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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the fiscal year ended December 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission file number 0-610
EQUITY OIL COMPANY
[Exact name of registrant as specified in its charter]
Colorado 87-0129795
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
10 West Broadway, Suite 806 84101
Salt Lake City, Utah (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (801) 521-3515
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (par value, $1 per share)
[Title of class]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
As of February 28, 2000, 12,643,400 common shares were outstanding, and the
aggregate market value of voting stock held by non-affiliates of the registrant
was approximately $17,500,000.
Documents Incorporated by Reference
1. Definitive proxy statement to be filed in connection with Issuer's Annual
Stockholders' Meeting to be held on May 10, 2000 and more particularly the
information contained on pages 2 through 6 are incorporated by reference into
Part III of this report.
Total Pages 50
PART I
ITEM 1. BUSINESS
GENERAL
Equity Oil Company ("Equity" or "the Company") was originally incorporated in
the state of Utah in 1923. In 1958, it was merged into its subsidiary, Weber Oil
Company, a Colorado corporation. The surviving company adopted the name Equity
Oil Company.
Equity is an independent oil and gas exploration and production company,
currently conducting its business in eight states and two Canadian provinces.
Equity is also a 50% shareholder in Symskaya Exploration, Incorporated
(Symskaya) which is licensed to operate in Russia. Headquartered in Salt Lake
City, Utah, the Company also maintains an exploration office in Denver,
Colorado, and field offices in Cody, Wyoming and Vernal, Utah. The Company has
21 full-time employees.
The Company's exploration office in Denver is responsible for the generation and
review of exploration prospects, and participates in the planning, where
necessary, to drill the prospects. These include prospects developed in-house,
as well as those presented by independent third parties.
All production activities of the Company are coordinated through the Company's
field office in Cody, Wyoming. The office was opened on January 1, 2000, as a
result of a property exchange in the Big Horn basin of Wyoming and Montana.
Further information concerning the exchange can be found in ITEM 2. PROPERTIES,
under the caption PRESENT ACTIVITY.
BUSINESS STRATEGY
More than 90% of the Company's revenues come from the sale of crude oil and
natural gas. Accordingly, the Company continually seeks to increase its oil and
gas production. The key to increasing production is the replacement, on an
annual basis, of current production, as well as achieving additional reserve
growth.
The Company's strategy to replace production and increase its oil and natural
gas reserves on an ongoing basis is comprised of a balanced approach in the
areas of focused exploration drilling, development drilling and exploitation and
the acquisition of proved reserves.
When conducting its exploration activities, the general practice of the Company
is to participate in projects on a 25% to 50% working interest basis.
Participation varies with each prospect depending on location and the attendant
financial and technical risk.
2
In addition to its exploration ventures, the Company works in conjunction with
other working interest owners in producing properties to identify projects that
will develop and exploit the productive capacities of existing wells and fields.
These projects include development drilling, production enhancement, operating
cost reductions and other types of activities.
The Company also investigates opportunities to purchase interests in properties
with existing production. During the last five years, the Company has replaced a
significant amount of its production through the purchase of producing
properties. These purchases have, in turn, produced additional developmental and
enhancement projects.
The Company has conducted international exploration in Russia through its 50%
ownership of Symskaya. Symskaya operations were significantly curtailed during
1999 and will be again curtailed in 2000. Further discussion of this venture and
other Company activities is found in ITEM 2. PROPERTIES, under the caption
PRESENT ACTIVITY.
PRINCIPAL PRODUCTS AND MARKETS
The Company produces crude oil and natural gas. During the last five years,
revenues from the sales of these products have accounted for more than 90% of
the total revenues of the Company, while remaining revenues have come from other
sources, including interest income on invested funds, operating overhead
reimbursements, and the sales of various developed and undeveloped properties.
The majority of the Company's oil production occurs in Colorado and other Rocky
mountain states, and the Canadian provinces of Alberta and British Columbia. The
Company's crude oil production is sold under short-term contracts at current
posted prices for each geographic area, less applicable quality or
transportation tariffs, plus negotiated bonuses. Prices are set by oil
purchasers, and, while their methods of determining prices are not within the
control of the Company, it is assumed they are influenced by regional, national
and international factors relating to oil supply and demand (see discussion
under MAJOR CUSTOMERS).
The bulk of the Company's natural gas production occurs in Wyoming, California
and the Canadian province of Alberta. During 1999, the Company sold all of its
gas producing properties that were located in Texas. While the areas where the
Company has its major gas reserves are characterized by large reserves of other
companies, the Company has historically been able to sell all of its productive
capacity, and expects to be able to continue to do so in the near future. The
majority of gas sold in Wyoming is marketed under a contract at an index price
that changes monthly. The contract is subject to renegotiation on an annual
basis. The majority of gas produced by the Company in other geographic areas is
sold on the spot market, where prices also vary on a monthly basis.
3
The Company periodically enters into hedging activities with a portion of its
oil production which are intended to support its oil price at targeted levels,
to manage the Company's exposure to oil price fluctuations, and to comply with
the terms of its credit facility. Further discussion of the Company's hedging
activities can be found in Footnote 1 to the financial statements.
SEASONALITY
The Company experiences some seasonality in gas sales revenues. Net sales prices
and production tend to rise during the winter months compared to the rest of the
year. However, since over 70% of the Company's oil and gas revenues come from
the sale of oil, the seasonal impact on total oil and gas sales is not
significant.
MAJOR CUSTOMERS
All oil and gas produced in the U.S. or Canada is sold to unaffiliated pipeline,
refining or crude oil purchasing companies. These companies may be the operators
of the fields where the product is produced, owners of the pipelines which
transport the products, or other third-party purchasers. While certain entities
purchase more than 10% of the Company's oil and gas production, previous changes
in purchasers have not resulted in an interruption of production or
transportation, and consequently have not had a material adverse effect on the
business of the Company.
COMPETITION
Equity is part of a highly competitive industry composed of many companies that
are significantly larger and possess greater resources than the Company. These
include major oil companies as well as large independent exploration and
production companies. Their size and resources may allow these parties to
operate at a greater competitive advantage than Equity.
During 1999, the Company did not experience any competitive factors which
impaired its production or sale of oil and gas, nor did it experience
significant difficulties in contracting for drilling and related equipment.
GOVERNMENT REGULATION
Drilling activities of the Company are regulated by several governmental
agencies in the United States, both federal and state, including the
Environmental Protection Agency, Forest Service, Department of Wildlife and
Bureau of Land Management, as well as state oil and gas commissions for those
states in which the Company has operations. Canadian and Russian operations are
subject to similar requirements.
4
The Company believes that it is currently in compliance with all federal, state
and local environmental regulations, both domestically and abroad. Further, the
Company does not believe that any current environmental regulations will have a
material impact on its capital expenditures or earnings, nor will they result in
any competitive disadvantage to the Company.
FINANCIAL INFORMATION ABOUT FOREIGN OPERATIONS
Foreign operations of the Company are currently conducted in the Canadian
provinces of Alberta and British Columbia. Financial information concerning
these operations can be found in Footnotes 5 and 9 to the financial statements.
For financial reporting purposes, the Company does not allocate any general and
administrative expenses to its Canadian operations, nor are they burdened with
indirect exploration overhead expenses. Direct exploration expenses are charged
to the geographic area in which they occur. Because the majority of the
Company's exploration efforts occur in the United States, very little
exploration expenses are allocated to the Canadian operations. As a result of
these and other factors, the operating profit of the Canadian operations is
significantly greater than the operating profit in the United States. The
Company does not believe that its Canadian operations are attended with any more
risk than those in the United States.
The Company owns a 50% interest in Symskaya Exploration, Incorporated, which is
licensed to operate in Russia. Further discussion of this venture is found in
ITEM 2. PROPERTIES, under the caption PRESENT ACTIVITY, and in Footnotes 6 and 9
in the financial statements.
ITEM 2. PROPERTIES
The principal properties of the Company consist of developed and undeveloped oil
and gas leasehold interests. Developed leases are comprised of properties with
existing production, where lease terms continue as long as oil and/or gas is
produced. Undeveloped leases include unproven acreage on both public and private
lands. The leases have set terms and terminate at the time specified in each
lease unless oil and gas in commercial quantities are discovered prior to that
time.
The Company also has a fee interest in 6,996 net acres of oil shale lands in
Colorado. These properties have not generated significant revenue for the
Company.
RESERVES
The information found in Footnote 9 to the financial statements concerning
proved reserves represents the Company's best estimate of product quantities
expected to be produced from its properties based on geologic and engineering
data, as well as current economic and operating conditions. The presentation is
made in accordance with Securities and Exchange Commission guidelines, and is
based on prices and costs in effect on December 31, 1999. No estimates of
reserves have been filed with or included in any report to any other federal
agency during 1999.
