413 |
|
|
|
24,552,316 |
|
|
Less accumulated depletion, depreciation and
amortization Domestic
|
|
|
(118,172,467 |
) |
|
|
(70,597,411 |
) |
|
Less accumulated depletion, depreciation and
amortization China
|
|
|
(13,183,036 |
) |
|
|
(3,255,887 |
) |
|
|
|
|
|
|
|
|
|
|
612,960,790 |
|
|
|
385,794,926 |
|
Unproven Properties:
|
|
|
|
|
|
|
|
|
|
Acquisition and exploration costs Domestic
|
|
|
17,647,300 |
|
|
|
16,910,010 |
|
|
Acquisition and exploration costs China
|
|
|
72,055,165 |
|
|
|
71,929,450 |
|
|
|
|
|
|
|
|
|
|
$ |
702,663,255 |
|
|
$ |
474,634,386 |
|
|
|
|
|
|
|
|
The Company holds interests in projects located in both the
United States and in China. Costs related to these interests of
$89.7 million ($17.6 million in the U.S. and
$72.1 million in China) are not being depleted pending
determination of existence of estimated proved reserves. The
Companys share of exploration on its China properties
accounts for the majority of this balance. The properties in
China began producing in July 2004 and development of additional
fields continues along with exploration of future fields. The
Company will
55
ULTRA PETROLEUM CORP
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
continue to assess and allocate the unproven properties over the
next several years as proved reserves are established and as
exploration dictates whether or not future areas will be
developed.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total | |
|
2005 | |
|
2004 | |
|
2003 | |
|
Prior | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
United States:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition costs
|
|
$ |
18,606,405 |
|
|
$ |
1,818,954 |
|
|
$ |
222,685 |
|
|
$ |
418,064 |
|
|
$ |
16,146,702 |
|
|
Exploration costs
|
|
|
7,477,887 |
|
|
|
545,602 |
|
|
|
1,082,804 |
|
|
|
995,612 |
|
|
|
4,853,869 |
|
|
Less transfers to proved
|
|
|
(8,436,992 |
) |
|
|
(1,627,266 |
) |
|
|
|
|
|
|
(128,139 |
) |
|
|
(6,681,587 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,647,300 |
|
|
|
737,290 |
|
|
|
1,305,489 |
|
|
|
1,285,537 |
|
|
|
14,318,984 |
|
|
China:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition costs
|
|
|
44,857,346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,857,346 |
|
|
Exploration costs
|
|
|
67,911,028 |
|
|
|
19,167,259 |
|
|
|
29,390,964 |
|
|
|
8,862,000 |
|
|
|
10,490,805 |
|
|
Less transfers to proved
|
|
|
(40,713,209 |
) |
|
|
(19,041,544 |
) |
|
|
(21,671,665 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72,055,165 |
|
|
|
125,715 |
|
|
|
7,719,299 |
|
|
|
8,862,000 |
|
|
|
55,348,151 |
|
Total
|
|
$ |
89,702,465 |
|
|
$ |
863,005 |
|
|
$ |
9,024,788 |
|
|
$ |
10,147,537 |
|
|
$ |
69,667,135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
|
|
|
|
December 31, | |
|
2005 | |
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
Accumulated | |
|
2005 | |
|
2004 | |
|
|
Cost | |
|
Depreciation | |
|
Net Book Value | |
|
Net Book Value | |
|
|
| |
|
| |
|
| |
|
| |
Computer equipment
|
|
$ |
1,000,516 |
|
|
$ |
688,632 |
|
|
$ |
311,884 |
|
|
$ |
221,261 |
|
Office equipment
|
|
|
277,142 |
|
|
|
188,757 |
|
|
|
88,385 |
|
|
|
88,339 |
|
Field equipment
|
|
|
1,534,442 |
|
|
|
508,527 |
|
|
|
1,025,915 |
|
|
|
329,264 |
|
Other
|
|
|
2,482,917 |
|
|
|
1,761,573 |
|
|
|
721,344 |
|
|
|
785,503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,295,017 |
|
|
$ |
3,147,489 |
|
|
$ |
2,147,528 |
|
|
$ |
1,424,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5. |
LONG-TERM LIABILITIES: |
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Bank indebtedness
|
|
$ |
|
|
|
$ |
102,000,000 |
|
Other long-term obligations
|
|
|
20,576,574 |
|
|
|
9,734,904 |
|
|
|
|
|
|
|
|
|
|
$ |
20,576,574 |
|
|
$ |
111,734,904 |
|
|
|
|
|
|
|
|
Bank indebtedness: The Company (through its subsidiary)
participates in a revolving credit facility with a group of
banks led by JP Morgan Chase Bank, N.A. The agreement specifies
a maximum loan amount of $500 million and an aggregate
borrowing base of $800 million and a commitment amount of
$200 million at November 14, 2005. The commitment
amount may be increased up to the lesser of the borrowing base
amount or $500 million at any time at the request of the
Company. Each bank shall have the right, but not the obligation,
to increase the amount of their commitment as requested by the
Company. In the event that the existing banks increase their
commitment to an amount less than the requested commitment
amount, then it would be necessary to bring additional banks
into the facility. At December 31, 2005, the Company had no
amounts outstanding and $200 million unused and available
under the current committed amount.
56
ULTRA PETROLEUM CORP
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The credit facility matures on May 1, 2010. The note bears
interest at either (A) the banks prime rate plus a
margin of zero percent (0.00%) to three-quarters of one percent
(0.75%) based on the percentage of available credit drawn or at
(B) LIBOR plus a margin of one percent (1.00%) to one and
three-quarters of one percent (1.75%) based on the percentage of
available credit drawn. For the purposes of calculating
interest, the available credit is equal to the borrowing base.
An average annual commitment fee of 0.25% to 0.375%, depending
on the percentage of available credit drawn, is charged
quarterly for any unused portion of the commitment amount. The
Companys total commitment fees were $354,017, $374,096 and
$249,788 for the years ended December 31, 2005, 2004 and
2003, respectively.
The borrowing base is subject to periodic (at least semi-annual)
review and re-determination by the banks and may be decreased or
increased depending on a number of factors, including the
Companys proved reserves and the banks forecast of
future oil and gas prices. If the borrowing base is reduced to
an amount less than the balance outstanding, the Company has
sixty days from the date of written notice of the reduction in
the borrowing base to pay the difference. Additionally, the
Company is subject to quarterly reviews of compliance with the
covenants under the bank facility including minimum coverage
ratios relating to interest, working capital and advances to
Sino-American Energy Corporation. In the event of a default
under the covenants, the Company may not be able to access funds
otherwise available under the facility. As of December 31,
2005, the Company was in compliance with required ratios of the
bank facility.
The debt outstanding, if any, under the credit facility is
secured by a majority of the Companys proved domestic oil
and gas properties.
Other long-term obligations: These costs relate to the
long-term portion of production taxes payable, a liability
associated with imbalanced production, our asset retirement
obligations mentioned in Note 2 and the long-term portion
of the Companys incentive compensation plan.
|
|
6. |
STOCK BASED COMPENSATION: |
The Companys Stock Incentive Plans are administered by the
Board of Directors (the Plan Administrator). The
Plan Administrator may make awards of stock options to
employees, directors, officers and consultants of the Company as
long as the aggregate number of common shares issuable to any
one person pursuant to incentives does not exceed 5% of the
number of common shares outstanding at the time of the award. In
addition, no participant may receive during any fiscal year of
the Companys awards of incentives covering an aggregate of
more than 500,000 common shares. The Plan Administrator
determines the vesting requirements and any vesting restrictions
or forfeitures in certain circumstances. Incentives may not have
an exercise period longer than 10 years. The exercise price
of the stock may not be less than the fair market value of the
common shares at the time of award, where fair market
value means the weighted average trading price of the
common shares for the five trading days preceding the date of
the award.
On April 29, 2005, the shareholders approved the adoption
of the 2005 Stock Incentive Plan (2005 Stock Incentive
Plan). The 2005 Stock Incentive Plan authorizes the Plan
Administrator to award Incentives from the effective date of the
2005 Stock Incentive Plan. The 2005 Stock Incentive Plan is in
addition to the Companys existing stock option plans (the
2000 Option Plan and the 1998 Stock
Plan). The 2000 Option Plan and the 1998 Stock Plan remain
effective and the Company will make grants under each of the
existing plans.
The purpose of the 2005 Stock Incentive Plan is to foster and
promote the long-term financial success of the Company and to
increase shareholder value by attracting, motivating and
retaining key employees, consultants and directors and providing
such participants in the 2005 Stock Incentive Plan with a
program for obtaining an ownership interest in the Company that
links and aligns their personal interests with those of the
Companys shareholders, thus enabling such participants to
share in the long-term growth and success of the Company. To
accomplish these goals, the 2005 Stock Incentive Plan permits
the granting of incentive stock
57
ULTRA PETROLEUM CORP
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
options, non-statutory stock options, stock appreciation rights,
restricted stock, and other stock-based awards, some of which
may require the satisfaction of performance-based criteria in
order to be payable to participants. The 2005 Stock Incentive
Plan is an important component of the total compensation package
offered to employees and directors, reflecting the importance
that the Company places on motivating and rewarding superior
results with long-term, performance-based incentives.
