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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, 1997
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 contained herein and will 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, 1998, 12,596,500 common shares were outstanding, and the
aggregate market value of voting stock held by non-affiliates of the registrant
was approximately $33,000,000.
Documents Incorporated by Reference
1. Definitive proxy statement to be filed in connection with Issuer's
Annual Stockholders' Meeting to be held on May 13, 1998 and more particularly
the information contained on pages 2 through 5 are incorporated by reference
into Part III of this report.
Total Pages 75.
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 is
licensed to operate 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 production. The keys to increasing production are the replacement, on an
annual basis, of current production, as well as achieving additional reserve
growth.
The Company's strategy to replace production and increase its oil and
natural gas reserves on an ongoing basis is comprised of a balanced approach in
four areas. The four elements of that strategy are:
*Focused exploration drilling
*Development drilling and exploitation
*Acquisition of proved reserves
*International exploration in Russia
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 projects
that will develop and exploit the productive capacities of existing wells and
fields. These projects include development drilling, production enhancement,
operating cost reductions, and other types of activities.
The Company also investigates opportunities to purchase interests in
properties with existing production. During the last three years, the Company
has replaced a significant amount of its production through the purchase of
producing properties. These purchases have, in turn, produced additional
developmental and enhancement projects.
The Company conducts its international exploration in Russia through its
50% ownership of Symskaya Exploration, Inc. (Symskaya). Symskaya operations were
significantly curtailed during 1997. Further discussion of this venture and
other Company activities is found 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 developed and
undeveloped properties.
The majority of the Company's oil production occurs in Colorado and other
Rocky mountain states, and the Canadian provinces of Alberta and British
Columbia. The Company's crude oil production is sold under short-term contracts
at current posted prices for each geographic area, less applicable quality or
transportation tariffs plus negotiated bonuses. Prices are set by oil
purchasers, and their methods of determining prices are not within the control
of the Company, 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 occurs in Wyoming,
California, the Canadian province of Alberta, and the Gulf Coast of Texas. While
the areas where the Company has its major gas reserves are characterized by
large reserves of other companies, the Company has historically been able to
sell all of its productive capacity, and expects to be able to continue to do so
in the near future. The majority of gas sold in Wyoming is marketed under a
contract at an index price that changes monthly. The contract is subject to
renegotiation on an annual basis. The majority of gas produced by the Company in
other geographic areas is sold on the spot market, where prices also vary on a
monthly basis.
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 70% 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 have not had a material adverse effect on the
business of the Company.
Approximately 56% of the Company's total oil production, originating from
several different fields, is sold to or marketed through 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 1997 the Company did not experience any competitive factors which
impaired its production or sale of oil and gas, nor did it experience
significant difficulties in contracting for drilling and related equipment.
GOVERNMENT REGULATION
Drilling activities of the Company are regulated by several governmental
agencies in the United States, both federal and state, including the
Environmental Protection Agency, Forest Service, Department of Wildlife, and
Bureau of Land Management, as well as state oil and gas commissions for those
states in which the Company has operations. Canadian and Russian operations are
subject to similar requirements.
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
licensed to operate in Russia. Further discussion of this venture is found in
ITEM 2. PROPERTIES, under the caption Present Activity, and in Footnotes 6 and 9
in the financial statements.
ITEM 2. PROPERTIES
The principal properties of the Company consist of developed and
undeveloped oil and gas leasehold interests. Developed leases are comprised of
properties with existing production, where lease terms continue as long as oil
and/or gas is produced. Undeveloped leases include unproven acreage on both
public and private lands. The leases have set terms and terminate at the time
specified in each lease unless oil and gas in commercial quantities are
discovered prior to that time.
The Company also has a fee interest in 6,996 net acres of oil shale lands
in Colorado. These properties have not generated significant revenue for the
Company. 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, 1997.
Estimates of reserve quantities and related future net cash flows are
calculated using unescalated year-end oil and gas prices and operating costs,
and may be subject to substantial fluctuations based on the prices in effect at
the end of each year. Reserve revisions occur when the economic limit of a
property is lengthened or shortened due to changes in commodity pricing. The
following table sets forth a comparison of year-end reserves, the weighted
average prices used in calculating estimated reserve quantities and future net
cash flows, future net cash flows discounted at 10%, and per barrel of oil
equivalent discounted cash flows at the end of 1997, 1996, and 1995 (quantities
in thousands, except for pricing and per barrel of oil equivalent amounts):
Year-end SEC-10
Proved reserves Year-end SEC-10 pre-tax
Oil Gas prices pre-ta values
(MBBLs) (MMCF) BOE* Oil Gas values per BOE
---- ----- --- --- --- ------ -------
12/31/97 ...... 8,420 18,909 11,571 $14.99 $2.03 $37,409 $3.23
12/31/96 ...... 8,369 17,617 11,305 $24.36 $2.84 $79,002 $7.00
12/31/95 ...... 7,750 18,024 10,754 $18.02 $1.38 $42,772 $3.98
No estimates of reserves have been filed with or included in any report to any
other federal agency during 1997.
* - gas converted at 6,000 Mcf per barrel.
PRODUCTION
The following table sets forth the Company's production, average sales prices,
and average lifting costs by geographic area for 1997, 1996, and 1995:
1997 1996 1995 1997 1996 1995
Oil Oil Oil Gas Gas Gas
(Bbls) (Bbls) (Bbls) (MMCF) (MMCF) (MMCF)
------ ------ ------ ------ ------ ------
Production
Area
Colorado 366,319 363,080 373,766 170 106 84
Texas 25,359 29,186 32,861 211 315 356
Montana 26,103 32,845 23,385 16 17 9
Utah 18,745 16,769 10,069 - - -
Wyoming 76,190 68,924 44,283 660 519 422
North Dakota 7,007 6,768 5,869 3 3 2
Oklahoma 435 607 640 - - -
California - - - 560 365 5
Other States 7 13 6 - - 2
------- ------- ------- ----- ----- ---
Total U.S. 520,165 518,192 490,879 1,620 1,325 880
Alberta 92,376 113,756 116,252 439 586 568
B.C. 23,371 4,769 12,249 10 2 3
------ ----- ------ -- - -
Total Canada 115,747 118,525 128,501 449 588 571
------- ------- ------- --- --- ---
Grand Total 635,912 636,717 619,380 2,069 1,913 1,451
======= ======= ======= ===== ===== =====
Average Price
-------------
U.S. $19.49 $21.49 $17.44 $ 2.21 $1.79 $1.67
Canada $15.36 $16.99 $15.49 $ 1.34 $1.01 $ .74
Total $18.74 $20.65 $17.00 $ 2.02 $1.55 $1.31
Lifting Costs
U.S. $ 7.53 $ 7.92 $ 7.75 $ .85 $ .66 $ .74
Canada $ 4.15 $ 6.09 $ 3.75 $ .36 $ .37 $ .19
------ ------ ------ ------ ----- -----
Total $ 6.92 $ 7.58 $ 6.85 $ .75 $ .57 $ .53
====== ====== ====== ====== ===== =====
PRODUCTIVE WELLS AND ACREAGE
The location and quantity of Equity's productive wells and acreage as of
December 31, 1997 are as follows:
Productive Wells: Gross Net
Oil:
United States 747 100.932
Canada 243 11.625
Gas:
United States 71 19.768
Canada 9 1.604
----- -------
Total Productive Wells 1,070 133.929
===== =======
Developed Acreage
United States 126,314 12,408
Canada 126,440 2,696
------- -----
Total Developed Acreage 252,754 15,104
======= ======
UNDEVELOPED LEASEHOLD ACREAGE
The following table sets forth the Company's undeveloped oil and gas lease
acreage as of December 31, 1997 by geographic area:
Gross Net
Area Acreage Acreage
- ---- ------- -------
Colorado 22,744 15,479
Texas 3,992 1,211
Montana 58,673 7,527
Utah 7,950 880
Wyoming 26,573 15,943
California 18,775 13,497
North Dakota 13,809 7,706
------ -----
Total U.S. 152,516 62,243
Alberta 18,877 3,763
------ -----
Total Canada 18,877 3,763
------ -----
Grand Total 171,393 66,006
======= ======
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 1997, the Company participated in the drilling of 30 gross wells. Of
this total, 18 were completed as producing oil and gas wells and 12 were plugged
and abandoned as dry holes.
