Attached files
file | filename |
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8-K - Energy XXI Ltd | v204198_8-k.htm |
EX-99.1 - Energy XXI Ltd | v204198_ex99-1.htm |
EX-99.4 - Energy XXI Ltd | v204198_ex99-4.htm |
EX-99.2 - Energy XXI Ltd | v204198_ex99-2.htm |
EX-99.3 - Energy XXI Ltd | v204198_ex99-3.htm |
EX-99.5 - Energy XXI Ltd | v204198_ex99-5.htm |
EX-99.6 - Energy XXI Ltd | v204198_ex99-6.htm |
EX-99.9 - Energy XXI Ltd | v204198_ex99-9.htm |
EX-99.7 - Energy XXI Ltd | v204198_ex99-7.htm |
Exhibit
99.8
RISK
FACTORS
An investment in the notes is
subject to a number of risks. You should carefully consider the risk factors
listed below and all of the other information included or incorporated by
reference in this offering memorandum in evaluating an investment in the notes.
If any of these risks were to occur, our business, financial condition or
results of operations could be adversely affected. In that case, the trading
price of our debt securities could decline and you could lose all or part of
your investment.
Risks
Related to the Notes
The
notes and the guarantees will be structurally subordinated to our and the
guarantors’ secured debt to the extent of the value of the collateral securing
the debt.
The
indebtedness evidenced by the notes will be our senior unsecured obligations.
The notes will rank equal in right of payment with all of our existing and
future senior indebtedness, including the Existing Unsecured Notes and the
Existing Secured Notes, and senior to all of our existing and future
subordinated indebtedness. However, the notes will be structurally subordinated
to all of our existing and future secured indebtedness (including the Existing
Secured Notes and our obligations under the revolving credit facility), to the
extent of the value of the assets securing such secured indebtedness. Debt
outstanding under our revolving credit facility (including hedges entered into
in connection herewith) is secured by a first priority security interest,
subject to certain exceptions, in substantially all of our assets and, through
secured guarantees, the assets of our subsidiaries.
The
indebtedness evidenced by the subsidiary guarantees and our Parent’s guarantee
will be senior unsecured indebtedness of the applicable guarantor. Such
guarantees will rank equal in right of payment with all existing and future
senior indebtedness of such guarantor, and senior to all existing and future
subordinated indebtedness of such guarantor. The guarantees will also be
effectively subordinated to any secured indebtedness of such guarantor,
including the obligations of such guarantor under our revolving credit facility
(including hedges entered into in connection herewith), to the extent of the
value of the assets securing such secured indebtedness. With respect to our
future subsidiaries, only domestic subsidiaries that meet materiality
requirements in the indenture and that guarantee our debt under a credit
facility will be required to guarantee the notes.
As of
September 30, 2010, after giving effect to this offering and the application of
the proceeds therefrom as set forth under “Use of Proceeds” and the other
transactions described under “— Recent Developments,” we and the subsidiary
guarantors would have had outstanding approximately $302 million of secured
indebtedness and $231 million in outstanding letters of credit under our
revolving credit facility, to which the notes would effectively be junior in
right of payment to the extent of the value of the assets securing such
obligations. In addition, we would have had the ability to borrow an additional
$167 million under such revolving credit facility.
In the
event of a bankruptcy, liquidation, reorganization or other winding up involving
us or any of our subsidiaries, a default in the payment under our revolving
credit facility, the notes or an acceleration of any debt under our revolving
credit facility (including hedges entered into in connection herewith) or the
notes. the holders of the secured debt could have the right to foreclose on
their collateral to the exclusion of the holders of the notes even if an event
of default were then to exist under the indenture governing the notes. Upon the
occurrence of any of these events, there may not be sufficient funds to pay
amounts due on the notes.
We
are dependent on the earnings of our subsidiaries to make payments on the
notes.
A
substantial portion of our assets consist of direct and indirect ownership
interests in our subsidiaries. Our subsidiaries are legally distinct from us and
have no obligation to pay amounts due on our debt or to make funds available to
us for such payment. Consequently, our ability to repay our debt, including the
notes, depends to a large extent on the earnings of our subsidiaries, our
ability to receive funds from such subsidiaries through dividends, repayment of
intercompany notes or other payments and from our investments in cash and
marketable securities. The ability of our subsidiaries to pay dividends, repay
intercompany notes or make other advances to us is subject to restrictions
imposed by applicable laws, tax considerations and the farm, of agreements
governing our subsidiaries. In addition, such payment may be restricted by
claims against our subsidiaries by their creditors, including suppliers,
vendors, lessors and employees.
We
may not be able to purchase the notes upon a change of control or an offer to
repurchase the notes in connection with an asset sale as required by the
indenture.
Upon the
occurrence of specific types of change of control events, we may be required to
offer to repurchase all of the notes at a price equal to 101% of the principal
amount, plus accrued and unpaid interest up to, but not including the date of
repurchase. In addition, in connection with certain asset sales, we may be
required to offer to repurchase a principal amount of the notes equal to the
amount of any excess cash proceeds from such sale at a price equal to 100% of
the principal amount, plus accrued and unpaid interest up to but not including
the date of repurchase. We may not have sufficient funds available to repurchase
all of notes tendered pursuant to any such offer and any other debt that would
become payable upon a change of control (including the Existing Unsecured Notes
and the Existing Secured Notes). Our failure to purchase the notes would be a
default under the indenture, which would in turn trigger a default under the
revolving credit facility. In that event, we would need to cure or refinance the
revolving credit facility before making an offer to purchase. Additionally, the
exercise by the holders of notes of their right to require us to repurchase the
notes upon a change of control or an asset sale could cause a default under our
revolving credit facility if we are then prohibited by the terms of the
revolving credit facility from making the change of control or asset sale offer
under the indenture. In the event of a change of control or an asset sale occurs
at a time when we are prohibited from purchasing notes, we could seek the
consent of our senior lenders to the purchase of notes or could attempt to
refinance the borrowings that contain such prohibition. If we do not obtain a
consent or repay those borrowings, we will remain prohibited from purchasing
notes. In that case, our failure to purchase tendered notes would constitute an
event of default under the indenture, which could, in turn, constitute a default
under the other indebtedness, including the first lien revolving credit
agreement. A change of control (as defined under the revolving credit facility)
would also constitute a default under our revolving credit facility. Upon any
such default, the lenders may declare any outstanding obligations under the
revolving credit facility immediately due and payable. If such debt repayment
were accelerated, we may not have sufficient funds to repurchase the notes and
repay the debt. There can be no assurance that we would be able to refinance our
indebtedness or, if a refinancing were to occur, that the refinancing would be
on terms favorable to us.
In
addition, agreements governing future senior indebtedness may contain
prohibitions of certain events that would constitute a change of control or
require such senior indebtedness to be repurchased or repaid upon a change of
control. Moreover, the exercise by the holders of their right to require us to
repurchase the notes could cause a default under such agreements, even if the
change of control itself does not due to the financial effect of such repurchase
on us. Finally, our ability to pay cash to the holders upon a repurchase may be
limited by our then existing financial resources. There can be no assurance that
sufficient funds will be available when necessary to make any required
repurchases.
The
definition of change of control includes a phrase relating to the sale or other
transfer of “all or substantially all” of the properties or assets of the Parent
and its subsidiaries, taken as a whole, us or any of our restricted subsidiaries
taken as a whole. There is no precise definition of the phrase under applicable
law. Accordingly, in certain circumstances there may be a degree of uncertainty
in ascertaining whether a particular transaction would involve a disposition of
“all or substantially all” of the assets of any of the companies in question,
and therefore it may be unclear as to whether a change of control has occurred
and whether the holders of the notes have the right to require us to repurchase
such notes.
Our
substantial level of indebtedness could adversely affect our financial condition
and prevent us from fulfilling our obligations under the notes.
As of
September 30, 2010, after giving effect to this offering and the application of
the proceeds therefrom as set forth under “Use of Proceeds” and the other
transactions described under “Offering Memorandum Summary — Recent
Developments,” we and the subsidiary guarantors would have had outstanding
approximately $1,278.5 million in total indebtedness. Our high level of
indebtedness could have important consequences to you, including the
following:
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it
may make it difficult for us to satisfy our obligations under the notes
and our other indebtedness and contractual and commercial
commitments;
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prevent
us from raising the funds necessary to repurchase notes tendered to us if
there is a change of control, which would constitute a default under the
indenture governing the notes, the indentures governing our Existing
Unsecured Notes and Existing Secured Notes and our revolving credit
facility; and
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it
may otherwise limit us in the ways summarized above under “Risks Related
to Our Business — Our indebtedness may limit our ability to
borrow additional funds or capitalize on acquisition or other business
opportunities.”
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Our
ability to make payments with respect to the notes and to satisfy our other debt
obligations will depend on our future operating performance, including our
ability to realize the anticipated benefits from the Exxon acquisition, and our
ability to refinance our indebtedness, which will be affected by prevailing
economic conditions and financial, business and other factors, many of which are
beyond our control.
Despite
existing debt levels, we and our subsidiaries may still be able to incur
substantially more debt, which would increase the risks associated with our
leverage.
Even
though we are highly leveraged, we may be able to incur substantial amounts of
additional debt in the future, including debt under existing and future credit
facilities, which may be secured and therefore effectively senior to the notes.
As of September 30, 2010, after giving effect to this offering and the
application of the proceeds therefrom as set forth under “Use of Proceeds” and
the other transactions described under “Offering Memorandum
Summary — Recent Developments,” we would have been able to incur
approximately $167 million of additional indebtedness under the borrowing base
limitations of our revolving credit facility, including $69 million of
additional letters of credit. Although the terms of the notes, our Existing
Unsecured Notes and Existing Secured Notes and our credit facility will limit
our ability to incur additional debt, such terms do not and will not prohibit us
from incurring substantial amounts of additional debt for specific purposes or
under certain circumstances. If new debt is added to our and our subsidiaries’
current debt levels, the related risks that we and they now face could
intensify. The incurrence of additional debt could adversely impact our ability
to service payments on the notes.
