| EXPLORATION CO OF DELAWARE INC ITEM 1A RISK FACTORS Risks Related to Our Business Our future success depends upon our ability to find, develop and acquire additional oil and gas reserves that are economically recoverable |
| The rate of production from oil and natural gas properties declines as reserves are depleted |
| We must do this even during periods of low oil and gas prices when it is difficult to raise the capital necessary to finance activities |
| Without successful exploration or acquisition activities, our reserves and revenues will decline |
| We may not be able to find and develop or acquire additional reserves at an acceptable cost or have necessary financing for these activities |
| Our future success will depend on the success of our drilling programs |
| In addition to the numerous operating risks described in more detail below, these activities involve the risk that no commercially productive oil or gas reservoirs will be discovered |
| Furthermore, our drilling operations may be curtailed, delayed or canceled as a result of a variety of factors, including, but not limited to, the following: - unexpected drilling conditions; - pressure or irregularities in formations; - equipment failures or accidents; - adverse weather conditions; - inability to comply with governmental requirements; and - shortages or delays in the availability of drilling rigs and the delivery of equipment |
| If we experience any of these problems, our ability to conduct operations could be adversely affected |
| Factors beyond our control affect our ability to market oil and gas |
| Our ability to market oil and gas from our wells depends upon numerous factors beyond our control |
| These factors include, but are not limited to, the following: - the level of domestic production and imports of oil and gas; - the proximity of gas production to gas pipelines; - the availability of pipeline capacity; - the demand for oil and gas by utilities and other end users; - the availability of alternate fuel sources; - the effect of inclement weather; - state and federal regulation of oil and gas marketing; and - federal regulation of gas sold or transported in interstate commerce |
| If these factors were to change dramatically, our ability to market oil and gas or obtain favorable prices for our oil and gas could be adversely affected |
| 10 The marketability of our production may be dependent upon transportation facilities over which we have no control |
| The marketability of our production depends in part upon the availability, proximity, and capacity of pipelines, natural gas gathering systems and processing facilities |
| Any significant change in market factors affecting these infrastructure facilities could harm our business |
| We deliver some of our oil and natural gas through gathering systems and pipelines that we do not own |
| These facilities may not be available to us in the future |
| A substantial decrease in oil and natural gas prices could adversely affect our financial results |
| Our future financial condition, results of operations and the carrying value of our oil and natural gas properties depend primarily upon the prices we receive for our oil and natural gas production |
| Oil and natural gas prices historically have been volatile and likely will continue to be volatile in the future, especially given current world geopolitical conditions |
| Our cash flow from operations is highly dependent on the prices that we receive for oil and natural gas |
| This price volatility also affects the amount of our cash flow available for capital expenditures and our ability to borrow money or raise additional capital |
| The amount we can borrow or have outstanding under our bank credit facility is subject to semi-annual redeterminations |
| Oil prices are likely to affect us more than natural gas prices because approximately 70prca of our proved reserves are oil |
| The prices for oil and natural gas are subject to a variety of additional factors that are beyond our control |
| These factors include : - the level of consumer demand for oil and natural gas; - the domestic and foreign supply of oil and natural gas; - the ability of the members of the Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls; - the price of foreign oil and natural gas; - domestic governmental regulations and taxes; - the price and availability of alternative fuel sources; - weather conditions, including hurricanes and tropical storms in and around the Gulf of Mexico; - market uncertainty; - political conditions in oil and natural gas producing regions, including the Middle East; and - worldwide economic conditions |
| These factors and the volatility of the energy markets generally make it extremely difficult to predict future oil and natural gas price movements with any certainty |
| Also, oil and natural gas prices do not necessarily move in tandem |
| Declines in oil and natural gas prices would not only reduce revenue, but could reduce the amount of oil and natural gas that we can produce economically and, as a result, could have a material adverse effect upon our financial condition, results of operations, oil and natural gas reserves and the carrying values of our oil and natural gas properties |
| If the oil and natural gas industry experiences significant price declines, we may, among other things, be unable to meet our financial obligations or make planned expenditures |
| At the end of 1998, NYMEX oil prices were at historic lows of approximately dlra12dtta00 per Bbl, but have generally increased since that time, albeit with fluctuations |