The following table summarizes the changes in stock options for
the three-year period ended December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
Number of | |
|
Weighted Average | |
|
|
Options | |
|
Exercise Price (US$) | |
|
|
| |
|
| |
Balance, December 31, 2002
|
|
|
11,123,500 |
|
|
$ |
0.26 to $4.43 |
|
Granted
|
|
|
1,595,000 |
|
|
$ |
4.83 to $7.10 |
|
Exercised
|
|
|
(886,000 |
) |
|
$ |
0.32 to $4.43 |
|
Cancelled
|
|
|
(27,500 |
) |
|
$ |
4.43 to $4.83 |
|
|
|
|
|
|
|
|
Balance, December 31, 2003
|
|
|
11,805,000 |
|
|
$ |
0.26 to $7.10 |
|
|
|
|
|
|
|
|
Granted
|
|
|
2,005,000 |
|
|
$ |
11.69 to $24.31 |
|
Exercised
|
|
|
(1,106,600 |
) |
|
$ |
0.38 to $7.10 |
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
|
12,703,400 |
|
|
$ |
0.26 to $24.31 |
|
|
|
|
|
|
|
|
Granted
|
|
|
1,529,000 |
|
|
$ |
23.90 to $58.71 |
|
Exercised
|
|
|
(4,793,700 |
) |
|
$ |
0.32 to $25.68 |
|
Cancelled
|
|
|
(50,000 |
) |
|
$ |
25.68 to $25.68 |
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
|
9,388,700 |
|
|
$ |
0.26 to $58.71 |
|
|
|
|
|
|
|
|
No compensation resulted from the granting of these options as
all were granted at or above the market value of the common
shares at the date of grant. Stock options granted to
consultants have been assessed at fair value and capitalized to
the full cost pool based on the nature of the services provided
by the consultants. At December 31, 2005, all stock options
granted to date were fully vested.
The following table summarizes information about the stock
options outstanding at December 31, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding | |
|
Options Exercisable | |
|
|
| |
|
| |
|
|
|
|
Weighted Average | |
|
Weighted Average | |
|
|
|
Weighted Average | |
|
Weighted Average | |
|
|
Number | |
|
Remaining | |
|
Exercise Price | |
|
Number | |
|
Remaining | |
|
Exercise Price | |
Range of Exercise Price ($US) |
|
Outstanding | |
|
Contractual Life | |
|
($US) | |
|
Exercisable | |
|
Contractual Life | |
|
($US) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
$ 0.38 - 0.46
|
|
|
2,627,500 |
|
|
|
3.08 |
|
|
$ |
0.46 |
|
|
|
2,627,500 |
|
|
|
3.08 |
|
|
$ |
0.46 |
|
$ 0.25 - 0.57
|
|
|
823,000 |
|
|
|
4.30 |
|
|
$ |
0.36 |
|
|
|
823,000 |
|
|
|
4.30 |
|
|
$ |
0.36 |
|
$ 1.49 - 2.61
|
|
|
1,405,000 |
|
|
|
5.21 |
|
|
$ |
1.91 |
|
|
|
1,405,000 |
|
|
|
5.21 |
|
|
$ |
1.91 |
|
$ 3.91 - 4.43
|
|
|
722,000 |
|
|
|
6.36 |
|
|
$ |
4.39 |
|
|
|
722,500 |
|
|
|
6.36 |
|
|
$ |
4.39 |
|
$ 4.83 - 7.10
|
|
|
941,200 |
|
|
|
7.35 |
|
|
$ |
5.04 |
|
|
|
941,200 |
|
|
|
7.35 |
|
|
$ |
5.04 |
|
$11.68 - 24.21
|
|
|
1,484,000 |
|
|
|
8.31 |
|
|
$ |
16.06 |
|
|
|
1,484,000 |
|
|
|
8.31 |
|
|
$ |
16.06 |
|
$23.90 - 58.71
|
|
|
1,386,000 |
|
|
|
9.48 |
|
|
$ |
35.28 |
|
|
|
1,386,000 |
|
|
|
9.48 |
|
|
$ |
35.28 |
|
In December 2004, the FASB issued SFAS No. 123R,
Share-Based Payments
(SFAS No. 123R). SFAS No. 123R
is a revision of SFAS No. 123, Accounting for
Stock Based Compensation, and supersedes APB Opinion 25.
Among other items, SFAS No. 123R eliminates the use of APB
Opinion 25 and the intrinsic value method of accounting, and
requires companies to recognize the cost of employee services
received in exchange for awards of equity instruments, based on
the grant date fair value of those awards, in
58
ULTRA PETROLEUM CORP
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the financial statements. Pro forma disclosure is no longer an
alternative under the new standard. The Company will adopt SFAS
No. 123R as of the required effective date for calendar
year companies, which is January 1, 2006.
SFAS No. 123R permits companies to adopt its
requirements using either a modified prospective
method, or a modified retrospective method. Under
the modified prospective method, compensation cost
is recognized in the financial statements beginning with the
effective date, based on the requirements of
SFAS No. 123R for all share-based payments granted
after that date, and based on the requirements of
SFAS No. 123 for all unvested awards granted prior to
the effective date of SFAS No. 123R. Under the
modified retrospective method, the requirements are
the same as under the modified prospective method,
but also permit entities to restate financial statements of
previous periods based on proforma disclosures made in
accordance with SFAS No. 123. At December 31, 2005,
all stock options granted to date were fully vested.
The Company currently utilizes a standard option pricing model
(i.e., Black-Scholes) to measure the fair value of stock options
granted to Employees. While SFAS No. 123R permits
entities to continue to use such a model, the standard also
permits the use of a more complex binomial, or
lattice model. Based upon research done by the
Company on the alternative models available to value option
grants, and in conjunction with the type and number of stock
options expected to be issued in the future, the Company has
determined that it will continue to use the Black-Scholes model
for option valuation as of the current time.
SFAS No. 123R includes several modifications to the
way that income taxes are recorded in the financial statements.
The expense for certain types of option grants is only
deductible for tax purposes at the time that the taxable event
takes place, which could cause variability in the Companys
effective tax rates recorded throughout the year.
SFAS No. 123R does not allow companies to
predict when these taxable events will take place.
Furthermore, it requires that the benefits associated with the
tax deductions in excess of recognized compensation cost be
reported as a financing cash flow, rather than as an operating
cash flow as required under current literature. This requirement
will reduce net operating cash flows and increase net financing
cash flows in periods after the effective date. These future
amounts cannot be estimated, because they depend on, among other
things, when employees exercise stock options.
|
|
7. |
DERIVATIVE FINANCIAL INSTRUMENTS: |
The Company has, in the past, used derivative instruments as one
way to manage its exposure to commodity prices. The Company has
periodically entered into fixed-price to index-price swap
agreements in order to hedge a portion of its production. The
purpose of the swaps is to provide a measure of stability to the
Companys cash flows in an environment of volatile oil and
gas prices. The derivatives reduce the Companys exposure
on the hedged volumes to decreases in commodity prices and limit
the benefit the Company might otherwise have received from any
increases in commodity prices on the hedged volumes. The Company
recognizes all derivative instruments as assets or liabilities
in the balance sheet at fair value. The accounting treatment for
the changes in fair value as specified in SFAS No. 133
is dependent upon whether or not a derivative instrument is
designated as a hedge. For derivatives designated as cash flow
hedges, changes in fair value, to the extent the hedge is
effective, are recognized in Other Comprehensive Income (Loss)
on the balance sheet until the hedged item is recognized in
earnings as oil and gas revenue. For all other derivatives,
changes in fair value are recognized in earnings as income or
expense.
During 2005, the Company recognized costs associated with
financially settled swaps to counter-parties totaling $9,286,000
as its net realization from hedging activities. This total
includes $999,900 for the first quarter of 2005, $1,440,800 for
the second quarter of 2005, $2,090,600 for the third quarter of
2005, and $4,754,700 for the fourth quarter of 2005.
At December 31, 2005, the Company had no open derivative
contracts to manage price risk on its natural gas production.
59
ULTRA PETROLEUM CORP
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company also utilizes fixed price forward natural gas sales
at southwest Wyoming delivery points to hedge its commodity
exposure. The Company had the following physical delivery
contracts in place at December 31, 2005.
|
|
|
|
|
|
|
|
|
|
|
Volume | |
|
Average | |
Contract Period |
|
MMBTU/Day | |
|
Price/MMbtu | |
|
|
| |
|
| |
Calendar 2006
|
|
|
70,000 |
|
|
$ |
5.86 |
|
As of February 28, 2006, the Companys fixed price
forward natural gas sales contracts represented net volumes
equal to approximately 24% of the Companys currently
forecasted natural gas production for Calendar 2006.
Income before income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
United States
|
|
$ |
304,943,491 |
|
|
$ |
153,553,816 |
|
|
$ |
70,970,170 |
|
Foreign
|
|
|
46,828,841 |
|
|
|
13,606,257 |
|
|
|
(393,860 |
) |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
351,772,332 |
|
|
$ |
167,160,073 |
|
|
$ |
70,576,310 |
|
|
|
|
|
|
|
|
|
|
|
The consolidated income tax provision is comprised of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal & state
|
|
$ |
50,636,118 |
|
|
$ |
261,826 |
|
|
|
|
|
|
Foreign
|
|
|
3,564,990 |
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal & state
|
|
|
57,228,294 |
|
|
|
53,144,257 |
|
|
|
25,253,671 |
|
|
Foreign
|
|
|
12,042,683 |
|
|
|
4,604,195 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax provision
|
|
$ |
123,472,085 |
|
|
$ |
58,010,278 |
|
|
$ |
25,253,671 |
|
|
|
|
|
|
|
|
|
|
|
During 2005, the Company realized tax benefits of
$50.6 million attributable to tax deductions associated
with the exercise of stock options. These benefits are recorded
as a reduction of current taxes payable and as an increase in
shareholders equity.