5
PRODUCTION
The following table sets forth the Company's production, average sales prices
and average lifting costs by geographic area for 1999, 1998 and 1997:
1999 1998 1997 1999 1998 1997
Oil Oil Oil Gas Gas Gas
Area (Bbls) (Bbls) (Bbls) (MMCF) (MMCF) (MMCF)
Production
Colorado 298,507 332,230 366,319 76 117 170
Texas 18,433 22,291 25,359 85 145 211
Montana 19,650 20,434 26,103 28 34 16
Utah 13,120 20,658 18,745 - - -
Wyoming 130,453 131,943 76,190 601 733 660
North Dakota 96,068 67,906 7,007 55 31 3
California - - - 923 1,032 560
Other 4 5 442 - - -
- --------------- ---------- ---------- ---------- --------- --------- ---------
Total U.S. 576,235 595,467 520,165 1,768 2,092 1,620
Alberta 74,257 75,015 92,376 245 277 439
B.C. 11,898 21,352 23,371 20 69 10
- --------------- ---------- ---------- ---------- --------- --------- ---------
Total Canada 86,155 96,367 115,747 265 346 449
Grand Total 662,390 691,834 635,912 2,033 2,438 2,069
=============== ========== ========== ========== ========= ========= =========
Average Price
U.S. $17.44 $12.28 $19.49 $ 2.11 $1.95 $2.21
Canada $17.12 $11.43 $15.36 $ 1.57 $1.15 $1.34
- --------------- ---------- ---------- ---------- --------- --------- ---------
Total $17.40 $12.16 $18.74 $ 2.04 $1.83 $2.02
=============== ========== ========== ========== ========= ========= =========
Lifting Costs
U.S. $ 6.86 $ 6.11 $ 7.53 $ .83 $ .97 $ .85
Canada $ 4.87 $ 4.48 $ 4.15 $ .40 $ .40 $ .36
- --------------- ---------- ---------- ---------- --------- --------- ---------
Total $ 6.60 $ 5.88 $ 6.92 $ .77 $ .89 $ .75
=============== ========== ========== ========== ========= ========= =========
6
PRODUCTIVE WELLS AND ACREAGE
The location and quantity of Equity's productive wells and acreage as of
December 31, 1999 are as follows:
Productive Wells: Gross Net
-------------------------------------------------------------------
Oil:
United States 679 96.566
Canada 386 12.905
Gas:
United States 64 19.273
Canada 9 1.604
----- -------
Total Productive Wells 1,138 130.348
===== =======
Developed Acreage
United States 107,788 11,344
Canada 127,120 2,946
------- ------
Total Developed Acreage 234,908 14,290
======= ======
UNDEVELOPED LEASEHOLD ACREAGE
The following table sets forth the Company's undeveloped oil and gas leasehold
acreage as of December 31, 1999 by geographic area:
Gross Net
Area Acreage Acreage
Colorado 19,369 11,978
Texas 1,280 586
Montana 30,001 2,967
Utah 7,950 880
Wyoming 42,413 22,359
California 15,503 4,074
North Dakota 15,105 8,041
------- ------
Total U.S. 131,621 50,885
Alberta 20,697 3,571
------- ------
Total Canada 20,697 3,571
------- ------
Grand Total 152,318 54,456
======= ======
7
Through its 50% ownership in Symskaya, the Company also has an indirect 50%
interest in an additional 1,100,000 gross acres in Russia. Further discussion of
this venture is found in ITEM 2. PROPERTIES, under the caption PRESENT ACTIVITY,
and in Footnotes 6 and 9 to the financial statements.
DRILLING ACTIVITY
During 1999, the Company participated in the drilling of 10 gross wells. Of this
total, 5 were completed as producing oil and gas wells and 5 were plugged and
abandoned as dry holes.
Gross exploratory wells
drilled: Status 1999 1998 1997
- ----------------------- ------ ---- ---- ----
United States Productive 5 6 13
Dry 5 5 12
Canada Productive - - -
Dry - - -
Gross development wells
drilled:
- -----------------------
United States Productive - 1 5
Dry - - -
Canada Productive - - -
Dry - - -
Net exploratory wells
drilled: Status 1999 1998 1997
- ----------------------- ------ ---- ---- ----
United States Productive 1.74 2.18 4.21
Dry 2.25 2.10 5.99
Canada Productive - - -
Dry - - -
Net development wells
drilled:
- -----------------------
United States Productive - .40 1.74
Dry - - -
Canada Productive - - -
Dry - - -
8
PRESENT ACTIVITY
ACQUISITIONS/DIVESTITURES:
In December of 1999, the Company acquired the assets of a private Rocky Mountain
production company, that included the operating rights and additional working
interests in 14 fields in the Big Horn Basin of Wyoming and Montana where Equity
already held working interests. After the acquisition, the Company's working
interests in the fields range from 21% to 100%. This acquisition, as well as the
separate purchase of a 48% operated working interest in a waterflood adjacent to
existing production in central Montana, was accomplished through the exchange of
non-operated working interests in other properties previously acquired by
Equity, plus cash consideration of $585,000. As a result of the acquisitions,
Equity's proved reserve position increased by 314,000 barrels of oil equivalent.
The strategic significance of the acquisition is that Equity is now the operator
of all of the wells included in the transaction, and has opened a new field
office in Cody, Wyoming, which is staffed by a drilling and production manager
and seven employees. Furthermore, Equity now operates 50% of its non-Rangely
Weber Sand Unit oil production.
The Big Horn Basin properties have significant potential for the development of
additional reserves, and the Company now has the operational control required to
begin exploitation of these fields through drilling, workovers and operating
cost reductions.
The cash component of the Big Horn Basin acquisition was funded principally by
the sale of minor non-operated working interests in oil and gas properties in
Texas. The Company will continue to evaluate all of our properties outside our
core areas of interest as potential candidates for divestiture.
EXPLORATION
In 1999, Equity participated in ten exploratory wells, all in California, five
of which were completed as gas wells. Of the ten wells, eight wells were drilled
on 3D surveys in the Sacramento Basin, and of those, five were completed as gas
wells, for a completion percentage of 62.5%. Five of the eight wells were
operated by Equity. The other two California wells were drilled on the Sequoia
3D survey in the San Joaquin Basin, and neither well was successful.
In 2000, the Company's exploration drilling activity will again be focused in
California. Present plans call for the drilling of eleven wells on Sacramento
Basin 3D projects, five of which will be operated by Equity. One additional well
will be drilled on the Sequoia 3D project.
9
Equity will also initiate two new 3D seismic surveys in 2000, one in the
Sacramento Basin, and one in the Williston Basin of North Dakota. The Rancho
Colusa 3D survey, located approximately five miles north of the Company's Davis
Ranch Survey in the Sacramento Basin will cover 25 square miles and will be
operated by Equity. Equity's intent is to sell up to a 50% interest in the
project to industry partners. One of the eleven wells scheduled to be drilled in
the Sacramento Basin this year is expected to be drilled on this survey.
The second Equity operated 3D survey is a 20 square mile survey to be conducted
on acreage that includes the prolific 1998 discovery, the Beaver Creek #24-15.
This well had cumulative gross production through year-end 1999 in excess of
560,000 barrels, and continues to flow at a rate of 1,100 barrels of oil and 600
MCF per day. The well has been assigned gross recoverable reserves of 2 million
barrels. Equity has a 32.5% working interest in the well and Westport Oil and
Gas has the remaining interest.
The 3D survey area includes the Company's 100% owned 3,520 acre Northwest Beaver
Creek Prospect. As with the Rancho Colusa survey, the Company is marketing a 50%
interest in the Norwest Beaver Creek Prospect to industry partners.
DEVELOPMENT/EXPLOITATION
In addition to the exploratory wells drilled, three of the Company's producing
wells were successfully recompleted or reworked during the year. The reworked
wells included the Beaver Creek #24- 15 well, where gross oil production
increased from 800 barrels per day to its current level of 1,100 barrels per day
following an acid stimulation.
The Company also recompleted two wells at its Merlin project in the Sacramento
Basin. Gross gas production from the #1-15 Henning and #1-22 Otto Lohse wells
increased from 500 Mcf per day to 3,000 Mcf per day. The Company has a 50%
working interest in each well. The Merlin survey has produced in excess of 1
billion cubic feet of gas, with current field production of 3,200 Mcf per day
from three wells.
The operational control of the Big Horn Basin properties acquired in 1999 should
provide development opportunities in 2000 and beyond. The technical evaluation
of the opportunities associated with the 14 acquired fields is underway, and the
Company expects to initiate the first steps of a coordinated program of
development and exploitation by mid-year.
10
SYMSKAYA EXPLORATION
While awaiting the results from the Averinskaya well being drilled immediately
south of Symskaya's license area by the Geological Committee of the Krasnoyarsk
Krai, Equity continues to hold its 50% ownership position in Symskaya
Exploration Inc. The Averinskaya well has been drilled to a depth of 3,500
meters to test the same formations that were tested in Symskaya's exploratory
well, the Lemok #1, and may be deepened to 4,500 meters.
Symskaya was issued a 25 year, 1 million acre License in 1993 to explore for,
develop and produce hydrocarbons in the Krasnoyarsk Krai in Russia. We believe
that it continues to be in the best interest of our shareholders for Symskaya to
hold the License at minimum cost.
Barring major developments from the Averinskaya well and changes in federal and
local policies regarding production sharing, further attempts to drill
Symskaya's prospect are unlikely, absent additional outside financing. The
economy of the Russian Federation is currently in a period of instability. The
return to economic stability is dependent to a large extent on the effectiveness
of the fiscal measures taken by the government and other actions beyond the
Company's control. Russia's current economic environment, coupled with the
depression in world oil markets in 1998 and 1999, has made it difficult for
Symskaya to attract interested parties in their project.
DELIVERY COMMITMENTS
The Company is not obligated to provide any fixed or determinable quantity of
oil or gas in the future under any existing contracts or agreements.
ITEM 3. LEGAL PROCEEDINGS
No material legal proceedings are pending.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year covered by this report, no matters
were submitted to the security holders for a vote, and no proxies were
solicited.
11
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED MATTERS
The Company's stock is traded on the over-the-counter market and quoted over the
NASDAQ National Market System using the symbol EQTY. High and low closing prices
for 1999 and 1998 are as follows:
Quarter High Low
- ------- ---- ---
1999 - 4th 1 17/32 1
3rd 1 1/2 1 1/8
2nd 1 5/8 1
1st 1 9/16 29/32
1998 - 4th 1 15/16 21/32
3rd 2 7/16 1 13/16
2nd 2 13/16 2
1st 3 1/16 2 1/2
The approximate number of registered stockholders of the Company as of February
24, 2000 is 1,500.
No unregistered equity securities of the registrant have been sold during the
period covered by this report.
12
ITEM 6. SELECTED FINANCIAL DATA
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Oil and Gas Sales ........ $ 15,434,537 $ 12,720,876 $ 16,457,048 $ 16,115,125 $ 12,259,739
Other Income ............. 334,980 377,282 1,023,037 312,759 457,837
Lease Operating
Costs .................... 5,948,055 6,233,955 5,940,808 5,912,128 5,093,782
Depreciation, Depletion
and Amortization ......... 4,072,278 5,029,119 4,675,411 4,292,237 3,843,442
Impairment of
Proved Oil and
Gas Properties ........... 313,751 4,015,158 411,894 237,279 2,471,146
Equity Loss and Impairment
of Investment in Symskaya
Exploration, Inc. ........ 169,933 446,758 356,661 9,204,394 -0-
3-D Seismic .............. 35,200 431,075 626,525 757,964 237,604
Exploration
Expense .................. 1,566,521 2,383,163 3,026,550 2,336,405 1,633,612
General and
Administrative ........... 1,743,590 1,914,590 2,048,194 2,030,811 1,908,778
Net Income (loss) ........ 403,521 (5,814,884) (211,156) (5,502,646) (1,254,812)
Basic and Diluted
Net Income (Loss)
Per Common Share ......... $ .03 $ (.46) $ (.02) $ (.43) $ (.10)
============ ============ ============ ============ ============
Total Assets ............. $ 46,117,335 $ 47,271,168 $ 53,541,639 $ 50,181,437 $ 53,947,050
Long-Term Debt ........... $ 15,000,000 $ 16,500,000 $ 13,978,830 $ 8,878,830 $ 4,918,830
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL. The profitability of the Company's operations in any particular
accounting period will be directly related to the average realized prices of oil
and gas sold, the volume of oil and gas produced and the results of acquisition,
development and exploration activities. The average realized prices of oil and
gas will fluctuate from one period to another due to market conditions. The
aggregate amount of oil and gas produced may fluctuate based on development and
exploitation of oil and gas reserves and other factors. Production rates,
value-based production taxes, labor and maintenance expenses are expected to be
the principal influences on operating costs. Accordingly, the results of
operations of the Company may fluctuate from period to period.
