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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, 1996
OR
o 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. Yes X No
As of February 24, 1997, 12,751,100 common shares were outstanding, and the
aggregate market value of voting stock held by non-affiliates of the registrant
was approximately $41,000,000.
Documents Incorporated by Reference
1. Definitive proxy statement to be filed in connection with Issuer's Annual
Stockholders' Meeting to be held on May 14, 1997 and more particularly the
information contained on pages 2 through 5 are incorporated by reference into
Part III of this report.
Total Pages 59
INDEX TO EXHIBITS IS FOUND ON PAGE 45
PART I
ITEM 1. Business
GENERAL DEVELOPMENT OF BUSINESS
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 nine states and two Canadian provinces.
Equity is also a 50% shareholder in Symskaya Exploration, Inc., which has
operations in Russia. Headquartered in Salt Lake City, Utah, the Company also
maintains an exploration office in Denver, Colorado, and a field office in
Vernal, Utah. The Company has 18 full-time employees.
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 reserves through exploration, development of existing properties, and/or the
purchase of existing producing properties.
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. The general drilling
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.
In addition to its exploration ventures, the Company works in conjunction with
other working interest owners in producing properties to identify and develop
projects that will enhance and expand the productive capacities of existing
wells and fields. The Company also investigates opportunities to purchase
interests in properties with existing production.
A discussion of the Company's activities during 1996 is set forth below in ITEM
2. Properties, under the caption Present Activity.
NARRATIVE DESCRIPTION OF BUSINESS
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, partnership income,
operating overhead reimbursements, and the sales of various undeveloped
properties.
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 their methods of determining prices are not within the knowledge
of the registrant, but 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 is sold in the Gulf Coast of
Texas, in the Canadian province of Alberta, in Wyoming, and in California.
In the Gulf Coast of Texas, the majority of the Company's gas production is sold
on the spot market. Contracts are typically of short duration, and prices
received vary in concert with the futures markets. While the areas in Texas
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 the natural gas produced in Alberta is taken in kind and sold on
the spot market under short term contracts. The Company's contracts do not
provide for minimum production amounts; however, the Company has historically
been able to produce most of the wells at or near capacity, and has been able to
sell all of the gas produced.
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 Company sells gas produced in California on the spot market,
where prices also vary on a monthly basis.
The Company has not historically hedged significant amounts of either oil or gas
production.
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 80% of the Company's oil and gas revenues come from
the sale of oil, the seasonal impact on 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, or owners of the
pipelines which transport the products. Previous changes of ownership or changes
in operator have not resulted in an interruption of production or
transportation, and consequently not had a material adverse effect on the
business of the Company.
Approximately 70% of the Company's total oil production, originating from
several different fields, is sold to JN Petroleum Marketing, Inc (JN). The
Company does not believe that the loss of JN as a customer would have any
material impact on the Company, as oil production from the various fields could
readily be sold to other crude oil purchasers. No other customer accounts for
more than 10% of the Company's sales.
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 1996 the Company did not experience any competitive factors which
impaired its production or sale of oil and gas, nor did it experience any
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 operations are subject to
similar requirements.
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.
Symskaya Exploration, Inc., in which the Company owns a 50% interest, is
conducting operations 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 3,968 net acres of oil shale lands in
Colorado. These properties have not generated significant revenue for the
Company. In 1994, the Company entered into a lease agreement with another
company for a five year oil and gas lease on these lands.
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 the 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, 1996.
The calculation of future net cash flows relating to proved oil and gas reserves
is sensitive to price variations, and is based on the prices in effect at a
specific point in time. The weighted average net prices used for the 1996
reserve calculation were $24.36 per barrel of oil and $2.84 per Mcf of natural
gas, which compares to $18.02 and $1.38 in 1995.
No estimates of reserves have been filed with or included in any report to any
other federal agency during 1996.
PRODUCTION
The following table sets forth the Company's production, average sales prices,
and average lifting costs by geographic area for 1996, 1995, and 1994:
1996 1995 1994 1996 1995 1994
Oil Oil Oil Gas Gas Gas
Area (Bbls) (Bbls) (Bbls) (MMCF) (MMCF) (MMCF)
Production
Colorado 363,080 373,766 387,919 106 84 27
Texas 29,186 32,861 42,603 315 356 439
Montana 32,845 23,385 17,889 17 9 -
Utah 16,769 10,069 12,216 - - -
Wyoming 68,924 44,283 22,956 519 422 398
North Dakota 6,768 5,869 5,370 3 2 1
Oklahoma 607 640 664 - - -
California - - - 365 5 -
Other States 13 6 30 - 2 15
------- ------- ------- ----- --- ---
Total U.S. 518,192 490,879 489,647 1,325 880 880
Alberta 113,756 116,252 108,466 586 568 238
B.C. 4,769 12,249 11,430 2 3 2
----- ------ ------ --- --- ---
Total Canada 118,525 128,501 119,896 588 571 240
Grand Total 636,717 619,380 609,543 1,913 1,451 1,120
======= ======= ======= ===== ===== =====
AVERAGE PRICE
U.S. $21.49 $17.44 $15.88 $ 1.79 $1.67 $2.18
Canada $16.99 $15.49 $14.30 $ 1.01 $ .74 $1.57
Total $20.65 $17.00 $15.57 $ 1.55 $1.31 $2.05
LIFTING COSTS
U.S. $ 7.92 $ 7.75 $ 6.60 $ .66 $ .74 $ .91
Canada $ 6.09 $ 3.75 $ 4.32 $ .37 $ .19 $ .46
- ------------------------ -------------- -------------- -------------- ------------- ------------- -------------
Total $ 7.58 $ 6.85 $ 6.15 $ .57 $ .53 $ .81
======================== ============== ============== ============== ============= ============= =============
PRODUCTIVE WELLS AND ACREAGE
The location and quantity of Equity's productive wells and acreage as of
December 31, 1996 are as follows:
Productive Wells: Gross Net
Oil:
United States 714 77.772
Canada 243 11.625
Gas:
United States 57 14.565
Canada 11 2.159
-- -----
Total Productive Wells 1,025 106.121
===== =======
Developed Acreage
United States 123,584 9,562
Canada 126,960 2,981
------- -----
Total Developed Acreage 250,544 12,543
======= ======
UNDEVELOPED ACREAGE
The following table sets forth the Company's undeveloped oil and gas lease
acreage as of December 31, 1996 by geographic area:
Gross Net
Area Acreage Acreage
Colorado 12,518 10,419
Texas 4,427 975
Montana 62,087 8,167
Utah 7,156 880
Wyoming 12,550 3,880
California 13,909 3,040
North Dakota 7,863 3,359
Other States 40 8
------- ------
Total U.S. 120,550 30,728
Alberta 29,573 3,573
------ -----
Total Canada 29,573 3,573
------ -----
Grand Total 150,123 34,301
======= ======
Through its 50% ownership in Symskaya Exploration, Inc., 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 1996, the Company participated in the drilling of 25 gross wells. Of this
total, 19 were completed as producing oil and gas wells and 6 were plugged and
abandoned as dry holes.
Gross exploratory wells Status 1996 1995 1994
drilled: ------ ---- ---- ----
United States Productive 15 8 7
Dry 6 4 6
Canada Productive - - -
Dry - - -
Gross development wells
drilled:
United States Productive 3 3 5
Dry - - -
Canada Productive 1 5 2
Dry - - -
Net exploratory wells Status 1996 1995 1994
drilled:
United States Productive 3.95 1.05 1.10
Dry 1.64 1.08 1.48
Canada Productive - - -
Dry - - -
Net development wells
drilled:
United States Productive 1.19 1.30 .80
Dry - - -
Canada Productive .50 2.14 .90
Dry - - -
PRESENT ACTIVITY
In 1996, by following the growth strategy implemented in 1994, the Company
completed the second consecutive year of reserve replacement in excess of 150%
of production. The Company's strategy to replace its oil and natural gas
reserves is comprised of a balanced approach in four areas. The four elements of
that strategy are:
*Focused exploration drilling in North America
*Development drilling and exploitation in North America
*Acquisition of proved reserves in North America
*International exploration in Russia
Following is background information concerning the Company's current and
expected activities as they relate to this strategy:
FOCUSED EXPLORATION IN NORTH AMERICA
The principal focus of 1996 exploration was the Sacramento Basin in California,
where 17 wells were drilled, resulting in 13 gas completions. Each of these
wells was drilled using 3-D seismic data acquired in 1995 and 1996. Including
the 3 wells completed in this area in 1995, the Company now has working
interests in 16 gas wells. 12 wells are on production at a combined daily rate
of 9.4 million cubic feet per day. Since many of these wells were drilled in the
fourth quarter of 1996, and have been on production for a very short time, the
Company's ability to accurately assess overall long term production rates and
ultimate recoverable reserves is somewhat limited.