Gross exploratory wells Status 1997 1996 1995
drilled:
United States Productive 13 15 8
Dry 12 6 4
Canada Productive - - -
Dry - - -
Gross development wells
drilled:
United States Productive 5 3 3
Dry - - -
Canada Productive - 1 5
Dry - - -
Net exploratory wells Status 1997 1996 1995
drilled:
United States Productive 4.21 3.95 1.05
Dry 5.99 1.64 1.08
Canada Productive - - -
Dry - - -
Net development wells
drilled:
United States Productive 1.74 1.19 1.30
Dry - - -
Canada Productive - .50 2.14
Dry - - -
PRESENT ACTIVITY
DOMESTIC EXPLORATION
In 1997, the Company participated in the drilling of a total of 25
exploratory wells resulting in 12 gas wells and 1 oil well, an overall
completion success rate of 52%.
As in 1996, drilling for gas on 3-D seismic prospects in the Sacramento
Basin of northern California was the major focus of drilling activity for the
Company. Over the last three years, Equity has participated in a total of nine
3-D seismic surveys in this area, covering a total of 131 square miles. A total
of 40 wells, including the 11 drilled in 1997, have been drilled on these
surveys through the end of this year. Of those, 25 have been completed as gas
wells for an overall 63% success rate. Equity's working interest in the wells
and the associated surveys ranges from 18.75% to 60%.
Equity is the operator of two of the surveys, Davis Ranch and Merlin. The
Company drilled three wells in the Merlin survey in 1997, resulting in one
completion, the Henning #1-15. That well was placed on production in February
1998, producing from perforations at 5,565 to 5,568 feet at a rate of 1.2
million cubic feet per day. During drilling, additional zones from 5,518 to
5,557 feet drill stem tested at a rate of 5.9 million cubic feet per day. This
interval will be completed in March of 1998. Equity has a 50% working interest
in the well and the survey. A fourth well is currently scheduled to be drilled
on the Merlin prospect in the second quarter of 1998.
Should oil prices strengthen from their early 1998 low levels, Equity
expects to participate in the drilling of 11 more wells in the Sacramento Basin
in 1998 in addition to the Merlin well, including 2 in the Davis Ranch prospect
where Equity operates with a 60% working interest, and 9 in other surveys where
Equity has a 25% working interest. Further, the Company believes that there may
be another 40 prospective locations on the surveys that may be drilled in future
years.
In an effort to add oil exploration to existing California activities, in
1997 the Company participated in a 36 square mile 3- D survey in the Southern
San Joaquin Basin. The survey area includes several producing oil fields as well
as numerous undrilled 2-D seismic leads. Shooting for the survey was completed
in January of 1998. Evaluation of the data from the shoot should take
approximately three months, and it is presently expected that at least one
exploratory well will be drilled on the survey in the second half of the year.
Equity has a 30% working interest in the survey.
The Company participated in two exploratory wells in Wyoming in 1997,
resulting in one oil completion. Although exploration drilling in the Rocky
Mountains was limited in 1997, work on several Rocky Mountain prospects will
lead to drilling in 1998. The largest of these is the O'Brien Springs prospect.
This prospect, developed in house by Equity, covers a 19,200 acre lease
block on which a 35 square mile 3-D survey was conducted in the fall of 1997.
The project is located in Carbon County, Wyoming, in an area of complex
structural geology. The prospect area has been lightly explored in the past, and
includes potential multiple pays in the Tensleep, Nugget and Frontier
formations. The processing and evaluation of the survey data has been completed
and the initial exploratory wells on the prospect are scheduled to be drilled in
mid-1998. Equity maintains a 50% operated working interest in the prospect.
Early 1998 drilling on another Rocky Mountain prospect assembled in 1997
has met with initial success. On March 3rd casing was set on a well in Golden
Valley County, North Dakota. The well, in which Equity has a 32.5% working
interest, was drilled on acreage adjacent to a recompletion that Equity
participated in during 1997. During drilling, the well tested oil from two
formations, and is being completed as an oil well. In addition, electric logs
and other tests have identified two additional zones in the well that may be
productive.
EXPLOITATION & DEVELOPMENT DRILLING
In 1997, Equity completed 100% of its five development wells, resulting in
four gas wells and one oil well. Three development wells were drilled in the
Siberia Ridge gas field in Sweetwater County, Wyoming. The Company has a 50%
working interest in two of the wells, and a 40% interest in the other. These
wells are currently on production with a combined productive capacity of 3.3
million cubic feet and 30 barrels of condensate per day. The oil well, in which
Equity has a 46% working interest, was drilled and completed in the Sage Creek
Unit in the Bighorn Basin of Wyoming. In each case, these wells represent part
of the Company's ongoing effort to develop the potential of existing properties.
In addition to development drilling, the Company participated in a broad
range of workovers on existing properties, and committed to a 3-D seismic survey
of the core producing area of the Cessford Field in Alberta, Canada in which
Equity has a 50% working interest. Workover activity in the Milligan Creek Unit
#2, British Columbia, resulted in a dramatic increase in production from 440 to
1,025 barrels per day. Equity maintains a 11.44% working interest in the Unit.
ACQUISITIONS
Equity made one significant acquisition in 1997, the purchase in December
of proved reserves of 1.1 million barrels of oil and 438 million cubic feet of
gas for a total cost of $3.28 million. The reserves are located primarily in the
Bighorn Basin of northwestern Wyoming and consist of 73 active wells in 14
fields. The Company's working interest in the properties range from 17% to 74%
and average approximately 38%. In each case, in addition to the proved producing
reserves, the Company believes there are substantial reserves that can be
developed by further exploitation and drilling in an improved economic climate.
SYMSKAYA EXPLORATION
During 1997, the Company operated its Symskaya project in a maintenance
mode, focusing on two objectives. First, the successful sale or farmout of an
interest in Symskaya to support further drilling, and second, the approval of
the project by the Russian parliament in accordance with the Law on Production
Sharing that was adopted subsequent to the time the original Production Sharing
Agreement was signed. Neither objective has yet been accomplished. The Company
will continue to pursue the same objectives in 1998.
The area covered by Symskaya's License 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 frontier exploration 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.
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 1997 and 1996 are as follows:
Quarter High Low
1997 - 4th 3 15/16 2 3/4
3rd 4 1/8 3 3/16
2nd 3 3/8 2 3/4
1st 4 5/16 2 11/16
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
The approximate number of registered stockholders of the Company as of
March 6, 1998 is 1,684.
No unregistered equity securities of the registrant have been sold during
the period covered by this report.
