| Our revenues, profitability and future growth and the carrying value of our properties depend substantially on prevailing oil and gas prices |
| Prices also affect the amount of cash flow available for capital expenditures and our ability to borrow and raise additional capital |
| The amount we will be able to borrow under our senior revolving credit facility will be subject to periodic redetermination based in part on changing expectations of future prices |
| Lower prices may also reduce the amount of oil and gas that we can economically produce and have an adverse effect on the value of our properties |
| Prices for oil and gas have increased significantly and been more volatile over the past twelve months |
| Historically, the markets for oil and gas have been volatile, and they are likely to continue to be volatile in the future |
| Among the factors that can cause volatility are: • the domestic and foreign supply of oil and gas; • the ability of members of the Organization of Petroleum Exporting Countries, or OPEC, and other producing countries to agree upon and maintain oil prices and production levels; • political instability, armed conflict or terrorist attacks, whether or not in oil or gas producing regions; • the level of consumer product demand; • the growth of consumer product demand in emerging markets, such as China; • labor unrest in oil and gas producing regions; • weather conditions, including hurricanes; • the price and availability of alternative fuels; • the price of foreign imports; • worldwide economic conditions; and • the availability of liquid natural gas imports |
| These external factors and the volatile nature of the energy markets make it difficult to estimate future prices of oil and gas |
| In addition, the borrowing base limitation under our senior revolving credit facility is determined on a semi-annual basis at the discretion of our banks and is based, in part, on oil and gas prices |
| If the banks set our borrowing base at an amount below the aggregate principal amount of our debt outstanding under that facility, we could be required to repay a portion of our bank debt |
| We may not have sufficient funds to make such repayments, which could result in a default under the terms of the loan agreement and an acceleration of the loan |
| Assets we acquire may prove to be worth less than we paid because of uncertainties in evaluating recoverable reserves and potential liabilities |
| Our recent growth is due significantly to acquisitions of exploration and production companies, producing properties and undeveloped leaseholds |
| We expect acquisitions will also contribute to our future growth |
| Successful acquisitions require an assessment of a number of factors, including estimates of recoverable reserves, exploration potential, future oil and gas prices, operating and capital costs and potential environmental and other liabilities |
| Such assessments are inexact and their accuracy is inherently uncertain |
| In connection with our assessments, we perform a review of the acquired properties which we believe is generally consistent with industry practices |
| However, such a review will not reveal all existing or potential problems |
| In addition, our review may not permit us to become sufficiently familiar with the properties to fully assess their deficiencies and capabilities |
| We do not inspect every well |
| Even when we inspect a well, we do not always discover structural, subsurface and environmental problems that may exist or arise |
| We are generally not entitled to contractual indemnification for preclosing liabilities, including environmental liabilities |
| Normally, we acquire interests in properties on an “as is” basis with limited remedies for breaches of representations and warranties |
| 15 _________________________________________________________________ [53]Table of Contents As a result of these factors, we may not be able to acquire oil and gas properties that contain economically recoverable reserves or be able to complete such acquisitions on acceptable terms |
| Estimates of oil and gas reserves are uncertain and any material inaccuracies in these reserve estimates will materially affect the quantities and the value of our reserves |
| These estimates are based upon various assumptions, including assumptions required by the SEC relating to oil and gas prices, drilling and operating expenses, capital expenditures, taxes and availability of funds |
| The process of estimating oil and gas reserves is complex |
| This process requires significant decisions and assumptions in the evaluation of available geological, geophysical, engineering and economic data for each reservoir |
| Actual future production, oil and gas prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable oil and gas reserves will vary from those estimated |
| Any significant variance could materially affect the estimated quantities and the value of our reserves |
| Our properties may also be susceptible to hydrocarbon drainage from production by other operators on adjacent properties |
| In addition, we may adjust estimates of proved reserves to reflect production history, results of exploration and development, prevailing oil and gas prices and other factors, many of which are beyond our control |
| Recovery of undeveloped reserves requires significant capital expenditures and successful drilling operations |
| The reserve data assumes that we will make significant capital expenditures to develop our reserves |
| Although we have prepared estimates of these oil and gas reserves and the costs associated with development of these reserves in accordance with SEC regulations, we cannot assure you that the estimated costs or estimated reserves are accurate, that development will occur as scheduled or that the actual results will be as estimated |
| We intend to fund our development, acquisition and exploration activities in part through additional debt financing |
| A higher level of debt could negatively impact our financial condition, results of operations and business prospects |
