Back to GetFilings.com
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, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission file number 0-610
EQUITY OIL COMPANY
[Exact name of registrant as specified in its charter]
Colorado 87-0129795
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
10 West Broadway, Suite 806 84101
Salt Lake City, Utah (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (801) 521-3515
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (par value, $1 per share)
[Title of class]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x/ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ x/ ]
As of March 10, 1999, 12,629,440 common shares were outstanding, and the
aggregate market value of voting stock held by non-affiliates of the registrant
was approximately $15,000,000.
Documents Incorporated by Reference
1. Definitive proxy statement to be filed in connection with Issuer's Annual
Stockholders' Meeting to be held on May 12, 1999 and more particularly the
information contained on pages 2 through 5 are incorporated by reference into
Part III of this report.
Total Pages 42
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, Incorporated
(Symskaya) which is licensed to operate in Russia. Headquartered in Salt Lake
City, Utah, the Company also maintains an exploration office in Denver,
Colorado, and a field office in Vernal, Utah. The Company has 16 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 the
areas of focused exploration drilling, development drilling and exploitation and
the acquisition of proved reserves.
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 1996 and 1997, the Company replaced a
significant amount of its production through the purchase of producing
properties. These purchases have, in turn, produced additional developmental and
enhancement projects. No producing properties were purchased in 1998.
The Company has conducted international exploration in Russia through its 50%
ownership of Symskaya. Symskaya operations were significantly curtailed during
1998 and will be again curtailed in 1999. 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, while their methods of determining prices are not within the
control of the Company, it is assumed they are influenced by regional, national
and international factors relating to oil supply and demand (see discussion
under Major Customers).
The bulk of the Company's natural gas production occurs in Wyoming, California,
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 65% of the Company's oil and gas revenues come from
the sale of oil, the seasonal impact on total oil and gas sales is not
significant.
MAJOR CUSTOMERS
All oil and gas produced in the U.S. or Canada is sold to unaffiliated pipeline,
refining, or crude oil purchasing companies. These companies may be the
operators of the fields where the product is produced, owners of the pipelines
which transport the products, or other third-party purchasers. While certain
entities purchase more than 10% of the Company's oil and gas production,
previous changes in purchasers have not resulted in an interruption of
production or transportation, and consequently have not had a material adverse
effect on the business of the Company.
COMPETITION
Equity is part of a highly competitive industry composed of many companies that
are significantly larger and possess greater resources than the Company. These
include major oil companies as well as large independent exploration and
production companies. Their size and resources may allow these parties to
operate at a greater competitive advantage than Equity.
During 1998, 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.
The Company owns a 50% interest in Symskaya Exploration, Incorporated, which is
licensed to operate in Russia. Further discussion of this venture is found in
ITEM 2. Properties, under the caption Present Activity, and in Footnotes 6 and 9
in the financial statements.
ITEM 2. PROPERTIES
The principal properties of the Company consist of developed and undeveloped oil
and gas leasehold interests. Developed leases are comprised of properties with
existing production, where lease terms continue as long as oil and/or gas is
produced. Undeveloped leases include unproven acreage on both public and private
lands. The leases have set terms and terminate at the time specified in each
lease unless oil and gas in commercial quantities are discovered prior to that
time.
The Company also has a fee interest in 6,996 net acres of oil shale lands in
Colorado. These properties have not generated significant revenue for the
Company. 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, 1998. No estimates of
reserves have been filed with or included in any report to any other federal
agency during 1998.
PRODUCTION
The following table sets forth the Company's production, average sales prices,
and average lifting costs by geographic area for 1998, 1997, and 1996:
===============================================================================================================================
1998 1997 1996 1998 1997 1996
Oil Oil Oil Gas Gas Gas
Area (Bbls) (Bbls) (Bbls) (MMCF) (MMCF) (MMCF)
===============================================================================================================================
Production
- -------------------------------------------------------------------------------------------------------------------------------
Colorado 332,230 366,319 363,080 117 170 106
- -------------------------------------------------------------------------------------------------------------------------------
Texas 22,291 25,359 29,186 145 211 315
- -------------------------------------------------------------------------------------------------------------------------------
Montana 20,434 26,103 32,845 34 16 17
- -------------------------------------------------------------------------------------------------------------------------------
Utah 20,658 18,745 16,769 - - -
- -------------------------------------------------------------------------------------------------------------------------------
Wyoming 131,943 76,190 68,924 733 660 519
- -------------------------------------------------------------------------------------------------------------------------------
North Dakota 67,906 7,007 6,768 31 3 3
- -------------------------------------------------------------------------------------------------------------------------------
Oklahoma - 435 607 - - -
- -------------------------------------------------------------------------------------------------------------------------------
California - - - 1,032 560 365
- -------------------------------------------------------------------------------------------------------------------------------
Other 5 7 13 - - -
- -------------------------------------------------------------------------------------------------------------------------------
Total U.S. 595,467 520,165 518,192 2,092 1,620 1,325
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Alberta 75,015 92,376 113,756 277 439 586
- -------------------------------------------------------------------------------------------------------------------------------
B.C. 21,352 23,371 4,769 69 10 2
- -------------------------------------------------------------------------------------------------------------------------------
Total Canada 96,367 115,747 118,525 346 449 588
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Grand Total 691,834 635,912 636,717 2,438 2,069 1,913
===============================================================================================================================
===============================================================================================================================
Average Price
- -------------------------------------------------------------------------------------------------------------------------------
U.S. $12.28 $19.49 $21.49 $ 1.95 $2.21 $1.79
- -------------------------------------------------------------------------------------------------------------------------------
Canada $11.43 $15.36 $16.99 $ 1.15 $1.34 $1.01
- -------------------------------------------------------------------------------------------------------------------------------
Total $12.16 $18.74 $20.65 $ 1.83 $2.02 $1.55
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Lifting Costs
- -------------------------------------------------------------------------------------------------------------------------------
U.S. $ 6.11 $ 7.53 $ 7.92 $ .97 $ .85 $ .66
- -------------------------------------------------------------------------------------------------------------------------------
Canada $ 4.48 $ 4.15 $ 6.09 $ .40 $ .36 $ .37
- -------------------------------------------------------------------------------------------------------------------------------
Total $ 5.88 $ 6.92 $ 7.58 $ .89 $ .75 $ .57
===============================================================================================================================
PRODUCTIVE WELLS AND ACREAGE
The location and quantity of Equity's productive wells and acreage as of
December 31, 1998 are as follows:
==================================================================
Productive Wells: Gross Net
- ------------------------------------------------------------------
Oil:
- ------------------------------------------------------------------
United States 686 88.311
- ------------------------------------------------------------------
Canada 384 11.896
- ------------------------------------------------------------------
Gas:
- ------------------------------------------------------------------
United States 71 18.872
- ------------------------------------------------------------------
Canada 11 2.209
- ------------------------------------------------------------------
Total Productive Wells 1,152 121.288
- ------------------------------------------------------------------
- ------------------------------------------------------------------
Developed Acreage
- ------------------------------------------------------------------
United States 118,128 13,046
- ------------------------------------------------------------------
Canada 127,120 2,946
- ------------------------------------------------------------------
Total Developed Acreage 245,248 15,992
==================================================================
UNDEVELOPED LEASEHOLD ACREAGE
The following table sets forth the Company's undeveloped oil and gas lease
acreage as of December 31, 1998 by geographic area:
================================================================================
Gross Net
Area Acreage Acreage
- --------------------------------------------------------------------------------
Colorado 23,389 15,480
- --------------------------------------------------------------------------------
Texas 2,647 1,257
- --------------------------------------------------------------------------------
Montana 31,678 3,164
- --------------------------------------------------------------------------------
Utah 7,950 880
- --------------------------------------------------------------------------------
Wyoming 52,724 34,646
- --------------------------------------------------------------------------------
California 32,714 8,447
- --------------------------------------------------------------------------------
North Dakota 15,105 8,041
- --------------------------------------------------------------------------------
Total U.S. 166,207 71,915
- --------------------------------------------------------------------------------
Alberta 20,697 3,571
- --------------------------------------------------------------------------------
Total Canada 20,697 3,571
- --------------------------------------------------------------------------------
Grand Total 186,904 75,486
================================================================================
Through its 50% ownership in Symskaya, the Company also has an indirect 50%
interest in an additional 1,100,000 gross acres in Russia. Further discussion of
this venture is found in ITEM 2. Properties, under the caption Present Activity,
and in Footnotes 6 and 9 to the financial statements.
DRILLING ACTIVITY
During 1998, the Company participated in the drilling of 12 gross wells. Of this
total, 7 were completed as producing oil and gas wells and 5 were plugged and
abandoned as dry holes.