The income tax provision differs from the amount that would be
computed by applying the U.S. federal income tax rate of
35% to pretax income as a result of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Income tax provision computed at the U.S. statutory rate
|
|
$ |
123,120,316 |
|
|
$ |
58,506,026 |
|
|
$ |
24,701,708 |
|
State income tax provision net of federal benefit
|
|
|
297,319 |
|
|
|
159,628 |
|
|
|
455,557 |
|
Other, net
|
|
|
54,450 |
|
|
|
(655,376 |
) |
|
|
96,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
123,472,085 |
|
|
$ |
58,010,278 |
|
|
$ |
25,253,671 |
|
|
|
|
|
|
|
|
|
|
|
60
ULTRA PETROLEUM CORP
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The tax effects of temporary differences that give rise to
significant components of the Companys deferred tax assets
and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
Unrecognized loss on derivative instruments (current)
|
|
$ |
|
|
|
$ |
1,327,489 |
|
|
|
U.S. federal net operating loss carryforwards
|
|
|
|
|
|
|
5,845,351 |
|
|
|
Foreign net operating loss carryforwards
|
|
|
1,976,930 |
|
|
|
2,554,106 |
|
|
|
Unrecognized loss on derivative instruments (noncurrent)
|
|
|
|
|
|
|
112,747 |
|
|
|
Other, net
|
|
|
4,469 |
|
|
|
1,009,305 |
|
|
|
|
|
|
|
|
|
|
|
1,981,399 |
|
|
|
10,848,998 |
|
|
|
|
Valuation allowance
|
|
|
(1,976,930 |
) |
|
|
(2,554,106 |
) |
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
4,469 |
|
|
|
8,294,892 |
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
(155,750,934 |
) |
|
|
(93,330,144 |
) |
|
|
|
|
|
|
|
|
Net deferred tax asset (liability)
|
|
$ |
(155,746,465 |
) |
|
$ |
(85,035,252 |
) |
|
|
|
|
|
|
|
In assessing the realizability of the deferred tax assets,
management considers whether it is more likely than not that
some or all of the deferred tax assets will not be realized. The
ultimate realization of the deferred tax assets is dependent
upon the generation of future taxable income during the periods
in which the temporary differences become deductible. Among
other items, management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income and
available tax planning strategies.
As of December 31, 2004, the Company had U.S. federal
regular tax net operating loss carryforwards
(NOLs) of approximately $16.7 million
which were available to offset future U.S. taxable income.
The Company did not record any valuation allowance attributable
to its U.S. NOLs as management estimated that it was
more likely than not that the U.S. NOLs would be
fully utilized before they expire. These U.S. NOLs
were fully utilized to offset U.S. taxable income in 2005.
The Company has Canadian non-capital tax loss carryforwards of
approximately $5.6 million and $7.3 million as of
December 31, 2005 and December 31, 2004, respectively.
The benefit of the Canadian loss carryforwards can only be
utilized to the extent the Company generates future taxable
income in Canada. If not utilized, the $5.6 million
Canadian loss carryforward will expire between 2006 and 2015.
Since the Company currently has no income producing operations
in Canada, management estimates that it is more likely than not
that the Canadian loss carryforwards will not be utilized. A
valuation allowance has been recorded at December 31, 2005
and December 31, 2004 attributable to this deferred tax
asset.
The Company periodically uses derivative instruments designated
as cash flow hedges as a method of managing its exposure to
commodity price fluctuations. To the extent these hedges are
effective, changes in the fair value of these derivative
instruments are recorded in Other Comprehensive Income, net of
income tax. At December 31, 2005, the Company had no open
derivative contracts; and, therefore, no recorded tax benefit
attributable to unrecognized loss on derivative instruments. A
tax benefit attributable to unrecognized loss on
61
ULTRA PETROLEUM CORP
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
derivative instruments of $1,440,236 was allocated directly to
Other Comprehensive Income as of December 31, 2004.
The Company sponsors a qualified, tax-deferred savings plan in
accordance with provisions of Section 401(k) of the
Internal Revenue Code for its employees. Employees may defer up
to 15% of their compensation, subject to certain limitations.
The Company matches the employee contributions up to 5% of
employee compensation along with a profit sharing contribution
of 8%. The plan operates on a calendar year basis and began in
February 1998. The expense associated with the Companys
contribution was $507,306, $396,684 and $299,832 for the years
ended December 31, 2005, 2004 and 2003, respectively.
The Company has two reportable operating segments, one domestic
and one foreign, which are in the business of natural gas and
crude oil exploration and production. The accounting policies of
the segments are the same as those described in the summary of
significant accounting policies. The Company evaluates
performance based on profit or loss from oil and gas operations
before price-risk management and other, general and
administrative expenses and interest expense. The Companys
reportable operating segments are managed separately based on
their geographic locations. Financial information by operating
segment is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States | |
|
China | |
|
Total | |
|
|
| |
|
| |
|
| |
Year-ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and gas sales
|
|
$ |
448,730,965 |
|
|
$ |
67,762,036 |
|
|
$ |
516,493,001 |
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depletion, depreciation and amortization
|
|
|
48,455,070 |
|
|
|
9,647,801 |
|
|
|
58,102,871 |
|
|
Lease operating expenses
|
|
|
9,047,390 |
|
|
|
7,352,000 |
|
|
|
16,399,390 |
|
|
Production taxes
|
|
|
52,689,060 |
|
|
|
3,388,089 |
|
|
|
56,077,149 |
|
|
Gathering
|
|
|
17,125,147 |
|
|
|
|
|
|
|
17,125,147 |
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$ |
321,414,298 |
|
|
$ |
47,374,146 |
|
|
$ |
368,788,444 |
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
|
|
|
|
|
|
|
|
14,342,178 |
|
|
Other expense, net
|
|
|
|
|
|
|
|
|
|
|
2,673,934 |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
$ |
351,772,332 |
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$ |
263,486,693 |
|
|
$ |
19,181,362 |
|
|
$ |
282,668,055 |
|
|
|
|
|
|
|
|
|
|
|
Net oil and gas properties
|
|
$ |
599,900,713 |
|
|
$ |
102,762,542 |
|
|
$ |
702,663,255 |
|
|
|
|
|
|
|
|
|
|
|
62
ULTRA PETROLEUM CORP
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States | |
|
China | |
|
Total | |
|
|
| |
|
| |
|
| |
Year-ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and gas sales
|
|
$ |
238,866,913 |
|
|
$ |
20,179,534 |
|
|
$ |
259,046,447 |
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depletion, depreciation and amortization
|
|
|
27,346,061 |
|
|
|
2,903,000 |
|
|
|
30,249,061 |
|
|
Lease operating expenses
|
|
|
6,286,715 |
|
|
|
2,286,000 |
|
|
|
8,572,715 |
|
|
Production taxes
|
|
|
28,151,661 |
|
|
|
1,009,098 |
|
|
|
29,160,759 |
|
|
Gathering
|
|
|
13,135,809 |
|
|
|
|
|
|
|
13,135,809 |
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$ |
163,946,667 |
|
|
$ |
13,981,436 |
|
|
$ |
177,928,103 |
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
|
|
|
|
|
|
|
|
7,075,720 |
|
|
Other expense, net
|
|
|
|
|
|
|
|
|
|
|
3,692,310 |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
$ |
167,160,073 |
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$ |
179,592,969 |
|
|
$ |
16,005,515 |
|
|
$ |
195,598,484 |
|
|
|
|
|
|
|
|
|
|
|
Net oil and gas properties
|
|
$ |
381,408,507 |
|
|
$ |
93,225,879 |
|
|
$ |
474,634,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States | |
|
China | |
|
Total | |
|
|
| |
|
| |
|
| |
Year-ended December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and gas sales
|
|
$ |
121,581,097 |
|
|
|
|
|
|
$ |
121,581,097 |
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depletion, depreciation and amortization
|
|
|
16,215,714 |
|
|
|
|
|
|
|
16,215,714 |
|
|
Lease operating expenses
|
|
|
3,627,639 |
|
|
|
|
|
|
|
3,627,639 |
|
|
Production taxes
|
|
|
13,767,668 |
|
|
|
|
|
|
|
13,767,668 |
|
|
Gathering
|
|
|
7,828,372 |
|
|
|
|
|
|
|
7,828,372 |
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$ |
80,141,704 |
|
|
$ |
|
|
|
$ |
80,141,704 |
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
|
|
|
|
|
|
|
|
6,751,367 |
|
|
Other expense, net
|
|
|
|
|
|
|
|
|
|
|
2,814,027 |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
$ |
70,576,310 |
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$ |
100,677,192 |
|
|
$ |
15,160,058 |
|
|
$ |
115,837,250 |
|
|
|
|
|
|
|
|
|
|
|
Net oil and gas properties
|
|
$ |
226,893,478 |
|
|
$ |
80,970,244 |
|
|
$ |
307,863,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
11. |
COMMITMENTS AND CONTINGENCIES: |
On October 16, 2003 the operator of the Companys
properties in China, Kerr-McGee, signed a 15 year contract,
which provides for up to an additional 10 years, to lease a
floating production storage offloading unit (FPSO).