We
may not be able to generate sufficient cash flow to meet our debt service and
other obligations due to events beyond our control.
Our
ability to generate cash flows from operations and to make scheduled payments on
our indebtedness will depend on our future financial performance. Our future
performance will be affected by a range of economic, competitive and business
factors that we cannot control, such as general economic and financial
conditions in our industry or the economy generally. A significant reduction in
operating cash flow resulting from changes in economic conditions, increased
competition or other events beyond our control could increase the need for
additional or alternative sources of liquidity and could have a material adverse
effect on our business, financial condition, results of operations, prospects
and our ability to service our debt and other obligations. If we are unable to
service our indebtedness, we will be forced to adopt an alternative strategy
that may include actions such as reducing capital expenditures, selling assets,
restructuring or refinancing our indebtedness or seeking additional equity
capital. We cannot assure you that any of these alternative strategies could be
effected on satisfactory terms, if at all, or that they would yield sufficient
funds to make required payments on the notes and our other
indebtedness.
If for
any reason we are unable to meet our debt service and repayment obligations, we
would be in default under the terms of the agreements governing our debt, which
would allow our creditors at that time to declare all outstanding indebtedness
to be due and payable, which would in turn trigger cross-acceleration or
cross-default rights between the relevant agreements. In addition, our lenders
could compel us to apply all of our available cash to repay our borrowings or
they could prevent us front making payments on the notes. If the amounts
outstanding under the revolving credit facility or the notes were to be
accelerated, we cannot assure you that our assets would be sufficient to repay
in full the money owed to the lenders or to our other debt holders, including
you as a noteholder.
The
indenture governing the notes and the agreements governing our other
indebtedness impose significant operating and financial restrictions on us and
our subsidiaries that may prevent us from pursuing certain business
opportunities and restrict our ability to operate our business.
The
indenture governing the notes will contain and our indentures governing the
Existing Unsecured Notes and the Existing Secured Notes and our revolving credit
facility contain covenants that restrict our and our subsidiaries’ (but
generally not our Parent’s) ability to take various actions, such
as:
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engaging
in businesses other than the oil and gas
business;
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incurring
or guaranteeing additional indebtedness or issuing disqualified capital
stock;
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making
investments;
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paying
dividends, redeeming subordinated indebtedness or making other restricted
payments;
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entering
into transactions with affiliates;
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creating
or incurring liens;
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transferring
or selling assets;
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incurring
dividend or other payment restrictions affecting certain
subsidiaries;
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consummating
a merger, consolidation or sale of all or substantially all our assets;
and
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entering
into sale/leaseback transactions.
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In
addition, under our revolving credit facility there is a restriction on changes
in our management. Our revolving credit facility requires, and any future credit
facilities may require us to comply with specified financial ratios, including
regarding interest coverage, total leverage, senior secured leverage coverage
and fixed charge coverage. Please read “Description of Other
Indebtedness.”
Our
ability to comply with these covenants will likely be affected by events beyond
our control and we cannot assure you that we will satisfy those requirements. A
breach of any of these provisions could result in a default under these
instruments, which could allow all amounts outstanding thereunder to be declared
immediately due and payable, which would in turn trigger cross-acceleration and
cross-default rights under our other debt. We may also be prevented from taking
advantage of business opportunities that arise if we fail to meet certain ratios
or because of the limitations imposed on us by the restrictive covenants under
these instruments.
The
restrictions contained in the indenture for the notes, our other indentures and
the revolving credit facility could:
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limit
our ability to plan for or react to market conditions, meet capital needs
or otherwise restrict our activities or business plans;
and
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adversely
affect our ability to finance our operations, enter into acquisitions or
to engage in other business activities that would be in our
interest.
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Although
the notes will be guaranteed by our Parent, our Parent will generally not be
subject to the restrictive covenants in the indenture governing the
notes.
In the
event of a default under the revolving credit facility, the lenders could
foreclose on the assets and capital stock pledged to them.
A breach
of any of the covenants contained in our revolving credit facility, or in any
future credit facilities, or our inability to comply with the financial ratios
could result in an event of default, which would allow the lenders to declare
all borrowings outstanding to be due and payable, which would in turn trigger an
event of default under the indenture for the notes or our other indentures. In
addition, our lenders could compel us to apply all of our available cash to
repay our borrowings or they could prevent us from making payments on the notes.
If the amounts outstanding under the revolving credit facility or the notes were
to be accelerated, we cannot assure you that our assets would be sufficient to
repay in full the money owed to the lenders or to our other debt holders,
including you as a noteholder.
Many
of the covenants contained in the indenture will be suspended if the notes are
rated investment grade by both Standard & Poor’s and Moody’s and no default
or event of default has occurred and is continuing
Many of
the covenants in the indenture governing the notes will be suspended if the
notes are rated investment grade by both Standard & Poor’s and Moody’s and
no default or event of default has occurred and is continuing. These covenants
restrict, among other things, our ability to make certain payments, incur debt
and enter into certain other transactions. Suspension of these covenants would
allow us to engage in certain transactions that would not be permitted while
these covenants were in force. See “Description of Notes — Certain
Covenants — Suspended Covenants.”
If
the Exxon acquisition is not consummated on or before January 31, 2011, the
notes will be redeemed.
Pending
the closing of the Exxon Acquisition, the net proceeds from this offering will
be placed in an escrow account with the trustee for the notes, acting as escrow
agent. If the Exxon acquisition is not closed on or prior to January 31, 2011,
or the acquisition agreement is terminated earlier, the funds in the escrow
account, together with additional funds we expect our Parent to provide, will be
used to redeem all of the notes at a redemption price of 100% of the principal
amount, plus accrued and unpaid interest from the issuance date of the notes to
the redemption date. The amount placed into escrow upon the closing of this
offering is less than the full amount that will be required to redeem the notes,
and we will be dependent on our Parent to contribute additional cash to use for
such redemption. Upon such a redemption, you may not be able to reinvest the
proceeds from the redemption in an investment that yields comparable returns.
Additionally, you may suffer a loss on your investment if you purchase the notes
at a price greater than the aggregate principal amount of the notes. See
“Description of Notes — Escrow of Proceeds; Special Mandatory
Redemption.”
A
court could cancel the guarantees under fraudulent conveyance laws or certain
other circumstances.
All of
our present and future domestic restricted subsidiaries and Parent will
guarantee the notes. If, however, such a guarantor becomes a debtor in a case
under the U.S. Bankruptcy Code or encounters other financial difficulty, under
federal or state laws governing fraudulent conveyance or preferential payments,
a court in the relevant jurisdiction might void or cancel its guarantee. The
court might do so if it found that, when the guarantor entered into its
guarantee or, in some states, when payments become due thereunder, it received
less than reasonably equivalent value or fair consideration for such guarantee
and either was or was rendered insolvent, was left with inadequate capital to
conduct its business, or believed or should have believed that it would incur
debts beyond its ability to pay. The court might also void such guarantee,
without regard to the above factors. If it found that the guarantor entered into
its guarantee with actual or deemed intent to hinder, delay, or defraud its
creditors.
A court
would likely find that a guarantor did not receive reasonably equivalent value
or fair consideration for its guarantee unless it benefited directly or
indirectly from the issuance of the notes. If a court voided such guarantee, you
would no longer have a claim against such guarantor. In addition, the court
might direct you to repay any amounts already received from such guarantor. If
the court were to void any guarantee, we cannot assure you that funds would be
available to pay the notes from another guarantor or from any other
source.
The
indenture will state that the liability of each guarantor on its guarantee is
limited to the maximum amount that the guarantor can incur without risk that the
guarantee will be subject to avoidance as a fraudulent conveyance. This
limitation may not protect the guarantees from a fraudulent conveyance attack
or, if it does, we cannot assure you that the guarantees will be in amounts
sufficient, if necessary, to pay obligations under the notes when
due.
The
notes
currently have no established trading or other public market and, if one
develops, it may not be liquid.
The notes
will constitute a new issue of securities with no established trading market. We
cannot assure you that any market for the notes will develop, or if one does
develop, that it will be liquid. If the notes are traded, they may trade at a
discount from their initial offering price, depending on prevailing interest
rates, the market for similar securities, our credit rating, our operating
performance and financial condition and other factors. As a result, we cannot
ensure you that you will be able to sell any of the notes at a particular time,
at attractive prices, or at all.
In
addition, the market for non-investment-grade debt securities has historically
been subject to disruptions that have caused price volatility independent of the
operating and financial performance of the issuers of these securities. It is
possible that the market for the notes, or the exchange notes, if any are
issued, will be subject to these kinds of disruptions. Accordingly, declines in
the liquidity and market price of the notes and the exchange notes, if any are
issued, may occur independent of our operating and financial performance. If any
notes are issued, any liquid market for the notes or the exchange notes is not
certain to develop.
The
trading prices for the notes will be directly affected by our credit
rating.
Credit
rating agencies continually revise their ratings for companies that they follow,
including us. Any ratings downgrade could adversely affect the trading price of
the notes of the trading market for the notes to the extent a trading market for
the notes develops. The condition of the financial and credit markets and
prevailing interest rates have fluctuated in the past and are likely to
fluctuate in the future.
There
are restrictions on transfers of the notes.
We are
relying upon an exemption from a registration requirement under the Securities
Act and applicable state securities laws in offering the notes. As a result, the
notes may be transferred or resold only in a transaction registered under or
exempt from the registration requirements of the Securities Act and applicable
state securities laws. We intend to file a registration statement with the SEC
with respect to an offer to exchange the notes for freely transferable exchange
notes and to try to cause the registration statement to become effective. The
SEC, however, has broad discretion to declare any registration statement
effective and may delay or deny the effectiveness of any registration statement
for a variety of reasons. Failure to have the registration statement declared
effective or to complete the exchange offer for the notes could aversely affect
the liquidity and price of the notes. In addition, pending the effectiveness of
any such registration statement, your ability to transfer the notes will be
significantly restricted.