ITEM 6. Selected Financial Data
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
Net Sales ................ $ 16,457,048 $ 16,115,125 $ 12,259,739 $ 11,713,498 $ 12,729,899
Other Income ............. 1,023,037 312,759 457,837 196,431 43,096
Lease Operating
Costs .................... 5,940,808 5,912,128 5,093,782 4,658,115 5,293,628
DD&A ..................... 4,675,411 4,292,237 3,843,442 5,011,155 5,090,744
Impairment of
Proved Oil and
Gas Properties ........... 411,894 237,279 2,471,146 -0- -0-
Equity Loss and Impairment
of Investment in Symskaya
Exploration, Inc. ........ 356,661 9,204,394 -0- -0- -0-
Property
Writedowns ............... -0- -0- -0- -0- 3,292,624
3-D Seismic .............. 626,525 757,964 237,604 -0- -0-
Exploration
Expense .................. 3,026,550 2,336,405 1,633,612 1,718,339 1,737,923
General and
Administrative ........... 2,048,194 2,030,811 1,908,778 1,560,675 1,607,892
Basic Income (Loss) Before
Cumulative Effect
of Accounting
Changes .................. (211,156) (5,502,646) (1,254,812) (360,830) (2,476,631)
Basic Income (Loss) Per
Common Share Before
Cumulative Effect of
Accounting Changes ....... $ (.02) $ (.43) $ (.10) $ (.03) $ (.20)
Total Assets ............. $ 53,541,639 $ 50,181,437 $ 53,947,050 $ 51,908,336 $ 53,322,749
Long-Term Debt ........... 13,978,830 8,878,830 4,918,830 460,000 920,000
Cash Dividends
Per Share ................ $ .00 $ .00 $ .00 $ .00 $ .05
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, 1997 and the financial condition,
liquidity and capital resources as of December 31, 1997. 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.
OIL AND GAS RESERVES
Excluding revisions to previous estimates, 1997 drilling and acquisition
activities in the United States and Canada added 1.72 million barrels of oil
equivalent to the Company's proved reserve base, replacing 175% of 1997
production. Sharply lower oil prices caused year-end downward revisions in the
estimates of oil reserves of 555,000 barrels. In total, the Company's proved oil
and gas reserves inreased 5% over 1996 levels. At year end 1997, proved reserves
stood at 8.42 million barrels of oil and 18.9 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 1997 totaled $37 million, compared
to $79 million at year-end 1996. The principal cause of the decline in pre-tax
values are the lower year-end prices in 1997 used to estimate oil reserves.
In 1996 the Company added 1.30 million barrels of oil equivalent, equal to 136%
of 1996 oil and gas production. Year end 1996 proved reserves of oil were 8.37
million barrels, an increase of 8% over year end 1995 reserves of 7.75 million
barrels. Natural gas proved reserves at year end 1996 were 17.62 billion cubic
feet, 2% lower than at year end 1995. Barrel equivalent reserves of 11.31
million barrels were 5% higher on a year to year basis.
EQUITY LOSS AND IMPAIRMENT OF INVESTMENT IN SYMSKAYA EXPLORATION, INC.
In 1996, Symskaya plugged and abandoned the Lemok #1 well, and charged the
drilling costs of the well to expense. Due to the uncertainty relating to
Symskaya's obtaining additional outside financing and proceeding with
development of the License area, all other capitalized costs related to the
Company's investments in and advances to Symskaya were also written off,
resulting in a total charge to expense of $9,204,394. The Company has no current
plans to fund future exploratory drilling in Russia. The Company's 50% share of
Symskaya's net loss in 1997 was $356,661, which resulted primarily from
administrative related epenses. 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 SFAS No.
121 impairment charges of $411,894 ($259,493 after tax) and $237,279 ($149,557
after tax) were recorded during 1997 and 1996, respectively. 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 1997 WITH 1996
OIL AND GAS PRODUCTION AND SALES
The Company's 1997 increases in oil and gas sales are due largely to
increases in natural gas production and prices. During 1997, the Company's gas
production increased 8%, from 1.9 Bcf in 1996 to 2.1 Bcf in 1997. Average prices
of $2.02 per Mcf in 1997 were 30% higher than the $1.55 received in 1996. The
increase in gas production reflects the ongoing success and rising contribution
from the Company's exploration and development programs in California and
Wyoming.
Offsetting the increases in gas production and pricing, oil production was
essentially flat from year to year, with 636,000 barrels produced in 1997,
compared to 637,000 barrels in 1996. While 1997 year-end oil prices experienced
a sharp decline from the prior year, the decline in average prices received
throughout the year was somewhat milder. Average prices of $18.74 per barrel
were 10% lower than the $20.65 per barrel received in 1996. Further details of
production and pricing are found in Item 2. PROPERTIES, under the caption
PRODUCTION.
OTHER INCOME
During the first half of 1997, the Company recorded a gain on the sale of
certain oil and gas properties of approximately $325,000. The properties sold
had reserves of less than 15,000 barrels of oil. There was no corresponding
event in 1996. In addition, during the third quarter of 1997, the Company sold
its minority interest in an oil field technology research company. In connection
with the sale, the Company recognized a gain of approximately $200,000. These
two transactions combined to increase other income by 227% over 1996 levels.
LEASE OPERATING COSTS
Despite a higher number of wells on production during 1997 as compared to
1996, lease operating costs declined on a per-unit basis. The primary factor in
the decline was a reduction in value-based production taxes. As 65% of the
Company's production on a barrel of oil equivalent basis comes from crude oil,
the decline in average oil prices in 1997 brought about a similar decline in
production taxes.
In addition, operating costs associated with natural gas properties are lower on
a barrel of oil equivalent basis than for oil producing properties. The
Company's ratio of gas to oil production is increasing, and as it does so, per
unit costs are likely to decline.
DEPRECIATION, DEPLETION, AND AMORTIZATION (DD&A)
Increased DD&A charges in 1997 were a direct reflection of lower year-end
oil prices used in calculating reserves. Generally speaking, as oil prices
decline, economic oil reserves also decline. As these reserves decline,
extraction percentages increase, resulting in higher DD&A charges.
IMPAIRMENT OF PROVED OIL AND GAS PROPERTIES
As discussed previously, included in the Statement of Operations for 1997
and 1996 are non-cash charges for the impairment of proved oil and gas
properties in the amount of $411,894 and $237,239, respectively.
EQUITY LOSS AND IMPAIRMENT OF INVESTMENT IN SYMSKAYA EXPLORATION, INC.
As discussed above, in 1996, Symskaya plugged and abandoned the Lemok #1
well, and charged the drilling costs of the well to expense. Due to the
uncertainty relating to Symskaya's obtaining additional outside financing and
proceeding with development of the License area, all other capitalized costs
related to the Company's investments in and advances to Symskaya were also
written off, resulting in a total charge to expense of $9,204,394 ($6,592,206
after tax). The Company's 50% share of Symskaya's net loss in 1997 was $356,661,
which resulted primarily from administrative related epenses.
3-D SEISMIC AND EXPLORATION EXPENSES
During 1997, the Company incurred $626,525 in 3-D seismic costs related to
its exploration programs, compared to $757,964 in 1996. Exploration expenses
increased as the Company drilled 12 exploratory dry holes in 1997, compared to 6
dry holes in 1996. Successful efforts accounting, the method used by the
Company, requires both 3D seismic costs and exploratory dry hole costs to be
expensed on a current basis.
GENERAL AND ADMINISTRATIVE EXPENSES
The Company recorded increases in compensation expense, along with small
increases in other administrative charges during 1997.
INTEREST EXPENSE
During 1996, because of its ongoing exploration project in Russia, the
Company was required to capitalize most of its interest expense. With activity
in Russia curtailed in 1997, interest is now being charged to expense. Along
with increased borrowing on the Company's revolving credit facility, this caused
interest expense to increase during 1997 over 1996 levels.
INCOME TAX BENEFIT
Income tax expense for 1997 includes additional taxes arising from an audit
of the Company's Canadian tax returns. The adjustment resulted in the accrual of
approximately $375,000 in additional Canadian taxes related to prior years.