| For 2005, NYMEX oil prices were high throughout the year, averaging over dlra56dtta00 per Bbl for 2005 |
| During 2004 and 2005, the price we received for our heavier, sour crude oil did not correlate as well with NYMEX prices as it has historically |
| During 2002 and 2003, our average discount to NYMEX was dlra3dtta73 per Bbl and dlra3dtta60 per Bbl respectively |
| During 2004, this differential increased to dlra4dtta91 per Bbl for the year as a result of the price deterioration for heavier, sour crudes, and was even higher during the fourth quarter of 2004, averaging dlra6dtta48 per Bbl |
| While we attempt to obtain the best price for our crude in our marketing efforts, we cannot control these market price swings and ar e subject to the market volatility for this type of oil |
| These price differentials relative to NYMEX prices can have as much of an impact on our profitability as does the volatility in the NYMEX oil prices |
| Natural gas prices have also experienced volatility during the last few years |
| During 1999 natural gas prices averaged approximately dlra2dtta35 per Mcf and, like crude oil, have generally trended upward since that time, although with significant fluctuations along the way |
| During 2004 NYMEX natural gas prices averaged dlra6dtta23 per MMBtu and in 2005, averaged dlra8dtta97 per MMBtu |
| 11 We may not be able to replace our reserves or generate cash flows if we are unable to raise capital |
| We make, and will continue to make, substantial capital expenditures for the exploration, acquisition and production of oil and gas reserves |
| Historically, we have financed these expenditures primarily with cash generated by operations and proceeds from bank borrowings and equity financing |
| If our revenues or borrowing base decrease as a result of lower oil and gas prices, operating difficulties or declines in reserves, we may have limited ability to expend the capital necessary to undertake or complete future drilling programs |
| Additional debt or equity financing or cash generated by operations may not be available to meet these requirements |
| We face strong competition from other energy companies that may negatively affect our ability to carry on operations |
| We operate in the highly competitive areas of oil and gas exploration, development and production |
| Factors which affect our ability to successfully compete in the marketplace include, but are not limited to, the following: - the availability of funds and information relating to a property; - the standards established by us for the minimum projected return on investment; - the availability of alternate fuel sources; and - the intermediate transportation of gas |
| Our competitors include major integrated oil companies, substantial independent energy companies, affiliates of major interstate and intrastate pipelines, and national and local gas gatherers |
| Many of these competitors possess greater financial and other resources than we do |
| The inability to control other associated entities could adversely affect our business |
| To the extent that we do not operate all of our properties, our success depends in part upon operations on certain properties in which we may have an interest along with other business entities |
| Because we have no control over such entities, we are able to neither direct their operations, nor ensure that their operations on our behalf will be completed in a timely and efficient manner |
| Any delays in such business entities &apos operations could adversely affect our operations |
| We constantly evaluate opportunities to acquire oil and natural gas properties and frequently engage in bidding and negotiating for these acquisitions |
| If successful in this process, we may alter or increase our capitalization through the issuance of additional debt or equity securities, the sale of production payments or other measures |
| Any change in capitalization affects our risk profile |
| A change in capitalization, however, is not the only way acquisitions affect our risk profile |
| Acquisitions may alter the nature of our business |
| This could occur when the character of acquired properties is substantially different from our existing properties in terms of operating or geologic characteristics |
| Operating hazards may adversely affect our ability to conduct business |
| Our operations are subject to risks inherent in the oil and gas industry, including, but not limited to, the following: - blowouts; - cratering; - explosions; - uncontrollable flows of oil, gas or well fluids; - fires; - pollution; and - other environmental risks |
| These risks could result in substantial losses to us from injury and loss of life, damage to and destruction of property and equipment, pollution and other environmental damage and suspension of operations |
| Governmental regulations may impose liability for pollution damage or result in the interruption or termination of operations |
| 12 Losses and liabilities from uninsured or underinsured drilling and operating activities could have a material adverse effect on our financial condition and operations |
| Although we maintain several types of insurance to cover our operations, we may not be able to maintain adequate insurance in the future at rates we consider reasonable, or losses may exceed the maximum limits under our insurance policies |
| If a significant event that is not fully insured or indemnified occurs, it could materially and adversely affect our financial condition and results of operations |
| Compliance with environmental and other government regulations could be costly and could negatively impact production |