The Company ratified the contract for its net share which is
8.91%. The FPSO service agreement calls for a day rate lease
payment and a sliding scale per barrel processing fee that
decreases based on cumulative barrels processed. The lease
contains a cancellation fee based on a sliding time-scale
(cancellation fee decreases with time), which as of
December 31, 2005 was $3.3 million net to the
Companys 8.91% interest. The Company considers it very
unlikely that a lease cancellation situation will occur. Due to
the terms of the lease, the Company cannot estimate with any
degree of accuracy the costs it may incur during the life of the
lease. The Companys net share for the costs of the FPSO in
2005 was approximately $1.8 million.
63
ULTRA PETROLEUM CORP
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In May 2003, the Company amended its prior office lease in
Englewood, Colorado, which it has committed to through June
2008. The Companys total remaining commitment at
December 31, 2005 on this lease is $677,791 at
December 31, 2005 ($265,485 in 2006, $273,530 in 2007 and
$138,776 in 2008). In December 2003, the Company signed a lease
for office space in Houston, Texas, which it has committed to
through April 2007 for a total remaining commitment of $135,792
($101,844 in 2006 and $33,948 in 2007) at December 31,
2005. The total remaining commitment for both offices is
$813,583.
As of December 31, 2005, the Company had committed to
drilling obligations with certain rig contractors totalling
$108,410,500 with $104,610,500 due in one to three years and the
balance of $3,800,000 due in three to five years. The
commitments expire in 2009 and were entered into to fulfill the
Companys 2006-2008 drilling program initiatives in Wyoming.
During 2005, the Company took a major step toward assuring that
the pipeline infrastructure to move the Companys natural
gas supplies away from southwest Wyoming will be expanded to
provide sufficient capacity to transport its natural gas
production and to provide for reasonable basis differentials for
its natural gas in the future. The Company agreed to become an
anchor shipper on the proposed Rockies Express Pipeline project,
sponsored by subsidiaries of Kinder Morgan and Sempra Energy.
The Rockies Express Pipeline, if built as proposed, would be the
largest natural gas transmission pipeline project of its type
built in the United States in more than 20 years. As
proposed, the Rockies Express Pipeline would begin at the Opal
Processing Plant in southwest Wyoming, and traverse Wyoming and
several other states to an ultimate terminus in eastern Ohio.
This project is projected to cover more than 1,800 miles
and is contemplated to be a large-diameter (42),
high-pressure natural gas pipeline. The Rockies Express
Pipeline, if built, will be an interstate pipeline and would
therefore be subject to the jurisdiction of the United States
Federal Energy Regulatory Commission.
On December 19, 2005, the Company signed, subject to Board
of Director approval, a Precedent Agreement with Rockies Express
Pipeline, LLC committing to take firm transportation capacity in
the proposed Rockies Express interstate pipeline. The
Companys commitment involves capacity of
200,000 MMBtu per day of natural gas for a term of
10 years, and the Company will be obligated to pay to
Rockies Express certain demand charges related to its rights to
hold this firm transportation capacity as an anchor shipper. The
Companys Board of Directors approved the Precedent
Agreement on February 6, 2006 and Kinder Morgan, as the
Managing Member of the Rockies Express Pipeline LLC advised the
Company of their final approval of the Precedent Agreement, and
their intent to proceed with the construction of the Rockies
Express Pipeline on February 28, 2006. Although the Company
is optimistic that the Rockies Express Pipeline project will
receive the necessary regulatory approvals and be constructed in
a timely manner, there can be no assurances that the Rockies
Express Pipeline will be built, nor will there be any assurances
that, if built, it will prevent large basis differentials from
occurring in the future.
The Company is currently involved in various routine disputes
and allegations incidental to its business operations. While it
is not possible to determine the ultimate disposition of these
matters, management, after consultation with legal counsel, is
of the opinion that the final resolution of all such currently
pending or threatened litigation is not likely to have a
material adverse effect on the consolidated financial position,
results of operations or cash flows of the Company.
|
|
12. |
FAIR VALUE OF FINANCIAL INSTRUMENTS: |
For certain of the Companys financial instruments,
including accounts receivable, notes receivable, accounts
payable and accrued liabilities, the carrying amounts
approximate fair value due to the immediate or short-term
maturity of these financial instruments.
The Companys revenues are derived principally from
uncollateralized sales to customers in the natural gas and oil
industry. The concentration of credit risk in a single industry
affects the Companys overall exposure to credit risk
because customers may be similarly affected by changes in
economic and other
64
ULTRA PETROLEUM CORP
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
conditions. In 2005, the Company had three significant
customers, CNOOC, Occidental Energy Marketing, Inc. and Sempra
Energy Trading, that individually accounted for 10% or more of
the Companys total natural gas and oil sales during 2005.
|
|
13. |
SUMMARIZED QUARTERLY FINANCIAL INFORMATION (UNAUDITED): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before | |
|
Income | |
|
|
|
Basic | |
|
Diluted | |
|
|
|
|
|
|
Income Tax | |
|
Tax | |
|
Net | |
|
Earnings | |
|
Earnings | |
|
|
Revenues | |
|
Expenses | |
|
Provision | |
|
Provision | |
|
Income | |
|
per Share | |
|
per Share | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except for per share data) | |
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$ |
89,364 |
|
|
$ |
31,857 |
|
|
$ |
57,507 |
|
|
$ |
20,185 |
|
|
$ |
37,322 |
|
|
$ |
0.25 |
|
|
$ |
0.23 |
|
Second Quarter
|
|
$ |
110,635 |
|
|
$ |
36,848 |
|
|
$ |
73,787 |
|
|
$ |
25,899 |
|
|
$ |
47,888 |
|
|
$ |
0.31 |
|
|
$ |
0.30 |
|
Third Quarter
|
|
$ |
134,378 |
|
|
$ |
40,618 |
|
|
$ |
93,760 |
|
|
$ |
32,910 |
|
|
$ |
60,850 |
|
|
$ |
0.40 |
|
|
$ |
0.38 |
|
Fourth Quarter
|
|
$ |
182,116 |
|
|
$ |
55,398 |
|
|
$ |
126,718 |
|
|
$ |
44,478 |
|
|
$ |
82,240 |
|
|
$ |
0.53 |
|
|
$ |
0.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
516,493 |
|
|
$ |
164,721 |
|
|
$ |
351,772 |
|
|
$ |
123,472 |
|
|
$ |
228,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$ |
48,619 |
|
|
$ |
17,947 |
|
|
$ |
30,672 |
|
|
$ |
10,888 |
|
|
$ |
19,784 |
|
|
$ |
0.13 |
|
|
$ |
0.12 |
|
Second Quarter
|
|
$ |
46,110 |
|
|
$ |
17,393 |
|
|
$ |
28,717 |
|
|
$ |
10,195 |
|
|
$ |
18,522 |
|
|
$ |
0.12 |
|
|
$ |
0.12 |
|
Third Quarter
|
|
$ |
66,849 |
|
|
$ |
23,261 |
|
|
$ |
43,588 |
|
|
$ |
15,713 |
|
|
$ |
27,875 |
|
|
$ |
0.19 |
|
|
$ |
0.17 |
|
Fourth Quarter
|
|
$ |
97,468 |
|
|
$ |
33,285 |
|
|
$ |
64,183 |
|
|
$ |
21,214 |
|
|
$ |
42,969 |
|
|
$ |
0.29 |
|
|
$ |
0.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
259,046 |
|
|
$ |
91,886 |
|
|
$ |
167,160 |
|
|
$ |
58,010 |
|
|
$ |
109,150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14. |
DISCLOSURE ABOUT OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED): |
The following information about the Companys oil and gas
producing activities is presented in accordance with Financial
Accounting Standards Board Statement No. 69, Disclosure
About Oil and Gas Producing Activities:
The determination of oil and gas reserves is complex and highly
interpretive. Assumptions used to estimate reserve information
may significantly increase or decrease such reserves in future
periods. The estimates of reserves are subject to continuing
changes and, therefore, an accurate determination of reserves
may not be possible for many years because of the time needed
for development, drilling, testing, and studies of reservoirs.
The following unaudited tables as of December 31, 2005,
2004 and 2003 are based upon estimates prepared by Netherland,
Sewell & Associates, Inc. dated January 27, 2006,
January 24, 2005 and January 23, 2004, respectively.
The estimates for properties in China were prepared by Ryder
Scott Company in a report dated January 31, 2006 and
February 11, 2005. These are estimated quantities of proved
oil and gas reserves for the Company and the changes in total
proved reserves as of December 31, 2005, 2004 and 2003. All
such reserves are located in the Green River Basin, Wyoming and
Bohai Bay, China.