OIL AND GAS RESERVES. Estimates of reserve quantities and related future net
cash flows are calculated using unescalated year-end oil and gas prices and
operating costs, and may be subject to substantial fluctuations based on the
prices in effect at the end of each year. The following table sets forth a
comparison of year-end reserves, the weighted average prices used in calculating
estimated reserve quantities and future net cash flows, pre-tax future net cash
flows discounted at 10%, and per barrel of oil equivalent discounted cash flows
at the end of 1999, 1998 and 1997 (quantities in thousands, except for pricing
and per barrel of oil equivalent amounts):
SEC-10
Year-end Year-end SEC-10 pre-tax
proved reserves prices pre-tax values
Oil(MBBLs) Gas(MMCF) BOE* Oil Gas values per BOE
---------- --------- ---- --- --- ------ -------
12/31/99 9,293 16,331 12,015 $22.99 $1.93 $63,366 $5.27
12/31/98 6,193 19,010 9,361 $10.80 $1.95 $25,210 $2.69
12/31/97 8,420 18,909 11,571 $14.99 $2.03 $37,409 $3.23
* - gas converted at 6,000 Mcf per barrel.
14
Reserve revisions occur when the economic limit of a property is lengthened or
shortened due to changes in commodity pricing. The following excerpt from the
footnotes to the Company's financial statements shows the effect of changing oil
prices on the volume of oil reserves (shown in thousands of barrels):
Year ended December 31,
1999 1998 1997
---- ---- ----
Proved oil reserves (000's):
Beginning of year 6,193 8,420 8,369
Revisions of previous estimates 3,442 (1,896) (555)
Extensions and discoveries 6 361 202
Acquisition of minerals in place 563 - 1,085
Sales of minerals in place (249) - (45)
Production (662) (692) (636)
----- ----- -----
End of year 9,293 6,193 8,420
===== ===== =====
The revisions of 3,442,000 and (1,896,000) barrels in 1999 and 1998,
respectively, are primarily price-related.
Excluding revisions to previous estimates, the Company's 1999 drilling and
acquisition activities, which were curtailed for much of the year, added 663,000
barrels of oil equivalent reserves, 66% of 1999 total oil and gas production.
1998 drilling and acquisition activities, which were also reduced in that year
from prior years, added 779,000 barrels of oil equivalent to the Company's
proved reserve base, replacing 71% of 1998 production. The Company did not make
any producing property acquisitions in 1998. In 1997, the Company added 1.76
million barrels of oil equivalent, equal to 179% of 1997 oil and gas production.
Further information concerning the Company's reserve volumes and values can be
found in Footnote 9 to the financial statements.
IMPAIRMENT OF PROVED OIL AND GAS PROPERTIES. Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long Lived Assets and for
Assets Held for Disposal, requires successful efforts companies to evaluate the
recoverability of the carrying costs of their proved oil and gas properties by
comparing the expected undiscounted future net revenues from each producing
field with the related net capitalized costs at the end of each period. When the
net capitalized costs exceed the undiscounted future net revenues, the cost of
the property is written down to fair value, which is determined using discounted
future net revenues from the producing field.
During 1999, the Company recorded an impairment of proved oil and gas properties
of $313,751 ($196,094 net of tax) associated with certain properties that
experienced increased operating costs, declining production and other technical
problems that reduced their economic reserves.
Primarily as a result of depressed year-end oil prices, the Company recorded
proved property impairment charges of $4,015,158 in 1998. During 1997, the
Company recorded proved property impairment charges of $411,894.
15
RESULTS OF OPERATIONS
COMPARISON OF 1999 WITH 1998
OIL AND GAS PRODUCTION AND SALES. Oil and gas sales increased more than 20% in
1999 over 1998 levels. Higher oil and gas prices were offset somewhat by
decreases in both oil and gas production. Total revenues increased 20% from 1998
to 1999.
Oil production decreased 4% in 1999, as a number of the Company's high-cost,
low-margin oil wells were shut-in during the first several months of the year.
Oil production was 662,000 barrels, compared to 692,000 barrels in 1998. Gas
production decreased 17% to 2.0 Bcf in 1999 from 2.4 Bcf in 1998. Gas production
declined primarily as a result of reduced drilling in California during 1998 and
1999, as well as the sale of the Company's Texas gas properties during the
fourth quarter of 1999.
While average year-end oil prices in 1999 were more than double those of
year-end 1998, the average price received for the entire year increased a more
modest 43%. Higher second half prices were offset by abnormally low prices in
the first half of the year. The Company's average oil price for the full year of
1999 was $17.40 compared to $12.16 per barrel realized during 1998. Gas prices
were also higher, averaging $2.04 per Mcf in 1999 compared to $1.83 per Mcf in
1998.
LEASE OPERATING COSTS. Lease operating costs decreased 5% over the prior year.
Higher per unit costs were offset by reduced volumes. Per unit costs rose as the
Company recorded higher value-based production taxes associated with higher oil
prices.
DEPRECIATION, DEPLETION AND AMORTIZATION (DD&A).DD&A per unit charges decreased
from $4.58 per BOE in 1998 to $4.07 per BOE in 1999. The primary reason for the
per unit decrease was the elimination of approximately $4 million from the
Company's depletable base through a property impairment charge in the fourth
quarter of 1998. In addition, higher oil prices enabled the Company to record
positive reserve revisions, which in turn decreased DD&A rates for many of the
Company's oil properties.
IMPAIRMENT OF PROVED OIL AND GAS PROPERTIES. As discussed previously, included
in the statement of operations for 1999 and 1998 are non-cash charges for the
impairment of proved oil and gas properties in the amount of $313,751 and
$4,015,158, respectively.
16
EQUITY LOSS IN SYMSKAYA EXPLORATION, INCORPORATED. The equity loss in Symskaya
Exploration decreased by $276,825 during 1999. As operations continue to be
curtailed at the project, Symskaya terminated its only domestic employee, and
further reduced administrative expenses in 1999. The 1998 loss included $125,000
of accrued interest income on a senior note between Symskaya and the Company
that had been recognized in prior periods. The 1998 amount also included the
Company's share of a bottom hole contribution that was not repeated in 1999.
3-D SEISMIC AND EXPLORATION EXPENSES. Lower exploration costs in 1999 resulted
from the Company's reduced drilling program. During 1999, the Company incurred
approximately $470,000 in dry hole costs compared to approximately $875,000 in
1998. In addition, as a result of the Company's cost cutting measures in 1999,
the Company reduced other exploratory geological and administrative costs by
23%.
In 1998, the Company incurred 3-D seismic charges in the amount of $431,000
associated with its Sequoia prospect in California. The Company curtailed its
use of 3-D seismic in 1999 in response to low oil prices during the first part
of the year.
GENERAL AND ADMINISTRATIVE EXPENSES. The Company cut its general and
administrative expenses by $171,000, or 9%, from 1998 levels. In response to
abnormally low oil prices in the beginning of 1998, the Company made a concerted
effort to reduce overhead costs through staff reductions, lower compensation
costs, reduced employee benefits and other costs.
INTEREST AND INCOME TAXES. Lower interest costs in 1999 reflect lower average
interest rates on the debt outstanding under the Company's credit facility. The
income tax expense (benefits) recorded for both periods reflect the results of
operations, as well as various credits available to the Company. Details
concerning the components of the tax provision can be found in Footnote 3 to the
financial statements.
COMPARISON OF 1998 WITH 1997
OIL AND GAS PRODUCTION AND SALES. Lower oil and gas prices offset higher oil and
gas production during 1998, resulting in a 23% drop in oil and gas sales. Gas
production of 2.4 Bcf in 1998 was 14% higher than 2.1 Bcf produced in 1997. Oil
production of 692,000 barrels was 9% higher than the 636,000 barrels produced in
1997.
Average oil prices for 1998 were 35% lower than those of 1997. The Company's
average oil price received for 1998 was $12.16 per barrel, compared to $18.74
per barrel in 1997. Gas prices also dropped by 9%, averaging $1.83 in 1998,
compared to $2.02 in 1997. Further details of production and pricing are found
in Item 2. PROPERTIES, under the caption PRODUCTION.
17
OTHER INCOME. During 1997, the Company recorded a gain on the sale of certain
oil and gas properties of approximately $325,000. In addition, the Company sold
its minority interest in an oil field technology research company. In connection
with the sale, the Company recognized a gain of approximately $200,000. There
were no corresponding events in 1998.
LEASE OPERATING COSTS. Lease operating costs declined on a per-unit basis in
1998. Costs per BOE during 1998 of $5.68 were 6% lower than costs of $6.06 per
BOE during 1997. During much of 1998, the Company shut-in several high-cost,
marginally economic wells whose profitability was severely curtailed by low oil
prices. Another factor in the decline was a reduction in value-based production
taxes. As the majority of the Company's production on a barrel of oil equivalent
basis comes from crude oil, the decline in average oil prices in 1998 brought
about declines in production taxes.
In addition, operating costs associated with natural gas properties are lower on
a BOE basis than for oil producing properties. The Company's ratio of gas to oil
production rose in 1998 compared to prior years, and as it did so, per BOE
operating costs declined.
DEPRECIATION, DEPLETION, AND AMORTIZATION (DD&A). DD&A charges in 1998 declined
slightly to $4.58 per barrel of oil equivalent from $4.77 per barrel of oil
equivalent in 1997.
IMPAIRMENT OF PROVED OIL AND GAS PROPERTIES. As discussed previously, included
in the statement of operations for 1998 and 1997 are non-cash charges for the
impairment of proved oil and gas properties in the amount of $4,015,158 and
$411,894, respectively.
