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RegistrationNo. 333-151899
• | We are offering to exchange up to: |
• | $650,000,000 aggregate principal amount of registered 85/8% Senior Notes Due 2015, for any and all of our $650,000,000 aggregate principal amount of unregistered 85/8% Senior Notes Due 2015; and | |
• | $350,000,000 aggregate principal amount of registered Senior Floating Rate Notes Due 2014, for any and all of our $350,000,000 aggregate principal amount of unregistered Senior Floating Rate Notes Due 2014. |
• | We will exchange all outstanding notes that you validly tender and do not validly withdraw before the applicable exchange offer expires for an equal principal amount of exchange notes of the same series. | |
• | The terms of the exchange notes of each series are substantially identical to those of the outstanding notes of the same series, except that the transfer restrictions, registration rights and provisions for additional interest relating to the outstanding notes do not apply to the exchange notes. | |
• | The outstanding notes are, and the exchange notes will be, guaranteed by each of our existing and future domestic restricted subsidiaries. | |
• | Each exchange offer expires at 5:00 p.m., New York City time, on October 17, 2008, unless extended. We do not currently intend to extend the exchange offers. | |
• | Tenders of outstanding notes may be withdrawn at any time prior to the expiration of the applicable exchange offer. | |
• | The exchange of outstanding notes for exchange notes will not be a taxable event for U.S. federal income tax purposes. |
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Outstanding notes | Our 85/8% Senior Notes Due 2015 and our Senior Floating Rate Notes Due 2014, which were issued on May 1, 2008. | |
Exchange notes | Our 85/8% Senior Notes Due 2015 and Senior Floating Rate Notes Due 2014. The terms of each series of exchange notes are substantially identical to those terms of the same series of outstanding notes, except that the transfer restrictions, the registration rights and provisions for additional interest relating to the outstanding notes do not apply to the exchange notes. | |
The exchange offers | We are offering to exchange upon the terms set forth in this prospectus and the accompanying letter of transmittal: | |
• up to $650,000,000 aggregate principal amount of our 85/8% Senior Notes Due 2015, that have been registered under the Securities Act of 1933, as amended (the “Securities Act”), in exchange for an equal outstanding principal amount of our 85/8% Senior Notes Due 2015 that have not been registered under the Securities Act; and | ||
• up to $350,000,000 aggregate principal amount of our Senior Floating Rate Notes Due 2014 that have been registered under the Securities Act in exchange for an equal outstanding principal amount of our Senior Floating Rate Notes Due 2014 that have not been registered under the Securities Act; | ||
to satisfy our obligations under the registration rights agreement that we entered into when we issued the outstanding notes in transactions exempt from registration under the Securities Act. This prospectus |
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also relates to additional exchange notes that may be issued at our option as payment of interest on our Senior Notes Due 2015. | ||
Expiration date | Each exchange offer will expire at 5:00 p.m., New York City time, on October 17, 2008, unless we decide to extend it. | |
Conditions to the exchange offers | The registration rights agreement does not require us to accept outstanding notes for exchange if the applicable exchange offer or the making of any exchange by a holder of the outstanding notes would violate any applicable law or interpretation of the staff of the SEC. A minimum aggregate principal amount of outstanding notes being tendered is not a condition to either exchange offer. | |
Procedures for tendering outstanding notes | All of the outstanding notes are held in book-entry form through the facilities of The Depository Trust Company, or DTC. To participate in either exchange offer, you must follow the automatic tender offer program, or ATOP, procedures established by DTC for tendering notes held in book-entry form. The ATOP procedures require that the exchange agent receive, prior to the expiration date of the applicable exchange offer, a computer-generated message known as an “agent’s message” that is transmitted through ATOP and that DTC confirm that DTC has received instructions to exchange your notes and you agree to be bound by the terms of the letter of transmittal in Annex A hereto. | |
For more details, please read “The Exchange Offers — Terms of the Exchange” and “The Exchange Offers — Procedures for Tendering.” | ||
Guaranteed delivery procedures | None. | |
Withdrawal of tenders | You may withdraw your tender of outstanding notes at any time prior to the expiration date of the applicable exchange offer. To withdraw, you must submit a notice of withdrawal to the exchange agent using ATOP procedures before 5:00 p.m., New York City time, on the expiration date of the applicable exchange offer. Please read “The Exchange Offers — Withdrawal Rights.” | |
Acceptance of Outstanding Notes and Delivery of Exchange Notes | If you fulfill all conditions required for proper acceptance of outstanding notes, we will accept any and all outstanding notes that you properly tender in the applicable exchange offer before 5:00 p.m., New York City time, on the expiration date of the applicable exchange offer. We will return any outstanding note that we do not accept for exchange to you without expense promptly after the expiration date. We will deliver the exchange notes promptly after the expiration date and acceptance of the outstanding notes for exchange. Please read “The Exchange Offers — Terms of the Exchange Offers.” | |
U.S. federal income tax considerations | The exchange of exchange notes for outstanding notes in the exchange offer will not be a taxable event for U.S. federal income tax purposes. Please read the discussion under the caption “Certain U.S. Federal Tax Considerations” for more information regarding the tax consequences to you of the exchange offer. |
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Use of proceeds | The issuance of the exchange notes will not provide us with any new proceeds. We are making each exchange offer solely to satisfy our obligations under the registration rights agreement. | |
Fees and expenses | We will pay all of our expenses related to the exchange offers. | |
Exchange Agent | We have appointed Wells Fargo Bank, National Associationas exchange agent for each exchange offer. You can find the address, telephone number and fax number of the exchange agent under the caption “The Exchange Offers — Exchange Agent.” | |
Consequences of not exchanging your outstanding notes | If you do not exchange your outstanding notes in the applicable exchange offer, you will no longer be able to require us to register your outstanding notes under the Securities Act, except in the limited circumstances provided under the registration rights agreement. In addition, you will not be able to resell, offer to resell or otherwise transfer the outstanding notes unless we have registered the outstanding notes under the Securities Act, or unless you resell, offer to resell or otherwise transfer them under an exemption from the registration requirements of, or in a transaction not subject to, the Securities Act. | |
For information regarding the consequences of not tendering your outstanding notes and our obligation to file a registration statement, please read “The Exchange Offers — Consequences of Failure to Exchange Outstanding Securities” and “Description of the Notes.” |
Issuer | SandRidge Energy, Inc. | |
Securities offered | $650,000,000 aggregate principal amount of 85/8% Senior Notes Due 2015. | |
$350,000,000 aggregate principal amount of Senior Floating Rate Notes Due 2014. | ||
The exchange notes are being offered as additional debt securities under the indenture pursuant to which we previously issued the outstanding notes. | ||
Maturity date of the 85/8% Senior Notes | April 1, 2015 | |
Maturity date of the Senior Floating Rate Notes | April 1, 2014 |
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PIK interest | At our election, we may from time to time prior to April 30, 2011 upon notice elect to pay interest on the 85/8% Senior Notes in kind by the issuance of additional principal amount of 85/8% Senior Notes. | |
Interest payment dates | Interest on the 85/8% Senior Notes is payable semi-annually on each April 1 and October 1 of each year beginning on October 1, 2008. Interest on the Senior Floating Rate Notes is payable quarterly in cash in arrears on each January 1, April 1, July 1 and October 1 of each year beginning on July 1, 2008. Interest on the exchange notes will accrue from April 1, 2008 in the case of the 85/8% Senior Notes and from July 1, 2008 in the case of the Senior Floating Rate Notes. | |
Guarantees | The exchange notes are unconditionally guaranteed by our existing restricted subsidiaries and will be guaranteed by our future domestic restricted subsidiaries. | |
Use of proceeds | The issuance of the exchange notes will not provide us with any new proceeds. We are making this exchange offer solely to satisfy our obligations under our registration rights agreement. | |
Ranking | The exchange notes of each series are unsecured and rank equally in right of payment with the exchange notes of the other series and with all of our other existing and future senior indebtedness. The exchange notes are senior in right of payment to all our future subordinated indebtedness. | |
Transfer restrictions | The exchange notes generally will be freely transferable, but will also be new securities for which there will not initially be a market. There can be no assurance as to the development or liquidity of any market for the exchange notes. |
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• | the domestic and foreign supply of natural gas and oil; | |
• | the price of foreign imports; | |
• | worldwide economic conditions; | |
• | political and economic conditions in oil producing countries, including the Middle East and South America; | |
• | the ability of members of the Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls; | |
• | the level of consumer product demand; | |
• | weather conditions; | |
• | technological advances affecting energy consumption; | |
• | availability of pipeline infrastructure, treating, transportation and refining capacity; | |
• | domestic and foreign governmental regulations and taxes; and | |
• | the price and availability of alternative fuels. |
• | make us more vulnerable to adverse changes in general economic, industry and competitive conditions and adverse changes in governmental regulation; | |
• | require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flows to fund working capital, capital expenditures, acquisitions and other general corporate purposes; |
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• | limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; | |
• | place us at a competitive disadvantage compared to our competitors that are less leveraged and, therefore, may be able to take advantage of opportunities that our leverage prevents us from pursuing; and | |
• | limit our ability to borrow additional amounts for working capital, capital expenditures, acquisitions, debt service requirements, execution of our business strategy or other purposes. |
• | actual prices we receive for natural gas and oil; | |
• | actual cost of development and production expenditures; | |
• | the amount and timing of actual production; | |
• | supply of and demand for natural gas and oil; and | |
• | changes in governmental regulations or taxation. |
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• | unusual or unexpected geological formations and miscalculations; | |
• | pressures; | |
• | fires; | |
• | blowouts; | |
• | loss of drilling fluid circulation; | |
• | title problems; | |
• | facility or equipment malfunctions; | |
• | unexpected operational events; | |
• | shortages of skilled personnel; | |
• | shortages or delivery delays of equipment and services; | |
• | compliance with environmental and other regulatory requirements; and | |
• | adverse weather conditions. |
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• | our proved reserves; | |
• | the level of natural gas and oil we are able to produce from existing wells; | |
• | the prices at which natural gas and oil are sold; and | |
• | our ability to acquire, locate and produce new reserves. |
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• | production is less than expected; | |
• | the counter-party to the derivative instrument defaults on its contract obligations; or | |
• | there is a change in the expected differential between the underlying price in the derivative instrument and the actual prices received. |
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• | the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest; |
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• | the lenders under our senior credit facility could elect to terminate their commitments thereunder, cease making further loans and institute foreclosure proceedings against our assets; and | |
• | we could be forced into bankruptcy or liquidation. |
• | we or any of the Guarantors, as applicable, were insolvent or rendered insolvent by reason of the issuance of the notes or the incurrence of the guarantees or subsequently become insolvent for other reasons; | |
• | the issuance of the notes or the incurrence of the guarantees left us or any of the Guarantors, as applicable, with an unreasonably small amount of capital to carry on the business; | |
• | we or any of the Guarantors intended to, or believed that we or such Guarantor would, incur debts beyond our or such Guarantor’s ability to pay such debts as they mature; or | |
• | we or any of the Guarantors was a defendant in an action for money damages, or had a judgment for money damages docketed against us or such Guarantor if, in either case, after final judgment, the judgment is unsatisfied. |
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For the Years Ended December 31, | For the Six Months Ended June 30, | |||||||||||||||||||||||||||
2003 | 2004 | 2005 | 2006 | 2007 | 2007 | 2008 | ||||||||||||||||||||||
Ratio of earnings to fixed charges | 19.4 | 12.2 | 6.3 | 2.2 | 1.7 | 1.4 | (a | ) |
(a) | Due to our loss for the six months ended June 30, 2008, the ratio coverage was less than 1:1. We would have needed additional earnings of $118,353,000 to achieve coverage of 1:1. |
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• | A book-entry confirmation of such outstanding notes into the exchange agent’s account at DTC; and | |
• | A properly transmitted agent’s message. |
• | Any exchange notes that you receive will be acquired in the ordinary course of your business; | |
• | You have no arrangement or understanding with any person or entity to participate in the distribution of the exchange notes; | |
• | You are not engaged in and do not intend to engage in the distribution of the exchange notes; | |
• | If you are a broker-dealer who will receive exchange notes for your own account in exchange for outstanding notes, you acquired those outstanding notes as a result of market-making activities or other trading activities and you will deliver this prospectus, as required by law, in connection with any resale of the exchange notes; and | |
• | You are not an “affiliate,” as defined in Rule 405 under the Securities Act, of us. |
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• | The exchange notes are acquired in the ordinary course of the holder’s business; | |
• | The holders have no arrangement or understanding with any person to participate in the distribution of the exchange notes; | |
• | The holders are not “affiliates” of ours within the meaning of Rule 405 under the Securities Act; and | |
• | The holders are not broker-dealers who purchased outstanding notes directly from us for resale pursuant to Rule 144A or any other available exemption under the Securities Act. |
• | Cannot rely on the applicable interpretations of the staff of the SEC mentioned above; | |
• | Will not be permitted or entitled to tender its outstanding notes in the exchange offers; and | |
• | Must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any secondary resale transaction. |
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By Facsimile for Eligible Institutions: | By Registered and Certified Mail: | Confirm by Telephone: | ||
(214)777-4086 | Wells Fargo Bank, NA | (214) 740-1573 | ||
Attention: Patrick T. Giordano | Corporate Trust Operations | |||
MAC N9303-121 | ||||
PO Box 1517 | ||||
Minneapolis, MN 55480 | ||||
By Regular Mail or Overnight Courier: | ||||
Wells Fargo Bank, NA | ||||
Corporate Trust Operations | ||||
MAC N9303-121 | ||||
Sixth & Marquette Avenue | ||||
Minneapolis, MN 55479 | ||||
In person by hand only: | ||||
Wells Fargo Bank, NA | ||||
12th Floor — Northstar East Building | ||||
Corporate Trust Operations | ||||
608 Second Avenue South | ||||
Minneapolis, MN |
• | SEC registration fees; | |
• | Fees and expenses of the exchange agent and trustee; | |
• | Accounting and legal fees and printing costs; and | |
• | Related fees and expenses. |
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• | the volatility of natural gas and oil prices; | |
• | discovery, estimation, development and replacement of natural gas and oil reserves; | |
• | cash flow and liquidity; | |
• | financial position; | |
• | business strategy; | |
• | amount, nature and timing of capital expenditures, including future development costs; | |
• | availability and terms of capital; | |
• | timing and amount of future production of natural gas and oil; | |
• | availability of drilling and production equipment; | |
• | timing of drilling rig fabrication and delivery; | |
• | customer contracting of drilling rigs; | |
• | availability of oil field labor; | |
• | availability and regulation of CO2; | |
• | operating costs and other expenses; | |
• | prospect development and property acquisitions; | |
• | availability of pipeline infrastructure to transport natural gas production; | |
• | marketing of natural gas and oil; | |
• | competition in the natural gas and oil industry; | |
• | governmental regulation and taxation of the natural gas and oil industry; and | |
• | developments in oil-producing and natural gas-producing countries. |
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Years Ended December 31, | Six Months Ended June 30, | |||||||||||||||||||||||||||
2003(1) | 2004(2) | 2005 | 2006 | 2007 | 2007 | 2008 | ||||||||||||||||||||||
(in thousands, except per share data) | ||||||||||||||||||||||||||||
Statement of Operations Data: | ||||||||||||||||||||||||||||
Revenues | $ | 155,337 | $ | 175,995 | $ | 287,693 | $ | 388,242 | $ | 677,452 | $ | 308,127 | $ | 647,136 | ||||||||||||||
Expenses: | ||||||||||||||||||||||||||||
Production | 7,980 | 10,230 | 16,195 | 35,149 | 106,192 | 49,018 | 74,442 | |||||||||||||||||||||
Production taxes | 2,099 | 2,497 | 3,158 | 4,654 | 19,557 | 7,926 | 22,739 | |||||||||||||||||||||
Drilling and services | 13,847 | 26,442 | 52,122 | 98,436 | 44,211 | 24,126 | 12,235 | |||||||||||||||||||||
Midstream marketing | 94,620 | 96,180 | 141,372 | 115,076 | 94,253 | 46,747 | 105,151 | |||||||||||||||||||||
Depreciation, depletion and amortization — natural gas and crude oil | 3,298 | 4,909 | 9,313 | 26,321 | 173,568 | 70,699 | 137,332 | |||||||||||||||||||||
Depreciation, depletion and amortization — other | 5,284 | 7,765 | 14,893 | 29,305 | 53,541 | 22,263 | 33,745 | |||||||||||||||||||||
General and administrative | 3,705 | 6,554 | 11,908 | 55,634 | 61,780 | 25,360 | 47,197 | |||||||||||||||||||||
Loss (gain) on derivative contracts | 3,450 | 878 | 4,132 | (12,291 | ) | (60,732 | ) | (15,981 | ) | 296,612 | ||||||||||||||||||
Loss (gain) on sale of assets | (1,284 | ) | (210 | ) | 547 | (1,023 | ) | (1,777 | ) | (659 | ) | (7,711 | ) | |||||||||||||||
Total operating expenses | 132,999 | 155,245 | 253,640 | 351,261 | 490,593 | 229,499 | 721,742 | |||||||||||||||||||||
(Loss) income from operations | 22,338 | 20,750 | 34,053 | 36,981 | 186,859 | 78,628 | (74,606 | ) | ||||||||||||||||||||
Other income (expense): | ||||||||||||||||||||||||||||
Interest income | 103 | 56 | 206 | 1,109 | 4,694 | 3,127 | 2,145 | |||||||||||||||||||||
Interest expense | (1,208 | ) | (1,678 | ) | (5,277 | ) | (16,904 | ) | (117,185 | ) | (60,108 | ) | (47,395 | ) | ||||||||||||||
Other income (expense), net | 960 | (298 | ) | (1,121 | ) | 671 | 5,377 | 2,506 | 1,503 | |||||||||||||||||||
Total other expense | (145 | ) | (1,920 | ) | (6,192 | ) | (15,124 | ) | (107,114 | ) | (54,475 | ) | (43,747 | ) | ||||||||||||||
(Loss) income before income taxes | 22,193 | 18,830 | 27,861 | 21,857 | 79,745 | 24,153 | (118,353 | ) | ||||||||||||||||||||
Income tax (benefit) expense | 7,585 | 6,433 | 9,968 | 6,236 | 29,524 | 9,082 | (41,385 | ) | ||||||||||||||||||||
Income from continuing operations | 14,608 | 12,397 | 17,893 | 15,621 | 50,221 | 15,071 | (76,968 | ) | ||||||||||||||||||||
(Loss) income from discontinued operations, net of tax | (85 | ) | 451 | 229 | — | — | — | — | ||||||||||||||||||||
Cumulative effect of accounting change | (1,636 | ) | — | — | — | — | — | — | ||||||||||||||||||||
Extraordinary gain | — | 12,544 | — | — | — | — | — | |||||||||||||||||||||
Net (loss) income | 12,887 | 25,392 | 18,122 | 15,621 | 50,221 | 15,071 | (76,968 | ) | ||||||||||||||||||||
Preferred stock dividends and accretion | — | — | — | 3,967 | 39,888 | 21,260 | 16,232 | |||||||||||||||||||||
(Loss applicable) income available to common stockholders | $ | 12,887 | $ | 25,392 | $ | 18,122 | $ | 11,654 | $ | 10,333 | $ | (6,189 | ) | $ | (93,200 | ) | ||||||||||||
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Historical | ||||||||||||||||||||||||||||
Years Ended December 31, | Six Months Ended June 30, | |||||||||||||||||||||||||||
