WHITING PETROLEUM CORPORATION AND SUBSIDIARIES | | |
CONSOLIDATED BALANCE SHEETS
| | |
AS OF MARCH 31, 2005 (Unaudited) AND DECEMBER 31, 2004
| | |
(In thousands)
| | |
|
| | | | | | | | |
| | March 31, | | | December 31, | |
| | 2005 | | | 2004 | |
| | (unaudited) | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | |
| | | | | | | | |
CURRENT LIABILITIES: | | | | | | | | |
Accounts payable | | $ | 26,121 | | | $ | 21,865 | |
Oil and gas sales payable | | | 5,201 | | | | 4,987 | |
Accrued employee benefits | | | 2,156 | | | | 7,808 | |
Production taxes payable | | | 8,761 | | | | 8,254 | |
Current portion of tax sharing liability | | | 4,214 | | | | 4,214 | |
Current portion of long-term debt | | | 3,205 | | | | 3,167 | |
Derivative liability | | | 27,630 | | | | 1,670 | |
Income taxes payable and other liabilities | | | 1,331 | | | | 129 | |
| | | | | | |
| | | | | | | | |
Total current liabilities | | | 78,619 | | | | 52,094 | |
| | | | | | | | |
ASSET RETIREMENT OBLIGATIONS | | | 32,958 | | | | 31,639 | |
| | | | | | | | |
PRODUCTION PARTICIPATION PLAN LIABILITY | | | 10,265 | | | | 9,579 | |
| | | | | | | | |
TAX SHARING LIABILITY | | | 27,586 | | | | 26,966 | |
| | | | | | | | |
LONG-TERM DEBT | | | 364,321 | | | | 325,261 | |
| | | | | | | | |
DEFERRED INCOME TAXES | | | 49,030 | | | | 34,281 | |
| | | | | | | | |
COMMITMENTS AND CONTINGENCIES | | | | | | | | |
| | | | | | | | |
STOCKHOLDERS’ EQUITY: | | | | | | | | |
Common stock, $.001 par value; 75,000,000 shares authorized, 29,791,922 and 29,717,808 shares issued and outstanding as of March 31, 2005 and December 31, 2004, respectively | | | 30 | | | | 30 | |
Additional paid-in capital | | | 458,800 | | | | 455,635 | |
Accumulated other comprehensive loss | | | (16,965 | ) | | | (1,025 | ) |
Deferred compensation | | | (4,685 | ) | | | (1,715 | ) |
Retained earnings | | | 185,516 | | | | 159,461 | |
| | | | | | |
| | | | | | | | |
Total stockholders’ equity | | | 622,696 | | | | 612,386 | |
| | | | | | |
| | | | | | | | |
TOTAL | | $ | 1,185,475 | | | $ | 1,092,206 | |
| | | | | | |
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2005 (Unaudited) AND DECEMBER 31, 2004
(In thousands) | | | | | | | | |
| | June 30, | | December 31, |
| | 2005 | | 2004 |
| | (unaudited) | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | |
| | | | | | | | |
CURRENT LIABILITIES: | | | | | | | | |
Accounts payable | | $ | 24,919 | | | $ | 19,815 | |
Accrued interest | | | 4,845 | | | | 2,050 | |
Oil and gas sales payable | | | 6,237 | | | | 4,987 | |
Accrued employee compensation and benefits | | | 5,445 | | | | 7,808 | |
Production taxes payable | | | 9,497 | | | | 8,254 | |
Current portion of tax sharing liability | | | 4,214 | | | | 4,214 | |
Current portion of long-term debt | | | 3,242 | | | | 3,167 | |
Derivative liability | | | 18,890 | | | | 1,670 | |
Income taxes payable and other liabilities | | | — | | | | 129 | |
| | | | | | | | |
| | | | | | | | |
Total current liabilities | | | 77,289 | | | | 52,094 | |
| | | | | | | | |
ASSET RETIREMENT OBLIGATIONS | | | 35,218 | | | | 31,639 | |
| | | | | | | | |
PRODUCTION PARTICIPATION PLAN LIABILITY | | | 9,848 | | | | 9,579 | |
| | | | | | | | |
TAX SHARING LIABILITY | | | 28,206 | | | | 26,966 | |
| | | | | | | | |
LONG-TERM DEBT | | | 367,369 | | | | 325,261 | |
| | | | | | | | |
DEFERRED INCOME TAXES | | | 61,161 | | | | 34,281 | |
| | | | | | | | |
COMMITMENTS AND CONTINGENCIES | | | | | | | | |
| | | | | | | | |
STOCKHOLDERS’ EQUITY: | | | | | | | | |
Common stock, $.001 par value; 75,000,000 shares authorized, 29,790,722 and 29,717,808 shares issued and outstanding as of June 30, 2005 and December 31, 2004, respectively | | | 30 | | | | 30 | |
Additional paid-in capital | | | 458,879 | | | | 455,635 | |
Accumulated other comprehensive loss | | | (11,598 | ) | | | (1,025 | ) |
Deferred compensation | | | (3,395 | ) | | | (1,715 | ) |
Retained earnings | | | 209,754 | | | | 159,461 | |
| | | | | | | | |
| | | | | | | | |
Total stockholders’ equity | | | 653,670 | | | | 612,386 | |
| | | | | | | | |
| | | | | | | | |
TOTAL | | $ | 1,232,761 | | | $ | 1,092,206 | |
| | | | | | | | |
See condensed notes to unaudited consolidated financial statements.
- 3 -
WHITING PETROLEUM CORPORATION AND SUBSIDIARIES
| | |
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
| | |
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
| | |
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2005 AND 2004 (In thousands, except per share data) | | |
|
| | | | | | | | |
| | 2005 | | | 2004 | |
REVENUES: | | | | | | | | |
Oil and gas sales | | $ | 105,465 | | | $ | 47,636 | |
Loss on oil and gas hedging activities | | | (2,055 | ) | | | (1,015 | ) |
Interest income and other | | | 131 | | | | 99 | |
| | | | | | |
Total | | | 103,541 | | | | 46,720 | |
| | | | | | |
| | | | | | | | |
COSTS AND EXPENSES: | | | | | | | | |
Lease operating | | | 20,830 | | | | 10,549 | |
Production taxes | | | 6,540 | | | | 3,006 | |
Depreciation, depletion and amortization | �� | | 20,347 | | | | 10,729 | |
Exploration | | | 1,398 | | | | 418 | |
General and administrative | | | 6,728 | | | | 4,001 | |
Interest expense | | | 5,256 | | | | 2,319 | |
| | | | | | |
Total costs and expenses | | | 61,099 | | | | 31,022 | |
| | | | | | |
| | | | | | | | |
INCOME BEFORE INCOME TAXES | | | 42,442 | | | | 15,698 | |
| | | | | | | | |
INCOME TAX EXPENSE: | | | | | | | | |
Current | | | 1,638 | | | | — | |
Deferred | | | 14,749 | | | | 6,060 | |
| | | | | | |
Total income tax expense | | | 16,387 | | | | 6,060 | |
| | | | | | |
| | | | | | | | |
NET INCOME | | $ | 26,055 | | | $ | 9,638 | |
| | | | | | |
| | | | | | | | |
NET INCOME PER COMMON SHARE, BASIC AND DILUTED | | $ | 0.88 | | | $ | 0.51 | |
| | | | | | |
| | | | | | | | |
WEIGHTED AVERAGE SHARES OUTSTANDING, BASIC | | | 29,674 | | | | 18,753 | |
| | | | | | |
| | | | | | | | |
WEIGHTED AVERAGE SHARES OUTSTANDING, DILUTED | | | 29,707 | | | | 18,753 | |
| | | | | | |
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2005 | | 2004 | | 2005 | | 2004 |
REVENUES: | | | | | | | | | | | | | | | | |
Oil and gas sales | | $ | 115,978 | | | $ | 52,874 | | | $ | 221,443 | | | $ | 100,510 | |
Loss on oil and gas hedging activities | | | (4,890 | ) | | | (560 | ) | | | (6,945 | ) | | | (1,575 | ) |
Gain on sale of marketable securities | | | — | | | | 2,382 | | | | — | | | | 2,382 | |
Interest income and other | | | 35 | | | | 35 | | | | 166 | | | | 134 | |
| | | | | | | | | | | | | | | | |
Total | | | 111,123 | | | | 54,731 | | | | 214,664 | | | | 101,451 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
COSTS AND EXPENSES: | | | | | | | | | | | | | | | | |
Lease operating | | | 22,110 | | | | 11,144 | | | | 42,939 | | | | 21,693 | |
Production taxes | | | 7,915 | | | | 3,212 | | | | 14,455 | | | | 6,218 | |
Depreciation, depletion and amortization | | | 20,735 | | | | 10,761 | | | | 41,082 | | | | 21,490 | |
Exploration and impairment | | | 6,005 | | | | 502 | | | | 7,404 | | | | 920 | |
General and administrative | | | 6,767 | | | | 4,073 | | | | 13,495 | | | | 8,074 | |
Interest expense | | | 8,122 | | | | 3,100 | | | | 13,378 | | | | 5,419 | |
| | | | | | | | | | | | | | | | |
Total costs and expenses | | | 71,654 | | | | 32,792 | | | | 132,753 | | | | 63,814 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
INCOME BEFORE INCOME TAXES | | | 39,469 | | | | 21,939 | | | | 81,911 | | | | 37,637 | |
| | | | | | | | | | | | | | | | |
INCOME TAX EXPENSE: | | | | | | | | | | | | | | | | |
Current | | | 3,099 | | | | — | | | | 4,737 | | | | — | |
Deferred | | | 12,132 | | | | 8,468 | | | | 26,881 | | | | 14,528 | |
| | | | | | | | | | | | | | | | |
Total income tax expense | | | 15,231 | | | | 8,468 | | | | 31,618 | | | | 14,528 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
NET INCOME | | $ | 24,238 | | | $ | 13,471 | | | $ | 50,293 | | | $ | 23,109 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
NET INCOME PER COMMON SHARE, BASIC AND DILUTED | | $ | 0.82 | | | $ | 0.72 | | | $ | 1.69 | | | $ | 1.23 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
WEIGHTED AVERAGE SHARES OUTSTANDING, BASIC | | | 29,681 | | | | 18,755 | | | | 29,673 | | | | 18,754 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
WEIGHTED AVERAGE SHARES OUTSTANDING, DILUTED | | | 29,699 | | | | 18,775 | | | | 29,698 | | | | 18,766 | |
| | | | | | | | | | | | | | | | |
See condensed notes to unaudited consolidated financial statements.