================================================================================
Gross exploratory wells drilled: Status 1998 1997 1996
- --------------------------------------------------------------------------------
United States Productive 6 13 15
- --------------------------------------------------------------------------------
Dry 5 12 6
- --------------------------------------------------------------------------------
Canada Productive - - -
- --------------------------------------------------------------------------------
Dry - - -
- --------------------------------------------------------------------------------
Gross development wells drilled:
- --------------------------------------------------------------------------------
United States Productive 1 5 3
- --------------------------------------------------------------------------------
Dry - - -
- --------------------------------------------------------------------------------
Canada Productive - - 1
- --------------------------------------------------------------------------------
Dry - - -
================================================================================
================================================================================
Net exploratory wells drilled: Status 1998 1997 1996
- --------------------------------------------------------------------------------
United States Productive 2.18 4.21 3.95
- --------------------------------------------------------------------------------
Dry 2.10 5.99 1.64
- --------------------------------------------------------------------------------
Canada Productive - - -
- --------------------------------------------------------------------------------
Dry - - -
- --------------------------------------------------------------------------------
Net development wells drilled:
- --------------------------------------------------------------------------------
United States Productive .40 1.74 1.19
- --------------------------------------------------------------------------------
Dry - - -
- --------------------------------------------------------------------------------
Canada Productive - - .50
- --------------------------------------------------------------------------------
Dry - - -
================================================================================
PRESENT ACTIVITY
In 1998, eleven of the twelve wells that the Company participated in were
exploration wells and one was a development well. The drilling resulted in the
completion of six gas wells, one oil well and five dry holes. Five of the gas
wells were drilled on 3-D geophysical surveys in the Sacramento Basin of
northern California, and the oil well was completed in Golden Valley County,
North Dakota. Although total drilling activity decreased by 60% from the 30
wells drilled in 1997, the seven wells completed in 1998 added new reserves of
361,000 barrels of oil and 2.5 billion cubic feet of gas to the company's
reserve base, compared to 41,000 barrels and 2.4 billion cubic feet added by the
completion of eighteen wells in 1997.
The projects in the Sacramento Basin are becoming increasingly important to the
Company. Gas production from the basin now makes up 40% of total Company gas
production. The Company's drilling efforts there are focused on prospects
defined by 131 square miles on nine 3-D seismic surveys conducted during the
last four years. Including the 6 wells drilled in 1998, 31 of 49 wells drilled
in the basin have been completed as gas wells; an overall drilling success ratio
of 63%. Equity's working interest in the wells and 3-D surveys ranges from 18.75
to 60%. Gross production at December 31, 1998 from the wells completed in 1998
was approximately 13.1 million cubic feet per day, 3.2 million cubic feet net to
Equity. Of particular importance to the Company, three of the 1998 gas
completions are on two 3-D surveys operated by Equity where the Company has a
higher working interest, and further, these wells are three of the most
productive wells drilled to date on the Sacramento Basin 3-D surveys.
Two of the Sacramento Basin gas discoveries were on the Company's 16 square mile
Merlin 3-D project. The initial discovery, the #1-15 Henning, was completed in
the Forbes formation in February, and since completion has recorded cumulative
production of 607 million cubic feet of gas and continues to produce at a rate
of 900,000 cubic feet per day. The second well, the Equity #1-22 Otto Lohse, is
presently producing at a rate of 300,000 cubic feet per day with cumulative gas
sales to date of 230 million cubic feet. In addition, a second Forbes reservoir
in this well drill stem tested at a rate of 7.5 million cubic feet per day
proving additional behind pipe reserves. Equity operates and has a 50% working
interest in the wells and the Merlin survey. Two additional wells on the Merlin
survey are planned for 1999.
A third gas discovery, the Equity #1-8 Wescott, was drilled on the Company's 17
square mile Davis Ranch 3-D survey in the Sacramento Basin. The well is
presently producing at a rate of 2 million cubic feet per day and has cumulative
gas sales of 481 million cubic feet since August. Equity operates and maintains
a 60% working interest in the well. One additional well on the Davis Ranch
survey is planned for 1999.
In addition to further drilling on Company operated 3-D projects in the
Sacramento Basin in 1999, Equity expects to participate in additional drilling
on non-operated projects. At year end 1998, the Company estimates that seven 3-D
surveys in which it currently has an interest may contain as many as 30
prospects that may be drilled over the next several years.
In 1999, Equity also expects to participate in at least one well on the Sequoia
prospect in 1999. Sequoia is a 36 square mile 3-D survey in the northern San
Joaquin Basin of California. Seismic processing and interpretation of the survey
data was completed early in 1998, and the analysis of the data developed 21
seismic leads that may develop into drillable prospects. Equity has a 30%
interest in the survey.
Equity participated in the drilling of one of the most prolific wells in its
history in North Dakota during 1998. The Westport #24- 15 Beaver Creek in Golden
Valley County, North Dakota, was initially completed as a pumping oil well in
the Duperow formation at a rate of 390 barrels per day. After production testing
for one month, the Duperow producing zone was isolated and the well was
recompleted as a flowing oil well in the Nisku formation at an initial rate of
1,800 barrels and 1.3 million cubic feet of gas per day. At year end the well
was still flowing at a rate of 1,000 barrels and 250,000 cubic feet per day and
had gross cumulative production of 223,000 barrels and 94 million cubic feet of
gas. Equity has a 32.5 % working interest in the well. Westport Oil and Gas
Company operates the well and holds the remaining working interest. The Company
is presently evaluating further drilling opportunities associated with the
Beaver Creek discovery.
COST CONTROLS
Operating with low oil prices requires strict attention to cost control at all
levels in the Company. Equity has been successful in reducing operating costs in
each of the last two years, and will endeavor to make additional reductions
during 1999. In addition, the Company has taken steps to further reduce 1999
general and administrative overhead, including a freeze on salaries, a 50% cut
in payroll benefits, and staff reductions.
SYMSKAYA EXPLORATION
In 1998, Symskaya entered into a Bottom Hole Contribution Agreement with the
Committee for Natural Resources of the Krasnoyarsk Krai in Eastern Siberia to
support the drilling of the Averinskaya - 150 well, an exploratory well that is
being drilled near the town of Yeniseysk. The well is adjacent to the southern
block of acreage that Symskaya holds as part of its 1.1 million acre
exploration, development and production license. The well is being drilled to
evaluate the oil and gas potential of the same geologic section that Symskaya
targeted in the drilling of its Lemok No. 1 well on the northern acreage block
of its license area.
In exchange for a nominal payment, Symskaya will receive all pre- drilling data
from the well, drilling data acquired during the drilling of the well, and all
final reports on the well including logs, test results, core and drill cutting
samples, and samples of any oil, water or gas recovered during drilling. In
addition, Symskaya personnel will have complete access to the drill site during
drilling, the right to collect drill cuttings and other samples, and the right
to witness all coring and testing. The well, which is expected to be completed
during 1999, is projected to be drilled to a total depth of 11,500 feet.
Barring major developments from the Averinskaya-150 well and changes in federal
and local policies regarding production sharing, further attempts to drill
Symskaya's prospect are unlikely, absent additional outside financing. The
economy of the Russian Federation is currently in a period of instability. The
impact includes a severe devaluation of the currency and an increasing rate of
inflation. The return to economic stability is dependent to a large extent on
the effectiveness of the fiscal measures taken by the government and other
actions beyond the Company's control. Russia's current economic environment,
coupled with the depression in world oil markets, has made it difficult for
Symskaya to attract interested parties in their project.
DELIVERY COMMITMENTS
The Company is not obligated to provide any fixed or determinable quantity of
oil or gas in the future under any existing contracts or agreements.
ITEM 3. LEGAL PROCEEDINGS
No material legal proceedings are pending.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year covered by this report, no matters
were submitted to the security holders for a vote, and no proxies were
solicited.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED MATTERS
The Company's stock is traded on the over-the-counter market and quoted over the
NASDAQ National Market System using the symbol EQTY. High and low closing prices
for 1998 and 1997 are as follows:
================================================================================
Quarter High Low
- --------------------------------------------------------------------------------
1998 - 4th 1 15/16 21/32
- --------------------------------------------------------------------------------
3rd 2 7/16 1 13/16
- --------------------------------------------------------------------------------
2nd 2 13/16 2
- --------------------------------------------------------------------------------
1st 3 1/16 2 1/2
- --------------------------------------------------------------------------------
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
================================================================================
The approximate number of registered stockholders of the Company as of March 10,
1999 is 1,574.
No unregistered equity securities of the registrant have been sold during the
period covered by this report.
