| | be adequate
to cover any losses or liabilities. We cannot predict the continued availability
of insurance or the availability of insurance at premium levels that justify its
purchase. We may elect to self-insure if we believe that the cost of available
insurance is excessive relative to the risks presented. In addition, pollution
and environmental risks generally are not fully insurable. The occurrence of an
event not fully covered by insurance could have a material adverse effect on our
financial condition and results of operations. We participate
in a substantial percentage of our wells on a nonoperated basis, and may be accordingly
limited in our ability to control the risks associated with natural gas and oil
operations. Title to Properties; Acquisition Risks We
believe we have satisfactory title to all of our producing properties in accordance
with standards generally accepted in the natural gas and oil industry. Our properties
are subject to customary royalty interests, liens incident to operating agreements,
liens for current taxes and other burdens which we believe do not materially interfere
with the use of or affect the value of these properties. As is customary in the
industry in the case of undeveloped properties, we make little investigation of
record title at the time of acquisition (other than a preliminary review of local
records). Investigations, including a title opinion of local counsel, are generally
made before commencement of drilling operations. Our revolving credit facility
is secured by substantially all of our natural gas and oil properties. In
acquiring producing properties, we assess the recoverable reserves, future natural
gas and oil prices, operating costs, potential liabilities and other factors relating
to the properties. Our assessments are necessarily inexact and their accuracy
is inherently uncertain. Our review of a subject property in connection with our
acquisition assessment will not reveal all existing or potential problems or permit
us to become sufficiently familiar with the property to assess fully its deficiencies
and capabilities. We may not inspect every well, and we may not be able to observe
structural and environmental problems even when we do inspect a well. If problems
are identified, the seller may be unwilling or unable to provide effective contractual
protection against all or part of those problems. Any acquisition of property
interests may not be economically successful, and unsuccessful acquisitions may
have a material adverse effect on our financial condition and future results of
operations. See “Risk Factors — Our future acquisitions may yield revenues or
production that varies significantly from our projections.” Customers
We sold oil and natural gas production representing
more than 10% of our oil and natural gas revenues for the year ended December
31, 2005 to Chevron Texaco (12%) and Reichman Petroleum (11%); for the year ended
December 31, 2004 to Cokinos Natural Gas Company (17%), Texon L.P. (13%) and WMJ
Investments Corp. (12%); and for the year ended December 31, 2003 to WMJ Investments
Corp. (16%), Cokinos Natural Gas Company (15%) and Gulfmark Energy, Inc. (14%).
Because alternate purchasers of oil and natural gas are readily available, we
believe that the loss of any of our purchasers would not have a material adverse
effect on our financial results. Employees At
December 31, 2005, we had 50 full-time employees, including four landmen, six
geoscientists, seven engineers and three technical support staff. We believe that
our relationships with our employees are good. In order
to optimize prospect generation and development, we utilize the services of independent
consultants and contractors to perform various professional services, particularly
in the areas of 3-D seismic data mapping, acquisition of leases and lease options,
construction, design, well site surveillance, permitting and environmental assessment.
Independent contractors generally provide field and on-site production operation
services, such as pumping, maintenance, dispatching, inspection and testings.
We believe that this use of third-party service providers has enhanced our ability
to contain general and administrative expenses. We
depend to a large extent on the services of certain key management personnel,
the loss of, any of which could have a material adverse effect on our operations.
We do not maintain key-man life insurance with respect to any of our employees.
Pinnacle Transaction Formation
and Operations During the second quarter of 2003,
we and Rocky Mountain Gas, Inc. (“RMG”) each contributed our interests in certain
natural gas and oil leases in Wyoming and Montana in areas prospective for coalbed
methane to a newly formed joint venture, Pinnacle Gas Resources, Inc. In exchange
for the contribution of these assets, we each received 37.5% of the common stock
of Pinnacle and options to purchase additional Pinnacle common stock, or on a
fully diluted basis, we each received an ownership | |