Because
our Parent is incorporated under the laws of Bermuda, there may be difficulty in
serving process on and enforcing liabilities against our Parent.
Our
Parent, which will guarantee payments under the notes, is incorporated under the
laws of Bermuda. Some of the directors and officers and a substantial portion of
the assets of Parent are located outside the United States. Accordingly, it may
be difficult for investors in the notes to effect service of process within the
United States upon these persons or to enforce against them, in courts outside
the United States, judgments of courts of the United Stoles predicated upon
civil liabilities under the U.S. federal securities or other laws.
We have
been advised by our Bermuda legal counsel, Appleby, that there is doubt with
respect to Bermuda law as to (a) whether a judgment of a U.S. court predicated
solely upon the civil liability provisions of the U.S. federal securities or
other laws would be enforceable in Bermuda against Parent and (b) whether an
action could be brought in Bermuda against Parent in the first instance on the
basis of liability predicated solely upon the provisions of the U.S. federal
securities or other laws. In addition, other laws of these jurisdictions, such
as those limiting a party’s enforcement rights on the grounds of public policy
of that jurisdiction, and the fact that a treaty may not exist between the
United States and the governments of these jurisdictions regarding the
enforcement of civil liabilities may also restrict the ability to enforce
Parent’s obligations under its guarantee.
Risks
Related to Our Business
The
possible lack of business diversification may adversely affect our results of
operations.
Unlike
other entities that are geographically diversified, we do not have the resources
to effectively diversify our operations or benefit from the possible spreading
of risks or offsetting of losses. By consummating acquisitions only in the
offshore Gulf of Mexico and Gulf Coast onshore our lack of diversification
may:
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subject
us to numerous economic, competitive and regulatory developments, any or
all of which may have a substantial adverse impact upon the particular
industry in which we operate; and
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result
in our dependency upon a single or limited number of reserve
basins.
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In
addition, the geographic concentration of our properties in the Gulf of Mexico
and Gulf Coast onshore means that some or all of the properties could be
affected should the region experience:
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severe
weather;
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delays
or decreases in production, the availability of equipment, facilities or
services;
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delays
or decreases in the availability of capacity to transport, gather or
process production; and/or
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changes
in the regulatory environment.
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For
example, the oil and gas properties that we acquired in April 2006 were damaged
by both Hurricanes Katrina and Rita, and again by Hurricanes Gustav and Ike and
the oil and gas properties that we acquired in June 2007 were damaged by
Hurricanes Katrina and Rita, which required us to spend a considerable amount of
time and capital on inspections, repairs, debris removal, and the drilling of
replacement wells. Although we maintain insurance coverage to cover a portion of
these types of risks, there may be potential risks associated with our
operations not covered by insurance. There also may be certain risks covered by
insurance where the policy does not reimburse us for all of the costs related to
a loss.
Because
all or a number of the properties could experience many of the same conditions
at the same time, these conditions could have a relatively greater impact on our
results of operations than they might have on other producers who have
properties over a wider geographic area.
Our
indebtedness may limit our ability to borrow additional funds or capitalize on
acquisition or other business opportunities.
We have
incurred substantial indebtedness in acquiring our properties. Our leverage and
the current and future restrictions contained in the agreements governing our
indebtedness may reduce our ability to incur additional indebtedness, engage in
certain transactions or capitalize on acquisition or other business
opportunities. Our indebtedness and other financial obligations and restrictions
could have important consequences. For example, they could:
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impair
our ability to obtain additional financing in the future for capital
expenditures, potential acquisitions, general corporate purposes or other
purposes;
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increase
our vulnerability to general adverse economic and industry
conditions;
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result
in higher interest expense in the event of increases in interest rates
since some of our debt is at variable rates of
interest;
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have
a material adverse effect if we fail to comply with financial and
restrictive covenants in any of our debt agreements, including an event of
default if such event is not cured or
waived;
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require
us to dedicate a substantial portion of future cash flow to payments of
our indebtedness and other financial obligations, thereby reducing the
availability of our cash flow to fund working capital, capital
expenditures and other general corporate
requirements;
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limit
our flexibility in planning for, or reacting to, changes in our business
and industry; and
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place
us at a competitive disadvantage to those who have proportionately less
debt.
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If we are
unable to meet future debt service obligations and other financial obligations,
we could be forced to restructure or refinance our indebtedness and other
financial transactions, seek additional equity or sell assets. We may then be
unable to obtain such financing or capital or sell assets on satisfactory terms,
if at all.
We
expect to have substantial capital requirements, and we may be unable to obtain
needed financing on satisfactory terms.
We expect
to make substantial capital expenditures for the acquisition, development,
production, exploration and abandonment of oil and gas properties. Our capital
requirements will depend on numerous factors, and we cannot predict accurately
the timing and amount of our capital requirements. We intend to primarily
finance our capital expenditures through cash flow from operations. However, if
our capital requirements vary materially from those provided for in our current
projections, we may require additional financing. A decrease in expected
revenues or adverse change in market conditions could make obtaining this
financing economically unattractive or impossible.
The cost
of raising money in the debt and equity capital markets has increased
substantially while the availability of funds from those markets generally has
diminished significantly. Also, as a result of concerns about the stability of
financial markets generally and the solvency of counterparties specifically, the
cost of obtaining money from the credit markets generally has increased as many
lenders and institutional investors have increased interest rates, imposed
tighter lending standards, refused to refinance existing debt at maturity at all
or on terms similar to our current debt and, in some cases, ceased to provide
funding to borrowers.
A
significant increase in our indebtedness, or an increase in our indebtedness
that is proportionately greater than our issuances of equity, as well as the
credit market and debt and equity capital market conditions discussed above
could negatively impact our ability to remain in compliance with the financial
covenants under our revolving credit facility which could have a material
adverse effect on our financial condition, results of operations and cash flows.
If we are unable to finance our growth as expected, we could be required to seek
alternative financing, the terms of which may not be attractive to us, or not
pursue growth opportunities.
Without
additional capital resources, we may be forced to limit or defer our planned
natural gas and oil exploration and development program and this will adversely
affect the recoverability and ultimate value of our natural gas and oil
properties, in turn negatively affecting our business, financial condition and
results of operations. We may also be unable to obtain sufficient credit
capacity with counterparties to finance the hedging of our future crude oil and
natural gas production which may limit our ability to manage price risk. As a
result, we may lack the capital necessary to complete potential acquisitions,
obtain credit necessary to enter into derivative contracts to hedge our future
crude oil and natural gas production or to capitalize on other business
opportunities.
The
borrowing base under our revolving credit facility could be reduced upon the
next re-determination date, and may be further reduced in the future if
commodity prices decline, which will limit our available funding for exploration
and development.
As of
November 29, 2010, total outstanding borrowings under our revolving credit
facility were $0 million and our current borrowing base was $350 million. Upon
the closing of the Exxon acquisition, our borrowing base will increase to $700
million. We expect that the next determination of the borrowing base under our
revolving credit facility will occur in the spring of 2011. Any decrease in our
borrowing base is subject to approval by banks holding not less than 67% of the
lending commitments under our revolving credit facility, and the final borrowing
base may be lower than the level recommended by the agent for the bank
group.
Our
borrowing base is re-determined semi-annually by our lenders in their sole
discretion. The lenders will re-determine the borrowing base based on an
engineering report with respect to our natural gas and oil reserves, which will
take into account the prevailing natural gas and oil prices at such time. In the
future, we may not be able to access adequate funding under our revolving credit
facility as a result of (i) a decrease in our borrowing base due to the outcome
of a subsequent borrowing base re-determination, or (ii) an unwillingness or
inability on the part of our lending counterparties to meet their funding
obligations. If oil and natural gas commodity prices deteriorate, we anticipate
that the revised borrowing base under our revolving credit facility may be
reduced. As a result, we may be unable to obtain adequate funding under our
revolving credit facility or even be required to pay down amounts outstanding
under our revolving credit facility to reduce our level of borrowing. If funding
is not available when needed, or is available only on unfavorable terms, it
could adversely affect our exploration and development plans as currently
anticipated and our ability to make new acquisitions, each of which could have a
material adverse effect on our production, revenues and results of
operations.
The
lenders can unilaterally adjust the borrowing base and the borrowings permitted
to be outstanding under our revolving credit facility. Any increase in the
borrowing base requires the consent of all the lenders. Outstanding borrowings
in excess of the borrowing base must be repaid immediately, or we must pledge
other natural gas and oil properties as additional collateral. We do not
currently have any substantial unpledged properties, and we may not have the
financial resources in the future to make any mandatory principal prepayments
required under our revolving credit facility.
The
recent financial crisis may impact our business and financial condition. We may
not be able to obtain funding in the capital markets on terms we find
acceptable, or obtain funding under our revolving credit facility because of the
deterioration of the capital and credit markets and our borrowing
base.
The
recent credit crisis and related turmoil in the global financial systems have
had an impact on our business and our financial condition, and we may face
challenges if economic and financial market conditions do not improve.
Historically, we have used our cash flow from operations and borrowings under
our revolving credit facility to fund our capital expenditures and have relied
on the capital markets to provide us with additional capital for large or
exceptional transactions. A continuation or recurrence of the economic crisis
could further reduce the demand for oil and natural gas and put downward
pressure on the prices for oil and natural gas.
In the
future, we may not be able to access adequate funding under our revolving credit
facility as a result of (i) a decrease in our borrowing base due to the outcome
of a subsequent borrowing base redetermination, or (ii) an unwillingness or
inability on the part of our lending counterparties to meet their funding
obligations. Declines in commodity prices, or a continuing decline in those
prices, could result in a determination to lower the borrowing base in the
future and, in such case, we could be required to repay any indebtedness in
excess of the borrowing base. The turmoil in the financial markets has adversely
impacted the stability and solvency of a number of large global financial
institutions.