2003(1) | 2004(2) | 2005 | 2006 | 2007 | 2007 | 2008 | ||||||||||||||||||||||
(In thousands except per share data) | ||||||||||||||||||||||||||||
Earnings Per Share Information: | ||||||||||||||||||||||||||||
Basic | ||||||||||||||||||||||||||||
(Loss) income from continuing operations | $ | 0.26 | $ | 0.22 | $ | 0.31 | $ | 0.21 | $ | 0.46 | $ | 0.15 | $ | (0.52 | ) | |||||||||||||
Income from discontinued operations, net of income tax | — | 0.01 | 0.01 | — | — | — | — | |||||||||||||||||||||
Extraordinary gain on acquisition | — | 0.22 | — | — | — | — | — | |||||||||||||||||||||
Cumulative effect of change in accounting principle, net of income tax | (0.03 | ) | — | — | — | — | — | — | ||||||||||||||||||||
Preferred stock dividends | — | — | — | (0.05 | ) | (0.37 | ) | (0.21 | ) | (0.11 | ) | |||||||||||||||||
(Loss) income per share (applicable) available to common stockholders | $ | 0.23 | $ | 0.45 | $ | 0.32 | $ | 0.16 | $ | 0.09 | $ | (0.06 | ) | $ | (0.63 | ) | ||||||||||||
Weighted average number of shares outstanding(3): | 56,312 | 56,312 | 56,559 | 73,727 | 108,828 | 100,025 | 148,124 | |||||||||||||||||||||
Diluted | ||||||||||||||||||||||||||||
(Loss) income from continuing operations | $ | 0.26 | $ | 0.22 | $ | 0.31 | $ | 0.21 | $ | 0.46 | $ | 0.15 | $ | (0.52 | ) | |||||||||||||
Income from discontinued operations, net of income tax | — | 0.01 | 0.01 | — | — | — | — | |||||||||||||||||||||
Extraordinary gain on acquisition | — | 0.22 | — | — | — | — | — | |||||||||||||||||||||
Cumulative effect of change in accounting principle, net of income tax | (0.03 | ) | — | — | — | — | — | — | ||||||||||||||||||||
Preferred stock dividends | — | — | — | (0.05 | ) | (0.37 | ) | (0.21 | ) | (0.11 | ) | |||||||||||||||||
(Loss) income per share (applicable) available to common stockholders | $ | 0.23 | $ | 0.45 | $ | 0.32 | $ | 0.16 | $ | 0.09 | $ | (0.06 | ) | $ | (0.63 | ) | ||||||||||||
Weighted average number of shares outstanding(3): | 56,312 | 56,312 | 56,737 | 74,664 | 110,041 | 100,025 | 148,124 |
(1) | We adopted the provisions of SFAS 143 “Accounting for Retirement Obligations,” resulting in a cumulative effect of change in accounting principal of $1.6 million. | |
(2) | We recognized an extraordinary gain from the recognition of the excess of fair value over acquisition cost of $12.5 million related to an acquisition we made in 2004. | |
(3) | The number of shares has been adjusted to reflect a 281.562-to-1 stock split in December 2005. |
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As of December 31, | As of June 30, | |||||||||||||||||||||||||||
2003 | 2004 | 2005 | 2006 | 2007 | 2007 | 2008 | ||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||
Balance Sheet Data: | ||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 176 | $ | 12,973 | $ | 45,731 | $ | 38,948 | $ | 63,135 | $ | 2,199 | $ | 275,888 | ||||||||||||||
Property, plant and equipment, net | $ | 70,289 | $ | 114,818 | $ | 337,881 | $ | 2,134,718 | $ | 3,337,410 | $ | 2,542,460 | $ | 3,955,721 | ||||||||||||||
Total assets | $ | 127,744 | $ | 197,017 | $ | 458,683 | $ | 2,388,384 | $ | 3,630,566 | $ | 2,765,348 | $ | 4,565,810 | ||||||||||||||
Long-term debt | $ | 24,740 | $ | 59,340 | $ | 43,133 | $ | 1,066,831 | $ | 1,067,649 | $ | 1,066,656 | $ | 1,810,034 | ||||||||||||||
Redeemable convertible preferred stock | $ | — | $ | — | $ | — | $ | 439,643 | $ | 450,715 | $ | 449,998 | — | |||||||||||||||
Total stockholders’ equity | $ | 33,940 | $ | 59,330 | $ | 289,002 | $ | 649,818 | $ | 1,766,891 | $ | 950,821 | $ | 2,142,403 | ||||||||||||||
Total liabilities and stockholders’ equity | $ | 127,744 | $ | 197,017 | $ | 458,683 | $ | 2,388,384 | $ | 3,630,566 | $ | 2,765,348 | $ | 4,565,810 |
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FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Six Months Ended | ||||||||||||||||||||
Year Ended December 31, | June 30, | |||||||||||||||||||
2007 | 2006 | 2005 | 2008 | 2007 | ||||||||||||||||
Segment revenue: | ||||||||||||||||||||
Exploration and production | $ | 478,747 | $ | 106,413 | $ | 54,051 | $ | 500,350 | $ | 207,305 | ||||||||||
Drilling and oil field services | 73,202 | 138,657 | 80,151 | 24,186 | 40,228 | |||||||||||||||
Midstream gas services | 107,578 | 122,892 | 147,499 | 113,383 | 52,100 | |||||||||||||||
Other | 17,925 | 20,280 | 5,992 | 9,217 | 8,494 | |||||||||||||||
Total revenues | 677,452 | 388,242 | 287,693 | 647,136 | 308,127 | |||||||||||||||
Segment operating (loss) income: | ||||||||||||||||||||
Exploration and production | 198,913 | 17,069 | 14,886 | (53,934 | ) | 76,463 | ||||||||||||||
Drilling and oil field services | 10,473 | 32,946 | 18,295 | 2,496 | 8,876 | |||||||||||||||
Midstream gas services | 6,783 | 3,528 | 4,096 | 6,585 | 2,301 | |||||||||||||||
Other | (29,310 | ) | (16,562 | ) | (3,224 | ) | (29,753 | ) | (9,012 | ) | ||||||||||
Total operating (loss) income | 186,859 | 36,981 | 34,053 | (74,606 | ) | 78,628 | ||||||||||||||
Interest income | 5,423 | 1,109 | 206 | 2,145 | 3,127 | |||||||||||||||
Interest expense | (117,185 | ) | (16,904 | ) | (5,277 | ) | (47,395 | ) | (60,108 | ) | ||||||||||
Other (expense) income | 4,648 | 671 | (1,121 | ) | 1,503 | 2,506 | ||||||||||||||
(Loss) income before income taxes | $ | 79,745 | $ | 21,857 | $ | 27,861 | $ | (118,353 | ) | $ | 24,153 | |||||||||
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Six Months Ended | ||||||||||||||||||||
Year Ended December 31, | June 30, | |||||||||||||||||||
2007 | 2006 | 2005 | 2008 | 2007 | ||||||||||||||||
Production data: | ||||||||||||||||||||
Natural gas (MMcf) | 51,958 | 13,410 | 6,873 | 40,888 | 22,292 | |||||||||||||||
Crude oil (MBbls)(1) | 2,042 | 322 | 72 | 1,231 | 906 | |||||||||||||||
Combined equivalent volumes (MMcfe) | 64,211 | 15,342 | 7,305 | 48,274 | 27,728 | |||||||||||||||
Average daily combined equivalent volumes (MMcfe/d) | 175.9 | 42.0 | 20.0 | 265 | 153 | |||||||||||||||
Average prices- as reported(2): | ||||||||||||||||||||
Natural gas (per Mcf) | $ | 6.51 | $ | 6.19 | $ | 6.54 | $ | 9.11 | $ | 6.90 | ||||||||||
Crude oil (per Bbl)(1) | $ | 68.12 | $ | 56.61 | $ | 48.19 | $ | 101.55 | $ | 58.18 | ||||||||||
Combined equivalent (per Mcfe) | $ | 7.45 | $ | 6.60 | $ | 6.63 | $ | 10.31 | $ | 7.45 | ||||||||||
Average prices- including impact of derivative contract settlements: | ||||||||||||||||||||
Natural gas (per Mcf) | $ | 7.18 | $ | 7.25 | $ | 6.54 | $ | 8.11 | $ | 6.86 | ||||||||||
Crude oil (per Bbl)(1) | $ | 68.10 | $ | 56.61 | $ | 48.19 | $ | 93.74 | $ | 58.18 | ||||||||||
Combined equivalent (per Mcfe) | $ | 7.98 | $ | 7.52 | $ | 6.63 | $ | 9.26 | $ | 7.42 | ||||||||||
Drilling and oil field services: | ||||||||||||||||||||
Number of operational drilling rigs owned at end of period | 25.0 | 25.0 | 19.0 | 26.7 | 27.0 | |||||||||||||||
Average number of operational drilling rigs owned during the period | 26.0 | 21.9 | 14.3 | 28.0 | 25.5 |
(1) | Includes natural gas liquids. | |
(2) | Prices represent actual average prices for the periods presented and do not give effect to derivative transactions. |
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Six Months Ended | ||||||||||||||||
June 30, | ||||||||||||||||
2008 | 2007 | $ Change | % Change | |||||||||||||
(In thousands) | ||||||||||||||||
Revenues: | ||||||||||||||||
Natural gas and crude oil | $ | 497,621 | $ | 206,450 | $ | 291,171 | 141.0 | % | ||||||||
Drilling and services | 24,291 | 40,244 | (15,953 | ) | (39.6) | % | ||||||||||
Midstream and marketing | 115,897 | 52,101 | 63,796 | 122.4 | % | |||||||||||
Other | 9,327 | 9,332 | (5 | ) | (0.1) | % | ||||||||||
Total revenues | $ | 647,136 | $ | 308,127 | $ | 339,009 | 110.0 | % | ||||||||
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Six Months Ended | ||||||||||||||||
June 30, | ||||||||||||||||
2008 | 2007 | $ Change | % Change | |||||||||||||
(In thousands) | ||||||||||||||||
Operating costs and expenses: | ||||||||||||||||
Production | $ | 74,442 | $ | 49,018 | $ | 25,424 | 51.9 | % | ||||||||
Production taxes | 22,739 | 7,926 | 14,813 | 186.9 | % | |||||||||||
Drilling and services | 12,235 | 24,126 | (11,891 | ) | (49.3) | % | ||||||||||
Midstream and marketing | 105,151 | 46,747 | 58,404 | 124.9 | % | |||||||||||
Depreciation, depletion, and amortization — natural gas and crude oil | 137,332 | 70,699 | 66,633 | 94.2 | % | |||||||||||
Depreciation, depletion and amortization — other | 33,745 | 22,263 | 11,482 | 51.6 | % | |||||||||||
General and administrative | 47,197 | 25,360 | 21,837 | 86.1 | % | |||||||||||
Loss (gain) on derivative contracts | 296,612 | (15,981 | ) | 312,593 | (1,956.0) | % | ||||||||||
Gain on sale of assets | (7,711 | ) | (659 | ) | (7,052 | ) | 1,070.1 | % | ||||||||
Total operating costs and expenses | $ | 721,742 | $ | 229,499 | $ | 492,243 | 214.5 | % | ||||||||
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Six Months Ended | ||||||||||||||||
June 30, | ||||||||||||||||
2008 | 2007 | $ Change | % Change | |||||||||||||
(In thousands) | ||||||||||||||||
Other income (expense): | ||||||||||||||||
Interest income | $ | 2,145 | $ | 3,127 | $ | (982 | ) | (31.4) | % | |||||||
Interest expense | (47,395 | ) | (60,108 | ) | 12,713 | (21.2) | % | |||||||||
Minority interest | (851 | ) | (157 | ) | (694 | ) | 442.0 | % | ||||||||
Income from equity investments | 1,415 | 2,164 | (749 | ) | (34.6) | % | ||||||||||
Other income, net | 939 | 499 | 440 | 88.2 | % | |||||||||||
Total other expense, net | (43,747 | ) | (54,475 | ) | 10,728 | (19.7) | % | |||||||||
(Loss) income before income tax (benefit) expense | (118,353 | ) | 24,153 | (142,506 | ) | (590.0) | % | |||||||||
Income tax (benefit) expense | (41,385 | ) | 9,082 | (50,467 | ) | (555.7) | % | |||||||||
Net (loss) income | $ | (76,968 | ) | $ | 15,071 | $ | (92,039 | ) | (610.7) | % | ||||||
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Year Ended December 31, | ||||||||||||||||
2007 | 2006 | $ Change | % Change | |||||||||||||
(In thousands) | ||||||||||||||||
Revenue: | ||||||||||||||||
Natural gas and crude oil | $ | 477,612 | $ | 101,252 | $ | 376,360 | 371.7 | % | ||||||||
Drilling and services | 73,197 | 139,049 | (65,852 | ) | (47.4 | )% | ||||||||||
Midstream and marketing | 107,765 | 122,896 | (15,131 | ) | (12.3 | )% | ||||||||||
Other | 18,878 | 25,045 | (6,167 | ) | (24.6 | )% | ||||||||||
Total revenues | $ | 677,452 | $ | 388,242 | $ | 289,210 | 74.5 | % | ||||||||
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Year Ended December 31, | ||||||||||||||||
2007 | 2006 | $ Change | % Change | |||||||||||||
(In thousands) | ||||||||||||||||
Operating costs and expenses: | ||||||||||||||||
Production | $ | 106,192 | $ | 35,149 | $ | 71,043 | 202.1 | % | ||||||||
Production taxes | 19,557 | 4,654 | 14,903 | 320.2 | % | |||||||||||
Drilling and services | 44,211 | 98,436 | (54,225 | ) | (55.1 | )% | ||||||||||
Midstream and marketing | 94,253 | 115,076 | (20,823 | ) | (18.1 | )% | ||||||||||
Depreciation, depletion, and amortization — natural gas and crude oil | 173,568 | 26,321 | 147,247 | 559.4 | % | |||||||||||
Depreciation, depletion and amortization — other | 53,541 | 29,305 | 24,236 | 82.7 | % | |||||||||||
General and administrative | 61,780 | 55,634 | 6,146 | 11.0 | % | |||||||||||
Gain on derivative instruments | (60,732 | ) | (12,291 | ) | (48,441 | ) | (394.1 | )% | ||||||||
Gain on sale of assets | (1,777 | ) | (1,023 | ) | (754 | ) | (73.7 | )% | ||||||||
Total operating costs and expenses | $ | 490,593 | $ | 351,261 | $ | 139,332 | 39.7 | % | ||||||||
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Year Ended December 31, | ||||||||||||||||
2007 | 2006 | $ Change | % Change | |||||||||||||
(In thousands) | ||||||||||||||||
Other income (expense): | ||||||||||||||||
Interest income | $ | 5,423 | $ | 1,109 | $ | 4,314 | 389.0 | % | ||||||||
Interest expense | (117,185 | ) | (16,904 | ) | (100,281 | ) | 593.2 | % | ||||||||
Minority interest | 276 | (296 | ) | 572 | 193.2 | % | ||||||||||
Income from equity investments | 4,372 | 967 | 3,405 | 352.1 | % | |||||||||||
Total other expense | (107,114 | ) | (15,124 | ) | (91,990 | ) | (608.2 | )% | ||||||||
Income before income taxes | 79,745 | 21,857 | 57,888 | 264.8 | % | |||||||||||
Income tax expense | 29,524 | 6,236 | 23,288 | 373.4 | % | |||||||||||
Net income | $ | 50,221 | $ | 15,621 | $ | 34,600 | 221.5 | % | ||||||||
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Year Ended December 31, | ||||||||||||||||
2006 | 2005 | $ Change | % Change | |||||||||||||
(In thousands) | ||||||||||||||||
Revenue: | ||||||||||||||||
Natural gas and crude oil | $ | 101,252 | $ | 49,987 | $ | 51,265 | 102.6 | % | ||||||||
Drilling and services | 139,049 | 80,343 | 58,706 | 73.1 | % | |||||||||||
Midstream and marketing | 122,896 | 147,133 | (24,237 | ) | (16.5 | )% | ||||||||||
Other | 25,045 | 10,230 | 14,815 | 144.8 | % | |||||||||||
Total revenues | $ | 388,242 | $ | 287,693 | $ | 100,549 | 35.0 | % | ||||||||
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Year Ended December 31, | ||||||||||||||||
2006 | 2005 | $ Change | % Change | |||||||||||||
(In thousands) | ||||||||||||||||
Operating costs and expenses: | ||||||||||||||||
Production | $ | 35,149 | $ | 16,195 | $ | 18,954 | 117.0 | % | ||||||||
Production taxes | 4,654 | 3,158 | 1,496 | 47.4 | % | |||||||||||
Drilling and services | 98,436 | 52,122 | 46,314 | 88.9 | % | |||||||||||
Midstream and marketing | 115,076 | 141,372 | (26,296 | ) | (18.6 | )% | ||||||||||
Depreciation, depletion and amortization-natural gas and oil | 26,321 | 9,313 | 17,008 | 182.6 | % | |||||||||||
Depreciation, depletion andamortization-other | 29,305 | 14,893 | 14,412 | 96.8 | % | |||||||||||
General and administrative | 55,634 | 11,908 | 43,726 | 367.2 | % | |||||||||||
Loss (gain) on derivative instruments | (12,291 | ) | 4,132 | (16,423 | ) | (397.5 | )% | |||||||||
Loss (gain) on sale of assets | (1,023 | ) | 547 | (1,570 | ) | (287.0 | )% | |||||||||
Total operating costs and expenses | $ | 351,261 | $ | 253,640 | $ | 97,621 | 38.5 | % | ||||||||
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Year Ended December 31, | ||||||||||||||||
2006 | 2005 | $ Change | % Change | |||||||||||||
(In thousands) | ||||||||||||||||
Other income (expense): | ||||||||||||||||
Interest income | $ | 1,109 | $ | 206 | $ | 903 | 438.3 | % | ||||||||
Interest expense | (16,904 | ) | (5,277 | ) | (11,627 | ) | (220.3 | )% | ||||||||
Minority interest | (296 | ) | (737 | ) | 441 | 59.8 | % | |||||||||
Income (loss) from equity investments | 967 | (384 | ) | 1,351 | 351.8 | % | ||||||||||
Total other expense | (15,124 | ) | (6,192 | ) | (8,932 | ) | (144.3 | )% | ||||||||
Income before income taxes | 21,857 | 27,861 | (6,004 | ) | (21.5 | )% | ||||||||||
Income tax expense | 6,236 | 9,968 | (3,732 | ) | (37.4 | )% | ||||||||||
Income from discontinued operations, net of tax | — | 229 | (229 | ) | (100.0 | )% | ||||||||||
Net income | $ | 15,621 | $ | 18,122 | $ | (2,501 | ) | (13.8 | )% | |||||||
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Repayment of outstanding balance and accrued interest on senior credit facility | $ | 515.9 | ||
Repayment of note payable and accrued interest incurred in connection with recent acquisition | 49.1 | |||
Excess cash to fund capital expenditures | 229.7 | |||
Total | $ | 794.7 | ||
Six Months Ended | ||||||||||||||||||||
Year Ended December 31, | June 30, | |||||||||||||||||||
2007 | 2006 | 2005 | 2008 | 2007 | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Capital Expenditures: | ||||||||||||||||||||
Exploration and production | $ | 1,046,552 | $ | 170,872 | $ | 61,227 | $ | 813,900 | $ | 377,120 | ||||||||||
Drilling and oil field services | 123,232 | 89,810 | 43,730 | 35,791 | 83,913 | |||||||||||||||
Midstream gas services | 63,828 | 16,975 | 25,904 | 69,429 | 23,130 | |||||||||||||||
Other | 47,236 | 28,884 | 3,735 | 15,181 | 7,981 | |||||||||||||||
Capital expenditures, excluding acquisitions | 1,280,848 | 306,541 | 134,596 | 934,301 | 492,144 | |||||||||||||||
Acquisitions | 116,650 | 1,054,075 | 21,247 | — | — | |||||||||||||||
Total | $ | 1,397,498 | $ | 1,360,616 | $ | 155,843 | $ | 934,301 | $ | 492,144 | ||||||||||
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Six Months Ended | ||||||||||||||||||||
Year Ended December 31, | June 30, | |||||||||||||||||||
2007 | 2006 | 2005 | 2008 | 2007 | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Cash Flows from Operations: | ||||||||||||||||||||
Cash flows provided by operating activities | $ | 357,452 | $ | 67,349 | $ | 63,297 | $ | 296,834 | $ | 180,844 | ||||||||||
Cash flows used in investing activities | (1,385,581 | ) | (1,340,567 | ) | (155,826 | ) | (785,891 | ) | (493,310 | ) | ||||||||||
Cash flows provided by financing activities | 1,052,316 | 1,266,435 | 126,413 | 701,810 | 275,717 | |||||||||||||||
Net increase (decrease) in cash and cash equivalents | $ | 24,187 | $ | (6,783 | ) | $ | 33,884 | $ | 212,753 | $ | (36,749 | ) | ||||||||
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Payments Due by Year | ||||||||||||||||||||||||||||
2008 | 2009 | 2010 | 2011 | 2012 | After 2012 | Total | ||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||
Long-term debt | $ | 15,350 | $ | 16,580 | $ | 12,476 | $ | 7,222 | $ | 1,052 | $ | 1,014,969 | $ | 1,067,649 | ||||||||||||||
Interest on term loans(1) | 92,868 | 91,580 | 90,322 | 89,510 | 89,219 | 172,020 | 625,519 | |||||||||||||||||||||
Firm transportation(2) | 1,597 | 1,597 | 1,597 | 1,597 | 1,597 | 6,775 | 14,760 | |||||||||||||||||||||
Operating leases | 2,139 | 1,102 | 110 | 110 | 46 | — | 3,507 | |||||||||||||||||||||
Third-party drilling rig commitments(3) | 12,803 | — | — | — | — | — | 12,803 | |||||||||||||||||||||
Dispute settlement payments(4) | 5,000 | 5,000 | 5,000 | 5,000 | — | — | 20,000 | |||||||||||||||||||||
Asset retirement obligations | 864 | 365 | — | 7,822 | 444 | 49,085 | 58,580 | |||||||||||||||||||||
Total | $ | 130,621 | $ | 116,224 | $ | 109,505 | $ | 111,261 | $ | 92,358 | $ | 1,242,849 | $ | 1,802,818 | ||||||||||||||
(1) | Based on interest rates as of December 31, 2007. | |
(2) | We entered into a firm transportation agreement with Questar Pipeline Company giving us guaranteed capacity on its pipeline for 10 MmBtu per day at an estimated charge of $0.9 million per year, with a total commitment of $9.1 million. In December 2006, we assigned our rights and obligations to a third-party. | |
(3) | Drilling contracts with third-party drilling rig operators at specified day rates. All of our drilling rig contracts contain operator performance conditions that allow for pricing adjustments or early termination for operator nonperformance. | |
(4) | In January 2007, we settled a royalty interest dispute and agreed to pay five installments of $5 million each, plus interest commencing April 1, 2007. The remaining installments are due on July 1 of each year commencing July 1, 2008. |
2008 | $ | 3,200 | ||
2009 | 3,200 | |||
2010 | 2,586 | |||
$ | 8,986 | |||
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Notional | Weighted Avg. | |||||||
Period and Type of Contract | (MMcf)(1) | Fixed Price | ||||||
July 2008 — September 2008 | ||||||||
Price swap contracts | 19,940 | $ | 8.60 | |||||
Basis swap contracts | 15,640 | $ | (0.57 | ) | ||||
October 2008 — December 2008 | ||||||||
Price swap contracts | 17,480 | $ | 8.67 | |||||
Basis swap contracts | 14,720 | $ | (0.65 | ) | ||||
January 2009 — March 2009 | ||||||||
Price swap contracts | 9,900 | $ | 10.05 | |||||
Basis swap contracts | 2,700 | $ | (0.49 | ) | ||||
April 2009 — June 2009 | ||||||||
Price swap contracts | 4,550 | $ | 9.27 | |||||
Basis swap contracts | 2,730 | $ | (0.49 | ) | ||||
July 2009 — September 2009 | ||||||||
Price swap contracts | 310 | $ | 9.67 | |||||
Basis swap contracts | 2,760 | $ | (0.49 | ) | ||||
October 2009 — December 2009 | ||||||||
Basis swap contracts | 2,760 | $ | (0.49 | ) | ||||
January 2011 — March 2011 | ||||||||
Basis swap contracts | 1,350 | $ | (0.47 | ) | ||||
April 2011 — June 2011 | ||||||||
Basis swap contracts | 1,365 | $ | (0.47 | ) |
Notional | Weighted Avg. | |||||||
Period and Type of Contract | (in MMbls) | Fixed Price | ||||||
July 2011 — September 2011 | ||||||||
Basis swap contracts | 1,380 | $ | (0.47 | ) | ||||
October 2011 — December 2011 | ||||||||
Basis swap contracts | 1,380 | $ | (0.47 | ) |
(1) | Assumes ratio of 1:1 for Mcf to MMBtu. |
Notional | Weighted Avg. | |||||||
Period and Type of Contract | (in MBbls) | Fixed Price | ||||||
July 2008 — September 2008 | ||||||||
Price swap contracts | 225 | $ | 94.33 | |||||
Collar contracts | 27 | $ | 50.00 — 82.60 | |||||
October 2008 — December 2008 | ||||||||
Price swap contracts | 225 | $ | 93.17 | |||||
Collar contracts | 27 | $ | 50.00 — 82.60 |
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Six Months | ||||||||||||||||||||
Year Ended December 31, | Ended June 30, | |||||||||||||||||||
2005 | 2006 | 2007 | 2007 | 2008 | ||||||||||||||||
Realized (gain) loss | $ | 2,836 | $ | (14,169 | ) | $ | (34,494 | ) | $ | 793 | $ | 50,674 | ||||||||
Unrealized (gain) loss | 1,296 | 1,878 | (26,238 | ) | (16,774 | ) | 245,938 | |||||||||||||
(Gain) loss on derivative contracts | $ | 4,132 | $ | (12,291 | ) | $ | (60,732 | ) | $ | (15,981 | ) | $ | 296,612 | |||||||
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• | On April 4, 2008, we amended our revolving credit facility, increasing the borrowing base to $1.2 billion, with aggregate commitments of $1.75 billion. The $1.2 billion borrowing base contemplated a potential future fixed income transaction not to exceed $400.0 million. As a result of our May 2008 issuance of $750.0 million of senior notes, our borrowing base was reduced to $1.1 billion. |
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• | On May 1, 2008, we consummated an exchange offer for both tranches of our senior term loans. Under the terms of the exchange offer, we issued $650 million of 85/8% Senior Notes Due 2015 in exchange for an equal outstanding principal amount of fixed rate senior term loans and $350 million of Senior Floating Rate Notes Due 2014 in exchange for an equal outstanding principal amount of variable rate term loans. | |