During 1995 and 1996 the Company participated in the acquisition of 98 square
miles of 3-D seismic data in 6 different surveys in the Sacramento Basin. 40
possible additional drill sites have been identified, and present plans call for
the drilling of 20 exploratory wells on those surveys in 1997. A seventh 17
square mile survey on the Company's Davis Ranch prospect should be completed in
the first quarter of 1997, and the Company expects to drill 2 wells on that
survey in 1997. Equity's working interest in the completed wells and the
prospects vary from a high of 70% in the Davis Ranch prospect to a low of 18.75%
in the Moon Bend prospect.
During the past several years, the Company has relied to a great extent on third
party prospect generation for its exploration program. Equity began again in
1996 to actively promote and participate in drilling prospects that were
generated by the Company. One of these prospects, the North Riley Ridge in
Southwestern Wyoming, may represent a significant discovery. The No. 1-35 North
Riley Ridge well was drilled and completed in the 1st Frontier formation, and
tested at a rate of 3.6 million cubic feet per day from an estimated 48 feet of
net pay. It is currently shut in awaiting a pipeline connection. Drilled on a
17,160 acre Federal oil and gas unit, the well is located on a prospect
developed by Equity. Equity has an 18.75% working interest in the well. Other
working interest owners include Griggs Oil, Inc., who is the operator, with a
15.625% interest, and Nuevo Energy Company with a 50% interest. The timing and
extent of further drilling on
the Unit will depend upon testing results, but the potential may exist for
additional development locations associated with this new
field discovery.
In addition to 1997 drilling in the Sacramento Basin of California, and
additional drilling that may take place at the North Riley Ridge Unit, the
Company has present plans to participate in 6 other exploratory tests, 5 in the
Rocky Mountains and one in Texas.
DEVELOPMENT DRILLING AND EXPLOITATION IN NORTH AMERICA
The logical outgrowth of any exploration or acquisition program is the ongoing
development of reserves and production that were not developed by initial
drilling. Prior to 1994, the Company had three core properties that had specific
development and/or exploitation potential: the Cessford field in Alberta, the
Siberia Ridge field in Wyoming, and the Ashley Valley field in Utah.
Since 1994, development activities have been focused on these three areas. The
Company has recorded nearly 100% development drilling success at Cessford and
Siberia Ridge, participating in a total of 13 wells.
During 1996, the Company successfully drilled 4 development wells with a 100%
success rate, resulting in 3 oil wells and 1 gas well. The first of the oil
wells was an infill well drilled on the Cessford property in Alberta, Canada,
the second was drilled on the Sage Creek field in Big Horn County, Wyoming on a
property acquired in 1995, and the third was an extension well drilled adjacent
to the Spearhead Ranch Field in Converse County, Wyoming. The single gas well
was a development well drilled with Marathon Oil Company at the Siberia Ridge
field in Sweetwater County, Wyoming. In addition, prior to beginning
exploitation work at the Ashley Valley field located near Vernal, Utah, the
Company doubled its working interest there in 1996 through a series of
acquisitions.
As a result of exploration drilling and acquisitions in the last three years,
the list of properties slated for development drilling and exploitation work has
grown to include the Mountain Oil and Gas properties in Wyoming, where a
comprehensive reservoir study of the Sage Creek Field was recently completed,
the West Padroni property in Colorado, the East Rangely Field in Colorado, and
the North Riley Ridge Unit in Wyoming.
In 1997, the Company is planning additional development drilling in the Siberia
Ridge Field, the Cessford field, and the Sage Creek field. Equity also expects
to see the initial implementation of a water flood project in the Michelle Kay
Field in Kent County, Texas where Equity has a 27.5% working interest.
ACQUISITION OF PROVED RESERVES IN NORTH AMERICA
As the Company developed its growth strategy in 1994, it recognized that the
replacement of reserves through drilling alone would not be adequate to replace
production and increase the Company's declining reserve base. Accordingly, the
Company adopted a strategy element of reserve acquisition to be financed in its
initial stages by the use of a $20 million revolving credit facility. That
program has resulted in net acquisitions of 1.7 million barrels of oil and 1.3
MMCF of gas in 1995 and 1996, for a total original investment of $5.1 million,
or a net acquisition cost of $2.65 per barrel of oil equivalent. These
properties will produce approximately 23% of forecast oil production in 1997,
and 17% of total BOE production. In addition, the properties have contributed in
excess of $1 million in incremental discretionary cash flow.
The Company made two principal acquisitions in 1996, both in Colorado. The
first, the purchase of 14 wells in Rio Blanco County, added 332,000 barrels of
proved developed reserves at a cost of $1.4 million, or $4.22 per barrel, and
added approximately 100 barrels per day of production. The wells are adjacent to
the Rangely Weber Sand Unit, where Equity participated in the first commercial
well in 1946. The Company believes that its knowledge of the area will allow it
to enhance production and develop additional reserves associated with the wells
purchased. The second, the purchase of 8 producing wells in the West Padroni
field in Logan County, added 292,000 barrels of proved developed heavy oil
reserves at a cost of $386,000, or $1.32 per barrel, and added approximately 130
barrels per day of production. In each case, the Company has a 100% working
interest and operates the properties.
INTERNATIONAL EXPLORATION IN RUSSIA
Equity began its efforts to explore for oil in Russia in December of 1991. Over
a period of five years, Symskaya Exploration, Inc., which is a 50% owned
subsidiary, has been able to obtain a 25 year License and Production Sharing
Contract to explore, develop and produce hydrocarbons on a 1.1 million acre
tract in the Krasnoyarsk Krai of Eastern Siberia. During 1996, the drilling and
testing of a 14,100 foot exploratory well was completed. Unfortunately, the well
did not reach the principal objective at an estimated depth of 14,500 feet as
drilling was terminated due to mechanical problems that occurred at 14,100 feet.
Nevertheless, the well enabled Symskaya to collect a large amount of geologic
and geochemical data related to the Symskaya area. This data appears to support
the presence of a major structure on the concession drilled, as well as the
possibility for the development of oil accumulations in the zones that were
tested at a higher structural location. No assurance can be given, however, that
any hydrocarbons will be discovered.
Through the end of 1996, Symskaya has invested a total of $15.5 million ($9.2
million net to Equity) in its Russian operations, and has fulfilled the specific
obligations of its License and Production Sharing Contract which called for the
investment of $12 million in the first five years of the License term. The
License was issued in November of 1993, and, consequently, as of December 31,
1996, Symskaya has a paid-up 22 year right to continue its exploration efforts
on the 1.1 million acre license area. The only specific financial commitment for
maintenance of the License is the payment of an annual License fee of $100,000,
which Symskaya intends to pay. Symskaya remains convinced of the project's
geologic merit, and is actively engaged in the pursuit of additional financing.
However, because of the
uncertainty regarding further exploration activities, and the probability that
the Company will not recover its investment in and advances to Symskaya, the
Company charged its remaining investment in and advances to Symskaya to expense
as of December 31, 1996. The Company has no current plans to fund future
exploratory drilling on the Symskaya concession.
The License area is located in a country that may be considered economically and
politically unstable. As a result, the Symskaya project is subject to all the
risks of an exploratory well in addition to the economic and political risks
associated with the Russian Federation and local government, including but not
necessarily limited to the cancellation or renegotiation of contracts,
expropriation, tax and royalty increases, foreign exchange controls, import and
export regulations, environmental regulations and other laws that may have an
adverse impact on the operation. There are also increased logistical problems
and costs associated with exploration activities in such a remote region.
Further information concerning the Company's investment in Symskaya Exploration,
Inc. may be found in Footnotes 6 and 9 to the financial statements.
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.
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 prices for
1996 and 1995 are as follows:
Quarter High Low
- ------- ---- ---
1996 - 4th 3 5/8 2 13/16
3rd 5 3 1/16
2nd 6 1/2 4 3/8
1st 5 7/8 4
1995 - 4th 6 1/8 3 3/4
3rd 7 1/8 4
2nd 4 5/8 3 1/8
1st 4 3 3/8
The approximate number of registered stockholders of the Company as of
February 24, 1997 is 1,847.
No unregistered equity securities of the registrant have been sold
during the period covered by this report.