The
recent credit crisis made it more difficult to obtain funding in the public and
private capital markets. In particular, the cost of raising money in the debt
and equity capital markets increased substantially while the availability of
funds from those markets generally diminished significantly. Also, as a result
of concerns about the general stability of financial markets and the solvency of
specific counterparties, the cost of obtaining money from the credit markets
increased as many lenders and institutional investors have increased interest
rates, imposed tighter lending standards, refused to refinance existing debt at
maturity or on terms similar to existing debt or at all, or, in some cases,
ceased to provide any new funding.
Oil
and natural gas prices are volatile, and a decline in oil and natural gas prices
would affect our financial results and impede growth.
Our
future financial condition, revenues, profitability and carrying value of our
properties will depend substantially upon the prices and demand for oil and
natural gas. Prices also affect our cash flow available for capital expenditures
and our ability to access funds under our revolving credit facility and through
the capital markets. The amount available for borrowing under our revolving
credit facility is subject to a borrowing base, which is determined by our
lenders taking into account our estimated proved reserves and is subject to
semi-annual redeterminations based on pricing models determined by the lenders
at such time. The markets for these commodities are volatile and even relatively
modest drops in prices can affect our financial results and impede our
growth.
Natural
gas and oil prices historically have been volatile and are likely to continue to
be volatile in the future, especially given current geopolitical and economic
conditions. For example, the NYMEX crude oil spot price per barrel for the
period between January 1, 2010 and November 25, 2010 ranged from a high of
$87.81 to a low of $68.01 and the NYMEX natural gas spot price per MMBtu for the
period January 1, 2010 to November 25, 2010 ranged from a high of $6.01 to a low
of $3.29. Prices for oil and natural gas fluctuate widely in response to
relatively minor changes in the supply and demand for oil and natural gas,
market uncertainty and a variety of additional factors beyond our control, such
as:
•
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domestic
and foreign supplies of oil and natural
gas;
|
•
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price
and quantity of foreign imports of oil and natural
gas;
|
•
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actions
of the Organization of Petroleum Exporting Countries and other
state-controlled oil companies relating to oil and natural gas price and
production controls;
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•
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level
of consumer product demand;
|
•
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level
of global oil and natural gas exploration and
productivity;
|
•
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domestic
and foreign governmental
regulations;
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•
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level
of global oil and natural gas
inventories;
|
•
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political
conditions in or affecting other oil-producing and natural gas-producing
countries, including the current conflicts in the Middle East and
conditions in South America and
Russia;
|
•
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weather
conditions;
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technological
advances affecting oil and natural gas
consumption;
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overall
U.S. and global economic conditions;
and
|
•
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price
and availability of alternative
fuels.
|
Further,
oil prices and natural gas prices do not necessarily fluctuate in direct
relationship to each other. Lower oil and natural gas prices may not only
decrease our expected future revenues on a per unit basis but also may reduce
the amount of oil and natural gas that we can produce economically. This may
result in us having to make substantial downward adjustments to our estimated
proved reserves and could have a material adverse effect on our financial
condition and results of operations.
Reserve
estimates depend on many assumptions that may turn out to be inaccurate and any
material inaccuracies in the reserve estimates or underlying assumptions of our
properties will materially affect the quantities and present value of those
reserves.
Estimating
crude oil and natural gas reserves is complex and inherently imprecise. It
requires interpretation of the available technical data and making many
assumptions about future conditions, including price and other economic
conditions. In preparing such estimates, projection of production rates, timing
of development expenditures and available geological, geophysical, production
and engineering data are analyzed. The extent, quality and reliability of this
data can vary. This process also requires economic assumptions about matters
such as oil and natural gas prices, drilling and operating expenses, capital
expenditures, taxes and availability of funds. If our interpretations or
assumptions used in arriving at our reserve estimates prove to be inaccurate,
the amount of oil and gas that will ultimately be recovered may differ
materially from the estimated quantities and net present value of reserves owned
by us. Any inaccuracies in these interpretations or assumptions could also
materially affect the estimated quantities of reserves shown in the reserve
reports summarized herein. Actual future production, oil and natural gas prices,
revenues, taxes, development expenditures, operating expenses, decommissioning
liabilities and quantities of recoverable oil and gas reserves most likely will
vary from estimates. In addition, we may adjust estimates of proved reserves to
reflect production history, results of exploration and development, prevailing
oil and natural gas prices and other factors, many of which are beyond our
control.
We
may be limited in our ability to book additional proved undeveloped reserves
under the new SEC rules.
We have
included in this offering memorandum certain estimates of our proved reserves as
of June 30, 2010 and estimates of the proved reserves of the Exxon properties as
of November 30, 2010 prepared in a manner consistent with our and our
independent petroleum consultant’s interpretation of the new SEC rules relating
to modernizing reserve estimation and disclosure requirements for oil and
natural gas companies. These new rules are effective for annual reporting
periods ended on or after December 31, 2009. Included within these new SEC
reserve rules is a general requirement that, subject to limited exceptions,
proved undeveloped reserves may only be classified as such if a development plan
has been adopted indicating that they are scheduled to be drilled within five
years of the date of booking. This new rule may limit our potential to book
additional proved undeveloped reserves as we pursue our drilling program.
Further, if we postpone drilling of proved undeveloped reserves beyond this
five-year development horizon, we may have to write off reserves previously
recognized as proved undeveloped.
As of
June 30, 2010, approximately 30.5% of our total proved reserves were undeveloped
and approximately 24.5% of our total proved reserves were developed
non-producing. There can be no assurance that all of those reserves will
ultimately be developed or produced.
While we
have plans or are in the process of developing plans for exploiting and
producing a majority of our proved reserves, there can be no assurance that all
of those reserves will ultimately be developed or produced. We are not the
operator with respect to approximately 27.0% of our proved undeveloped reserves,
so we may not be in a position to control the timing of all development
activities. Furthermore, there can be no assurance that all of our undeveloped
and developed non-producing reserves will ultimately be produced during the time
periods we have planned, at the costs we have budgeted, or at all, which could
result in the write-off of previously recognized reserves.
Unless
we replace crude oil and natural gas reserves our future reserves and production
will decline.
Our
future crude oil and natural gas production will depend on our success in
finding or acquiring additional reserves. If we are unable to replace reserves
through drilling or acquisitions, our level of production and cash flows will be
adversely affected. In general, production from oil and gas properties declines
as reserves are depleted, with the rate of decline depending on reservoir
characteristics. Our total proved reserves decline as reserves are produced
unless we conduct other successful exploration and development activities or
acquire properties containing proved reserves, or both. Our ability to make the
necessary capital investment to maintain or expand our asset base of crude oil
and natural gas reserves would be impaired to the extent cash flow from
operations is reduced and external sources of capital become limited or
unavailable. We may not be successful in exploring for, developing or acquiring
additional reserves. We also may not be successful in raising funds to acquire
additional reserves.
Relatively
short production periods or reserve lives for Gulf of Mexico properties subject
us to higher reserve replacement needs and may impair our ability to reduce
production during periods of low oil and natural gas prices.
High
production rates generally result in recovery of a relatively higher percentage
of reserves from properties in the Gulf of Mexico during the initial few years
when compared to other regions in the United States. Typically, 50% of the
reserves of properties in the Gulf of Mexico are depleted within three to four
years. Due to high initial production rates, production of reserves from
reservoirs in the Gulf of Mexico generally decline more rapidly than from other
producing reservoirs. The vast majority of our existing operations are in the
Gulf of Mexico. As a result, our reserve replacement needs from new prospects
may be greater than those of other oil and gas companies with longer-life
reserves in other producing areas. Also, our expected revenues and return on
capital will depend on prices prevailing during these relatively short
production periods. Our need to generate revenues to fund ongoing capital
commitments or repay debt may limit our ability to slow or shut in production
from producing wells during periods of low prices for oil and natural
gas.
Our
offshore operations will involve special risks that could affect operations
adversely.
Offshore
operations are subject to a variety of operating risks specific to the marine
environment, such as capsizing, collisions and damage or loss from hurricanes or
other adverse weather conditions. These conditions can cause substantial damage
to facilities and interrupt production. As a result, we could incur substantial
liabilities that could reduce or eliminate the funds available for exploration,
development or leasehold acquisitions, or result in loss of equipment and
properties. In particular, we are not intending to put in place business
interruption insurance due to its high cost. We therefore may not be able to
rely on insurance coverage in the event of such natural phenomena.
Shallow
water ultra-deep shelf wells may require equipment that may delay development
and incur longer drilling times that may increase costs
We are
currently participating in the drilling of the shallow-water, ultra-deep shelf
appraisal well Davy Jones #14 and a well on South Timbalier 144, also known as
Blackbeard East and are awaiting long lead facility equipment on South Timbalier
168, formerly known as Blackbeard West. All of these projects have some of the
same geological characteristics as deepwater prospects with a potential for
significant reserves. The use of advanced drilling technologies involves a
higher risk of technological failure and usually higher costs. In addition,
there can be delays in completion due to the need to obtain equipment that must
be special ordered.
Deepwater
operations present special risks that may adversely affect the cost and timing
of development.