- 4 -
WHITING PETROLEUM CORPORATION AND SUBSIDIARIES
| | |
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME FOR THE YEAR ENDED DECEMBER 31, 2004 AND THE SIX MONTHS ENDED JUNE 30, 2005 (Unaudited)
FOR THE YEAR ENDED DECEMBER 31, 2004 AND THE THREE MONTHS ENDED MARCH 31, 2005 (Unaudited)
| | |
(In thousands) | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Accumulated | | | | | | | | | | | | | | | |
| | | | | | | | | | Additional | | | Other | | | | | | | | | | | Total | | | | |
| | Common Stock | | | Paid-in | | | Comprehensive | | | Deferred | | | Retained | | | Stockholders’ | | | Comprehensive | |
| | Shares | | | Amount | | | Capital | | | Income (Loss) | | | Compensation | | | Earnings | | | Equity | | | Income | |
BALANCES—January 1, 2004 | | | 18,750 | | | $ | 19 | | | $ | 170,367 | | | $ | (223 | ) | | $ | — | | | $ | 89,415 | | | $ | 259,578 | | | $ | 19,612 | |
Net income | | | — | | | | — | | | | — | | | | — | | | | — | | | | 70,046 | | | | 70,046 | | | | 70,046 | |
Change in fair value of marketable securities for sale | | | — | | | | — | | | | — | | | | 3,741 | | | | — | | | | — | | | | 3,741 | | | | 3,741 | |
Realized gain on marketable securities for sale | | | — | | | | — | | | | — | | | | (4,835 | ) | | | — | | | | — | | | | (4,835 | ) | | | (4,835 | ) |
Change in derivative instrument fair value | | | — | | | | — | | | | — | | | | 292 | | | | — | | | | — | | | | 292 | | | | 292 | |
Issuance of stock – Equity Oil Company merger | | | 2,237 | | | | 2 | | | | 43,296 | | | | — | | | | | | | | — | | | | 43,298 | | | | | |
Issuance of stock – secondary offering | | | 8,625 | | | | 9 | | | | 239,677 | | | | — | | | | — | | | | — | | | | 239,686 | | | | — | |
Deferred compensation stock issued | | | 106 | | | | — | | | | 2,295 | | | | — | | | | (2,295 | ) | | | — | | | | — | | | | — | |
Amortization of deferred compensation. | | | — | | | | — | | | | — | | | | — | | | | 580 | | | | — | | | | 580 | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCES—December 31, 2004 | | | 29,718 | | | | 30 | | | | 455,635 | | | | (1,025 | ) | | | (1,715 | ) | | | 159,461 | | | | 612,386 | | | $ | 69,244 | |
Net income (unaudited) | | | | | | | | | | | | | | | | | | | | | | | 26,055 | | | | 26,055 | | | | 26,055 | |
Change in derivative instrument fair value (unaudited) | | | — | | | | — | | | | — | | | | (15,940 | ) | | | — | | | | — | | | | (15,940 | ) | | | (15,940 | ) |
Deferred compensation stock issued (unaudited) | | | 85 | | | | — | | | | 3,421 | | | | — | | | | (3,421 | ) | | | — | | | | — | | | | — | |
Deferred compensation stock forfeited (unaudited) | | | (7 | ) | | | — | | | | (163 | ) | | | — | | | | 163 | | | | — | | | | — | | | | — | |
Deferred compensation stock used for tax withholdings (unaudited) | | | (4 | ) | | | — | | | | (93 | ) | | | — | | | | — | | | | — | | | | (93 | ) | | | — | |
Amortization of deferred compensation (unaudited) | | | — | | | | — | | | | — | | | | — | | | | 288 | | | | — | | | | 288 | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCES—March 31, 2005 (unaudited) | | | 29,792 | | | $ | 30 | | | $ | 458,800 | | | $ | (16,965 | ) | | $ | (4,685 | ) | | $ | 185,516 | | | $ | 622,696 | | | $ | 10,115 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Accumulated | | | | | | | | | | | | |
| | | | | | | | | | Additional | | Other | | | | | | | | | | Total | | |
| | Common Stock | | Paid-in | | Comprehensive | | Deferred | | Retained | | Stockholders’ | | Comprehensive |
| | Shares | | Amount | | Capital | | Income (Loss) | | Compensation | | Earnings | | Equity | | Income |
BALANCES—January 1, 2004 | | | 18,750 | | | $ | 19 | | | $ | 170,367 | | | $ | (223 | ) | | $ | — | | | $ | 89,415 | | | $ | 259,578 | | | $ | 19,612 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | — | | | | — | | | | — | | | | — | | | | — | | | | 70,046 | | | | 70,046 | | | | 70,046 | |
Change in fair value of marketable securities for sale | | | — | | | | — | | | | — | | | | 3,741 | | | | — | | | | — | | | | 3,741 | | | | 3,741 | |
Realized gain on marketable securities for sale | | | — | | | | — | | | | — | | | | (4,835 | ) | | | — | | | | — | | | | (4,835 | ) | | | (4,835 | ) |
Change in derivative instrument fair value | | | — | | | | — | | | | — | | | | 292 | | | | — | | | | — | | | | 292 | | | | 292 | |
Issuance of stock — Equity Oil Company merger | | | 2,237 | | | | 2 | | | | 43,296 | | | | — | | | | | | | | — | | | | 43,298 | | | | | |
Issuance of stock — secondary offering | | | 8,625 | | | | 9 | | | | 239,677 | | | | — | | | | — | | | | — | | | | 239,686 | | | | — | |
Deferred compensation stock issued | | | 106 | | | | — | | | | 2,295 | | | | — | | | | (2,295 | ) | | | — | | | | — | | | | — | |
Amortization of deferred compensation | | | — | | | | — | | | | — | | | | — | | | | 580 | | | | — | | | | 580 | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | �� | | |
BALANCES—December 31, 2004 | | | 29,718 | | | | 30 | | | | 455,635 | | | | (1,025 | ) | | | (1,715 | ) | | | 159,461 | | | | 612,386 | | | $ | 69,244 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income (unaudited) | | | | | | | | | | | | | | | | | | | | | | | 50,293 | | | | 50,293 | | | | 50,293 | |
Change in derivative instrument fair value (unaudited) | | | | | | | | | | | | | | | (10,573 | ) | | | | | | | | | | | (10,573 | ) | | | (10,573 | ) |
Restricted stock issued (unaudited) | | | 85 | | | | | | | | 3,407 | | | | | | | | (3,407 | ) | | | | | | | | | | | | |
Restricted stock forfeited (unaudited) | | | (8 | ) | | | | | | | (181 | ) | | | | | | | 181 | | | | | | | | | | | | | |
Restricted stock used for tax withholdings (unaudited) | | | (4 | ) | | | | | | | (174 | ) | | | | | | | | | | | | | | | (174 | ) | | | | |
Net tax effect arising from restricted stock activity | | | | | | | | | | | 192 | | | | | | | | | | | | | | | | 192 | | | | | |
Amortization of deferred compensation (unaudited) | | | | | | | | | | | | | | | | | | | 1,546 | | | | | | | | 1,546 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCES—June 30, 2005 (unaudited) | | | 29,791 | | | $ | 30 | | | $ | 458,879 | | | $ | (11,598 | ) | | $ | (3,395 | ) | | $ | 209,754 | | | $ | 653,670 | | | $ | 39,720 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
See condensed notes to unaudited consolidated financial statements.