ITEM 6. SELECTED FINANCIAL DATA
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
Oil and Gas Sales ........ $ 12,720,876 $ 16,457,048 $ 16,115,125 $ 12,259,739 $ 11,713,498
Other Income ............. 377,282 1,023,037 312,759 457,837 196,431
Lease Operating
Costs .................... 6,233,955 5,940,808 5,912,128 5,093,782 4,658,115
DD&A ..................... 5,029,119 4,675,411 4,292,237 3,843,442 5,011,155
Impairment of
Proved Oil and
Gas Properties ........... 4,015,158 411,894 237,279 2,471,146 -0-
Equity Loss and Impairment
of Investment in Symskaya
Exploration, Inc. ........ 446,758 356,661 9,204,394 -0- -0-
3-D Seismic .............. 431,075 626,525 757,964 237,604 -0-
Exploration
Expense .................. 2,383,163 3,026,550 2,336,405 1,633,612 1,718,339
General and
Administrative ........... 1,914,590 2,048,194 2,030,811 1,908,778 1,560,675
Loss Before
Cumulative Effect
of Accounting
Changes .................. (5,814,884) (211,156) (5,502,646) (1,254,812) (360,830)
Basic Loss Per
Common Share Before
Cumulative Effect of
Accounting Changes ....... $ (.46) $ (.02) $ (.43) $ (.10) $ (.03)
============ ============ ============ ============ ============
Total Assets ............. $ 47,271,168 $ 53,541,639 $ 50,181,437 $ 53,947,050 $ 51,908,336
Long-Term Debt ........... $ 16,500,000 $ 13,978,830 $ 8,878,830 $ 4,918,830 $ 460,000
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL. The profitability of the Company's operations in any particular
accounting period will be directly related to the average realized prices of oil
and gas sold, the volume of oil and gas produced and the results of acquisition,
development and exploration activities. The average realized prices of oil and
gas will fluctuate from one period to another due to market conditions. The
aggregate amount of oil and gas produced may fluctuate based on development and
exploitation of oil and gas reserves and other factors. Production rates,
value-based production taxes, labor and maintenance expenses are expected to be
the principal influences on operating costs. Accordingly, the results of
operations of the Company may fluctuate from period to period.
OIL AND GAS RESERVES. During 1998, crude oil prices reached 12 year lows, and
remained near those levels for much of the year. Natural gas prices in 1998 were
9% lower than 1997. This decrease in prices had a significant effect on the
volumes and values of the Company's reserves. Estimates of reserve quantities
and related future net cash flows are calculated using unescalated year-end oil
and gas prices and operating costs, and may be subject to substantial
fluctuations based on the prices in effect at the end of each year. The
following table sets forth a comparison of year-end reserves, the weighted
average prices used in calculating estimated reserve quantities and future net
cash flows, pre-tax future net cash flows discounted at 10%, and per barrel of
oil equivalent discounted cash flows at the end of 1998, 1997 and 1996
(quantities in thousands, except for pricing and per barrel of oil equivalent
amounts):
SEC-10
Year-end Year-end SEC-10 pre-tax
proved reserves prices pre-tax values
(MBBLs) (MMCF)
Oil Gas BOE* Oil Gas values per BOE
--- --- ---- --- --- ------ -------
12/31/98 6,193 19,010 9,361 $10.80 $1.95 $25,210 $2.69
12/31/97 8,420 18,909 11,571 $14.99 $2.03 $37,409 $3.23
12/31/96 8,369 17,617 11,305 $24.36 $2.84 $79,002 $7.00
* - gas converted at 6,000 Mcf per barrel.
Reserve revisions occur when the economic limit of a property is lengthened or
shortened due to changes in commodity pricing. The following excerpt from the
footnotes to the Company's financial statements shows the effect of depressed
oil prices on the volume of oil reserves (shown in thousands of barrels):
Year ended December 31,
1998 1997 1996
---- ---- ----
Proved oil reserves (000's):
Beginning of year 8,420 8,369 7,750
Revisions of previous estimates (1,896) (555) 225
Extensions and discoveries 361 202 88
Acquisitions of minerals in place - 1,085 949
Sales of minerals in place - (45) (6)
Production (692) (636) (637)
---- ---- ----
End of year 6,193 8,420 8,369
===== ===== =====
The negative revisions of 1,896,000 and 555,000 barrels in 1998 and 1997,
respectively, are primarily price-related and take into account those properties
where production has been shut-in due to marginal economics.
Excluding revisions to previous estimates, the Company's drilling program in
1998 added 779,000 barrels of oil equivalent reserves, 71% of 1998 production.
The Company did not make any producing property acquisitions in 1998. Should oil
and gas prices remain at their current low levels for the balance of 1999,
further reductions in capital spending for 1999 are likely, which may impact the
Company's ability to replace production. The Company continues to high-grade
both exploratory and development projects based on their assumed risks and
rewards, balancing this with projects that have specific lease related drilling
commitments. Other projects have been delayed or deferred until oil prices
strengthen and cash flows increase.
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. In 1996, the Company added 1.30 million
barrels of oil equivalent, equal to 136% of 1996 oil and gas production. Further
information concerning the Company's reserve volumes and values can be found in
Footnote 9 to the financial statements.
IMPAIRMENT OF PROVED OIL AND GAS PROPERTIES. As a result of depressed year-end
oil prices, the Company recorded an impairment of proved oil and gas properties
of $4,015,158 ($2,529,550 net of tax) as of December 31, 1998. Statement of
Financial Accounting Standards No. 121 requires successful efforts companies to
evaluate the recoverability of the carrying costs of their proved oil and gas
properties by comparing the expected undiscounted future net revenues from each
producing field with the related net capitalized costs at the end of each
period. When the net capitalized costs exceed the undiscounted future net
revenues, the cost of the property is written down to fair value, which is
determined using discounted future net revenues from the producing field.
During 1998, the Company wrote down the costs of several properties
characterized by low-margin production, where low oil prices have severely
reduced the economic value of their reserves. During 1997 and 1996, the Company
recorded proved property impairment charges of $411,894 and $237,279,
respectively.
EQUITY LOSS AND IMPAIRMENT OF INVESTMENT IN SYMSKAYA EXPLORATION, INCORPORATED.
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 investment 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 losses in 1998 and 1997 were $446,758 and $356,661, respectively,
which resulted primarily from administrative related expenses. The 1998 amount
includes a write off of approximately $125,000 in interest income on a senior
note between Symskaya and the Company that had been accrued in prior periods, as
well as the Company's share of the bottom hole contribution discussed earlier.
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.
RESULTS OF OPERATIONS
COMPARISON OF 1998 WITH 1997
OIL AND GAS PRODUCTION AND SALES. Despite record gas production and higher oil
production, lower oil and gas prices during 1998 resulted in a 23% drop in oil
and gas sales. Gas production of 2.4 Bcf in 1998, the highest level in company
history, was 14% higher than 2.1 Bcf produced in 1997. Oil production of 692,000
barrels was 9% higher than the 636,000 barrels produced in 1997.
Average oil prices for 1998 were 35% lower than those of 1997. The Company's
average oil price received for 1998 was $12.16 per barrel, compared to $18.74
per barrel in 1997. Gas prices also dipped by 9%, averaging $1.83 in 1998,
compared to $2.02 in 1997. Further details of production and pricing are found
in Item 2. Properties, under the caption Production.
OTHER INCOME. During 1997, the Company recorded a gain on the sale of certain
oil and gas properties of approximately $325,000. In addition, the Company sold
its minority interest in an oil field technology research company. In connection
with the sale, the Company recognized a gain of approximately $200,000. There
were no corresponding events in 1998.
LEASE OPERATING COSTS. Lease operating costs continued to decline on a per-unit
basis in 1998. Costs per barrel of oil equivalent during 1998 of $5.68 were 6%
lower than costs of $6.06 per barrel of oil equivalent during 1997. During much
of 1998, the Company shut-in several high-cost, marginally economic wells whose
profitability was severely curtailed by low oil prices. Another factor in the
decline was a reduction in value-based production taxes. As the majority of the
Company's production on a barrel of oil equivalent basis comes from crude oil,
the decline in average oil prices in 1998 brought about declines in production
taxes.
In addition, operating costs associated with natural gas properties are lower on
a barrel of oil equivalent basis than for oil producing properties. The
Company's ratio of gas to oil production continued to rise in 1998 compared to
prior years, and as it did so, per barrel of oil equivalent operating costs
declined.
DEPRECIATION, DEPLETION, AND AMORTIZATION (DD&A). DD&A charges in 1998 declined
slightly to $4.58 per barrel of oil equivalent from $4.77 per barrel of oil
equivalent in 1997.
IMPAIRMENT OF PROVED OIL AND GAS PROPERTIES. As discussed previously, included
in the Statement of Operations for 1998 and 1997 are non-cash charges for the
impairment of proved oil and gas properties in the amount of $4,015,158 and
$411,894, respectively.
EQUITY LOSS AND IMPAIRMENT OF INVESTMENT IN SYMSKAYA EXPLORATION, INCORPORATED.
The Company is continuing to pursue additional outside financing for its
Symskaya project in Russia. The Company announced in 1998 that its 50% owned
subsidiary, Symskaya, entered into a bottom hole contribution agreement to
support the drilling of an exploratory well that is being drilled near the
southern block of acreage that Symskaya holds as part of its 1.1 million acre
exploration, development and production License.