Details concerning the components of the tax expense can be found in Footnote 3
to the financial statements.
COMPARISON OF 1996 WITH 1995
OIL AND GAS PRODUCTION AND SALES
The Company recorded increases in oil and gas production and sales during
1996, compared to 1995. 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 included 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 wells during 1996.
DEPRECIATION, DEPLETION, AND AMORTIZATION (DD&A)
Increased DD&A charges in 1996 were 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 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, In 1996, Symskaya plugged and abandoned the Lemok #1
well, and charged the drilling costs of the well to expense. Due to the
uncertainty relating to Symskaya's obtaining additional outside financing and
proceeding with development of the License area, all other capitalized costs
related to the Company's investments in and advances to Symskaya were also
written off, resulting in a total charge to expense of $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 over 1995 levels.
INCOME TAX BENEFIT
The Company's income tax benefit was a function of the loss in 1996.
Details concerning the components of the tax benefit can be found in Footnote 3
to the financial statements.
LIQUIDITY AND CAPITAL RESOURCES
1997 1996 1995
- ----------------------------------------------------------------
Cash, cash equivalents,
and temporary cash
investments $ 378,801 $ 837,763 $1,467,219
Working capital 2,652,023 2,809,086 3,721,049
Cash provided by
operating activities 4,181,477 5,807,986 4,143,390
Cash (used in)
investing activities (9,260,988) (9,476,999) (8,414,086)
Cash provided by
financing activities 4,670,351 3,945,722 4,418,606
CASH AND WORKING CAPITAL
Total cash balances dropped by 55% from 1996, as a result of a combination
of several events discussed in the following paragraphs. Working capital
decreased by 6%. The Company's ratio of current assets to current liabilities
was 2.33 to 1 at December 31, 1997, compared to 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 1998.
CASH FLOW FROM OPERATING ACTIVITIES
Cash flow from operating activities declined in 1997 compared to 1996
levels, primarily as a result of a reduction in accounts payable balances, which
is mainly a function of timing. Higher oil and gas sales, which arose from
increased oil and gas production and higher product prices, were the principal
factors behind an increase in cash flow from operating activities from 1995 to
1996.
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures in 1997 were 30% higher than the amount recorded in
1996. Included in the 1997 figures were $3.2 million associated with proved
property acquisitions, and $1.2 million associated with unproved property
acquisitions. During 1996, the Company recorded costs of $2 million and $.5
million, respectively, for these property acquisitions. Subsequent to the
plugging of the Lemok #1 in 1996, the Company's advances to Symskaya
Exploration, Inc. decreased significantly. During 1997 the Company advanced
approximately $357,000 to Symskaya, compared to approximately $3.0 million in
1996. The Company expects that advances to Symskaya in 1998 will again be
minimal as the Company has no current plans to fund any exploratory drilling.
The investment activity was partially funded by proceeds from the sale of
properties in 1997, and by the sale of temporary cash investments in both years.
1996 capital expenditures increased 2% over 1995 levels. Funds advanced to
Symskaya Exploration increased from $2,745,319 in 1995 to $3,043,952 in 1996, an
increase of 11%.
CASH FLOWS FROM FINANCING ACTIVITIES
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 $5,100,000, $3,960,000 and $4,918,830 in 1997, 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, 1997 the outstanding balance under the
Facility was $13,978,830 at an average interest rate of 7.69%. On October 17,
1997, the Company amended its credit agreement, increasing the current
commitment from $10 million to $15 million.
The Company purchased 135,600 shares of its stock on the open market during 1997
at an average price of $3.17 per share. The purchases were made pursuant to a
share repurchase program adopted by the Company in June of 1997. The Company
purchased 29,000 shares of its stock during 1996 at an average price of $3.40
per share.
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, 1997, the end of the
fourth 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.
YEAR 2000
The Company uses computers principally for processing and analyzing
geophysical and geological data, map making, and administrative functions such
as word processing, accounting, and financial reporting. The Company's principal
computer systems have been purchased since December 31, 1995. The Company has an
ongoing program to ensure that its operational and financial systems will not be
adversely affect by year 2000 software failures. While the Company believes it
is taking all appropriate steps to assure year 2000 compliance, it is dependent
substantially on vendor compliance. The Company intends to modify or replace
those systems that are not year 2000 compliant. The Company is requiring its
systems and software vendors to represent that the services and products
provided are, or will be, year 2000 compliant, and has planned a program to test
compliance. The Company anticipates completing that test no later than year-end
1998. The Company estimates that any cost to redevelop, replace, or repair its
technology will not be material.
FORWARD-LOOKING STATEMENTS
Forward-looking statements in this Form 10-K, future filings by the Company
with the Securities and Exchange Commission, the Company's press releases and
oral statements by authorized officers of the Company are intended to be subject
to the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Investors are cautioned that all forward-looking statements involve risks
and uncertainty, including without limitation, the risk of a significant natural
disaster, the inability of the Company to ensure against certain risks, the
adequacy of its loss reserves, fluctuations in commodity prices, the inherent
limitations in the inability to estimate oil and gas reserves, changing
government regulations, as well as general market conditions, competition and
pricing. The Company believes that forward-looking statements made by it are
based upon reasonable expectations. However, no assurances can be given that
actual results will not differ materially from those contained in such
forward-looking statements. The words "estimate", "anticipate",
"expect","predict", "believe" and similar expressions are intended to identify
forward-looking statements.
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, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997 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
January 16, 1998
EQUITY OIL COMPANY
BALANCE SHEET
December 31, 1997 and 1996
ASSETS 1997 1996
---- ----
Current assets:
Cash and cash equivalents ............................... $ 378,801 $ 787,961
Temporary cash investments .............................. -- 49,802
Accounts receivable ..................................... 2,957,677 2,911,637
Operator advances ....................................... 683,858 749,033
Federal, state and foreign income
taxes receivable ...................................... 88,174 311,393
Deferred income taxes ................................... 18,934 31,053
Other current assets .................................... 514,713 372,701
------------- -------------
Total current assets ............................ 4,642,157 5,213,580
------------- -------------
Property and equipment, at cost (successful efforts method):
Unproved oil and gas properties ......................... 3,504,362 2,565,727
Proved oil and gas properties:
Developed leaseholds .................................. 13,049,597 10,548,580
Intangible drilling costs ............................. 68,324,359 65,983,136
Equipment ............................................. 27,733,805 26,284,602
Other property and equipment ............................ 759,768 765,100
------------- -------------
113,371,891 106,147,145
Less accumulated depreciation,
depletion and amortization ...................... (64,846,514) (61,732,014)
------------- -------------
48,525,377 44,415,131
------------- -------------
Other assets:
Investment in Raven Ridge Pipeline
Partnership ........................................... 268,821 405,328
Other assets ............................................ 105,284 147,398
------------- -------------
374,105 552,726
------------- -------------
Total assets .................................... $ 53,541,639 $ 50,181,437
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY ....................