- 5 -
WHITING PETROLEUM CORPORATION AND SUBSIDIARIES
| | |
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
| | |
FOR THE THREE MONTHS ENDED MARCH 31,UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004 (in thousands)
| | |
|
| | | | | | | | |
| | 2005 | | | 2004 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | |
Net income | | $ | 26,055 | | | $ | 9,638 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
Depreciation, depletion and amortization | | | 20,347 | | | | 10,729 | |
Deferred income taxes | | | 14,749 | | | | 6,060 | |
Amortization of debt issuance costs and debt discount | | | 681 | | | | 282 | |
Accretion of tax sharing agreement | | | 620 | | | | 600 | |
Amortization of deferred compensation | | | 288 | | | | 65 | |
Changes in assets and liabilities: | | | | | | | | |
Accounts receivable | | | 5,109 | | | | (1,765 | ) |
Other assets | | | 103 | | | | (2,342 | ) |
Asset retirement obligations | | | (111 | ) | | | (75 | ) |
Production participation plan liability | | | (4,515 | ) | | | (3,426 | ) |
Accounts payable | | | 4,257 | | | | (4,845 | ) |
Other liabilities | | | 1,416 | | | | (619 | ) |
| | | | | | |
Net cash provided by operating activities | | | 68,999 | | | | 14,302 | |
| | | | | | |
| | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | |
Cash acquisition capital expenditures | | | (68,600 | ) | | | (423 | ) |
Drilling capital expenditures | | | (25,722 | ) | | | (11,085 | ) |
| | | | | | |
Net cash used in investing activities | | | (94,322 | ) | | | (11,508 | ) |
| | | | | | |
| | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | |
Issuance of long-term debt under credit agreement | | | 60,000 | | | | — | |
Payments on long-term debt under credit agreement | | | (20,000 | ) | | | (40,000 | ) |
| | | | | | |
Net cash provided by (used in) financing activities | | | 40,000 | | | | (40,000 | ) |
| | | | | | |
| | | | | | | | |
NET CHANGE IN CASH AND CASH EQUIVALENTS | | | 14,677 | | | | (37,206 | ) |
CASH AND CASH EQUIVALENTS: | | | | | | | | |
Beginning of period | | | 1,660 | | | | 53,585 | |
| | | | | | |
End of period | | $ | 16,337 | | | $ | 16,379 | |
| | | | | | |
| | | | | | | | |
SUPPLEMENT CASH FLOW DISCLOSURES: | | | | | | | | |
Cash paid for income taxes | | $ | 634 | | | $ | 499 | |
| | | | | | |
Cash paid for interest | | $ | 912 | | | $ | 1,612 | |
| | | | | | |
| | | | | | | | |
| | 2005 | | 2004 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | |
Net income | | $ | 50,293 | | | $ | 23,109 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
Depreciation, depletion and amortization | | | 41,082 | | | | 21,490 | |
Deferred income taxes | | | 26,881 | | | | 14,528 | |
Amortization of debt issuance costs and debt discount | | | 1,697 | | | | 659 | |
Accretion of tax sharing agreement | | | 1,240 | | | | 1,200 | |
Amortization of deferred compensation | | | 1,546 | | | | 227 | |
Impairment of oil and gas properties | | | 1,928 | | | | — | |
Gain on sale of marketable securities | | | — | | | | (2,382 | ) |
Changes in assets and liabilities: | | | | | | | | |
Accounts receivable | | | 6,633 | | | | (6,147 | ) |
Other assets | | | (1,783 | ) | | | (3,545 | ) |
Asset retirement obligations | | | (128 | ) | | | (224 | ) |
Production participation plan liability | | | (1,971 | ) | | | (2,436 | ) |
Accounts payable | | | 4,636 | | | | 351 | |
Other liabilities | | | 5,111 | | | | 451 | |
| | | | | | | | |
Net cash provided by operating activities | | | 137,165 | | | | 47,281 | |
| | | | | | | | |
| | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | |
Cash acquisition capital expenditures | | | (76,738 | ) | | | (2,874 | ) |
Drilling capital expenditures | | | (53,989 | ) | | | (26,349 | ) |
Proceeds from sale of marketable securities | | | — | | | | 2,677 | |
Acquisition of Partnership interests, net of cash acquired of $26 | | | (30,433 | ) | | | — | |
| | | | | | | | |
Net cash used by investing activities | | | (161,160 | ) | | | (26,546 | ) |
| | | | | | | | |
| | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | |
Issuance of 7 1/4% Senior Subordinated debt due 2012 | | | — | | | | 148,890 | |
Issuance of 7 1/4% Senior Subordinated debt due 2013 | | | 216,715 | | | | — | |
Issuance of long-term debt under credit agreement | | | 60,000 | | | | — | |
Payments on long-term debt under credit agreement | | | (235,000 | ) | | | (185,000 | ) |
Debt issuance costs | | | (3,777 | ) | | | (5,834 | ) |
Restricted stock used for tax withholdings | | | (174 | ) | | | — | |
Net tax effect arising from restricted stock activity | | | 192 | | | | — | |
| | | | | | | | |
Net cash provided (used) by financing activities | | | 37,956 | | | | (41,944 | ) |
| | | | | | | | |
| | | | | | | | |
NET CHANGE IN CASH AND CASH EQUIVALENTS | | | 13,961 | | | | (21,209 | ) |
| | | | | | | | |
CASH AND CASH EQUIVALENTS: | | | | | | | | |
Beginning of period | | | 1,660 | | | | 53,585 | |
| | | | | | | | |
End of period | | $ | 15,621 | | | $ | 32,376 | |
| | | | | | | | |
| | | | | | | | |
SUPPLEMENTAL CASH FLOW DISCLOSURES: | | | | | | | | |
Cash paid for income taxes | | $ | 5,277 | | | $ | 722 | |
| | | | | | | | |
Cash paid for interest | | $ | 7,075 | | | $ | 2,976 | |
| | | | | | | | |
See condensed notes to unaudited consolidated financial statements.
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WHITING PETROLEUM CORPORATION AND SUBSIDIARIES
| | |
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
| | |
MARCH 31, 2005
| | |
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2005 (In thousands, except per share data) | | |
|
Description of Operations— Whiting Petroleum Corporation (“Whiting” or the “Company”) is a Delaware corporation that prior to its initial public offering in November 2003 was a wholly owned indirect subsidiary of Alliant Energy Corporation (“Alliant Energy” or “Alliant”), a holding company whose primary businesses are utility companies. Whiting acquires, develops and explores for producing oil and gas properties primarily in the Rocky Mountains, Permian Basin, Gulf Coast, Michigan, Mid-Continent and California regions of the United States.
Consolidated Financial Statements— The unaudited consolidated financial statements include the accounts of Whiting and its subsidiaries, all of which are wholly owned. The financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial reporting. All intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Except as disclosed herein, there has been no material change to the information disclosed in the notes to consolidated financial statements included in Whiting’s Annual Report on Form 10-K for the year ended December 31, 2004. It is recommended that these unaudited consolidated financial statements be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Form 10-K.
Earnings Per Share— Basic net income per common share of stock is calculated by dividing net income by the weighted average number of common shares outstanding during each period. Diluted net income per common share of stock is calculated by dividing net income by the weighted average number of common shares outstanding and other dilutive securities. The only securities considered dilutive are the Company’s unvested restricted stock awards. The dilutive effect of these securities was immaterial to the calculation.
Reclassifications— Certain prior period balances were reclassified to conform to the current year presentation. Those reclassifications had no impact on net income, stockholders’ equity or cash flows from operations as previously reported.
2. DERIVATIVE FINANCIAL INSTRUMENTS
Whiting is exposed to market risk in the pricing of its oil and gas production. Historically, prices received for oil and gas production have been volatile because of seasonal weather patterns, supply and demand factors, worldwide political factors and general economic conditions. Periodically, Whiting utilizes traditional swap and collar arrangements to mitigate the impact of oil and gas price fluctuations related to its sales of oil and gas. The Company attempts to qualify the majority of these instruments as cash flow hedges for accounting purposes.