EQUITY LOSS IN SYMSKAYA EXPLORATION, INCORPORATED. In 1998, Symskaya entered
into a bottom hole contribution agreement to support the drilling of an
exploratory well being drilled near the southern block of acreage that Symskaya
holds as part of its 1.1 million acre exploration, development and production
License.
The equity loss in Symskaya increased by approximately $90,000 during 1998. This
increase included a write down of approximately $125,000 of accrued interest
income on a senior note between Symskaya and the Company that had been
recognized in prior periods. In addition, the 1998 increase included the
Company's share of the bottom hole contribution. There were no corresponding
events in 1997.
18
3-D SEISMIC AND EXPLORATION EXPENSES. During 1998, the Company incurred $431,075
in 3-D seismic costs related to its exploration programs, compared to $626,525
in 1997. The bulk of 1998 3-D costs were associated with its Sequoia project in
the San Joaquin Basin of California. Exploration expenses decreased as the
Company drilled 5 exploratory dry holes in 1998, compared to 12 dry holes in
1997.
INTEREST AND INCOME TAXES. Higher interest costs in 1998 reflect the higher
amount of debt outstanding under the Company's credit facility. The income tax
benefits recorded for both periods result primarily from the deferred tax
benefits associated with net losses reported. Details concerning the components
of the tax provision can be found in Footnote 3 to the financial statements.
LIQUIDITY AND CAPITAL RESOURCES
Higher oil prices, lower expenses and improved financial results have led to an
overall strengthening in the Company's financial position at December 31, 1999.
The Company's cash balances increased by 126% from December 31, 1998. Working
capital at December 31, 1999 was 76% higher than that at December 31, 1998. The
Company's ratio of current assets to current liabilities also improved, reaching
2.40 to 1 at December 31, 1999 compared to 1.76 to 1 at the end of 1998. Cash
flow from operating activities more than doubled in 1999, increasing 128% over
1998 levels.
During 1999, the Company cut its capital spending by 33% compared to 1998. The
reduction reflected lower first half oil and gas prices, as well as the
uncertainty surrounding the futures markets. As oil prices strengthened during
the year, the Company increased its capital spending; 57% of total 1999 capital
spending occurred in the fourth quarter. The Company's 1999 capital expenditures
were partially offset by proceeds from the sale of certain oil and gas
properties. The Company sold all of its Texas gas producing properties during
1999.
In September of 1999, the Company announced a new $50 million reducing revolving
credit facility with Bank One Texas, N.A. The facility has an initial commitment
of $17 million, and replaces a prior facility with HSBC Investment Bank. The
maturity date of the facility is September 9, 2002, three years from the date of
closing. The new facility has a LIBOR or a prime interest rate option; the
average interest rate on debt outstanding at December 31, 1999 was 8.42 percent.
The Company's commitment under its credit facility is subject to a
redetermination as of May 1 and November 1 of each year, with estimated future
oil and gas prices used in the evaluation determined by the Company's lender. As
of December 31, 1999, the Company had $2,000,000 of remaining availability on
the facility. The Company is in compliance with all its facility covenants.
19
During 1998, the Company increased borrowings under its credit facility by
$2,521,170, which were used to fund investments in property and equipment and
for working capital purposes. Higher revenues and cash flows in 1999 enabled the
Company to make principal payments of $1,500,000 on its facility.
As part of the new credit facility, the Company is required to hedge at least
50% but not more than 75% of its daily oil production, at a price not lower than
the lowest price used in the bank's price deck, for a period between 12 and 18
months. The Company has 120 days after the closing date to have the hedge or
hedges in place. The Company entered into one collar agreement for 12 months
effective October 1, 1999, covering 400 barrels per day with a floor at $18.00
per barrel and a ceiling at $25.30 per barrel. The Company entered into a second
collar agreement for 12 months effective January 1, 2000, covering 500 barrels
per day with a floor at $18.00 per barrel and a ceiling at $27.22 per barrel.
As a result of the hedge entered into effective October 1, 1999, revenues were
reduced by $9,784 during 1999. The fair value of this hedge at December 31, 1999
was approximately $(64,000). No hedging transactions occurred in 1998 and 1997.
The Company believes that existing cash balances, cash flow from operating
activities, and funds available under the Company's credit facility will provide
adequate resources to meet its capital and exploration spending objectives for
2000. The Company has adequate liquidity to maintain its operations as they
currently exist.
COMMITMENTS. Under the terms of Symskaya's License and Production Sharing
Contract (PSC), Equity was committed to advance Symskaya a minimum of $6 million
during the first 5 contract years, representing 50% of the minimum expenditures
called for in the License and PSC, with the remainder being funded by Leucadia
National Corporation, Symskaya's other 50% shareholder. The first contract year
began November 15, 1993. The amounts spent through November 14, 1998, the end of
the fifth contract year, have satisfied all minimum commitments required.
Further discussion of this venture is found in ITEM 2. PROPERTIES, under the
caption PRESENT ACTIVITY, and in Footnotes 6 and 9 to the financial statements.
OTHER ITEMS. The Company has reviewed all recently issued, but not yet adopted,
accounting standards in order to determine their effects, if any, on the results
of operations or financial position of the Company. Based on that review, the
Company believes that none of these pronouncements will have any significant
effects on current or future earnings or operations.
20
YEAR 2000 REVIEW
The Company has not experienced any disruptions from year 2000 date related
computer problems. All of its mission-critical and non- mission-critical systems
are functioning properly. In addition, the Company is not aware of any year 2000
problems associated with any of its suppliers, partners, or entities in other
business relationships.
FORWARD LOOKING STATEMENTS
The preceding discussion and analysis should be read in conjunction with the
consolidated financial statements, including the notes thereto, appearing
elsewhere in this annual report on Form 10-K. Except for the historical
information contained herein, the matters discussed in this annual report
contain forward-looking statements within the meaning of Section 27a of the
Securities Act of 1933, as amended, and Section 21e of the Securities Exchange
Act of 1934, as amended, that are based on management's beliefs and assumptions,
current expectations, estimates, and projections. Statements that are not
historical facts, including without limitation statements which are preceded by,
followed by or include the words "believes," "anticipates," "plans," "expects,"
"may," "should" or similar expressions are forward-looking statements. Many of
the factors that will determine the Company's future results are beyond the
ability of the Company to control or predict. These statements are subject to
risks and uncertainties and, therefore, actual results may differ materially.
All subsequent written and oral forward- looking statements attributable to the
Company, or persons acting on its behalf, are expressly qualified in their
entirety by these cautionary statements. The Company disclaims any obligation to
update any forward-looking statements whether as a result of new information,
future events or otherwise.
Important factors that may effect future results include, but are not limited
to: the risk of a significant natural disaster, the inability of the Company to
insure against certain risks, fluctuations in commodity prices, the inherent
limitations in the ability to estimate oil and gas reserves, changing government
regulations, as well as general market conditions, competition and pricing, and
other risks detailed from time to time in the Company's SEC reports, copies of
which are available upon request from the Company's investor relations
department.
ITEM 7(a). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The
answers to items listed under Item 7(a) are inapplicable or negative.
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Accountants
To the Stockholders and Board of
Directors of Equity Oil Company:
In our opinion, the financial statements as listed in Item 14 (a) of this Form
10-K, present fairly, in all material respects, the financial position of Equity
Oil Company (the "Company") at December 31, 1999 and 1998, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Salt Lake City, Utah
January 31, 2000
22
EQUITY OIL COMPANY
BALANCE SHEETS
December 31, 1999 and 1998
ASSETS 1999 1998
---- ----
Current assets:
Cash and cash equivalents ............................... $ 1,006,602 $ 444,476
Accounts receivable ..................................... 2,896,558 1,933,686
Operator advances ....................................... 485,803 762,474
Federal, state and foreign income
taxes receivable ...................................... 221,199 291,597
Deferred income taxes ................................... 19,632 19,417
Other current assets .................................... 277,595 318,904
------------- -------------
Total current assets ............................ 4,907,389 3,770,554
------------- -------------
Property and equipment, at cost (successful efforts method):
Unproved oil and gas properties ......................... 2,388,819 3,003,223
Proved oil and gas properties:
Developed leaseholds .................................. 10,265,095 9,994,273
Intangible drilling costs ............................. 64,282,028 64,845,202
Equipment ............................................. 25,671,687 25,731,345
Other property and equipment ............................ 966,997 833,772
------------- -------------
103,574,626 104,407,815
Less accumulated depreciation,
depletion and amortization ...................... (62,800,100) (61,191,368)
------------- -------------
40,774,526 43,216,447
------------- -------------
Other assets ............................................... 435,420 284,167
------------- -------------
Total assets .................................... $ 46,117,335 $ 47,271,168
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................ $ 1,541,834 $ 1,675,758
Accrued liabilities ..................................... 177,550 254,576
Federal, state and foreign income
taxes payable ......................................... 321,981 212,583
------------- -------------
Total current liabilities ....................... 2,041,365 2,142,917
------------- -------------
Revolving credit facility .................................. 15,000,000 16,500,000
Deferred income taxes ...................................... 1,667,648 1,642,700
------------- -------------
16,667,648 18,142,700
------------- -------------
Commitments (Note 6)
Stockholders' equity:
Common stock, $1 par value:
Authorized: 25,000,000 shares
Issued: 12,808,040 shares in 1999
and 12,794,040 shares in 1998 ...................... 12,808,040 12,794,040
Paid in capital ......................................... 3,719,743 3,714,493
Retained earnings ....................................... 11,408,841 11,005,320
------------- -------------
27,936,624 27,513,853
Less treasury stock, at cost ............................ (528,302) (528,302)
------------- -------------
27,408,322 26,985,551
------------- -------------
Total liabilities and
stockholders' equity ............................ $ 46,117,335 $ 47,271,168
============= =============
The accompanying notes are an integral part of the financial statements
23
EQUITY OIL COMPANY
STATEMENTS OF OPERATIONS
for the years ended December 31, 1999, 1998 and 1997
1999 1998 1997
---- ---- ----
Revenues:
Oil and gas sales ......................... $ 15,434,537 $ 12,720,876 $ 16,457,048