Current liabilities:
Accounts payable ........................................ $ 1,327,120 $ 1,880,418
Accrued liabilities ..................................... 120,039 153,467
Federal, state and foreign income
taxes payable ......................................... 354,002 191,509
Accrued profit-sharing contribution ..................... 188,973 179,100
------------- -------------
Total current liabilities ....................... 1,990,134 2,404,494
------------- -------------
Revolving credit facility .................................. 13,978,830 8,878,830
Deferred income taxes ...................................... 4,851,966 5,565,973
------------- -------------
18,830,796 14,444,803
------------- -------------
Commitments (Note 6)
Stockholders' equity:
Common stock, $1 par value:
Authorized: 25,000,000 shares
Issued: 12,761,100 shares in 1997
and 12,751,100 shares in 1996 ...................... 12,761,100 12,751,100
Paid in capital ......................................... 3,667,707 3,648,333
Retained earnings ....................................... 16,820,204 17,031,360
------------- -------------
33,249,011 33,430,793
Less treasury stock, at cost ............................ (528,302) (98,653)
------------- -------------
32,720,709 33,332,140
------------- -------------
Total liabilities and
stockholders' equity ............................ $ 53,541,639 $ 50,181,437
============= =============
The accompanying notes are an integral part of the financial statements
EQUITY OIL COMPANY
STATEMENT OF OPERATIONS
for the years ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
Revenues:
Oil and gas sales ......................... $ 16,457,048 $ 16,115,125 $ 12,259,739
Partnership income ........................ 311,215 306,114 311,960
Interest .................................. 153,672 140,053 221,020
Other income .............................. 1,023,037 312,759 457,837
------------ ------------ ------------
17,944,972 16,874,051 13,250,556
------------ ------------ ------------
Expenses:
Oil and gas leasehold operating costs ..... 5,940,808 5,912,128 5,093,782
Depreciation, depletion and amortization .. 4,675,411 4,292,237 3,843,442
Impairment of proved oil and gas properties 411,894 237,279 2,471,146
Equity loss and impairment of investment
in Symskaya Exploration, Inc. ........... 356,661 9,204,394 --
Leasehold abandonments .................... 86,542 87,464 30,597
3-D seismic ............................... 626,525 757,964 237,604
Exploration ............................... 3,026,550 2,336,405 1,633,612
General and administrative ................ 2,048,194 2,030,811 1,908,778
Interest, net of interest capitalized
of $364,637 in 1996 and $70,000 in 1995 . 733,980 164,678 72,625
------------ ------------ ------------
17,906,565 25,023,360 15,291,586
------------ ------------ ------------
Income (loss) before income taxes .... 38,407 (8,149,309) (2,041,030)
Provision for (benefit from) income taxes ..... 249,563 (2,646,663) (786,218)
------------ ------------ ------------
Net loss ............................. $ (211,156) $ (5,502,646) $ (1,254,812)
============ ============ ============
Basic and diluted net loss per common share ... $ (.02) $ (.43) $ (.10)
============ ============ ============
Basic and diluted weighted
average shares outstanding ................. 12,686,211 12,733,864 12,597,238
============ ============ ============
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, 1997, 1996 and 1995
Common Stock Paid in Retained Treasury Stock
Shares Amount Capital Earnings Shares Cost
Balance at January 1, 1995 ................ 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)
Net loss ............................... (211,156)
Treasury stock purchased,
$3.17 per share ...................... 135,600 (429,649)
Common stock issued for services,
$2.94 per share ...................... 10,000 10,000 19,374
Balance at December 31, 1997 .............. 12,761,100 $ 12,761,100 $ 3,667,707 $ 16,820,204 164,600 $ (528,302)
============ ============ ============ ============ ========= ===========
The accompanying notes are an integral part of the financial statements
EQUITY OIL COMPANY
STATEMENT OF CASH FLOWS
for the years ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Net loss .................................................................... $ (211,156) $(5,502,646) $(1,254,812)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Impairment of proved oil and gas properties ............................. 411,894 237,279 2,471,146
Equity loss and impairment of investment
in Symskaya Exploration, Inc. ........................................ 356,661 9,204,394 --
Depreciation, depletion and amortization ................................ 4,675,411 4,292,237 3,843,442
Partnership distributions in excess of income ........................... 136,508 134,892 144,717
(Gain) loss on property dispositions .................................... (243,423) 87,464 43,227
Change in other assets .................................................. 42,114 42,113 21,057
Deferred income tax benefit ............................................. (701,888) (3,130,574) (1,374,414)
Common stock issued for services ........................................ 29,374 103,313 46,500
Cash provided by operating activities before ----------- ----------- -----------
changes in working capital items 4,495,495 5,468,472 3,940,863
Increase (decrease) from changes in:
Accounts receivable and operator advances ............................ 19,135 (406,805) 133,624
Other current assets ................................................. (142,012) 5,893 (784)
Accounts payable and accrued liabilities ............................. (576,853) 735,915 11,438
Deferred lease rental revenue ........................................ -- -- (178,553)
Income taxes payable/receivable ...................................... 385,712 4,511 236,802
----------- ----------- -----------
Net cash provided by operating activities .......................... 4,181,477 5,807,986 4,143,390
----------- ----------- -----------
Cash flows from investing activities:
Sale of temporary cash investments .......................................... 49,802 906,165 1,510,761
Advances to Symskaya Exploration ............................................ (356,661) (3,043,952) (2,745,319)
Capital expenditures ........................................................ (9,547,036) (7,339,212) (7,179,528)
Proceeds from sale of oil and gas property .................................. 592,907 -- --
----------- ----------- -----------
Net cash used in investing activities .............................. (9,260,988) (9,476,999) (8,414,086)
----------- ----------- -----------
Cash flows from financing activities:
Exercise of incentive stock options ......................................... -- 84,375 681,525
Increase in other assets .................................................... -- -- (210,568)
Purchase of treasury stock .................................................. (429,649) (98,653) (51,181)
Borrowings under revolving credit facility .................................. 5,100,000 3,960,000 4,918,830
Payments on note payable .................................................... -- -- (920,000)
----------- ----------- -----------
Net cash provided by financing activities ............................ 4,670,351 3,945,722 4,418,606
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents ........................... (409,160) 276,709 147,910
Cash and cash equivalents at beginning of year ................................. 787,961 511,252 363,342
----------- ----------- -----------
Cash and cash equivalents at end of year ....................................... $ 378,801 $ 787,961 $ 511,252
=========== =========== ===========
Cash, cash equivalents and temporary
cash investments at end of year .............................................. $ 378,801 $ 837,763 $ 1,467,219
=========== =========== ===========
Supplemental disclosures of cash flow information: Cash paid during the year
for:
Income taxes .............................................................. $ 701,694 $ 419,121 $ 355,993
Interest .................................................................. $ 733,980 $ 164,678 $ 72,625
The accompanying notes are an integral part of the financial statements
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
A. The Company:
Equity Oil Company (the Company) is a Colorado corporation
engaged in oil and gas exploration, development and production in
the United States, Canada and Russia.
B. 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.
Exploratory geological and geophysical costs are expensed as
incurred. The costs of development wells are capitalized whether
productive or nonproductive.
The Company annually assesses undeveloped oil and gas properties
for impairment. 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 unit of
production method, based on
Continued
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
1. Significant Accounting Policies, Continued:
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.
D. Concentration of Credit Risk:
Substantially all of the Company's accounts receivable are within
the oil and gas industry, primarily from purchasers of oil and
gas (see Note 5). Although diversified within many companies,
collectibility is dependent upon the general economic conditions
of the industry. The receivables are not collateralized and, to
date, the Company has experienced minimal bad debts. The majority
of the Company's cash, cash equivalents and temporary cash
investments is held by three financial institutions located in
Salt Lake City, Utah, and by one financial institution in
Calgary, Alberta.
E. Equipment:
The provision for depreciation of equipment (other than oil and
gas equipment) is based on the straight-line method using asset
lives as follows:
Office equipment 10 years
Automobiles 3 years
When equipment is retired or otherwise disposed of, the cost and
accumulated depreciation are removed from the accounts and any
resulting gain or loss is included in the Statement of
Operations.