During the first six months of 2005 and 2004, the Company recognized losses of $6,945 and $1,575, respectively, related to its hedging activities. In addition, at June 30, 2005, Whiting’s
1. | BASIS OF PRESENTATION |
|
| Description of Operations—Whiting Petroleum Corporation (“Whiting” or the “Company”) is a Delaware corporation that prior to its initial public offering in November 2003 was a wholly owned indirect subsidiary of Alliant Energy Corporation (“Alliant Energy” or “Alliant”), a holding company whose primary businesses are utility companies. Whiting acquires, develops and explores for producing oil and gas properties primarily in the Rocky Mountains, Permian Basin, Gulf Coast, Michigan, Mid-Continent and California regions of the United States. |
|
| Consolidated Financial Statements—The unaudited consolidated financial statements include the accounts of Whiting and its subsidiaries, all of which are wholly owned, together with its pro rata share of the assets, liabilities, revenue and expenses of limited partnerships in which Whiting is the sole general partner. The financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial reporting. All significant intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Except as disclosed herein, there has been no material change to the information disclosed in the notes to consolidated financial statements included in Whiting’s Annual Report on Form 10-K for the year ended December 31, 2004. It is recommended that these unaudited consolidated financial statements be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Form 10-K. |
|
| Earnings Per Share—Basic net income per common share of stock is calculated by dividing net income by the weighted average number of common shares outstanding during each period. Diluted net income per common share of stock is calculated by dividing net income by the weighted average number of common shares outstanding and other dilutive securities. The only securities considered dilutive are the Company’s unvested restricted stock awards. The dilutive effect of these securities was immaterial to the calculation. |
|
| Reclassifications—Certain prior period balances were reclassified to conform to the current year presentation. Those reclassifications had no impact on net income, stockholders’ equity or cash flows from operations as previously reported. |
|
2. | DERIVATIVE FINANCIAL INSTRUMENTS |
|
| Whiting is exposed to market risk in the pricing of its oil and gas production. Historically, prices received for oil and gas production have been volatile because of seasonal weather patterns, supply and demand factors, worldwide political factors and general economic conditions. Periodically, Whiting utilizes traditional swap and collar arrangements to mitigate the impact of oil and gas price fluctuations related to its sales of oil and gas. The |
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remaining cash flow hedge positions resulted in a pre-tax liability of $18,890 of which $11,598 was recorded as a component of accumulated other comprehensive income and $7,292 was recorded as a current deferred tax asset. See Note 4 for restrictions in our credit agreement relating to hedging activities.
3. ASSET RETIREMENT OBLIGATIONS
The Company recognizes the fair value of its liability for plugging and abandoning its oil and natural gas wells in the financial statements by capitalizing that cost as a part of the cost of the related asset. The additional carrying amount is depleted over the estimated lives of the properties. The discounted liability is based on historical abandonment costs in specific areas and includes the abandonment obligation for certain onshore and offshore facilities located in California. The discounted obligation is accreted at the end of each accounting period through charges to depreciation, depletion and amortization expense. If the obligation is settled for other than the carrying amount, then a gain or loss is recognized upon settlement.
The following table provides a reconciliation of the Company’s asset retirement obligations for the six months ended June 30, 2005 and 2004, respectively.
| | | | | | | | |
| | Six Months Ended | | Six Months Ended |
| | June 30, 2005 | | June 30, 2004 |
Beginning asset retirement obligation | | $ | 31,639 | | | $ | 23,021 | |
Additional liability incurred | | | 2,593 | | | | 423 | |
Accretion expense | | | 1,114 | | | | 760 | |
Liabilities settled | | | (128 | ) | | | (224 | ) |
| | | | | | | | |
| | | | | | | | |
Ending asset retirement obligation | | $ | 35,218 | | | $ | 23,980 | |
| | | | | | | | |
No revisions have been made to the timing or the amount of the original estimate of undiscounted cash flows during the first six months of 2005 or 2004.
4. LONG-TERM DEBT
Long-term debt consisted of the following at June 30, 2005 and December 31, 2004:
| | | | | | | | |
| | June 30, | | | December 31, | |
| | 2005 | | | 2004 | |
Credit Agreement | | $ | 0 | | | $ | 175,000 | |
7-1/4% Senior Subordinated Notes due 2012 | | | 150,545 | | | | 150,261 | |
7-1/4% Senior Subordinated Notes due 2013 | | | 216,824 | | | | 0 | |
Alliant Energy | | | 3,242 | | | | 3,167 | |
| | | | | | |
Total debt | | | 370,611 | | | | 328,428 | |
Current portion of long-term debt | | | (3,242 | ) | | | (3,167 | ) |
| | | | | | |
Long-term debt | | $ | 367,369 | | | $ | 325,261 | |
| | | | | | |
Credit Agreement— Whiting Oil and Gas Corporation has a $750.0 million credit agreement with a syndicate of banks that, as of June 30, 2005, had a borrowing base of $550.0 million. The borrowing base under the credit agreement is determined in the discretion of the lenders based on
| Company attempts to qualify the majority of these instruments as cash flow hedges for accounting purposes. |
|
| During the first three months of 2005 and 2004, the Company recognized losses of $2,055 and $1,015, respectively, related to its hedging activities. In addition, at March 31, 2005, Whiting’s remaining cash flow hedge positions resulted in a pre-tax liability of $27,630 of which $16,965 was recorded as a component of accumulated other comprehensive income and $10,665 was recorded as a current deferred tax asset. See Note 4 for restrictions in our credit agreement relating to hedging activities. |
|
3. | ASSET RETIREMENT OBLIGATIONS |
|
| The Company recognizes the fair value of its liability for plugging and abandoning its oil and natural gas wells in the financial statements by capitalizing that cost as a part of the cost of the related asset. The additional carrying amount is depleted over the estimated lives of the properties. The discounted liability is based on historical abandonment costs in specific areas and includes the abandonment obligation for certain onshore and offshore facilities located in California. The discounted obligation is accreted at the end of each accounting period through charges to depreciation, depletion and amortization expense. If the obligation is settled for other than the carrying amount, then a gain or loss is recognized upon settlement. |
|
| The following table provides a reconciliation of the Company’s asset retirement obligations for the three months ended March 31, 2005 and 2004, respectively. |
| | | | | | | | |
| | Three Months Ended | | | Three Months Ended | |
| | March 31, 2005 | | | March 31, 2004 | |
Beginning asset retirement obligation | | $ | 31,639 | | | $ | 23,021 | |
Additional liability incurred | | | 873 | | | | — | |
Accretion expense | | | 557 | | | | 380 | |
Liabilities settled | | | (111 | ) | | | (75 | ) |
| | | | | | |
| | | | | | | | |
Ending asset retirement obligation | | $ | 32,958 | | | $ | 23,326 | |
| | | | | | |
| No revisions have been made to the timing or the amount of the original estimate of undiscounted cash flows during the first three months of 2005 or 2004. |
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the collateral value of the proved reserves that have been mortgaged to the lenders and is subject to regular redetermination on May 1 and November 1 of each year as well as special redeterminations described in the credit agreement. As of June 30, 2005, there was no outstanding principal balance under the credit agreement.
The credit agreement provides for interest only payments until September 23, 2008, when the entire amount borrowed is due. Whiting Oil and Gas Corporation may, throughout the four year term of the credit agreement, borrow, repay and reborrow up to the borrowing base in effect from time to time. The lenders under the credit agreement have also committed to issue letters of credit for the account of Whiting Oil and Gas Corporation or other designated subsidiaries of the Company from time to time in an aggregate amount not to exceed $30.0 million. As of June 30, 2005, letters of credit totaling $0.3 million were outstanding under the credit agreement.
Interest accrues, at Whiting Oil and Gas Corporation’s option, at either (1) the base rate plus a margin where the base rate is defined as the higher of the federal funds rate plus 0.5% or the prime rate and the margin varies from 0% to 0.50% depending on the utilization percentage of the borrowing base, or (2) at the LIBOR rate plus a margin where the margin varies from 1.00% to 1.75% depending on the utilization percentage of the borrowing base. Whiting Oil and Gas Corporation has consistently chosen the LIBOR rate option since it delivers the lowest effective interest rate. Commitment fees of 0.250% to 0.375% accrue on the unused portion of the borrowing base, depending on the utilization percentage, and are included as a component of interest expense. At June 30, 2005, the six month LIBOR rate was 3.71%.
The credit agreement contains restrictive covenants that may limit the Company’s ability to, among other things, pay cash dividends, incur additional indebtedness, sell assets, make loans to others, make investments, enter into mergers, enter into hedging contracts, change material contracts, incur liens and engage in certain other transactions without the prior consent of the lenders and requires the Company to maintain a debt to EBITDAX (as defined in the credit agreement) ratio of less than 3.5 to 1 and a working capital ratio of greater than 1 to 1. The Company is in compliance with all credit agreement provisions, including those that require the Company to hedge at least 60% but not more than 75% of its total forecasted proved developed producing production through December 31, 2005 in the form of costless collars or fixed price swaps, with a minimum floor price of $35 per barrel of oil or $4.50 per million British Thermal Units (MMBtu). After December 31, 2005, the credit agreement will not require the Company to hedge any of the Company’s production, but will continue to limit the Company’s hedging to a maximum of 75% of the Company’s forecasted proved developed producing production. In addition, while the credit agreement allows the Company’s subsidiaries to make payments to the Company so that it may pay interest on its senior subordinated notes, it does not allow the Company’s subsidiaries to make payments to it to pay principal on the senior subordinated notes. The Company was in compliance with its covenants under the credit agreement as of June 30, 2005. The credit agreement is secured by a first lien on substantially all of Whiting Oil and Gas Corporation’s assets. Whiting Petroleum Corporation and Equity Oil Company have guaranteed the obligations of Whiting Oil and Gas Corporation under the credit agreement, Whiting Petroleum Corporation has pledged the stock of Whiting Oil and Gas Corporation and Equity Oil Company as security for its guarantee and Equity Oil Company has mortgaged substantially all of its assets as security for its guarantee.