ITEM 6. SELECTED FINANCIAL DATA
1996 1995 1994 1993 1992
Net Sales $16,115,125 $12,259,739 $11,713,498 $12,729,899 $15,222,887
Other Income 312,759 457,837 196,431 43,096 277,289
Lease Operating
Costs 5,912,128 5,093,782 4,658,115 5,293,628 5,481,102
DD&A 4,292,237 3,843,442 5,011,155 5,090,744 4,868,084
Impairment of
Proved Oil and
Gas Properties 237,279 2,471,146 -0- -0- -0-
Equity Loss and Impairment
of Investment in Symskaya
Exploration, Inc. 9,204,394 -0- -0- -0- -0-
Property
Writedowns -0- -0- -0- 3,292,624 -0-
3-D Seismic 757,964 237,604 -0- -0- -0-
Exploration
Expense 2,336,405 1,633,612 1,718,339 1,737,923 2,459,873
General and
Administrative 2,030,811 1,908,778 1,560,675 1,607,892 1,939,682
Income (Loss) Before
Cumulative Effect
of Accounting
Changes (5,502,646) (1,254,812) (360,830) (2,476,631) 801,440
Income (Loss) Per
Common Share Before
Cumulative Effect of
Accounting Changes $ (.43) $ (.10) $ (.03) $ (.20) $ .07
===== ===== ===== ===== ====
Total Assets $50,181,437 $53,947,050 $51,908,336 $53,322,749 $58,154,880
Long Term Debt 8,878,830 4,918,830 460,000 920,000 1,380,000
Cash dividends
per share $.00 $.00 $.00 $.05 $.20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL. The following discussion provides information on the results of
operations for the three years ended December 31, 1996 and the financial
condition, liquidity and capital resources as of December 31, 1996. The
financial statements and the notes thereto contain detailed information that
should be referred to in conjunction with this discussion.
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 based on the
foregoing and other factors.
OIL AND GAS RESERVES. 1996 drilling and acquisition activities in the United
States and Canada added 1.51 million barrels of oil equivalent to the Company's
proved reserve base, resulting in a net 5% gain in its reserves, replacing 158%
of 1996 oil and gas production. At year end 1996, proved reserves stood at 8.37
million barrels of oil and 17.6 billion cubic feet of natural gas. Using a 10%
discount rate and year end oil and gas prices and operating costs as prescribed
by the Securities and Exchange Commission, the pre-tax net present value of the
Company's reserves at year end 1996 totaled $79 million, an 84% increase over
the year end value in 1995 of $43 million. After-tax values were $55 million and
$30 million, respectively.
In 1995 the Company added 1.44 million barrels of oil equivalent, equal to 167%
of 1995 oil and gas production. Year end 1995 proved reserves of oil were 7.75
million barrels, an increase of 6% over year end 1994 reserves of 7.31 million
barrels. Natural gas proved reserves at year end 1995 were 18.02 billion cubic
feet, 5% higher than at year end 1994. Barrel equivalent reserves of 10.75
million barrels were 6% higher on a year to year basis.
EQUITY LOSS AND IMPAIRMENT OF INVESTMENT IN SYMSKAYA EXPLORATION, INC. In August
of 1996, Symskaya Exploration, Inc., the Company's 50% owned subsidiary, plugged
and abandoned the Lemok #1 well. Symskaya subsequently charged the drilling
costs of the well to expense. The Company's equity share of the loss in Symskaya
of $5,250,000 was reflected in the Statement of Operations for the quarter ended
September 30, 1996.
Due to the amount of uncertainty relating to Symskaya's obtaining additional
outside financing and proceeding with development of the License area, and the
probability that the Company will not recover its investment, the remaining
capitalized costs were written off in the fourth quarter of 1996, resulting in a
charge to expense of $3,954,394. 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.
ADOPTION OF SFAS NO. 121. As discussed in Note 2 to the financial statements,
the Company adopted SFAS No. 121, Accounting for the Impairment of Long Lived
Assets and Assets Held for Disposal, effective July 1, 1995. The adoption of
this accounting standard resulted in non-cash charges for the impairment of
proved oil and gas properties in the amount of $2,471,146 ($1,557,563 after tax)
in 1995. Non-cash impairment charges of $237,279 ($149,557 after tax) were
recorded during 1996. SFAS No. 121 requires successful efforts companies to
evaluate the recoverability of the carrying costs of their proved oil and gas
properties at a field level, rather than on a company-wide level as previously
allowed by the Securities and Exchange Commission. The SFAS No. 121 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 cost of the
property is written down to fair value, which is determined using discounted
future net revenues from the producing field. These are non-cash financial
statement events only. There has been no decrease in the quantity or expected
future net revenue from the Company's reserves, nor is there any impact on the
Company's cash flows.
RESULTS OF OPERATIONS
- ---------------------
COMPARISON OF 1996 WITH 1995
OIL AND GAS PRODUCTION AND SALES. The Company recorded increases in oil and gas
production and sales during 1996. Oil production rose 3%, from 619,380 barrels
in 1995 to 636,717 barrels in 1996. Gas production rose 32%, from 1.45 Bcf in
1995 to 1.91 Bcf in 1996. The production increases were a direct result of the
Company's successful exploration and development drilling and acquisition
programs. Increases in production were augmented by increases in both oil and
gas average prices received during the year. The Company's average gas price
received during 1996 was $1.55, up 18% from $1.31 received during 1995. Oil
prices increased 21% from $17.00 in 1995 to $20.65 in 1996. The combination of
increased production and increased prices resulted in an increase of 31% in oil
and gas sales for 1996. Further details of production and pricing are found in
Item 2. Properties, under the caption Production.
OTHER INCOME. Other income in 1995 includes the recognition of $178,553 of lease
revenue deferred in 1994. There was no similar transaction in 1996. This
reduction in other income was partially offset by increased overhead fees from
operated properties.
LEASE OPERATING COSTS. Lease operating costs increased 16% in 1996 over 1995
levels. The increase was directly attributable to the increases in production
discussed above, higher value-based production taxes associated with increased
product prices, and a greater number of wells on production. 1996 was the first
full year of operations for the wells drilled and acquired during 1995. In
addition, the Company added approximately 40 additional wells during 1996.
DEPRECIATION, DEPLETION, AND AMORTIZATION (DD&A). Increased DD&A charges in 1996
are a direct reflection of increased production and the addition of new wells to
the Company's depletion base. As discussed above, 1996 was the first full year
of operations for the wells drilled and acquired during 1995. In addition, the
Company added approximately 40 additional wells during 1996.
IMPAIRMENT OF PROVED OIL AND GAS PROPERTIES. As discussed previously, included
in the Statement of Operations for 1996 and 1995 are non-cash charges for the
impairment of proved oil and gas properties in the amount of $237,279 and
$2,471,146, respectively. The 1995 charge resulted from the Company's adoption
of SFAS No. 121, effective July 1, 1995.
EQUITY LOSS AND IMPAIRMENT OF INVESTMENT IN SYMSKAYA EXPLORATION, INC. As
discussed above, the Company recorded an equity loss in Symskaya of $5,250,000
for the quarter ended September 30, 1996. In the fourth quarter of 1996, the
Company's remaining capitalized costs were written off, resulting in a charge to
expense of $3,954,394. The total charge to earnings related to Symskaya
Exploration, Inc. for 1996 was $9,204,394 ($6,592,206 after tax).
3-D SEISMIC AND EXPLORATION EXPENSES. During 1996, the Company incurred $757,964
in 3-D seismic costs related to its California exploration programs, compared to
$237,604 in 1995. Exploration expenses increased as the Company drilled 6 dry
holes in 1996, including one dry hole which cost approximately $500,000,
compared to 4 dry holes in 1995.
GENERAL AND ADMINISTRATIVE EXPENSES. The Company recorded increases in
compensation expense, along with small increases in other administrative charges
during 1996.
INTEREST EXPENSE. Subsequent to the plugging of the Lemok #1, the Company
discontinued capitalizing interest expense on the investment in Symakaya
Exploration, Inc. Along with increased borrowing on the Company's revolving
credit facility, this caused interest expense to increase 126% during 1996. The
Company does not currently expect to capitalize any interest during 1997.
INCOME TAX BENEFIT. The Company's income tax benefit is a functionof the loss in
1996. Details concerning the components of the tax benefit can be found in
Footnote 3 to the financial statements.
COMPARISON OF 1995 WITH 1994
OIL AND GAS PRODUCTION AND SALES. The Company recorded increases in oil and gas
production and sales during 1995. Oil production rose 2%, from 609,543 barrels
in 1994 to 619,380 barrels in 1995. Gas production rose 30%, from 1.12 Bcf in
1994 to 1.45 Bcf in 1995. The production increases were a direct result of the
Company's successful development drilling and acquisition programs. While
increased gas production was offset by falling gas prices, oil prices rose
slightly during the year. The Company's average gas price received during 1995
was $1.31, down 36% from $2.05 received during 1994. Conversely, oil prices
increased 9% from $15.57 in 1994 to $17.00 in 1995. The increases in production
and oil prices were able to more than offset lower gas prices, resulting in an
increase of 5% in oil and gas sales for 1995. Net oil and gas sales for the year
were $12,259,739, compared to $11,713,498 in 1994. Further details of production
and pricing are found in Item 2. Properties, under the caption Production.