65
ULTRA PETROLEUM CORP
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
B. |
ANALYSES OF CHANGES IN PROVEN RESERVES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States | |
|
China | |
|
Total | |
|
|
| |
|
| |
|
| |
|
|
|
|
Natural Gas | |
|
|
|
Natural | |
|
|
|
Natural Gas | |
|
|
Oil (Bbls) | |
|
(Mcf) | |
|
Oil (Bbls) | |
|
Gas (Mcf) | |
|
Oil (Bbls) | |
|
(Mcf) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Reserves, December 31, 2002
|
|
|
5,559,000 |
|
|
|
667,121,000 |
|
|
|
|
|
|
|
|
|
|
|
5,559,000 |
|
|
|
667,121,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extensions, discoveries and additions
|
|
|
2,894,700 |
|
|
|
361,298,700 |
|
|
|
|
|
|
|
|
|
|
|
2,894,700 |
|
|
|
361,298,700 |
|
Production
|
|
|
(211,600 |
) |
|
|
(27,621,800 |
) |
|
|
|
|
|
|
|
|
|
|
(211,600 |
) |
|
|
(27,621,800 |
) |
Revisions
|
|
|
100,400 |
|
|
|
22,569,400 |
|
|
|
|
|
|
|
|
|
|
|
100,400 |
|
|
|
22,569,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves, December 31, 2003
|
|
|
8,342,500 |
|
|
|
1,023,367,300 |
|
|
|
|
|
|
|
|
|
|
|
8,342,500 |
|
|
|
1,023,367,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extensions, discoveries and additions
|
|
|
4,520,000 |
|
|
|
562,548,000 |
|
|
|
8,180,900 |
|
|
|
|
|
|
|
12,700,900 |
|
|
|
562,548,000 |
|
Production
|
|
|
(349,700 |
) |
|
|
(43,667,400 |
) |
|
|
(624,560 |
) |
|
|
|
|
|
|
(943,000 |
) |
|
|
(43,667,400 |
) |
Revisions
|
|
|
(1,123,700 |
)(1) |
|
|
(128,247,300 |
)(2) |
|
|
31,228 |
|
|
|
|
|
|
|
(1,123,700 |
) |
|
|
(128,247,300 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves, December 31, 2004
|
|
|
11,389,100 |
|
|
|
1,414,000,600 |
|
|
|
7,587,600 |
|
|
|
|
|
|
|
18,976,700 |
|
|
|
1,414,000,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extensions, discoveries and additions
|
|
|
5,516,300 |
|
|
|
680,671,500 |
|
|
|
370,600 |
|
|
|
|
|
|
|
5,886,900 |
|
|
|
680,671,500 |
|
Production
|
|
|
(464,300 |
) |
|
|
(61,722,300 |
) |
|
|
(1,556,300 |
) |
|
|
|
|
|
|
(2,020,600 |
) |
|
|
(61,722,300 |
) |
Revisions
|
|
|
(1,236,400 |
)(3) |
|
|
(132,727,000 |
)(4) |
|
|
(1,341,000 |
) |
|
|
|
|
|
|
(2,577,400 |
) |
|
|
(132,727,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves, December 31, 2005
|
|
|
15,204,700 |
|
|
|
1,900,222,800 |
|
|
|
5,060,900 |
|
|
|
|
|
|
|
20,265,600 |
|
|
|
1,900,222,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved developed reserves:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2002
|
|
|
2,003,000 |
|
|
|
222,608,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
222,608,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2003
|
|
|
3,028,000 |
|
|
|
359,072,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
359,072,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
|
4,195,000 |
|
|
|
514,686,000 |
|
|
|
4,356,000 |
|
|
|
|
|
|
|
8,551,000 |
|
|
|
514,686,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
5,087,000 |
|
|
|
635,591,000 |
|
|
|
2,484,000 |
|
|
|
|
|
|
|
7,571,000 |
|
|
|
635,591,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Revision amount of 936,500 attributable to 40 wells dropped
from PUD category replaced by more attractive wells. |
|
(2) |
Revision amount of 117,064,000 associated with above 40
mentioned wells. |
|
(3) |
Revision amount of 412,500 attributable to 26 wells dropped
from PUD category replaced by more attractive wells. |
|
(4) |
Revision amount of 51,560,000 associated with above mentioned
26 wells. |
66
ULTRA PETROLEUM CORP
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
C. STANDARDIZED
MEASURE (US$000): |
The following table sets forth a standardized measure of the
estimated discounted future net cash flows attributable to the
Companys proved natural gas reserves. Natural gas prices
have fluctuated widely in recent years. The calculated weighted
average sales prices utilized for the purposes of estimating the
Companys proved reserves and future net revenues were
$8.00, $5.46, and $5.59 per Mcf of natural gas at
December 31, 2005, 2004 and 2003, respectively. The
calculated weighted average oil price at December 31, 2005,
2004, and 2003 for Wyoming was $60.81, $42.80 and 31.87
respectively. The calculated weighted average crude oil price at
December 31, 2005 and 2004 for China was a Duri price of
$48.74 and $29.46, respectively. The future production and
development costs represent the estimated future expenditures to
be incurred in developing and producing the proved reserves,
assuming continuation of existing economic conditions. Future
income tax expense was computed by applying statutory income tax
rates to the difference between pretax net cash flows relating
to the Companys proved reserves and the tax basis of
proved properties and available operating loss carryovers .
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States | |
|
China | |
|
Total | |
|
|
| |
|
| |
|
| |
As of December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
Future cash inflows
|
|
$ |
5,986,603 |
|
|
$ |
|
|
|
$ |
5,986,603 |
|
Future production costs
|
|
|
(1,171,314 |
) |
|
|
|
|
|
|
(1,171,314 |
) |
Future development costs
|
|
|
(358,811 |
) |
|
|
|
|
|
|
(358,811 |
) |
Future income taxes
|
|
|
(1,620,437 |
) |
|
|
|
|
|
|
(1,620,437 |
) |
|
|
|
|
|
|
|
|
|
|
Future net cash flows
|
|
|
2,836,041 |
|
|
|
|
|
|
|
2,836,041 |
|
Discounted at 10%
|
|
|
(1,700,528 |
) |
|
|
|
|
|
|
(1,700,528 |
) |
|
|
|
|
|
|
|
|
|
|
Standardized measure of discounted future net cash flows
|
|
$ |
1,135,513 |
|
|
$ |
|
|
|
$ |
1,135,513 |
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2004 Future cash inflows
|
|
$ |
8,213,061 |
|
|
$ |
223,531 |
|
|
$ |
8,436,592 |
|
Future production costs
|
|
|
(1,699,891 |
) |
|
|
(67,387 |
) |
|
|
(1,767,278 |
) |
Future development costs
|
|
|
(623,539 |
) |
|
|
(18,382 |
) |
|
|
(641,921 |
) |
Future income taxes
|
|
|
(1,988,387 |
) |
|
|
(21,436 |
) |
|
|
(2,009,823 |
) |
|
|
|
|
|
|
|
|
|
|
Future net cash flows
|
|
|
3,901,244 |
|
|
|
116,326 |
|
|
|
4,017,570 |
|
Discounted at 10%
|
|
|
(2,285,779 |
) |
|
|
(62,455 |
) |
|
|
(2,348,234 |
) |
|
|
|
|
|
|
|
|
|
|
Standardized measure of discounted future net cash flows
|
|
$ |
1,615,465 |
|
|
$ |
53,871 |
|
|
$ |
1,669,336 |
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2005 Future cash inflows
|
|
$ |
16,124,248 |
|
|
$ |
246,666 |
|
|
$ |
16,370,914 |
|
Future production costs
|
|
|
(2,943,364 |
) |
|
|
(72,920 |
) |
|
|
(3,016,284 |
) |
Future development costs
|
|
|
(1,113,618 |
) |
|
|
(6,815 |
) |
|
|
(1,120,433 |
) |
Future income taxes
|
|
|
(4,110,554 |
) |
|
|
(30,235 |
) |
|
|
(4,140,789 |
) |
|
|
|
|
|
|
|
|
|
|
Future net cash flows
|
|
|
7,956,712 |
|
|
|
136,696 |
|
|
|
8,093,408 |
|
Discounted at 10%
|
|
|
(4,454,628 |
) |
|
|
(62,286 |
) |
|
|
(4,516,914 |
) |
|
|
|
|
|
|
|
|
|
|
Standardized measure of discounted future net cash flows
|
|
$ |
3,502,084 |
|
|
$ |
74,410 |
|
|
$ |
3,576,494 |
|
|
|
|
|
|
|
|
|
|
|
67
ULTRA PETROLEUM CORP
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The estimate of future income taxes is based on the future net
cash flows from proved reserves adjusted for the tax basis of
the oil and gas properties but without consideration of general
and administrative and interest expenses.
|
|
D. |
SUMMARY OF CHANGES IN THE STANDARDIZED MEASURE OF
DISCOUNTED FUTURE NET CASH FLOWS (US$000): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Standardized measure, beginning
|
|
$ |
1,669,336 |
|
|
$ |
1,135,513 |
|
|
$ |
316,965 |
|
Net revisions
|
|
|
(436,425 |
) |
|
|
(245,950 |
) |
|
|
41,715 |
|
Extensions, discoveries and other changes
|
|
|
2,306,982 |
|
|
|
1,062,236 |
|
|
|
680,136 |
|
Changes in future development costs
|
|
|
(130,727 |
) |
|
|
(123,051 |
) |
|
|
(10,603 |
) |
Sales of oil and gas, net of production costs
|
|
|
(426,891 |
) |
|
|
(216,670 |
) |
|
|
(96,357 |
) |
Net change in prices and production costs
|
|
|
1,992,707 |
|
|
|
2,645 |
|
|
|
605,892 |
|
Development costs incurred during the period that reduce future
development costs
|
|
|
172,962 |
|
|
|
96,220 |
|
|
|
8,886 |
|
Accretion of discount
|
|
|
254,236 |
|
|
|
178,431 |
|
|
|
47,353 |
|
Net change in income taxes
|
|
|
(1,825,686 |
) |
|
|
(220,038 |
) |
|
|
(458,474 |
) |
|
|
|
|
|
|
|
|
|
|
Standardized measure, ending
|
|
$ |
3,576,494 |
|
|
$ |
1,669,336 |
|
|
$ |
1,135,513 |
|
|
|
|
|
|
|
|
|
|
|
There are numerous uncertainties inherent in estimating
quantities of proved reserves and projected future rates of
production and timing of development expenditures, including
many factors beyond the control of the Company. The reserve data
and standardized measures set forth herein represent only
estimates. Reserve engineering is a subjective process of
estimating underground accumulations of oil and gas that cannot
be measured in an exact way and the accuracy of any reserve
estimate is a function of the quality of available data and of
engineering and geological interpretation and judgment. As a
result, estimates of different engineers often vary. In
addition, results of drilling, testing and production subsequent
to the date of an estimate may justify revision of such
estimates. Accordingly, reserve estimates are often different
from the quantities of oil and gas that are ultimately
recovered. Further, the estimated future net revenues from
proved reserves and the present value thereof are based upon
certain assumptions, including geologic success, prices, future
production levels and costs that may not prove correct over
time. Predictions of future production levels are subject to
great uncertainty, and the meaningfulness of such estimates is
highly dependent upon the accuracy of the assumptions upon which
they are based. Historically, oil and gas prices have fluctuated
widely.