7-1/4% Senior Subordinated Notes— On April 19, 2005, the Company issued $220.0 million aggregate principal amount of its 7-1/4% Senior Subordinated Notes due 2013. The net proceeds of the offering were used to repay debt outstanding under Whiting Oil and Gas Corporation’s credit agreement. The 7-1/4% Senior Subordinated Notes due 2013 were issued at 98.507% of par and
4. | LONG-TERM DEBT |
|
| Long-term debt consisted of the following at March 31, 2005 and December 31, 2004: |
| | | | | | | | |
| | March 31, | | | December 31, | |
| | 2005 | | | 2004 | |
Credit Agreement | | $ | 215,000 | | | $ | 175,000 | |
71/4% Senior Subordinated Notes due 2012 | | | 149,321 | | | | 150,261 | |
Alliant Energy | | | 3,205 | | | | 3,167 | |
| | | | | | |
Total debt | | | 367,526 | | | | 328,428 | |
Current portion of long-term debt | | | (3,205 | ) | | | (3,167 | ) |
| | | | | | |
Long-term debt | | $ | 364,321 | | | $ | 325,261 | |
| | | | | | |
| Credit Agreement—Whiting Oil and Gas Corporation has a $750.0 million credit agreement with a syndicate of banks that, as of March 31, 2005, had a borrowing base of $480.0 million. The borrowing base under the credit agreement is determined in the discretion of the lenders based on the collateral value of the proved reserves that have been mortgaged to the lenders and is subject to regular redetermination on May 1 and November 1 of each year as well as special redeterminations described in the credit agreement. On March 31, 2005, Whiting Oil and Gas Corporation borrowed $60.0 million in order to fund its $65.0 million acquisition of oil and natural gas producing properties located in the Green River Basin in Wyoming. As of March 31, 2005, the outstanding principal balance under the credit agreement was $215.0 million. |
|
| The credit agreement provides for interest only payments until September 23, 2008, when the entire amount borrowed is due. Whiting Oil and Gas Corporation may, throughout the four year term of the credit agreement, borrow, repay and reborrow up to the borrowing base in effect from time to time. The lenders under the credit agreement have also committed to issue letters of credit for the account of Whiting Oil and Gas Corporation or other designated subsidiaries of the Company from time to time in an aggregate amount not to exceed $30.0 million. As of March 31, 2005, letters of credit totaling $0.2 million were outstanding under the credit agreement. |
|
| Interest accrues, at Whiting Oil and Gas Corporation’s option, at either (1) the base rate plus a margin where the base rate is defined as the higher of the federal funds rate plus 0.5% or the prime rate and the margin varies from 0% to 0.50% depending on the utilization percentage of the borrowing base, or (2) at the LIBOR rate plus a margin where the margin varies from 1.00% to 1.75% depending on the utilization percentage of the borrowing base. Whiting Oil and Gas Corporation has consistently chosen the LIBOR rate option since it delivers the lowest effective interest rate. Commitment fees of 0.250% to 0.375% accrue on the unused portion of the borrowing base, depending on the utilization percentage, and are included as a component of interest expense. At March 31, 2005, the effective weighted average interest rate on the entire outstanding principal balance of $215.0 million was fixed at 3.77% through April 29, 2005. On April 19, 2005, the Company repaid the entire outstanding principal balance of $215.0 million under the credit agreement with cash on |
- 9 -
the associated discount is being amortized to interest expense over the term of the notes. Based on the market price of the 7-1/4% Senior Subordinated Notes due 2013, their estimated fair value was $223.6 million as of June 30, 2005.
In May 2004, the Company issued $150.0 million aggregate principal amount of its 7-1/4% Senior Subordinated Notes due 2012. The 7-1/4% Senior Subordinated Notes due 2012 were issued at 99.26% of par and the associated discount is being amortized to interest expense over the term of the notes. Based on the market price of the 7-1/4 % Senior Subordinated Notes due 2012, their estimated fair value was $153.2 million as of June 30, 2005.
The notes are unsecured obligations of the Company and are subordinated to all of the Company’s senior debt. The indentures governing the notes contain various restrictive covenants that are substantially identical and may limit the Company’s and its subsidiaries’ ability to, among other things, pay cash dividends, redeem or repurchase the Company’s capital stock or the Company’s subordinated debt, make investments, incur additional indebtedness or issue preferred stock, sell assets, consolidate, merge or transfer all or substantially all of the assets of the Company and its restricted subsidiaries taken as a whole, and enter into hedging contracts. These covenants may limit the discretion of the Company’s management in operating the Company’s business. In addition, Whiting Oil and Gas Corporation’s credit agreement restricts the ability of the Company’s subsidiaries to make certain payments to the Company. The Company was in compliance with these covenants as of June 30, 2005. Both of the Company’s subsidiaries, Whiting Oil and Gas Corporation and Equity Oil Company (the “Guarantors”), have fully, unconditionally, jointly and severally guaranteed the Company’s obligations under the notes. All of the Company’s subsidiaries other than the Guarantors are minor within the meaning of Rule 3-10(h)(6) of Regulation S-X of the Securities and Exchange Commission, and the Company has no independent assets or operations.
Interest Rate Swap— In August 2004, the Company entered into an interest rate swap contract to hedge the fair value of $75 million of its 7-1/4% Senior Subordinated Notes due 2012. Because this swap meets the conditions to qualify for the “short cut” method of assessing effectiveness under the provisions of Statement of Financial Accounting Standards No. 133, the change in fair value of the debt is assumed to equal the change in the fair value of the interest rate swap. As such, there is no ineffectiveness assumed to exist between the interest rate swap and the notes.
The interest rate swap is a fixed for floating swap in that the Company receives the fixed rate of 7.25% and pays the floating rate. The floating rate is redetermined every six months based on the LIBOR rate in effect at the contractual reset date. When LIBOR plus the Company’s margin of 2.345% is less than 7.25%, the Company receives a payment from the counterparty equal to the difference in rate times $75 million for the six month period. When LIBOR plus the Company’s margin of 2.345% is greater than 7.25%, the Company pays the counterparty an amount equal to the difference in rate times $75 million for the six month period. The LIBOR rate at June 30, 2005 was 3.71%. As of June 30, 2005, we have recorded a long term derivative asset of $1.5 million related to the interest rate swap, which has been designated as a fair value hedge, with a corresponding debt increase to the 7-1/4% Senior Subordinated Notes due 2012.
Short-Term Debt— In conjunction with the Company’s initial public offering in November 2003, the Company issued a promissory note payable to Alliant Energy in the aggregate principal amount of $3.0 million. The promissory note bears interest at an annual rate of 5%. All principal and interest on the promissory note are due on November 25, 2005.