• | We converted the remaining 1,844,464 shares of our outstanding redeemable convertible preferred stock to 18,810,260 shares of our common stock. Since December 31, 2007, holders of our preferred stock have received approximately 10.2 shares of our common stock for each share of preferred stock, resulting in the issuance of 19,150,083 shares of our common stock for all previously issued convertible preferred stock, including 339,823 shares of common stock issued upon conversion of convertible preferred stock prior to April 1, 2008. | |
• | On August 7, 2008, we announced an increase in our 2008 capital expenditures budget to $2.0 billion from the previously announced $1.5 billion. | |
• | In May 2008, we completed the sale of substantially all of our assets located in the Piceance Basin of Colorado with net proceeds to us of approximately $147.2 million after closing adjustments. Assets sold included undeveloped acreage, working interests in wells, gathering and compression systems and other facilities related to the wells. | |
• | On May 20, 2008, we issued $750 million of our 8% Senior Notes due 2018 in a private placement. We received net proceeds of approximately $735 million from the offering. We used approximately $478 million of the net proceeds to repay all of the outstanding balance on our senior credit facility. The remaining proceeds will be used to fund the remaining unfunded portion of our $2.0 billion capital expenditures budget for 2008. | |
• | We experienced a fire at our Grey Ranch Plant located in Pecos County, Texas on June 27, 2008. While there were no injuries, we believe that the plant will be shut down for a minimum of 90 days from the date of the fire for repairs. As a result of the fire, our loss is approximately 16.5 MMcf per day of net methane production. In the Gulf Coast, an additional 8.5 MMcfe per day of net production was shut in during May 2008 due to major well work. | |
• | In June 2008, we entered into an agreement with a subsidiary of Occidental Petroleum Corporation (“Occidental”) to construct a CO2 extraction plant (the “Century Plant”) located in Pecos County, Texas and associated compression and pipeline facilities for $800.0 million. Occidental will pay a minimum of 100% of the contract price (including any subsequentagreed-upon revisions) to us through periodic cost reimbursements based upon the percentage of the project completed. Uponstart-up, the Century Plant will be owned and operated by Occidental for the purpose of extracting CO2 from the delivered natural gas. We will deliver high CO2 natural gas to the Century Plant pursuant to a30-year treating agreement executed simultaneously with the construction agreement. Occidental will extract CO2 from the delivered natural gas. Occidental will retain substantially all CO2 extracted at the Century Plant and our other existing CO2 extraction plants. We will retain all methane from the Century Plant and our other existing plants. | |
• | In July 2008, we announced our intent to offer certain properties for sale and to retain third parties to assist in the marketing efforts. Assets subject to the potential sale include our developed and undeveloped properties in East Texas and our undeveloped properties in North Louisiana. | |
• | Our customer, SemGroup, L.P. and certain of its subsidiaries (“SemGroup”), filed for bankruptcy on July 22, 2008. On July 25, 2008, we offered to enter into supplier protection agreements with SemGroup under which we committed to continue to do business with SemGroup on the same terms and reasonably equivalent volume as before the bankruptcy filing in return for SemGroup’s full payment for goods and services provided before the filing. As of June 30, 2008, SemGroup owed us a total of $1.2 million. In July 2008, we provided an additional $1.1 million of goods and services to SemGroup prior to its declaration of bankruptcy. Based upon the expected protection afforded by the |
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terms of the supplier protection agreements, no allowance for doubtful recovery has been provided with respect to amounts outstanding from SemGroup. |
• | During July 2008, the Company purchased land, minerals, developed and undeveloped leasehold and interests in producing properties through various transactions at an aggregate purchase price of $67.6 million. |
• | Large Asset Base with Substantial Drilling Inventory. Our producing properties are characterized by long-lived, predominantly natural gas reserves with established production profiles. Our estimated proved reserves of 1,516.2 Bcfe as of December 31, 2007 had a proved reserves to production ratio of approximately 17.7 years. Our core area of operations in the WTO has expanded to approximately 731,000 gross (611,000 net) acres as of June 30, 2008. We have identified approximately 2,600 potential drilling locations in the WTO and believe that we will be able to expand the number of drilling locations in the remainder of the WTO through exploratory drilling and our use of3-D seismic technology. | |
• | Geographically Concentrated Exploration and Development Operations. We intend to focus our drilling and development operations in the WTO to fully exploit this unique geological area. In addition to the WTO, we also are active in East Texas developing the Cotton Valley Trend with a continuous five rig program. Geographic concentration in these areas allows us to establish economies of scale and improve both drilling and production efficiencies resulting in lower development and operating costs and maximizing the value of our producing properties. We believe our concentrated, largely undeveloped acreage position in our core areas will enable us to organically grow our reserves and production for many years. | |
• | Experienced Management Team. During 2006, we significantly expanded our management team when Tom L. Ward, co-founder and former president of Chesapeake Energy Corporation, purchased a significant interest in us and became our Chairman and Chief Executive Officer. Mr. Ward leads an experienced management team of 10 executive officers and 40 members of senior management. | |
• | High Degree of Operational Control. We operate over 98% of our production in the WTO, East Texas, the Gulf Coast and the Mid-Continent, which permits us to manage our operating costs and better control capital expenditures and the timing of development and exploitation activities. | |
• | Large Modern Fleet of Drilling Rigs. We own a drilling rig fleet consisting of 44 rigs — 32 rigs owned by us and 12 rigs owned by Larclay, L.P., a limited partnership in which we have a 50% interest. By controlling a large, modern and efficient drilling fleet, we can develop our existing reserves and explore for new reserves on a more economical basis. |
• | Grow Through Exploration and Development of Existing Acreage. We expect to generate long-term reserve and production growth by exploring and developing our large acreage position. Our primary exploration and development focus will be in the WTO, where we have identified approximately 2,600 potential drilling locations and had 31 rigs operating as of June 30, 2008. | |
• | Apply Technological Improvements to Our Exploration and Development Program. We intend to achieve high drilling and exploration success rates with a large scale3-D seismic acquisition program and the use of enhanced interpretation technologies. We strive to maximize value by minimizing time from spud to first sales with advanced drilling, completion and production methods that historically have not been widely used in the under-explored WTO. |
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• | Seek Opportunistic Acquisitions in Our Core Geographic Area. Since January 2006, through acquisitions and leasing activities, we have tripled our net acreage position in the WTO. We intend to continue to seek other opportunities to optimize and enhance our exploratory acreage position in the WTO and other strategic areas. | |
• | Reduce Costs, Enhance Returns and Maintain Operating Flexibility by Controlling Drilling Rigs and Midstream Assets. By controlling our fleet of drilling rigs and gathering and treating assets, we believe we will be able to better control overall costs and maintain a high degree of operational flexibility. |
As of June 30, 2008 | ||||||||||||||||||||||||||||||||
As of December 31, 2007 | Number of | |||||||||||||||||||||||||||||||
Estimated | Proved | Identified | ||||||||||||||||||||||||||||||
Net Proved | Daily | Reserves/ | Daily | Potential | ||||||||||||||||||||||||||||
Reserves | PV-10 | Production | Production | Production | Gross | Net | Drilling | |||||||||||||||||||||||||
(Bcfe)(1) | (In millions)(2) | (Mmcfe/d)(3) | (Years) | (Mmcfe/d)(4) | Acreage | Acreage | Locations | |||||||||||||||||||||||||
Area | ||||||||||||||||||||||||||||||||
WTO | 922.2 | $ | 1,785.5 | 115.7 | 21.8 | 170.5 | 730,245 | 610,327 | 2,594 | |||||||||||||||||||||||
East Texas | 202.5 | 331.1 | 32.7 | 17.0 | 40.0 | 57,811 | 31,441 | 1,055 | ||||||||||||||||||||||||
Gulf Coast | 97.8 | 388.3 | 42.5 | 6.3 | 29.0 | 49,281 | 31,497 | 46 | ||||||||||||||||||||||||
Mid-Continent | 66.0 | 131.2 | 9.0 | 20.1 | 20.3 | 359,311 | 238,349 | 1,749 | ||||||||||||||||||||||||
Other: | ||||||||||||||||||||||||||||||||
Gulf of Mexico | 60.1 | 240.3 | 18.3 | 9.0 | 16.7 | 68,183 | 31,339 | 67 | ||||||||||||||||||||||||
Other West Texas | 38.0 | 192.6 | 12.1 | 8.6 | 12.8 | 41,706 | 29,422 | 85 | ||||||||||||||||||||||||
Tertiary recovery- West Texas | 119.7 | 468.3 | 0.8 | 410.0 | 2.2 | 13,972 | 11,229 | 67 | ||||||||||||||||||||||||
Piceance Basin(5) | 9.0 | 8.9 | 0.6 | 41.0 | — | — | — | — | ||||||||||||||||||||||||
Other | 0.9 | 4.3 | 2.8 | 0.9 | 0.2 | 64,927 | 38,961 | — | ||||||||||||||||||||||||
Total | 1,516.2 | $ | 3,550.5 | 234.5 | 17.7 | 291.7 | 1,385,436 | 1,022,565 | 5,663 | |||||||||||||||||||||||
(1) | Internally prepared estimates of net proved reserves were 1,917.7 Bcfe as of June 30, 2008. | |
(2) | PV-10 generally differs from Standardized Measure of Discounted Net Cash Flows, or Standardized Measure, because it does not include the effects of income taxes on future net revenues. Our Standardized Measure was $2,718.5 million at December 31, 2007. | |
(3) | Represents average daily net production for the month of December 2007. | |
(4) | Represents average daily net production for the month of June 2008. | |
(5) | We sold all of our Piceance Basin assets on May 20, 2008 for net cash consideration to us of approximately $147.2 million, after closing adjustments. |
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• | South Sabino Exploration Area. The South Sabino exploration area is located directly east and adjacent to the Piñon Field. We are currently in the process of drilling two exploratory wells to depths of 10,000 to 13,000 feet in the South Sabino as a result of our recent3-D seismic interpretation of this area. | |
• | Big Canyon Exploration Area. As a result of our3-D seismic data in this area, we are currently drilling a 17,000 foot exploratory test well structurally offsetting to the original Big Canyon Ranch106-1 well. |
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Estimated | Estimated | 2008 Capital | ||||||||||||||||||||||||
Net PUD | Gross PUD | Gross PUD | Total Gross | Gross 2008 | Expenditures | 2007 Year | ||||||||||||||||||||
Reserves | Reserves | Drilling | Drilling | Drilling | Budget | End Rigs | ||||||||||||||||||||
(Bcfe)(1) | (Bcfe)(1) | Locations(1) | Locations(1) | Locations | (In millions)(2) | Working | ||||||||||||||||||||
509.9 | 731.6 | 397 | 2,594 | 268 | $ | 1,054 | 30 | |||||||||||||||||||
(1) | As of December 31, 2007. | |
(2) | Excludes capital expenditures related to land and seismic acquisitions. |
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At December 31, | At June 30, | |||||||||||||||
2005 | 2006 | 2007 | 2008 | |||||||||||||
Estimated Proved Reserves(1) | ||||||||||||||||
Natural Gas (Bcf)(2) | 237.4 | 850.7 | 1,297.0 | 1,643.2 | ||||||||||||
Oil (MmBbls) | 10.4 | 25.2 | 36.5 | 45.7 | ||||||||||||
Total (Bcfe) | 300.0 | 1,001.8 | 1,516.2 | 1,917.7 | ||||||||||||
PV-10 (in millions)(3) | $ | 733.3 | $ | 1,734.3 | $ | 3,550.5 | ||||||||||
Standardized Measure of Discounted Net Cash Flows (in millions)(4) | $ | 499.2 | $ | 1,440.2 | $ | 2,718.5 |
(1) | Substantially all of year-end reserves are based upon estimates of our independent petroleum engineers’ reserve data. Reserves at June 30, 2008 are based upon our internal reserves data, and 46% of these reserves are classified as proved developed. Our estimated proved reserves and the future net revenues,PV-10 and Standardized Measure of Discounted Net Cash Flows were determined using end of the period prices for natural gas and oil that we realized as of December 31, 2005, December 31, 2006 and December 31, 2007, which were as follows: |
At December 31, | ||||||||||||
2005 | 2006 | 2007 | ||||||||||
End of Period Prices | ||||||||||||
Natural Gas (per Mcf) | $ | 8.40 | $ | 5.32 | $ | 6.46 | ||||||
Oil (per barrel) | $ | 54.02 | $ | 54.62 | $ | 87.47 |
(2) | Given the nature of our natural gas reserves, a significant amount of our production, primarily in the WTO, contains natural gas that is high in CO2 content. These figures are net of volumes of CO2 in excess of pipeline quality specifications. | |
(3) | PV-10 is a non-GAAP financial measure and represents the present value of estimated future cash inflows from proved natural gas and oil reserves, less future development and production costs, discounted at 10% per annum to reflect timing of future cash flows and using pricing assumptions in effect at the end of the period.PV-10 differs from Standardized Measure of Discounted Net Cash Flows because it does not include the effects of income taxes and other items on future net revenues. NeitherPV-10 nor Standardized Measure represent an estimate of fair market value of our natural gas and oil properties.PV-10 is used by |
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the industry and by our management as an arbitrary reserve asset value measure to compare against past reserve bases and the reserve bases of other business entities that are not dependent on the taxpaying status of the entity. |
At December 31, | ||||||||||||
2005 | 2006 | 2007 | ||||||||||
(In millions) | ||||||||||||
Standardized Measure of Discounted Net Cash Flows | $ | 499.2 | $ | 1,440.2 | $ | 2,718.5 | ||||||
Present value of future income tax and other discounted at 10% | 234.1 | 294.1 | 832.0 | |||||||||
PV-10 | $ | 733.3 | $ | 1,734.3 | $ | 3,550.5 | ||||||
(4) | The Standardized Measure of Discounted Net Cash Flows represents the present value of estimated future cash inflows from proved natural gas and oil reserves, less future development and production costs, and income tax expenses, discounted at 10% per annum to reflect timing of future cash flows and using the same pricing assumptions as were used to calculatePV-10. Standardized Measure differs fromPV-10 because Standardized Measure includes the effect of future income taxes and other items. |
• | oil that may become available from known reservoirs but is classified separately as indicated additional reserves; | |
• | 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; | |
• | crude oil, natural gas and natural gas liquids that may occur in undrilled prospects; and | |
• | 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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Year Ended December 31, | Six Months Ended June 30, | |||||||||||||||||||
2005 | 2006 | 2007 | 2007 | 2008 | ||||||||||||||||
Production Data: | ||||||||||||||||||||
Natural Gas (Mmcf) | 6,873 | 13,410 | 51,958 | 22,292 | 40,888 | |||||||||||||||
Crude oil (MBbls)(1) | 72 | 322 | 2,042 | 906 | 1,231 | |||||||||||||||
Combined Equivalent Volumes (Mmcfe) | 7,305 | 15,342 | 64,211 | 27,728 | 48,274 | |||||||||||||||
Average Daily Combined Equivalent Volumes (Mmcfe/d) | 20.0 | 42.0 | 175.9 | 153.0 | 265.0 | |||||||||||||||
Average Sales Prices(2): | ||||||||||||||||||||
Natural Gas (per Mcf) | $ | 6.54 | $ | 6.19 | $ | 6.51 | $ | 6.90 | $ | 9.11 | ||||||||||
Crude oil (per Bbl)(1) | $ | 48.19 | $ | 56.61 | $ | 68.12 | $ | 58.18 | $ | 101.55 | ||||||||||
Combined Equivalent (per Mcfe) | $ | 6.63 | $ | 6.60 | $ | 7.45 | $ | 7.45 | $ | 10.31 | ||||||||||
Expenses per Mcfe: | ||||||||||||||||||||
Lease operating expenses: | ||||||||||||||||||||
Transportation | $ | 0.16 | $ | 0.22 | $ | 0.12 | $ | 0.17 | $ | 0.13 | ||||||||||
Processing and gathering(3) | 0.42 | 0.37 | 0.28 | 0.25 | 0.31 | |||||||||||||||
Other lease operating expenses | 1.64 | 1.70 | 1.25 | 1.35 | 1.10 | |||||||||||||||
Total lease operating expenses | $ | 2.22 | $ | 2.29 | $ | 1.65 | $ | 1.77 | $ | 1.54 | ||||||||||
Production taxes | $ | 0.43 | $ | 0.30 | $ | 0.30 | $ | 0.29 | $ | 0.47 |
(1) | Includes natural gas liquids. | |
(2) | Reported prices represent actual prices for the periods presented and do not give effect to hedging transactions. | |
(3) | Includes costs attributable to gas treatment to remove CO2 and other impurities from our high CO2 natural gas. |
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Area | Gross | Net | ||||||
WTO | 471 | 435 | ||||||
East Texas | 177 | 163 | ||||||
Gulf Coast | 214 | 133 | ||||||
Other: | ||||||||
Gulf of Mexico | 67 | 43 | ||||||
Other West Texas | 264 | 251 | ||||||
Tertiary recovery — West Texas (SandRidge Tertiary) | 46 | 43 | ||||||
Piceance Basin(1) | 52 | 20 | ||||||
Other, including Oklahoma | 363 | 146 | ||||||
Total | 1,654 | 1,234 | ||||||
(1) | We sold all of our Piceance Basin assets on May 20, 2008 for net cash consideration to us of approximately $147.2 million after closing adjustments. |
Developed Acreage(1) | Undeveloped Acreage(2) | |||||||||||||||
Area | Gross(3) | Net(4) | Gross(3) | Net(4) | ||||||||||||
WTO | 13,157 | 10,824 | 587,389 | 497,921 | ||||||||||||
East Texas | 28,084 | 25,891 | 25,304 | 6,848 | ||||||||||||
Gulf Coast | 39,438 | 24,678 | 11,330 | 8,639 | ||||||||||||
Other: | ||||||||||||||||
Gulf of Mexico | 73,614 | 36,770 | — | — | ||||||||||||
Other West Texas | 24,272 | 16,030 | 7,575 | 6,911 | ||||||||||||
Tertiary recovery — West Texas (SandRidge Tertiary) | 9,064 | 8,195 | — | — | ||||||||||||
Piceance Basin(5) | 1,800 | 451 | 38,534 | 15,235 | ||||||||||||
Other, including Oklahoma | 86,498 | 43,255 | 357,048 | 120,639 | ||||||||||||
Total | 275,927 | 166,094 | 1,027,180 | 656,193 | ||||||||||||
(1) | Developed acres are acres spaced or assigned to productive wells. | |
(2) | Undeveloped acres are acres on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil or natural gas, regardless of whether such acreage contains proved reserves. | |
(3) | A gross acre is an acre in which a working interest is owned. The number of gross acres is the total number of acres in which a working interest is owned. | |
(4) | A net acre is deemed to exist when the sum of the fractional ownership working interests in gross acres equals one. The number of net acres is the sum of the fractional working interests owned in gross acres expressed as whole numbers and fractions thereof. | |
(5) | We sold all of our Piceance Basin assets on May 20, 2008 for net cash consideration to us of approximately $147.2 million after closing adjustments. |
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Acres Expiring | ||||||||
Twelve Months Ending | Gross | Net | ||||||
December 31, 2008 | 46,635 | 36,198 | ||||||
December 31, 2009 | 135,669 | 121,134 | ||||||
December 31, 2010 | 356,993 | 162,761 | ||||||
December 31, 2011 and later | 390,181 | 279,038 | ||||||
Other(1) | 373,629 | 223,156 | ||||||
Total | 1,303,107 | 822,287 | ||||||
(1) | Leases remaining in effect until the cessation of development efforts or cessation of production on the developed portion of the particular lease. |
2007 | 2006 | 2005 | ||||||||||||||||||||||||||||||||||||||||||||||
Gross | Percent | Net | Percent | Gross | Percent | Net | Percent | Gross | Percent | Net | Percent | |||||||||||||||||||||||||||||||||||||
Development: | ||||||||||||||||||||||||||||||||||||||||||||||||
Productive | 281 | 99.3 | % | 244.4 | 99.5 | % | 82 | 94 | % | 50.8 | 95 | % | 31 | 100 | % | 13.0 | 100 | % | ||||||||||||||||||||||||||||||
Dry | 2 | 0.7 | % | 1.3 | 0.5 | % | 5 | 6 | % | 2.5 | 5 | % | — | — | — | — | ||||||||||||||||||||||||||||||||
Total | 283 | 100 | % | 245.7 | 100 | % | 87 | 100 | % | 53.3 | 100 | % | 31 | 100 | % | 13.0 | 100 | % | ||||||||||||||||||||||||||||||
Exploratory: | ||||||||||||||||||||||||||||||||||||||||||||||||
Productive | 27 | 82 | % | 24.3 | 84 | % | 19 | 76 | % | 13.0 | 72 | % | 2 | 22 | % | 0.8 | 22 | % | ||||||||||||||||||||||||||||||
Dry | 6 | 18 | % | 4.7 | 16 | % | 6 | 24 | % | 5.0 | 28 | % | 7 | 78 | % | 2.9 | 78 | % | ||||||||||||||||||||||||||||||
Total | 33 | 100 | % | 29.0 | 100 | % | 25 | 100 | % | 18.0 | 100 | % | 9 | 100 | % | 3.7 | 100 | % | ||||||||||||||||||||||||||||||
Total: | ||||||||||||||||||||||||||||||||||||||||||||||||
Productive | 308 | 98 | % | 268.7 | 98 | % | 101 | 90 | % | 63.8 | 89 | % | 33 | 83 | % | 13.8 | 83 | % | ||||||||||||||||||||||||||||||
Dry | 8 | 2 | % | 6.0 | 2 | % | 11 | 10 | % | 7.5 | 11 | % | 7 | 17 | % | 2.9 | 17 | % | ||||||||||||||||||||||||||||||
316 | 100 | % | 274.7 | 100 | % | 112 | 100 | % | 71.3 | 100 | % | 40 | 100 | % | 16.7 | 100 | % | |||||||||||||||||||||||||||||||
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Area | Owned(1) | Third-Party | ||||||
WTO | 28 | 2 | ||||||
East Texas | — | 6 | ||||||
Gulf Coast | — | 1 | ||||||
Other, including Oklahoma | 1 | 2 | ||||||
Total | 29 | 11 | ||||||
(1) | Includes rigs owned by Lariat, our wholly owned subsidiary, and by Larclay, a limited partnership in which we have a 50% interest. |
Gas Purchasers | % | |||
Magnus Energy Marketing, Ltd. | 25.0 | % | ||
ANP Funding I, LLC | 21.4 | % | ||
Atmos Energy Corporation | 12.9 | % | ||
City of Austin, Texas | 10.9 | % | ||
El Paso Industrial Energy, LP | 10.5 | % |
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Year Ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Number of operational rigs owned at end of period | 25 | 25 | 19 | |||||||||