F. Foreign Operations:
Operations and investments in Canada have been translated into
U.S. dollar equivalents at the average rate of exchange in effect
at the transaction date. Foreign exchange gains or losses during
1997, 1996 and 1995 were not material.
Continued
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
1. Significant Accounting Policies, Continued:
G. Income (Loss) Per Common Share:
In 1997, the Company adopted the provisions of SFAS No. 128,
"Earnings per Share". All prior periods have been restated to
conform to the new requirements. Basic earnings per share was
computed by dividing the net loss by the weighted average number
of common shares outstanding and the effect of dilutive
unexercised stock options. Options to purchase 1,141,000,
1,076,000 and 904,000 shares of common stock at prices ranging
from $3.56 to $6.00 per share were outstanding at December 31,
1997, 1996 and 1995, respectively, but were not included in the
computation of diluted earnings per share because the effect
would have been antidilutive.
H. Estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
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.
Continued
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
The Company recorded non-cash impairment charges of $411,894 and
$237,279 for 1997 and 1996, respectively.
3. Income Taxes:
The provision for (benefit from) income taxes consists of the
following:
1997 1996 1995
---- ---- ----
Currently payable (receivable):
U.S. income taxes (including
alternative minimum tax) $ 18,584 $ 185,082 $ 188,666
State income taxes 70,512 108,463 26,262
Canadian income taxes 471,064 190,366 373,268
Taxes due from Canadian audit 391,291 - -
Deferred tax benefit (701,888) (3,130,574) (1,374,414)
--------- ---------- -------------
$ 249,563 $ (2,646,663) $ (786,218)
======== ============= ===========
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.
Continued
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
3. Income Taxes, Continued:
The components of the net deferred tax liability as of December 31,
1997 and 1996 were as follows:
1997 1996
---- ----
Deferred tax assets:
AMT credit carryforward $ 293,789 $ 326,104
State income taxes 26,068 42,347
Deferred compensation 13,370 9,211
Geological and geophysical costs 637,371 439,306
Capitalized interest 433,750 204,755
Foreign tax credit carryforward 501,257 265,301
Equity loss and impairment of investment
in Symskaya Exploration, Inc. 2,687,806 3,283,105
--------- ---------
4,593,411 4,570,129
Valuation allowance (501,257) (992,458)
--------- ---------
Total deferred tax asset 4,092,154 3,577,671
--------- ---------
Deferred tax liabilities:
Deferred income 95,465 20,505
Property and equipment 8,802,389 9,012,408
Pipeline partnership 27,332 79,678
--------- ---------
Total deferred tax liability 8,925,186 9,112,591
--------- ---------
Net deferred tax liability $4,833,032 $5,534,920
========= =========
The net deferred tax liability as of December 31, 1997 and 1996 is
reflected in the balance sheet as follows:
Current deferred tax asset (18,934) (31,053)
Long-term deferred tax liability 4,851,966 5,565,973
--------- ---------
$4,833,032 $5,534,920
========= =========
Continued
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
3. Income Taxes, Continued:
The provision for (benefit from) income taxes differs from the amount
that would be provided by applying the statutory U.S. Federal income
tax rate to the income (loss) before income taxes for the following
reasons:
1997 1996 1995
---- ---- ----
Federal statutory tax expense (benefit) . $ 13,058 $(2,770,765) $ (693,948)
Increase (reduction) in taxes
resulting from:
State taxes (net of federal
benefit) .......................... (5,323) (198,849) (68,376)
Canadian taxes (net of foreign
tax credits) .................... 113,882 (107,549) 287,670
Excess allowable percentage
depletion ......................... (162,297) (171,724) (166,509)
Investment tax and other credits ... (84,136) (124,933) (145,055)
Taxes due from Canadian audit ...... 374,379 -- --
Unrecognized capital loss related
to impairment of investment
in Symskaya Exploration, Inc. ... -- 727,157 --
----------- ----------- -----------
Provision for (benefit from) income taxes $ 249,563 $(2,646,663) $ (786,218)
=========== =========== ===========
At December 31, 1997, the Company had approximately $294,000 of
alternative minimum tax credit carryforwards which can be carried
forward indefinitely, and approximately $501,000 of foreign tax credit
carryforwards which expire in 2001.
4. Stock-Based Compensation Plan:
At December 31, 1997, the Company had one stock-based compensation
plan, which is described below. The Company applies APB Opinion No. 25
and related Interpretations in accounting for 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 SFAS No. 123, the
Company's net loss and loss per share would have been increased to the
pro forma amounts indicated below:
Continued
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
4. Stock-Based Compensation Plan, Continued:
1997 1996 1995
------------ ----------- ---------
Net loss .......................... As reported $ (211,156) $ (5,502,646) $ (1,254,812)
Pro forma $ (336,511) $ (5,635,133) $ (1,297,811)
Net loss per share ................ As reported $ (.02) $ (.43) $ (.10)
Pro forma $ (.03) $ (.44) $ (.10)
Note: Basic and diluted loss per share are 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 1997, 1996, and 1995
respectively: expected volatility of 50, 67 and 65 percent, risk-free
interest rates of 6.3, 5.4 and 7.2 percent; expected life of 5 years
and dividend yield of zero for all three years.
Continued
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
4. Stock-Based Compensation Plan, Continued:
1997 1996 1995
-------------------------------------------------------------------------------------------
Shares Weighted-Average Shares Weighted-Average Shares Weighted-Average
Fixed Options (000) Exercise Price (000) Exercise Price (000) Exercise Price
- ------------- --------- --------------------------- --------------------------- ----------------
Outstanding at beginning of year 1,076 $4.42 904 $4.22 1,047 $4.28
Granted ........................ 121 3.56 222 5.13 102 3.63
Exercised ...................... -- -- (39) 3.94 (171) 3.98
Forfeited ...................... (56) 4.37 (11) 4.38 (74) 4.75
--- ---- --- ---- --- ----
Outstanding at end of year .... 1,141 4.33 1,076 4.42 904 4.22
Options exercisable at year-end 880 775 743
===== ===== =====
Weighted-average fair value of
options granted during the year $1.56 $3.06 $2.18
The following table summarizes information about fixed stock options
outstanding at December 31, 1997:
Options Outstanding Options Exercisable
Number Weighted-Average Number
Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise Prices at 12/31/97 Contractual Life Exercise Price at 12/31/97 Exercise Price
- ------------------- --------------- -------------------- ------------------ --------------- ----------------
$3.56 to $3.56 260,500 7.98 years $3.56 139,000 $3.56
$3.63 to $4.00 290,000 5.52 $3.86 263,600 $3.88
$4.22 to $5.00 292,000 6.44 $4.51 263,200 $4.53
$5.13 to $5.50 257,500 8.64 $5.18 172,700 $5.20
$6.00 to $6.00 41,000 2.16 $6.00 41,000 $6.00
--------- ---- ----- ------- -----
1,141,000 6.90 $4.33 879,500 $4.38
========= ==== ===== ======= =====
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.
Continued
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
5. Geographic Segment Information, Continued:
Revenue from a major U.S. oil company accounted for approximately
38 percent of total revenues in 1997, 45 percent of total revenues
in 1996, and 51 percent of total revenues in 1995.