The equity loss in Symskaya increased by approximately $90,000 during 1998. This
increase included a write down of approximately $125,000 of accrued interest
income on a senior note between Symskaya and the Company that had been
recognized in prior periods. In addition, the 1998 increase includes the
Company's share of the bottom hole contribution. There were no corresponding
events in 1997.
3-D SEISMIC AND EXPLORATION EXPENSES. During 1998, the Company incurred $431,075
in 3-D seismic costs related to its exploration programs, compared to $626,525
in 1997. The bulk of 1998 3-D costs were associated with its Sequoia project in
the San Joaquin Basin of California. The initial well at Sequoia has been
delayed until the first half of 1999. Exploration expenses decreased as the
Company drilled 5 exploratory dry holes in 1998, compared to 12 dry holes in
1997. Successful efforts accounting, the method used by the Company, requires
both 3-D seismic costs and exploratory dry hole costs to be charged to expense
on a current basis.
INTEREST AND INCOME TAXES. Higher interest costs in 1998 reflect the higher
amount of debt outstanding under the Company's credit facility. The income tax
benefits recorded for both periods result primarily from the deferred tax
benefits associated with net losses reported. Details concerning the components
of the tax provision can be found in Footnote 3 to the financial statements.
COMPARISON OF 1997 WITH 1996
OIL AND GAS PRODUCTION AND SALES. The Company's 1997 increases in oil and gas
and sales were 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 reflected the
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 the majority of the Company's production on a barrel of oil equivalent
basis comes from crude oil, the decline in average oil prices in 1997 brought
about a similar decline in production taxes.
In addition, operating costs associated with natural gas properties were lower
on a barrel of oil equivalent basis than for oil producing properties. The
Company's ratio of gas to oil production continued to rise in 1997, and as it
did so, per barrel of oil equivalent costs declined.
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, INCORPORATED.
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 investment in and advances to Symskaya were also written off,
resulting in a total charge to expense in 1996 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 expenses.
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 3-D seismic costs and
exploratory dry hole costs to be charged to expense 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 all interest expense. With
activity in Russia curtailed in 1997, interest was 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 TAXES. 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 $175,000 in additional Canadian taxes related to prior
years. The income tax benefit in 1996 resulted primarily from the deferred tax
benefit associated with the net loss reported. Details concerning the components
of the tax expense can be found in Footnote 3 to the financial statements.
LIQUIDITY AND CAPITAL RESOURCES
CASH AND WORKING CAPITAL. Total cash balances increased 17% from 1997, as a
result of a combination of several events discussed in the following paragraphs.
Working capital decreased by 39% primarily due to lower accrued oil and gas
sales. The Company's ratio of current assets to current liabilities was 1.76 to
1 at December 31, 1998, compared to 2.33 to 1 at December 31, 1997.
CASH FLOWS FROM OPERATING ACTIVITIES. Cash flows from operating activities
declined 54% in 1998 compared to 1997 levels, primarily as a result of lower
revenues caused by depressed oil and gas prices. Despite higher oil and gas
production in 1998, oil and gas sales dropped by $3.7 million. 1997 cash flows
decreased from 1996 levels as a result of a reduction in accounts payable
balances, which is mainly a function of timing.
CASH FLOWS FROM INVESTING ACTIVITIES. Capital expenditures in 1998 were 57%
lower than in 1997. Excluding 1997 property acquisitions, expenditures in 1998
were down 21%. This decrease in capital spending is a direct result of decreased
revenues resulting from lower oil and gas prices. Should oil prices remain at
their current low levels for the balance of 1999, the Company expects further
reductions in capital spending for 1999. The Company continues to high-grade
both exploratory and development projects based on their assumed risks and
rewards, balancing this with projects that have specific lease related drilling
commitments. Other projects have been delayed or deferred until oil prices
strengthen and cash flows increase.
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 incurred $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 1998 and 1997 the
Company advanced approximately $319,000 and $357,000 to Symskaya, respectively,
compared to approximately $3.0 million in 1996. The Company expects that
advances to Symskaya in 1999 will again be minimal as the Company has no current
plans to fund any exploratory drilling in Russia. The equity loss in Symskaya
Exploration for 1998 includes a writedown of approximately $125,000 in interest
income on a senior note between Symskaya and the Company that had been accrued
in prior periods. In addition, the 1998 amount included the Company's share of a
bottom hole contribution discussed earlier. Neither of these two events are
recurring.
CASH FLOWS FROM FINANCING ACTIVITIES. The Company used proceeds of $2,521,170,
$5,100,000 and $3,960,000 in 1998, 1997 and 1996 respectively, from its
Revolving Credit Facility to fund capital expenditures.
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. No treasury
stock was purchased during 1998. The Company purchased 29,000 shares of its
stock during 1996 at an average price of $3.40 per share.
CREDIT FACILITY. In March of 1995, the Company obtained a $20 million Borrowing
Base Credit Facility (the Facility). On March 30, 1998, the Company amended its
credit agreement, setting the current commitment under the Facility at $18
million. In addition, on June 24, 1998, the Facility was further amended in
order to set the first principal payment date to July 1, 2001 from July 1, 1999.
The Company's commitment under the Facility is subject to a redetermination as
of July 1 and January 1 of each year, with reserve values calculated using
estimated future prices determined by the Company's lender. Using a reduced oil
price deck, brought about by continued low oil prices, the Company's borrowing
base was lowered to $17 million after the July 1, 1998 redetermination, and the
Company was notified to this effect in September of 1998. As of December 31,
1998 the outstanding balance under the Facility was $16.5 million at an average
interest rate of 7.26%. Accordingly, at the end of 1998, the Company had
approximately $500,000 of remaining availability on the Facility.
Primarily as a result of the $4 million property impairment charge, as of
December 31, 1998 the Company was in violation of the "Tangible Net Worth"
covenant contained in the Facility. In March 1999, the Company's bank amended
the Facility to remedy the covenant violation. The Company is now in compliance
with all covenants in the Facility.
The Company believes that existing cash balances, cash flows from operating
activities, and funds available under the Company's credit facility will provide
adequate resources to fund on-going operations and will allow the Company to
meet limited capital and exploration spending objectives for 1999. The Company's
drilling plans for 1999 have been significantly curtailed due to low oil prices.
The ability of the Company to replace its 1999 production volumes through
drilling with curtailed budgets may be significantly impaired. Should the low
oil price environment continue for an extended period of time, the Company may
have difficulty in meeting its ongoing exploration and development drilling
objectives. The Company has adequate liquidity to maintain its operations as
they currently exist.
COMMITMENTS. Under the terms of Symskaya's License and Production Sharing
Contract (PSC), Equity was committed to advance Symskaya a minimum of $6 million
during the first 5 contract years, representing 50% of the minimum expenditures
called for in the License and PSC, with the remainder being funded by Leucadia
National Corporation, Symskaya's other 50% shareholder. The first contract year
began November 15, 1993. The amounts spent through November 14, 1998, the end of
the fifth contract year, have satisfied all minimum commitments required.
Further discussion of this venture is found in ITEM 2. Properties, under the
caption Present Activity, and in Footnotes 6 and 9 to the financial statements.
OTHER ITEMS. The Company has reviewed all recently issued, but not yet adopted,
accounting standards in order to determine their effects, if any, on the results
of operations or financial position of the Company. Based on that review, the
Company believes that none of these pronouncements will have any significant
effects on current or future earnings or operations.
YEAR 2000
In 1998, the Company began a project to ensure that its computer systems were
year 2000 compliant. The Company identified this project as a priority and has
allocated personnel and financial resources to it in an effort to minimize the
impact of year 2000 date related problems. An officer of the Company is
supervising the project. In addition, the Company is conducting a year 2000
compliance assessment of those of its vendors and customers whose relationship,
in the Company's business judgment, is material. Although the Company's
assessment of its year 2000 issues is not complete, the Company has made a
preliminary determination of its mission-critical and non-mission-critical
items.
The Company's mission-critical items include its financial accounting,
engineering, and lease/land software. Each of these items has either been
certified by the vendor as year 2000 compliant, or the vendor has certified that
a compliant version of the software will be in place before June 30, 1999. All
non- mission-critical systems have been certified as being compliant. The
Company is conducting tests to support these claims.
The Company does not anticipate incurring any significant expense to ensure year
2000 compliance. Although the Company is undertaking this project, no assurance
can be given that such a program will be able to solve the year 2000 issues
applicable to the Company or that failure to solve will not have a material
adverse effect on the Company.