Average number of operational rigs owned during the period | 26.0 | 21.9 | 14.3 | |||||||||
Average number of rigs utilized | 23.8 | 21.9 | 14.3 | |||||||||
Average drilling revenue per rig per day(1)(2) | $ | 17,177 | $ | 17,034 | $ | 11,503 |
(1) | Represents the total revenues from our contract drilling operations divided by the total number of days our drilling rigs were used during the period. | |
(2) | Does not include revenues for related rental equipment. |
Operating for | Operating for | |||||||||||||||||||
Owned | Operational | Idle | SandRidge | Third Parties | ||||||||||||||||
Lariat | 32 | (1) | 25 | 0 | 22 | 3 | ||||||||||||||
Larclay | 12 | (2) | 11 | 1 | 7 | 3 | ||||||||||||||
Total | 44 | 36 | 1 | 29 | 6 | |||||||||||||||
(1) | Includes three rigs that were being retrofitted and four rigs that are non-operational. | |
(2) | Includes one rig that has not been assembled. |
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Plant Capacity | Average | Third-Party | ||||||||||
Gas Plants | (Mmcf/d) | Utilization(1) | Usage | |||||||||
Pike’s Peak(2) — West Texas | 70 | 90 | % | 1 | % | |||||||
Grey Ranch(3) — West Texas | 92 | 89 | % | 31 | % | |||||||
Sagebrush(4) — Piceance Basin | 50 | 24 | % | 21 | % |
(1) | Average utilization for the year ended December 31, 2007. | |
(2) | A project to expand Pike’s Peak capacity to 70 Mmcf per day was completed in the fourth quarter of 2007. | |
(3) | A project to expand the plant to 92 Mmcf/per day was completed during the fourth quarter of 2007. We experienced a fire at the Grey Ranch Plant located in Pecos County, Texas on June 27, 2008. While there were no injuries, it is expected that the plant will be shut down for a minimum of 90 days from the date of the fire for repairs. As a result of the fire, we lost approximately 16.5 MMcf per day of net methane production. | |
(4) | Sagebrush commenced processing operations on May 1, 2007. Current throughput is 22 Mmcf per day, increasing utilization to 44%. See “— Recent Developments” for information about the sale of our Piceance assets. |
CO2 Compression | Average | |||||||
SandRidge Tertiary Facilities (West Texas) | Capacity (Mmcf/d) | Utilization(1) | ||||||
Pike’s Peak | 38 | 63 | % | |||||
Mitchell | 26 | 41 | % | |||||
Grey Ranch | 40 | 59 | % | |||||
Terrell | 38 | 66 | % |
(1) | Average utilization for year ended December 31, 2007. |
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• | require the acquisition of various permits before drilling commences; | |
• | require the installation of expensive pollution control equipment; | |
• | require safety-related procedures and personal protective equipment to be used during operations; | |
• | restrict the types, quantities and concentrations of various substances that can be released into the environment in connection with the natural gas and oil drilling, production, transportation and processing activities; | |
• | suspend, limit, prohibit or require approval before construction, drilling or other activities; and | |
• | require remedial measures to mitigate pollution from historical and ongoing operations, such as the closure of pits and plugging of abandoned wells. |
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• | the location of the wells; | |
• | the method of drilling and casing wells; | |
• | the rate of production or “allowables;” | |
• | the surface use and restoration of properties upon which wells are drilled; | |
• | the plugging and abandoning of wells; and | |
• | notice to surface owners and other third parties. |
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• | are unsecured unsubordinated obligations of the Company, ranking equally in right of payment with all existing and future unsubordinated obligations of the Company; | |
• | were issued in an original aggregate principal amount of up to $650,000,000;provided, that the Company is entitled to, without the consent of the holders (and without regard to any restrictions or limitations set forth under “— Certain Covenants — Limitation on Indebtedness and Issuance of Disqualified Stock”), increase the outstanding principal amount of the Senior Notes or issue additional Senior Notes (the “PIK Notes”) under the indenture on the same terms and conditions as the applicable Senior Notes issued under the indenture (in each case, a “PIK Payment”). | |
• | mature on April 1, 2015; | |
• | permit the Company, with respect to interest periods ending on or before April 1, 2011, to elect to pay interest in cash (“Cash Interest”) or by increasing the outstanding principal amount of the Senior Notes or issuing additional Senior Notes (“PIK Interest”); | |
• | bear interest commencing the date of issue (or, the case of the first interest payment, commencing April 1, 2008) at (i) 8.625% during periods when Cash Interest is accruing and (ii) 9.375% during periods when PIK Interest is accruing, payable semiannually on each April 1 and October 1, payable |
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commencing October 1, 2008, to holders of record on the March 15 or September 15 immediately preceding the interest payment date; |
• | bear interest on overdue principal, and, in certain circumstances, to the extent lawful, overdue interest, at 2% per annum higher than the rates described in the preceding bullet point. |
• | are unsecured unsubordinated obligations of the Company, ranking equally in right of payment with all existing and future unsubordinated obligations of the Company; | |
• | were issued in an original aggregate principal amount of up to $350,000,000; | |
• | mature on April 1, 2014; | |
• | bear interest, payable in cash, commencing the date of issue (or, the case of the first interest payment, commencing April 1, 2008) at the LIBOR Rate (which will be adjusted quarterly) plus 3.625%, payable quarterly on each January 1, April 1, July 1 and October 1, payable commencing July 1, 2008, to holders of record on the March 15, June 15, September 15 or December 15 immediately preceding the interest payment date, except that the interest rate for the period beginning on the Issue Date and ending June 30, 2008 will be 6.3225%; and | |
• | bear interest on overdue principal, and, in certain circumstances, to the extent lawful, on overdue interest, at 2% per annum higher than the rates described in the preceding bullet point. |
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12-Month Period Commencing | Percentage | |||
April 1, 2011 | 104.313 | % | ||
April 1, 2012 | 102.156 | % | ||
April 1, 2013 and thereafter | 100.000 | % |
12-Month Period Commencing | Percentage | |||
April 1, 2009 | 103.00 | % | ||
April 1, 2010 | 102.00 | % | ||
April 1, 2011 | 101.00 | % | ||
April 1, 2012 and thereafter | 100.00 | % |
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• | you acquire the exchange notes in the ordinary course of your business; and | |
• | you are not engaged in, and do not intend to engage in, and have no arrangement or understanding with any person to participate in, a distribution of such exchange notes. |
• | A broker-deal that acquired the outstanding notes directly from us, or | |
• | An “affiliate,” as defined in Rule 405 of the Securities Act, of ours. |
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SandRidge Energy, Inc. Audited Financial Statements | ||||
Report of Independent Registered Public Accounting Firm | F-2 | |||
Consolidated Balance Sheets as of December 31, 2007 and 2006 | F-3 | |||
Consolidated Statements of Operations for the Years Ended December 31, 2007, 2006 and 2005 | F-4 | |||
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2007, 2006 and 2005 | F-5 | |||
Consolidated Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and 2005 | F-6 | |||
Notes to Consolidated Financial Statements | F-7 | |||
SandRidge Energy, Inc. Unaudited Financial Statements | ||||
Condensed Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007 | F-41 | |||
Condensed Consolidated Statements of Operations for the Six Months Ended June 30, 2008 and 2007 | F-42 | |||
Condensed Consolidated Statement of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2008 | F-43 | |||
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2008 and 2007 | F-44 | |||
Notes to Condensed Consolidated Financial Statements | F-45 | |||
NEG Oil & Gas LLC Audited Financial Statements | ||||
Report of Independent Registered Public Accounting Firm | F-62 | |||
Combined Balance Sheet as of December 31, 2005 | F-63 | |||
Combined Statements of Operations for the Years Ended December 31, 2004 and 2005 | F-64 | |||
Combined Statements of Cash Flows for the Years Ended December 31, 2004 and 2005 | F-65 | |||
Combined Statement of Changes in Total Member’s Equity for the Years Ended December 31, 2004 and 2005 | F-66 | |||
Notes to Combined Financial Statements | F-67 | |||
NEG Oil & Gas LLC Unaudited Financial Statements | ||||
Combined Balance Sheets as of December 31, 2005 and September 30, 2006 | F-89 | |||
Combined Statements of Operations for the Nine Month Periods Ended September 30, 2005 and 2006 | F-90 | |||
Combined Statements of Cash Flows for the Nine Month Periods Ended September 30, 2005 and 2006 | F-91 | |||
Combined Statement of Changes in Total Member’s Equity for the Nine Month Period Ended September 30, 2006 | F-92 | |||
Notes to Combined Financial Statements | F-93 |
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As of December 31, | ||||||||
2007 | 2006 | |||||||
(In thousands) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 63,135 | $ | 38,948 | ||||
Accounts receivable, net: | ||||||||
Trade | 94,741 | 89,774 | ||||||
Related parties | 20,018 | 5,731 | ||||||
Derivative contracts | 21,958 | — | ||||||
Inventories | 3,993 | 2,544 | ||||||
Deferred income taxes | 1,820 | 6,315 | ||||||
Other current assets | 20,787 | 31,494 | ||||||
Total current assets | 226,452 | 174,806 | ||||||
Oil and natural gas properties, using full cost method of accounting | ||||||||
Proved | 2,848,531 | 1,636,832 | ||||||
Unproved | 259,610 | 282,374 | ||||||
Less: accumulated depreciation and depletion | (230,974 | ) | (60,752 | ) | ||||
2,877,167 | 1,858,454 | |||||||
Other property, plant and equipment, net | 460,243 | 276,264 | ||||||
Derivative contracts | 270 | — | ||||||
Investments | 7,956 | 3,584 | ||||||
Restricted deposits | 31,660 | 33,189 | ||||||
Other assets | 26,818 | 42,087 | ||||||
Total assets | $ | 3,630,566 | $ | 2,388,384 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Current maturities of long-term debt | $ | 15,350 | $ | 26,201 | ||||
Accounts payable and accrued expenses: | ||||||||
Trade | 215,497 | 129,799 | ||||||
Related parties | 395 | 1,834 | ||||||
Asset retirement obligation | 864 | — | ||||||
Derivative contracts | — | 958 | ||||||
Total current liabilities | 232,106 | 158,792 | ||||||
Long-term debt | 1,052,299 | 1,040,630 | ||||||
Derivative contracts | — | 3,052 | ||||||
Other long-term obligations | 16,817 | 21,219 | ||||||
Asset retirement obligation | 57,716 | 45,216 | ||||||
Deferred income taxes | 49,350 | 24,922 | ||||||
Total liabilities | 1,408,288 | 1,293,831 | ||||||
Commitments and contingencies (Note 16) | ||||||||
Minority interest | 4,672 | 5,092 | ||||||
Redeemable convertible preferred stock, $0.001 par value, 2,625 shares authorized, 2,184 and 2,137 shares issued and outstanding at December 31, 2007 and 2006, respectively | 450,715 | 439,643 | ||||||
Stockholders’ equity: | ||||||||
Preferred stock, $0.001 par value; 47,375 shares authorized; no shares issued and outstanding in 2007 and 2006 | — | — | ||||||
Common stock, $0.001 par value, 400,000 shares authorized; 141,847 issued and 140,391 outstanding at December 31, 2007 and 93,048 issued and 91,604 outstanding at December 31, 2006 | 140 | 92 | ||||||
Additional paid-in capital | 1,686,113 | 574,868 | ||||||
Treasury stock, at cost | (18,578 | ) | (17,835 | ) | ||||
Retained earnings | 99,216 | 92,693 | ||||||
Total stockholders’ equity | 1,766,891 | 649,818 | ||||||
Total liabilities and stockholders’ equity | $ | 3,630,566 | $ | 2,388,384 | ||||
F-3
Table of Contents
Years Ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
(In thousands, except per share amounts) | ||||||||||||
Revenues: | ||||||||||||
Natural gas and crude oil | $ | 477,612 | $ | 101,252 | $ | 49,987 | ||||||
Drilling and services | 73,197 | 139,049 | 80,343 | |||||||||
Midstream and marketing | 107,765 | 122,896 | 147,133 | |||||||||
Other | 18,878 | 25,045 | 10,230 | |||||||||
Total revenues | 677,452 | 388,242 | 287,693 | |||||||||
Expenses: | ||||||||||||
Production | 106,192 | 35,149 | 16,195 | |||||||||
Production taxes | 19,557 | 4,654 | 3,158 | |||||||||
Drilling and services | 44,211 | 98,436 | 52,122 | |||||||||
Midstream and marketing | 94,253 | 115,076 | 141,372 | |||||||||
Depreciation, depletion and amortization — natural gas and crude oil | 173,568 | 26,321 | 9,313 | |||||||||
Depreciation, depletion and amortization — other | 53,541 | 29,305 | 14,893 | |||||||||
General and administrative | 61,780 | 55,634 | 11,908 | |||||||||
(Gain) loss on derivative contracts | (60,732 | ) | (12,291 | ) | 4,132 | |||||||
(Gain) loss on sale of assets | (1,777 | ) | (1,023 | ) | 547 | |||||||
Total expenses | 490,593 | 351,261 | 253,640 | |||||||||
Income from operations | 186,859 | 36,981 | 34,053 | |||||||||
Other income (expense): | ||||||||||||
Interest income | 5,423 | 1,109 | 206 | |||||||||
Interest expense | (117,185 | ) | (16,904 | ) | (5,277 | ) | ||||||
Minority interest | 276 | (296 | ) | (737 | ) | |||||||
Income (loss) from equity investments | 4,372 | 967 | (384 | ) | ||||||||
Total other income (expense) | (107,114 | ) | (15,124 | ) | (6,192 | ) | ||||||
Income before income tax expense | 79,745 | 21,857 | 27,861 | |||||||||
Income tax expense | 29,524 | 6,236 | 9,968 | |||||||||
Income from continuing operations | 50,221 | 15,621 | 17,893 | |||||||||
Income from discontinued operations (net of tax expense of $118 in 2005) | — | — | 229 | |||||||||
Net income | 50,221 | 15,621 | 18,122 | |||||||||
Preferred stock dividends and accretion | 39,888 | 3,967 | — | |||||||||
Income available to common stockholders | 10,333 | $ | 11,654 | $ | 18,122 | |||||||
Basic and Diluted Earnings Per Share: | ||||||||||||
Income from continuing operations | $ | 0.46 | $ | 0.21 | $ | 0.31 | ||||||
Income from discontinued operations, net of income tax | — | — | 0.01 | |||||||||
Preferred dividends | (0.37 | ) | (0.05 | ) | — | |||||||
Basic and diluted income per share available to common stockholders | $ | 0.09 | $ | 0.16 | $ | 0.32 | ||||||
Weighted average number of common shares outstanding: | ||||||||||||
Basic | 108,828 | 73,727 | 56,559 | |||||||||
Diluted | 110,041 | 74,664 | 56,737 | |||||||||
F-4
Table of Contents
Additional | ||||||||||||||||||||||||||||
Preferred | Common | Paid-in | Deferred | Treasury | Retained | |||||||||||||||||||||||
Stock | Stock | Capital | Compensation | Stock | Earnings | Total | ||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||
Balance, December 31, 2004 | $ | 23 | $ | 200 | $ | — | $ | — | $ | — | $ | 59,108 | $ | 59,331 | ||||||||||||||
Exchange of preferred stock for common stock | (23 | ) | 1 | 22 | — | — | — | — | ||||||||||||||||||||
Purchase of treasury shares | — | (5 | ) | — | — | (17,335 | ) | — | (17,340 | ) | ||||||||||||||||||
Stock split (change in par value) | — | (141 | ) | 141 | — | — | — | — | ||||||||||||||||||||
Issuance of stock in acquisitions | — | 4 | 55,281 | — | — | — | 55,285 | |||||||||||||||||||||
Stock offering, net of $18.0 million in offering costs | — | 12 | 173,110 | — | — | — | 173,122 | |||||||||||||||||||||
Restricted shares | — | 2 | 15,366 | (15,366 | ) | — | — | 2 | ||||||||||||||||||||
Amortization of deferred compensation | — | — | — | 481 | — | — | 481 | |||||||||||||||||||||
Net income | — | — | — | — | — | 18,122 | 18,122 | |||||||||||||||||||||
Dividends on preferred stock | — | — | — | — | — | (1 | ) | (1 | ) | |||||||||||||||||||
Balance, December 31, 2005 | — | 73 | 243,920 | (14,885 | ) | (17,335 | ) | 77,229 | 289,002 | |||||||||||||||||||
Stock offering | — | — | 3,343 | — | — | — | 3,343 | |||||||||||||||||||||
Change in accounting principle for stock-based compensation | — | — | (14,885 | ) | 14,885 | — | — | — | ||||||||||||||||||||
Issuance of stock in acquisitions | — | 13 | 236,271 | — | — | — | 236,284 | |||||||||||||||||||||
Stock offering, net of $3.9 million in offering costs | — | 6 | 97,427 | — | — | 97,433 | ||||||||||||||||||||||
Stock-based compensation | — | — | 8,792 | — | — | — | 8,792 | |||||||||||||||||||||
Accretion on redeemable convertible preferred stock | — | — | — | — | — | (157 | ) | (157 | ) | |||||||||||||||||||
Purchase of treasury shares | — | — | — | — | (500 | ) | — | (500 | ) | |||||||||||||||||||
Net income | — | — | — | — | — | 15,621 | 15,621 | |||||||||||||||||||||
Balance, December 31, 2006 | — | 92 | 574,868 | — | (17,835 | ) | 92,693 | 649,818 | ||||||||||||||||||||
Stock offerings, net of $4.5 million in offering costs | — | 50 | 1,113,314 | — | — | — | 1,113,364 | |||||||||||||||||||||
Conversion of common stock to redeemable convertible preferred stock | — | (1 | ) | (9,650 | ) | — | — | — | (9,651 | ) | ||||||||||||||||||
Accretion on redeemable convertible preferred stock | — | — | — | — | — | (1,421 | ) | (1,421 | ) | |||||||||||||||||||
Purchase of treasury stock | — | (1 | ) | — | — | (1,660 | ) | — | (1,661 | ) | ||||||||||||||||||
Common stock issued under retirement plan | — | — | 379 | — | 917 | — | 1,296 | |||||||||||||||||||||
Stock-based compensation | — | — | 7,202 | — | — | — | 7,202 | |||||||||||||||||||||
Net income | — | — | — | — | — | 50,221 | 50,221 | |||||||||||||||||||||
Redeemable convertible preferred stock dividend | — | — | — | — | — | (42,277 | ) | (42,277 | ) | |||||||||||||||||||
Balance, December 31, 2007 | $ | — | $ | 140 | $ | 1,686,113 | $ | — | $ | (18,578 | ) | $ | 99,216 | $ | 1,766,891 | |||||||||||||
F-5
Table of Contents
Years Ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
(In thousands) | ||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||
Net income | $ | 50,221 | $ | 15,621 | $ | 18,122 | ||||||
Income from discontinued operations, net of tax | — | — | 229 | |||||||||
Income from continuing operations | 50,221 | 15,621 | 17,893 | |||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Provision for doubtful accounts | — | 2,528 | 33 | |||||||||
Depreciation, depletion and amortization | 227,109 | 55,626 | 24,206 | |||||||||
Debt issuance cost amortization | 15,998 | 299 | — | |||||||||
Deferred income taxes | 28,923 | 348 | 9,460 | |||||||||
Provision for inventory obsolescence | 203 | — | — | |||||||||
Unrealized (gain) loss on derivatives | (26,238 | ) | 1,878 | 1,296 | ||||||||
(Income) loss on sale of assets | (1,777 | ) | (1,023 | ) | 547 | |||||||
Interest income — restricted deposits | (1,354 | ) | (151 | ) | — | |||||||
(Gain) loss from equity investments, net of distributions | (4,372 | ) | (956 | ) | 846 | |||||||
Stock-based compensation | 7,202 | 8,792 | 481 | |||||||||
Minority interest | (276 | ) | 296 | 737 | ||||||||
Changes in operating assets and liabilities increasing (decreasing) cash: | ||||||||||||
Receivables | (19,061 | ) | (2,648 | ) | (25,494 | ) | ||||||
Inventories | (1,730 | ) | (938 | ) | (46 | ) | ||||||
Other current assets | 12,374 | (22,238 | ) | (1,146 | ) | |||||||
Other assets and liabilities, net | (5,069 | ) | (2,131 | ) | 775 | |||||||
Accounts payable and accrued expenses | 75,299 | 12,046 | 33,709 | |||||||||
Net cash provided by operating activities by continuing operations | 357,452 | 67,349 | 63,297 | |||||||||
Net cash provided by operating activities by discontinued operations | — | — | �� | 347 | ||||||||
Net cash provided by operating activities | 357,452 | 67,349 | 63,644 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||
Capital expenditures for property, plant and equipment | (1,280,848 | ) | (306,541 | ) | (134,596 | ) | ||||||
Acquisitions of assets, net of cash received of $0, $21,100 and $66 | (116,650 | ) | (1,054,075 | ) | (21,247 | ) | ||||||
Proceeds from sale of assets | 9,034 | 19,742 | 3,327 | |||||||||
Proceeds from sale of investments | — | 2,373 | 413 | |||||||||
Contributions on equity investments | — | (3,388 | ) | (1,350 | ) | |||||||
Refunds of restricted deposits | 10,328 | — | — | |||||||||
Fundings of restricted deposits | (7,445 | ) | (1,051 | ) | — | |||||||
Restricted cash | — | 2,373 | (2,373 | ) | ||||||||
Net cash used in investing activities for continuing operations | (1,385,581 | ) | (1,340,567 | ) | (155,826 | ) | ||||||
Net cash used in investing activities for discontinued operations | — | — | (1,473 | ) | ||||||||
Net cash used in investing activities | (1,385,581 | ) | (1,340,567 | ) | (157,299 | ) | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||
Proceeds from borrowings | 1,331,541 | 1,261,910 | 247,460 | |||||||||
Repayments of borrowings | (1,332,219 | ) | (518,870 | ) | (301,285 | ) | ||||||
Dividends paid-preferred | (33,321 | ) | — | (1 | ) | |||||||
Minority interests contributions (distributions) | (144 | ) | (618 | ) | 7,117 | |||||||
Proceeds from issuance of common stock | 1,114,660 | 100,776 | 173,122 | |||||||||
Proceeds from issuance of redeemable convertible preferred stock | — | 439,486 | — | |||||||||
Purchase of treasury shares | (1,661 | ) | (500 | ) | — | |||||||
Debt issuance costs | (26,540 | ) | (15,749 | ) | — | |||||||
Net cash provided by financing activities for continuing operations | 1,052,316 | 1,266,435 | 126,413 | |||||||||
Net cash provided by financing activities for discontinued operations | — | — | — | |||||||||
Net cash provided by financing activities | 1,052,316 | 1,266,435 | 126,413 | |||||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 24,187 | (6,783 | ) | 32,758 | ||||||||
CASH AND CASH EQUIVALENTS, beginning of year | 38,948 | 45,731 | 12,973 | |||||||||
CASH AND CASH EQUIVALENTS, end of year | $ | 63,135 | $ | 38,948 | $ | 45,731 | ||||||
Supplemental Disclosure of Cash Flow Information: | ||||||||||||
Cash paid for interest, net of amounts capitalized | $ | 83,567 | $ | 15,079 | $ | 7,222 | ||||||
Cash paid for income taxes | 2,371 | 1,599 | — | |||||||||
