to write down the carrying value of our natural
gas and oil properties increases when natural gas and oil prices
are low or volatile. In addition, write-downs would occur if we
were to experience sufficient downward adjustments to our estimated
proved reserves or the present value of estimated future net revenues,
as further discussed in "Risk Factors--Our reserve data and estimated
discount future net cash flows are estimates based upon assumptions
that may be inaccurate and are based on existing economic and operating
conditions that may change in the future." Once incurred, a write-down
of natural gas and oil properties is not reversible at a later date.
See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Critical Accounting Policies and Estimates"
for additional information on these matters.
ITEM 7A. QUALITATIVE AND QUANTITATIVE
DISCLOSURES ABOUT MARKET RISK
COMMODITY RISK. Our major market
risk exposure is the commodity pricing applicable to our oil and
natural gas production. Realized commodity prices received for such
production are primarily driven by the prevailing worldwide price
for oil and spot prices applicable to natural gas. The effects of
such pricing volatility have been discussed above, and such volatility
is expected to continue. A 10% fluctuation in the price received
for oil and gas production would have an approximate $3.9 million
impact on our annual revenues and operating income.
To mitigate some of this risk, we engage
periodically in certain limited hedging activities but only to the
extent of buying protection price floors. Costs and any benefits
derived from these price floors are accordingly recorded as a reduction
or increase, as applicable, in oil and gas sales revenue and were
not significant for any year presented. The costs to purchase put
options are amortized over the option period. We do not hold or
issue derivative instruments for trading purposes. Income and (losses)
realized by us related to these instruments were $2.0 million, $(0.9
million) and $(1.8 million) or $0.63, $(0.12) and $(0.46) per MMBtu
for the years ended December 31, 2001, 2002, and 2003, respectively.
INTEREST RATE RISK. Our exposure
to changes in interest rates results from our floating rate debt.
In regards to our Hibernia Facility, the result of a 10% fluctuation
in short-term interest rates would have impacted 2003 cash flow
by approximately $25,000.
FINANCIAL INSTRUMENTS & DEBT MATURITIES.
Our financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable, bank borrowing, Subordinated
Notes payable and Series B Redeemable Preferred Stock. The carrying
amounts of cash and cash equivalents, accounts receivable and accounts
payable approximate fair value due to the highly liquid nature of
these short-term instruments. The fair values of the bank and vendor
borrowings approximate the carrying amounts as of December 31, 2003
and 2002, and were determined based upon interest rates currently
available to us for borrowings with similar terms. Maturities of
the debt are $1.0 million in 2004, $7.1 million in 2005 and the
balance in 2007.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
The response to this item is included
elsewhere in this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
In accordance with Exchange Act Rules
13a-15 and 15d-15, we carried out an evaluation, under the supervision
and with the participation of management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures as of the end of the period covered
by this report. Based on that evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that except as provided below
our disclosure controls and procedures were effective as of December
31, 2003 to provide reasonable assurance that information required
to be disclosed in our reports filed or submitted under the Exchange
Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules
and forms.
In performing its audit of our Consolidated
Financial Statements for the year ended December 31, 2003, our independent
auditors, Ernst & Young LLP (Ernst & Young), noted certain matters
involving our internal controls that it considered to be a reportable
condition under the standards established by the American Institute
of Certified Public Accountants. A reportable condition involves
matters relating to significant deficiencies in the design or operation
of internal controls that, in Ernst & Young's judgment, could adversely
affect our ability to record, process, summarize and report financial
data consistent with the assertions of management on the financial
statements. The reportable conditions noted related to (1) the presence
of underlying errors in the tax basis utilized in our
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