Currently,
we have minority, non-operated interests in three deepwater fields, Viosca Knoll
822/823, Viosca Knoll 821 and Viosca Knoll 1003. We may evaluate additional
activity in the deepwater Gulf of Mexico in the future. Exploration for oil or
natural gas in the deepwater of the Gulf of Mexico generally involves greater
operational and financial risks than exploration on the shelf. Deepwater
drilling generally requires more time and more advanced drilling technologies,
involving a higher risk of technological failure and usually higher drilling
costs. Deepwater wells often use subsea completion techniques with subsea trees
tied back to host production facilities with flow lines. The installation of
these subsea trees and flow lines requires substantial time and the use of
advanced remote installation mechanics. These operations may encounter
mechanical difficulties and equipment failures that could result in cost
overruns. Furthermore, the deepwater operations generally lack the physical and
oilfield service infrastructure present on the shelf. As a result, a
considerable amount of time may elapse between a deepwater discovery and the
marketing of the associated oil or natural gas, increasing both the financial
and operational risk involved with these operations. Because of the lack and
high cost of infrastructure, some reserve discoveries in the deepwater may never
be produced economically.
Recent
events in the Gulf of Mexico may increase risks, costs and delays in our
offshore operations.
In April
2010, there was a fire and explosion aboard the Deepwater Horizon drilling
platform operated by BP in ultra deep water in the Gulf of Mexico. As a result
of the explosion, ensuing fire and apparent failure of the blowout preventers,
the rig sank and created a catastrophic oil spill that produced widespread
economic, environmental and natural resource damage in the Gulf Coast region. In
response to the explosion and spill, the Bureau of Ocean Energy Management,
Regulation and Enforcement (the “BOEMRE,” formerly the Minerals Management
Service) of the U.S. Department of the Interior issued a “Notice to Lessees”, or
“NTL”, on May 30, 2010, and a revised notice on July 12, 2010, implementing a
moratorium on deepwater drilling activities that effectively halted deepwater
drilling of wells using subsea blowout preventers (“BOPs”) or surface BOPs on a
floating facility. While the moratorium was in place, the BOEMRE issued a series
of NTLs and adopted changes to its regulations to impose a variety of new
measures intended to help prevent a similar disaster in the future. The
moratorium was lifted on October 12, 2010, but offshore operators must now
comply with strict new safety and operating requirements. For example, before
being allowed to resume drilling in deepwater, outer continental shelf operators
must certify compliance with all applicable operating regulations found in 30
C.F.R. Part 250, including those rules recently placed into effect, such as
rules relating to well casing and cementing, BOPs, safety certification,
emergency response, and worker training. Operators also must demonstrate the
availability of adequate spill response and blowout containment resources.
Notwithstanding the lifting of the moratorium, we anticipate that there will
continue to be delays in the resumption of drilling-related activities,
including delays in the issuance of drilling permits, as these various
regulatory initiatives are fully implemented.
Legislative
and regulatory initiatives relating to offshore operations, which include
consideration of increases in the minimum levels of demonstrated financial
responsibility required to conduct exploration and production operations on the
outer continental shelf and elimination of liability limitations on damages,
will, if adopted, likely result in increased costs and additional operating
restrictions and could have a material adverse effect on our
business.
In
addition to the new requirements recently imposed by the BOEMRE, there have been
a variety of proposals to change existing laws and regulations that could affect
our operations and cause us to incur substantial costs. Implementation of any
one or more of the various proposed changes could materially adversely affect
operations in the Gulf of Mexico by raising operating costs, increasing
insurance premiums, delaying drilling operations and increasing regulatory
burdens, and, further, could lead to a wide variety of other unforeseeable
consequences that make operations in the Gulf of Mexico and other offshore
waters more difficult, more time consuming, and more costly. For example,
Congress is currently considering a variety of amendments to the Oil Pollution
Act of 1990, or “OPA”, in response to the Deepwater Horizon incident. OPA and
regulations adopted pursuant to OPA impose a variety of requirements related to
the prevention of and response to oil spills into waters of the United States,
including the outer continental shelf waters where we have substantial
operations. OPA subjects operators of offshore leases and owners and operators
of oil handling facilities to strict, joint and several liability for all
containment and cleanup costs and certain other damages arising from an oil
spill, including, but not limited to, the costs of responding to a spill,
natural resource damages and economic damages suffered by persons adversely
affected by the spill. OPA also requires owners and operators of offshore oil
production facilities to establish and maintain evidence of financial
responsibility to cover costs that could be incurred in responding to an oil
spill. OPA currently requires a minimum financial responsibility demonstration
of $35 million for companies operating in offshore waters, although the
Secretary of Interior may increase this amount up to $150 million in certain
situations. At least one proposed bill that Congress is considering with regard
to OPA, which has been approved by the House of Representatives (H.R. 3534, the
“Consolidated Land, Energy and Aquatic Resources Act”), would increase the
minimum level of financial responsibility to $300 million. If OPA is amended to
increase the minimum level of financial responsibility to $300 million, we may
experience difficulty in providing financial assurances sufficient to comply
with this requirement. If we are unable to provide the level of financial
assurance required by OPA, we may be forced to sell our properties or operations
located in offshore waters or enter into partnerships with other companies that
can meet the increased financial responsibility requirement, and any such
developments could have an adverse effect on the value of our offshore assets
and the results of our operations. We cannot predict at this time whether OPA
will be amended or whether the level of financial responsibility required for
companies operating in offshore waters will be increased.
We
suffered ceiling test write-downs in fiscal 2009 and may suffer additional
ceiling test write-downs in future periods.
Under the
full cost method of accounting, we are required to perform each quarter, a
“ceiling test” that determines a limit on the book value of our oil and gas
properties. If the net capitalized cost of proved oil and gas properties, net of
related deferred income taxes, plus the cost of unevaluated oil and gas
properties, exceeds the present value of estimated future net cash flows
discounted at 10%, net of related tax effects, plus the cost of unevaluated oil
and gas properties, the excess is charged to expense and reflected as additional
accumulated depreciation, depletion and amortization. Prior to June 30, 2010,
future net cash flows were based on period-end commodity prices and excluded
future cash outflows related to estimated abandonment costs of proved developed
properties. Effective with our June 30, 2010 financial statements, prices are
based on the average realized prices for the previous twelve-month period. As of
the reported balance sheet date, capitalized costs of an oil and gas producing
company may not exceed the full cost limitation calculated under the above
described rule based on the average previous twelve-month prices for oil and
natural gas. However, if prior to the balance sheet date, we enter into certain
hedging arrangements for a portion of our future natural gas and oil production,
thereby enabling us to receive future cash flows that are higher than the
estimated future cash flows indicated, these higher hedged prices are used if
they qualify as cash flow hedges.
Because
of the significant decline in crude oil and natural gas prices, coupled with the
impact of Hurricanes Gustav and Ike, we recognized a non-cash write-down of the
net book value of our oil and gas properties of $117.9 million and $459.1
million in the third and second quarters of fiscal 2009, respectively. The
write-downs were reduced by $179.9 million and $203.0 million pre-tax as a
result of our hedging program in the third and second quarters of fiscal 2009,
respectively. Additional write-downs may be required if oil and natural gas
prices decline, unproved property values decrease, estimated proved reserve
volumes are revised downward or the net capitalized cost of proved oil and gas
properties otherwise exceeds the present value of estimated future net cash
flows.
We
may need to obtain bonds or other surety in order to maintain compliance with
those regulations promulgated by the BOEMRE, which, if required, could be costly
and reduce borrowings available under our bank credit facility.
For
offshore operations, lessees must comply with the BOEMRE regulations governing,
among other things, engineering and construction specifications for production
facilities, safety procedures, plugging and abandonment of wells on the Shelf
and removal of facilities. The BOEMRE’s safety requirements have recently been
made more stringent as a result of the April 20, 2010 Deep Water Horizon
incident and resulting oil spill in the Gulf of Mexico. To cover the various
obligations of lessees on the U.S. Outer Continental Shelf of the Gulf of
Mexico, the BOEMRE generally requires that lessees have substantial net worth or
post bonds or other acceptable assurances that such obligations will be met.
While we believe that we are currently exempt from the supplemental bonding
requirements of the BOEMRE, the BOEMRE could re-evaluate our plugging
obligations and increase them which could cause us to lose our exemption. The
cost of these bonds or other surety could be substantial and there is no
assurance that bonds or other surety could be obtained in all cases. In
addition, we may be required to provide letters of credit to support the
issuance of these bonds or other surety. Such letter of credit would likely be
issued under our credit facility and would reduce the amount of borrowings
available under such facility in the amount of any such letter of credit
obligations. The cost of compliance with these supplemental bonding requirements
could materially and adversely affect our financial condition, cash flows and
results of operations.
Our
insurance may not protect us against business and operating risks.
We
maintain insurance for some, but not all, of the potential risks and liabilities
associated with our business. For some risks, we may not obtain insurance if we
believe the cost of available insurance is excessive relative to the risks
presented. Due to market conditions, premiums and deductibles for certain
insurance policies can increase substantially, and in some instances, certain
insurance policies are economically unavailable or available only for reduced
amounts of coverage. Although we will maintain insurance at levels we believe
are appropriate and consistent with industry practice, we will not be fully
insured against all risks, including high-cost business interruption insurance
and drilling and completion risks that are generally not recoverable from third
parties or insurance. In addition, pollution and environmental risks generally
are not fully insurable. Losses and liabilities from uninsured and underinsured
events and delay in the payment of insurance proceeds could have a material
adverse effect on our financial condition and results of operations. Due to a
number of recent catastrophic events like the terrorist attacks on September 11,
2001, Hurricanes Ivan, Katrina, Rita, Gustav and Ike, and the April 20, 2010
Deep Water Horizon incident, insurance underwriters increased insurance premiums
for many of the coverages historically maintained and issued general notices of
cancellation and significant changes for a wide variety of insurance coverages.