FORWARD LOOKING STATEMENTS
The preceding discussion and analysis should be read in conjunction with the
consolidated financial statements, including the notes thereto, appearing
elsewhere in this annual report on Form 10-K. Except for the historical
information contained herein, the matters discussed in this annual report
contain forward-looking statements within the meaning of section 27a of the
securities act of 1933, as amended, and section 21e of the securities exchange
act of 1934, as amended, that are based on management's beliefs and assumptions,
current expectations, estimates, and projections. Statements that are not
historical facts, including without limitation statements which are preceded by,
followed by or include the words "believes," "anticipates," "plans," "expects,"
"may," "should" or similar expressions are forward-looking statements. Many of
the factors that will determine the Company's future results are beyond the
ability of the Company to control or predict. These statements are subject to
risks and uncertainties and, therefore, actual results may differ materially.
The Company disclaims any obligation to update any forward-looking statements
whether as a result of new information, future events or otherwise.
Important factors that may effect future results include, but are not limited
to: the risk of a significant natural disaster, the inability of the Company to
insure against certain risks, fluctuations in commodity prices, the inherent
limitations in the ability to estimate oil and gas reserves, changing government
regulations, as well as general market conditions, competition and pricing, and
other risks detailed from time to time in the Company's SEC reports, copies of
which are available upon request from the Company's investor relations
department.
ITEM 7(a). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The answers to items listed under Item 7(a) are inapplicable or negative.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Accountants
To the Stockholders and Board of
Directors of Equity Oil Company:
In our opinion, the financial statements as listed in Item 14 (a) of this Form
10-K, present fairly, in all material respects, the financial position of Equity
Oil Company (the "Company") at December 31, 1998 and 1997, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Salt Lake City, Utah
March 10, 1999
EQUITY OIL COMPANY
BALANCE SHEETS
December 31, 1998 and 1997
ASSETS 1998 1997
Current assets:
Cash and cash equivalents ......................................... $ 444,476 $ 378,801
Accounts receivable ............................................... 1,933,686 2,957,677
Operator advances ................................................. 762,474 683,858
Federal, state and foreign income
taxes receivable ............................................... 291,597 88,174
Deferred income taxes ............................................. 19,417 18,934
Other current assets .............................................. 318,904 514,713
------------- -------------
Total current assets ..................................... 3,770,554 4,642,157
------------- -------------
Property and equipment, at cost (successful efforts method):
Unproved oil and gas properties ................................... 3,003,223 3,504,362
Proved oil and gas properties:
Developed leaseholds ........................................... 9,994,273 13,049,597
Intangible drilling costs ...................................... 64,845,202 68,324,359
Equipment ...................................................... 25,731,345 27,733,805
Other property and equipment ..................................... 833,772 759,768
------------- -------------
104,407,815 113,371,891
Less accumulated depreciation,
depletion and amortization ............................... (61,191,368) (64,846,514)
------------- -------------
43,216,447 48,525,377
------------- -------------
Other assets:
Investment in Raven Ridge Pipeline
Partnership .................................................... 220,997 268,821
Other assets ...................................................... 63,170 105,284
------------- -------------
284,167 374,105
------------- -------------
Total assets ............................................. $ 47,271,168 $ 53,541,639
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
Current liabilities:
Accounts payable .................................................. $ 1,675,758 $ 1,327,120
Accrued liabilities ............................................... 164,163 120,039
Federal, state and foreign income
taxes payable .................................................. 212,583 354,002
Accrued profit-sharing contribution ............................... 90,413 188,973
------------- -------------
Total current liabilities ................................ 2,142,917 1,990,134
------------- -------------
Revolving credit facility ........................................... 16,500,000 13,978,830
Deferred income taxes ............................................... 1,642,700 4,851,966
------------- -------------
18,142,700 18,830,796
------------- -------------
Commitments (Note 6)
Stockholders' equity:
Common stock, $1 par value:
Authorized: 25,000,000 shares
Issued: 12,794,040 shares in 1998
and 12,761,100 shares in 1997 ............................... 12,794,040 12,761,100
Paid in capital ................................................... 3,714,493 3,667,707
Retained earnings ................................................. 11,005,320 16,820,204
------------- -------------
27,513,853 33,249,011
Less treasury stock, at cost ...................................... (528,302) (528,302)
------------- -------------
26,985,551 32,720,709
------------- -------------
Total liabilities and
stockholders' equity ..................................... $ 47,271,168 $ 53,541,639
============= =============
EQUITY OIL COMPANY
STATEMENTS OF OPERATIONS
for the years ended December 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
Revenues:
Oil and gas sales ......................... $ 12,720,876 $ 16,457,048 $ 16,115,125
Partnership income ........................ 19,334 311,215 306,114
Interest .................................. 60,491 153,672 140,053
Other income .............................. 377,282 1,023,037 312,759
------------ ------------ ------------
13,177,983 17,944,972 16,874,051
------------ ------------ ------------
Expenses:
Oil and gas leasehold operating costs ..... 6,233,955 5,940,808 5,912,128
Depreciation, depletion and amortization .. 5,029,119 4,675,411 4,292,237
Impairment of proved oil and gas properties 4,015,158 411,894 237,279
Equity loss and impairment of investment
in Symskaya Exploration, Inc ........... 446,758 356,661 9,204,394
Leasehold abandonments .................... 162,754 86,542 87,464
3-D seismic ............................... 431,075 626,525 757,964
Exploration ............................... 2,383,163 3,026,550 2,336,405
General and administrative ................ 1,914,590 2,048,194 2,030,811
Interest, net of interest capitalized
of $364,637 in 1996 .................... 1,298,061 733,980 164,678
------------ ------------ ------------
21,914,633 17,906,565 25,023,360
------------ ------------ ------------
Income (loss) before income taxes .... (8,736,650) 38,407 (8,149,309)
Provision for (benefit from) income taxes .. (2,921,766) 249,563 (2,646,663)
------------ ------------ ------------
Net loss ............................. $ (5,814,884) $ (211,156) $ (5,502,646)
============ ============ ============
Basic and diluted net loss per common share $ (.46) $ (.02) $ (.43)
============ ============ ============
Basic and diluted weighted
average shares outstanding .............. 12,623,041 12,686,211 12,733,864
============ ============ ============
The accompanying notes are an integral part of the financial statements
EQUITY OIL COMPANY
STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY for the years ended
December 31, 1998, 1997 and 1996
Common Stock Paid in Retained Treasury Stock
Shares Amount Capital Earnings Shares Cost
------ ------ ------- -------- ------ ----
Balance at January 1, 1996 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)
Net loss (5,814,884)
Common stock issued for services, $2.42 per share 32,940 32,940 46,786
---------- ---------- --------- ---------- -------- --------
Balance at December 31, 1998 12,794,040 $12,794,040 $3,714,493 $11,005,320 164,600 $(528,302)
========== ========== ========= ========== ======= ========
EQUITY OIL COMPANY
STATEMENTS OF CASH FLOWS
for the years ended December 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
Cash flows from operating activities:
Net loss .................................................................... $(5,814,884) $ (211,156) $(5,502,646)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Impairment of proved oil and gas properties ............................. 4,015,158 411,894 237,279
Equity loss and impairment of investment
in Symskaya Exploration, Inc. ......................................... 446,758 356,661 9,204,394
Depreciation, depletion and amortization ................................ 5,029,119 4,675,411 4,292,237
Partnership distributions in excess of income ........................... 47,824 136,508 134,892
(Gain) loss on property dispositions .................................... 325,558 (243,423) 87,464
Change in other assets .................................................. 42,114 42,114 42,113
Deferred income tax benefit ............................................. (3,209,749) (701,888) (3,130,574)
Common stock issued for services ........................................ 79,726 29,374 103,313
----------- ----------- -----------
961,624 4,495,495 5,468,472
Increase (decrease) from changes in:
Accounts receivable and operator advances ............................. 817,827 19,135 (406,805)
Other current assets .................................................. 195,809 (142,012) 5,893
Accounts payable and accrued liabilities .............................. 294,202 (576,853) 735,915
Income taxes payable/receivable ....................................... (344,842) 385,712 4,511
----------- ----------- -----------
Net cash provided by operating activities .......................... 1,924,620 4,181,477 5,807,986
----------- ----------- -----------
Cash flows from investing activities:
Sale of temporary cash investments .......................................... -- 49,802 906,165
Advances to Symskaya Exploration, Inc. ...................................... (319,210) (356,661) (3,043,952)
Capital expenditures ........................................................ (4,126,630) (9,547,036) (7,339,212)
Proceeds from sale of oil and gas properties ................................ 65,725 592,907 --
----------- ----------- -----------
Net cash used in investing activities .............................. (4,380,115) (9,260,988) (9,476,999)
----------- ----------- -----------
Cash flows from financing activities:
Exercise of incentive stock options ......................................... -- -- 84,375
Purchase of treasury stock .................................................. -- (429,649) (98,653)
Borrowings under revolving credit facility .................................. 2,521,170 5,100,000 3,960,000
----------- ----------- -----------
Net cash provided by financing activities .......................... 2,521,170 4,670,351 3,945,722
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents ......................... 65,675 (409,160) 276,709
Cash and cash equivalents at beginning of year ............................... 378,801 787,961 511,252
----------- ----------- -----------
Cash and cash equivalents at end of year ..................................... $ 444,476 $ 378,801 $ 787,961
=========== =========== ===========
Supplemental disclosures of cash flow information: Cash paid during the year
for:
Income taxes .............................................................. $ 495,882 $ 701,694 $ 419,121
Interest .................................................................. $ 1,298,061 $ 733,980 $ 164,678
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. Cash and Cash Equivalents:
The Company considers all highly liquid debt instruments
purchased with an original maturity of three months or less to be
cash equivalents.