Other income .............................. 334,980 457,107 1,487,924
------------ ------------ ------------
15,769,517 13,177,983 17,944,972
------------ ------------ ------------
Expenses:
Leasehold operating costs ................. 5,948,055 6,233,955 5,940,808
Depreciation, depletion and amortization .. 4,072,278 5,029,119 4,675,411
Impairment of proved oil and gas properties 313,751 4,015,158 411,894
Equity loss in Symskaya Exploration, Inc. . 169,933 446,758 356,661
Leasehold abandonments .................... 68,965 162,754 86,542
3-D seismic ............................... 35,200 431,075 626,525
Exploration ............................... 1,566,521 2,383,163 3,026,550
General and administrative ................ 1,743,590 1,914,590 2,048,194
Interest, net of interest capitalized
of $364,637 in 1997 ..................... 1,214,600 1,298,061 733,980
------------ ------------ ------------
15,132,893 21,914,633 17,906,565
------------ ------------ ------------
Income (loss) before income taxes .... 636,624 (8,736,650) 38,407
Provision for (benefit from) income taxes ..... 233,103 (2,921,766) 249,563
------------ ------------ ------------
Net income (loss) .................... $ 403,521 $ (5,814,884) $ (211,156)
============ ============ ============
Basic and diluted net income (loss)
per common share ........................... $ .03 $ (.46) $ (.02)
============ ============ ============
Basic and diluted weighted
average shares outstanding ................. 12,638,377 12,623,041 12,686,211
============ ============ ============
The accompanying notes are an integral part of the financial statements
24
EQUITY OIL COMPANY
STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY for the years ended
December 31, 1999, 1998 and 1997
Common Stock Paid in Retained Treasury Stock
Shares Amount Capital Earnings Shares Cost
------ ------ ------- -------- ------ ----
Balance at January 1, 1997 ...................... 12,751,100 $12,751,100 $3,648,333 $17,031,360 29,000 $ (98,653)
Net (loss) ...................................... (211,156)
Treasury stock purchased, $3.17 per share ....... 135,600 (429,649)
Common stock issued for services, $2.94 per share 10,000 10,000 19,374
---------- ---------- --------- ---------- ------- -------
Balance at December 31, 1997 .................... 12,761,100 12,761,100 3,667,707 16,820,204 164,600 (528,302)
Net (loss) ...................................... (5,814,884)
Common stock issued for services, $2.42 per share 32,940 32,940 46,786
---------- ---------- --------- ---------- ------- -------
Balance at December 31, 1998 .................... 12,794,040 12,794,040 3,714,493 11,005,320 164,600 (528,302)
Net income ...................................... 403,521
Common stock issued for services, $1.38 per share 14,000 14,000 5,250
---------- ---------- --------- ---------- ------- -------
Balance at December 31, 1999 .................... 12,808,040 $12,808,040 $3,719,743 $11,408,841 164,600 $(528,302)
========== ========== ========= ========== ======= =======
The accompanying notes are an integral part of the financial statements
25
EQUITY OIL COMPANY
STATEMENTS OF CASH FLOWS
for the years ended December 31, 1999, 1998 and 1997
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
Net income (loss) ............................... $ 403,521 $ (5,814,884) $ (211,156)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation, depletion and amortization .... 4,072,278 5,029,119 4,675,411
Impairment of proved oil and gas properties . 313,751 4,015,158 411,894
Equity loss in Symskaya Exploration, Inc. ... 169,933 446,758 356,661
(Gain) loss on property dispositions ........ (12,343) 325,558 (243,423)
Change in other assets ...................... 71,151 89,938 178,622
Deferred income tax expense (benefit) ....... 24,733 (3,209,749) (701,888)
Common stock issued for services ............ 19,250 79,726 29,374
------------ ------------ ------------
5,062,274 961,624 4,495,495
Increase (decrease) from changes in:
Accounts receivable and operator advances (686,201) 817,827 19,135
Other current assets ..................... 41,309 195,809 (142,012)
Accounts payable and accrued liabilities . (210,950) 294,202 (576,853)
Income taxes payable/receivable .......... 179,796 (344,842) 385,712
------------ ------------ ------------
Net cash provided by operating activities 4,386,228 1,924,620 4,181,477
------------ ------------ ------------
Cash flows from investing activities:
Sale of temporary cash investments .............. -- -- 49,802
Advances to Symskaya Exploration, Inc. .......... (169,933) (319,210) (356,661)
Capital expenditures ............................ (2,406,251) (4,126,630) (9,547,036)
Proceeds from sale of oil and gas properties .... 474,486 65,725 592,907
------------ ------------ ------------
Net cash used in investing activities ... (2,101,698) (4,380,115) (9,260,988)
------------ ------------ ------------
Cash flows from financing activities:
Payments on revolving credit facility ........... (18,000,000) -- --
Payment of revolving credit facility fees ....... (222,404)
Borrowings under revolving credit facility ...... 16,500,000 2,521,170 5,100,000
Purchase of treasury stock ...................... -- -- (429,649)
------------ ------------ ------------
Net cash provided by (used in)
financing activities ................ (1,722,404) 2,521,170 4,670,351
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 562,126 65,675 (409,160)
Cash and cash equivalents at beginning of year ..... 444,476 378,801 787,961
------------ ------------ ------------
Cash and cash equivalents at end of year ........... $ 1,006,602 $ 444,476 $ 378,801
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year
for:
Income taxes .................................. $ 148,938 $ 495,882 $ 701,694
Interest ...................................... $ 1,214,600 $ 1,298,061 $ 733,980
Supplemental disclosures of non-cash investing activities:
Non-cash proceeds from oil and gas property exchange $ 366,699 $ -- $ --
The accompanying notes are an integral part of the financial statements
26
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
A. The Company:
Equity Oil Company (the Company) is a Colorado corporation
engaged in oil and gas exploration, development and production in
the United States, Canada and Russia.
B. Cash and Cash Equivalents:
The Company considers all highly liquid debt instruments
purchased with an original maturity of three months or less to be
cash equivalents.
C. Accounting for Oil and Gas Operations:
The Company reports using the "successful efforts" method of
accounting for oil and gas operations. The use of this method
results in capitalization of those costs identified with the
acquisition, exploration and development of properties that
produce revenue or, if in the development stage, are anticipated
to produce future revenue. Costs of unsuccessful exploration
efforts are expensed in the period in which it is determined that
such costs are not recoverable through future revenues.
Exploratory geological and geophysical costs are expensed as
incurred. The costs of development wells are capitalized whether
productive or nonproductive.
The Company annually assesses undeveloped oil and gas properties
for impairment. Any impairment recorded represents management's
estimate of the decline in realizable value experienced during
the year. The costs of proved properties which management
determines are not recoverable are written off in the period such
determination is made. The net capitalized costs of proved oil
and gas properties are measured for impairment in accordance with
Statement of Financial Accounting Standards (SFAS) No. 121. (See
Note 2).
The provision for depreciation, depletion and amortization of
proved oil and gas properties is computed using the units of
production method, based on proved oil and gas reserves.
Estimated dismantlement, restoration and abandonment costs are
expected to be offset by estimated residual values of lease and
well equipment. Thus, no accrual for such costs has been
recorded.
Continued
27
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
1. Significant Accounting Policies, Continued:
D. Concentration of Credit Risk:
Substantially all of the Company's accounts receivable are within
the oil and gas industry, primarily from purchasers of oil and
gas (see Note 5). Although diversified within many companies,
collectibility is dependent upon the general economic conditions
of the industry. The receivables are not collateralized and, to
date, the Company has experienced minimal bad debts. The majority
of the Company's cash and cash equivalents is held by one
financial institution located in Salt Lake City, Utah, and by one
financial institution in Calgary, Alberta.
E. Equipment:
The provision for depreciation of equipment (other than oil and
gas equipment) is based on the straight-line method using asset
lives as follows:
Office equipment 10 years
Automobiles 3 years
When equipment is retired or otherwise disposed of, the cost and
accumulated depreciation are removed from the accounts and any
resulting gain or loss is included in the statement of
operations.
F. Foreign Operations:
Operations and investments in Canada have been translated into
U.S. dollar equivalents at the average rate of exchange in effect
at the transaction date. Foreign exchange gains or losses during
1999, 1998 and 1997 were not material.
Continued
28
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
1. Significant Accounting Policies, Continued:
G. Net Income (Loss) Per Common Share:
Basic earnings per share is computed by dividing the net income
(loss) by the weighted average number of common shares
outstanding. Diluted earnings per share is computed by dividing
the net income (loss) by the sum of the weighted average number
of common shares and the effect of dilutive unexercised stock
options. Options to purchase 1,434,000, 1,203,000 and 1,141,000
shares of common stock at prices ranging from $1.06 to $6.00 per
share were outstanding at December 31, 1999, 1998 and 1997,
respectively, but were not included in the computation of diluted
earnings per share because the effect would have been
antidilutive.
H. Estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Significant estimates with regard to these financial statements
include the estimates of proved oil and gas reserve volumes and
future dismantlement and abandonment costs used in determining
amortization and impairment provisions.
I. Hedging:
The Company enters into futures contracts to hedge the price
risks associated with oil and gas sales. The Company defers the
impact of changes in the market value of these contracts until
such time as the hedged transaction is completed. At that time,
the impact of the changes in the fair value of these contracts is
recognized in income.
To qualify as a hedge, the item to be hedged must expose the
Company to oil and gas price risk and the hedging instrument must
reduce that exposure. Any contracts held or issued that did not
meet the requirements of a hedge would be recorded at fair value
in the balance sheet and any changes in that fair value
recognized in income. If a contract designated as a hedge of
price risk is terminated, the associated gain or loss is deferred
and recognized in income in the same manner as the hedged item.
Also, a contract designated as a hedge of an anticipated
transaction that is no longer likely to occur would be recorded
at fair value and the associated changes in fair value recognized
in income.
Continued
29
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
1. Significant Accounting Policies, Continued:
Under the terms of its revolving credit facility, the Company is
required to hedge at least 50%, but not more than 75%, of its
daily oil production at a price not lower than the lowest price
used in the bank's price deck, for a period between 12 and 18
months. The Company had 120 days after the closing date in
September 1999 to have the hedge or hedges in place. The Company
entered into one collar agreement for 12 months effective October
1, 1999, covering 400 barrels per day with a floor at $18.00 per
barrel and a ceiling at $25.30 per barrel. The Company entered
into a second collar agreement for 12 months effective January 1,
2000, covering 500 barrels per day with a floor at $18.00 per
barrel and a ceiling at $27.22 per barrel.
