not have
sufficient funds and are otherwise unable to negotiate renewals of our borrowings
or arrange new financing, we may have to sell a portion of our assets. We
may record ceiling limitation write-downs that would reduce our shareholders’
equity. We use the full-cost method of accounting
for investments in natural gas and oil properties. Accordingly, we capitalize
all the direct costs of acquiring, exploring for and developing natural gas and
oil properties. Under the full-cost accounting rules, the net capitalized cost
of natural gas and oil properties may not exceed a “ceiling limit” that is based
upon the present value of estimated future net revenues from proved reserves,
discounted at 10%, plus the lower of the cost or the fair market value of unproved
properties. If net capitalized costs of natural gas and oil properties exceed
the ceiling limit, we must charge the amount of the excess to operations through
depreciation, depletion and amortization expense. This charge is called a “ceiling
limitation writedown.” This charge does not impact cash flow from operating activities
but does reduce our shareholders’ equity. The risk that we will be required 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. We participate in oil and
natural gas leases with third parties. We may own
less than 100% of the working interest in certain leases acquired by us, and other
parties will own the remaining portion of the working interest. Financial risks
are inherent in any operation where the cost of drilling, equipping, completing
and operating wells is shared by more than one person. We could be held liable
for the joint activity obligations of the other working interest owners such as
nonpayment of costs and liabilities arising from the actions of the working interest
owners. In the event other working interest owners do not pay their share of such
costs, we would likely have to pay those costs, which could materially adversely
affect our financial condition. We may incur losses as
a result of title deficiencies. We purchase working
and revenue interests in the natural gas and oil leasehold interests upon which
we will perform our exploration activities from third parties or directly from
the mineral fee owners. The existence of a material title deficiency can render
a lease worthless and can adversely affect our results of operations and financial
condition. Title insurance covering mineral leaseholds is not generally available
and, in all instances, we forego the expense of retaining lawyers to examine the
title to the mineral interest to be placed under lease or already placed under
lease until the drilling block is assembled and ready to be drilled. As is customary
in our industry, we rely upon the judgment of natural gas and oil lease brokers
or independent landmen who perform the field work in examining records in the
appropriate governmental offices and abstract facilities before attempting to
acquire or place under lease a specific mineral interest. We, in some cases, perform
curative work to correct deficiencies in the marketability of the title to us.
The work might include obtaining affidavits of heirship or causing an estate to
be administered. In cases involving more serious title problems, the amount paid
for affected natural gas and oil leases can be generally lost, and the target
area can become undrillable. The threat and impact of
terrorist attacks or similar hostilities may adversely impact our operations.
We cannot assess the extent of either the threat
or the potential impact of future terrorist attacks on the energy industry in
general, and on us in particular, either in the short-term or in the long-term.
Uncertainty surrounding such hostilities may affect our operations in unpredictable
ways, including the possibility that infrastructure faculties, including pipelines
and gathering systems, production facilities, processing plants and refineries,
could be targets of, or indirect casualties of, an act of terror or war. Item
1B. Unresolved Staff Comments None. Glossary
of Certain Industry Terms The definitions set forth
below shall apply to the indicated terms as used herein. All volumes of natural
gas referred to herein are stated at the legal pressure base of the state or area
where the reserves exist and at 60 degrees Fahrenheit and in most instances are
rounded to the nearest major multiple. |