The oil and natural gas industry suffered extensive damage from Hurricanes Ivan,
Katrina, Rita, Gustav and Ike. As a result, insurance costs have increased
significantly from the costs that similarly situated participants in this
industry have historically incurred. Insurers are requiring higher retention
levels and limit the amount of insurance proceeds that are available after a
major wind storm in the event that damages are incurred. If storm activity in
the future is as severe as it was in 2005 or 2008, insurance underwriters may no
longer insure Gulf of Mexico assets against weather-related damage. Although we
currently have windstorm insurance covering our existing properties, we do not
intend to purchase windstorm insurance with respect to the Exxon properties
until the 2011 hurricane season begins. Therefore, if a severe storm that causes
damage to the Exxon properties occurs in the Gulf of Mexico prior to July 2011,
we will not have any insurance coverage for such damages. Further, we do not
currently have, nor do we intend to put in place, business interruption
insurance due to its high cost. The insurance that we currently maintain may not
be economically available in the future, which could adversely impact business
prospects in the Gulf of Mexico and adversely impact our operations. If an
accident or other event resulting in damage to our operations, including severe
weather, terrorist acts, war, civil disturbances, pollution or environmental
damage, occurs and is not fully covered by insurance or a recoverable indemnity
from a vendor, it could adversely affect our financial condition and results of
operations. Moreover, we may not be able to maintain adequate insurance in the
future at rates we consider reasonable or be able to obtain insurance against
certain risks.
Competition
for oil and gas properties and prospects is intense and some of our competitors
have larger financial, technical and personnel resources that could give them an
advantage in evaluating and obtaining properties and prospects.
We
operate in a highly competitive environment for reviewing prospects, acquiring
properties, marketing oil and gas and securing trained personnel. Many of our
competitors are major or independent oil and gas companies that possess and
employ financial resources that allow them to obtain substantially greater
technical and personnel resources than we possess. We actively compete with
other companies when acquiring new leases or oil and gas properties. For
example, new leases acquired from the BOEMRE are acquired through a “sealed bid”
process and are generally awarded to the highest bidder. These additional
resources can be particularly important in reviewing prospects and purchasing
properties. Competitors may be able to evaluate, bid for and purchase a greater
number of properties and prospects than our financial or personnel resources
permit. Competitors may also be able to pay more for productive oil and gas
properties and exploratory prospects than we are able or willing to pay. If we
are unable to compete successfully in these areas in the future, our future
revenues and growth may be diminished or restricted.
The
present value of future net cash flows from our proved reserves is not
necessarily the same as the current market value of our estimated natural gas
reserves.
We base
the estimated discounted future net cash flows from our proved reserves on
average prices for the preceding twelve-month period and costs in effect on the
day of the estimate. However, actual future net cash flows from our natural gas
and oil properties will be affected by factors such as:
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the
volume, pricing and duration of our natural gas and oil hedging
contracts
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supply
of and demand for natural gas and
oil;
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actual
prices we receive for natural gas and
oil;
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our
actual operating costs in producing natural gas and
oil;
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the
amount and timing of our capital expenditures and decommissioning
costs;
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the
amount and timing of actual production;
and
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changes
in governmental regulations or
taxation.
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The
timing of both our production and our incurrence of expenses in connection with
the development and production of natural gas and oil properties will affect the
timing of actual future net cash flows from proved reserves, and thus their
actual present value. In addition, the 10% discount factor we use when
calculating discounted future net cash flows 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. Any material
inaccuracies in these reserve estimates or underlying assumptions will
materially affect the quantities and present value of our reserves, which could
adversely affect our business, results of operations and financial
condition.
The
unavailability or high cost of drilling rigs, equipment, supplies, personnel and
oil field services could adversely affect our ability to execute exploration and
exploitation plans on a timely basis and within budget, and consequently could
adversely affect our anticipated cash flow.
We
utilize third-party services to maximize the efficiency of our organization. The
cost of oil field services may increase or decrease depending on the demand for
services by other oil and gas companies. While we currently have excellent
relationships with oil field service companies, there is no assurance that we
will be able to contract for such services on a timely basis or that the cost of
such services will remain at a satisfactory or affordable level. Shortages or
the high cost of drilling rigs, equipment, supplies or personnel could delay or
adversely affect our exploitation and exploration operations, which could have a
material adverse effect on our business, financial condition or results of
operations.
Our
future business will involve many uncertainties and operating risks that can
prevent us from realizing profits and can cause substantial losses.
We engage
in exploration and development drilling activities. Any such activities may be
unsuccessful for many reasons. In addition to a failure to find oil or natural
gas, drilling efforts can be affected by adverse weather conditions (such as
hurricanes and tropical storms in the Gulf of Mexico), cost overruns, equipment
shortages and mechanical difficulties. Therefore, the successful drilling of an
oil or gas well does not ensure we will realize a profit on our investment. A
variety of factors, both geological and market-related, could cause a well to
become uneconomic or only marginally economic. In addition to their costs,
unsuccessful wells could impede our efforts to replace reserves.
Our
business involves a variety of inherent operating risks, including:
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fires;
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explosions;
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blow-outs
and surface cratering;
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uncontrollable
flows of gas, oil and formation
water;
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natural
disasters, such as hurricanes and other adverse weather
conditions;
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pipe,
cement, subsea well or pipeline
failures;
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casing
collapses;
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mechanical
difficulties, such as lost or stuck oil field drilling and service
tools;
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abnormally
pressured formations; and
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environmental
hazards, such as gas leaks, oil spills, pipeline ruptures and discharges
of toxic gases.
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If we
experience any of these problems, well bores, platforms, gathering systems and
processing facilities could be affected, which could adversely affect our
ability to conduct operations. We could also incur substantial losses due to
costs and/or liability incurred as a result of:
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injury
or loss of life;
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severe
damage to and destruction of property, natural resources and
equipment;
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pollution
and other environmental damage;
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clean-up
responsibilities;
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regulatory
investigations and penalties;
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suspension
of our operations; and
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repairs
to resume operations.
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Market
conditions or transportation impediments may hinder access to oil and gas
markets, delay production or increase our costs.
Market
conditions, the unavailability of satisfactory oil and natural gas
transportation or the remote location of certain of our drilling operations may
hinder our access to oil and natural gas markets or delay production. The
availability of a ready market for oil and gas production depends on a number of
factors, including the demand for and supply of oil and gas and the proximity of
reserves to pipelines or trucking and terminal facilities. In deepwater
operations, market access depends on the proximity of and our ability to tie
into existing production platforms owned or operated by others and the ability
to negotiate commercially satisfactory arrangements with the owners or
operators. We may be required to shut in wells or delay initial production for
lack of a market or because of inadequacy or unavailability of pipeline or
gathering system capacity. Restrictions on our ability to sell our oil and
natural gas may have several other adverse effects, including higher
transportation costs, fewer potential purchasers (thereby potentially resulting
in a lower selling price) or, in the event we were unable to market and sustain
production from a particular lease for an extended time, possible loss of a
lease due to lack of production. In the event that we encounter restrictions in
our ability to tie our production to a gathering system, we may face
considerable delays from the initial discovery of a reservoir to the actual
production of the oil and gas and realization of revenues. In some cases, our
wells may be tied back to platforms owned by parties with no economic interests
in these wells. There can be no assurance that owners of such platforms will
continue to operate the platforms. If the owners cease to operate the platforms
or their processing equipment, we may be required to shut in the associated
wells, which could adversely affect our results of operations.
We
are not the operator on all of our properties and therefore are not in a
position to control the timing of development efforts, the associated costs, or
the rate of production of the reserves on such properties.
As we
carry out our planned drilling program, we will not serve as operator of all
planned wells. We currently operate approximately 80% of our properties. As a
result, we may have limited ability to exercise influence over the operations of
some non-operated properties or their associated costs. Dependence on the
operator and other working interest owners for these projects, and limited
ability to influence operations and associated costs could prevent the
realization of targeted returns on capital in drilling or acquisition
activities. The success and timing of development and exploitation activities on
properties operated by others depend upon a number of factors that will be
largely outside of our control, including:
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the
timing and amount of capital
expenditures;
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the
availability of suitable offshore drilling rigs, drilling equipment,
support vessels, production and transportation infrastructure and
qualified operating personnel;
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the
operator’s expertise and financial
resources;
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approval
of other participants in drilling
wells;
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selection
of technology; and
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the
rate of production of the reserves.
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We
are exposed to trade credit risk in the ordinary course of our business
activities.
We are
exposed to risks of loss in the event of nonperformance by our vendors,
customers and by counterparties to our price risk management arrangements. Some
of our vendors, customers and counterparties may be highly leveraged and subject
to their own operating and regulatory risks. Many of our vendors, customers and
counterparties finance their activities through cash flow from operations, the
incurrence of debt or the issuance of equity. Recently, there has been a
significant decline in the credit markets and the availability of credit.
Additionally, many of our vendors’, customers’ and counterparties’ equity values
have substantially declined. The combination of reduction of cash flow resulting
from declines in commodity prices and the lack of availability of debt or equity
financing may result in a significant reduction in our vendors, customers and
counterparties liquidity and ability to make payments or perform on their
obligations to us. Even if our credit review and analysis mechanisms work
properly, we may experience financial losses in our dealings with other parties.
Any increase in the nonpayment or nonperformance by our vendors, customers
and/or counterparties could reduce our cash flows.
Our
operations will be subject to environmental and other government laws and
regulations that are costly and could potentially subject us to substantial
liabilities.
Our oil
and gas exploration, production, and related operations are subject to extensive
rules and regulations promulgated by federal, state, and local agencies. Failure
to comply with such rules and regulations can result in substantial penalties.
The regulatory burden on the oil and gas industry increases our cost of doing
business and affects our profitability. Because such rules and regulations are
frequently amended or reinterpreted, we are unable to predict the future cost or
impact of complying with such laws.
All of
the jurisdictions in which we operate generally require permits for drilling
operations, drilling bonds, and reports concerning operations and impose other
requirements relating to the exploration and production of oil and gas. Such
jurisdictions also have statutes or regulations addressing conservation matters,
including provisions for the unitization or pooling of oil and gas properties,
the establishment of maximum rates of production from oil and gas wells and the
spacing, plugging and abandonment of such wells. The statutes and regulations of
certain jurisdictions also limit the rate at which oil and gas can be produced
from our properties.