Supplemental Disclosure of Noncash Investing and Financing Activities: | ||||||||||||
Redeemable convertible preferred stock dividends, net of dividends paid | $ | 8,956 | $ | — | $ | — | ||||||
Insurance premium financed | 1,496 | 5,023 | 2,133 | |||||||||
Accretion on redeemable convertible preferred stock | 1,421 | 157 | — | |||||||||
Common stock issued in connection with acquisitions | — | 236,284 | 55,285 | |||||||||
Assumption of restricted deposits and notes payable in connection with acquisition | — | 313,628 | — | |||||||||
Assets disposed in exchange for common stock | — | — | 17,335 |
F-6
Table of Contents
1. | Summary of Significant Accounting Policies |
F-7
Table of Contents
F-8
Table of Contents
F-9
Table of Contents
F-10
Table of Contents
2007 | 2006 | 2005 | ||||||||||
Asset retirement obligation, January 1 | $ | 45,216 | $ | 6,979 | $ | 4,394 | ||||||
Liability incurred upon acquiring and drilling wells | 3,265 | 2,996 | 2,779 | |||||||||
NEG acquisition | — | 40,343 | — | |||||||||
Revisions in estimated cash flows | 5,971 | (5,700 | ) | — | ||||||||
Liability settled in current period | (9 | ) | — | (512 | ) | |||||||
Accretion of discount expense | 4,137 | 598 | 318 | |||||||||
Asset retirement obligation, December 31 | 58,580 | 45,216 | 6,979 | |||||||||
Less: current portion | 864 | — | — | |||||||||
Asset retirement obligation, net of current | $ | 57,716 | $ | 45,216 | $ | 6,979 | ||||||
• | 26.19% interest in Sagebrush Pipeline, LLC; and | |
• | 1.29% interest in Cholla Pipeline, LP. |
F-11
Table of Contents
F-12
Table of Contents
2. | Acquisitions and Dispositions |
• | Acquired additional equity interests in PetroSource Energy Company, LLC (“PetroSource”), which increased the Company’s ownership from 22.4% to 86.5%, resulting in the consolidation of PetroSource in the Company’s financial statements; | |
• | Acquired from an executive officer and director the remaining 50% equity interest in the Company’s compression services subsidiary, Lariat Compression Company (“Larco”), resulting in it becoming a wholly-owned subsidiary; | |
• | Acquired from an executive officer and director approximately 7,400 net acres of additional leasehold interest in West Texas in properties in which the Company previously held interests; | |
• | Acquired approximately 2,503 net acres additional leasehold interest in property in the Piceance Basin in which the Company previously held interests; | |
• | Acquired from a director additional working interests in Missouri and Nevada leases in which the Company previously held interests; | |
• | Acquired an additional 19.5% before pay-out interest in the Company’s subsidiary, Sagebrush Pipeline LLC; and | |
• | Acquired certain interests in several oil and natural gas properties in West Texas from Carl E. Gungoll Exploration, LLC and certain other parties. The purchase price was approximately $8.0 million, comprised of $5.4 million in cash, and 174,833 shares of common stock (valued at $2.6 million). |
Addition to | Consideration Paid | |||||||||||||||||||||||||||
Property, | Change in | Common | Common | Cash, Net of | ||||||||||||||||||||||||
Plant & | Addition to | Elimination of | Minority | Stock No. of | Stock at | Cash | ||||||||||||||||||||||
Acquisition Transaction | Equipment | Net Assets(1) | Investments | Interest | Shares | $15/Share | Acquired | |||||||||||||||||||||
PetroSource additional interests | $ | 73,744 | $ | (37,381 | ) | $ | (3,052 | ) | $ | 3,253 | 958 | $ | 14,372 | $ | 15,686 | |||||||||||||
Larco remaining interest | 5,054 | — | — | (2,446 | ) | 500 | 7,500 | — | ||||||||||||||||||||
West Texas additional lease interests | 10,000 | — | — | — | 667 | 10,000 | — | |||||||||||||||||||||
Piceance Basin additional interests | 17,565 | — | — | — | 1,164 | 17,456 | 109 | |||||||||||||||||||||
Various additional lease interests | 268 | — | — | — | 17 | 268 | — | |||||||||||||||||||||
Sagebrush additional interests | 689 | — | — | (2,378 | ) | 204 | 3,067 | — | ||||||||||||||||||||
Gungoll lease interests | 8,074 | — | — | — | 176 | 2,622 | 5,452 | |||||||||||||||||||||
Totals | $ | 115,394 | $ | (37,381 | ) | $ | (3,052 | ) | $ | (1,571 | ) | 3,686 | $ | 55,285 | $ | 21,247 | ||||||||||||
(1) | The purchase price for additional interests in PetroSource was approximately $30.1 million, comprised of $15.7 million in cash (net of $0.1 million in cash acquired), and approximately 958,000 shares of |
F-13
Table of Contents
SandRidge common stock (valued at $14.4 million). The purchase price has been allocated to accounts receivable of $4.5 million, other current assets of $0.1 million, other assets of $0.4 million, accounts payable and accrued expenses of $2.6 million, long-term debt of $37.4 million, and asset retirement obligations of $2.4 million. |
• | On March 15, 2006, the Company acquired from an executive officer and director, an additional 12.5% interest in PetroSource. The acquisition consisted of the retirement of subordinated debt of approximately $1.0 million and a $4.5 million cash payment for the ownership interest acquired for a total acquisition price of approximately $5.5 million. | |
• | On May 1, 2006, the Company purchased certain leases in developed and undeveloped properties from an oil and gas company. The purchase price was approximately $40.9 million in cash. The cash consideration was paid in July 2006. | |
• | On May 26, 2006, the Company purchased several oil and natural gas properties from an oil and gas company. The purchase price was approximately $12.9 million, comprised of $8.2 million in cash, and 251,351 shares of Company common stock (valued at $4.7 million). The cash and equity consideration was paid in July 2006. | |
• | On June 1, 2006, the Company purchased certain producing well interests from an executive officer and director. The purchase price was approximately $9.0 million in cash. | |
• | On June 7, 2006, the Company acquired the remaining 1% interest in PetroSource Energy Company, a consolidated subsidiary, from an oil and gas company. The purchase price was 27,749 shares of Company common stock (valued at $0.5 million). As a result of this acquisition, the Company became the 100% owner of PetroSource. |
Addition to | Consideration Paid | |||||||||||||||||||||||
Property, | Change in | Retirement of | Common | |||||||||||||||||||||
Plant & | Minority | Subordinated | Stock No. of | Common | ||||||||||||||||||||
Acquisition Transaction | Equipment | Interest | Debt(1) | Shares | Stock | Cash | ||||||||||||||||||
PetroSource additional interests | $ | 2,116 | $ | (2,370 | ) | $ | (1,003 | ) | — | $ | — | $ | 5,489 | |||||||||||
Purchased leases | 40,960 | — | — | — | — | 40,960 | ||||||||||||||||||
Oil and natural gas properties | 12,850 | — | — | 251 | 4,650 | 8,200 | ||||||||||||||||||
Producing well interest from executive officer and director | 9,000 | — | — | — | — | 9,000 | ||||||||||||||||||
PetroSource additional interest (remaining 1% interest) | 85 | (393 | ) | — | 28 | 478 | — | |||||||||||||||||
Totals | $ | 65,011 | $ | (2,763 | ) | $ | (1,003 | ) | 279 | $ | 5,128 | $ | 63,649 | |||||||||||
(1) | Includes retirement of subordinated debt of $972,000 and accrued interest of $31,000. |
F-14
Table of Contents
Cash and cash equivalents | $ | 21,100 | ||
Accounts receivable | 30,840 | |||
Other current assets | 6,025 | |||
Property, plant and equipment | 1,524,072 | |||
Restricted deposits | 31,987 | |||
Other assets | 270 | |||
Total assets acquired | 1,614,294 | |||
Accounts payable and other current liabilities | 46,082 | |||
Deferred income taxes | 2,189 | |||
Long-term debt | 281,641 | |||
Other long-term obligations | 1,357 | |||
Asset retirement obligation | 40,343 | |||
Net assets acquired | 1,242,682 | |||
Less: Cash and cash equivalents acquired | (21,100 | ) | ||
Net amount paid for acquisition | $ | 1,221,582 | ||
F-15
Table of Contents
Year Ended December 31, | ||||||||||||||||
2006 | 2005 | |||||||||||||||
Actual | Pro Forma | Actual | Pro Forma | |||||||||||||
(Unaudited) | ||||||||||||||||
Revenues | $ | 388,242 | $ | 565,256 | $ | 287,693 | $ | 560,235 | ||||||||
Income (loss) from continuing operations | 15,621 | 36,337 | 17,893 | (49,594 | ) | |||||||||||
Net income (loss) | 15,621 | 36,337 | 18,122 | (49,594 | ) | |||||||||||
Basic and diluted earnings per share available (applicable) to common stockholders: | ||||||||||||||||
Income (loss) from continuing operations | $ | 0.21 | $ | 0.40 | $ | 0.31 | $ | (0.96 | ) | |||||||
Net income (loss) available to common stockholders | $ | 0.16 | $ | 0.04 | $ | 0.32 | $ | (0.96 | ) |
• | On October 9, 2007, the Company purchased developed and undeveloped properties located in West Texas from an oil and gas company. The purchase price was approximately $73.8 million, comprised of $25.0 million in cash and a $48.8 million note payable. The $25 million cash consideration paid was funded through a draw on the Company’s senior credit facility. All principal and accrued interest (interest at 7% annually) due on the note payable were repaid on November 9, 2007 with proceeds from the Company’s initial public offering. For additional discussion of the Company’s initial public offering, refer to Note 18 herein. | |
• | On November 28, 2007, the Company purchased a gas treatment plant and related gathering system located in Pecos County, Texas. The purchase price of approximately $10.0 million was paid in cash. | |
• | On November 29, 2007, the Company purchased leasehold acreage and producing well interests located predominantly in the WTO from a group of entities controlled by a significant shareholder. The purchase price of approximately $32.0 million was paid in cash. |
3. | Discontinued Operations |
F-16
Table of Contents
2007 | 2006 | 2005 | ||||||||||
Revenues | $ | — | $ | — | $ | 1,683 | ||||||
Operating expenses | — | — | (1,336 | ) | ||||||||
Income from discontinued operations | — | — | 347 | |||||||||
Income tax expense | — | — | (118 | ) | ||||||||
Net income from discontinued operations | $ | — | $ | — | $ | 229 | ||||||
4. | Accounts Receivable |
December 31, | ||||||||
2007 | 2006 | |||||||
Oil and natural gas services | $ | 6,622 | $ | 8,489 | ||||
Oil and natural gas sales | 72,393 | 57,458 | ||||||
Joint interest billing | 17,874 | 26,553 | ||||||
Other | 90 | 299 | ||||||
96,979 | 92,799 | |||||||
Less allowance for doubtful accounts | (2,238 | ) | (3,025 | ) | ||||
Total accounts receivable, net | $ | 94,741 | $ | 89,774 | ||||
Additions | ||||||||||||||||
Balance at | Charged to | Balance at | ||||||||||||||
Beginning of | Costs and | End of | ||||||||||||||
Allowance for Doubtful Accounts | Period | Expenses | Deductions(1) | Period | ||||||||||||
Year ended December 31, 2005 | $ | 1,074 | $ | 33 | $ | (256 | ) | $ | 851 | |||||||
Year ended December 31, 2006 | $ | 851 | $ | 2,528 | $ | (354 | ) | $ | 3,025 | |||||||
Year ended December 31, 2007 | $ | 3,025 | $ | — | $ | (787 | ) | $ | 2,238 |
(1) | Deductions represent the write-off/recovery of receivables. |
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5. | Other Current Assets |
December 31, | ||||||||
2007 | 2006 | |||||||
Prepaid insurance | $ | 9,379 | $ | 7,604 | ||||
Prepaid drilling | 5,924 | 2,207 | ||||||
Materials and supplies | 4,751 | 6,244 | ||||||
Post closing receivable — NEG acquisition | — | 15,232 | ||||||
Other | 733 | 207 | ||||||
Total other current assets | $ | 20,787 | $ | 31,494 | ||||
December 31, | ||||||||
2007 | 2006 | |||||||
Oil and natural gas properties: | ||||||||
Proved | $ | 2,848,531 | $ | 1,636,832 | ||||
Unproved | 259,610 | 282,374 | ||||||
Total oil and natural gas properties | 3,108,141 | 1,919,206 | ||||||
Less accumulated depreciation and depletion | (230,974 | ) | (60,752 | ) | ||||
Net oil and natural gas properties capitalized costs | 2,877,167 | 1,858,454 | ||||||
Land | 1,149 | 738 | ||||||
Non oil and gas equipment | 539,893 | 337,294 | ||||||
Buildings and structures | 38,288 | 6,564 | ||||||
Total | 579,330 | 344,596 | ||||||
Less accumulated depreciation, depletion and amortization | (119,087 | ) | (68,332 | ) | ||||
Net capitalized costs | 460,243 | 276,264 | ||||||
Total property, plant and equipment | $ | 3,337,410 | $ | 2,134,718 | ||||
F-18
Table of Contents
Excluded | ||||||||||||||||||||
Year Cost Incurred | Costs at | |||||||||||||||||||
Prior | December 31, | |||||||||||||||||||
Years | 2005 | 2006 | 2007 | 2007 | ||||||||||||||||
Property acquisition | $ | — | $ | — | $ | 259,610 | $ | — | $ | 259,610 | ||||||||||
Exploration | — | — | — | — | — | |||||||||||||||
Development | — | — | — | — | — | |||||||||||||||
Capitalized interest | — | — | — | — | — | |||||||||||||||
Total costs incurred | $ | — | $ | — | $ | 259,610 | $ | — | $ | 259,610 | ||||||||||
7. | Investment in Affiliated Companies |
8. | Restricted Deposits |
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Table of Contents
Years ending December 31: | ||||
2008 | $ | 3,200 | ||
2009 | 3,200 | |||
2010 and none thereafter | 2,586 |
9. | Accounts Payable and Accrued Expenses |
December 31, | ||||||||
2007 | 2006 | |||||||
Accounts payable-trade | $ | 154,423 | $ | 103,683 | ||||
Redeemable convertible preferred stock dividends | 8,956 | — | ||||||
Payroll and benefits | 15,690 | 10,718 | ||||||
Drilling advances | 5,817 | 5,318 | ||||||
Legal (current) | 5,000 | 5,000 | ||||||
Accrued interest | 24,201 | 3,850 | ||||||
Other | 1,410 | 1,230 | ||||||
Total accounts payable and accrued expenses | $ | 215,497 | $ | 129,799 | ||||
10. | Long-Term Debt |
December 31, | ||||||||
2007 | 2006 | |||||||
Senior term loans | $ | 1,000,000 | $ | — | ||||
Senior credit facility | — | 140,000 | ||||||
Senior bridge facility | — | 850,000 | ||||||
Other notes payable: | ||||||||
Drilling rig fleet and related oil field services equipment | 47,836 | 61,105 | ||||||
Mortgage | 19,651 | — | ||||||
Sagebrush | — | 4,000 | ||||||
Insurance financing | — | 7,240 | ||||||
Other equipment and vehicles | 162 | 4,486 | ||||||
Total debt | 1,067,649 | 1,066,831 | ||||||
Less: Current maturities of long-term debt | 15,350 | 26,201 | ||||||
Long-term debt | $ | 1,052,299 | $ | 1,040,630 | ||||
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F-21
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• | failure to pay any principal when due or any interest, fees or other amount within certain grace periods; | |
• | failure to perform or otherwise comply with the covenants in the credit agreement or other loan documents, subject, in certain instances, to certain grace periods; | |
• | bankruptcy or insolvency events involving the Company or its subsidiaries; | |
• | a change of control (as defined in the senior credit facility). |
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Years ending December 31: | ||||
2008 | $ | 15,350 | ||
2009 | 16,580 | |||
2010 | 12,476 | |||
2011 | 7,222 | |||
2012 | 1,052 | |||
Thereafter | 1,014,969 | |||
Total debt | $ | 1,067,649 | ||
11. | Other Long-Term Obligations |
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12. | Derivatives |
Weighted Avg. | ||||||||||||
Period | Commodity | Notional | Fixed Price | |||||||||
Fixed price swaps: | ||||||||||||
November 2007 — March 2008 | Natural gas | 1,520,000 MmBtu | $ | 8.51 | ||||||||
November 2007 — June 2008 | Natural gas | 4,860,000 MmBtu | $ | 8.05 | ||||||||
November 2007 — June 2008 | Natural gas | 9,720,000 MmBtu | $ | 8.20 | ||||||||
January 2008 | Natural gas | 310,000 MmBtu | $ | 8.24 | ||||||||
January 2008 — June 2008 | Natural gas | 3,640,000 MmBtu | $ | 7.99 | ||||||||
January 2008 — June 2008 | Natural gas | 3,640,000 MmBtu | $ | 7.99 | ||||||||
January 2008 — December 2008 | Natural gas | 3,660,000 MmBtu | $ | 8.23 | ||||||||
January 2008 — December 2008 | Natural gas | 3,660,000 MmBtu | $ | 8.48 | ||||||||
January 2008 — December 2008 | Natural gas | 3,660,000 MmBtu | $ | 9.00 | ||||||||
April 2008 — June 2008 | Natural gas | 910,000 MmBtu | $ | 7.17 | ||||||||
May 2008 — August 2008 | Natural gas | 2,460,000 MmBtu | $ | 8.38 | ||||||||
July 2008 | Natural gas | 310,000 MmBtu | $ | 8.00 | ||||||||
July 2008 | Natural gas | 310,000 MmBtu | $ | 8.02 | ||||||||
July 2008 — September 2008 | Natural gas | 920,000 MmBtu | $ | 7.43 | ||||||||
July 2008 — September 2008 | Natural gas | 920,000 MmBtu | $ | 7.49 | ||||||||
July 2008 — September 2008 | Natural gas | 920,000 MmBtu | $ | 8.06 | ||||||||
July 2008 — September 2008 | Natural gas | 920,000 MmBtu | $ | 8.07 | ||||||||
July 2008 — September 2008 | Natural gas | 920,000 MmBtu | $ | 8.23 | ||||||||
July 2008 — September 2008 | Natural gas | 920,000 MmBtu | $ | 8.36 | ||||||||
July 2008 — December 2008 | Natural gas | 1,840,000 MmBtu | $ | 8.31 | ||||||||
July 2008 — December 2008 | Natural gas | 1,840,000 MmBtu | $ | 8.59 | ||||||||
August 2008 | Natural gas | 310,000 MmBtu | $ | 8.00 | ||||||||
August 2008 | Natural gas | 310,000 MmBtu | $ | 8.07 | ||||||||
September 2008 | Natural gas | 300,000 MmBtu | $ | 8.05 | ||||||||
September 2008 | Natural gas | 300,000 MmBtu | $ | 8.10 | ||||||||
October 2008 — December 2008 | Natural gas | 920,000 MmBtu | $ | 7.96 | ||||||||
October 2008 — December 2008 | Natural gas | 1,840,000 MmBtu | $ | 8.00 | ||||||||
October 2008 — December 2008 | Natural gas | 920,000 MmBtu | $ | 8.07 |
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Table of Contents
Weighted Avg. | ||||||||||||
Period | Commodity | Notional | Fixed Price | |||||||||
October 2008 — December 2008 | Natural gas | 920,000 MmBtu | $ | 8.11 | ||||||||
October 2008 — December 2008 | Natural gas | 920,000 MmBtu | $ | 8.16 | ||||||||
October 2008 — December 2008 | Natural gas | 920,000 MmBtu | $ | 8.32 | ||||||||
October 2008 — December 2008 | Natural gas | 920,000 MmBtu | $ | 8.83 | ||||||||
January 2009 — March 2009 | Natural gas | 900,000 MmBtu | $ | 8.56 | ||||||||
January 2009 — March 2009 | Natural gas | 900,000 MmBtu | $ | 8.60 | ||||||||
January 2009 — March 2009 | Natural gas | 900,000 MmBtu | $ | 8.65 | ||||||||
January 2009 — March 2009 | Natural gas | 900,000 MmBtu | $ | 8.91 | ||||||||
Collars: | ||||||||||||
January 2008 — June 2008 | Crude oil | 42,000 Bbls | $ | 50.00 - $83.35 | ||||||||
July 2008 — December 2008 | Crude oil | 54,000 Bbls | $ | 50.00 - $82.60 | ||||||||
Waha basis swaps: | ||||||||||||
January 2008 — December 2008 | Natural gas | 10,980,000 MmBtu | $ | (0.57 | ) | |||||||
January 2008 — December 2008 | Natural gas | 7,320,000 MmBtu | $ | (0.585 | ) | |||||||
January 2008 — December 2008 | Natural gas | 7,320,000 MmBtu | $ | (0.59 | ) | |||||||
January 2008 — December 2008 | Natural gas | 3,660,000 MmBtu | $ | (0.595 | ) | |||||||
January 2008 — December 2008 | Natural gas | 3,660,000 MmBtu | $ | (0.625 | ) | |||||||
January 2008 — December 2008 | Natural gas | 7,320,000 MmBtu | $ | (0.635 | ) | |||||||
January 2008 — December 2008 | Natural gas | 7,320,000 MmBtu | $ | (0.6525 | ) | |||||||
May 2008 — August 2008 | Natural gas | 2,460,000 MmBtu | $ | (0.45 | ) | |||||||
June 2008 — August 2008 | Natural gas | 920,000 MmBtu | $ | (0.4808 | ) | |||||||
September 2008 — December 2008 | Natural gas | 2,440,000 MmBtu | $ | (0.7930 | ) | |||||||
January 2009 — December 2009 | Natural gas | 3,650,000 MmBtu | $ | (0.47 | ) | |||||||
January 2009 — December 2009 | Natural gas | 3,650,000 MmBtu | $ | (0.49 | ) | |||||||
January 2009 — December 2009 | Natural gas | 3,650,000 MmBtu | $ | (0.4975 | ) |
2007 | 2006 | 2005 | ||||||||||
Realized (gain) loss | $ | (34,494 | ) | $ | (14,169 | ) | $ | 2,836 | ||||
Unrealized (gain) loss | (26,238 | ) | 1,878 | 1,296 | ||||||||
(Gain) loss on derivative contracts | $ | (60,732 | ) | $ | (12,291 | ) | $ | 4,132 | ||||
13. | Retirement and Deferred Compensation Plans |
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14. | Income Taxes |
December 31, | ||||||||
2007 | 2006 | |||||||
Deferred tax assets (liabilities): | ||||||||
Current: | ||||||||
Accrued liabilities | $ | 1,820 | $ | 4,451 | ||||
Other | — | 1,864 | ||||||
Total current deferred tax assets | $ | 1,820 | $ | 6,315 | ||||
Noncurrent: | ||||||||
Property, plant and equipment | $ | (45,537 | ) | $ | (25,692 | ) | ||
Net operating loss carryforwards | 2,397 | — | ||||||
Other | (6,210 | ) | 770 | |||||
Total noncurrent deferred tax liabilities | $ | (49,350 | ) | $ | (24,922 | ) | ||
2007 | 2006 | 2005 | ||||||||||
Current: | ||||||||||||
Federal | $ | — | $ | 3,235 | $ | 508 | ||||||
State | 601 | 2,653 | — | |||||||||
601 | 5,888 | 508 | ||||||||||
Deferred: | ||||||||||||
Federal | 28,121 | 345 | 9,460 | |||||||||
State | 802 | 3 | — | |||||||||
28,923 | 348 | 9,460 | ||||||||||
Total provision for income taxes | $ | 29,524 | $ | 6,236 | $ | 9,968 | ||||||
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2007 | 2006 | 2005 | ||||||||||
Computed at federal statutory rates | $ | 27,911 | $ | 7,650 | $ | 9,543 | ||||||
State taxes, net of federal benefit | 912 | 1,724 | 390 | |||||||||
Nondeductible expenses | 312 | 84 | 35 | |||||||||
Percentage depletion deduction | — | (3,488 | ) | — | ||||||||
Change in rate | — | 326 | — | |||||||||
Other | 389 | (60 | ) | — | ||||||||
Total provision for income taxes | $ | 29,524 | $ | 6,236 | $ | 9,968 | ||||||
15. | Earnings Per Share |
2007 | 2006 | 2005 | ||||||||||
Weighted average basic common shares outstanding | 108,828 | 73,727 | 56,559 | |||||||||
Effect of dilutive securities: | ||||||||||||
Restricted stock | 1,213 | 937 | 178 | |||||||||
Weighted average diluted common and potential common shares outstanding | 110,041 | 74,664 | 56,737 | |||||||||
16. | Commitments and Contingencies |
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Table of Contents
Years ending December 31: | ||||
2008 | $ | 2,139 | ||
2009 | 1,102 | |||
2010 | 110 | |||
2011 | 110 | |||
2012 | 45 | |||
Thereafter | — | |||
$ | 3,506 | |||
17. | Redeemable Convertible Preferred Stock |
Dividends | ||||||||||||
Declared | Dividend Period | per Share | Total | Date Paid | ||||||||
January 31, 2007 | November 21, 2006 — February 1, 2007 | $ | 3.21 | $ | 6,859 | February 15, 2007 | ||||||
May 8, 2007 | February 2, 2008 — May 1, 2007 | 3.97 | 8,550 | May 15, 2007 | ||||||||
June 8, 2007 | May 2, 2007 — August 1, 2007 | 4.10 | 8,956 | August 15, 2007 | ||||||||