| As of December 31, 2005, we had approximately dlra500 million of long term debt, including dlra2dtta8 million of long term debt that is required to be repaid in the next 12 months |
| As of December 31, 2005, the borrowing base under our senior revolving credit facility was dlra260 million; however, as of January 31, 2006, it had increased to dlra400 million, due to the North Louisiana Acquisitions in early 2006 |
| If we incur additional debt in order to fund our development, acquisition and exploration activities or for other purposes, our level of debt, and the covenants contained in the agreements governing our debt, could have important consequences, including the following: • a portion of our cash flow from operations is used to pay interest on borrowings; • the covenants contained in the agreements governing our debt limit, our ability to borrow additional funds, pay dividends, dispose of assets or issue shares of preferred stock and otherwise may affect our flexibility in planning for, and reacting to, changes in business conditions; • a high level of debt may impair our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate or other purposes; • a leveraged financial position would make us more vulnerable to economic downturns and could limit our ability to withstand competitive pressures; and • any debt that we incur under our revolving credit facility will be at variable rates which make us vulnerable to increases in interest rates |
| In addition, in connection with the Mission merger, we assumed Mission’s 9 7/8prca senior notes in the aggregate principal amount of dlra130 million |
| The notes contain covenants that, subject to certain exceptions and qualifications, limit our ability and the ability of our subsidiaries to incur and guarantee additional indebtedness, issue certain types of equity securities, transfer or sell assets, or pay dividends |
| Additionally, transactions with affiliates, selling stock of a subsidiary, merging or consolidating are subject to qualifications |
| 16 _________________________________________________________________ [54]Table of Contents Our exploration and development drilling efforts and the operation of our wells may not be profitable or achieve our targeted returns |
| We require significant amounts of undeveloped leasehold acreage in order to further our development efforts |
| Exploration, development, drilling and production activities are subject to many risks, including the risk that commercially productive reservoirs will not be discovered |
| We invest in property, including undeveloped leasehold acreage, which we believe will result in projects that will add value over time |
| However, we cannot guarantee that all of our prospects will result in viable projects or that we will not abandon our initial investments |
| Additionally, we cannot guarantee that the leasehold acreage we acquire will be profitably developed, that new wells drilled by us will be productive or that we will recover all or any portion of our investment in such leasehold acreage or wells |
| In addition, wells that are profitable may not achieve our targeted rate of return |
| Our ability to achieve our target results are dependent upon the current and future market prices for oil and gas, costs associated with producing oil and gas and our ability to add reserves at an acceptable cost |
| We rely to a significant extent on 3-D seismic data and other advanced technologies in identifying leasehold acreage prospects and in conducting our exploration activities |
| The 3-D seismic data and other technologies we use do not allow us to know conclusively prior to acquisition of leasehold acreage or drilling a well whether oil or gas is present or may be produced economically |
| The use of 3-D seismic data and other technologies also requires greater pre-drilling expenditures than traditional drilling strategies |
| In addition, we may not be successful in implementing our business strategy of controlling and reducing our drilling and production costs in order to improve our overall return |
| The cost of drilling, completing and operating a well is often uncertain and cost factors can adversely affect the economics of a project |
| We cannot predict the cost of drilling, and we may be forced to limit, delay or cancel drilling operations as a result of a variety of factors, including: • unexpected drilling conditions; • pressure or irregularities in formations; • equipment failures or accidents; • adverse weather conditions, including hurricanes; • compliance with governmental requirements; and • shortages or delays in the availability of drilling rigs and the delivery of equipment |
| Our ability to finance our business activities will require us to generate substantial cash flow |
| Our business activities require substantial capital |
| We intend to finance our capital expenditures in the future through cash flow from operations, the incurrence of additional indebtedness and/or the issuance of additional equity securities |
| We cannot be sure that our business will continue to generate cash flow at or above current levels |
| Future cash flows and the availability of financing will be subject to a number of variables, such as: • the level of production from existing wells; • prices of oil and gas; • our results in locating and producing new reserves; • the success and timing of development of proved undeveloped reserves; and • general economic, financial, competitive, legislative, regulatory and other factors beyond our control |
| If we are unable to generate sufficient cash flow from operations to service our debt, we may have to obtain additional financing through the issuance of debt and/or equity |
| We cannot be sure that any additional financing will be available to us on acceptable terms |
| Issuing equity securities to satisfy our financing requirements could cause substantial dilution to our existing stockholders |
| The level of our debt financing could also materially affect our operations |