| hand and proceeds from the 71/4% Senior Subordinated Notes due 2013. See a further discussion of this transaction in Note 9. |
|
| The credit agreement contains restrictive covenants that may limit the Company’s ability to, among other things, pay cash dividends, incur additional indebtedness, sell assets, make loans to others, make investments, enter into mergers, enter into hedging contracts, change material contracts, incur liens and engage in certain other transactions without the prior consent of the lenders and requires the Company to maintain a debt to EBITDAX (as defined in the credit agreement) ratio of less than 3.5 to 1 and a working capital ratio of greater than 1 to 1. The Company is in compliance with the credit agreement provision that requires the Company to hedge at least 60% but not more than 75% of its total forecasted proved developed producing production through December 31, 2005 in the form of costless collars or fixed price swaps, with a minimum floor price of $35 per barrel of oil or $4.50 per million British Thermal Units (MMBtu). After December 31, 2005, the credit agreement will not require the Company to hedge any of the Company’s production, but will continue to limit our hedging to a maximum of 75% of our forecasted proved developed producing production. In addition, while the credit agreement allows the Company’s subsidiaries to make payments to the Company so that it may pay interest on its senior subordinated notes, it does not allow the Company’s subsidiaries to make payments to it to pay principal on the senior subordinated notes. The Company was in compliance with its covenants under the credit agreement as of March 31, 2005. The credit agreement is secured by a first lien on substantially all of Whiting Oil and Gas Corporation’s assets. Whiting Petroleum Corporation and Equity Oil Company have guaranteed the obligations of Whiting Oil and Gas Corporation under the credit agreement, Whiting Petroleum Corporation has pledged the stock of Whiting Oil and Gas Corporation and Equity Oil Company as security for its guarantee and Equity Oil Company has mortgaged substantially all of its assets as security for its guarantee. |
|
| 71/4% Senior Subordinated Notes due 2012— In May 2004, the Company issued, in a private placement, $150.0 million aggregate principal amount of its 71/4% senior subordinated notes due 2012. The net proceeds of the offering were used to refinance debt outstanding under the Company’s credit agreement. The notes were issued at 99.26% of par and the associated discount is being amortized to interest expense over the term of the notes. The notes are unsecured obligations of the Company and are subordinated to all of the Company’s senior debt. The indenture governing the notes contains various restrictive covenants that may limit the Company’s and its subsidiaries’ ability to, among other things, pay cash dividends, redeem or repurchase the Company’s capital stock or the Company’s subordinated debt, make investments, incur additional indebtedness or issue preferred stock, sell assets, consolidate, merge or transfer all or substantially all of the assets of the Company and its restricted subsidiaries taken as a whole, and enter into hedging contracts. These covenants may limit the discretion of the Company’s management in operating the Company’s business. In addition, Whiting Oil and Gas Corporation’s credit agreement restricts the ability of the Company’s subsidiaries to make payments to the Company. The Company was in compliance with these covenants as of March 31, 2005. Three of the Company’s subsidiaries, Whiting Oil and Gas Corporation, Whiting Programs, Inc. and Equity Oil Company (the “Guarantors”), have fully, unconditionally, jointly and severally guaranteed the Company’s obligations under the notes. All of the Company’s subsidiaries other than the Guarantors are minor within the meaning of Rule 3-10(h)(6) of Regulation |
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5. EQUITY INCENTIVE PLAN
The Company maintains the Whiting Petroleum Corporation 2003 Equity Incentive Plan, pursuant to which two million shares of the Company’s common stock have been reserved for issuance. No participating employee may be granted options for more than 300,000 shares of common stock, stock appreciation rights with respect to more than 300,000 shares of common stock or more than 150,000 shares of restricted stock during any calendar year. This plan prohibits the repricing of outstanding stock options without stockholder approval. During the first six months of 2005, the Company granted 84,652 shares of restricted stock under this plan and 8,065 shares were forfeited. The new shares of restricted stock were recorded at fair value of $3.4 million and are being amortized to general and administrative expense over their three year vesting period.
6. PRODUCTION PARTICIPATION PLAN
The Company has a Production Participation Plan for all employees. On an annual basis, interests in oil and gas properties acquired or developed during the year are allocated to the plan on a discretionary basis. Once allocated, the interests (not legally conveyed) are fixed. Allocations prior to 1995 consisted of 2% — 3% overriding royalty interests. Allocations since 1995 have been 2% — 5% net revenue interests. Prior to plan year 2004, plan participants generally vested ratably over their initial five years of employment in all income allocated to the plan on their behalf and forfeitures were re-allocated among other Plan participants. The Production Participation Plan was modified in 2004 to provide that (1) for years 2004 and beyond, employees will vest at a rate of 20% per year with respect to the income allocated to the plan for such year; (2) employees will become fully vested at age 65, regardless of when their interests would otherwise vest; and (3) for years 2004 and beyond, if there are forfeitures, the interests will inure to the benefit of the Company.
7. TAX SEPARATION AND INDEMNIFICATION AGREEMENT WITH ALLIANT ENERGY
In connection with Whiting’s initial public offering in November 2003, the Company entered into a tax separation and indemnification agreement with Alliant Energy. Pursuant to this agreement, the Company and Alliant Energy made a tax election with the effect that the tax basis of the assets of Whiting and its subsidiaries were increased to the deemed purchase price of their assets immediately prior to such initial public offering. Whiting has adjusted deferred taxes on its balance sheet to reflect the new tax basis of the Company’s assets. This additional basis is expected to result in increased future income tax deductions and, accordingly, may reduce income taxes otherwise payable by Whiting.
Under this agreement, the Company has agreed to pay to Alliant Energy 90% of the future tax benefits the Company realizes annually as a result of this step-up in tax basis for the years ending on or prior to December 31, 2013. Such tax benefits will generally be calculated by comparing the Company’s actual taxes to the taxes that would have been owed by the Company had the increase in basis not occurred. In 2014, Whiting will be obligated to pay Alliant Energy 90% of the present value of the remaining tax benefits assuming all such tax benefits will be realized in future years. Future tax benefits in total will approximate $62.0 million. The Company has estimated total payments to Alliant will approximate $49.0 million given the discounting affect of the final payment in 2014. The Company has discounted all cash payments to Alliant at the date of the Tax Separation Agreement.
| S-X of the Securities and Exchange Commission, and the Company has no independent assets or operations. Based on the market price of the 71/4 % Senior Subordinated Notes due 2012, their estimated fair value was $151.9 million as of March 31, 2005. |
|
| Interest Rate Swap—In August 2004, the Company entered into an interest rate swap contract to hedge the fair value of $75 million of our 71/4% Senior Subordinated Notes due 2012. Because this swap meets the conditions to qualify for the “short cut” method of assessing effectiveness under the provisions of Statement of Financial Accounting Standards No. 133, the change in fair value of the debt is assumed to equal the change in the fair value of the interest rate swap. As such, there is no ineffectiveness assumed to exist between the interest rate swap and the notes. |
|
| The interest rate swap is a fixed for floating swap in that we receive the fixed rate of 7.25% and pay the floating rate. The floating rate is redetermined every six months based on the LIBOR rate in effect at the contractual reset date. When LIBOR plus our margin of 2.345% is less than 7.25%, we receive a payment from the counterparty equal to the difference in rate times $75 million for the six month period. When LIBOR plus our margin of 2.345% is greater than 7.25%, we pay the counterparty an amount equal to the difference in rate times $75 million for the six month period. The LIBOR rate at March 31, 2005 was 2.3%. As of March 31, 2005, we have recorded a long term derivative asset of $0.3 million related to the interest rate swap, which has been designated as a fair value hedge, with a corresponding debt increase to the 71/4% Senior Subordinated Notes due 2012. |
|
| Short-Term Debt—In conjunction with the Company’s initial public offering in November 2003, the Company issued a promissory note payable to Alliant Energy in the aggregate principal amount of $3.0 million. The promissory note bears interest at an annual rate of 5%. All principal and interest on the promissory note are due on November 25, 2005. |
|
5. | EQUITY INCENTIVE PLAN |
|
| The Company maintains the Whiting Petroleum Corporation 2003 Equity Incentive Plan, pursuant to which two million shares of the Company’s common stock have been reserved for issuance. No participating employee may be granted options for more than 300,000 shares of common stock, stock appreciation rights with respect to more than 300,000 shares of common stock or more than 150,000 shares of restricted stock during any calendar year. This plan prohibits the repricing of outstanding stock options without stockholder approval. During the first three months of 2005, the Company granted 85,732 shares of restricted stock under this plan and 6,865 shares were forfeited. The new shares of restricted stock were recorded at fair value of $3.4 million and are being amortized to general and administrative expense over their three year vesting period. |
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6. | PRODUCTION PARTICIPATION PLAN |
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| The Company has a Production Participation Plan for all employees. On an annual basis, interests in oil and gas properties acquired or developed during the year are allocated to the plan on a discretionary basis. Once allocated, the interests (not legally conveyed) are fixed. Allocations prior to 1995 consisted of 2%- 11 - 3% overriding royalty interests. Allocations since 1995 have been 2% - 5% net revenue interests. Prior to plan year 2004, plan |
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The initial recording of this transaction in November 2003 resulted in a $57.2 million increase in deferred tax assets, a $28.6 million discounted payable to Alliant Energy and a $28.6 million increase to stockholders’ equity. The Company will monitor the estimate of when payments will be made and adjust the accretion of this liability on a prospective basis. During the first six months of 2005, the Company did not make any payments under this agreement but did recognize $1.2 million of accretion expense which is included as a component of interest expense. The Company’s estimate of payments to be made in 2005 under this agreement of $4.2 million is reflected as a current liability at June 30, 2005.
The Tax Separation Agreement provides that if tax rates were to change (increase or decrease), the tax benefit or detriment would result in a corresponding adjustment of the Alliant liability. For purposes of this calculation, the Company’s management has assumed that no such change will occur during the term of this agreement.