OTHER INCOME. Other income in 1995 includes the recognition of $178,553 of lease
revenue deferred in 1994. In addition, the Company had begun to operate a
greater number of properties, and 1995 figures include increased overhead fees.
LEASE OPERATING COSTS. Lease operating costs increased 9% over 1994 levels. The
increase was directly attributable to the increases in production discussed
above, along with a greater number of wells on production. Through it's
successful acquisition and drilling programs, the Company acquired interests in
more than 50 additional wells, most of which were added as of July 1, 1995.
DEPRECIATION, DEPLETION, AND AMORTIZATION (DD&A). Decreased DD&A charges in 1995
were a direct reflection of the adoption of SFAS No. 121 as discussed above. The
Company removed almost $2.5 million from its depletion base effective July 1,
1995, most of which was associated with high cost, marginally economic wells.
IMPAIRMENT OF PROVED OIL AND GAS PROPERTIES. As discussed previously, included
in the Statement of Operations for 1995 is a non-cash charge for the impairment
of proved oil and gas properties in the amount of $2,471,146 ($1,557,563 after
tax), which results from the Company's adoption of SFAS No. 121, effective July
1, 1995.
3-D SEISMIC AND EXPLORATION EXPENSES. During 1995, the Company incurred $237,604
of 3-D seismic costs, while no such costs were incurred in 1994. Exploration
expenses decreased in 1995 due to fewer dry holes. The Company drilled 4 dry
holes in 1995, compared to 6 in 1994.
GENERAL AND ADMINISTRATIVE EXPENSES. The Company recorded increases in insurance
expense, research expense, and legal fees associated with its increased
activities during 1995, causing general and administrative expenses to increase
22% over 1994 levels.
INCOME TAX BENEFIT. The Company's income tax benefit was a function of the loss
in 1995. Details concerning the components of the tax benefit can be found in
Footnote 3 to the financial statements.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
1996 1995 1994
- -----------------------------------------------------------------
Cash, cash equivalents,
and temporary cash
investments $ 837,763 $ 1,467,219 $ 2,830,070
Working capital 2,809,086 3,721,049 4,841,243
Cash provided by
operating activities 5,807,986 4,143,390 3,747,669
Cash used in
investing activities 9,476,999 8,414,086 8,092,488
Cash provided by (used in)
financing activities 3,945,722 4,418,606 (485,852)
CASH AND WORKING CAPITAL. Total cash balances dropped by 43% from 1995, as a
result of a combination of several events discussed in the following paragraphs.
Working capital decreased by 25%. The Company's ratio of current assets to
current liabilities was 2.17 to 1 at December 31, 1996. The Company believes
that existing cash balances, cash flow from operating activities, and the
remaining borrowing capacity under its revolving credit facility will provide
adequate resources to meet its capital, exploration, and acquisition spending
objectives in 1997.
CASH FLOW FROM OPERATING ACTIVITIES. Higher oil and gas sales, which were mainly
a function of increased oil and gas production and higher product prices, were
the principal factors behind a 40% increase in cash flow from operating
activities during 1996. 1995 cash flow from operating activities likewise
increased over 1994 levels due to overall higher product prices and increases in
production. The Company is unable to accurately predict future cash flows
because of oil and gas price fluctuations.
CASH FLOWS FROM INVESTING ACTIVITIES. In 1996, the Company maintained the pace
of capital expenditures recorded during 1995. Capital expenditures increased 2%
to $7,339,212 compared to $7,179,528 in 1995. Included in the 1996 amount was
approximately $2 million associated with proved property acquisitions. The
Company spent approximately $3.1 million on proved property
acquisitions in 1995. Funds advanced to Symskaya Exploration increased from
$2,745,319 in 1995 to $3,043,952 in 1996, an increase of 11%. Funds advanced to
Symskaya were $1,696,261 in 1994. The Company expects that advances to Symskaya
in 1997 will be minimal as the Company has no current plans to fund any
exploratory drilling.
CASH FLOWS FROM FINANCING ACTIVITIES. During 1995, current and former employees
of the Company exercised both Incentive and Non-Qualified Stock Options for
171,000 shares of common stock under the Company's Incentive Stock Option Plans.
These exercises generated $681,525 in cash for the Company. Option exercises in
1996 generated $84,375 in cash. There were no option exercises in 1994.
In March of 1995, the Company obtained a $20 million Borrowing Base Credit
Facility (the Facility), with an initial commitment of $10 million. The Company
used proceeds of $3,960,000 and $4,918,830 in 1996 and 1995 respectively, from
the Facility to fund capital expenditures, retire its previous outstanding Note
Payable in the amount of $920,000, and for working capital purposes. As of
December 31, 1996 the outstanding balance under the Facility was $8,878,830 at
an average interest rate of 7.69%.
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, 1996, the end of
the third 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of
Directors of Equity Oil Company:
We have audited the financial statements of Equity Oil Company as listed in Item
14(a) of this Form 10-K. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Equity Oil Company as of
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996 in conformity
with generally accepted accounting principles.
As discussed in Note 2 to the financial statements, in 1995 the Company changed
its method of measuring impairment of proved oil and gas properties.
Coopers & Lybrand L.L.P.
Salt Lake City, Utah
February 5, 1997
EQUITY OIL COMPANY
BALANCE SHEET
December 31, 1996 and 1995
ASSETS 1996 1995
---- ----
Current assets:
Cash and cash equivalents $ 787,961 $ 511,252
Temporary cash investments 49,802 955,967
Accounts receivable 2,911,637 2,620,865
Operator advances 749,033 633,000
Federal, state and foreign income
taxes receivable 311,393 264,300
Deferred income taxes 31,053 -
Other current assets 372,701 378,594
---------- ----------
Total current assets 5,213,580 5,363,978
---------- ----------
Property and equipment, at cost (successful efforts method):
Unproved oil and gas properties 2,565,727 2,468,412
Proved oil and gas properties:
Developed leaseholds 10,548,580 8,622,146
Intangible drilling costs 65,983,136 62,346,421
Equipment 26,284,602 25,127,047
Other property and equipment 765,100 678,728
----------- -----------
106,147,145 99,242,754
Less accumulated depreciation,
depletion and amortization (61,732,014) (57,549,855)
---------- ----------
44,415,131 41,692,899
---------- ----------
Other assets:
Investment in Raven Ridge Pipeline
Partnership 405,328 540,220
Investment in and notes receivable
from Symskaya Exploration - 6,160,442
Other assets 147,398 189,511
---------- ----------
552,726 6,890,173
---------- ----------
Total assets $50,181,437 $53,947,050
========== ==========
EQUITY OIL COMPANY
BALANCE SHEET
December 31, 1996 and 1995
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
---- ----
Current liabilities:
Accounts payable $ 1,880,418 $ 1,182,877
Accrued liabilities 153,467 145,422
Federal, state and foreign income
taxes payable 191,509 155,063
Accrued profit-sharing contribution 179,100 148,771
Deferred income taxes - 10,796
--------- ---------
Total current liabilities 2,404,494 1,642,929
--------- ---------
Revolving credit facility 8,878,830 4,918,830
Deferred income taxes 5,565,973 8,654,698
---------- ----------
14,444,803 13,573,528
---------- ----------
Commitments (Note 6)
Stockholders' equity:
Common stock, $1 par value:
Authorized: 25,000,000 shares
Issued: 12,751,100 shares in 1996
and 12,711,100 shares in 1995 12,751,100 12,711,100
Paid in capital 3,648,333 3,485,487
Retained earnings 17,031,360 22,534,006
---------- ----------
33,430,793 38,730,593
Less treasury stock, at cost (98,653) -
---------- ----------
33,332,140 38,730,593
---------- ----------
Total liabilities and
stockholders' equity $50,181,437 $53,947,050
========== ==========
The accompanying notes are an integral part of the financial statements
EQUITY OIL COMPANY
STATEMENT OF OPERATIONS
for the years ended December 31, 1996, 1995 and 1994
1996 1995 1994
---- ---- ----
Revenues:
Oil and gas sales $16,115,125 $12,259,739 $11,713,498
Partnership income 306,114 311,960 306,221
Interest 140,053 221,020 244,054
Other income 312,759 457,837 196,431
---------- ---------- ----------
16,874,051 13,250,556 12,460,204
---------- ---------- ----------
Expenses:
Oil and gas leasehold operating costs 5,912,128 5,093,782 4,658,115
Depreciation, depletion and amortization 4,292,237 3,843,442 5,011,155
