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commercial substance. The Company expects the
adoption of SFAS No. 153 to have no impact on its consolidated financial
statements.
In October 2004, the SEC released SAB 106,
which expresses the staff's views on the application of SFAS No.
143 by oil and gas producing companies following the full cost accounting
method. SAB 106 provides interpretive responses related to computing
the full cost ceiling to avoid double counting the expected future
cash outflows associated with asset retirement obligations, required
disclosure relating to the interaction of SFAS No. 143 and the full
cost rules, and the impact of SFAS No. 143 on the calculation of
depreciation, depletion and amortization. The Company is in the
process of determining the impact of the requirements of SAB 106.
3. INVESTMENT IN MICHAEL PETROLEUM CORPORATION
In 2000, the Company received a finder's fee
valued at $1.5 million from affiliates of Donaldson, Lufkin & Jenrette
("DLJ") in connection with their purchase of a significant minority
shareholder interest in Michael Petroleum Corporation ("MPC"). MPC
is a privately held exploration and production company which focuses
on the natural gas producing Lobo Trend in South Texas. The minority
shareholder interest in MPC was purchased by entities affiliated
with DLJ. The Company elected to receive the fee in the form of
18,947 shares of common stock, 1.9% of the outstanding common shares
of MPC, which, until its sale in 2001, was accounted for as a cost
basis investment. Steven A. Webster, who is the Chairman of the
Board of the Company, and a Managing Director of Global Energy Partners
Ltd., a merchant banking affiliate of DLJ which makes investments
in energy companies, joined the Board of Directors of MPC in connection
with the transaction.
In 2001, the Company agreed to sell
its interest in MPC pursuant to an agreement between MPC and its
shareholders for the sale of a majority interest in MPC to Calpine
Natural Gas Company. The Company received total cash proceeds of
$5.7 million, of which $5.5 million was paid to the Company during
the third quarter of 2001, resulting in a financial statement gain
of $3.9 million being reflected in the third quarter 2001 financial
results. The remaining amounts were paid in 2003.
4. INVESTMENT IN PINNACLE GAS RESOURCES, INC.
THE PINNACLE TRANSACTION
On June 23, 2003, pursuant to a Subscription
and Contribution Agreement by and among the Company and its wholly-owned
subsidiary, CCBM, Inc., Rocky Mountain Gas, Inc. ("RMG") and the
Credit Suisse First Boston Private Equity entities, named therein
(the "CSFB Parties"), CCBM and RMG contributed their respective
interests, having a estimated fair value of approximately $7.5 million
each, in (1) leases in the Clearmont, Kirby, Arvada and Bobcat project
areas and (2) oil and natural gas reserves in the Bobcat project
area to a newly formed entity, Pinnacle Gas Resources, Inc., a Delaware
corporation. In exchange for the contribution of these assets, CCBM
and RMG each received 37.5% of the common stock of Pinnacle ("Pinnacle
Common Stock") as of the closing date and options to purchase Pinnacle
Common Stock ("Pinnacle Stock Options"). CCBM no longer has a drilling
obligation in connection with the oil and natural gas leases contributed
to Pinnacle.
Simultaneously with the contribution of these
assets, the CSFB Parties contributed approximately $17.6 million
of cash to Pinnacle in return for the Redeemable Preferred Stock
of Pinnacle ("Pinnacle Preferred Stock"), 25% of the Pinnacle Common
Stock as of the closing date and warrants to purchase Pinnacle Common
Stock ("Pinnacle Warrants"). The CSFB Parties also agreed to contribute
additional cash, under certain circumstances, of up to approximately
$11.8 million to Pinnacle to fund future drilling, development and
acquisitions. The CSFB Parties currently have greater than 50% of
the voting power of the Pinnacle capital stock through their ownership
of Pinnacle Common Stock and Pinnacle Preferred Stock.
Immediately following the contribution and
funding, Pinnacle used approximately $6.2 million of the proceeds
from the funding to acquire an approximate 50% working interest
in existing leases and acreage prospective for coalbed methane development
in the Powder River Basin of Wyoming from Gastar Exploration, Ltd.
Pinnacle also agreed to fund up to $14.9 million of future drilling
and development costs on these properties on behalf of Gastar prior
to December 31, 2005. The drilling and development work will be
done under the terms of an earn-in joint venture agreement between
Pinnacle and Gastar. The majority of these leases are part of, or
adjacent to, the Bobcat project area. All of CCBM and RMG's interests
in the Bobcat project area, the only producing coalbed methane property
owned by CCBM prior to the transaction, were contributed to Pinnacle.
Prior to and in connection with its contribution
of assets to Pinnacle, CCBM paid RMG approximately $1.8 million
in cash as part of its outstanding purchase obligation on the coalbed
methane property interests CCBM previously acquired from RMG. As
of June 30, 2003, approximately $1.1 million of the remaining balance
of CCBM's obligation to RMG was scheduled to be paid in monthly
installments of approximately $52,805 through November 2004 and
a balloon payment on December 31, 2004, all of which were paid.
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