8. COMMITMENTS AND CONTINGENCIES
The Company leases 87,000 square feet of administrative office space under an operating lease arrangement through October 31, 2010. Rental expense for the initial six months of 2005 and 2004 was $725 and $481, respectively. A summary of future minimum lease payments under this non-cancelable operating lease as of June 30, 2005 is as follows (in thousands):
| | | | |
Year Ending December 31, 2005 | | $ | 735 | |
Year Ending December 31, 2006 | | | 1,469 | |
Year Ending December 31, 2007 | | | 1,469 | |
Year Ending December 31, 2008 | | | 1,469 | |
Year Ending December 31, 2009 | | | 1,469 | |
Year Ending December 31, 2010 | | | 1,224 | |
| | | | |
| | | | |
Total | | $ | 7,835 | |
| | | | |
The Company is subject to litigation claims and governmental and regulatory controls arising in the ordinary course of business. It is the opinion of the Company’s management that all claims and litigation involving the Company are not likely to have a material adverse effect on its financial position or results of operations.
9. ACQUISITIONS
Limited Partnership Interests —On June 23, 2005, Whiting Oil and Gas Corporation acquired all of the limited partnership interests in three institutional partnerships managed by its wholly-owned subsidiary, Whiting Programs, Inc. The purchase price was $30.5 million for estimated proved reserves of approximately 17.4 Bcfe, resulting in a cost of approximately $1.75 per Mcfe of estimated proved reserves. Current production attributable to the property interests is approximately 4.0 MMcfe per day. The partnership properties are located primarily in Louisiana, Texas, Arkansas, Oklahoma and Wyoming. The effective date of the acquisition is January 1, 2005 and the acquisition was funded with cash on hand.
As this acquisition was recorded using the purchase method of accounting, the results of operations from the acquisition are included with our results from June 23, 2005 forward. The table below summarizes the allocation of the purchase price based on the acquisition date fair value of the assets acquired and the liabilities assumed (in thousands):
| participants generally vested ratably over their initial five years of employment in all income allocated to the plan on their behalf and forfeitures were re-allocated among other Plan participants. The Production Participation Plan was modified in 2004 to provide that (1) for years 2004 and beyond, employees will vest at a rate of 20% per year with respect to the income allocated to the plan for such year; (2) employees will become fully vested at age 65, regardless of when their interests would otherwise vest; and (3) for years 2004 and beyond, if there are forfeitures, the interests will inure to the benefit of the Company. |
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7. | TAX SEPARATION AND INDEMNIFICATION AGREEMENT WITH ALLIANT ENERGY |
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| In connection with Whiting’s initial public offering in November 2003, the Company entered into a tax separation and indemnification agreement with Alliant Energy. Pursuant to this agreement, the Company and Alliant Energy made a tax election with the effect that the tax basis of the assets of Whiting and its subsidiaries were increased to the deemed purchase price of their assets immediately prior to such initial public offering. Whiting has adjusted deferred taxes on its balance sheet to reflect the new tax basis of the Company’s assets. This additional basis is expected to result in increased future income tax deductions and, accordingly, may reduce income taxes otherwise payable by Whiting. |
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| Under this agreement, the Company has agreed to pay to Alliant Energy 90% of the future tax benefits the Company realizes annually as a result of this step-up in tax basis for the years ending on or prior to December 31, 2013. Such tax benefits will generally be calculated by comparing the Company’s actual taxes to the taxes that would have been owed by the Company had the increase in basis not occurred. In 2014, Whiting will be obligated to pay Alliant Energy 90% of the present value of the remaining tax benefits assuming all such tax benefits will be realized in future years. Future tax benefits in total will approximate $62 million. The Company has estimated total payments to Alliant will approximate $49 million given the discounting affect of the final payment in 2014. The Company has discounted all cash payments to Alliant at the date of the Tax Separation Agreement. |
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| The initial recording of this transaction in November 2003 resulted in a $57.2 million increase in deferred tax assets, a $28.6 million discounted payable to Alliant Energy and a $28.6 million increase to stockholders’ equity. The Company will monitor the estimate of when payments will be made and adjust the accretion of this liability on a prospective basis. During the first three months of 2005, the Company did not make any payments under this agreement but did recognize $0.62 million of accretion expense which is included as a component of interest expense. The Company’s estimate of payments to be made in 2005 under this agreement of $4,214 is reflected as a current liability at March 31, 2005. |
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| The Tax Separation Agreement provides that if tax rates were to change (increase or decrease), the tax benefit or detriment would result in a corresponding adjustment of the Alliant liability. For purposes of this calculation, management has assumed that no such change will occur during the term of this agreement. |
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| | | | |
Purchase Price: | | | | |
Cash paid, net of cash acquired of $26 | | $ | 30,433 | |
| | | | |
| | | | |
Allocation of Purchase Price: | | | | |
Working capital | | $ | 2,096 | |
Oil and gas properties | | | 30,022 | |
Long-term liabilities | | | (1,685 | ) |
| | | | |
Total | | $ | 30,433 | |
| | | | |
Green River Basin Acquisition-On March 31, 2005, the Company acquired operated interests in five producing gas fields in the Green River Basin of Wyoming. The purchase price was $65.0 million for estimated proved reserves as of the effective date of the acquisition of approximately 50.5 Bcfe, resulting in a cost of $1.29 per Mcfe of estimated proved reserves. Future development costs of the proved undeveloped reserves are estimated at approximately $14 million. Whiting operates approximately 95% of the net daily production from the properties, which was estimated to be 6.3 million Mcfe per day at the acquisition date. Whiting funded the acquisition through borrowings under Whiting Oil and Gas Corporation’s credit agreement and with cash on hand.
10. SUBSEQUENT EVENTS
In July 2005, Whiting entered into two purchase and sale agreements with Celero Energy, LP to acquire the operated interest in two producing oil and gas fields, one in the Oklahoma Panhandle and the other in the Permian Basin of West Texas. The separate closings are expected to occur on August 4, 2005 and October 4, 2005, subject to standard conditions to closing. The total purchase price will be approximately $802 million, or $1.09 per thousand cubic feet equivalent (Mcfe) of estimated proved reserves. The purchase and sale agreements provide that Whiting will pay Celero $343 million in cash at the August closing and $442 million in cash at the October closing, as well as issue 441,500 shares of Whiting common stock to Celero at the October closing. Based on recent trading, this stock has a value of approximately $17 million. A deposit of $80.2 million was paid on July 26, 2005, of which $ 80.0 million was funded with borrowings under the Credit Agreement. The effective date of both transactions will be July 1, 2005.
Total proved reserves for the properties to be acquired are estimated at 734 billion cubic feet equivalent (Bcfe), as of July 1, 2005, 94% of which is oil and 43% of which is developed. In aggregate, the properties cover an area of approximately 112,000 acres (net). Upon completion of the acquisitions, Whiting will operate approximately 95% of the properties, which produced at an average net daily rate of approximately 7,510 barrels of oil and 2.8 million cubic feet of gas, or 47.8 million cubic feet equivalent (MMcfe), during the first quarter of 2005. Substantially all of the properties to be acquired from Celero provide potential for enhanced recovery (primarily waterflooding and CO2 injection), as well as reserve growth associated with development and exploratory drilling. Whiting estimates future development costs of $534 million related to the Celero properties, of which 80% will be incurred over the next 5 -1/2 years.
8. | GREEN RIVER BASIN ACQUISITION |
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| On March 31, 2005, the Company acquired operated interests in five producing gas fields in the Green River Basin of Wyoming. The purchase price was $65.0 million for estimated proved reserves as of the effective date of the acquisition of approximately 50.5 Bcfe, resulting in a cost of $1.29 per Mcfe of estimated proved reserves. Future development costs of the proved undeveloped reserves are estimated at approximately $14 million. Whiting operates approximately 95% of the net daily production from the properties, which was estimated to be 6.3 million Mcfe per day at the acquisition date. Whiting funded the acquisition through borrowings under Whiting Oil and Gas Corporation’s credit agreement and with cash on hand. |
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9. | SUBSEQUENT EVENT |
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| On April 19, 2005, the Company issued, in a public offering, $220.0 million aggregate principal amount of its 71/4% Senior Subordinated Notes due 2013. The net proceeds of the offering were used to refinance debt outstanding under Whiting Oil and Gas Corporation’s credit agreement. The notes are unsecured obligations of the Company and are subordinated to all of the Company’s senior debt. The notes were issued at 98.507% of par and the associated discount is being amortized to interest expense over the term of the notes. The indenture governing the notes contains restrictive covenants that are substantially identical to those contained in the indenture governing the Company’s 71/4% Senior Subordinated Notes due 2012. These covenants may limit the discretion of the Company’s management in operating the Company’s business. In addition, Whiting Oil and Gas Corporation’s credit agreement restricts the ability of the Company’s subsidiaries to make payments to the Company. Three of the Company’s subsidiaries, Whiting Oil and Gas Corporation, Equity Oil Company and Whiting Programs, Inc. (the “Guarantors”), have fully, unconditionally, jointly and severally guaranteed the Company’s obligations under the notes. All of the Company’s subsidiaries other than the Guarantors are minor within the meaning of Rule 3-10(h)(6) of Regulation S-X of the Securities and Exchange Commission, and the Company has no independent assets or operations. |
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| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless the context otherwise requires, the terms “Whiting,” “we,” “us,” “our” or “ours” when used in this Item refer to Whiting Petroleum Corporation, together with its operating subsidiaries, Whiting Oil and Gas Corporation and Equity Oil Company. When the context requires, we refer to these entities separately.