| 17 _________________________________________________________________ [55]Table of Contents If our revenues were to decrease due to lower oil and gas prices, decreased production or other reasons, and if we could not obtain capital through our senior revolving credit facility or otherwise, our ability to execute our development and acquisition plans, replace our reserves or maintain production levels could be greatly limited |
| We depend substantially on the continued presence of key personnel for critical management decisions and industry contacts |
| Our future performance will be substantially dependent on retaining key members of our management |
| The loss of the services of any of our executive officers or other key employees for any reason could have a material adverse effect on our business, operating results, financial condition and cash flows |
| We currently do not have employment agreements with any of our officers |
| The unavailability or high cost of drilling rigs, equipment, supplies, personnel and oil field services could adversely affect our ability to execute our exploration and development plans on a timely basis and within our budget |
| Our industry is cyclical and, from time to time, there is a shortage of drilling rigs, equipment, supplies or qualified personnel |
| During these periods, the costs and delivery times of rigs, equipment and supplies are substantially greater |
| In addition, the demand for, and wage rates of, qualified drilling rig crews rise as the number of active rigs in service increases |
| As a result of increasing levels of exploration and production in response to strong prices of oil and natural gas, the demand for oilfield services has risen, and the costs of these services are increasing, while the quality of these services may suffer |
| If the unavailability or high cost of drilling rigs, equipment, supplies or qualified personnel were particularly severe in Texas and Louisiana, we could be materially and adversely affected because our operations and properties are concentrated in those areas |
| The marketability of our oil and gas production depends on services and facilities that we typically do not own or control |
| The failure or inaccessibility of any such services or facilities could result in a curtailment of production and revenues |
| The marketability of our production depends in part upon the availability, proximity and capacity of gathering systems, pipelines and processing facilities |
| Pursuant to interruptible or short term transportation agreements, we generally deliver gas through gathering systems and pipelines that we do not own |
| Under the interruptible transportation agreements, the transportation of our gas may be interrupted due to capacity constraints on the applicable system, for maintenance or repair of the system, or for other reasons as dictated by the particular agreements |
| If any of the pipelines or other facilities become unavailable, we would be required to find a suitable alternative to transport and process the gas, which could increase our costs and reduce the revenues we might obtain from the sale of the gas |
| For example, Hurricane Rita disrupted the operations of gas pipelines and processing plants and required the evacuation of personnel required to oversee some of our facilities in the Gulf Coast and Gulf of Mexico areas |
| We depend on the skill, ability and decisions of third party operators to a significant extent |
| The success of the drilling, development and production of the oil and gas properties in which we have or expect to have a non-operating working interest is substantially dependent upon the decisions of such third-party operators and their diligence to comply with various laws, rules and regulations affecting such properties |
| The failure of any third-party operator to make decisions, perform their services, discharge their obligations, deal with regulatory agencies, and comply with laws, rules and regulations, including environmental laws and regulations in a proper manner with respect to properties in which we have an interest could result in material adverse consequences to our interest in such properties, including substantial penalties and compliance costs |
| Such adverse consequences could result in substantial liabilities to us or reduce the value of our properties, which could negatively affect our results of operations |
| Our business is highly competitive |
| The oil and gas industry is highly competitive in many respects, including identification of attractive oil and gas properties for acquisition, drilling and development, securing financing for such activities and obtaining the necessary equipment and personnel to conduct such operations and activities |
| In seeking suitable opportunities, we compete with a number of other companies, including large oil and gas companies and other independent operators with greater financial resources, larger numbers of personnel and facilities, and, in some cases, with more expertise |
| There can be no assurance that we will be able to compete effectively with these entities |
| 18 _________________________________________________________________ [56]Table of Contents Hedging transactions may limit our potential gains |
| In order to manage our exposure to price risks in the marketing of our oil and gas production, from time to time we enter into oil and gas price hedging arrangements with respect to a portion of our expected production |
| While intended to reduce the effects of volatile oil and gas prices, such transactions may limit our potential gains and increase our potential losses if oil and gas prices were to rise substantially over the price established by the hedge |
| In addition, such transactions may expose us to the risk of loss in certain circumstances, including instances in which: • our production is less than expected; • there is a widening of price differentials between delivery points for our production and the delivery point assumed in the hedge arrangement; or • the counterparties to our hedging agreements fail to perform under the contracts |