Impairment of proved oil and gas properties 237,279 2,471,146 -
Equity loss and impairment of investment
in Symskaya Exploration, Inc. 9,204,394 - -
Leasehold abandonments 87,464 30,597 60,545
3-D seismic 757,964 237,604 -
Exploration 2,336,405 1,633,612 1,718,339
General and administrative 2,030,811 1,908,778 1,560,675
Interest, net of interest capitalized
of $364,637 in 1996 and$70,000 in 1995 164,678 72,625 87,308
---------- ---------- ----------
25,023,360 15,291,586 13,096,137
---------- ---------- ----------
Loss before income taxes (8,149,309) (2,041,030) (635,933)
Benefit from income taxes (2,646,663) (786,218) (275,103)
---------- ---------- ----------
Net loss $(5,502,646) $(1,254,812) $ (360,830)
========== ========== ==========
Net loss per common share $ (0.43) $ (.10) $ (.03)
========== ========== ==========
Weighted average shares outstanding 12,733,864 12,597,238 12,540,594
========== ========== ==========
The accompanying notes are an integral part of the financial statements
EQUITY OIL COMPANY
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
for the years ended
December 31, 1996, 1995 and 1994
Common Stock Paid in Retained Treasury Stock
Shares Amount Capital Earnings Shares Cost
------ ------ --------- ---------- ------ ----
Balance at December 31, 1993 12,583,631 $12,583,631 $2,904,792 $24,149,648 45,931 $ (86,358)
Net loss (360,830)
Treasury stock purchased, $4.24 per share 6,100 (25,852)
Common stock issued for services,
$4.00 per share 10,000 10,000 30,000
---------- ---------- --------- ---------- ------ -------
Balance at December 31, 1994 12,593,631 12,593,631 2,934,792 23,788,818 52,031 (112,210)
Net loss (1,254,812)
Treasury stock purchased, $3.79 per share 13,500 (51,181)
Common stock issued for services,
$3.88 per share 12,000 12,000 34,500
Treasury stock canceled, $2.49 per share (65,531) (65,531) (97,860) (65,531) 163,391
Common stock issued on exercise
of incentive stock options 171,000 171,000 510,525
Income tax benefit from exercise
of incentive stock options 103,530
---------- ---------- --------- ---------- ------ -------
Balance at December 31, 1995 12,711,100 12,711,100 $3,485,487 $ 22,534,006 - -
Net loss (5,502,646)
Treasury stock purchased, $3.40 per share 29,000 (98,653)
Common stock issued for services,
$5.04 per share 20,500 20,500 82,813
Common stock issued on exercise
of incentive stock options 19,500 19,500 64,875
Income tax benefit from exercise
of incentive stock options 15,158
---------- ---------- --------- ---------- ------ -------
Balance at December 31, 1996 12,751,100 $12,751,100 $3,648,333 $ 17,031,360 29,000 $ (98,653)
========== ========== ========= ========== ====== ======
The accompanying notes are an integral part of the financial statements
EQUITY OIL COMPANY
STATEMENT OF CASH FLOWS
for the years ended December 31, 1996, 1995 and 1994
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
Net loss $(5,502,646) $ (1,254,812) $(360,830)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Impairment of proved oil and gas properties 237,279 2,471,146 -
Equity loss and impairment of investment
in Symskaya Exploration, Inc. 9,204,394 - -
Depreciation, depletion and amortization 4,292,237 3,843,442 5,011,155
Partnership distributions in excess of income 134,892 144,717 137,023
Property dispositions 87,464 43,227 60,545
Change in other assets 42,113 21,057 -
Decrease in deferred income taxes (3,130,574) (1,374,414) (474,950)
Common stock issued for services 103,313 46,500 40,000
Increase (decrease) from changes in:
Accounts receivable and operator advances (406,805) 133,624 (471,691)
Other current assets 5,893 (784) (78,015)
Accounts payable and accrued liabilities 735,915 11,438 (368,649)
Deferred lease rental revenue - (178,553) 178,553
Income taxes payable/receivable 4,511 236,802 74,528
--------- --------- ---------
Net cash provided by operating activities 5,807,986 4,143,390 3,747,669
--------- --------- ---------
Cash flows from investing activities:
Sale of temporary cash investments 906,165 1,510,761 -
Purchase of temporary cash investments - - (2,466,728)
Advances to Symskaya Exploration (3,043,952) (2,745,319) (1,696,261)
Capital expenditures (7,339,212) (7,179,528) (4,027,752)
Proceeds from sale of property - - 98,253
--------- --------- ---------
Net cash used in investing activities (9,476,999) (8,414,086) (8,092,488)
--------- --------- ---------
Cash flows from financing activities:
Exercise of incentive stock options 84,375 681,525 -
Increase in other assets - (210,568) -
Purchase of treasury stock (98,653) (51,181) (25,852)
Borrowings under revolving credit facility 3,960,000 4,918,830 -
Payments on note payable - (920,000) (460,000)
--------- --------- ---------
Net cash provided by (used in)
financing activities 3,945,722 4,418,606 (485,852)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 276,709 147,910 (4,830,671)
Cash and cash equivalents at beginning of year 511,252 363,342 5,194,013
--------- --------- ---------
Cash and cash equivalents end of year $ 787,961 $ 511,252 $ 363,342
========= ========= =========
Cash, cash equivalents and temporary
cash investments at end of year $ 837,763 $ 1,467,219 $ 2,830,070
========= ========= ==========
Supplemental disclosures of cash flow information: Cash paid during the year
for:
Income taxes $ 419,121 $ 355,993 $ 103,745
Interest $ 164,678 $ 72,625 $ 87,308
The accompanying notes are an integral part of the financial statements
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
A. 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. TEMPORARY CASH INVESTMENTS AND CASH EQUIVALENTS:
Temporary cash investments consist of U.S. Treasury Notes stated
at cost which approximates market. 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.
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. The annual impairment 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 down in the period
such determination is made. The net capitalized costs of proved
oil and gas properties are measured for impairment in accordance
with 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.
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 6). 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, cash equivalents and temporary cash
investments is held by three financial institutions located in
Salt Lake City, Utah.
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
1996, 1995 and 1994 were not material.
Through December 31, 1996, the Company's investment in Russia
was composed of U.S. dollar expenditures (see Note 6).
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
1. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
G. INCOME (LOSS) PER COMMON SHARE:
Net income (loss) per common share is computed based on the
weighted average number of common shares and common share
equivalents outstanding during the year. Primary and fully
diluted net income (loss) per common share are essentially the
same.
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.
I. RECLASSIFICATIONS:
Certain balances in the December 31, 1995 and 1994 financial
statements have been reclassified to conform with the current
year presentation. These changes had no effect on the previously
reported net loss, total assets, liabilities or stockholders'
equity.
2. IMPAIRMENT OF PROVED OIL AND GAS PROPERTIES:
Included in the Statement of Operations for 1995 is a non-cash charge
for the impairment of proved oil and gas properties in the amount of
$2,471,146 ($1,557,563 after tax), which results from the Company's
adoption of SFAS No.121, Accounting for the Impairment of Long Lived
Assets and for Assets Held for Disposal (SFAS No. 121), effective July
1, 1995. SFAS No.121 requires successful efforts companies to evaluate
the recoverability of the net capitalized costs of their proved oil
and gas properties at a field level, rather than on a company-wide
level as previously allowed by the Securities and Exchange Commission.
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 cost of the
property is written down to fair value, which is determined using
discounted future net revenues from the producing field.
The Company recorded a non-cash impairment charge of $237,279
($149,557 after tax) for 1996.
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
3. INCOME TAXES:
The benefit from income taxes consists of the following:
1996 1995 1994
---- ---- ----
Currently payable (receivable):
U.S. income taxes (including
alternative minimum tax) $ 185,082 $ 188,666 $ (92,726)
State income taxes 108,463 26,262 36,058
Canadian income taxes 190,366 373,268 256,515
Deferred tax benefit (3,130,574) (1,374,414) (474,950)
--------- --------- -------
$(2,646,663) $ (786,218) $(275,103)
========= ======== ========
The Company accounts for income taxes in accordance with SFAS No. 109.
