in the
prospect area, in which case actual drilling and results are likely to vary, possibly
materially, from those statistical results. In addition, our drilling schedule
may vary from our expectations because of future uncertainties. Our
reserve data and estimated discounted future net cash flows are estimates based
on assumptions that may be inaccurate and are based on existing economic and operating
conditions that may change in the future. There
are uncertainties inherent in estimating natural gas and oil reserves and their
estimated value, including many factors beyond the control of the producer. The
reserve data set forth in this Form 10-K/A represents only estimates. Reservoir
engineering is a subjective and inexact process of estimating underground accumulations
of natural gas and oil that cannot be measured in an exact manner and is based
on assumptions that may vary considerably from actual results. Accordingly,
reserve estimates may be subject to upward or downward adjustment, and actual
production, revenue and expenditures with respect to our reserves likely will
vary, possibly materially, from estimates. Additionally, there recently has been
increased debate and disagreement over the classification of reserves, with particular
focus on proved undeveloped reserves. Changes in interpretations as to classification
standards, or disagreements with our interpretations, could cause us to write
down these reserves. As of December 31, 2005, approximately
80.9% of our proved reserves were proved undeveloped and proved nonproducing.
Moreover, some of the producing wells included in our reserve reports as of December
31, 2005 had produced for a relatively short period of time as of that date. Because
most of our reserve estimates are calculated using volumetric analysis, those
estimates are less reliable than estimates based on a lengthy production history.
Volumetric analysis involves estimating the volume of a reservoir based on the
net feet of pay of the structure and an estimation of the area covered by the
structure based on seismic analysis. In addition, realization or recognition of
our proved undeveloped reserves will depend on our development schedule and plans.
Lack of certainty with respect to development plans for proved undeveloped reserves
could cause the discontinuation of the classification of these reserves as proved.
Although we have accelerated our development of the Camp Hill Field in East Texas,
we have in the past chosen to delay development of our proved undeveloped reserves
in the Camp Hill Field in favor of pursuing shorter-term exploration projects
with higher potential rates of return, adding to our lease position in this field
and further evaluating additional economic enhancements for this field’s development.
The discounted future net cash flows included in this
Form 10-K/A are not necessarily the same as the current market value of our estimated
natural gas and oil reserves. As required by the Commission, the estimated discounted
future net cash flows from proved reserves are based on prices and costs as of
the date of the estimate. Actual future net cash flows also will be affected by
factors such as: - the actual prices we receive for natural
gas and oil;
- our actual operating costs in producing natural
gas and oil;
- the amount and timing of actual production;
- supply and demand for natural gas and oil;
- increases
or decreases in consumption of natural gas and oil; and
- changes
in governmental regulations or taxation.
In addition,
the 10% discount factor we use when calculating discounted future net cash flows
for reporting requirements in compliance with the Financial Accounting Standards
Board Statement of Financial Accounting Standards No. 69 may not be the most appropriate
discount factor based on interest rates in effect from time to time and risks
associated with us or the natural gas and oil industry in general. We
depend on successful exploration, development and acquisitions to maintain reserves
and revenue in the future. In general, the volume
of production from natural gas and oil properties declines as reserves are depleted,
with the rate of decline depending on reservoir characteristics. Except to the
extent we conduct successful exploration and development activities or acquire
properties containing proved reserves, or both, our proved reserves will decline
as reserves are produced. Our future natural gas and oil production is, therefore,
highly dependent on our level of success in finding or acquiring additional reserves.
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