C. Accounting for Oil and Gas Operations:
The Company reports using the "successful efforts" method of
accounting for oil and gas operations. The use of this method
results in capitalization of those costs identified with the
acquisition, exploration and development of properties that
produce revenue or, if in the development stage, are anticipated
to produce future revenue. Costs of unsuccessful exploration
efforts are expensed in the period in which it is determined that
such costs are not recoverable through future revenues.
Exploratory geological and geophysical costs are expensed as
incurred. The costs of development wells are capitalized whether
productive or nonproductive.
The Company annually assesses undeveloped oil and gas properties
for impairment. Any impairment recorded represents management's
estimate of the decline in realizable value experienced during
the year. The costs of proved properties which management
determines are not recoverable are written off in the period such
determination is made. The net capitalized costs of proved oil
and gas properties are measured for impairment in accordance with
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 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 and cash equivalents 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 Statements 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
1998, 1997 and 1996 were not material.
Continued
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
1. Significant Accounting Policies, Continued:
G. Loss Per Common Share:
Basic earnings per share is computed by dividing the net loss by
the weighted average number of common shares outstanding. Diluted
earnings per share is computed by dividing the net loss by the
sum of the weighted average number of common shares and the
effect of dilutive unexercised stock options. Options to purchase
1,203,000, 1,141,000 and 1,076,000 shares of common stock at
prices ranging from $2.50 to $6.00 per share were outstanding at
December 31, 1998, 1997 and 1996, respectively, but were not
included in the computation of diluted earnings per share because
the effect would have been antidilutive.
H. Estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Significant estimates with regard to these financial statements
include the estimate of proved oil and gas reserve volumes and
the estimated future development, dismantlement, and abandonment
costs used in determining amortization provisions.
2. Impairment of Proved Oil and Gas Properties:
SFAS No.121, Accounting for the Impairment of Long Lived Assets and for
Assets Held for Disposal, requires successful efforts companies to
evaluate the recoverability of the net capitalized costs of their
proved oil and gas properties at a field level. The SFAS No. 121
impairment test compares the expected undiscounted future net revenues
from each producing field with the related net capitalized costs at the
end of each period. When the net capitalized costs exceed the
undiscounted future net revenues, the carrying value of the property is
written down to fair value, which is determined using discounted future
net revenues from the producing field.
The Company recorded non-cash impairment charges of $4,015,158,
$411,894 and $237,279 for 1998, 1997 and 1996, respectively.
Continued
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
3. Income Taxes:
The Company accounts for income taxes in accordance with SFAS No. 109.
Deferred income taxes are provided using enacted tax rates on the
difference between the tax basis of an asset or liability and its
reported amount in the financial statements that will result in taxable
or deductible amounts in future years when the reported amount of the
asset or liability is recovered or settled, respectively.
The provision for (benefit from) income taxes consists of the
following:
1998 1997 1996
---- ---- ----
Currently payable (receivable):
U.S. income taxes (including
alternative minimum tax) . $ -- $ 18,584 $ 185,082
State income taxes .......... 6,500 70,512 108,463
Canadian income taxes ....... 208,046 471,064 190,366
Prior years taxes ........... 73,437 391,291 --
Deferred tax benefit ........ (3,209,749) (701,888) (3,130,574)
----------- ----------- -----------
$(2,921,766) $ 249,563 $(2,646,663)
=========== =========== ===========
The components of the net deferred tax liability as of December 31,
1998 and 1997 were as follows:
1998 1997
---- ----
Deferred tax assets:
AMT credit carryforward ................ $ 311,931 $ 293,789
State income taxes ..................... 2,403 26,068
Deferred compensation .................. 17,014 13,370
Geological and geophysical costs ....... 645,680 637,371
Accrued interest ....................... 660,319 433,750
Foreign tax credit carryforward ........ 699,908 501,257
Statutory depletion carryforward ....... 82,287 --
Equity loss and impairment of investment
in Symskaya Exploration, Inc ......... 2,781,918 2,687,806
Net operating loss ..................... 2,271,216 --
--------- ---------
7,472,676 4,593,411
Valuation allowance .................... (699,908) (501,257)
--------- ---------
Total deferred tax asset ............... 6,772,768 4,092,154
Deferred tax liabilities:
Deferred income ........................ 39,402 95,465
Property and equipment ................. 8,321,804 8,802,389
Pipeline partnership ................... 34,845 27,332
--------- ---------
Total deferred tax liability ........... 8,396,051 8,925,186
--------- ---------
Net deferred tax liability ............... $ 1,623,283 $ 4,833,032
========= =========
The net deferred tax liability as of December 31, 1998 and 1997 is
reflected in the balance sheet as follows:
Current deferred tax asset ............... $ (19,417) $ (18,934)
Long-term deferred tax liability ......... 1,642,700 4,851,966
--------- ---------
$ 1,623,283 $4,833,032
========= =========
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:
1998 1997 1996
----------- ----------- -----------
Federal statutory tax expense (benefit) . $(2,970,461) $ 13,058 $(2,770,765)
Increase (reduction) in taxes
resulting from:
State taxes (net of federal
benefit) .......................... (255,742) (5,323) (198,849)
Canadian taxes (net of foreign
tax credits) .................... 208,046 113,882 (107,549)
Excess allowable percentage
depletion ......................... (54,059) (162,297) (171,724)
Investment tax and other credits ... -- (84,136) (124,933)
Taxes due from Canadian audit ...... 150,450 374,379 --
Unrecognized capital loss related
to impairment of investment
in Symskaya Exploration, Inc. ... -- -- 727,157
----------- ----------- -----------
Provision for (benefit from) income taxes $(2,921,766) $ 249,563 $(2,646,663)
=========== =========== ===========
At December 31, 1998, the Company had approximately $312,000 of
alternative minimum tax credit carryforwards which can be carried
forward indefinitely, and approximately $700,000 of foreign tax credit
carryforwards which begin to expire in 2001. In addition, the Company
has approximately $6,150,000 of net operating loss carryforwards which
expire in 2018.
4. Stock-Based Compensation Plan:
At December 31, 1998, 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 options granted to employees
under its fixed stock option plan. Had compensation cost for the
Company's stock-based compensation plan been determined based on the
fair value at the grant dates consistent with the method of SFAS No.
123, 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:
1998 1997 1996
---- ---- ----
Net loss As reported $(5,814,884) $(211,156) $(5,502,646)
Pro forma $(5,991,191) $(336,511) $(5,635,133)
Net loss per share As reported $(.46) $(.02) $(.43)
Pro forma $(.47) $(.03) $(.44)
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 1998, 1997 and 1996
respectively: expected volatility of 138, 50 and 67 percent, risk-free
interest rates of 5.5, 6.3 and 5.4 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:
1998 1997 1996
---------------------- ---------------------- ----------------------
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 1,141 $4.33 1,076 $4.42 904 $4.22
Granted 150 2.50 121 3.56 222 5.13
Exercised - - - - (39) 3.94
Forfeited (88) 3.87 (56) 4.37 (11) 4.38
------- ------- ------
Outstanding at end of year 1,203 4.14 1,141 4.33 1,076 4.42
====== ====== ======
Options exercisable at year-end 900 880 775
======= ======= =====
Weighted-average fair value of
options granted during the year $2.21 $1.56 $3.06
The following table summarizes information about fixed stock options
outstanding at December 31, 1998:
Options Outstanding Options Exercisable
------------------- -------------------
Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise Prices at 12/31/98 Contractual Life Exercise Price at 12/31/98 Exercise Price
$2.50 to $3.56 353,000 7.54 years $3.11 146,200 $3.56
$3.63 to $4.00 281,000 4.03 $3.86 263,400 $3.88
$4.22 to $5.00 283,000 4.69 $4.51 268,600 $4.53
$5.13 to $5.13 209,500 7.15 $5.13 145,900 $5.13
$5.50 to $6.00 76,000 1.62 $5.77 76,000 $5.77
----------- ---- ----- --------- -----
1,202,500 5.61 $4.14 900,100 $4.38
========= ==== ===== ======= =====
5. Geographic Segment Information:
During 1998, the Company adopted Statement of Financial Accounting
Standards ("FAS") 131, Disclosure about Segments of an Enterprise
and Related Information. FAS 131 supersedes FAS 14, Financial
Reporting for Segments of a Business Enterprise. The adoption of
FAS 131 did not affect the Company's results of operations or
financial position.