The FERC
regulates interstate natural gas transportation rates and service conditions,
which affect the marketing of gas we produce, as well as the revenues we receive
for sales of such production. Since the mid-1980s, the FERC has issued various
orders that have significantly altered the marketing and transportation of gas.
These orders resulted in a fundamental restructuring of interstate pipeline
sales and transportation services, including the unbundling by interstate
pipelines of the sales, transportation, storage and other components of the
city-gate sales services such pipelines previously performed. These FERC actions
were designed to increase competition within all phases of the gas industry. The
interstate regulatory framework may enhance our ability to market and transport
our gas, although it may also subject us to greater competition and to the more
restrictive pipeline imbalance tolerances and greater associated penalties for
violation of such tolerances.
Our sales
of oil and natural gas liquids are not presently regulated and are made at
market prices. The price we receive from the sale of those products is affected
by the cost of transporting the products to market. The FERC has implemented
regulations establishing an indexing system for transportation rates for oil
pipelines, which, generally, would index such rate to inflation, subject to
certain conditions and limitations. We are not able to predict with any
certainty what effect, if any, these regulations will have on us, but, other
factors being equal, the regulations may, over time, tend to increase
transportation costs which may have the effect of reducing wellhead prices for
oil and natural gas liquids.
Under the
Environmental Protection Act of 2005, FERC has civil penalty authority under the
NGA to impose penalties for current violations of up to $1 million per day for
each violation and disgorgement of profits associated with any violation. While
our operations have not been regulated by FERC under the NGA, FERC has adopted
regulations that may subject certain of our otherwise non-FERC jurisdictional
entities to FERC annual reporting and daily scheduled flow and capacity posting
requirements. Additional rules and legislation pertaining to those and other
matters may be considered or adopted by FERC from time to time. Failure to
comply with those regulations in the future could subject us to civil penalty
liability.
Our oil
and gas operations are subject to stringent laws and regulations relating to the
release or disposal of materials into the environment or otherwise relating to
environmental protection. These laws and regulations:
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require
the acquisition of a permit before drilling
commences;
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restrict
the types, quantities and concentration of substances that can be released
into the environment in connection with drilling and production
activities;
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limit
or prohibit drilling activities on certain lands lying within wilderness,
wetlands and other protected areas;
and
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impose
substantial liabilities for pollution resulting from
operations.
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Failure
to comply with these laws and regulations may result in:
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the
imposition of administrative, civil and/or criminal
penalties;
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incurring
investigatory or remedial obligations;
and
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the
imposition of injunctive relief, which could limit or restrict our
operations.
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Changes
in environmental laws and regulations occur frequently, and any changes that
result in more stringent or costly waste handling, storage, transport, disposal
or cleanup requirements could require us to make significant expenditures to
attain and maintain compliance and may otherwise have a material adverse effect
on our industry in general and on our own results of operations, competitive
position or financial condition. Although we intend to be in compliance in all
material respects with all applicable environmental laws and regulations, we
cannot assure you that we will be able to comply with existing or new
regulations. In addition, the risk of accidental spills, leakages or other
circumstances could expose us to extensive liability.
We are
unable to predict the effect of additional environmental laws and regulations
that may be adopted in the future, including whether any such laws or
regulations would materially adversely increase our cost of doing business or
affect operations in any area.
Under
certain environmental laws and regulations, we could be held strictly liable for
the removal or remediation of previously released materials or property
contamination regardless of whether we were responsible for the release or
contamination, or if current or prior operations were conducted consistent with
accepted standards of practice. Such liabilities can be significant, and if
imposed could have a material adverse effect on our financial condition or
results of operations.
Our
sales of oil and natural gas, and any hedging activities related to such energy
commodities, expose us to potential regulatory risks.
The FERC,
the Federal Trade Commission and the Commodity Futures Trading Commission hold
statutory authority to monitor certain segments of the physical and futures
energy commodities markets relevant to our business. These agencies have imposed
broad regulations prohibiting fraud and manipulation of such markets. With
regard to our physical sales of oil and natural gas, and any hedging activities
related to these energy commodities, we are required to observe the
market-related regulations enforced by these agencies, which hold substantial
enforcement authority. Failure to comply with such regulations, as interpreted
and enforced, could materially and adversely affect our financial condition or
results of operations.
Climate
change legislation or regulations restricting emissions of “greenhouse gases”
could result in increased operating costs and reduced demand for the oil and
natural gas we produce while the physical effects of climate change could
disrupt our production and cause us to incur costs in preparing for or
responding to those effects.
On
December 15, 2009, the U.S. Environmental Protection Agency, or “EPA” published
its final findings that emissions of carbon dioxide, methane and other
“greenhouse gases” present an endangerment to public health and the environment
because emissions of such gases are, according to the EPA, contributing to
warming of the earth’s atmosphere and other climatic changes. These findings
allow the EPA to adopt and implement regulations that would restrict emissions
of greenhouse gases under existing provisions of the federal Clean Air Act.
Accordingly, the EPA has adopted regulations that require a reduction in
emissions of greenhouse gases from motor vehicles and limits on greenhouse gas
emissions in permits for new or modified stationary sources that emit large
volumes of greenhouse gases. In addition, , the EPA has adopted rules requiring
the reporting of greenhouse gas emissions from specified large greenhouse gas
emission sources in the United States beginning in 2011 for emissions occurring
in 2010, and from emissions from petroleum and natural gas systems beginning in
2012 for emissions occurring in 2011. Several of EPA’s greenhouse gas rules are
being challenged in pending court proceedings and it is possible that the rules
may be modified or rescinded. The adoption and implementation of any regulations
imposing reporting obligations on, or limiting emissions of greenhouse gases
from, our equipment and operations could require us to incur costs to reduce
emissions of greenhouse gases associated with our operations. Further, Congress
is presently considering, and almost one-half of the states have adopted,
legislation that seeks to control or reduce emissions of greenhouse gases from a
wide range of sources. Any such legislation could adversely affect demand for
the oil and natural gas we produce. Finally, it should be noted that some
scientists have concluded that increasing concentrations of greenhouse gases in
the Earth’s atmosphere may produce climate changes that have significant
physical effects, such as increased frequency and severity of storms, floods and
other climatic events. If any such effects were to occur, they could have an
adverse effect on our operations and cause us to incur costs in preparing for or
responding to those effects.
The
adoption of derivatives legislation by Congress could have an adverse impact on
our ability to hedge risks associated with our business.
The
United States Congress recently adopted comprehensive financial reform
legislation that establishes federal oversight and regulation of the
over-the-counter derivatives market and entities, such as us, that participate
in that market. The new legislation was signed into law by the President on July
21, 2010, and requires the Commodities Futures Trading Commission (the “CFTC”)
and the SEC to promulgate rules and regulations implementing the new legislation
within 360 days from the date of enactment. The CFTC has also proposed
regulations to set position limits for certain futures and option contracts in
the major energy markets, although it is not possible at this time to predict
whether or when the CFTC will adopt those rules or include comparable provisions
in its rulemaking under the new legislation. The financial reform legislation
may also require us to comply with margin requirements and with certain clearing
and trade-execution requirements in connection with our derivative activities,
although the application of those provisions to us is uncertain at this time.
The financial reform legislation may also require the counterparties to our
derivative instruments to spin off some of their derivatives activities to a
separate entity, which may not be as creditworthy as the current counterparty.
The new legislation and any new regulations could significantly increase the
cost of derivative contracts (including through requirements to post collateral
which could adversely affect our available liquidity), materially alter the
terms of derivative contracts, reduce the availability of derivatives to protect
against risks we encounter, reduce our ability to monetize or restructure our
existing derivative contracts, and increase our exposure to less creditworthy
counterparties. If we reduce our use of derivatives as a result of the
legislation and regulations, our results of operations may become more volatile
and our cash flows may be less predictable, which could adversely affect our
ability to plan for and fund capital expenditures. Finally, the legislation was
intended, in part, to reduce the volatility of oil and natural gas prices, which
some legislators attributed to speculative trading in derivatives and commodity
instruments related to oil and natural gas. Our revenues could therefore be
adversely affected if a consequence of the legislation and regulations is to
lower commodity prices. Any of these consequences could have a material effect
on our financial condition and our results of operations.
Risks
Associated with Acquisitions and Our Risk Management Program
Our
acquisition strategy involves potential risks that could adversely impact our
future financial performance.
A key
component of our business strategy is to acquire oil and gas properties. Since
our inception in July 2005, we have made four major acquisitions. The pending
Exxon acquisition is our largest acquisition to date. Any acquisition involves
potential risks, including, among other things:
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the
risk that reserves expected to support the acquired assets may not be of
the anticipated magnitude or may not be developed as
anticipated;
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the
risk that financial information relating to the acquired assets may not be
accurate;
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inaccurate
assumptions about revenues and costs, including
synergies;
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significant
increases in our indebtedness and working capital
requirements;
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an
inability to transition and integrate successfully or timely the
businesses we acquire;
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the
cost of transition and integration of data systems and
processes;
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potential
environmental problems and costs;
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the
assumption of unknown liabilities;
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limitations
on rights to indemnity from the
seller;
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the
diversion of management’s attention from other business
concerns;
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increased
demands on existing personnel and on our corporate
structure;
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increased
responsibility for plugging and abandonment
costs;
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customer
or key employee losses of the acquired businesses;
and
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the
failure to realize expected growth or
profitability.
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The scope
and cost of these risks may ultimately be materially greater than estimated at
the time of the acquisition. Further, our future acquisition costs may be higher
than those we have achieved historically. Any of these factors could adversely
impact our future financial performance and ability to pay principal and
interest on the notes. The Exxon acquisition and future transactions may prove
to stretch our internal resources and infrastructure. As a result, we may need
to hire additional personnel and invest in additional resources, which will
increase our costs. Any further acquisitions we make over the short term would
likely exacerbate these risks.