|
|
E. |
COSTS INCURRED IN OIL AND GAS EXPLORATION AND DEVELOPMENT
ACTIVITIES (US$000): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended | |
|
|
| |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Acquisition costs unproved properties
|
|
$ |
775 |
|
|
$ |
1,268 |
|
|
$ |
1,603 |
|
Exploration
|
|
|
56,894 |
|
|
|
97,068 |
|
|
|
55,095 |
|
Development
|
|
|
208,173 |
|
|
|
82,646 |
|
|
|
43,111 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
265,842 |
|
|
$ |
180,982 |
|
|
$ |
99,809 |
|
|
|
|
|
|
|
|
|
|
|
68
ULTRA PETROLEUM CORP
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended | |
|
|
| |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Acquisition costs unproved properties
|
|
$ |
2,876 |
|
|
$ |
2,351 |
|
|
$ |
16,027 |
|
Exploration
|
|
|
|
|
|
|
|
|
|
|
|
|
Development
|
|
|
16,465 |
|
|
|
12,657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
19,341 |
|
|
$ |
15,008 |
|
|
$ |
16,027 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended | |
|
|
| |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Acquisition costs unproved properties
|
|
$ |
3,651 |
|
|
$ |
3,619 |
|
|
$ |
17,630 |
|
Exploration
|
|
|
56,894 |
|
|
|
97,068 |
|
|
|
55,095 |
|
Development
|
|
|
224,638 |
|
|
|
95,303 |
|
|
|
43,111 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
285,183 |
|
|
$ |
195,990 |
|
|
$ |
115,836 |
|
|
|
|
|
|
|
|
|
|
|
|
|
F. |
RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES
(US$000): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended | |
|
|
| |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Oil and gas revenue
|
|
$ |
448,731 |
|
|
$ |
238,867 |
|
|
$ |
121,581 |
|
Production expenses and taxes
|
|
|
(78,861 |
) |
|
|
(47,574 |
) |
|
|
(25,224 |
) |
Depletion and depreciation
|
|
|
(48,456 |
) |
|
|
(27,346 |
) |
|
|
(16,216 |
) |
Deferred income taxes
|
|
|
(107,916 |
) |
|
|
(53,406 |
) |
|
|
(25,254 |
) |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
213,498 |
|
|
$ |
110,541 |
|
|
$ |
54,887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
December 31, | |
|
December 31, | |
|
December 31, |
|
|
2005 | |
|
2004 | |
|
2003 |
|
|
| |
|
| |
|
|
Oil and gas revenue
|
|
$ |
67,762 |
|
|
$ |
20,180 |
|
|
$ |
|
|
Production expenses and taxes
|
|
|
(10,740 |
) |
|
|
(3,295 |
) |
|
|
|
|
Depletion and depreciation
|
|
|
(9,648 |
) |
|
|
(2,903 |
) |
|
|
|
|
Deferred income taxes
|
|
|
(15,556 |
) |
|
|
(4,604 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
31,818 |
|
|
$ |
9,378 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
69
ULTRA PETROLEUM CORP
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended | |
|
|
| |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Oil and gas revenue
|
|
$ |
516,493 |
|
|
$ |
259,047 |
|
|
$ |
121,581 |
|
Production expenses and taxes
|
|
|
(89,601 |
) |
|
|
(50,869 |
) |
|
|
(25,224 |
) |
Depletion and depreciation
|
|
|
(58,104 |
) |
|
|
(30,249 |
) |
|
|
(16,216 |
) |
Deferred income taxes
|
|
|
(123,472 |
) |
|
|
(58,010 |
) |
|
|
(25,254 |
) |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
245,316 |
|
|
$ |
119,919 |
|
|
$ |
54,887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
G. |
CAPITALIZED COSTS RELATING TO OIL AND GAS PRODUCING
ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Developed Properties:
|
|
|
|
|
|
|
|
|
|
Acquisition, equipment, exploration, drilling and environmental
costs Domestic
|
|
$ |
700,425,880 |
|
|
$ |
435,095,908 |
|
|
Acquisition, equipment, exploration, drilling and environmental
costs China
|
|
|
43,890,413 |
|
|
|
24,552,316 |
|
|
Less accumulated depletion, depreciation and
amortization Domestic
|
|
|
(118,172,467 |
) |
|
|
(70,597,411 |
) |
|
Less accumulated depletion, depreciation and
amortization China
|
|
|
(13,183,036 |
) |
|
|
(3,255,887 |
) |
|
|
|
|
|
|
|
|
|
|
612,960,790 |
|
|
|
385,794,926 |
|
Unproven Properties:
|
|
|
|
|
|
|
|
|
|
Acquisition and exploration costs Domestic
|
|
|
17,647,300 |
|
|
|
16,910,010 |
|
|
Acquisition and exploration costs China
|
|
|
72,055,165 |
|
|
|
71,929,450 |
|
|
|
|
|
|
|
|
|
|
$ |
702,663,255 |
|
|
$ |
474,634,386 |
|
|
|
|
|
|
|
|
70
|
|
Item 9. |
Change in and Disagreements with Accountants on Accounting
and Financial Disclosures. |
None.
|
|
Item 9A. |
Controls and Procedures. |
|
|
(a) |
Evaluation of Disclosure Controls and Procedures |
The Company maintains disclosure controls and procedures (as
defined in
Rules 13a-15(e)
and 15d-15(e) under the
Securities Exchange Act of 1934) designed to ensure that
information required to be disclosed in the Companys
reports under the Securities Exchange Act of 1934, as amended
(Exchange Act), is recorded, processed, summarized
and reported within the time periods specified in the SECs
rules and forms and that such information is accumulated and
communicated to management, including the Companys Chief
Executive Officer and Chief Financial Officer, as appropriate,
to allow timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures,
management recognizes that any controls and procedures, no
matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives.
In connection with the preparation of this Annual Report on
Form 10-K, an evaluation was performed under the
supervision and with the participation of the Companys
management, including the CEO and CFO, of the effectiveness of
the design and operation of the Companys disclosure
controls and procedures. Based on that evaluation, the
Companys CEO and CFO concluded that the Companys
disclosure controls and procedures were not effective as of
December 31, 2005, because of the material weaknesses
described below.
|
|
(b) |
Managements Report on Internal Control Over Financial
Reporting |
Management is responsible for establishing and maintaining
adequate control over financial reporting for the Company as
such term is defined in Rules 13a-15(f) and 15d-15(f)
promulgated under the Securities Exchange Act of 1934. In order
to evaluate the effectiveness of internal control over financial
reporting, as required by Section 404 of the Sarbanes-Oxley
Act, management has conducted an assessment using the criteria
in Internal Control Integrated Framework,
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Because of its inherent limitations,
internal control over financial reporting may not prevent or
detect misstatements.
A material weakness is a control deficiency or combination of
control deficiencies that results in a more than a remote
likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. As of
December 31, 2005, the Company identified the following
material weaknesses:
|
|
|
|
|
The Company did not maintain effective company level controls.
Specifically, (i) certain of its accounting personnel in
key roles did not possess an appropriate level of technical
expertise, and (ii) the Companys monitoring of the
internal audit function was not sufficient to provide management
a basis to assess the quality of the Companys internal
control performance over time. These deficiencies resulted in
more than a remote likelihood that a material misstatement of
the Companys annual or interim financial statements would
not be prevented or detected. |
|
|
|
The Company did not have adequate policies and procedures
regarding supervisory review of account reconciliations and
account and transaction analyses. This deficiency resulted in
the following material errors in the Companys preliminary
2005 consolidated financial statements: |
|
|
|
|
|
misclassification of costs between proved and unproved oil and
gas properties and understatement of depletion expense; |
|
|
|
improper reporting of value added taxes; |
|
|
|
understatement of asset retirement obligations; |
|
|
|
overstatement in tubular inventory; |
|
|
|
understatement of capitalized well cost accrued liabilities; and |
71
|
|
|
|
|
overstatement of accounts receivable. |
|
|
|
These errors have been corrected by management prior to the
issuance of the Companys 2005 consolidated financial
statements. |
|
|
|
|
|
The Company did not have adequate policies and procedures to
ensure that accurate and reliable interim and annual
consolidated financial statements were prepared and reviewed on
a timely basis. Specifically, the Company did not have: |
|
|
|
|
|
sufficient personnel with the skills and experience in the
application of U.S. generally accepted accounting principles; and |
|
|
|
policies and procedures regarding the preparation and management
review of footnote disclosures accompanying the Companys
financial statements. |
|
|
|
As a result of these deficiencies, material errors were
identified in the footnotes to the Companys preliminary
2005 consolidated financial statements. These errors have been
corrected by management prior to the issuance of the
Companys 2005 consolidated financial statements. |
As a result of the aforementioned material weaknesses,
management has concluded that the Company did not maintain
effective internal control over financial reporting as of
December 31, 2005, based on the criteria in Internal
Control Integrated Framework issued by the COSO.