As a result of the hedge entered into effective October 1, 1999,
revenues were reduced by $9,784 during 1999. The fair value of
this hedge at December 31, 1999 was $(64,000). No hedging
transactions occurred in 1998 and 1997.
2. Impairment of Proved Oil and Gas Properties:
SFAS No.121, Accounting for the Impairment of Long Lived Assets and for
Assets Held for Disposal, requires successful efforts companies to
evaluate the recoverability of the net capitalized costs of their
proved oil and gas properties at a field level. The SFAS No.121
impairment test compares the expected undiscounted future net revenues
from each producing field with the related net capitalized costs at the
end of each period. When the net capitalized costs exceed the
undiscounted future net revenues, the carrying value of the property is
written down to fair value, which is determined using discounted future
net revenues from the producing field.
The Company recorded SFAS No. 121 non-cash impairment charges of
$313,751, $4,015,158 and $411,894 for 1999, 1998 and 1997,respectively.
Continued
30
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
3. Income Taxes:
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Deferred income taxes are provided using
enacted tax rates applied to the difference between the tax basis of an
asset or liability and its reported amount in the financial statements
that will result in taxable or deductible amounts in future years when
the reported amount of the asset or liability is recovered or settled,
respectively.
The provision for (benefit from) income taxes consists of the
following:
1999 1998 1997
---- ---- ----
Currently payable (receivable):
U.S. income taxes (including
alternative minimum tax) $ 719 $ - $ 18,584
State income taxes 5,000 6,500 70,512
Canadian income taxes 336,167 208,046 471,064
Changes in prior years' taxes,
including taxes due from
Canadian audit (84,050) 73,437 391,291
Deferred tax benefit (24,733) (3,209,749) (701,888)
---------- ---------- ----------
$ 233,103 $(2,921,766) $ 249,563
========== ========== ==========
Continued
31
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
3. Income Taxes, Continued:
The components of the net deferred tax liability as of December 31,
1999 and 1998 were as follows:
1999 1998
---- ----
Deferred tax assets:
AMT credit carryforward ............................................. $ 312,650 $ 311,931
State income taxes .................................................. 1,849 2,403
Deferred compensation ............................................... 17,783 17,014
Geological and geophysical costs .................................... 600,923 645,680
Accrued interest .................................................... 893,755 660,319
Foreign tax credit carryforward ..................................... 491,862 699,908
Statutory depletion carryforward .................................... -- 82,287
Equity loss and impairment of investment
in Symskaya Exploration, Inc. ..................................... 2,844,742 2,781,918
Net operating loss carryforward ..................................... 2,104,119 2,271,216
----------- -----------
7,267,683 7,472,676
Valuation allowance ................................................. (491,862) (699,908)
----------- -----------
Total deferred tax asset ............................................ 6,775,821 6,772,768
----------- -----------
Deferred tax liabilities:
Deferred income ..................................................... 42,719 39,402
Property and equipment .............................................. 8,342,487 8,321,804
Other assets ........................................................ 38,631 34,845
----------- -----------
Total deferred tax liability ........................................ 8,423,837 8,396,051
----------- -----------
Net deferred tax liability ............................................ $ 1,648,016 $ 1,623,283
=========== ===========
The net deferred tax liability as of December 31, 1999 and 1998 is
reflected in the balance sheet as follows:
Current deferred tax asset .......................................... $ (19,632) $ (19,417)
Long-term deferred tax liability .................................... 1,667,648 1,642,700
----------- -----------
$ 1,648,016 $ 1,623,283
=========== ===========
Continued
32
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
3. Income Taxes, Continued:
The provision for (benefit from) income taxes differs from the amount
that would be provided by applying the statutory U.S. Federal income
tax rate to the income (loss) before income taxes for the following
reasons:
1999 1998 1997
---- ---- ----
Federal statutory tax expense (benefit) $216,452 $(2,970,461) $ 13,058
Increase (reduction) in taxes
resulting from:
State taxes (net of federal
benefit) 6,733 (255,742) (5,323)
Canadian taxes (net of foreign
tax credits) 221,870 208,046 113,882
Excess allowable percentage
depletion (124,638) (54,059) (162,297)
Investment tax and other credits - - (84,136)
Changes in prior years' taxes,
including taxes due from
Canadian audit (87,314) 150,450 374,379
-------- --------- --------
Provision for (benefit from) income taxes $233,103 $(2,921,766) $249,563
======== ========= ========
At December 31, 1999, the Company had approximately $312,650 of
alternative minimum tax credit carryforwards which can be carried
forward indefinitely, and approximately $491,862 of foreign tax credit
carryforwards which begin to expire in 2000. In addition, the Company
has approximately $5,817,000 of net operating loss carryforwards which
expire in 2018.
Continued
33
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
4. Stock-Based Compensation Plan:
At December 31, 1999, the Company had one stock-based compensation
plan, which is described below. The Company applies APB Opinion No. 25
and related Interpretations in accounting for this plan. Accordingly,
no compensation cost has been recognized for options granted to
employees under its fixed stock option plan. Had compensation cost for
the Company's stock-based compensation plan been determined based on
the fair value at the grant dates consistent with the method of SFAS
No. 123, Accounting for Stock Based Compensation, the Company's net
income (loss) and net income (loss) per share would have been changed
to the pro forma amounts indicated below:
1999 1998 1997
---- ---- ----
Net income (loss) As reported $403,521 $(5,814,884) $(211,156)
Pro forma $239,294 $(5,991,191) $(336,511)
Net income (loss)
per share As reported $.03 $(.46) $(.02)
Pro forma $.02 $(.47) $(.03)
Under the 1993 Equity Oil Company Incentive Stock Option Plan, the
Company may grant options to its employees for up to 1.4 million shares
of common stock. The options may take the form of incentive stock
options, non-qualified stock options, and non-qualified stock options
with tandem stock appreciation rights. The exercise price of each
option equals the market price of the Company's stock on the date of
grant, and an option's maximum term is 10 years. Options are granted
from time to time at the discretion of the Board of Directors, and vest
over periods of one to five years from the grant date.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1999, 1998 and 1997
respectively: expected volatility of 112, 138 and 50 percent, risk-free
interest rates of 5.1, 5.5 and 6.3 percent; expected life of 5 years
and dividend yield of zero for all three years.
Continued
34
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
4. Stock-Based Compensation Plan, Continued:
1999 1998 1997
---------------------------- --------------------------- --------------------------
Shares Weighted-Average Shares Weighted-Average Shares Weighted-Average
Fixed Options (000) Exercise Price (000) Exercise Price (000) Exercise Price
- ------------- --------- ---------------- --------- --------------- -------- ----------------
Outstanding at beginning of year 1,203 $4.14 1,141 $4.33 1,076 $4.42
Granted 323 1.06 150 2.50 121 3.56
Exercised - - - - - -
Forfeited (92) 4.08 (88) 3.87 (56) 4.37
------ ------ ------
Outstanding at end of year 1,434 3.45 1,203 4.14 1,141 4.33
====== ====== ======
Options exercisable at year-end 973 900 880
====== ====== ======
Weighted-average fair value of
options granted during the year $ .88 $2.21 $1.56
The following table summarizes information about fixed stock options
outstanding at December 31, 1999:
Options Outstanding Options Exercisable
-------------------------------------------------------- ----------------------------------
Number Weighted-Average Number
Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise Prices at 12/31/99 Contractual Life Exercise Price at 12/31/99 Exercise Price
$1.06 to $1.06 323,000 9.25 years $1.06 0 $1.06
$2.50 to $3.56 326,000 6.48 $3.11 230,000 $3.20
$3.63 to $4.00 269,500 2.96 $3.87 262,200 $3.88
$4.25 to $5.00 254,000 3.98 $4.55 254,000 $4.55
$5.13 to $6.00 261,500 4.60 $5.31 226,700 $5.33
--------- ---- ----- ------- -----
1,434,000 5.66 $3.45 972,900 $4.23
========= ==== ===== ======= =====
5. Geographic Segment Information:
During 1998, the Company adopted SFAS No. 131, Disclosure about
Segments of an Enterprise and Related Information. SFAS No. 131
supersedes SFAS No. 14, Financial Reporting for Segments of a Business
Enterprise. The adoption of SFAS No. 131 did not affect the Company's
results of operations or financial position.
The Company operates in the exploration and production segment of the
oil and gas industry. The Company's operations are located in the
following geographical areas.
Revenues Long-lived Assets
for the years ended December 31, as of December 31,
------------------------------------------------ -----------------------------------------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
United States $13,625,811 $11,199,836 $14,150,670 $ 94,104,683 $95,009,887 $104,094,883
Canada 1,808,726 1,521,040 2,306,378 9,469,943 9,397,928 9,277,008
----------- ----------- ----------- ------------ ------------ ------------
Total $15,434,537 $12,720,876 $16,457,048 $103,574,626 $104,407,815 $113,371,891
=========== =========== =========== ============ ============ ============
Continued
35
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
5. Geographic Segment Information, Continued:
Revenue from a major U.S. oil company accounted for approximately 31
percent of total revenues in 1999, 32 percent of total revenues in 1998
and 38 percent of total revenues in 1997. The Company believes this
purchaser could be replaced, if necessary, without a loss in revenue.
6. Symskaya Exploration:
Symskaya Exploration, Incorporated, a company in the development stage
and a Texas corporation (Symskaya), was formed on November 25, 1991,
and is engaged in oil and gas exploration in Russia. Symskaya holds a
Combined License (License) which grants it the exclusive right to
explore, develop and produce hydrocarbons on a contract area totaling
approximately 1,100,000 acres in the Yenisysk District of the
Krasnoyarsk Krai in the Russian Federation. The License has a primary
term of 25 years from November 15, 1993.
The work to be performed and the obligations and rights of Symskaya are
set forth in the License and a Production Sharing Agreement (PSA) which
is an integral part of the License. Under the License and PSA, Symskaya
will provide funding for all exploration and development and will
recover these costs from 80% of hydrocarbon production after payment of
an 8% royalty. The remaining 20% of any hydrocarbon production, net of
royalty, will be shared by Symskaya and the Russian government based on
the rate of production. As of December 31, 1999, the Symskaya area had
not received approval by the Russian federal government as a production
sharing area.
Minimum expenditures required under the License and PSA total
$12,000,000 during the first five years of the License term, which
began on November 15, 1993. As of December 31, 1999, Symskaya had
satisfied all of the minimum expenditures required.