| Our oil and gas activities are subject to various risks which are beyond our control |
| Our operations are subject to many risks and hazards incident to exploring and drilling for, producing, transporting, marketing and selling oil and gas |
| Although we may take precautionary measures, many of these risks and hazards are beyond our control and unavoidable under the circumstances |
| Many of these risks or hazards could materially and adversely affect our revenues and expenses, the ability of certain of our wells to produce oil and gas in commercial quantities, the rate of production and the economics of the development of, and our investment in the prospects in which we have or will acquire an interest |
| Any of these risks and hazards could materially and adversely affect our financial condition, results of operations and cash flows |
| Such risks and hazards include: • human error, accidents, labor force and other factors beyond our control that may cause personal injuries or death to persons and destruction or damage to equipment and facilities; • blowouts, fires, hurricanes, pollution and equipment failures that may result in damage to or destruction of wells, producing formations, production facilities and equipment; • unavailability of materials and equipment; • engineering and construction delays; • unanticipated transportation costs and delays; • unfavorable weather conditions; • hazards resulting from unusual or unexpected geological or environmental conditions; • environmental regulations and requirements; • accidental leakage of toxic or hazardous materials, such as petroleum liquids or drilling fluids, into the environment; • changes in laws and regulations, including laws and regulations applicable to oil and gas activities or markets for the oil and gas produced; • fluctuations in supply and demand for oil and gas causing variations of the prices we receive for our oil and gas production; and • the internal and political decisions of OPEC and oil and natural gas producing nations and their impact upon oil and gas prices |
| As a result of these risks, expenditures, quantities and rates of production, revenues and cash operating costs may be materially adversely affected and may differ materially from those anticipated by us |
| 19 _________________________________________________________________ [57]Table of Contents Governmental and environmental regulations could adversely affect our business |
| Our business is subject to federal, state and local laws and regulations on taxation, the exploration for and development, production and marketing of oil and gas and safety matters |
| Many laws and regulations require drilling permits and govern the spacing of wells, rates of production, prevention of waste, unitization and pooling of properties and other matters |
| These laws and regulations have increased the costs of planning, designing, drilling, installing, operating and abandoning our oil and gas wells and other facilities |
| In addition, these laws and regulations, and any others that are passed by the jurisdictions where we have production, could limit the total number of wells drilled or the allowable production from successful wells, which could limit our revenues |
| Our operations are also subject to complex environmental laws and regulations adopted by the various jurisdictions in which we have or expect to have oil and gas operations |
| We could incur liability to governments or third parties for any unlawful discharge of oil, gas or other pollutants into the air, soil or water, including responsibility for remedial costs |
| We could potentially discharge these materials into the environment in any of the following ways: • from a well or drilling equipment at a drill site; • from gathering systems, pipelines, transportation facilities and storage tanks; • damage to oil and gas wells resulting from accidents during normal operations; and • blowouts, hurricanes, cratering and explosions |
| Because the requirements imposed by laws and regulations are frequently changed, we cannot assure you that laws and regulations enacted in the future, including changes to existing laws and regulations, will not adversely affect our business |
| In addition, because we acquire interests in properties that have been operated in the past by others, we may be liable for environmental damage caused by the former operators |
| We cannot be certain that the insurance coverage maintained by us will be adequate to cover all losses that may be sustained in connection with all oil and gas activities |
| We maintain general and excess liability policies, which we consider to be reasonable and consistent with industry standards |
| These policies generally cover: • personal injury; • bodily injury; • third party property damage; • medical expenses; • legal defense costs; • pollution in some cases; • well blowouts in some cases; and • workers compensation |
| There can be no assurance that this insurance coverage will be sufficient to cover every claim made against us in the future |
| A loss in connection with our oil and natural gas properties could have a materially adverse effect on our financial position and results of operation to the extent that the insurance coverage provided under our policies cover only a portion of any such loss |
| 20 _________________________________________________________________ [58]Table of Contents Title to the properties in which we have an interest may be impaired by title defects |
| We generally obtain title opinions on significant properties that we drill or acquire |
| However, there is no assurance that we will not suffer a monetary loss from title defects or failure |
| Generally, under the terms of the operating agreements affecting our properties, any monetary loss is to be borne by all parties to any such agreement in proportion to their interests in such property |
| If there are any title defects or defects in assignment of leasehold rights in properties in which we hold an interest, we will suffer a financial loss |