September 24, 2007 | August 2, 2007 — November 1, 2007 | 4.10 | 8,956 | November 15, 2007 | ||||||||
December 16, 2007 | November 2, 2007 — February 1, 2008 | 4.10 | 8,956 | February 15, 2008 |
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18. | Stockholders’ Equity |
December 31, | ||||||||
2007 | 2006 | |||||||
Shares authorized | 400,000 | 400,000 | ||||||
Shares outstanding at end of period | 140,391 | 91,604 | ||||||
Shares held in treasury | 1,456 | 1,444 |
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Repayment of outstanding balance and accrued interest on senior credit facility | $ | 515.9 | ||
Repayment of note payable and accrued interest incurred in connection with recent acquisition | 49.1 | |||
Excess cash to fund future capital expenditures | 229.7 | |||
Total | $ | 794.7 | ||
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Weighted- | ||||||||
Number of | Average Grant | |||||||
Shares | Date Fair Value | |||||||
Unvested restricted shares outstanding at December 31, 2006 | 937 | $ | 15.88 | |||||
Granted | 1,600 | 19.79 | ||||||
Vested | (466 | ) | 15.62 | |||||
Canceled | (144 | ) | 15.15 | |||||
Unvested restricted shares outstanding at December 31, 2007 | 1,927 | $ | 19.25 | |||||
19. | Related Party Transactions |
2007 | 2006 | 2005 | ||||||||||
Sales to and reimbursements from related parties | $ | 118,631 | $ | 14,102 | $ | 12,673 | ||||||
Purchases of services from related parties | $ | 77,555 | $ | 4,811 | $ | 37 | ||||||
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Table of Contents
20. | Subsequent Events |
21. | Industry Segment Information |
2007 | 2006 | 2005 | ||||||||||
Revenues: | ||||||||||||
Exploration and production | $ | 479,321 | $ | 106,990 | $ | 54,425 | ||||||
Elimination of inter-segment revenue | 574 | 577 | 374 | |||||||||
Exploration and production, net of inter-segment revenue | 478,747 | 106,413 | 54,051 | |||||||||
Drilling and oil field services | 261,818 | 211,055 | 109,766 | |||||||||
Elimination of inter-segment revenue | 188,616 | 72,398 | 29,615 | |||||||||
Drilling and oil field services, net of inter-segment revenue | 73,202 | 138,657 | 80,151 | |||||||||
Midstream services | 285,065 | 192,960 | 192,503 | |||||||||
Elimination of inter-segment revenue | 177,487 | 70,068 | 45,004 | |||||||||
Midstream services, net of inter-segment revenues | 107,578 | 122,892 | 147,499 | |||||||||
Other | 29,286 | 21,411 | 6,164 | |||||||||
Elimination of inter-segment revenue | 11,361 | 1,131 | 172 | |||||||||
Other, net of inter-segment revenue | 17,925 | 20,280 | 5,992 | |||||||||
Total revenues | $ | 677,452 | $ | 388,242 | $ | 287,693 | ||||||
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2007 | 2006 | 2005 | ||||||||||
Operating Income: | ||||||||||||
Exploration and production | $ | 198,913 | $ | 17,069 | $ | 14,886 | ||||||
Drilling and oil field services | 10,473 | 32,946 | 18,295 | |||||||||
Midstream services | 6,783 | 3,528 | 4,096 | |||||||||
Other | (29,310 | ) | (16,562 | ) | (3,224 | ) | ||||||
Total operating income | 186,859 | 36,981 | 34,053 | |||||||||
Interest expense, net | (111,762 | ) | (15,795 | ) | (5,071 | ) | ||||||
Other income (expense), net | 4,648 | 671 | (1,121 | ) | ||||||||
Income before income taxes | $ | 79,745 | $ | 21,857 | $ | 27,861 | ||||||
Identifiable Assets(1): | ||||||||||||
Exploration and production | $ | 3,143,137 | $ | 2,091,459 | $ | 243,612 | ||||||
Drilling and oil field services | 271,563 | 175,169 | 100,995 | |||||||||
Midstream services | 127,822 | 75,606 | 33,845 | |||||||||
Other | 88,044 | 46,150 | 80,231 | |||||||||
Total assets | $ | 3,630,566 | $ | 2,388,384 | $ | 458,683 | ||||||
Capital Expenditures: | ||||||||||||
Exploration and production | $ | 1,046,552 | $ | 170,872 | $ | 61,227 | ||||||
Drilling and oil field services | 123,232 | 89,810 | 43,730 | |||||||||
Midstream services | 63,828 | 16,975 | 25,904 | |||||||||
Other | 47,236 | 28,884 | 3,735 | |||||||||
Total capital expenditures | $ | 1,280,848 | $ | 306,541 | $ | 134,596 | ||||||
Depreciation, Depletion and Amortization | ||||||||||||
Exploration and production | $ | 175,565 | $ | 28,104 | $ | 8,796 | ||||||
Drilling and oil field services | 37,792 | 20,268 | 11,851 | |||||||||
Midstream services | 6,641 | 3,180 | 1,652 | |||||||||
Other | 7,110 | 4,074 | 1,907 | |||||||||
Total depreciation, depletion and amortization | $ | 227,108 | $ | 55,626 | $ | 24,206 | ||||||
(1) | Identifiable assets are those used in SandRidge’s operations in each industry segment. |
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Table of Contents
22. | Supplemental Information on Oil and Gas Producing Activities (Unaudited) |
December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Oil and natural gas properties: | ||||||||||||
Proved | $ | 2,848,531 | $ | 1,636,832 | $ | 160,789 | ||||||
Unproved | 259,610 | 282,374 | 33,974 | |||||||||
Total oil and natural gas properties | 3,108,141 | 1,919,206 | 194,763 | |||||||||
Less accumulated depreciation and depletion | (230,974 | ) | (60,752 | ) | (35,029 | ) | ||||||
Net oil and natural gas properties capitalized costs | $ | 2,877,167 | $ | 1,858,454 | $ | 159,734 | ||||||
2007 | 2006 | 2005 | ||||||||||
Acquisitions of properties | ||||||||||||
Proved | $ | 303,282 | $ | 1,311,029 | $ | 14,554 | ||||||
Unproved | — | 268,839 | 21,085 | |||||||||
Exploration(1) | 361,973 | 18,612 | 2,527 | |||||||||
Development | 485,348 | 115,153 | 60,364 | |||||||||
Total cost incurred | $ | 1,150,603 | $ | 1,713,633 | $ | 98,530 | ||||||
(1) | 2007 amount includes seismic costs of $38.6 million. |
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Table of Contents
For the Year Ended December 31, 2005 | ||||
Revenues | $ | 48,405 | ||
Expenses: | ||||
Production costs | 19,353 | |||
Depreciation, depletion and amortization expenses | 8,995 | |||
Total expenses | 28,348 | |||
Income before income taxes | 20,057 | |||
Provision for income taxes | 7,020 | |||
Results of operations for oil and gas producing activities | $ | 13,037 | ||
For the Year Ended December 31, 2006 | ||||
Revenues | $ | 101,252 | ||
Expenses: | ||||
Production costs | 39,803 | |||
Depreciation, depletion and amortization expenses | 25,723 | |||
Total expenses | 65,526 | |||
Income before income taxes | 35,726 | |||
Provision for income taxes | 10,718 | |||
Results of operations for oil and gas producing activities | $ | 25,008 | ||
For the Year Ended December 31, 2007 | ||||
Revenues | $ | 477,612 | ||
Expenses: | ||||
Production costs | 125,749 | |||
Depreciation, depletion and amortization expenses | 169,392 | |||
Total expenses | 295,141 | |||
Income before income taxes | 182,471 | |||
Provision for income taxes | 65,690 | |||
Results of operations for oil and gas producing activities | $ | 116,781 | ||
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F-36
Table of Contents
Crude Oil | Nat. Gas | |||||||
(MBbls) | (MMcf)(a) | |||||||
Proved developed and undeveloped reserves: | ||||||||
As of December 31, 2004 | 682 | 144,452 | ||||||
Revisions of previous estimates | 108 | 11,679 | ||||||
Acquisitions of new reserves | 9,518 | 32,022 | ||||||
Extensions and discoveries | 200 | 56,133 | ||||||
Production | (72 | ) | (6,873 | ) | ||||
As of December 31, 2005 | 10,436 | 237,413 | ||||||
Revisions of previous estimates | 1,250 | 19,139 | ||||||
Acquisitions of new reserves | 13,753 | 514,170 | ||||||
Extensions and discoveries | 58 | 93,396 | ||||||
Production | (322 | ) | (13,410 | ) | ||||
As of December 31, 2006 | 25,175 | 850,708 | ||||||
Revisions of previous estimates | 5,492 | 318,639 | ||||||
Acquisitions of new reserves | 53 | 75,139 | ||||||
Extensions and discoveries | 7,849 | 104,501 | ||||||
Production | (2,042 | ) | (51,958 | ) | ||||
As of December 31, 2007 | 36,527 | 1,297,029 | ||||||
Proved developed reserves: | ||||||||
As of December 31, 2004 | 231 | 50,981 | ||||||
As of December 31, 2005 | 899 | 69,377 | ||||||
As of December 31, 2006 | 10,994 | 308,296 | ||||||
As of December 31, 2007 | 12,532 | 590,358 |
(a) | Natural gas reserves are computed at 14.65 pounds per square inch absolute and 60 degrees Fahrenheit. |
• | the standardized measure includes the Company’s estimate of proved crude oil, natural gas liquids and natural gas reserves and projected future production volumes based upon year-end economic conditions; | |
• | pricing is applied based upon year-end market prices adjusted for fixed or determinable contracts that are in existence at year-end. The calculated weighted average per unit prices for the Company’s proved reserves and future net revenues were as follows: |
At December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Natural gas (per Mcf) | $ | 6.46 | $ | 5.32 | $ | 8.40 | ||||||
Crude oil (per barrel) | $ | 87.47 | $ | 54.62 | $ | 54.02 |
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• | future development and production costs are determined based upon actual cost at year-end; | |
• | the standardized measure includes projections of future abandonment costs based upon actual costs at year-end; and | |
• | a discount factor of 10% per year is applied annually to the future net cash flows. |
Proved Oil and Gas Reserves
(In thousands) | ||||
As of December 31, 2005 | ||||
Future cash inflows from production | $ | 2,558,668 | ||
Future production costs | (653,748 | ) | ||
Future development costs(a) | (296,489 | ) | ||
Future income tax expenses | (546,867 | ) | ||
Undiscounted future net cash flows | 1,061,564 | |||
10% annual discount | (562,410 | ) | ||
Standardized measure of discounted future net cash flows | $ | 499,154 | ||
As of December 31, 2006 | ||||
Future cash inflows from production | $ | 5,901,660 | ||
Future production costs | (1,623,216 | ) | ||
Future development costs(a) | (931,947 | ) | ||
Future income tax expenses | (638,599 | ) | ||
Undiscounted future net cash flows | 2,707,898 | |||
10% annual discount | (1,267,752 | ) | ||
Standardized measure of discounted future net cash flows | $ | 1,440,146 | ||
As of December 31, 2007 | ||||
Future cash inflows from production | $ | 11,578,381 | ||
Future production costs | (2,706,208 | ) | ||
Future development costs(a) | (1,640,500 | ) | ||
Future income tax expenses | (1,782,909 | ) | ||
Undiscounted future net cash flows | 5,448,764 | |||
10% annual discount | (2,730,227 | ) | ||
Standardized measure of discounted future net cash flows | $ | 2,718,537 | ||
(a) | Includes abandonment costs. |
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Table of Contents
From Proved Oil and Gas Reserves
Present value as of December 31, 2004 | $ | 198,962 | ||
Changes during the year: | ||||
Revenues less production and other costs | (29,052 | ) | ||
Net changes in prices, production and other costs | 225,227 | |||
Development costs incurred | 56,368 | |||
Net changes in future development costs | (86,828 | ) | ||
Extensions and discoveries | 96,514 | |||
Revisions of previous quantity estimates | 47,501 | |||
Accretion of discount | 28,981 | |||
Net change in income taxes | (155,250 | ) | ||
Purchases of reserves in-place | 196,206 | |||
Timing differences and other(a) | (79,475 | ) | ||
Net change for the year | 300,192 | |||
Present value as of December 31, 2005 | $ | 499,154 | ||
Revenues less production and other costs | (61,449 | ) | ||
Net changes in prices, production and other costs | (294,437 | ) | ||
Development costs incurred | 75,323 | |||
Net changes in future development costs | (75,466 | ) | ||
Extensions and discoveries | 126,061 | |||
Revisions of previous quantity estimates | 54,313 | |||
Accretion of discount | 73,643 | |||
Net change in income taxes | (36,962 | ) | ||
Purchases of reserves in-place | 1,135,062 | |||
Timing differences and other(a) | (55,096 | ) | ||
Net change for the year | 940,992 | |||
Present value as of December 31, 2006 | $ | 1,440,146 | ||
Changes during the year: | ||||
Revenues less production and other costs | (351,863 | ) | ||
Net changes in prices, production and other costs | 800,630 | |||
Development costs incurred | 485,348 | |||
Net changes in future development costs | (723,943 | ) | ||
Extensions and discoveries | 328,094 | |||
Revisions of previous quantity estimates | 998,729 | |||
Accretion of discount | 88,596 | |||
Net change in income taxes | (537,835 | ) | ||
Purchases of reserves in-place | 155,051 | |||
Timing differences and other(a) | 35,584 | |||
Net change for the year | 1,278,391 | |||
Present value as of December 31, 2007 | $ | 2,718,537 | ||
(a) | The change in timing differences and other are related to revisions in the Company’s estimated time of production and development. |
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23. | Quarterly Financial Results (Unaudited) |
First | Second | Third | Fourth | |||||||||||||
Quarter | Quarter | Quarter | Quarter | |||||||||||||
2007: | ||||||||||||||||
Total revenues | $ | 149,064 | $ | 159,063 | $ | 153,648 | $ | 215,677 | ||||||||
Income from operations | $ | 14,408 | $ | 75,160 | $ | 59,716 | $ | 37,575 | ||||||||
Net income (loss) | $ | (19,493 | ) | $ | 34,564 | $ | 20,920 | $ | 14,230 | |||||||
Income (loss) available (applicable) to common stockholders | $ | (28,459 | ) | $ | 22,270 | $ | 11,607 | $ | 4,915 | |||||||
Basic and diluted: | ||||||||||||||||
Net income (loss) available (applicable) to common stockholders(1) | $ | (0.31 | ) | $ | 0.21 | $ | 0.11 | $ | 0.04 | |||||||
2006: | ||||||||||||||||
Total revenues | $ | 85,915 | $ | 87,915 | $ | 89,650 | $ | 124,762 | ||||||||
Income from operations | $ | 3,468 | $ | 6,757 | $ | 8,576 | $ | 18,180 | ||||||||
Net income (loss) | $ | 8,383 | $ | 5,649 | $ | 4,895 | $ | (3,306 | ) | |||||||
Income (loss) available (applicable) to common stockholders | $ | 8,383 | $ | 5,649 | $ | 4,895 | $ | (7,273 | ) | |||||||
Basic and diluted: | ||||||||||||||||
Net income (loss) available (applicable) to common stockholders(1) | $ | 0.12 | $ | 0.08 | $ | 0.07 | $ | (0.10 | ) | |||||||
(1) | Income (loss) available (applicable) to common stockholders for each quarter is computed using the weighted-average number of shares outstanding during the quarter, while earnings per share for the fiscal year is computed using the weighted-average number of shares outstanding during the year. Thus, the sum of income (loss) available (applicable) to common stockholders for each of the four quarters may not equal the fiscal year amount. |
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June 30, | December 31, | |||||||
2008 | 2007 | |||||||
(Unaudited) | ||||||||
(In thousands) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 275,888 | $ | 63,135 | ||||
Accounts receivable, net: | ||||||||
Trade | 143,974 | 94,741 | ||||||
Related parties | 20,893 | 20,018 | ||||||
Derivative contracts | 1,534 | 21,958 | ||||||
Inventories | 6,476 | 3,993 | ||||||
Deferred income taxes | 1,430 | 1,820 | ||||||
Costs incurred in excess of billings | 39,809 | — | ||||||
Other current assets | 21,696 | 20,787 | ||||||
Total current assets | 511,700 | 226,452 | ||||||
Natural gas and crude oil properties, using full cost method of accounting | ||||||||
Proved | 3,519,253 | 2,848,531 | ||||||
Unproved | 259,610 | 259,610 | ||||||
Less: accumulated depreciation and depletion | (363,879 | ) | (230,974 | ) | ||||
3,414,984 | 2,877,167 | |||||||
Other property, plant and equipment, net | 540,737 | 460,243 | ||||||
Derivative contracts | 11,063 | 270 | ||||||
Investments | 9,371 | 7,956 | ||||||
Restricted deposits | 32,684 | 31,660 | ||||||
Other assets | 45,271 | 26,818 | ||||||
Total assets | $ | 4,565,810 | $ | 3,630,566 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Current maturities of long-term debt | $ | 15,874 | $ | 15,350 | ||||
Accounts payable and accrued expenses: | ||||||||
Trade | 295,751 | 215,497 | ||||||
Related parties | 3,561 | 395 | ||||||
Asset retirement obligation | 1,524 | 864 | ||||||
Derivative contracts | 225,858 | — | ||||||
Total current liabilities | 542,568 | 232,106 | ||||||
Long-term debt | 1,794,160 | 1,052,299 | ||||||
Other long-term obligations | 16,817 | 16,817 | ||||||
Asset retirement obligation | 61,776 | 57,716 | ||||||
Deferred income taxes | 6,622 | 49,350 | ||||||
Total liabilities | 2,421,943 | 1,408,288 | ||||||
Commitments and contingencies (Note 12) | ||||||||
Minority interest | 1,464 | 4,672 | ||||||
Redeemable convertible preferred stock, $0.001 par value, 2,625 shares authorized; 0 and 2,184 issued and outstanding at June 30, 2008 and December 31, 2007, respectively | — | 450,715 | ||||||
Stockholders’ equity: | ||||||||
Preferred stock, $0.001 par value; 47,375 shares authorized; no shares issued and outstanding in 2008 and 2007 | — | — | ||||||
Common stock, $0.001 par value, 400,000 shares authorized; 166,315 issued and 164,991 outstanding at June 30, 2008 and 141,847 issued and 140,391 outstanding at December 31, 2007 | 163 | 140 | ||||||
Additional paid-in capital | 2,154,267 | 1,686,113 | ||||||
Treasury stock, at cost | (18,043 | ) | (18,578 | ) | ||||
Retained earnings | 6,016 | 99,216 | ||||||
Total stockholders’ equity | 2,142,403 | 1,766,891 | ||||||
Total liabilities and stockholders’ equity | $ | 4,565,810 | $ | 3,630,566 | ||||
F-41
Table of Contents
Six Months Ended | ||||||||
June 30, | ||||||||
2008 | 2007 | |||||||
(Unaudited) | ||||||||
(In thousands, except per share amounts) | ||||||||
Revenues: | ||||||||
Natural gas and crude oil | $ | 497,621 | $ | 206,450 | ||||
Drilling and services | 24,291 | 40,244 | ||||||
Midstream and marketing | 115,897 | 52,101 | ||||||
Other | 9,327 | 9,332 | ||||||
Total revenues | 647,136 | 308,127 | ||||||
Expenses: | ||||||||
Production | 74,442 | 49,018 | ||||||
Production taxes | 22,739 | 7,926 | ||||||
Drilling and services | 12,235 | 24,126 | ||||||
Midstream and marketing | 105,151 | 46,747 | ||||||
Depreciation, depletion and amortization — natural gas and crude oil | 137,332 | 70,699 | ||||||
Depreciation, depletion and amortization — other | 33,745 | 22,263 | ||||||
General and administrative | 47,197 | 25,360 | ||||||
Loss (gain) on derivative contracts | 296,612 | (15,981 | ) | |||||
Gain on sale of assets | (7,711 | ) | (659 | ) | ||||
Total expenses | 721,742 | 229,499 | ||||||
(Loss) income from operations | (74,606 | ) | 78,628 | |||||
Other income (expense): | ||||||||
Interest income | 2,145 | 3,127 | ||||||
Interest expense | (47,395 | ) | (60,108 | ) | ||||
Minority interest | (851 | ) | (157 | ) | ||||
Income from equity investments | 1,415 | 2,164 | ||||||
Other income, net | 939 | 499 | ||||||
Total other (expense) income | (43,747 | ) | (54,475 | ) | ||||
(Loss) income before income tax (benefit) expense | (118,353 | ) | 24,153 | |||||
Income tax (benefit) expense | (41,385 | ) | 9,082 | |||||
Net (loss) income | (76,968 | ) | 15,071 | |||||
Preferred stock dividends and accretion | 16,232 | 21,260 | ||||||
(Loss applicable) income available to common stockholders | $ | (93,200 | ) | $ | (6,189 | ) | ||
Basic and diluted (loss) income per share (applicable) available to common stockholders | $ | (0.63 | ) | $ | (0.06 | ) | ||
Weighted average number of common shares outstanding: | ||||||||
Basic | 148,124 | 100,025 | ||||||
Diluted | 148,124 | 100,025 | ||||||
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Table of Contents
Additional | ||||||||||||||||||||
Common | Paid-In | Treasury | Retained | |||||||||||||||||
Stock | Capital | Stock | Earnings | Total | ||||||||||||||||
(Unaudited) | ||||||||||||||||||||
(In thousands) | ||||||||||||||||||||
Six months ended June 30, 2008: | ||||||||||||||||||||
Balance, December 31, 2007 | $ | 140 | $ | 1,686,113 | $ | (18,578 | ) | $ | 99,216 | $ | 1,766,891 | |||||||||
Purchase of treasury stock | — | — | (1,908 | ) | — | (1,908 | ) | |||||||||||||
Common stock issued under retirement plan | — | 2,566 | 2,443 | — | 5,009 | |||||||||||||||
Accretion on redeemable convertible preferred stock | — | — | — | (7,636 | ) | (7,636 | ) | |||||||||||||
Redeemable convertible preferred stock dividend | — | — | — | (8,596 | ) | (8,596 | ) | |||||||||||||
Stock-based compensation | — | 7,260 | — | — | 7,260 | |||||||||||||||
Conversion of redeemable convertible preferred stock to common stock | 23 | 458,328 | — | — | 458,351 | |||||||||||||||
Net loss | — | — | — | (76,968 | ) | (76,968 | ) | |||||||||||||
Balance, June 30, 2008 | $ | 163 | $ | 2,154,267 | $ | (18,043 | ) | $ | 6,016 | $ | 2,142,403 | |||||||||
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Table of Contents
Six Months Ended | ||||||||
June 30, | ||||||||
2008 | 2007 | |||||||
(Unaudited) | ||||||||
(In thousands) | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net (loss) income | $ | (76,968 | ) | $ | 15,071 | |||
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | ||||||||
Depreciation, depletion and amortization | 171,077 | 92,962 | ||||||
Debt issuance cost amortization | 2,445 | 13,822 | ||||||
Deferred income taxes | (42,338 | ) | 9,082 | |||||
Unrealized loss (gain) on derivative contracts | 235,489 | (16,774 | ) | |||||
Gain on sale of assets | (7,711 | ) | (659 | ) | ||||
Interest income — restricted deposits | (243 | ) | (660 | ) | ||||
Income from equity investments | (1,415 | ) | (2,163 | ) | ||||
Stock-based compensation | 7,260 | 2,259 | ||||||
Minority interest | 851 | 157 | ||||||
Changes in operating assets and liabilities | 8,387 | 67,747 | ||||||
Net cash provided by operating activities | 296,834 | 180,844 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Capital expenditures for property, plant and equipment | (934,301 | ) | (492,144 | ) | ||||
Proceeds from sale of assets | 153,191 | 2,807 | ||||||
Loans to unconsolidated investees | (4,000 | ) | — | |||||
Fundings of restricted deposits | (781 | ) | (3,973 | ) | ||||
Net cash used in investing activities | (785,891 | ) | (493,310 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Proceeds from borrowings | 1,408,000 | 1,152,772 | ||||||
Repayments of borrowings | (665,615 | ) | (1,154,443 | ) | ||||
Dividends paid — preferred | (17,552 | ) | (15,409 | ) | ||||
Minority interest (distributions) contributions | (4,059 | ) | 522 | |||||
Proceeds from issuance of common stock | — | 319,966 | ||||||
Purchase of treasury stock | (1,908 | ) | (1,572 | ) | ||||
Debt issuance costs | (17,056 | ) | (26,119 | ) | ||||