Symskaya is owned 50% each by Equity Oil Company (Equity) and Leucadia
National Corporation, (Leucadia). Leucadia acquired 50% of the stock of
Symskaya effective January 1, 1994, in exchange for their commitment to
spend up to $6,000,000, in an amount equal to that spent by Equity,
towards the Symskaya project through the drilling, completion and/or
plugging and abandonment of the initial test well, the Lemok #1.
Pursuant to a Shareholders' Agreement, Leucadia was not required to pay
any part of the amounts previously advanced by Equity under a Loan
Agreement with Symskaya, with the exception of one-half (1/2) of the
interest on a $1,740,519 loan between Equity and Symskaya. The loan
reflects the initial investment by Equity in Symskaya prior to
Leucadia's ownership.
Continued
36
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
6. Symskaya Exploration, Continued:
Amounts advanced by Equity and Leucadia after January 1, 1994 are
treated as interest-bearing notes payable or equity, as mutually agreed
upon by the respective companies. The Shareholder Agreement with
Leucadia also requires that Leucadia share equally in the payment of
the one (1%) percent royalty obligation in favor of Coastline
Exploration, Inc. on future revenues from the Symskaya project. The
Company's President serves on Leucadia's Board of Directors.
The Company's investment in Symskaya is being accounted for using the
equity method of accounting.
In 1996, Symskaya plugged and abandoned the Lemok #1 well, and charged
all capitalized costs to expense. Subsequent to the plugging of the
Lemok #1 well, the Company and Leucadia agreed to suspend interest
payments on Symskaya's notes with the Company. The Company has no
current plans to fund future exploratory drilling by Symskaya. The
Company's 50% share of Symskaya's net loss, excluding losses related to
interest payable to the Company, was $169,933, $446,758 and $356,661 in
1999, 1998 and 1997, respectively. The Company's investment in and
advances to Symskaya were charged to expense as of December 31, 1996.
7. Note Payable:
In September of 1999, the Company obtained a $50 million Reducing
Revolving Credit Facility (the Facility), with a commitment of $17
million as of December 31, 1999, which replaced its prior credit
facility. The terms of the Facility call for interest payments only, at
the lower of prime or LIBOR plus 2.25%, until September 9, 2002, at
which time the principal amount becomes due. An unused commitment fee
of 1/2% will be charged to the Company based on the average daily
unused portion of the Facility. The Facility is collateralized by
essentially all oil and gas assets of the Company. As of December 31,
1999, the outstanding balance under the Facility was $15,000,000 at an
average interest rate of 8.42%.
Future maturities on the Facility as of December 31, 1999 are as
follows:
2000 $ -
2001 -
2002 15,000,000
----------
$15,000,000
Continued
37
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
7. Note Payable, Continued:
The Facility contains provisions relating to maintenance of certain
financial ratios, as well as restrictions governing its use. Under
covenants contained in the Facility, the Company has agreed, among
other things, not to advance any proceeds from the Facility to
Symskaya, not to pay dividends, and not to merge with or acquire any
other company without the prior approval of the bank. As of December
31, 1999, the Company was in compliance with all covenants in the
Facility. Facility fees, which are reflected as other assets in the
accompanying balance sheet, are being amortized on a straight line
basis over 36 months.
8. Quarterly Financial Data (Unaudited):
Quarterly financial information for the years ended December 31, 1999
and 1998 is as follows:
1999 Quarter Ended: December 31 September 30 June 30 March 31
----------- ----------- ----------- -----------
Net revenues .................. $ 4,995,330 $ 4,311,235 $ 3,515,233 $ 2,618,352
Gross margin .................. 2,032,571 1,645,306 1,195,995 232,194
Net income (loss) ............. 441,743 422,532 111,945 (572,699)
Basic and diluted income (loss)
per common share ........... $ .03 $ .03 $ .01 $ (.05)
=========== =========== =========== ===========
1998 Quarter Ended: December 31 September 30 June 30 March 31
----------- ----------- ----------- -----------
Net revenues .................. $ 3,093,918 $ 3,113,521 $ 3,024,311 $ 3,508,460
Gross margin .................. 123,384 301,843 442,379 609,530
Net loss ...................... (3,028,324) (1,250,826) (893,728) (642,006)
Basic and diluted loss
per common share ........... $ (.24) $ (.10) $ (.07) $ (.05)
=========== =========== =========== ===========
Continued
38
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
9. Disclosures About Oil and Gas Producing Activities:
Capitalized Costs:
United States Canada Russia Total
------------- ------ ------ -----
1999:
Unproved oil and gas
properties $ 2,358,084 $ 30,735 $ 2,388,819
Proved oil and gas
properties 90,779,602 9,439,208 100,218,810
----------- ---------- -----------
93,137,686 9,469,943 102,607,629
Accumulated depreciation,
depletion and amortization (55,037,943) (7,762,157) (62,800,100)
----------- ---------- -----------
Net capitalized costs $ 38,099,743 $ 1,707,786 $ 39,807,529
=========== ========== ===========
Symskaya, equity method
(see Note 6) $ -
==========
1998:
Unproved oil and gas
properties $ 2,969,999 $ 33,224 $ 3,003,223
Proved oil and gas
properties 91,206,116 9,364,704 100,570,820
----------- ---------- -----------
94,176,115 9,397,928 103,574,043
Accumulated depreciation,
depletion and amortization (53,212,301) (7,453,705) (60,666,006)
----------- ---------- -----------
Net capitalized costs $ 40,963,814 $1,944,223 $ 42,908,037
=========== ========== ===========
Symskaya, equity method
(see Note 6) $ -
==========
1997:
Unproved oil and gas
properties $ 3,471,138 $ 33,224 $ 3,504,362
Proved oil and gas
properties 99,863,977 9,243,784 109,107,761
----------- ---------- -----------
103,335,115 9,277,008 112,612,123
Accumulated depreciation,
depletion and amortization (58,065,779) (6,292,480) (64,358,259)
----------- ---------- -----------
Net capitalized costs $ 45,269,336 $2,984,528 $ 48,253,864
=========== ========== ===========
Symskaya, equity method
(see Note 6) $ -
==========
Continued
39
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
9. Disclosures About Oil and Gas Producing Activities, Continued:
Costs Incurred in Oil and Gas Property Acquisition, Exploration and Development Activities:
1999: United States Canada Russia Total
------------- ------ ------ -----
Acquisition of properties:
Proved $ 946,665 $ 946,665
Unproved 200,541 200,541
Exploration costs 1,863,875 $ 30,073 1,893,948
Development costs 1,062,408 110,521 1,172,929
Symskaya, equity method $ 169,933 169,933
1998:
Acquisition of properties:
Proved -
Unproved $ 124,066 $ 124,066
Exploration costs 4,423,128 $ 27,529 4,450,657
Development costs 2,270,849 267,392 2,538,241
Symskaya, equity method $ 446,758 446,758
1997:
Acquisition of properties:
Proved $3,226,494 $ 3,226,494
Unproved 1,227,117 1,227,117
Exploration costs 4,468,531 $ 25,103 4,493,634
Development costs 4,169,802 43,125 4,212,927
Symskaya, equity method $ 356,661 356,661
Continued
40
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
9. Disclosures About Oil and Gas Producing Activities, Continued:
Results of Operations (Unaudited):
1999: United States Canada Russia Total
Oil and gas sales $ 13,625,811 $1,808,726 $15,434,537
Production costs (5,422,811) (525,244) (5,948,055)
Exploration expenses (1,650,413) (20,273) (1,670,686)
Depreciation, depletion and amortization (3,761,339) (310,939) (4,072,278)
Impairment of proved
oil and gas properties (313,751) - (313,751)
Equity loss in Symskaya Exploration, Inc. $ (169,933) (169,933)
---------- --------- --------- ----------
2,477,497 952,270 (169,933) 3,259,834
Imputed income tax benefit (expense) (677,741) (423,760) 63,725 (1,037,776)
---------- --------- --------- ----------
Results of operations from producing activities $ 1,799,756 $ 528,510 $ (106,208) $ 2,222,058
========== ========== ========== ==========
1998:
Oil and gas sales $ 11,199,836 $1,521,040 $12,720,876
Production costs (5,665,047) (568,908) (6,233,955)
Exploration expenses (2,954,780) (22,212) (2,976,992)
Depreciation, depletion and amortization (4,720,913) (308,206) (5,029,119)
Impairment of proved
oil and gas properties (4,015,158) - (4,015,158)
Equity loss in Symskaya Exploration, Inc. $ (446,758) (446,758)
---------- --------- --------- ----------
(6,156,062) 621,714 (446,758) (5,981,106)
Imputed income tax benefit (expense) 2,308,523 (276,663) 167,534 2,199,394
---------- --------- --------- ----------
Results of operations from producing activities $(3,847,539) $ 345,051 $ (279,224) $ (3,781,712)
========== ========== ========== ==========
1997:
Oil and gas sales $14,150,670 $2,306,378 $16,457,048
Production costs (5,300,909) (639,899) (5,940,808)
Exploration expenses (3,718,531) (21,086) (3,739,617)
Depreciation, depletion and amortization (4,385,015) (290,398) (4,675,413)
Impairment of proved
oil and gas properties (411,894) - (411,894)
Equity loss in Symskaya Exploration, Inc. $ (356,661) (356,661)
---------- --------- --------- ----------
334,321 1,354,995 (356,661) 1,332,655
Imputed income tax benefit (expense) 77,745 (245,790) 133,748 (34,297)
---------- --------- --------- ----------
Results of operations from producing activities $ 412,066 $1,109,205 $ (222,913) $ 1,298,358
========== ========== ========== ==========
The imputed income tax benefit (expense) is hypothetical and determined without
regard to the Company's deduction for general and administrative and interest
expense.