You
have not been provided with audited historical financial statements for the
Exxon properties or pro forma financial statements for the combined
company.
This
offering memorandum does not include audited financial statements for the Exxon
properties or pro forma financial statements for the combined company. SEC rules
will require us to file, within 71 days following the closing of the Exxon
acquisition, audited financial statements for the Exxon properties for the
fiscal years ended June 30, 2008, 2009 and 2010 and pro forma financial
statements for the combined company for the year ended June 30, 2010 and the
three months ended September 30, 2010, giving effect to the acquisition of the
Exxon properties. As a result of the review process in connection with the
preparation of these audits and SEC-compliant pro forma financial statements,
the Exxon financial data presented in this offering memorandum could change
materially. Accordingly, you have limited financial information regarding the
Exxon properties and the combined company to consider in making your investment
decision and, when such information becomes available, it could be information
that, if it had been available to you, would have been be important to your
investment decision.
Incremental
expenses related to the Exxon properties are presented for illustrative purposes
only and may not be an indication of actual incremental expenses to be incurred
following the closing of the Exxon acquisition. Actual incremental expenses will
differ, and such differences may be material.
The
estimated incremental expenses related to the Exxon properties contained in this
offering memorandum are presented for illustrative purposes only and may not be
an indication of the actual incremental expenses to be incurred following the
closing of the Exxon acquisition for several reasons. The information upon which
these adjustments and assumptions have been made is preliminary and is based on
information obtained from the seller. Moreover, these incremental expenses do
not reflect all costs that we expect to incur in connection with the Exxon
properties. For example, the impact of any additional income taxes is unknown at
this time. Further, costs to obtain insurance fluctuate widely, and we will not
know the actual costs associated with incremental insurance until such time as
we purchase it. As a result, you should not assume that the actual incremental
expenses associated with the Exxon properties will be as estimated. Actual
expenses will differ, and such differences may be material.
We
may be unable to successfully integrate the operations of the properties we
acquire, including the Exxon properties.
Integration
of the operations of the properties we acquire with our existing business will
be a complex, time-consuming and costly process. Failure to successfully
integrate the acquired properties and operations in a timely manner may have a
material adverse effect on our business, financial condition, results of
operations and cash flows. The difficulties of combining the acquired operations
include, among other things:
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operating
a larger organization;
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coordinating
geographically disparate organizations, systems and
facilities;
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integrating
corporate, technological and administrative functions;
and
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diverting
management’s attention from other business
concerns.
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The
process of integrating our operations could cause an interruption of, or loss of
momentum in, the activities of our business. Members of our senior management
may be required to devote considerable amounts of time to this integration
process, which will decrease the time they will have to manage our business. If
our senior management is not able to effectively manage the integration process,
or if any business activities are interrupted as a result of the integration
process, our business could suffer.
In
addition, we face the risk of identifying, competing for and pursuing other
acquisitions, which takes time and expense and diverts management’s attention
from other activities.
We
may not realize all of the anticipated benefits from our acquisitions, including
the Exxon acquisition.
We may
not realize all of the anticipated benefits from the Exxon acquisition or any
future acquisitions, such as increased earnings, cost savings and revenue
enhancements, for various reasons, including difficulties integrating operations
and personnel, higher than expected acquisition and operating costs or other
difficulties, unknown liabilities, inaccurate reserve estimates and fluctuations
in market prices.
If
we are unable to effectively manage the commodity price risk of our production
if energy prices fall, we may not realize the anticipated cash flows from our
acquisitions.
Compared
to some other participants in the oil and gas industry, we are a relatively
small company with modest resources. Therefore, there is the possibility that we
may be unable to find counterparties willing to enter into derivative
arrangements with us or be required to either purchase relatively expensive put
options, or commit to deliver future production, to manage the commodity price
risk of our future production. To the extent that we commit to deliver future
production, we may be forced to make cash deposits available to counterparties
as they mark to market these financial hedges. Proposed changes in regulations
affecting derivatives may further limit or raise the cost, or increase the
credit support required to hedge. This funding requirement may limit the level
of commodity price risk management that we are prudently able to complete. In
addition, we are unlikely to hedge undeveloped reserves to the same extent that
we hedge the anticipated production from proved developed reserves. If we fail
to manage the commodity price risk of our production and energy prices fall, we
may not be able to realize the cash flows from our assets that are currently
anticipated even if we are successful in increasing the production and ultimate
recovery of reserves.
If
we place hedges on future production and encounter difficulties meeting that
production, we may not realize the originally anticipated cash
flows.
Our
assets consist of a mix of reserves, with some being developed while others are
undeveloped. To the extent that we sell the production of these reserves on a
forward-looking basis but do not realize that anticipated level of production,
our cash flow may be adversely affected if energy prices rise above the prices
for the forward-looking sales. In this case, we would be required to make
payments to the purchaser of the forward-looking sale equal to the difference
between the current commodity price and that in the sales contract multiplied by
the physical volume of the shortfall. There is the risk that production
estimates could be inaccurate or that storms or other unanticipated problems
could cause the production to be less than the amount anticipated, causing us to
make payments to the purchasers pursuant to the terms of the hedging
contracts.
Our
price risk management activities could result in financial losses or could
reduce our income, which may adversely affect our cash flows.
We enter
into derivative contracts to reduce the impact of natural gas and oil price
volatility on our cash flow from operations. Currently, we use a combination of
natural gas and crude oil put, swap and collar arrangements to mitigate the
volatility of future natural gas and oil prices received.
Our
actual future production may be significantly higher or lower than we estimate
at the time we enter into derivative contracts for such period. If the actual
amount of production is higher than we estimate, we will have greater commodity
price exposure than we intended. If the actual amount of production is lower
than the notional amount that is subject to our derivative financial
instruments, we might be forced to satisfy all or a portion of our derivative
transactions without the benefit of the cash flow from our sale of the
underlying physical commodity, resulting in a substantial diminution of our
liquidity. As a result of these factors, our hedging activities may not be as
effective as we intend in reducing the volatility of our cash flows, and in
certain circumstances may actually increase the volatility of our cash flows. In
addition, our price risk management activities are subject to the following
risks:
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a
counterparty may not perform its obligation under the applicable
derivative instrument;
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there
may be a change in the expected differential between the underlying
commodity price in the derivative instrument and the actual price
received; and
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the
steps we take to monitor our derivative financial instruments may not
detect and prevent violations of our risk management policies and
procedures.
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The
properties we acquire may not produce as projected, and we may be unable to
determine reserve potential, identify liabilities associated with the acquired
properties or obtain protection from sellers against such
liabilities.
The
properties we acquire may not produce as expected, may be in an unexpected
condition and we may be subject to increased costs and liabilities, including
environmental liabilities. Although we review properties prior to acquisition in
a manner consistent with industry practices, such reviews are not capable of
identifying all potential adverse conditions. Generally, it is not feasible to
review in depth every individual property involved in each acquisition. We focus
our review efforts on the higher-value properties or properties with known
adverse conditions and will sample the remainder. However, even a detailed
review of records and properties may not necessarily reveal existing or
potential problems or permit a buyer to become sufficiently familiar with the
properties to fully assess their condition, any deficiencies, and development
potential.
Other
Risks
We
depend on key personnel, the loss of any of whom could materially adversely
affect future operations.
Our
success will depend to a large extent upon the efforts and abilities of our
executive officers and key operations personnel. The loss of the services of one
or more of these key employees could have a material adverse effect on us. Our
business will also be dependent upon our ability to attract and retain qualified
personnel. Acquiring and keeping these personnel could prove more difficult or
cost substantially more than estimated. This could cause us to incur greater
costs, or prevent us from pursuing our strategy as quickly as we would otherwise
wish to do.
Unanticipated
decommissioning costs could materially adversely affect our future financial
position and results of operations.
We may
become responsible for unanticipated costs associated with abandoning and
reclaiming wells, facilities and pipelines. Abandonment and reclamation of
facilities and the costs associated therewith is often referred to as
“decommissioning.” Should decommissioning be required that is not presently
anticipated or the decommissioning be accelerated, such as can happen after a
hurricane, such costs may exceed the value of reserves remaining at any
particular time. We may have to draw on funds from other sources to satisfy such
costs. The use of other funds to satisfy such decommissioning costs could have a
material adverse effect on our financial position and results of
operations.
If
we are unable to acquire or renew permits and approvals required for operations,
we may be forced to suspend or cease operations altogether.
The
construction and operation of energy projects require numerous permits and
approvals from governmental agencies. We may not be able to obtain all necessary
permits and approvals, and as a result our operations may be adversely affected.
In addition, obtaining all necessary permits and approvals may necessitate
substantial expenditures and may create a risk of expensive delays or loss of
value if a project is unable to proceed as planned due to changing requirements
or local opposition.
Certain
U.S. federal income tax deductions currently available with respect to oil and
gas exploration and development may be eliminated as a result of future
legislation.
The
Proposed Fiscal Year 2011 Budget includes proposed legislation that would, if
enacted into law, make significant changes to United States tax laws, including
the elimination of certain key U.S. federal income tax incentives currently
available to oil and natural gas exploration and production companies. These
changes include, but are not limited to, (i) the repeal of the percentage
depletion allowance for oil and natural gas properties, (ii) the elimination of
current deductions for intangible drilling and development costs, (iii) the
elimination of the deduction for certain domestic production activities, and
(iv) an extension of the amortization period for certain geological and
geophysical expenditures. It is unclear whether any such changes will be enacted
or how soon any such changes could become effective. The passage of any
legislation as a result of these proposals or any other similar changes in U.S.
federal income tax laws could eliminate certain tax deductions that are
currently available with respect to oil and gas exploration and development, and
any such change could negatively affect our financial condition and results of
operations.