The Company operates in the exploration and production segment of
the oil and gas industry. The Company's operations are located in
the following geographical areas.
Revenues Long-lived Assets
for the years ended December 31, as of December 31,
---------------------------------------- -------------------------------
1998 1997 1996 1998 1997 1996
----------- ----------- ----------- ----------- ---------- -----------
United States $11,199,836 $14,150,670 $13,508,077 $ 95,009,887 $104,094,883 $ 97,135,423
Canada 1,521,040 2,306,378 2,607,048 9,397,928 9,277,008 9,011,722
----------- ----------- ----------- ------------ ----------- -----------
Total $12,720,876 $16,457,048 $16,115,125 $104,407,815 $113,371,891 $106,147,145
=========== =========== =========== ============ ============ ===========
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 32 percent of total revenues in 1998, 38
percent of total revenues in 1997 and 45 percent of total
revenues in 1996. The Company believes this purchaser
could be replaced, if necessary, without a loss in
revenue.
6. Symskaya Exploration:
Symskaya Exploration, Incorporated, a company in the
development stage and a Texas corporation (Symskaya), was
formed on November 25, 1991, and is engaged in oil and gas
exploration in Russia. Symskaya holds a Combined License
(License) which grants it the exclusive right to explore,
develop and produce hydrocarbons on a contract area
totaling approximately 1,100,000 acres in the Yenisysk
District of the Krasnoyarsk Krai in the Russian
Federation. The License has a primary term of 25 years
from November 15, 1993.
The work to be performed and the obligations and rights of
Symskaya are set forth in the License and a Production
Sharing Agreement (PSA) which is an integral part of the
License. Under the License and PSA, Symskaya will provide
funding for all exploration and development and will
recover these costs from 80% of hydrocarbon production
after payment of an 8% royalty. The remaining 20% of any
hydrocarbon production, net of royalty, will be shared by
Symskaya and the Russian government based on the rate of
production. As of December 31, 1998, 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, 1998, Symskaya had satisfied all of the
minimum expenditures required.
Symskaya is owned 50% each by Equity Oil Company (Equity)
and Leucadia National Corporation, (Leucadia). Leucadia
acquired 50% of the stock of Symskaya effective January 1,
1994, in exchange for their commitment to spend up to
$6,000,000, in an amount equal to that spent by Equity,
towards the Symskaya project through the drilling,
completion and/or plugging and abandonment of the initial
test well, the Lemok #1. Pursuant to a Shareholders'
Agreement, Leucadia was not required to pay any part of
the amounts previously advanced by Equity under a Loan
Agreement with Symskaya, with the exception of one-half
(1/2) of the interest on a $1,740,519 loan between Equity
and Symskaya. The loan reflects the initial investment by
Equity in Symskaya prior to Leucadia's ownership.
Continued
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
6. Symskaya Exploration, Continued:
Amounts advanced by Equity and Leucadia after January 1,
1994 are treated as interest-bearing notes payable or
equity, as mutually agreed upon by the respective
companies. The Shareholder Agreement with Leucadia also
requires that Leucadia share equally in the payment of the
one (1%) percent royalty obligation in favor of Coastline
Exploration, Inc. on future revenues from the Symskaya
project. The Company's President serves on Leucadia's
Board of Directors.
The Company's investment in Symskaya is being accounted
for using the equity method of accounting.
In 1996, Symskaya plugged and abandoned the Lemok #1 well,
and charged 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 on the Company's balance sheet were also written
off, resulting in a total charge to expense in 1996 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
by Symskaya. The Company's 50% share of Symskaya's net
loss in 1998 and 1997 was $446,758 and $356,661,
respectively.
Summarized financial information concerning Symskaya is as
follows:
As of As of
December 31, December 31,
1998 1997
------------ ------------
Current assets ............................ $ 84,614 $ 87,695
Non-current assets ........................ 6,195,471 6,053,629
Total assets .............................. 6,280,085 6,141,324
Current liabilities ....................... -- 13,699
Non-current liabilities ................... 15,811,910 14,242,094
Accumulated deficit ....................... (14,352,655) (12,776,251)
Total liabilities and stockholders' deficit $ 6,280,085 $ 6,141,324
For the year For the year
Ended Ended
December 31, December 31,
1998 1997
------------ -----------
Gross revenues ............................. $ 13,867 $ 14,217
Net loss ................................... $(1,576,404) $ (1,673,926)
Continued
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
7. Note Payable:
In March of 1995, the Company obtained a $20 million Borrowing
Base Credit Facility (the Facility), with a commitment of $17
million as of December 31, 1998. The terms of the Facility call
for interest payments only, at the lower of prime or LIBOR plus
2%, until June 30, 2001, 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, 1998, the outstanding balance under the Facility was
$16,500,000 at an average interest rate of 7.26%.
Future maturities on the Facility as of December 31, 1998 are as
follows:
1999 $ -
2000 -
2001 2,062,500
2002 4,125,000
2003 4,125,000
2004 4,125,000
2005 2,062,500
---------
$16,500,000
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.
Primarily as a result of the $4 million property impairment
charge, as of December 31, 1998 the Company was in violation of
the "Tangible Net Worth" covenant contained in the Facility. In
March 1999, the Company's bank amended the Facility to remedy the
covenant violation. The Company is now in compliance with all
covenants in the Facility. Facility fees, which are reflected as
other assets in the accompanying Balance Sheets, are being
amortized on a straight line basis over 60 months.
Continued
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
8. Quarterly Financial Data (Unaudited):
Quarterly financial information for the years ended December 31, 1998
and 1997 is as follows:
1998 Quarter Ended: .. December 31 September 30 June 30 March 31
----------- ----------- ---------- ----------
Net revenues ......... $ 3,093,918 $ 3,113,521 $ 3,024,311 $ 3,508,460
Gross margin ......... 123,384 301,843 442,379 609,530
Net loss ............. (3,028,324) (1,250,826) (893,728) (642,006)
Basic and diluted loss
per common share .. $ (.24) $ (.10) $ (.07) $ (.05)
=========== =========== =========== ===========
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 ........ 1,242,793 1,252,468 1,382,273 2,274,510
Net income (loss) ... (1,104,583) (48,158) 161,210 780,375
Basic and diluted
income (loss)
per common share $ (.09) $ (.00) $ .01 $ .06
=========== =========== =========== ===========
Continued
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
9. Disclosures About Oil and Gas Producing Activities:
Capitalized Costs:
United States Canada Russia Total
1998:
Unproved oil and gas
properties ........................................... $ 2,969,999 $ 33,224 $ 3,003,223
Proved oil and gas
properties ........................................... 91,206,116 9,364,704 100,570,820
------------- ------------- -------------
94,176,115 9,397,928 103,574,043
Accumulated depreciation,
depletion and amortization ........................... (53,212,301) (7,453,705) (60,666,006)
------------- ------------- -------------
Net capitalized costs .................................. $ 40,963,814 $ 1,944,223 $ 42,908,037
============= ============= =============
Symskaya, equity method
(see Note 6) ......................................... $ --
=======
1997:
Unproved oil and gas
properties ........................................... $ 3,471,138 $ 33,224 $ 3,504,362
Proved oil and gas
properties ........................................... 99,863,977 9,243,784 109,107,761
------------- ------------- -------------
103,335,115 9,277,008 112,612,123
Accumulated depreciation,
depletion and amortization ........................... (58,065,779) (6,292,480) (64,358,259)
------------- ------------- -------------
Net capitalized costs .................................. $ 45,269,336 $ 2,984,528 $ 48,253,864
============= ============= =============
Symskaya, equity method
(see Note 6) ......................................... $ --
=======
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) ......................................... $ --
=======
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:
1998: United States Canada Russia Total
Acquisition of properties:
Proved ................. $ -- -- -- $ --
Unproved ............... 124,066 -- -- 124,066
Exploration costs ........ 4,423,128 $ 27,529 -- 4,450,657
Development costs ........ 2,270,849 267,392 -- 2,538,241
Symskaya, equity method .. -- -- $ 446,758 446,758
1997:
Acquisition of properties:
Proved ................. $3,226,494 -- -- $3,226,494
Unproved ............... 1,227,117 -- -- 1,227,117
Exploration costs ........ 4,468,531 $ 25,103 -- 4,493,634
Development costs ........ 4,169,802 43,125 -- 4,212,927
Symskaya, equity method .. -- -- $ 356,661 356,661
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
Continued
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
9. Disclosures About Oil and Gas Producing Activities, Continued:
Results of Operations (Unaudited):
1998: United States Canada Russia Total
Oil and gas sales ............................. $ 11,199,836 $ 1,521,040 $ 12,720,876
Production costs .............................. (5,665,047) (568,908) (6,233,955)
Exploration expenses .......................... (2,954,780) (22,212) (2,976,992)
Depreciation, depletion and amortization ...... (4,720,913) (308,206) (5,029,119)
Impairment of proved