The Companys independent registered public accountants,
KPMG LLP, have audited and issued a report on managements
assessment of the Companys internal control over financial
reporting, which report appears herein.
|
|
(c) |
Changes in Internal Control Over Financial Reporting |
Management has evaluated, with the participation of our Chief
Executive Officer and Chief Financial Officer, whether any
changes in our internal control over financial reporting that
occurred during our last fiscal quarter have materially
affected, or are reasonably likely to materially affect, our
internal control over financial reporting. Based on the
evaluation we conducted, management has concluded that no such
changes have occurred.
The Companys management has identified what it believes
are the steps necessary to address the material weakness
described above, as follows:
|
|
|
(1) Increasing training for the Companys current
accounting personnel, hiring additional accounting personnel and
engaging outside consultants with technical accounting
expertise, as needed, and reorganizing the accounting department
to ensure that accounting personnel have adequate experience,
skills and knowledge relating to the accounting and internal
audit functions assigned to them. |
|
|
(2) Establishing additional and refining current policies
and procedures to more effectively reconcile its accounting
entries along with better documentation procedures to meet the
standards established by COSO. |
The Company expects to complete these remedial actions by the
end of the second quarter of 2006.
|
|
(d) |
Report of Independent Registered Public Accounting Firm |
The Board of Directors and Shareholders
Ultra Petroleum Corp.:
We have audited managements assessment, included in the
accompanying Managements Report on Internal Control Over
Financial Reporting (Item 9A(b)), that Ultra Petroleum
Corp. and subsidiaries (the Company) did not maintain effective
internal control over financial reporting as of
December 31, 2005, because of the effect of material
weaknesses identified in managements assessment, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Ultra Petroleum
Corp.s management is responsible for
72
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express an
opinion on managements assessment and an opinion on the
effectiveness of the Companys internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of
control deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. The
following material weaknesses have been identified and included
in managements assessment as of December 31, 2005:
|
|
|
|
|
The Company did not maintain effective company level controls.
Specifically, (i) certain of its accounting personnel in
key roles did not possess an appropriate level of technical
expertise, and (ii) the Companys monitoring of the
internal audit function was not sufficient to provide management
a basis to assess the quality of the Companys internal
control performance over time. These deficiencies resulted in
more than a remote likelihood that a material misstatement of
the Companys annual or interim financial statements would
not be prevented or detected. |
|
|
|
The Company did not have adequate policies and procedures
regarding supervisory review of account reconciliations and
account and transaction analyses. This deficiency resulted in
the following material errors in the Companys preliminary
2005 consolidated financial statements: |
|
|
|
|
|
misclassification of costs between proved and unproved oil and
gas properties and understatement of depletion expense; |
|
|
|
improper reporting of value added taxes; |
|
|
|
understatement of asset retirement obligations; |
|
|
|
overstatement in tubular inventory; |
|
|
|
understatement of capitalized well cost accrued liabilities; and |
|
|
|
overstatement of accounts receivable. |
73
|
|
|
|
|
The Company did not have adequate policies and procedures to
ensure that accurate and reliable interim and annual
consolidated financial statements were prepared and reviewed on
a timely basis. Specifically, the Company did not have: |
|
|
|
|
|
sufficient personnel with the skills and experience in the
application of U.S. generally accepted accounting principles; and |
|
|
|
policies and procedures regarding the preparation and management
review of footnote disclosures accompanying the Companys
financial statements. |
As a result of these deficiencies, material errors were
identified in the footnotes to the Companys preliminary
2005 consolidated financial statements.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Ultra Petroleum Corp. and
subsidiaries as of December 31, 2005 and 2004, and the
related consolidated statements of operations and retained
earnings, shareholders equity and cash flows for each of
the years in the three-year period ended December 31, 2005.
The aforementioned material weaknesses were considered in
determining the nature, timing, and extent of audit tests
applied in our audit of the December 31, 2005 consolidated
financial statements, and this report does not affect our report
dated March 30, 2006, which expressed an unqualified
opinion on those consolidated financial statements.
In our opinion, managements assessment that Ultra
Petroleum Corp. and subsidiaries did not maintain effective
internal control over financial reporting as of
December 31, 2005, is fairly stated, in all material
respects, based on criteria established in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Also, in our opinion, because of the effect of the
material weaknesses described above on the achievement of the
objectives of the control criteria, Ultra Petroleum Corp. and
subsidiaries have not maintained effective internal control over
financial reporting as of December 31, 2005, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
/s/ KPMG LLP
Denver, Colorado
March 30, 2006
|
|
Item 9B. |
Other Information. |
None.
Part III
|
|
Item 10. |
Directors and Executive Officers of the Registrant. |
The information required by this item will be included in the
Companys definitive proxy statement, which will be filed
not later than 120 days after December 31, 2005 and is
incorporated herein by reference.
The Company has adopted a code of ethics that applies to the
Companys Chief Executive Officer, Chief Financial
Officer and Chief Accounting Officer. The full text of such code
of ethics has been posted on the Companys website at
www.ultrapetroleum.com, and is available free of charge in print
to any shareholder who requests it. Requests for copies should
be addressed to the Secretary at 363 North Sam Houston
Parkway East, Suite 1200, Houston, Texas 77060.
74
|
|
Item 11. |
Executive Compensation. |
The information required by this item will be included in the
Companys definitive proxy statement, which will be filed
not later than 120 days after December 31, 2005 and is
incorporated herein by reference.
|
|
Item 12. |
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters. |
The information required by Item 403 of
Regulation S-K
will be included in the Companys definitive proxy
statement, which will be filed not later than 120 days
after December 31, 2005 and is incorporated herein by
reference.
|
|
Item 13. |
Certain Relationships and Related Transactions. |
The information required by this item will be included in the
Companys definitive proxy statement, which will be filed
not later than 120 days after December 31, 2005, and
is incorporated herein by reference.
|
|
Item 14. |
Principal Accountants Fees and Services. |
The information required by this item will be included in the
Companys definitive proxy statement, which will be filed
not later than 120 days after December 31, 2005, and
is incorporated herein by reference.
Part IV
|
|
Item 15. |
Exhibits, Financial Statement Schedules, and Reports on
Form 8-K. |
The following documents are filed as part of this report:
|
|
|
1. Financial Statements: See Item 8. |
|
|
2. Financial Statement Schedules: None. |
|
|
3. Exhibits. The following Exhibits are filed
herewith pursuant to Rule 601 of the
Regulation S-K or
are incorporated by reference to previous filings. |
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
3 |
.1 |
|
Articles of Incorporation of Ultra Petroleum Corp.
(incorporated by reference to Exhibit 3.1 of the
Companys Quarterly Report on Form 10-Q for the period
ended June 30, 2001) |
|
|
3 |
.2 |
|
By-Laws of Ultra Petroleum Corp. (incorporated by
reference to Exhibit 3.2 of the Companys Quarterly
Report on Form 10-Q for the period ended June 30, 2001) |
|
|
4 |
.1 |
|
Specimen Common Share Certificate (incorporated by
reference to Exhibit 4.1 of the Companys Quarterly
Report on Form 10-Q for the period ended June 30, 2001) |
|
|
10 |
.1 |
|
Fourth Amendment to Second Amended and Restated Credit
Agreement, dated as of November 14, 2005 and effective as
of November 18, 2005, by and among Ultra Resources, Inc.,
JPMorgan Chase Bank N.A., Union Bank of California N.A.,
Hibernia National Bank, Guaranty Bank FSB, Compass Bank, Bank of
Scotland and Bank of America, N.A. (incorporated by reference
from Exhibit 10.1 of the Companys Report on
Form 8-K filed on November 23, 2005) |
|
|
10 |
.2 |
|
Third Amendment to Second Amended and Restated Credit Agreement
dated May 5, 2005 among Ultra Resources, Inc., JPMorgan
Chase Bank N.A., Union Bank of California N.A., Hibernia
National Bank, Guaranty Bank FSB, Compass Bank, Bank of Scotland
and Bank of America, N.A. (incorporated by reference from
Exhibit 10.1 of the Companys Quarterly Report on
Form 10-Q for the period ended June 30, 2005) |
75
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
10 |
.3 |
|
Second Amendment to Second Amended and Restated Credit Agreement
dated November 1, 2004 among Ultra Resources, Inc., Bank
One, NA, Union Bank of California, N.A., Hibernia National Bank,
Guaranty Bank, FSB, Compass Bank, Bank of Scotland and Fleet
National Bank. (incorporated by reference from Exhibit 10.1
of the Companys Report on Form 10-K for the year
ended December 31, 2004) |
|
|
10 |
.4 |
|
First Amendment to Second Amended and Restated Credit Agreement
dated August 10, 2004 among Ultra Resources, Inc., Bank
One, NA, Union Bank of California, N.A., Hibernia National Bank,
Guaranty Bank, FSB, Compass Bank, Bank of Scotland and Fleet
National Bank. (incorporated by reference from Exhibit 10.2
of the Companys Report on Form 10-K for the year
ended December 31, 2004) |
|
|
10 |
.5 |
|
Second Amended and Restated Credit Agreement dated June 9,
2004 among Ultra Resources, Inc., Bank One, NA, Union Bank of
California, N.A., Hibernia National Bank, Guaranty Bank, FSB,
Compass Bank, Bank of Scotland and Fleet National Bank
(incorporated by reference from Exhibit 10.1 of the
Companys Quarterly Report on Form 10-Q for the period
ended June 30, 2004). |
|
|
10 |
.6 |
|
Precedent Agreement between Rockies Express Pipeline LLC and
Ultra Resources, Inc. dated December 19, 2005 (incorporated
by reference from Exhibit 10.1 of the Companys Report
of Form 8-K filed on February 9, 2006) |
|
|
10 |
.7 |
|
Precedent Agreement between Rockies Express Pipeline LLC,
Entrega Gas Pipeline LLC and Ultra Resources, Inc. dated
December 19, 2005 (incorporated by reference from
Exhibit 10.2 of the Companys Report on Form 8-K
filed on February 9, 2006) |
|
|
10 |
.8 |
|
Ultra Petroleum Corp. 2005 Stock Incentive Plan (incorporated by
reference from Exhibit 99.1 of the Companys
Registration Statement on Form S-8 (Reg.