Information about the Company's operations in the U.S., Canada and
Russia for the years ended December 31, 1997, 1996, and 1995 is as
follows:
1997: United States Canada Russia Total
Revenues $ 15,631,738 $ 2,313,234 $ - $ 17,944,972
================== ================ ================ ================
Operating profit (loss) $ 1,815,391 $ 1,361,851 $ (356,661) $ 2,820,581
General and administrative
expenses (2,048,194) - - (2,048,194)
Interest expense (733,980) - - (733,980)
----------------- ---------------- ---------------- ----------------
Income (loss) before
income taxes $ (966,783) $ 1,361,851 $ (356,661) $ 38,407
================== ================ ================ ================
Identifiable assets at
December 31, 1997 $ 49,661,110 $ 3,880,529 $ - $ 53,541,639
================== ================ ================ ================
Additions to property and
equipment $ 9,291,931 $ 255,105 $ - $ 9,547,036
================== ================ ================ ================
Depreciation, depletion and
amortization $ 4,385,013 $ 290,398 $ - $ 4,675,411
================== ================ ================ ================
Continued
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
5. Geographic Segment Information, Continued:
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
========== ========= ========= ==========
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
========== ========= ========= ==========
Continued
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
6. Symskaya Exploration:
Symskaya Exploration, Inc., a company in the development stage and
a Texas corporation (Symskaya), was formed on November 25, 1991,
and is engaged in oil and gas exploration in Russia. Symskaya
holds a Combined License (License) which grants it the exclusive
right to explore, develop and produce hydrocarbons on a contract
area totaling approximately 1,100,000 acres in the Yenisysk
District of the Krasnoyarsk Krai in the Russian Federation. The
License has a primary term of 25 years from November 15, 1993.
The work to be performed and the obligations and rights of
Symskaya are set forth in the License and a Production Sharing
Agreement (PSA) which is an integral part of the License. Under
the License and PSA, Symskaya will provide funding for all
exploration and development and will recover these costs from 80%
of hydrocarbon production after payment of an 8% royalty. The
remaining 20% of any hydrocarbon production, net of royalty, will
be shared by Symskaya and the Russian government based on the rate
of production. As of December 31, 1997, the Symskaya area had not
received approval by the Russian federal government as a
production sharing area.
Minimum expenditures required under the License and PSA total
$12,000,000 during the first five years of the License term, which
began on November 15, 1993. As of December 31, 1997, Symskaya had
satisfied all of the minimum expenditures required.
Symskaya is owned 50% each by Equity Oil Company (Equity) and
Leucadia National Corporation, (Leucadia). Leucadia acquired 50%
of the stock of Symskaya effective January 1, 1994, in exchange
for their commitment to spend up to $6,000,000, in an amount equal
to that spent by Equity, towards the Symskaya project through the
drilling, completion and/or plugging and abandonment of the
initial test well, the Lemok #1. Pursuant to a Shareholders'
Agreement, Leucadia was not required to pay any part of the
amounts previously advanced by Equity under a Loan Agreement with
Symskaya, with the exception of one-half (1/2) of the interest on
a $1,740,519 loan between Equity and Symskaya. The loan reflects
the initial investment by Equity in Symskaya prior to Leucadia's
ownership.
Amounts advanced by Equity and Leucadia after January 1, 1994 are
treated as interest-bearing notes payable or equity, as mutually
agreed upon by the respective companies. The shareholder agreement
with Leucadia also requires that Leucadia share equally in the
payment of the one (1%) percent royalty obligation in favor of
Coastline Exploration, Inc. on future revenues from the Symskaya
project. The Company's President serves on Leucadia's Board of
Directors.
Continued
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
6. Symskaya Exploration, Continued:
The Company's investment in Symskaya is being accounted for using
the equity method of accounting.
In 1996, Symskaya plugged and abandoned the Lemok #1 well, and
charged the drilling costs of the well to expense. Due to the
uncertainty relating to Symskaya's obtaining additional outside
financing and proceeding with development of the License area, all
other capitalized costs were also written off, resulting in a
total charge to expense of $9,204,394. 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. The Company
has no current plans to fund future exploratory drilling. The
Company's 50% share of Symskaya's net loss in 1997 was $356,661.
Summarized financial information concerning Symskaya Exploration,
Inc. is as follows:
As of As of
December 31, December 31,
1997 1996
Current assets $ 87,695 $ 249,692
Non-current assets 6,053,629 5,876,700
Total assets 6,141,324 6,126,392
Current liabilities 13,699 98,210
Non-current liabilities 14,242,094 12,653,243
Accumulated deficit (12,776,251) (11,102,325)
Total liabilities and
stockholders' equity $ 6,141,324 $ 6,126,392
Continued
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
6. Symskaya Exploration, Continued:
For the year ended For the year ended
December 31, December 31,
1997 1996
Gross revenues $ 14,217 $ 59,405
Net (loss) $ (1,673,926) $(10,974,120)
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 commitment was raised to $15 million during 1997.
The terms of the Facility call for interest payments only, at the
lower of prime or LIBOR plus 2%, until June 30, 1999, at which
time it converts to a 4 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. As of December 31, 1997 the outstanding
balance under the Facility was $13,978,830 at an average interest
rate of 7.69%.
Future maturities on the Facility as of December 31, 1997 are as
follows:
1998 $ -
1999 1,747,354
2000 3,494,708
2001 3,494,708
2002 3,494,708
2003 1,747,352
---------
$13,978,830
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.
Continued
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
7. Note Payable, Continued:
As of December 31, 1997, 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.
8. Quarterly Financial Data (Unaudited):
Quarterly financial information for the years ended December 31,
1997 and 1996 is as follows:
1997 Quarter Ended: . December 31 September 30 June 30 March 31
----------- ----------- ----------- -----------
Net revenues ........ $ 4,038,890 $ 3,833,655 $ 3,978,440 $ 4,917,278
Gross margin ........ (844,586) (415,603) 712,019 1,531,928
Net income (loss) ... (1,104,583) (48,158) 161,210 780,375
Net income (loss) per
common share ..... $ (.09) $ (.00) $ .01 $ .06
=========== =========== =========== ===========
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 in 1996 includes the effects of
the equity loss in Symskaya Exploration, Inc. Fourth quarter
gross margin in 1996 includes the writedown of the Company's
remaining investment in Symskaya Exploration, Inc. See Note 6.
Continued
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
9. Disclosures About Oil and Gas Producing Activities:
Capitalized Costs:
United States Canada Russia Total
1997:
Unproved oil and gas
properties $ 3,471,138 $ 33,224 $ 3,504,362
Proved oil and gas
properties 99,863,977 9,243,784 109,107,761
----------- ---------- -----------
103,335,115 9,277,008 112,612,123
Accumulated depreciation,
depletion and amortization (58,065,779) (6,292,480) (64,358,259)
----------- ---------- -----------
Net capitalized costs $ 45,269,336 $ 2,984,528 $ 48,253,864
=========== ========== ===========
Symskaya, equity method
(see Note 6) $ -
==========
1996:
Unproved oil and gas
properties $ 2,532,503 $ 33,224 $ 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
========== ===========
Continued
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:
1997: United States Canada Russia Total
Acquisition of properties:
Proved $ 3,226,494 - - $ 3,226,494
Unproved 1,227,117 - - 1,227,117
Exploration costs 4,468,531 $ 25,103 - 4,493,634
Development costs 4,169,802 43,125 - 4,212,927
Symskaya, equity method - - $ 356,661 356,661
1996:
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
Continued
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
9. Disclosures About Oil and Gas Producing Activities, Continued:
Results of Operations (Unaudited):
1997: United States Canada Russia Total
Oil and gas sales $14,150,670 $2,306,378 $16,457,048
Production costs (5,300,909) (639,899) (5,940,808)
Exploration expenses (3,718,531) (21,086) (3,739,617)
Depreciation, depletion and amortization (4,385,015) (290,398) (4,675,413)
Impairment of proved
oil and gas properties (411,894) (411,894)
Equity loss in Symskaya Exploration, Inc. $ (356,661) (356,661)
----------- --------- ---------- ----------
334,321 1,354,995 (356,661) 1,332,655
Imputed income tax benefit (expense) 77,745 (245,790) 133,748 (34,297)
----------- --------- ---------- ----------
Results of operations from producing activities $ 412,066 $1,109,205 $ (222,913) $ 1,298,358
=========== ========= ========== ==========
1996:
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)
========== ========== ===========
The imputed income tax benefit (expense) is hypothetical and determined without
regard to the Company's deduction for general and administrative and interest
expense.