Forward-Looking Statements This report contains statements that we believe to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than historical facts, including, without limitation, statements regarding our future financial position, business strategy, projected revenues, earnings, costs, capital expenditures and debt levels, and plans and objectives of management for future operations, are forward-looking statements. When used in this report, words such as we “expect,” “intend,” “plan,” “estimate,” “anticipate,” “believe” or “should” or the negative thereof or variations thereon or similar terminology are generally intended to identify forward-looking statements. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in, or implied by, such statements. Some, but not all, of the risks and uncertainties include: declines in oil or natural gas prices; our level of success in exploitation, exploration, development and production activities;
the timing of our exploration and development expenditures, including our ability to obtain drilling rigs; our ability to obtain external capital to finance acquisitions; our ability to identify and complete acquisitions and to successfully integrate acquired businesses and properties; unforeseen underperformance of or liabilities associated with acquired properties; inaccuracies of our reserve estimates or our assumptions underlying them; failure of our properties to yield oil or natural gas in commercially viable quantities; uninsured or underinsured losses resulting from our oil and natural gas operations; our inability to access oil and natural gas markets due to market conditions or operational impediments; the impact and costs of compliance with laws and regulations governing our oil and natural gas operations; risks related to our level of indebtedness and periodic redeterminations of our borrowing base under our credit facility; our ability to replace our oil and natural gas reserves; any loss of our senior management or technical personnel; competition in the oil and natural gas industry; and risks arising out of our hedging transactions. We assume no obligation, and disclaim any duty, to update the forward-looking statements in this report.
We are engaged in oil and natural gas exploitation, acquisition, exploration and production activities primarily in the Rocky Mountains, Permian Basin, Gulf Coast, Michigan, Mid-Continent and California regions of the United States. Over the last four years, we have emphasized the acquisition of properties that provided current production and significant upside potential through further development. Our drilling activity is directed at this development; specifically on projects that we believe provide repeatable successes in particular fields.
Our combination of acquisitions and development allows us to direct our capital resources to what we believe to be the most advantageous investments. We have historically acquired operated as well as non operated properties that meet or exceed our rate of return criteria. For acquisitions of properties with additional development, exploitation and exploration potential, our focus has been on acquiring operated properties so that we can better control the timing and implementation of
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capital spending. In some instances, we have been able to acquire non operated property interests at
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attractive rates of return that provided a foothold in a new area of interest or complemented our existing operations. We intend to continue to acquire both operated and non operated interests to the extent we believe they meet our return criteria. In addition, our willingness to acquire non operated properties in new geographic regions provides us with geophysical and geologic data in some cases that leads to further acquisitions in the same region, whether on an operated or non operated basis. We sell properties when management is of the opinion that the sale price realized will provide an above average rate of return for the property or when the property no longer matches the profile of properties we desire to own.
On June 23, 2005, we acquired all of the limited partnership interests in three institutional partnership managed by our wholly-owned subsidiary, Whiting Programs, Inc., acquiring total estimated proved reserves as of the effective date of the acquisition of approximately 17.4 Bcfe for a purchase price of $30.5 million. On March 31, 2005, we acquired operated interests in five producing gas fields in the Green River Basin of Wyoming, acquiring total estimated proved reserves as of the effective date of the acquisition of approximately 50.5 Bcfe for a purchase price of $65.0 million. We completed seven separate acquisitions of producing properties during
2004. The2004 with a combined purchase price
for these seven acquisitions wasof $535.1 million for total estimated proved reserves as of the effective dates of the acquisitions of approximately 436.1 Bcfe.
We also completed the Green River Basin acquisition on March 31, 2005 for $65.0 million. See “Green River Basin” below. Because the Green River Basin acquisition was closed on the last day of the first quarter of 2005, it did not affect operating results. Because of our substantial recent acquisition activity, our discussion and analysis of our historical financial condition and results of operations for the periods discussed below may not necessarily be comparable with or applicable to our future results of operations.
Our revenue, profitability and future growth rate depend substantially on factors beyond our control, such as economic, political and regulatory developments and competition from other sources of energy. Oil and natural gas prices historically have been volatile and may fluctuate widely in the future. Sustained periods of low prices for oil or natural gas could materially and adversely affect our financial position, our results of operations, the quantities of oil and natural gas reserves that we can economically produce and our access to capital.
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ThreeSix Months Ended March 31,June 30, 2005 Compared to ThreeSix Months Ended March 31,June 30, 2004 | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Six Months Ended |
| | March 31, | | | June 30, |
| | 2005 | | 2004 | | | 2005 | | 2004 |
Net production: | | |
Natural gas (MMcf) | | 7,531 | | 5,520 | | | 14,977 | | 10,970 | |
Oil (MBbls) | | 1,464 | | 649 | | | 2,953 | | 1,301 | |
MMcfe | | 16,315 | | 9,414 | | | 32,695 | | 18,776 | |
Oil and gas sales (in thousands) | | |
Natural gas | | $ | 40,513 | | $ | 27,609 | | | $ | 85,518 | | $ | 58,263 | |
Oil | | $ | 64,952 | | $ | 20,027 | | | $ | 135,925 | | $ | 42,247 | |
Average sales prices: | | |
Natural gas (per Mcf) | | $ | 5.38 | | $ | 5.00 | | | $ | 5.71 | | $ | 5.31 | |
Effect of natural gas hedges on average price (per Mcf) | | $ | — | | $ | — | | | $ | — | | $ | — | |
| | | | | | | | | | |
Natural gas net of hedging (per Mcf) | | $ | 5.38 | | $ | 5.00 | | | $ | 5.71 | | $ | 5.31 | |
| | | | | | | | | | |
| | |
Oil (per Bbl) | | $ | 44.37 | | $ | 30.86 | | | $ | 46.03 | | $ | 32.47 | |
Effect of oil hedges on average price (per Bbl) | | $ | (1.40 | ) | | $ | (1.56 | ) | | $ | (2.35 | ) | | $ | (1.21 | ) |
| | | | | | | | | | |
Oil net of hedging (per Bbl) | | $ | 42.97 | | $ | 29.30 | | | $ | 43.68 | | $ | 31.26 | |
| | | | | | | | | | |
| | |
Additional data (per Mcfe): | | |
Sales price, net of hedging | | $ | 6.34 | | $ | 4.95 | | | $ | 6.56 | | $ | 5.27 | |
Lease operating expenses | | $ | 1.28 | | $ | 1.12 | | | $ | 1.31 | | $ | 1.16 | |
Production taxes | | $ | 0.40 | | $ | 0.32 | | | $ | 0.44 | | $ | 0.33 | |
Depreciation, depletion and amortization expense | | $ | 1.25 | | $ | 1.14 | | | $ | 1.26 | | $ | 1.14 | |
General and administrative expenses | | $ | 0.41 | | $ | 0.43 | | | $ | 0.41 | | $ | 0.43 | |
Oil and Natural Gas Sales. Our oil and natural gas sales revenue increased approximately
$57.8$120.9 million to
$105.5$221.4 million in the first
quartersix months of 2005 compared to the first
quartersix months of 2004. Sales are a function of sales volumes and average sales prices. Our sales volumes increased
73.3%74.1% between periods on an Mcfe basis. The volume increase resulted primarily from acquisition activities and
also from successful drilling activities over the past year that produced new sales volumes that more than offset natural
decline offset bydecline. Our production volumes in the first half of 2005 were less than anticipated due in part to delays in rig availability that have caused delays in our development drilling program and temporary pipeline
shutdowns for repairs by a gas purchaser in South Texas as well asshut downs and workover activity in the
Big Stick Field in North Dakota.first quarter of 2005. Our average price for natural gas sales increased
7.6%7.5% and our average price for crude oil increased
43.8%41.8% between periods.
Loss on Oil and Natural Gas Hedging Activities. We hedged 60% of our natural gas volumes during the first quartersix months of 2005 and 46%23% of our natural gas volumes during the first quartersix months of 2004 incurring no hedging loss or gain in either period. We hedged 70%60% of our oil volumes during the first quartersix months of 2005 incurring a hedging loss of $2.1$6.9 million, and 46.0%46% of our oil volumes during the first quartersix months of 2004 incurring a hedging loss of $1.0$1.6 million. See Item 3, “Qualitative and Quantitative Disclosures About Market Risk” for a list of our outstanding oil and natural gas hedges as of April 15,July 29, 2005.
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