Continued
41
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
9. Disclosures About Oil and Gas Producing Activities, Continued:
Reserves and Future Net Cash Flows (Unaudited):
Estimates of reserve quantities and related future net cash flows
are calculated using unescalated year-end oil and gas prices and
operating costs, and may be subject to substantial fluctuations
based on the prices in effect at the end of each year. Reserve
revisions occur when the economic limit of a property is
lengthened or shortened due to changes in commodity pricing. The
following table sets forth the weighted average prices used in
calculating estimated reserve quantities and future net cash
flows at the end of 1999, 1998 and 1997:
United States Canada Total
Oil Gas Oil Gas Oil Gas
--- --- --- --- --- ---
December 31, 1999 $23.28 $1.95 $20.40 $1.71 $22.99 $1.93
December 31, 1998 $10.97 $2.06 $9.92 $1.49 $10.80 $1.95
December 31, 1997 $15.49 $2.13 $12.35 $1.51 $14.99 $2.03
Estimates of Proved Oil and Gas Reserves(Unaudited):
The following tables present the Company's estimates of its
proved oil and gas reserves. The Company emphasizes that reserve
estimates are inherently imprecise and that estimates of new
discoveries are more imprecise than those of producing oil and
gas properties. Accordingly, the estimates are expected to change
as future information becomes available. Reserve estimates are
prepared by the Company and audited by the Company's independent
petroleum reservoir engineers, Fred S. Reynolds and Associates,
who have issued a report expressing their opinion that the
reserve information in the following tables complies with the
applicable rules promulgated by the Securities and Exchange
Commission and the Financial Accounting Standards Board. The
volumes presented on the following pages are in thousands of
barrels for oil and thousands of mcf for gas.
Continued
42
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
9. Estimates of Proved Oil and Gas Reserves, Continued:
Reserves and Future Net Cash Flows (Unaudited):
United States Canada Total
December 31, 1999: Oil Gas Oil Gas Oil Gas
------------------ --- --- --- --- --- ---
Proved developed and undeveloped reserves:
Beginning of year ........................ 5,117 15,411 1,076 3,599 6,193 19,010
Revisions of previous estimates .......... 3,181 274 261 (841) 3,442 (567)
Extensions and discoveries ............... 6 529 -- -- 6 529
Acquisition of minerals in place ......... 563 34 -- -- 563 34
Sales of minerals in place ............... (249) (642) -- -- (249) (642)
Production ............................... (576) (1,768) (86) (265) (662) (2,033)
------- ------- ------- ------- ------- -------
End of year .............................. 8,042 13,838 1,251 2,493 9,293 16,331
======= ======= ======= ======= ======= =======
Proved developed reserves:
Beginning of year ........................ 4,870 12,683 1,076 3,599 5,946 16,282
End of year .............................. 7,808 13,663 1,017 2,318 8,825 15,981
United States Canada Total
December 31, 1998: Oil Gas Oil Gas Oil Gas
------------------ --- --- --- --- --- ---
Proved developed and undeveloped reserves:
Beginning of year ........................ 7,168 15,457 1,252 3,452 8,420 18,909
Revisions of previous estimates .......... (1,817) (459) (79) 494 (1,896) 35
Extensions and discoveries ............... 361 2,505 -- -- 361 2,505
Production ............................... (595) (2,092) (97) (347) (692) (2,439)
------- ------- ------- ------- ------- -------
End of year .............................. 5,117 15,411 1,076 3,599 6,193 19,010
======= ======= ======= ======= ======= =======
Proved developed reserves:
Beginning of year ........................ 6,972 11,932 1,252 3,452 8,224 15,384
End of year .............................. 4,870 12,683 1,076 3,599 5,946 16,282
United States Canada Total
December 31, 1997: Oil Gas Oil Gas Oil Gas
------------------ --- --- --- --- --- ---
Proved developed and undeveloped reserves:
Beginning of year ........................ 7,252 14,910 1,117 2,707 8,369 17,617
Revisions of previous estimates .......... (806) (694) 251 1,194 (555) 500
Acquisitions of minerals in place ........ 1,085 438 -- -- 1,085 438
Extensions and discoveries ............... 202 2,423 -- -- 202 2,423
Sales of minerals in place ............... (45) -- -- -- (45) --
Production ............................... (520) (1,620) (116) (449) (636) (2,069)
------- ------- ------- ------- ------- -------
End of year .............................. 7,168 15,457 1,252 3,452 8,420 18,909
======= ======= ======= ======= ======= =======
Proved developed reserves:
Beginning of year ........................ 7,219 11,133 1,117 2,707 8,336 13,840
End of year .............................. 6,972 11,932 1,252 3,452 8,224 15,384
Continued
43
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
9. Disclosures About Oil and Gas Producing Activities, Continued:
Standardized Measure of Discounted Future Net Cash Flows and Changes
Therein Relating to Proved Oil and Gas Reserves (Unaudited):
Thousands of Dollars
United States Canada Total
1999: --------- --------- ---------
Future cash inflows ........................... $ 215,342 $ 27,122 $ 242,464
Future production and development costs ....... (108,395) (12,147) (120,542)
--------- --------- ---------
Future net cash flows before income taxes ..... 106,947 14,975 121,922
10% annual discount for estimated timing
of cash flows .............................. (51,627) (6,929) (58,556)
--------- --------- ---------
Standardized measure of discounted future
net cash flows before income taxes ......... 55,320 8,046 63,366
Future income taxes, net of 10% annual discount (13,951) (2,629) (16,580)
--------- --------- ---------
Standardized measure of discounted future
net cash flows ............................. $ 41,369 $ 5,417 $ 46,786
========= ========= =========
1998:
Future cash inflows ........................... $ 88,549 $ 15,442 $ 103,991
Future production and development costs ....... (54,825) (7,811) (62,636)
--------- --------- ---------
Future net cash flows before income taxes ..... 33,724 7,631 41,355
10% annual discount for estimated timing
of cash flows .............................. (13,176) (2,969) (16,145)
--------- --------- ---------
Standardized measure of discounted future
net cash flows before income taxes ......... 20,548 4,662 25,210
Future income taxes, net of 10% annual discount (1,479) (929) (2,408)
--------- --------- ---------
Standardized measure of discounted future
net cash flows ............................. $ 19,069 $ 3,733 $ 22,802
========= ========= =========
1997:
Future cash inflows ........................... $ 149,066 $ 19,350 $ 168,416
Future production and development costs ....... (93,945) (8,470) (102,415)
--------- --------- ---------
Future net cash flows before income taxes ..... 55,121 10,880 66,001
10% annual discount for estimated timing
of cash flows .............................. (24,778) (3,814) (28,592)
--------- --------- ---------
Standardized measure of discounted future
net cash flows before income taxes ......... 30,343 7,066 37,409
Future income taxes, net of 10% annual discount (6,071) (2,439) (8,510)
--------- --------- ---------
Standardized measure of discounted future
net cash flows ............................. $ 24,272 $ 4,627 $ 28,899
========= ========= =========
Continued
44
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
9. Disclosures About Oil and Gas Producing Activities, Continued:
Standardized Measure of Discounted Future Net Cash Flows and Changes
Therein Relating to Proved Oil and Gas Reserves (Unaudited), Continued:
Future net cash flows were computed using year-end prices and costs,
and year-end statutory tax rates with consideration of future tax rates
already legislated (adjusted for permanent differences that related to
proved oil and gas reserves).
Principal sources of change in the standardized measure of discounted
future net cash flow are as follows:
Thousands of Dollars
1999 1998 1997
Sales and transfers of oil and gas produced,
net of production costs ................... $ (9,486) $ (6,487) $(10,516)
Net changes in prices and production costs ... 29,172 (10,019) (45,280)
Extensions and discoveries, less related costs 294 2,098 1,639
Purchases of minerals in place ............... 3,373 -- 3,787
Sales of minerals in place ................... (959) -- (339)
Changes in estimated future development costs (3,033) 2,630 (1,447)
Revisions of previous quantity estimates ..... 23,747 (4,495) (1,573)
Accretion of discount ........................ 2,521 3,558 7,912
Net change in income taxes ................... (15,204) 3,315 18,100
Changes in production rates (timing) and other (6,441) 3,303 1,880
-------- -------- --------
$ 23,984 $ (6,097) $(25,837)
======== ======== ========
45
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES:
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF COMPANY
The information contained under the headings Election of Directors and
Continuing Directors and Executive Officers contained on pages 2 and 4 in the
definitive proxy statement to be filed in connection with the Company's annual
meeting on May 10, 2000 is incorporated herein by reference in answer to this
item.
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the heading Executive Compensation on pages 7
through 10 in the definitive proxy statement to be filed in connection with the
Company's annual meeting on May 10, 2000 is incorporated herein by reference in
answer to this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained under the headings Security Ownership of Management
and Voting Securities & Principal Holders Thereof, contained on pages 5 and 12
in the definitive proxy statement to be filed in connection with the Company's
annual meeting on May 10, 2000 is incorporated herein by reference in answer to
this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
46
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K:
Page:
(a) (1) Financial Statements:
Report of Independent Accountants 22
Financial Statements:
Balance Sheets as of December 31, 1999 and 1998 23
Statements of Operations for the years ended
December 31, 1999, 1998 and 1997 24
Statements of Changes in Stockholders' Equity
for the years ended December 31, 1999, 1998 and 1997 25
Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 26
Notes to Financial Statements 27
(3) Exhibits
(3)(i) Restated Articles of Incorporation. Incorporated by reference
from the annual report on Form 10-K for the year ended December
31, 1995.
(ii) Amended By-Laws. Incorporated by reference from the annual report
on Form 10-K for the year ended December 31, 1997.
(10) Material Contracts
(i) Change in Control Compensation Agreements for Paul M. Dougan, James
B. Larson, and Clay Newton. Incorporated by reference from the
annual report on Form 10-K for the year ended December 31, 1997.
(ii) Loan agreement between Equity Oil Company and Bank One Texas, N.A.
Incorporated by reference from the quarterly report on Form 10-Q
for the period ended September 30, 1999.
(21) Subsidiaries. Incorporated by reference from the annual report on
Form 10-K for the year ended December 31, 1995.
(23) Consent of Experts. Consent of PricewaterhouseCoopers LLP
regarding Form S-8 Registration.
(b)Reports on Form 8-K
None.
47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
EQUITY OIL COMPANY
By Paul M. Dougan
--------------
President
Chief Executive Officer
By Clay Newton
-----------
Treasurer
Chief Financial Officer
Principal Accounting Officer
Date: March 1, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Douglas W. Brandrup Joseph C. Bennett
- ------------------------- ------------------------
Director Director
March 1, 2000 March 1, 2000
- ------------------------- ------------------------
Date Date
William D. Forster Philip J. Bernhisel
- ------------------------- ------------------------
Director Director
March 1, 2000 March 1, 2000
- ------------------------- ------------------------
Date Date
Randolph G. Abood W. Durand Eppler
- ------------------------- ------------------------
Director Director
March 1, 2000 March 1, 2000
- ------------------------- ------------------------
Date Date
William P. Hartl
- -------------------------
Director
March 1, 2000
- -------------------------
Date