Net cash provided by financing activities | 701,810 | 275,717 | ||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 212,753 | (36,749 | ) | |||||
CASH AND CASH EQUIVALENTS, beginning of year | 63,135 | 38,948 | ||||||
CASH AND CASH EQUIVALENTS, end of period | $ | 275,888 | $ | 2,199 | ||||
Supplemental Disclosure of Noncash Investing and Financing Activities: | ||||||||
Insurance premiums financed | $ | — | $ | 1,496 | ||||
Accretion on redeemable convertible preferred stock | $ | 7,636 | $ | 705 | ||||
Redeemable convertible preferred stock dividends, net of dividends paid | $ | — | $ | 8,956 |
F-44
Table of Contents
1. | Basis of Presentation |
2. | Significant Accounting Policies |
F-45
Table of Contents
Notes to Condensed Consolidated Financial Statements — (Continued)
3. | Construction in Progress |
F-46
Table of Contents
Notes to Condensed Consolidated Financial Statements — (Continued)
4. | Property, Plant and Equipment |
June 30, | December 31, | |||||||
2008 | 2007 | |||||||
Natural gas and crude oil properties: | ||||||||
Proved | $ | 3,519,253 | $ | 2,848,531 | ||||
Unproved | 259,610 | 259,610 | ||||||
Total natural gas and crude oil properties | 3,778,863 | 3,108,141 | ||||||
Less accumulated depreciation and depletion | (363,879 | ) | (230,974 | ) | ||||
Net natural gas and crude oil properties capitalized costs | 3,414,984 | 2,877,167 | ||||||
Land | 1,344 | 1,149 | ||||||
Non natural gas and crude oil equipment | 647,920 | 539,893 | ||||||
Buildings and structures | 47,253 | 38,288 | ||||||
Total | 696,517 | 579,330 | ||||||
Less accumulated depreciation, depletion and amortization | (155,780 | ) | (119,087 | ) | ||||
Net capitalized costs | 540,737 | 460,243 | ||||||
Total property, plant and equipment | $ | 3,955,721 | $ | 3,337,410 | ||||
5. | Fair Value Measurements |
Level 1: | Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. The Company considers active markets as those in which |
F-47
Table of Contents
Notes to Condensed Consolidated Financial Statements — (Continued)
transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis. | ||
Level 2: | Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability. | |
Level 3: | Measured based on prices or valuation models that required inputs that are both significant to the fair value measurement and less observable for objective sources (i.e., supported by little or no market activity). |
Fair Value Measurements Using: | ||||||||||||||||
Quoted Prices in | Significant | |||||||||||||||
Active Markets for | Other | Significant | ||||||||||||||
Identical Assets | Observable | Unobservable | Assets/ | |||||||||||||
or Liabilities | Inputs | Inputs | (Liabilities) at | |||||||||||||
Description | (Level 1) | (Level 2) | (Level 3) | Fair Value | ||||||||||||
Assets (liabilities): | ||||||||||||||||
Natural gas and crude oil derivative contracts | $ | — | $ | — | $ | (223,710 | ) | $ | (223,710 | ) | ||||||
Interest rate swap | — | — | 10,449 | 10,449 | ||||||||||||
$ | — | $ | — | $ | (213,261 | ) | $ | (213,261 | ) | |||||||
F-48
Table of Contents
Notes to Condensed Consolidated Financial Statements — (Continued)
Derivatives | ||||
Balance of Level 3, December 31, 2007 | $ | 22,228 | ||
Total gains or losses (realized/unrealized) | (286,163 | ) | ||
Purchases, issuances and settlements | 50,674 | |||
Transfers in and out of Level 3 | — | |||
Balance of Level 3, June 30, 2008 | $ | (213,261 | ) | |
Changes in unrealized gains (losses) on derivative contracts held as of June 30, 2008 | $ | (235,489 | ) | |
6. | Asset Retirement Obligation |
Asset retirement obligation, December 31, 2007 | $ | 58,580 | ||
Liability incurred upon acquiring and drilling wells | 2,829 | |||
Revisions in estimated cash flows | — | |||
Liability settled in current period | (730 | ) | ||
Accretion of discount expense | 2,621 | |||
Asset retirement obligation, June 30, 2008 | 63,300 | |||
Less: current portion | 1,524 | |||
Asset retirement obligation, net of current | $ | 61,776 | ||
F-49
Table of Contents
Notes to Condensed Consolidated Financial Statements — (Continued)
7. | Long-Term Debt |
June 30, | December 31, | |||||||
2008 | 2007 | |||||||
Senior credit facility | $ | — | $ | — | ||||
Other notes payable: | ||||||||
Drilling rig fleet and related oil field services equipment | 40,791 | 47,836 | ||||||
Mortgage | 19,243 | 19,651 | ||||||
Other equipment and vehicles | — | 162 | ||||||
8.625% Senior Term Loan | — | 650,000 | ||||||
Senior Floating Rate Term Loan | — | 350,000 | ||||||
8.625% Senior Notes due 2015 | 650,000 | — | ||||||
Senior Floating Rate Notes due 2014 | 350,000 | — | ||||||
8.0% Senior Notes due 2018 | 750,000 | — | ||||||
Total debt | 1,810,034 | 1,067,649 | ||||||
Less: current maturities of long-term debt | 15,874 | 15,350 | ||||||
Long-term debt | $ | 1,794,160 | $ | 1,052,299 | ||||
F-50
Table of Contents
Notes to Condensed Consolidated Financial Statements — (Continued)
F-51
Table of Contents
Notes to Condensed Consolidated Financial Statements — (Continued)
F-52
Table of Contents
Notes to Condensed Consolidated Financial Statements — (Continued)
8. | Other Long-Term Obligations |
9. | Derivative Contracts |
F-53
Table of Contents
Notes to Condensed Consolidated Financial Statements — (Continued)
Notional | Weighted Avg. | |||||||
Period and Type of Contract | (MMcf)(1) | Fixed Price | ||||||
July 2008 — September 2008 | ||||||||
Price swap contracts | 19,940 | $ | 8.60 | |||||
Basis swap contracts | 15,640 | $ | (0.57 | ) | ||||
October 2008 — December 2008 | ||||||||
Price swap contracts | 17,480 | $ | 8.67 | |||||
Basis swap contracts | 14,720 | $ | (0.65 | ) | ||||
January 2009 — March 2009 | ||||||||
Price swap contracts | 9,900 | $ | 10.05 | |||||
Basis swap contracts | 2,700 | $ | (0.49 | ) | ||||
April 2009 — June 2009 | ||||||||
Price swap contracts | 4,550 | $ | 9.27 | |||||
Basis swap contracts | 2,730 | $ | (0.49 | ) | ||||
July 2009 — September 2009 | ||||||||
Price swap contracts | 310 | $ | 9.67 | |||||
Basis swap contracts | 2,760 | $ | (0.49 | ) | ||||
October 2009 — December 2009 | ||||||||
Basis swap contracts | 2,760 | $ | (0.49 | ) | ||||
January 2011 — March 2011 | ||||||||
Basis swap contracts | 1,350 | $ | (0.47 | ) | ||||
April 2011 — June 2011 | ||||||||
Basis swap contracts | 1,365 | $ | (0.47 | ) | ||||
July 2011 — September 2011 | ||||||||
Basis swap contracts | 1,380 | $ | (0.47 | ) | ||||
October 2011 — December 2011 | ||||||||
Basis swap contracts | 1,380 | $ | (0.47 | ) |
(1) | Assumes ratio of 1:1 for Mcf to MMBtu. |
Notional | Weighted Avg. | |||||||
Period and Type of Contract | (in MBbls) | Fixed Price | ||||||
July 2008 — September 2008 | ||||||||
Price swap contracts | 225 | $ | 94.33 | |||||
Collar contracts | 27 | $ | 50.00 — 82.60 | |||||
October 2008 — December 2008 | ||||||||
Price swap contracts | 225 | $ | 93.17 | |||||
Collar contracts | 27 | $ | 50.00 — 82.60 |
F-54
Table of Contents
Notes to Condensed Consolidated Financial Statements — (Continued)
Six Months Ended June 30, | ||||||||
2008 | 2007 | |||||||
Realized loss | $ | 50,674 | $ | 793 | ||||
Unrealized loss (gain) | 245,938 | (16,774 | ) | |||||
Loss (gain) on derivative contracts | $ | 296,612 | $ | (15,981 | ) | |||
10. | Income Taxes |
11. | Earnings Per Share |
Six Months Ended | ||||||||
June 30, | ||||||||
2008 | 2007 | |||||||
Weighted average basic common shares outstanding | 148,124 | 100,025 | ||||||
Effect of dilutive securities: | ||||||||
Restricted stock | — | — | ||||||
Weighted average diluted common and potential common shares outstanding | 148,124 | 100,025 | ||||||
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Table of Contents
Notes to Condensed Consolidated Financial Statements — (Continued)
12. | Commitments and Contingencies |
13. | Redeemable Convertible Preferred Stock |
Dividends | ||||||||||||
Declared | Dividend Period | per Share | Total | Payment Date | ||||||||
January 31, 2007 | November 21, 2006 — February 1, 2007 | $ | 3.21 | $ | 6,859 | February 15, 2007 | ||||||
May 8, 2007 | February 2, 2007 — May 1, 2007 | 3.97 | 8,550 | May 15, 2007 | ||||||||
June 8, 2007 | May 2, 2007 — August 1, 2007 | 4.10 | 8,956 | August 15, 2007 | ||||||||
September 24, 2007 | August 2, 2007 — November 1, 2007 | 4.10 | 8,956 | November 15, 2007 | ||||||||
December 16, 2007 | November 2, 2007 — February 1, 2008 | 4.10 | 8,956 | February 15, 2008 | ||||||||
March 7, 2008 | February 2, 2008 — May 1, 2008 | 4.01 | 8,095 | (1) | ||||||||
May 7, 2008 | May 2, 2008 — May 7, 2008 | 4.01 | 501 | May 7, 2008 |
(1) | Includes $0.6 million of prorated dividends paid to holders of redeemable convertible preferred shares at the time their shares converted to common stock in March 2008. The remaining dividends of $7.5 million were paid during May 2008. |
F-56
Table of Contents
Notes to Condensed Consolidated Financial Statements — (Continued)
14. | Stockholders’ Equity |
June 30, | December 31, | |||||||
2008 | 2007 | |||||||
Shares authorized | 400,000 | 400,000 | ||||||
Shares outstanding at end of period | 164,991 | 140,391 | ||||||
Shares held in treasury | 1,324 | 1,456 |
F-57
Table of Contents
Notes to Condensed Consolidated Financial Statements — (Continued)
Repayment of outstanding balance and accrued interest on senior credit facility | $ | 515.9 | ||
Repayment of note payable and accrued interest incurred in connection with recent acquisition | 49.1 | |||
Excess cash to fund future capital expenditures | 229.7 | |||
Total | $ | 794.7 | ||
15. | Related Party Transactions |
Six Months Ended | ||||||||
June 30, | ||||||||
2008 | 2007 | |||||||
Sales to and reimbursements from related parties | $ | 52,426 | $ | 45,079 | ||||
Purchases of services from related parties | $ | 39,061 | $ | 10,451 | ||||
F-58
Table of Contents
Notes to Condensed Consolidated Financial Statements — (Continued)
Six Months Ended | ||||||||
June 30, | ||||||||
2008 | 2007 | |||||||
Sales to and reimbursements from Larclay | $ | 22,973 | $ | 26,709 | ||||
Purchases of services from Larclay | $ | 23,958 | $ | 5,542 | ||||
As of | As of | |||||||
June 30, | December 31, | |||||||
2008 | 2007 | |||||||
Accounts receivable | $ | 15,453 | $ | 16,625 | ||||
Accounts payable | $ | 2,853 | $ | 274 |
16. | Subsequent Events |
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Table of Contents
Notes to Condensed Consolidated Financial Statements — (Continued)
17. | Industry Segment Information |
Six Months Ended | ||||||||
June 30, | ||||||||
2008 | 2007 | |||||||
Revenues: | ||||||||
Exploration and production | $ | 500,438 | $ | 209,201 | ||||
Elimination of inter-segment revenue | (88 | ) | (1,896 | ) | ||||
Exploration and production, net of inter-segment revenue | 500,350 | 207,305 | ||||||
Drilling and oil field services | 188,558 | 118,159 | ||||||
Elimination of inter-segment revenue | (164,372 | ) | (77,931 | ) | ||||
Drilling and oil field services, net of inter-segment revenue | 24,186 | 40,228 | ||||||
Midstream gas services | 368,054 | 133,748 | ||||||
Elimination of inter-segment revenue | (254,671 | ) | (81,648 | ) | ||||
Midstream gas services, net of inter-segment revenue | 113,383 | 52,100 | ||||||
Other | 11,507 | 12,571 | ||||||
Elimination of inter-segment revenue | (2,290 | ) | (4,077 | ) | ||||
Other, net of inter-segment revenue | 9,217 | 8,494 | ||||||
Total revenues | $ | 647,136 | $ | 308,127 | ||||
Operating (Loss) Income: | ||||||||
Exploration and production | $ | (53,934 | ) | $ | 76,463 | |||
Drilling and oil field services | 2,496 | 8,876 | ||||||
Midstream gas services | 6,585 | 2,301 | ||||||
Other | (29,753 | ) | (9,012 | ) | ||||
Total operating (loss) income | (74,606 | ) | 78,628 | |||||
Interest income | 2,145 | 3,127 | ||||||
Interest expense | (47,395 | ) | (60,108 | ) | ||||
Other income | 1,503 | 2,506 | ||||||
(Loss) income before income tax expense | $ | (118,353 | ) | $ | 24,153 | |||
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Notes to Condensed Consolidated Financial Statements — (Continued)
Six Months Ended | ||||||||
June 30, | ||||||||
2008 | 2007 | |||||||
Capital Expenditures: | ||||||||
Exploration and production | $ | 813,900 | $ | 377,120 | ||||
Drilling and oil field services | 35,791 | 83,913 | ||||||
Midstream gas services | 69,429 | 23,130 | ||||||
Other | 15,181 | 7,981 | ||||||
Total capital expenditures | $ | 934,301 | $ | 492,144 | ||||
Depreciation, Depletion and Amortization: | ||||||||
Exploration and production | $ | 138,588 | $ | 71,686 | ||||
Drilling and oil field services | 21,692 | 15,870 | ||||||
Midstream gas services | 6,133 | 2,494 | ||||||
Other | 4,664 | 2,912 | ||||||
Total depreciation, depletion and amortization | $ | 171,077 | $ | 92,962 | ||||
June 30, | December 31, | |||||||
2008 | 2007 | |||||||
Assets: | ||||||||
Exploration and production | $ | 4,002,268 | $ | 3,143,137 | ||||
Drilling and oil field services | 276,681 | 271,563 | ||||||
Midstream gas services | 204,286 | 127,822 | ||||||
Other | 82,575 | 88,044 | ||||||
Total | $ | 4,565,810 | $ | 3,630,566 | ||||
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(In thousands) | ||||
Current assets: | ||||
Cash and cash equivalents | $ | 102,322 | ||
Accounts receivable, net | 53,378 | |||
Notes receivable | 10 | |||
Drilling prepayments | 3,281 | |||
Other | 9,798 | |||
Total current assets | 168,789 | |||
Oil and gas properties, at cost (full cost method) | 1,229,923 | |||
Accumulated depreciation, depletion and amortization | (488,560 | ) | ||
Net oil and gas properties | 741,363 | |||
Other property and equipment | 6,029 | |||
Accumulated depreciation | (4,934 | ) | ||
Net other property and equipment | 1,095 | |||
Restricted deposits | 24,267 | |||
Other assets | 4,842 | |||
Total assets | $ | 940,356 | ||
Current Liabilities: | ||||
Accounts payable | $ | 18,105 | ||
Accounts payable revenue | 11,454 | |||
Accounts payable — affiliates | 1,660 | |||
Current portion of notes payable | 2,503 | |||
Advance from affiliate | 39,800 | |||
Prepayments from partners | 121 | |||
Accrued interest | 162 | |||
Accrued interest — affiliates | 2,194 | |||
Income tax payable — affiliate | 2,749 | |||
Derivative financial instruments | 68,039 | |||
Total current liabilities | 146,787 | |||
Commitments and contingencies | ||||
Credit facility | 300,000 | |||
Gas balancing | 1,108 | |||
Derivative financial instruments | 17,893 | |||
Other liabilities | 250 | |||
Asset retirement obligation | 41,228 | |||
Total liabilities | 507,266 | |||
Member’s equity | 433,090 | |||
Total liabilities and member’s equity | $ | 940,356 | ||
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For the Years Ended December 31, | ||||||||
2004 | 2005 | |||||||
(In thousands) | ||||||||
Revenues: | ||||||||
Oil and gas sales — gross | $ | 144,430 | $ | 261,398 | ||||
Unrealized derivative losses | (9,179 | ) | (69,254 | ) | ||||
Oil and gas revenues — net | 135,251 | 192,144 | ||||||
Plant revenues | 2,737 | 6,711 | ||||||
Total revenues | 137,988 | 198,855 | ||||||
Costs and expenses: | ||||||||
Lease operating | 14,912 | 27,437 | ||||||
Transportation and gathering | 3,144 | 4,978 | ||||||
Plant and field operations | 3,918 | 3,769 | ||||||
Production and ad valorem taxes | 10,883 | 16,560 | ||||||
Depreciation, depletion and amortization | 60,394 | 91,100 | ||||||
Accretion of asset retirement obligation | 593 | 3,019 | ||||||
General and administrative | 11,650 | 14,152 | ||||||
Total costs and expenses | 105,494 | 161,015 | ||||||
Operating income | 32,494 | 37,840 | ||||||
Interest expense | (3,428 | ) | (8,198 | ) | ||||
Interest expense — affiliate | (3,054 | ) | (3,047 | ) | ||||
Interest income and other | 930 | 810 | ||||||
Interest income from related parties | 150 | — | ||||||
Equity in loss on investment | (519 | ) | (1,118 | ) | ||||
Severance tax refund | 4,468 | — | ||||||
(Loss) gain on sale of assets | 1,686 | 9 | ||||||
Gain on sale of equity investment | — | 5,512 | ||||||
Income before income taxes | 32,727 | 31,808 | ||||||
Income tax benefit (expense) | (260 | ) | 2,932 | |||||
Income before minority interest | 32,467 | 34,740 | ||||||
Minority interest | (812 | ) | — | |||||
Net income | $ | 31,655 | $ | 34,740 | ||||
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For the Years Ended December 31, | ||||||||
2004 | 2005 | |||||||
(In thousands) | ||||||||
Operating activities: | ||||||||
Net income | $ | 31,655 | $ | 34,740 | ||||
Noncash adjustments: | ||||||||
Deferred income tax benefit | (144 | ) | (2,935 | ) | ||||
Depreciation depletion and amortization | 60,394 | 91,100 | ||||||
Minority interest | 812 | — | ||||||
Unrealized derivative losses | 9,179 | 69,254 | ||||||
(Gain) loss on sale of assets | (1,686 | ) | (9 | ) | ||||
Accretion of asset retirement obligation | 593 | 3,019 | ||||||
Equity in loss on investment | 519 | 1,118 | ||||||
Gain on sale of equity investment | — | (5,512 | ) | |||||
Provision for doubtful accounts | 790 | 470 | ||||||
Interest income-restricted deposits | — | (494 | ) | |||||
Amortization of note discount | 281 | 81 | ||||||
Amortization of note costs | 494 | 1,148 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (6,340 | ) | (13,496 | ) | ||||
Drilling prepayments | 249 | 179 | ||||||
Derivative deposit | 1,700 | — | ||||||
Other assets | (1,030 | ) | (4,883 | ) | ||||
Note receivable | (1,258 | ) | 3,098 | |||||
Accounts payable and accrued liabilities | 12,014 | (8,545 | ) | |||||
Net cash provided by operating activities | 108,222 | 168,333 | ||||||
Investing activities: | ||||||||
Acquisition, exploration, and development costs | (114,974 | ) | (315,880 | ) | ||||
Proceeds from sales of oil and gas properties | 4,981 | 1,329 | ||||||
Purchases of furniture, fixtures and equipment | (289 | ) | (511 | ) | ||||
Proceeds from sale of furniture, fixtures and equipment | — | 12 | ||||||
Equity investment | (1,200 | ) | (454 | ) | ||||
Investment in restricted deposits | — | (4,973 | ) | |||||
Proceeds from sale of equity investment | — | 7,227 | ||||||
Net cash used in investing activities | (111,482 | ) | (313,250 | ) | ||||
Financing activities: | ||||||||
Debt issuance costs | (440 | ) | (4,666 | ) | ||||
Net cash contributed by member | 23,753 | — | ||||||
Repurchase of membership interest | (4,136 | ) | — | |||||
Proceeds from affiliate borrowings | — | 161,800 | ||||||
Repayment of affiliate borrowings | — | (98,357 | ) | |||||
Guaranteed payment to member | (15,978 | ) | (15,978 | ) | ||||
Equity contribution | — | 5,326 | ||||||
Dividend payment to member | — | (78,000 | ) | |||||
Proceeds from credit facility | 8,000 | 379,100 | ||||||
Principal payments on debt | (9,365 | ) | (1,898 | ) | ||||
Repayment of credit facility | — | (130,934 | ) | |||||
Net cash provided (used) by financing activities | 1,834 | 216,393 | ||||||
Increase in cash and cash equivalents | (1,426 | ) | 71,476 | |||||
Cash and cash equivalents at beginning of period | 32,272 | 30,846 | ||||||
Cash and cash equivalents at end of period | $ | 30,846 | $ | 102,322 | ||||
Supplemental cash flow information: | ||||||||
Cash paid for interest | $ | 5,471 | $ | 8,483 | ||||
Cash paid for income taxes | $ | 50 | $ | — | ||||
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(In thousands) | ||||
Total member’s equity — January 1, 2004 | $ | 285,211 | ||
Contribution from member — National Offshore | 91,561 | |||
Contribution from member — National Onshore minority interest | 2,218 | |||
Purchase of minority membership interest | (4,136 | ) | ||
Guaranteed payment to member | (15,978 | ) | ||
Net income | 31,655 | |||
Total member’s equity — December 31, 2004 | 390,531 | |||
Contribution of Notes Payable to AREP | 89,143 | |||
Equity Contribution | 5,326 | |||
Contribution of deferred tax assets | (5,471 | ) | ||
Contribution of deferred tax liabilities | 12,799 | |||
Guaranteed payment to member | (15,978 | ) | ||
Dividend distribution | (78,000 | ) | ||
Net income | 34,740 | |||
Total member’s equity — December 31, 2005 | $ | 433,090 | ||
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1. | Organization and Background |
• | A 50.01% ownership interest in National Energy Group, Inc (National Energy Group), a publicly traded oil and gas management company. National Energy Group’s principal asset consists of its 50% membership interest in NEG Holding LLC (Holding, LLC). | |
• | $148.6 million principal amount of 103/4% Senior Notes due from National Energy Group (the “103/4% Senior Notes”). | |
• | A 50% managing membership interest in Holding, LLC. | |
• | The oil and gas operations of National Onshore LP (formerly TransTexas Gas Corporation); and | |
• | The oil and gas operations of National Offshore LP (formerly Panaco, Inc.) |
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2. | Significant Accounting Policies |
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2004 | 2005 | |||||||
Realized loss — (net cash payments) | $ | 16,625 | $ | 51,263 | ||||
Unrealized loss | 9,179 | 69,254 | ||||||
Loss on Derivative Contracts | $ | 25,804 | $ | 120,517 | ||||
Type of Contract | Production Month | Volume per Month | Floor | Ceiling | ||||||||
No cost collars | Jan-Dec 2006 | 31,000 Bbls | $ | 41.65 | $ | 45.25 | ||||||
No cost collars | Jan-Dec 2006 | 16,000 Bbls | 41.75 | 45.40 | ||||||||
No cost collars | Jan-Dec 2006 | 570,000 MmBtu | 6.00 | 7.25 | ||||||||
No cost collars | Jan-Dec 2006 | 120,000 MmBtu | 6.00 | 7.28 | ||||||||
No cost collars | Jan-Dec 2006 | 500,000 MmBtu | 4.50 | 5.00 | ||||||||
No cost collars | Jan-Dec 2006 | 46,000 Bbls | 60.00 | 68.50 | ||||||||
(The Company participates in a second ceiling at $84.50 on the 46,000 Bbls) | ||||||||||||
No cost collars | Jan-Dec 2007 | 30,000 Bbls | 57.00 | 70.50 | ||||||||
No cost collars | Jan-Dec 2007 | 30,000 Bbls | 57.50 | 72.00 | ||||||||
No cost collars | Jan-Dec 2007 | 930,000 MmBtu | 8.00 | 10.23 | ||||||||
No cost collars | Jan-Dec 2008 | 46,000 Bbls | 55.00 | 69.00 | ||||||||
No cost collars | Jan-Dec 2008 | 750,000 MmBtu | 7.00 | 10.35 |
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3. | Management Agreements |
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4. | Contributions of National Onshore and National Offshore |
Assets contributed | ||||
Cash and cash equivalents | $ | 23,753 | ||