| Our operations are subject to numerous laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection |
| Without limiting the generality of the foregoing, these laws and regulations may: - require the acquisition of a permit before drilling commences; - restrict the types, quantities and concentration of various substances that can be released into the environment from drilling and production activities; - limit or prohibit drilling activities on certain lands lying within wilderness, wetlands and other protected areas; - require remedial measures to mitigate pollution from former operations, such as plugging abandoned wells; and - impose substantial liabilities for pollution resulting from our operations |
| The recent trend toward stricter standards in environmental legislation and regulation is likely to continue |
| The enactment of stricter legislation or the adoption of stricter regulation could have a significant impact on our operating costs, as well as on the oil and gas industry in general |
| Our operations could result in liability for personal injuries, property damage, oil spills, discharge of hazardous materials, remediation and clean-up costs and other environmental damages |
| We could also be liable for environmental damages caused by previous property owners |
| As a result, substantial liabilities to third parties or governmental entities may be incurred which could have a material adverse effect on our financial condition and results of operations |
| We maintain insurance coverage for our operations, but we do not believe that insurance coverage for environmental damages that occur over time or complete coverage for sudden and accidental environmental damages is available at a reasonable cost |
| Accordingly, we may be subject to liability or may lose the privilege to continue exploration or production activities upon substantial portions of our properties if certain environmental damages occur |
| You should not place undue reliance on reserve information because reserve information represents estimates |
| While estimates of our oil and gas reserves, and future net cash flows attributable to those reserves, were prepared by independent petroleum engineers, there are numerous uncertainties inherent in estimating quantities of proved reserves and cash flows from such reserves, including factors beyond our control and the control of engineers |
| Reserve engineering is a subjective process of estimating underground accumulations of oil and gas that cannot be measured in an exact manner |
| The accuracy of an estimate of quantities of reserves, or of cash flows attributable to these reserves, is a function of many factors, including, but not limited to, the following: - the available data; - assumptions regarding future oil and gas prices; - expenditures for future development and exploitation activities; and - engineering and geological interpretation and judgment |
| Reserves and future cash flows may also be subject to material downward or upward revisions based upon production history, development and exploitation activities and oil and gas prices |
| Actual future production, revenue, taxes, development expenditures, operating expenses, quantities of recoverable reserves and value of cash flows from those reserves may vary significantly from the estimates |
| In addition, reserve engineers may make different estimates of reserves and cash flows based on the same available data |
| For the reserve calculations, oil was converted to gas equivalent at six Mcf of gas for one Bbl of oil |
| This ratio approximates the energy equivalency of gas to oil on a Btu basis |
| However, it may not represent the relative prices received from the sale of our oil and gas production |
| The estimated quantities of proved reserves and the discounted present value of future net cash flows attributable to those reserves included in this document were prepared by independent petroleum engineers in accordance with the rules of the SFAS 69 and the SEC These estimates are not intended to represent the fair market value of our reserves |
| 13 Loss of executive officers or other key employees could adversely affect our business |
| Our success is dependent upon the continued services and skills of our current executive management |
| The loss of services of any of these key personnel could have a negative impact on our business because of such personnelapstas skills and industry experience and the difficulty of promptly finding qualified replacement personnel |
| Our use of hedging arrangements could result in financial losses or reduce our income |
| We sometimes engage in hedging arrangements to reduce our exposure to fluctuations in the prices of oil and natural gas for a portion of our oil and natural gas production |
| These hedging arrangements expose us to risk of financial loss in some circumstances, including, without limitation, when: - production is less than expected; - the counterparty to the hedging contract defaults on our contract obligations; or - there is a change in the expected differential between the underlying price in the hedging agreement and the actual prices received |
| In addition, these hedging arrangements may limit the benefit we would otherwise receive from increases in prices for oil and natural gas |
| Acquisition of entire businesses may be a component of our growth strategy; our failure to complete future acquisitions successfully could reduce our earnings and slow our growth |
| While our business strategy does not currently contemplate the acquisition of entire businesses, it is possible that we might acquire entire businesses in the future |