Continued
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
9. Disclosures About Oil and Gas Producing Activities, Continued:
Reserves and Future Net Cash Flows (Unaudited):
Estimates of reserve quantities and related future net cash
flows are calculated using unescalated year-end oil and gas
prices and operating costs, and may be subject to substantial
fluctuations based on the prices in effect at the end of each
year. Reserve revisions occur when the economic limit of a
property is lengthend or shortened due to changes in commodity
pricing. The following table sets forth the weighted average
prices used in calculating estimated reserve quantities and
future net cash flows at the end of 1997, 1996, and 1995:
United States Canada Total
Oil Gas Oil Gas Oil Gas
December 31, 1997 $15.49 $2.13 $12.35 $1.51 $14.99 $2.03
December 31, 1996 $24.80 $3.28 $22.26 $1.52 $24.36 $2.84
December 31, 1995 $19.04 $1.52 $14.48 $1.10 $18.02 $1.38
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.
Continued
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
9. Estimates of Proved Oil and Gas Reserves, Continued:
United States Canada Total
December 31, 1997: Oil Gas Oil Gas Oil Gas
- ------------------------------------------------------------ ------- ------- ------- ------- ------- -------
Proved developed and undeveloped reserves:
Beginning of year ........................................ 7,252 14,910 1,117 2,707 8,369 17,617
Revisions of previous estimates .......................... (806) (694) 251 1,194 (555) 500
Acquisition of minerals in place ......................... 1,085 438 -- -- 1,085 438
Extensions and discoveries ............................... 202 2,423 -- -- 202 2,423
Sales of minerals in place ............................... (45) -- -- -- (45) --
Production ............................................... (520) (1,620) (116) (449) (636) (2,069)
------- ------- ------- ------- ------- -------
End of year .............................................. 7,168 15,457 1,252 3,452 8,420 18,909
======= ======= ======= ======= ======= =======
Proved developed reserves:
Beginning of year ........................................ 7,219 11,133 1,117 2,707 8,336 13,840
End of year .............................................. 6,972 11,932 1,252 3,452 8,224 15,384
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 (234) 49 104 225 (130)
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) (1,326) (119) (588) (637) (1,914)
------- ------- ------- ------- ------- -------
End of year .............................................. 7,252 14,910 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
United States Canada Total
December 31, 1995: Oil Gas Oil Gas Oil Gas
- ------------------------------------------------------------ ------- ------- ------- ------- ------- -------
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 (23) 4 (189) 102 (212)
Acquisition of minerals in place ......................... 701 1,129 61 152 762 1,281
Extensions and discoveries ............................... 3 920 196 274 199 1,194
Production ............................................... (491) (880) (129) (571) (620) (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
Continued
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
9. Disclosures About Oil and Gas Producing Activities, Continued:
Standardized Measure of Discounted Future Net Cash Flows and
Changes Therein Relating to Proved Oil and Gas Reserves
(Unaudited):
Thousands of Dollars
1997: United States Canada Total
Future cash inflows ........................... $ 149,066 $ 19,350 $ 168,416
Future production and development costs ....... (93,945) (8,470) (102,415)
--------- --------- ---------
Future net cash flows before income taxes ..... 55,121 10,880 66,001
10% annual discount for estimated timing
of cash flows .............................. (24,778) (3,814) (28,592)
--------- --------- ---------
Standardized measure of discounted future
net cash flows before income taxes ......... 30,343 7,066 37,409
Future income taxes, net of 10% annual discount (6,071) (2,439) (8,510)
--------- --------- ---------
Standardized measure of discounted future
net cash flows ............................. $ 24,272 $ 4,627 $ 28,899
========= ========= =========
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 net cash flows before income taxes ..... 132,064 21,810 153,874
10% annual discount for estimated timing
of cash flows .............................. (64,955) (9,917) (74,872)
--------- --------- ---------
Standardized measure of discounted future
net cash flows before income taxes ......... 67,109 11,893 79,002
Future income taxes, net of 10% annual discount (19,462) (4,804) (24,266)
--------- --------- ---------
Standardized measure of discounted future
net cash flows ............................. $ 47,647 $ 7,089 $ 54,736
========= ========= =========
Continued
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 net cash flows before income taxes ..... 72,023 15,676 87,699
10% annual discount for estimated timing
of cash flows .............................. (38,438) (6,489) (44,927)
--------- --------- ---------
Standardized measure of discounted future
net cash flows before income taxes ......... 33,585 9,187 42,772
Future income taxes, net of 10% annual discount (8,756) (3,569) (12,325)
--------- --------- ---------
Standardized measure of discounted future
net cash flows ............................. $ 24,829 $ 5,618 $ 30,447
========= ========= =========
Future net cash flows were computed using year-end prices and
costs, and year-end statutory tax rates with consideration of
future tax rates already legislated (adjusted for permanent
differences that related to proved oil and gas reserves).
Principal Sources of Change in the Standardized Measure of
Discounted Future Net Cash Flow:
Thousands of Dollars
1997 1996 1995
Sales and transfers of oil and gas produced,
net of production costs ................... $(10,516) $(10,203) $ (7,166)
Net changes in prices and production costs ... (45,280) 27,483 3,147
Extensions and discoveries, less related costs 1,639 2,374 1,274
Purchases of minerals in place ............... 3,787 7,174 3,804
Sales of minerals in place ................... (339) (116) --
Changes in estimated future development costs (1,447) 938 (203)
Revisions of previous quantity estimates ..... (1,573) 1,495 369
Accretion of discount ........................ 7,912 4,286 3,409
Net change in income taxes ................... 18,100 (12,045) (1,969)
Changes in production rates (timing) and other 1,880 2,903 3,561
-------- -------- --------
$(25,837) $ 24,289 $ 6,226
======== ======== ========
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
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 13, 1998 is incorporated herein by refer ence 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 13, 1998 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 13, 1998 is incorporated herein by reference in answer to
this item.
ITEM 13. Certain Relationships and Related Transactions
None.
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K:
(a) (1) Financial Statements: Page
Report of Independent Accountants 16
Financial Statements:
Balance Sheet as of December 31, 1997 and 1996 17
Statement of Operations for the years ended
December 31, 1997, 1996 and 1995 18
Statement of Changes in Stockholders' Equity
for the years ended December 31, 1997, 1996
and 1995 19
Statement of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 20
Notes to Financial Statements 21
(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) Amended By-Laws. 45
(10) Material Contracts. Change in Control Compensation Agreements
for Paul M. Dougan, James B. Larson, and Clay Newton. 56
(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. 74
(b)Reports on Form 8-K
None
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
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: March 10, 1998
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/ Douglas W. Brandrup /s/ Joseph C. Bennett
Director Director
March 10, 1997 March 10, 1998
- -------------------------- ---------------------
Date Date
/s/ William D. Forster /s/ Philip J. Bernhisel
Director Director
March 10, 1997 March 10, 1998
- -------------------------- ---------------------
Date Date
/s/ Randolph G. Abood /s/ W. Durand Eppler
Director Director
March 10, 1997 March 10, 1998
- -------------------------- ---------------------
Date Date
/s/ William P. Hartl
Director
March 10, 1997
- ---------------------------
Date