Accounts receivable | 10,482 | |||
Drilling prepayments | 2,601 | |||
Deferred tax assets, net | 1,943 | |||
Other | 2,051 | |||
Oil and natural gas properties | 128,673 | |||
Restricted deposits | 23,519 | |||
Deferred taxes | 592 | |||
Total assets | 193,614 | |||
Liabilities assumed | ||||
Accounts payable | 11,235 | |||
Accounts payable — affiliate | 555 | |||
Current portion of note payable to affiliate | 5,429 | |||
Prepayments from partners | 652 | |||
Accrued interest — affiliates | 288 | |||
Income tax payable — affiliate | 156 | |||
Accounts payable — revenue | 716 | |||
Accounts payable — other | 10 | |||
Derivative financial instruments | 903 | |||
Note payable to affiliate — net of current maturities | 32,571 | |||
Asset retirement obligation | 49,538 | |||
Total liabilities assumed | 102,053 | |||
Net assets contributed | $ | 91,561 | ||
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5. | Acquisitions |
6. | Sale of West Delta Properties |
7. | Investments/Note Receivable |
8. | Restricted Deposits |
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Year Ended December 31, | ||||
2006 | $ | 3,200 | ||
2007 | 6,100 | |||
2008 | 3,200 | |||
2009 | 3,200 | |||
2010 | 5,000 | |||
Thereafter | 4,000 | |||
$ | 24,700 | |||
9. | Debt |
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Notes payable to various prior creditors of National Onshore in settlement of bankruptcy claims. The notes are generally payable over a 30 month period with a stated interest rate of 6%; however, the notes have been discounted to an effective rate of 10% | $ | 2,503 | ||
Note payable — asset acquisition | — | |||
Total | 2,503 | |||
Less Current maturities | (2,503 | ) | ||
$ | — | |||
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10. | Income Taxes |
Year Ended December 31, | ||||||||
2004 | 2005 | |||||||
Current | $ | (404 | ) | $ | (3 | ) | ||
Deferred | 144 | 2,935 | ||||||
$ | (260 | ) | $ | 2,932 | ||||
Year Ended December 31, | ||||||||
2004 | 2005 | |||||||
Federal statutory rate | 35.0 | % | 35.0 | % | ||||
Income not subject to taxation | (31.2 | )% | (44.0 | )% | ||||
Valuation allowance on deferred tax assets | (3.0 | )% | — | |||||
Other | — | (0.2 | )% | |||||
0.8 | % | (9.2 | )% | |||||
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11. | Commitments and Contingencies |
12. | Asset Retirement Obligation |
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Balance as of January 1, 2005 | $ | 56,524 | ||
Add: Accretion | 3,019 | |||
Drilling additions | 2,067 | |||
Less: Revisions | (2,813 | ) | ||
Settlements | (431 | ) | ||
Dispositions | (17,138 | ) | ||
Balance as of December 31, 2005 | $ | 41,228 | ||
13. | Severance tax refund |
14. | Crude Oil and Natural Gas Producing Activities |
Year Ended December 31, | ||||||||
2004 | 2005 | |||||||
Acquisition of properties | $ | — | $ | 114,244 | ||||
Properties contributed by member | 128,673 | — | ||||||
Exploration costs | 62,209 | 75,357 | ||||||
Development costs | 52,765 | 124,305 | ||||||
Depletion rate per Mcfe | $ | 2.11 | $ | 2.33 |
Year Ended December 31, | ||||||||
2004 | 2005 | |||||||
Plains All American | $ | 19,857 | $ | 41,345 | ||||
Duke Energy | 33,958 | 44,850 | ||||||
Kinder Morgan | 18,005 | 14,402 | ||||||
Crosstex Energy Services, Inc. | 5,081 | 22,790 | ||||||
Riata Energy, Inc. | 29,846 | 52,300 | ||||||
Seminole Energy Services | 19,568 | 27,315 | ||||||
Louis Dreyfus | — | 26,790 |
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15. | Supplementary Crude Oil and Natural Gas Reserve Information (Unaudited) |
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Crude Oil | Natural Gas | |||||||
(MBbl) | ( MMcf) | |||||||
December 31, 2003 | 8,166 | 206,260 | ||||||
Reserves of Panaco contributed by member | 5,204 | 25,982 | ||||||
Sales of reserves in place | (16 | ) | (344 | ) | ||||
Extensions and discoveries | 524 | 50,226 | ||||||
Revisions of previous estimates | 204 | 9,810 | ||||||
Production | (1,484 | ) | (18,895 | ) | ||||
December 31, 2004 | 12,598 | 273,039 | ||||||
Purchase of reserves in place | 483 | 94,937 | ||||||
Sales of reserves in place | (625 | ) | (7,426 | ) | ||||
Extensions and discoveries | 743 | 79,592 | ||||||
Revisions of previous estimates | 495 | 17,015 | ||||||
Production | (1,790 | ) | (28,107 | ) | ||||
December 31, 2005 | 11,904 | 429,050 | ||||||
Proved developed reserves: | ||||||||
December 31, 2004 | 8,955 | 151,452 | ||||||
December 31, 2005 | 8,340 | 200,520 | ||||||
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Future cash inflows | $ | 4,891,094 | ||
Future production costs | (1,029,393 | ) | ||
Future development costs | (527,399 | ) | ||
Future income tax expense | — | |||
Future net cash flows | 3,334,302 | |||
10% annual discount for estimated timing of cash flows | (1,562,242 | ) | ||
Standardized measure of discounted future net cash flows | $ | 1,772,060 | ||
Year Ended December 31, | ||||||||
2004 | 2005 | |||||||
Beginning of Period | $ | 613,752 | $ | 771,280 | ||||
Purchases of reserves | — | 415,208 | ||||||
Contribution of reserves by member | 75,239 | — | ||||||
Sales of reserves in place | (1,375 | ) | (34,820 | ) | ||||
Sales and transfers of crude oil and natural gas produced, net of production costs | (130,640 | ) | (205,838 | ) | ||||
Net changes in prices and production costs | 16,686 | 408,909 | ||||||
Development costs incurred during the period and changes in estimated future development costs | (89,491 | ) | (150,639 | ) | ||||
Extensions and discoveries, less related costs | 193,022 | 411,092 | ||||||
Income taxes | — | 24,097 | ||||||
Revisions of previous quantity estimates | 31,730 | 68,937 | ||||||
Accretion of discount | 62,050 | 77,128 | ||||||
Changes in production rates (timing) and other | 307 | (13,294 | ) | |||||
Net change | 157,528 | 1,000,780 | ||||||
End of Period | $ | 771,280 | $ | 1,772,060 | ||||
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AND THE 103/4% SENIOR NOTES DUE FROM NATIONAL ENERGY GROUP, INC., BUT INCLUDING
NATIONAL ENERGY GROUP INC.’S 50% MEMBERSHIP INTEREST IN NEG HOLDING LLC
December 31, | September 30, | |||||||
2005 | 2006 | |||||||
(Unaudited) | ||||||||
(In thousands) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 102,322 | $ | 26,362 | ||||
Accounts receivable, net | 53,378 | 53,436 | ||||||
Notes receivable | 10 | 9 | ||||||
Drilling prepayments | 3,281 | 3,755 | ||||||
Derivative financial instruments | — | 14,158 | ||||||
Other | 9,798 | 5,788 | ||||||
Total current assets | 168,789 | 103,508 | ||||||
Oil and gas properties, at cost (full cost method) | 1,229,923 | 1,409,776 | ||||||
Accumulated depreciation, depletion and amortization | (488,560 | ) | (562,635 | ) | ||||
Net oil and gas properties | 741,363 | 847,141 | ||||||
Other property and equipment | 6,029 | 6,232 | ||||||
Accumulated depreciation | (4,934 | ) | (5,173 | ) | ||||
Net other property and equipment | 1,095 | 1,059 | ||||||
Restricted deposits | 24,267 | 30,713 | ||||||
Derivative financial instruments | — | 15,787 | ||||||
Other assets | 4,842 | 8,296 | ||||||
Total assets | $ | 940,356 | $ | 1,006,504 | ||||
LIABILITIES AND MEMBER’S EQUITY | ||||||||
Current Liabilities: | ||||||||
Accounts payable | $ | 18,105 | $ | 20,058 | ||||
Accounts payable — revenue | 11,454 | 9,759 | ||||||
Accounts payable — affiliates | 1,660 | 1,569 | ||||||
Current portion of notes payable | 2,503 | — | ||||||
Advance from affiliate | 39,800 | — | ||||||
Prepayments from partners | 121 | 823 | ||||||
Accrued interest | 162 | 61 | ||||||
Accrued interest — affiliates | 2,194 | 2,194 | ||||||
Income tax payable — affiliate | 2,749 | 2,749 | ||||||
Derivative financial instruments | 68,039 | — | ||||||
Total current liabilities | 146,787 | 37,213 | ||||||
Commitments and contingencies | ||||||||
Credit facility | 300,000 | 300,000 | ||||||
Gas balancing | 1,108 | 1,108 | ||||||
Derivative financial instruments | 17,893 | — | ||||||
Other liabilities | 250 | 250 | ||||||
Deferred income tax liability | — | 2,128 | ||||||
Asset retirement obligation | 41,228 | 47,609 | ||||||
Total liabilities | 507,266 | 388,308 | ||||||
Member’s equity | 433,090 | 618,196 | ||||||
Total liabilities and member’s equity | $ | 940,356 | $ | 1,006,504 | ||||
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AND THE 103/4% SENIOR NOTES DUE FROM NATIONAL ENERGY GROUP, INC. BUT INCLUDING
NATIONAL ENERGY GROUP INC.’S 50% MEMBERSHIP INTEREST IN NEG HOLDING LLC
COMBINED STATEMENTS OF OPERATIONS
Nine Months Ended | ||||||||
September 30, | ||||||||
2005 | 2006 | |||||||
(Unaudited) | ||||||||
(In thousands) | ||||||||
Revenues: | ||||||||
Oil and gas sales — gross | $ | 193,633 | $ | 208,800 | ||||
Unrealized derivatives (losses) gains | (111,631 | ) | 115,877 | |||||
Oil and gas revenues — net | 82,002 | 324,677 | ||||||
Plant revenues | 4,707 | 5,799 | ||||||
Total revenues | 86,709 | 330,476 | ||||||
Costs and expenses: | ||||||||
Lease operating | 19,632 | 26,817 | ||||||
Transportation and gathering | 3,764 | 3,441 | ||||||
Plant and field operations | 2,644 | 3,270 | ||||||
Production and ad valorem taxes | 11,184 | 8,948 | ||||||
Depreciation, depletion and amortization | 65,756 | 74,408 | ||||||
Accretion of asset retirement obligation | 2,290 | 2,112 | ||||||
General and administrative | 10,651 | 10,281 | ||||||
Total costs and expenses | 115,921 | 129,277 | ||||||
Operating income (loss) | (29,212 | ) | 201,199 | |||||
Interest expense | (4,856 | ) | (16,738 | ) | ||||
Interest expense — affiliate | (3,047 | ) | — | |||||
Interest income and other | 185 | 4,788 | ||||||
Income (loss) before income taxes | (36,930 | ) | 189,249 | |||||
Income tax benefit (expense) | 2,932 | (2,143 | ) | |||||
Net income (loss) | $ | (33,998 | ) | $ | 187,106 | |||
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AND THE 103/4% SENIOR NOTES DUE FROM NATIONAL ENERGY GROUP, INC., BUT INCLUDING
NATIONAL ENERGY GROUP INC.’S 50% MEMBERSHIP INTEREST IN NEG HOLDING LLC
COMBINED STATEMENTS OF CASH FLOWS
Nine Months Ended | ||||||||
September 30, | ||||||||
2005 | 2006 | |||||||
(Unaudited) | ||||||||
(In thousands) | ||||||||
Operating activities: | ||||||||
Net income (loss) | $ | (33,998 | ) | $ | 187,106 | |||
Noncash adjustments: | ||||||||
Deferred income tax expense (benefit) | (2,932 | ) | 2,128 | |||||
Depreciation, depletion and amortization | 65,756 | 74,408 | ||||||
Unrealized derivative losses (gains) | 111,631 | (115,877 | ) | |||||
Accretion of asset retirement obligation | 2,290 | 2,112 | ||||||
Amortization of note discount | 66 | 27 | ||||||
Equity in loss on investment | 917 | — | ||||||
Interest income-restricted deposits | (265 | ) | (616 | ) | ||||
Amortization of note costs | 527 | 773 | ||||||
Gain on sale of assets | (9 | ) | (2 | ) | ||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (9,270 | ) | (212 | ) | ||||
Drilling prepayments | (1,616 | ) | (475 | ) | ||||
Derivative deposit | (64,068 | ) | — | |||||
Other assets | 2,369 | 3,920 | ||||||
Accounts payable and accrued liabilities | (7,605 | ) | 1,013 | |||||
Net cash provided by operating activities | 63,793 | 154,305 | ||||||
Investing activities: | ||||||||
Acquisition, exploration, and development costs | (183,479 | ) | (175,619 | ) | ||||
Proceeds from sales of oil and gas properties | 679 | 37 | ||||||
Purchases of furniture, fixtures and equipment | (398 | ) | (293 | ) | ||||
Equity investment | (454 | ) | — | |||||
Investment in restricted deposits | (3,538 | ) | (5,832 | ) | ||||
Net cash used in investing activities | (187,190 | ) | (181,707 | ) | ||||
Financing activities: | ||||||||
Debt issuance costs | — | (573 | ) | |||||
Guaranteed payment to member | (7,989 | ) | (7,989 | ) | ||||
Equity contribution | — | 7,989 | ||||||
Proceeds from/repayment of affiliate borrowings | 73,443 | (39,800 | ) | |||||
Dividend payment to member | — | (2,000 | ) | |||||
Proceeds from credit facility | 59,100 | — | ||||||
Principal payments on debt | (1,554 | ) | (2,530 | ) | ||||
Deferred equity costs | — | (3,655 | ) | |||||
Net cash provided by (used in) financing activities | 123,000 | (48,558 | ) | |||||
Decrease in cash and cash equivalents | (397 | ) | (75,960 | ) | ||||
Cash and cash equivalents at beginning of period | 30,846 | 102,322 | ||||||
Cash and cash equivalents at end of period | $ | 30,449 | $ | 26,362 | ||||
Supplemental cash flow information: | ||||||||
Cash paid for interest | $ | 13,205 | $ | 16,052 | ||||
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AND THE 103/4% SENIOR NOTES DUE FROM NATIONAL ENERGY GROUP, INC., BUT INCLUDING
NATIONAL ENERGY GROUP INC.’S 50% MEMBERSHIP INTEREST IN NEG HOLDING LLC
COMBINED STATEMENT OF CHANGES IN TOTAL MEMBER’S EQUITY
Nine Month Period Ended September 30, 2006
(2006 Amounts Unaudited)
(In thousands) | ||||
Total member’s equity — December 31, 2005 | $ | 433,090 | ||
Dividend distribution | (2,000 | ) | ||
Equity contribution | 7,989 | |||
Guaranteed payment to member | (7,989 | ) | ||
Net income | 187,106 | |||
Total member’s equity — September 30, 2006 | $ | 618,196 | ||
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AND THE 103/4% SENIOR NOTES DUE FROM NATIONAL ENERGY GROUP, INC., BUT INCLUDING
NATIONAL ENERGY GROUP INC.’S 50% MEMBERSHIP INTEREST IN NEG HOLDING LLC
NOTES TO COMBINED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
1. | Organization, Basis of Presentation and Background |
• | A 50.01% ownership interest in National Energy Group, Inc (National Energy Group), a publicly traded oil and gas management company. National Energy Group’s principal asset consists of its 50% membership interest in NEG Holding LLC (Holding, LLC); | |
• | $148.6 million principal amount of 103/4% Senior Notes due from National Energy Group (the “103/4% Senior Notes”). | |
• | A 50% managing membership interest in Holding, LLC; | |
• | The oil and gas operations of National Onshore LP; and | |
• | The oil and gas operations of National Offshore LP. |
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AND THE 103/4% SENIOR NOTES DUE FROM NATIONAL ENERGY GROUP, INC., BUT INCLUDING
NATIONAL ENERGY GROUP INC.’S 50% MEMBERSHIP INTEREST IN NEG HOLDING LLC
NOTES TO COMBINED FINANCIAL STATEMENTS (Unaudited) — (Continued)
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AND THE 103/4% SENIOR NOTES DUE FROM NATIONAL ENERGY GROUP, INC., BUT INCLUDING
NATIONAL ENERGY GROUP INC.’S 50% MEMBERSHIP INTEREST IN NEG HOLDING LLC
NOTES TO COMBINED FINANCIAL STATEMENTS (Unaudited) — (Continued)
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AND THE 103/4% SENIOR NOTES DUE FROM NATIONAL ENERGY GROUP, INC., BUT INCLUDING
NATIONAL ENERGY GROUP INC.’S 50% MEMBERSHIP INTEREST IN NEG HOLDING LLC
NOTES TO COMBINED FINANCIAL STATEMENTS (Unaudited) — (Continued)
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AND THE 103/4% SENIOR NOTES DUE FROM NATIONAL ENERGY GROUP, INC., BUT INCLUDING
NATIONAL ENERGY GROUP INC.’S 50% MEMBERSHIP INTEREST IN NEG HOLDING LLC
NOTES TO COMBINED FINANCIAL STATEMENTS (Unaudited) — (Continued)
2. | Management Agreements |
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AND THE 103/4% SENIOR NOTES DUE FROM NATIONAL ENERGY GROUP, INC., BUT INCLUDING
NATIONAL ENERGY GROUP INC.’S 50% MEMBERSHIP INTEREST IN NEG HOLDING LLC
NOTES TO COMBINED FINANCIAL STATEMENTS (Unaudited) — (Continued)
3. | Derivatives |
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AND THE 103/4% SENIOR NOTES DUE FROM NATIONAL ENERGY GROUP, INC., BUT INCLUDING
NATIONAL ENERGY GROUP INC.’S 50% MEMBERSHIP INTEREST IN NEG HOLDING LLC
NOTES TO COMBINED FINANCIAL STATEMENTS (Unaudited) — (Continued)
Nine Months Ended | ||||||||
September 30, | ||||||||
2005 | 2006 | |||||||
Realized loss — (net cash payments) | $ | (19,486 | ) | $ | (25,014 | ) | ||
Unrealized gain (loss) | (111,631 | ) | 115,877 | |||||
Gain (loss) on Derivative Contracts | $ | (131,117 | ) | $ | 90,863 | |||
Type of Contract | Production Month | Volume per Month | Floor | Ceiling | ||||||||||||
No cost collars | Oct-Dec 2006 | 31,000 BBLS | $ | 41.65 | $ | 45.25 | ||||||||||
No cost collars | Oct-Dec 2006 | 16,000 Bbls | 41.75 | 45.40 | ||||||||||||
No cost collars | Oct-Dec 2006 | 570,000 MMBTU | 6.00 | 7.25 | ||||||||||||
No cost collars | Oct-Dec 2006 | 120,000 MMBTU | 6.00 | 7.28 | ||||||||||||
No cost collars | Oct-Dec 2006 | 500,000 MMBTU | 4.50 | 5.00 | ||||||||||||
No cost collars | Oct-Dec 2006 | 46,000 Bbls | 60.00 | 68.50 | ||||||||||||
(The Company participates in a second ceiling at $84.50 on the 46,000 Bbls) | ||||||||||||||||
No cost collars | Jan-Dec 2007 | 30,000 Bbls | 57.00 | 70.50 | ||||||||||||
No cost collars | Jan-Dec 2007 | 30,000 Bbls | 57.50 | 72.00 | ||||||||||||
No cost collars | Jan-Dec 2007 | 930,000 MMBTU | 8.00 | 10.23 | ||||||||||||
No cost collars | Jan-Dec 2007 | 1,000 Bbls | 65.00 | 87.40 | (A) | |||||||||||
No cost collars | Jan-Dec 2007 | 7,000 Bbls | 65.00 | 86.00 | (A) | |||||||||||
No cost collars | Jan-Dec 2007 | 330,000 MMBTU | 9.60 | 12.10 | (A) | |||||||||||
No cost collars | Jan-Dec 2007 | 100,000 MMBTU | 9.55 | 12.60 | (A) | |||||||||||
No cost collars | Jan-Dec 2008 | 46,000 Bbls | 55.00 | 69.00 | ||||||||||||
No cost collars | Jan-Dec 2008 | 750,000 MMBTU | 7.00 | 10.35 | ||||||||||||
No cost collars | Jan-Dec 2008 | 9,000 Bbls | 65.00 | 81.25 | (A) | |||||||||||
No cost collars | Jan-Dec 2008 | 70,000 MMBTU | 8.75 | 11.90 | (A) | |||||||||||
No cost collars | Jan-Dec 2008 | 270,000 MMBTU | 8.80 | 11.45 | (A) | |||||||||||
No cost collars | Jan-Dec 2009 | 19,000 Bbls | 65.00 | 78.50 | (A) | |||||||||||
No cost collars | Jan-Dec 2009 | 26,000 Bbls | 65.00 | 77.00 | (A) | |||||||||||
No cost collars | Jan-Dec 2009 | 330,000 MMBTU | 7.90 | 10.80 | (A) | |||||||||||
No cost collars | Jan-Dec 2009 | 580,000 MMBTU | 7.90 | 11.00 | (A) |
(A) | On October 17, 2006 the Company terminated the derivative contract. See Note 12. |
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AND THE 103/4% SENIOR NOTES DUE FROM NATIONAL ENERGY GROUP, INC., BUT INCLUDING
NATIONAL ENERGY GROUP INC.’S 50% MEMBERSHIP INTEREST IN NEG HOLDING LLC
NOTES TO COMBINED FINANCIAL STATEMENTS (Unaudited) — (Continued)
4. | Acquisitions |
5. | Sale of West Delta Properties |
6. | Investments/Note Receivable |
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AND THE 103/4% SENIOR NOTES DUE FROM NATIONAL ENERGY GROUP, INC., BUT INCLUDING
NATIONAL ENERGY GROUP INC.’S 50% MEMBERSHIP INTEREST IN NEG HOLDING LLC
NOTES TO COMBINED FINANCIAL STATEMENTS (Unaudited) — (Continued)
7. | Restricted Deposits |
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AND THE 103/4% SENIOR NOTES DUE FROM NATIONAL ENERGY GROUP, INC., BUT INCLUDING
NATIONAL ENERGY GROUP INC.’S 50% MEMBERSHIP INTEREST IN NEG HOLDING LLC
NOTES TO COMBINED FINANCIAL STATEMENTS (Unaudited) — (Continued)
Year Ended December 31, | ||||
Remainder of 2006 | 800 | |||
2007 | 6,100 | |||
2008 | 3,200 | |||
2009 | 3,200 | |||
2010 | 5,000 | |||
Thereafter | 4,000 | |||
$ | 22,300 | |||
8. | Debt |
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AND THE 103/4% SENIOR NOTES DUE FROM NATIONAL ENERGY GROUP, INC., BUT INCLUDING
NATIONAL ENERGY GROUP INC.’S 50% MEMBERSHIP INTEREST IN NEG HOLDING LLC
NOTES TO COMBINED FINANCIAL STATEMENTS (Unaudited) — (Continued)
December 31, | September 30, | |||||||
2005 | 2006 | |||||||
Notes payable to various prior creditors of National Onshore in settlement of bankruptcy claims. The notes are generally payable over a 30 month period with a stated interest rate of 6%; however, the notes have been discounted to an effective rate of 10% | $ | 2,503 | $ | — | ||||
Less Current maturities | (2,503 | ) | — | |||||
$ | — | $ | — | |||||
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AND THE 103/4% SENIOR NOTES DUE FROM NATIONAL ENERGY GROUP, INC., BUT INCLUDING
NATIONAL ENERGY GROUP INC.’S 50% MEMBERSHIP INTEREST IN NEG HOLDING LLC
NOTES TO COMBINED FINANCIAL STATEMENTS (Unaudited) — (Continued)
9. | Income Taxes |
10. | Commitments and Contingencies |
Estimated Commitment as of | ||||||||||||||||||||
September 30, 2006 | ||||||||||||||||||||
Expected Drilling Location | Contract Duration | Total | 2006 | 2007 | 2008 | |||||||||||||||
Onshore West Texas | Six wells (approximately 3 months | ) | $ | 1,201 | $ | 1,201 | $ | — | $ | — | ||||||||||
Onshore East Texas | 18 months | 10,900 | 1,800 | 7,300 | 1,800 | |||||||||||||||
Onshore East Texas | 18 months | 10,900 | 1,200 | 7,300 | 2,400 | |||||||||||||||
Offshore | 6 months | 8,100 | — | 8,100 | — | |||||||||||||||
Total estimated commitments | $ | 31,101 | $ | 4,201 | $ | 22,700 | $ | 4,200 | ||||||||||||
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AND THE 103/4% SENIOR NOTES DUE FROM NATIONAL ENERGY GROUP, INC., BUT INCLUDING
NATIONAL ENERGY GROUP INC.’S 50% MEMBERSHIP INTEREST IN NEG HOLDING LLC
NOTES TO COMBINED FINANCIAL STATEMENTS (Unaudited) — (Continued)
11. | Asset Retirement Obligation |
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AND THE 103/4% SENIOR NOTES DUE FROM NATIONAL ENERGY GROUP, INC., BUT INCLUDING
NATIONAL ENERGY GROUP INC.’S 50% MEMBERSHIP INTEREST IN NEG HOLDING LLC
NOTES TO COMBINED FINANCIAL STATEMENTS (Unaudited) — (Continued)
Balance as of December 31, 2005 | $ | 41,228 | ||
Add: Accretion | 2,112 | |||
Drilling additions | — | |||
Acquired properties | 4,269 | |||
Less: Revisions | — | |||
Settlements | — | |||
Dispositions | — | |||
Balance as of September 30, 2006 | $ | 47,609 | ||
12. | Subsequent Events |
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Delivery by Registered or Certified Mail: Wells Fargo Bank, NA Corporate Trust Operations MAC N9303-121 PO Box 1517 Minneapolis, MN 55480 | Facsimile Transmissions: (Eligible Institutions Only) (214) 777-4086 Attention: Patrick T. Giordano, Corporate Trust Services | Overnight Delivery or Regular Mail: Wells Fargo Bank, NA Corporate Trust Operations MAC N9303-121 Sixth & Marquette Avenue Minneapolis, MN 55479 | ||
To Confirm by Telephone or for Information Call: (214) 740-1573 |
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• | DTC has received your instructions to tender your Outstanding Notes; and | |
• | You agree to be bound by the terms of this Letter of Transmittal. |
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