| Potential risks involved in the acquisition of such businesses include the inability to continue to identify business entities for acquisition or the inability to make acquisitions on terms that we consider economically acceptable |
| Furthermore, there is intense competition for acquisition opportunities in our industry |
| Competition for acquisitions may increase the cost of, or cause us to refrain from, completing acquisitions |
| Our strategy of completing acquisitions would be dependent upon, among other things, our ability to obtain debt and equity financing and, in some cases, regulatory approvals |
| Our ability to pursue our growth strategy may be hindered if we are not able to obtain financing or regulatory approvals |
| Our ability to grow through acquisitions and manage growth would require us to continue to invest in operatio nal, financial and management information systems and to attract, retain, motivate and effectively manage our employees |
| The inability to effectively manage the integration of acquisitions could reduce our focus on subsequent acquisitions and current operations, which, in turn, could negatively impact our earnings and growth |
| Our financial position and results of operations may fluctuate significantly from period to period, based on whether or not significant acquisitions are completed in particular periods |
| Risks Related to Our Common Stock We may need additional capital |
| Our board of directors may determine in the future that we need to obtain additional capital through the issuance of additional shares of preferred stock, common stock or other securities |
| Any such issuance will dilute the ownership interests of the current holders of the Common Stock |
| We may issue additional shares of Common Stock |
| Pursuant to our certificate of incorporation, our board of directors has the authority to issue additional series of Common Stock and to determine the rights and restrictions of shares of those series without the approval of our stockholders |
| The rights of the holders of the current series of Common Stock may be junior to the rights of Common Stock that may be issued in the future |
| We may issue Preferred Stock with greater rights than our Common Stock |
| Although there are no current plans, arrangements, understandings or agreements to issue any preferred stock, our certificate of incorporation authorizes our board of directors to issue one or more series of preferred stock and set the terms of the preferred stock without seeking any further approval from you |
| Any preferred stock that is issued may rank ahead of our Common Stock for dividend priority and liquidation premiums and may have greater voting rights than our Common Stock |
| 14 There may be future dilution of our Common Stock |
| To the extent options to purchase Common Stock under employee and director stock option plans are exercised, holders of our Common Stock will be diluted |
| If available funds and cash generated from our operations are insufficient to satisfy our needs, we may be compelled to sell additional equity or convertible debt securities |
| The sale of additional equity or convertible debt securities could result in additional dilution to our stockholders |
| Our management controls a significant percentage of our outstanding Common Stock and their interests may conflict with those of our stockholders |
| Our directors and executive officers and their affiliates beneficially own a substantial percentage of our outstanding Common Stock |
| This concentration of ownership could have the effect of delaying or preventing a change in control of the Company, or otherwise discouraging a potential acquirer from attempting to obtain control of the Company |
| This could have a material adverse effect on the market price of the Common Stock or prevent our stockholders from realizing a premium over the then prevailing market prices for their shares of Common Stock |
| Sales of substantial amounts of our Common Stock may adversely affect our stock price and make future offerings to raise more capital difficult |
| Sales of a large number of shares of our Common Stock in the market or the perception that sales may occur could adversely affect the trading price of our Common Stock |
| We may issue restricted securities or register additional shares of Common Stock in the future for our use in connection with future acquisitions |
| Except for volume limitations and certain other regulatory requirements applicable to affiliates, such shares may be freely tradable unless we contractually restrict their resale |
| The availability for sale, or sale, of the shares of Common Stock eligible for future sale could adversely affect the market price of our Common Stock |
| Provisions in our corporate documents, Delaware law and our shareholders &apos rights agreement could delay or prevent a change in control of the Company, even if the change would be beneficial to our stockholders |
| Certain provisions of our certificate of incorporation and bylaws, as amended, together with our shareholders &apos rights agreement, may delay, discourage, prevent or render more difficult an attempt to obtain control of the Company, whether through a tender offer, business combination, proxy contest or otherwise |
| These factors may impair the efforts of a potential buyer of the Company to gain control and discourage transactions that could benefit our shareholders |
| We do not expect to pay dividends on our Common Stock |
| We do not expect to pay any cash dividends with respect to our Common Stock in the foreseeable future |