oil and gas properties .................... (4,015,158) (4,015,158)
Equity loss in Symskaya Exploration, Inc. ..... $ (446,758) (446,758)
------------ ------------ ------------ ------------
(6,156,062) 621,714 (446,758) (5,981,106)
Imputed income tax benefit (expense) .......... 2,308,523 (276,663) 167,534 2,199,394
------------ ------------ ------------ ------------
Results of operations from producing activities $ (3,847,539) $ 345,051 $ (279,224) $ (3,781,712)
============ ============ ============ ============
1997:
Oil and gas sales ............................. $ 14,150,670 $ 2,306,378 $ 16,457,048
Production costs .............................. (5,300,909) (639,899) (5,940,808)
Exploration expenses .......................... (3,718,531) (21,086) (3,739,617)
Depreciation, depletion and amortization ...... (4,385,015) (290,398) (4,675,413)
Impairment of proved
oil and gas properties .................... (411,894) (411,894)
Equity loss in Symskaya Exploration, Inc. ..... $ (356,661) (356,661)
------------ ------------ ------------ ------------
334,321 1,354,995 (356,661) 1,332,655
Imputed income tax benefit (expense) .......... 77,745 (245,790) 133,748 (34,297)
------------ ------------ ------------ ------------
Results of operations from producing activities $ 412,066 $ 1,109,205 $ (222,913) $ 1,298,358
============ ============ ============ ============
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 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)
============ ============ ============ ============
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 lengthened or shortened due to changes in commodity
pricing. The following table sets forth the weighted average
prices used in calculating estimated reserve quantities and
future net cash flows at the end of 1998, 1997 and 1996:
United States Canada Total
Oil Gas Oil Gas Oil Gas
December 31, 1998 $10.97 $2.06 $9.92 $1.49 $10.80 $1.95
December 31, 1997 $15.49 $2.13 $12.35 $1.51 $14.99 $2.03
December 31, 1996 $24.80 $3.28 $22.26 $1.52 $24.36 $2.84
Estimates of Proved Oil and Gas Reserves(Unaudited):
The following tables present the Company's estimates of its
proved oil and gas reserves. The Company emphasizes that reserve
estimates are inherently imprecise and that estimates of new
discoveries are more imprecise than those of producing oil and
gas properties. Accordingly, the estimates are expected to change
as future information becomes available. Reserve estimates are
prepared by the Company and audited by the Company's independent
petroleum reservoir engineers, Fred S. Reynolds and Associates,
who have issued a report expressing their opinion that the
reserve information in the following tables complies with the
applicable rules promulgated by the Securities and Exchange
Commission and the Financial Accounting Standards Board. The
volumes presented on the following pages are in thousands of
barrels for oil and thousands of mcf for gas.
Continued
EQUITY OIL COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
9. Estimates of Proved Oil and Gas Reserves, Continued:
Reserves and Future Net Cash Flows (Unaudited):
United States Canada Total
December 31, 1998: Oil Gas Oil Gas Oil Gas
- -------------------------------------------------------- -------- -------- -------- -------- -------- --------
Proved developed and undeveloped reserves:
Beginning of year .................................... 7,168 15,457 1,252 3,452 8,420 18,909
Revisions of previous estimates ...................... (1,817) (459) (79) 494 (1,896) 35
Extensions and discoveries ........................... 361 2,505 -- -- 361 2,505
Production ........................................... (595) (2,092) (97) (347) (692) (2,439)
-------- -------- -------- -------- -------- --------
End of year .......................................... 5,117 15,411 1,076 3,599 6,193 19,010
======== ======== ======== ======== ======== ========
Proved developed reserves:
Beginning of year .................................... 6,972 11,932 1,252 3,452 8,224 15,384
End of year .......................................... 4,870 12,683 1,076 3,599 5,946 16,282
United States Canada Total
December 31, 1997: Oil Gas Oil Gas Oil Gas
- -------------------------------------------------------- -------- -------- -------- -------- -------- --------
Proved developed and undeveloped reserves:
Beginning of year .................................... 7,252 14,910 1,117 2,707 8,369 17,617
Revisions of previous estimates ...................... (806) (694) 251 1,194 (555) 500
Acquisitions of minerals in place .................... 1,085 438 -- -- 1,085 438
Extensions and discoveries ........................... 202 2,423 -- -- 202 2,423
Sales of minerals in place ........................... (45) -- -- -- (45) --
Production ........................................... (520) (1,620) (116) (449) (636) (2,069)
-------- -------- -------- -------- -------- --------
End of year .......................................... 7,168 15,457 1,252 3,452 8,420 18,909
======== ======== ======== ======== ======== ========
Proved developed reserves:
Beginning of year .................................... 7,219 11,133 1,117 2,707 8,336 13,840
End of year .......................................... 6,972 11,932 1,252 3,452 8,224 15,384
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)
Acquisition 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
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
1998 United States Canada Total
- ---- ------------- ------ -----
Future cash inflows ....................................... $ 88,549 $ 15,442 $ 103,991
Future production and development costs ................... (54,825) (7,811) (62,636)
--------- --------- ---------
Future net cash flows before income taxes ................. 33,724 7,631 41,355
10% annual discount for estimated timing
of cash flows .......................................... (13,176) (2,969) (16,145)
--------- --------- ---------
Standardized measure of discounted future
net cash flows before income taxes ..................... 20,548 4,662 25,210
Future income taxes, net of 10% annual discount ........... (1,479) (929) (2,408)
--------- --------- ---------
Standardized measure of discounted future
net cash flows ......................................... $ 19,069 $ 3,733 $ 22,802
========= ========= =========
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:
Future net cash flows were computed using year-end prices and
costs, and year-end statutory tax rates with consideration of
future tax rates already legislated (adjusted for permanent
differences that related to proved oil and gas reserves).
Principal sources of change in the standardized measure of
discounted future net cash flow are as follows:
Thousands of Dollars
1998 1997 1996
Sales and transfers of oil and gas produced,
net of production costs ................... $ (6,487) $(10,516) $(10,203)
Net changes in prices and production costs ... (10,019) (45,280) 27,483
Extensions and discoveries, less related cost 2,098 1,639 2,374
Purchases of minerals in place ............... -- 3,787 7,174
Sales of minerals in place ................... -- (339) (116)
Changes in estimated future development costs 2,630 (1,447) 938
Revisions of previous quantity estimates ..... (4,495) (1,573) 1,495
Accretion of discount ........................ 3,558 7,912 4,286
Net change in income taxes ................... 3,315 18,100 (12,045)
Changes in production rates (timing) and other 3,303 1,880 2,903
-------- -------- --------
$ (6,097) $(25,837) $ 24,289
======== ======== ========
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 12, 1999 is incorporated herein by reference in answer to this
item.
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the heading Executive Compensation on pages 6
through 9 in the definitive proxy statement to be filed in connection with the
Company's annual meeting on May 12, 1999 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 12, 1999 is incorporated herein by reference in answer to
this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K:
(a) (1) Financial Statements: Page
Report of Independent Accountants 16
Financial Statements:
Balance Sheets as of December 31, 1998 and 1997 17
Statements of Operations for the years ended
December 31, 1998, 1997 and 1996 18
Statements of Changes in Stockholders' Equity
for the years ended December 31, 1998, 1997 and 1996 19
Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 20
Notes to Financial Statements 21
(3) Exhibits 39
(3) (i) Restated Articles of Incorporation. Incorporated by reference
from the annual report on Form 10-K for the year ended December 31,
1995.
(ii) Amended By-Laws. Incorporated by reference from the annual
report on Form 10- K for the year ended December 31, 1997.
(10) Material Contracts. Change in Control Compensation Agreements for
Paul M. Dougan, James B. Larson, and Clay Newton. Incorporated by ref-
erence from the annual report on Form 10-K for the year ended December
31, 1997.
(21) Subsidiaries. Incorporated by reference from the annual report on
Form 10-K for the year ended December 31, 1995.
(23) Consent of Experts. Consent of PricewaterhouseCoopers LLP
regarding Form S-8 Registration.
(b)Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
EQUITY OIL COMPANY
By Paul M. Dougan
--------------
President
Chief Executive Officer
By Clay Newton
-----------
Treasurer
Chief Financial Officer
Principal Accounting Officer
Date: March 15, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Douglas W. Brandrup Joseph C. Bennett
------------------- -----------------
Director Director
March 15, 1999 March 15, 1999
-------------- --------------
Date Date
William D. Forster Philip J. Bernhisel
------------------ -------------------
Director Director
March 15, 1999 March 15, 1999
-------------- --------------
Date Date
Randolph G. Abood W. Durand Eppler
----------------- ----------------
Director Director
March 15, 1999 March 15, 1999
-------------- --------------
Date Date
William P. Hartl
----------------
Director
March 15, 1999
--------------
Date