No. 333-132443), filed with the SEC on March 15, 2006) |
|
|
10 |
.9 |
|
Ultra Petroleum Corp. 2000 Stock Incentive Plan (incorporated by
reference from Exhibit 99.1 of the Companys
Registration Statement on Form S-8 (Reg.
No. 333-13278), filed with the SEC on March 15, 2001) |
|
|
10 |
.10 |
|
Ultra Petroleum Corp. 1998 Stock Option Plan (incorporated by
reference from Exhibit 99.1 of the Companys
Registration Statement on Form S-8 (Reg.
No. 333-13342) filed with the SEC on April 2, 2001) |
|
*10 |
.11 |
|
Employment Agreement between Ultra Petroleum Corp. and Michael
D. Watford dated February 1, 2004. |
|
|
14 |
.1 |
|
Code of Ethics for Chief Executive Officer and Senior Financial
Officers of Ultra Petroleum Corp. (Incorporated by reference to
Exhibit 3.3 of the Companys Annual Report on
Form 10-K for the year ended December 31, 2003) |
|
|
21 |
.1 |
|
Subsidiaries of the Company (incorporated by reference to
Exhibit 21.1 to the Companys Annual Report on
Form 10-K for the period ended December 31, 2001) |
|
|
*23 |
.1 |
|
Consent of Netherland, Sewell & Associates, Inc. |
|
|
*23 |
.2 |
|
Consent of Ryder Scott Company |
|
|
*23 |
.3 |
|
Consent of KPMG LLP |
|
|
*31 |
.1 |
|
Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
*32 |
.1 |
|
Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
76
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
|
|
By: |
/s/ Michael D. Watford |
|
|
|
|
Title: |
Chairman of the Board, |
|
|
|
Chief Executive Officer, and President |
Date: March 31, 2006
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
|
/s/ Michael D.
Watford
Michael D. Watford |
|
Chairman of the Board, Chief Executive Officer, and President
(principal executive officer) |
|
March 31, 2006 |
|
/s/ Marshall D.
Smith
Marshall D. Smith |
|
Chief Financial Officer
(principal financial officer) |
|
March 31, 2006 |
|
/s/ Kristen J.
Marron
Kristen J. Marron |
|
Financial Reporting Manager
(principal accounting officer) |
|
March 31, 2006 |
|
/s/ W. Charles
Helton
W. Charles Helton |
|
Director |
|
March 31, 2006 |
|
/s/ James E.
Nielson
James E. Nielson |
|
Director |
|
March 31, 2006 |
|
/s/ Robert E.
Rigney
Robert E. Rigney |
|
Director |
|
March 31, 2006 |
|
/s/ James C. Roe
James C. Roe |
|
Director |
|
March 31, 2006 |
77
EXHIBIT INDEX
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
3 |
.1 |
|
Articles of Incorporation of Ultra Petroleum Corp.
(incorporated by reference to Exhibit 3.1 of the
Companys Quarterly Report on Form 10-Q for the period
ended June 30, 2001) |
|
|
3 |
.2 |
|
By-Laws of Ultra Petroleum Corp. (incorporated by
reference to Exhibit 3.2 of the Companys Quarterly
Report on Form 10-Q for the period ended June 30, 2001) |
|
|
4 |
.1 |
|
Specimen Common Share Certificate (incorporated by
reference to Exhibit 4.1 of the Companys Quarterly
Report on Form 10-Q for the period ended June 30, 2001) |
|
|
10 |
.1 |
|
Fourth Amendment to Second Amended and Restated Credit
Agreement, dated as of November 14, 2005 and effective as
of November 18, 2005, by and among Ultra Resources, Inc.,
JPMorgan Chase Bank N.A., Union Bank of California N.A.,
Hibernia National Bank, Guaranty Bank FSB, Compass Bank, Bank of
Scotland and Bank of America, N.A. (incorporated by reference
from Exhibit 10.1 of the Companys Report on
Form 8-K filed on November 23, 2005) |
|
|
10 |
.2 |
|
Third Amendment to Second Amended and Restated Credit Agreement
dated May 5, 2005 among Ultra Resources, Inc., JPMorgan
Chase Bank N.A., Union Bank of California N.A., Hibernia
National Bank, Guaranty Bank FSB, Compass Bank, Bank of Scotland
and Bank of America, N.A. (incorporated by reference from
Exhibit 10.1 of the Companys Quarterly Report on
Form 10-Q for the period ended June 30, 2005) |
|
|
10 |
.3 |
|
Second Amendment to Second Amended and Restated Credit Agreement
dated November 1, 2004 among Ultra Resources, Inc., Bank
One, NA, Union Bank of California, N.A., Hibernia National Bank,
Guaranty Bank, FSB, Compass Bank, Bank of Scotland and Fleet
National Bank. (incorporated by reference from Exhibit 10.1
of the Companys Report on Form 10-K for the year
ended December 31, 2004) |
|
|
10 |
.4 |
|
First Amendment to Second Amended and Restated Credit Agreement
dated August 10, 2004 among Ultra Resources, Inc., Bank
One, NA, Union Bank of California, N.A., Hibernia National Bank,
Guaranty Bank, FSB, Compass Bank, Bank of Scotland and Fleet
National Bank. (incorporated by reference from Exhibit 10.2
of the Companys Report on Form 10-K for the year
ended December 31, 2004) |
|
|
10 |
.5 |
|
Second Amended and Restated Credit Agreement dated June 9,
2004 among Ultra Resources, Inc., Bank One, NA, Union Bank of
California, N.A., Hibernia National Bank, Guaranty Bank, FSB,
Compass Bank, Bank of Scotland and Fleet National Bank
(incorporated by reference from Exhibit 10.1 of the
Companys Quarterly Report on Form 10-Q for the period
ended June 30, 2004). |
|
|
10 |
.6 |
|
Precedent Agreement between Rockies Express Pipeline LLC and
Ultra Resources, Inc. dated December 19, 2005 (incorporated
by reference from Exhibit 10.1 of the Companys Report
of Form 8-K filed on February 9, 2006) |
|
|
10 |
.7 |
|
Precedent Agreement between Rockies Express Pipeline LLC,
Entrega Gas Pipeline LLC and Ultra Resources, Inc. dated
December 19, 2005 (incorporated by reference from
Exhibit 10.2 of the Companys Report on Form 8-K
filed on February 9, 2006) |
|
|
10 |
.8 |
|
Ultra Petroleum Corp. 2005 Stock Incentive Plan (incorporated by
reference from Exhibit 99.1 of the Companys
Registration Statement on Form S-8 (Reg.
No. 333-132443), filed with the SEC on March 15, 2006) |
|
|
10 |
.9 |
|
Ultra Petroleum Corp. 2000 Stock Incentive Plan (incorporated by
reference from Exhibit 99.1 of the Companys
Registration Statement on Form S-8 (Reg.
No. 333-13278), filed with the SEC on March 15, 2001) |
|
|
10 |
.10 |
|
Ultra Petroleum Corp. 1998 Stock Option Plan (incorporated by
reference from Exhibit 99.1 of the Companys
Registration Statement on Form S-8 (Reg.
No. 333-13342) filed with the SEC on April 2, 2001) |
|
|
*10 |
.11 |
|
Employment Agreement between Ultra Petroleum Corp. and Michael
D. Watford dated February 1, 2004. |
|
|
14 |
.1 |
|
Code of Ethics for Chief Executive Officer and Senior Financial
Officers of Ultra Petroleum Corp. (Incorporated by reference to
Exhibit 3.3 of the Companys Annual Report on
Form 10-K for the year ended December 31, 2003) |
|
|
21 |
.1 |
|
Subsidiaries of the Company (incorporated by reference to
Exhibit 21.1 to the Companys Annual Report on
Form 10-K for the period ended December 31, 2001) |
|
|
*23 |
.1 |
|
Consent of Netherland, Sewell & Associates, Inc. |
|
|
*23 |
.2 |
|
Consent of Ryder Scott Company |
78
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
*23 |
.3 |
|
Consent of KPMG LLP |
|
|
*31 |
.1 |
|
Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 |
|
|
*32 |
.1 |
|
Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 |
79