Deferred income taxes are provided on 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 components of the net deferred tax liability as of December 31,
1996 and 1995 were as follows:
1996 1995
---- ----
Deferred tax assets:
AMT credit and ITC carryforwards $ 326,104 $ 670,771
State income taxes 42,347 9,709
Deferred compensation 9,211 -
Geological and geophysical costs 439,306 181,989
Capitalized interest 204,755 8,957
Foreign tax credit (FTC) carryforward 265,301 442,942
Equity loss and impairment of investment
in Symskaya Exploration, Inc. 3,283,105 -
Other - 34,296
---------- ------------
4,570,129 1,348,664
Valuation allowance (992,458) (442,942)
---------- -----------
Total deferred tax asset $3,577,671 $ 905,722
========= ===========
Deferred tax liabilities:
Deferred income 20,505 20,505
Property and equipment 9,012,408 9,420,819
Pipeline partnership 79,678 129,892
----------- -----------
Total deferred tax liability 9,112,591 9,571,216
--------- ----------
Net deferred tax liability $5,534,920 $8,665,494
========= =========
The net deferred tax liability as of December 31, 1996 and 1995 is
reflected in the balance sheet as follows:
Current deferred tax liability $ - $ 10,796
Current deferred tax asset (31,053) -
Long-term deferred tax liability 5,565,973 8,654,698
--------- ---------
$5,534,920 $8,665,494
========= =========
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
. INCOME TAXES, Continued:
The benefit from income taxes differs from the amount that would be
provided by applying the statutory U.S. Federal income tax rate to the
loss before income taxes for the following reasons:
1996 1995 1994
---- ---- ----
Federal statutory tax benefit $(2,770,765) $(693,948) $(216,217)
Increase (reduction) in taxes
resulting from:
State taxes (net of federal
benefit) (198,849) (68,376) (11,161)
Canadian taxes (net of foreign
tax credits) (107,549) 287,670 169,300
Excess allowable percentage
depletion (171,724) (166,509) (186,418)
Investment tax and other credits (124,933) (145,055) (30,607)
Unrecognized capital loss related
to impairment of investment
in Symskaya Exploration, Inc. 727,157 - -
--------- -------- --------
Benefit from income taxes $(2,646,663) $ (786,218) $ (275,103)
========= ======== ========
At December 31, 1996, the Company had approximately $122,000 of
investment tax credit carryforwards that will expire in 2001,
approximately $204,000 of alternative minimum tax credit carryforwards
which can be carried forward indefinitely, and approximately $265,000
of foreign tax credit carryforwards which expire in 2000.
4. STOCK-BASED COMPENSATION PLAN
At December 31, 1996, the Company has one stock-based compensation
plan, which is described below. The Company applies APB Opinion No. 25
and related Interpretations in accounting for its plan. Accordingly, no
compensation cost has been recognized for 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 for awards
under the plan consistent with the method of FASB Statement 123, the
Company's net loss and loss per share would have been increased to the
pro forma amounts indicated below:
1996 1995
---- ----
Net loss As reported $(5,502,646) $(1,254,812)
Pro forma $(5,635,133) $(1,297,811)
Loss per share As reported $(.43) $(.10)
Pro forma $(.44) $(.10)
Note:Primary and fully diluted loss per share are essentially the same.
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 1995 and 1996,
respectively: expected volatility of 65 and 67 percent, risk-free
interest rates of 7.2 and 5.4 percent; expected lives of 5 and 5 years;
dividend yield of zero for both years.
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
4. STOCK-BASED COMPENSATION PLAN, Continued:
1996 1995 1994
-------------------------------------------------------------------------------------------
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 904 $4.22 1,047 $4.28 817 $4.29
Granted 222 5.13 102 3.63 247 4.25
Exercised (39) 3.94 (171) 3.98 -
Forfeited (11) 4.38 (74) 4.75 (17) 4.17
--- --- ---
Outstanding at end of year 1,076 4.42 904 4.22 1,047 4.28
------ ---- ------
Options exercisable at year-end 775 743 788
Weighted-average fair value of
options granted during the year $5.13 $3.63 $4.25
The following table summarizes information about fixed stock options
outstanding at December 31, 1996:
Options Outstanding Options Exercisable
Number Weighted-Average Number
Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price
- ------------------- --------------- -------------------- ------------------ --------------- ----------------
$3.56 to $3.63 238,000 7.69 years $3.59 202,800 $3.58
$3.88 to $4.25 421,000 6.42 $4.12 377,800 $4.40
$4.63 to $5.00 113,000 6.23 $4.96 113,000 $4.96
$5.13 to $5.13 227,500 10.27 $5.13 5,000 $5.13
$5.50 to $6.00 76,000 3.62 $5.77 76,000 $5.77
----------- ---- ----- --------- -----
1,075,500 7.30 $4.42 774,600 $4.26
========= ==== ===== ======= =====
5. GEOGRAPHIC SEGMENT INFORMATION:
The Company has oil and gas operations in the U.S., Canada, and
Russia. Operating profit is total revenue less operating expenses.
In computing operating profit, general and administrative expenses
and interest expense have not been deducted. Identifiable assets
are those assets of the Company that are identifiable with the
operations of each geographical area.
Revenue from a major U.S. oil company accounted for approximately
45 percent of total revenues in 1996, 51 percent of total revenues
in 1995, and 50 percent of total revenues in 1994.
Information about the Company's operations in the U.S., Canada and
Russia for the years ended December 31, 1996, 1995, and 1994 is as
follows:
1996: United States Canada Russia Total
----- ------------- ------ ------ -----
Revenues $14,230,763 $ 2,643,288 $ - $ 16,874,051
========== ========= = ==========
Operating profit (loss) $ 2,024,752 $ 1,225,822 $ (9,204,394) $ (5,953,820)
General and administrative
expenses (2,030,811) - - (2,030,811)
Interest expense (164,678) - - (164,678)
--------- -------- --------- ---------
Income (loss) before
income taxes $ (170,737) $ 1,225,822 $ (9,204,394) $ (8,149,309)
========= ========= ========= =========
Identifiable assets at
December 31, 1996 $46,031,896 $ 4,149,541 $ - $ 50,181,437
========== ========= = ==========
Additions to property and
equipment $ 7,241,452 $ 97,760 $ - $ 7,339,212
========= ========= = =========
Depreciation, depletion and
amortization $ 3,838,202 $ 454,035 $ - $ 4,292,237
========= ========= = =========
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
5. GEOGRAPHIC SEGMENT INFORMATION, Continued:
1995: United States Canada Russia Total
----- ------------- ------ ------ -----
Revenues $10,819,553 $ 2,431,003 - $13,250,556
========== ========= ==========
Operating profit (loss) $(1,391,469) $ 1,331,842 - $ (59,627)
General and administrative
expenses (1,908,778) - - (1,908,778)
Interest expense (72,625) - - (72,625)
--------- --------- ---------
Income (loss)
before income taxes $(3,372,872) $ 1,331,842 - $(2,041,030)
========= ========= =========
Identifiable assets at
December 31, 1995 $43,512,850 $ 4,273,758 $ 6,160,442 $53,947,050
========== ========= ========= ==========
Additions to property and
equipment $ 6,127,455 $ 1,052,073 - $ 7,179,528
========= ========= =========
Depreciation, depletion and
amortization $ 3,406,947 $ 436,495 - $ 3,843,442
========= ========= =========
1994: United States Canada Russia Total
----- ------------- ------ ------ -----
Revenues $10,414,683 $ 2,045,521 - $12,460,204
========== ========= ==========
Operating profit (loss) $ (38,477) $ 1,050,527 - $ 1,012,050
General and administrative
expenses (1,560,675) - - (1,560,675)
Interest expense (87,308) - - (87,308)
--------- --------- ---------
Income (loss) before
income taxes $(1,686,460) $ 1,050,527 - $ (635,933)
========= ========= =======
Identifiable assets at
December 31, 1994 $45,066,213 $ 3,427,000 $ 3,415,123 $51,908,336
========== ========= ========= ==========
Additions to property and
equipment $ 3,576,119 $ 451,633 - $ 4,027,752
========= ========= =========
Depreciation, depletion and
amortization $ 4,668,497 $ 342,658 - $ 5,011,155
========= ========= =========
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
6. SYMSKAYA EXPLORATION:
The Company conducts operations in Russia through its 50%
ownership interest in Symskaya Exploration, Inc. (Symskaya).
Symskaya holds a Combined License (the 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.
The work to be performed and the obligations and rights of
Symskaya are set forth in a License Agreement and a Production
Sharing Agreement (PSA) which are integral parts 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.
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, 1996, Symskaya had
satisfied all of the minimum expenditures
required.
Leucadia National Corporation (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 the Company, towards the Symskaya project through the
drilling, completion and/or plugging and abandonment of the
initial test well, the Lemok #1. No gain or loss was recognized on
the sale of Symskaya stock to Leucadia. Pursuant to a
Shareholders' Agreement, Leucadia was not required to pay any part
of the amounts previously advanced by the Company under a Loan
Agreement with Symskaya, with the exception of one-half (1/2) of
the interest on a $1,740,519 loan between the Company and
Symskaya. The loan reflects the initial investment by the Company
in Symskaya prior to Leucadia's ownership. The interest rate on
the loan was fixed by the Company and Leucadia at prime plus two
percent (2%), with a cap of twelve percent (12%) from and after
January 1, 1994. The interest rate in effect at December 31, 1996
was 10.5%.
Amounts advanced by the Company and Leucadia after January 1, 1994
will be treated as interest-bearing advances or equity, as
mutually agreed upon by the respective companies. The agreement
with Leucadia also requires that Leucadia share equally in the
payment of the one (1%) percent royalty obligation in favor of
Coastline 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.
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
6. SYMSKAYA EXPLORATION, continued:
In August of 1996, Symskaya plugged and abandoned the Lemok #1
well. Symskaya subsequently charged the drilling costs of the well
to expense. The Company's equity share of the loss in Symskaya of
$5,250,000 was reflected in the Statement of Operations for the
quarter ended September 30, 1996.
Subsequent to the plugging of the Lemok #1 well, the Company and
Leucadia agreed to suspend interest payments on Symskaya's note
with the Company. Due to the amount of uncertainty relating to
Symskaya's obtaining of additional outside financing and
proceeding with development of the License area, the remaining
capitalized costs were written off in the fourth quarter of 1996,
resulting in a charge to expense of $3,954,394. The Company has no
current plans to fund future exploratory drilling.
Summarized financial information concerning Symskaya Exploration,
Inc. is as follows:
As of As of
December 31, December 31,
1996 1995
------------ -----------
Current assets $ 249,692 $ 550,258
Non-current assets 5,876,700 10,329,991
Total assets 6,126,392 10,880,249
Current liabilities 98,210 334,573
Non-current liabilities 12,653,243 10,018,204
Accumulated deficit (11,102,325) (128,205)
Total liabilities and stockholders' equity 6,126,392 10,880,249
For the year ended For the year ended
December 31, December 31,
1996 1995
------------------ ------------------
Gross revenues $ 59,405 $ 69,423
Net (loss) $ (10,974,120) $ (1,294)
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
7. NOTE PAYABLE:
In March of 1995, the Company obtained a $20 million Borrowing
Base Credit Facility (the Facility), with an initial commitment of
$10 million. The terms of the Facility call for interest payments
only, at the lower of prime or LIBOR plus 2%, for 3 years, at
which time it converts to a 3 year term note. An unused commitment
fee of 3/8% will be charged to the Company based on the average
daily unused portion of the Facility. The Facility is
collateralized by all assets of the Company. The Company used
proceeds from the Facility to retire its previous outstanding Note
Payable in the amount of $920,000. As of December 31, 1996 the
outstanding balance under the Facility was $8,878,830 at an
average interest rate of 7.69%.
Future maturities on the Facility as of December 31, 1996 are as
follows:
1997 $ -
1998 -
1999 1,479,805
2000 2,959,610
2001 2,959,610
2002 1,479,805
---------
$8,878,830
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, 1996, the Company was in compliance with all
covenants contained 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 60 months.
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
8. QUARTERLY FINANCIAL DATA (Unaudited):
Quarterly financial information for the years ended December 31,
1996 and 1995 is as follows:
1996 Quarter Ended: December 31 September 30 June 30 March 31
----------------- --------------- ------------------- -------------
Net revenues $ 4,653,388 $ 4,049,173 $ 3,985,332 $ 3,733,346
Gross margin (4,056,478) (4,401,235) 1,372,329 678,753
Net income (loss) (3,563,431) (2,760,271) 715,349 105,707
Net income (loss) per
common share $(.28) $(.22) $.06 $ .01
==== ==== === ====
Note: Third quarter gross margin includes the effects of the
equity loss in Symskaya Exploration, Inc. Fourth quarter gross
margin includes the writedown of the Company's remaining
investment in Symskaya Exploration, Inc. See Note 6.
1995 Quarter Ended: December 31 September 30 June 30 March 31
----------------- --------------- ------------------- -------------
Net revenues $ 3,230,759 $ 3,062,833 $ 3,180,505 $ 3,097,602
Gross margin 148,738 (1,594,099) 469,916 236,961
Net income (loss) (168,165) (1,258,857) 62,105 110,105
Net income (loss) per
common share $(.01) $(.10) $.00 $.01
==== ==== === ===
Note: Third quarter gross margin includes the effects of the
adoption of SFAS No. 121, which was adopted as of July 1, 1995.
See Note 2.
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
9. DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES:
CAPITALIZED COSTS:
United States Canada Russia Total
1996:
Unproved oil and gas properties $ 2,532,503 $ 3,224 $ $ 2,565,727
Proved oil and gas properties 93,837,818 8,978,498 102,816,316
---------- --------- -----------
96,370,321 9,011,722 105,382,043
Accumulated depreciation,
depletion and amortization (55,259,210) (5,996,677) (61,255,887)
---------- --------- ----------
Net capitalized costs $ 41,111,111 $ 3,015,045 $ 44,126,156
========== ========= ===========
Symskaya, equity method
(see Note 6) $ -
=========
1995:
Unproved oil and gas properties $ 2,378,122 $ 90,290 $ 2,468,412
Proved oil and gas properties 87,200,659 8,894,955 96,095,614
---------- ---------- ----------
89,578,781 8,985,245 98,564,026
Accumulated depreciation,
depletion and amortization (51,531,172) (5,601,882) (57,133,054)
---------- --------- ----------
Net capitalized costs $ 38,047,609 $ 3,383,363 $ 41,430,972
========== ========= ===========
Symskaya, equity method
(see Note 6) $ 6,160,442 $ 6,160,442
========= ===========
1994:
Unproved oil and gas properties $ 2,270,014 $ 99,464 $ 2,369,478
Proved oil and gas properties 84,234,955 7,852,281 92,087,236
---------- --------- ----------
86,504,969 7,951,745 94,456,714
Accumulated depreciation,
depletion and amortization (48,686,141) (5,174,561) (53,860,702)
---------- --------- ----------
Net capitalized costs $ 37,818,828 $ 2,777,184 $ 40,596,012
========== ========= ==========
Symskaya, equity method
(See Note 6) $ 3,415,123 $ 3,415,123
========= ==========
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:
1996: United States Canada Russia Total
Acquisition of properties:
Proved $ 2,038,244 $ - $ - $ 2,038,244
Unproved 474,757 - - 474,757
Exploration costs 4,492,876 30,838 - 4,523,714
Development costs 3,287,637 43,728 - 3,331,365
Symskaya, equity method - - 3,043,952 3,043,952
1995:
Acquisition of properties:
Proved $ 2,654,651 $ 405,410 - $ 3,060,061
Unproved 674,146 - - 674,146
Exploration costs 1,654,022 30,969 - 1,684,991
Development costs 2,709,192 835,415 - 3,544,607
Symskaya, equity method - - $ 2,745,319 2,745,319
1994:
Acquisition of properties:
Proved $ 2,791 - - $ 2,791
Unproved 601,836 - - 601,836
Exploration costs 1,568,654 $ 439,805 - 2,008,459
Development costs 2,803,694 174,639 - 2,978,333
Symskaya, equity method - - $ 1,696,261 1,696,261
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
9. DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES, Continued:
RESULTS OF OPERATIONS (Unaudited):
1996: United States Canada Russia Total
- ----- ------------- ------ ------ -----
Oil and gas sales $ 13,508,077 $ 2,607,048 $ 16,115,125
Production costs (4,976,633) (935,495) (5,912,128)
Exploration expenses (3,153,897) (27,936) (3,181,833)
Depreciation, depletion and amortization (3,838,202) (454,035) (4,292,237)
Impairment of proved
oil and gas properties (237,279) - (237,279)
Equity loss and impairment of investment
in Symskaya Exploration, Inc. $ (9,204,394) (9,204,394)
----------- ---------- ----------- -----------
1,302,066 1,189,582 (9,204,394) (6,712,746)
Imputed income tax benefit (expense) (239,514) (258,048) 3,283,105 2,785,543
----------- ---------- ----------- -----------
Results of operations from producing activities $ 1,062,552 $ 931,534 (5,921,289) $ (3,927,203)
========== ========== =========== ==========
1995:
Oil and gas sales $ 9,803,677 $2,456,062 $12,259,739
Production costs (4,455,069) (638,713) (5,093,782)
Exploration expenses (1,877,840) (23,973) (1,901,813)
Depreciation, depletion and amortization (3,406,947) (436,495) (3,843,442)
Impairment of proved
oil and gas properties (2,471,146) - (2,471,146)
---------- ----------- -----------
(2,407,325) 1,356,881 (1,050,444)
Imputed income tax benefit (expense) 1,056,755 (534,319) 522,436
---------- ---------- ----------
Results of operations from producing activities $(1,350,570) $ 822,562 $ (528,008)
========== ========== ==========
1994:
Oil and gas sales $ 9,648,390 $ 2,065,108 $11,713,498
Production costs (4,031,030) (627,085) (4,658,115)
Exploration expenses (1,753,632) (25,252) (1,778,884)
Depreciation, depletion and amortization (4,668,497) (342,658) (5,011,155)
----------- ---------- -----------
(804,769) 1,070,113 265,344
Imputed income tax benefit (expense) 625,718 (476,200) 149,518
----------- ---------- ------------
Results of operations from producing activities $ (179,051) $ 593,913 $ 414,862
=========== ========== ============
The imputed income tax benefit (expense) is hypothetical and determined without
regard to the Company's deduction for general and administrative and interest
expense.
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 PROVED OIL AND GAS RESERVES
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.
United States Canada Total
December 31, 1996: Oil Gas Oil Gas Oil Gas
------- ------- ------- ------- ------- -------
Proved developed and undeveloped reserves:
Beginning of year 6,563 14,819 1,187 3,205 7,750 18,024
Revisions of previous estimates 176 (233) 49 104 225 (131)
Acquisitions of minerals in place 949 38 -- -- 949 38
Sales of minerals in place (6) (214) -- (54) (6) (268)
Extensions and discoveries 88 1,827 -- 40 88 1,867
Production (518) (1,325) (119) (588) (637) (1,913)
------- ------- ------- ------- ------- -------
End of year 7,252 14,912 1,117 2,707 8,369 17,617
======= ======= ======= ======= ======= =======
Proved developed reserves:
Beginning of year 6,527 11,238 1,139 3,068 7,666 14,306
End of year 7,219 11,133 1,117 2,707 8,336 13,840
December 31, 1995:
Proved developed and undeveloped reserves:
Beginning of year 6,252 13,673 1,055 3,539 7,307 17,212
Revisions of previous estimates 98 (24) 4 (189) 102 (213)
Acquisition of minerals in place 701 1,129 61 152 762 1,281
Extensions and discoveries 3 921 196 274 198 1,195
Production (491) (88) (129) (571) (619) (1,451)
------- ------- ------- ------- ------- -------
End of year 6,563 14,819 1,187 3,205 7,750 18,024
======= ======= ======= ======= ======= =======
Proved developed reserves:
Beginning of year 6,185 8,490 1,042 3,539 7,227 12,029
End of year 6,527 11,238 1,139 3,068 7,666 14,306
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 PROVED OIL AND GAS RESERVES
United States Canada Total
December 31, 1994: Oil Gas Oil Gas Oil Gas
------- ------- ------- ------- ------- -------
Proved developed and undeveloped reserves:
Beginning of year 6,644 12,969 958 3,798 7,602 16,767
Revisions of previous estimates 80 (482) 139 (131) 219 (613)
Acquisition of minerals in place -- 56 -- -- -- 56
Extensions and discoveries 18 2,010 78 112 96 2,122
Production (490) (880) (120) (240) (610) (1,120)
------- ------- ------- ------- ------- -------
End of year 6,252 13,673 1,055 3,539 7,307 17,212
======= ======= ======= ======= ======= =======
Proved developed reserves:
Beginning of year 6,584 8,374 919 3,798 7,503 12,172
End of year 6,185 8,490 1,042 3,539 7,227 12,029
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS AND CHANGES THEREIN
RELATING TO PROVED OIL AND GAS RESERVES (Unaudited):
Thousands of Dollars
1996: United States Canada Total
Future cash inflows $ 230,760 $ 28,073 $ 258,833
Future production and development costs (98,696) (6,263) (104,959)
Future income taxes (37,081) (8,872) (45,953)
--------- --------- ---------
Future net cash flows 94,983 12,938 107,921
10% annual discount for estimated timing
of cash flows ($21,687 related to
future income taxes) (47,336) (5,849) (53,185)
--------- --------- ---------
Standardized measure of discounted future
net cash flows $ 47,647 $ 7,089 $ 54,736
========= ========= =========
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:
Thousands of Dollars
1995 United States Canada Total
- ---- ------------- ------- -------
Future cash inflows $ 148,257 $ 20,381 $ 168,638
Future production and development costs (76,234) (4,705) (80,939)
Future income taxes (16,654) (6,033) (22,687)
--------- --------- ---------
Future net cash flows 55,369 9,643 65,012
10% annual discount for estimated timing
of cash flows ($10,361 related to
future income taxes) (30,540) (4,025) (34,565)
--------- --------- ---------
Standardized measure of discounted future
net cash flows $ 24,829 $ 5,618 $ 30,447
========= ========= =========
1994:
Future cash inflows $ 132,638 $ 20,304 $ 152,942
Future production and development costs (75,306) (5,476) (80,782)
Future income taxes (12,531) (5,887) (18,418)
--------- --------- ---------
Future net cash flows 44,801 8,941 53,742
10% annual discount for estimated timing
of cash flows ($8,567 related to
future income taxes) (25,688) (3,832) (29,520)
--------- --------- ---------
Standardized measure of discounted future
net cash flows $ 19,113 $ 5,109 $ 24,222
========= ========= =========
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).
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:
Principal sources of change in the standardized measure of discounted future net
cash flow are as follows:
Thousands of Dollars
1996 1995 1994
---- ---- ----
Sales and transfers of oil and gas produced,
net of production costs $(10,203) $ (7,166) $ (7,055)
Net changes in prices and production costs 27,483 3,147 6,363
Extensions and discoveries
less related costs 2,374 1,274 1,016
Purchases of minerals in place 7,174 3,804 18
Sales of minerals in place (116) -- --
Changes in estimated future development costs 938 (203) 6,126
Revisions of previous quantity estimates 1,495 369 592
Accretion of discount 4,286 3,409 2,192
Net change in income taxes (12,045) (1,969) (1,812)
Changes in production rates (timing) and other 2,903 3,561 377
-------- -------- --------
$ 24,289 $ 6,226 $ 7,817
======== ======== ========
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 3 in the
definitive proxy statement to be filed in connection with the Company's annual
meeting on May 14, 1997 is incorporated herein by reference in answer to this
item.
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the heading Executive Compensation on pages 6
through 9 in the definitive proxy statement to be filed in connection with the
Company's annual meeting on May 14, 1997 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 4 and 11
in the definitive proxy statement to be filed in connection with the Company's
annual meeting on May 14, 1997 is incorporated herein by reference in answer to
this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K:
(a) (1) Financial Statements:
Page
----
Report of Independent Accountants 19
Financial Statements:
Balance Sheet as of December 31, 1996 and 1995 20
Statement of Operations for the years
ended December 31, 1996, 1995 and 1994 22
Statement of Changes in Stockholders' Equity for the years
ended December 31, 1996, 1995 and 1994 23
Statement of Cash Flows for the years
ended December 31, 1996, 1995 and 1994 24
Notes to Financial Statements 25
(2) Financial Statements of Symskaya Exploration, Inc. 47
(3) Exhibits
(3) (i) Restated Articles of Incorporation. Incorporated by reference from
the annual report on Form 10K for the year ended December 31, 1995.
(ii) By-Laws. Incorporated by reference from the annual report on Form
10K for the year ended December 31, 1995.
(21) Subsidiaries. Incorporated by reference from the annual report on Form
10K for the year ended December 31, 1995.
(23) Consent of Experts. Consent of Coopers & Lybrand L.L.P.
regarding Form S-8 Registration 58
(b)Reports on Form 8-K
None
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 /s/ Paul M. Dougan
------------------
Paul M. Dougan
President
Chief Executive Officer
By /s/ Clay Newton
---------------
Clay Newton
Treasurer
Chief Financial Officer
Principal Accounting Officer
Date: February 27, 1997
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.
/s/ David W. Allen /s/ Joseph C. Bennett
------------------ ---------------------
Signature Signature
Director Director
-------- --------
Title Title
March 3, 1997 March 3, 1997
------------- -------------
Date Date
/s/ Douglas W. Brandrup /s/ William D. Forster
----------------------- ----------------------
Signature Signature
Director Director
-------- --------
Title Title
March 3, 1997 March 3, 1997
------------- -------------
Date Date