Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
----------------------------
(Mark One)
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 2004 or
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition period from ___________ to____________
--------------------
COMMISSION FILE NUMBER 0-13305
-------------------
PARALLEL PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 75-1971716
(State of other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) Number)
1004 N. Big Spring, Suite 400,
Midland, Texas 79701
(Address of principal executive offices) (Zip Code)
(432) 684-3727
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
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 whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes No X
--- ----
At August 4, 2004, 25,414,293 shares of the Registrant's Common Stock,
$0.01 par value, were outstanding.
INDEX
PART I. - FINANCIAL INFORMATION
Page
No.
-----
ITEM 1. FINANCIAL STATEMENTS
Reference is made to the succeeding pages for the following
consolidated financial statements:
- Consolidated Balance Sheets as of June 30, 2004 (unaudited)
and December 31, 2003 1
- Unaudited Consolidated Statements of Income for the three
months and six months ended June 30, 2004 and 2003 2
- Unaudited Consolidated Statements of Cash Flows for the six
months ended June 30, 2004 and 2003 3
- Unaudited Consolidated Statements of Comprehensive Income
(Loss)for the three months and six months ended June 30, 2004
and 2003 4
- Notes to Consolidated Financial Statements 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 28
ITEM 4. CONTROLS AND PROCEDURES 31
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 32
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 32
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 33
SIGNATURES
(i)
PARALLEL PETROLEUM CORPORATION
Consolidated Balance Sheets
(dollars in thousands)
June 30, December 31,
Assets 2004 2003
------------------ -------------------
(unaudited)
Current assets:
Cash and cash equivalents $ 4,943 $ 17,378
Accounts receivable:
Oil and gas 4,718 4,610
Others, net of allowance for doubtful account of $9 715 316
--------- ---------
5,433 4,926
Other current assets 297 210
Deferred tax asset 1,982 1,098
--------- ---------
Total current assets 12,655 23,612
--------- ---------
Property and equipment, at cost:
Oil and gas properties, full cost method 177,375 162,621
Other 1,930 1,414
--------- ---------
179,305 164,035
Less accumulated depreciation and depletion (74,116) (70,070)
--------- ---------
Net property and equipment 105,189 93,965
--------- ---------
Other assets, net of accumulated amortization of $245 and $182 907 766
--------- ---------
$ 118,751 $ 118,343
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 5,049 $ 3,965
Derivative obligations 6,167 3,231
--------- ---------
Total current liabilities 11,216 7,196
--------- ---------
Long-term debt 34,000 39,750
Asset retirement obligations 1,943 1,701
Derivative obligations 4,666 2,655
Deferred tax liability 6,485 5,809
--------- ---------
Total long-term liabilities 47,094 49,915
--------- ---------
Commitments and contingencies
Stockholders' equity:
Series A preferred stock -- par value $0.10 per share , authorized 50,000 shares - -
Preferred stock -- 6% convertible preferred stock -- par value of $.10 per share,
(liquidation preference of $10 per share) authorized 10,000,000
shares, issued and outstanding 957,000 and 959,500 96 96
Common stock -- par value $0.01 per share, authorized 60,000,000
shares, issued and outstanding 25,263,405 and 25,216,863 253 253
Additional paid-in capital 47,724 47,544
Retained earnings 19,358 17,060
Accumulated comprehensive loss (6,990) (3,721)
--------- ---------
Total stockholders' equity 60,441 61,232
--------- ---------
$ 118,751 $ 118,343
========= =========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
1
PARALLEL PETROLEUM CORPORATION
Consolidated Statements of Income
(Unaudited)
(in thousands, except per share data)
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- ---------------------------
2004 2003 2004 2003
---------- ---------- ---------- ---------
Oil and gas revenues $ 7,917 $ 8,532 $ 15,918 $ 17,025
---------- ---------- --------- ---------
Cost and expenses:
Lease operating expense 2,014 1,741 3,543 2,631
Production taxes 471 445 949 1,010
General and administrative 1,221 968 2,443 1,770
Depreciation and depletion 1,969 1,989 4,046 4,055
---------- ---------- --------- ---------
Total costs and expenses 5,675 5,143 10,981 9,466
---------- ---------- --------- ---------
Operating income 2,242 3,389 4,937 7,559
---------- ---------- --------- ---------
Other income (expense), net:
Change in fair market value of derivatives - (105) - (124)
Ineffective portion of hedges 17 379 7 196
Interest and other income 18 1 158 46
Interest expense (487) (522) (955) (1,008)
Other expense (59) (25) (85) (46)
---------- ---------- --------- ---------
Total other expense, net (511) (272) (875) (936)
---------- ---------- --------- ---------
Income before income taxes 1,731 3,117 4,062 6,623
Income tax expense, deferred (628) (447) (1,477) (1,639)
---------- ---------- --------- ---------
Net income before cumulative effect of change in accounting principle 1,103 2,670 2,585 4,984
Cumulative effect on prior years of a change in accounting principle,
net of tax of $32 - - - (62)
---------- ---------- --------- ---------
Net income 1,103 2,670 2,585 4,922
Cumulative preferred stock dividend (144) (146) (287) (292)
---------- ---------- --------- ---------
Net income available to common stockholders $ 959 $ 2,524 $ 2,298 $ 4,630
========== ========== ========= =========
Net income per common share:
Basic - before cumulative effect of a change in accounting principle $ 0.04 $ 0.12 $ 0.09 $ 0.22
Cumulative effect of a change in accounting principle, net of tax - - - -
---------- ---------- --------- ---------
Basic - after cumulative effect of a change in accounting principle $ 0.04 $ 0.12 $ 0.09 $ 0.22
========== ========== ========= =========
Diluted - before cumulative effect of a change in accounting principle $ 0.04 $ 0.11 $ 0.09 $ 0.20
Cumulative effect of a change in accounting principle, net of tax - - - -
---------- ---------- --------- ---------
Diluted - after cumulative effect of a change in accounting principle $ 0.04 $ 0.11 $ 0.09 $ 0.20
========== ========== ========= =========
Weighted average common share outstanding:
Basic 25,246 21,145 25,235 21,144
========== ========== ========= =========
Diluted 28,330 24,078 28,296 24,051
========== ========== ========= =========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
2
PARALLEL PETROLEUM CORPORATION
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2004 and 2003
(Unaudited)
(dollars in thousands)
2004 2003
---------------- -----------------
Cash flows from operating activities:
Net income $ 2,585 $ 4,922
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and depletion 4,046 4,055
Accretion of asset retirement obligation 53 68
Deferred income taxes 1,477 1,639
Change in fair value of derivative instruments - 21
Ineffective portion of hedges (7) (93)
Stock option expense 84 -
Cumulative effect on prior years of a change in accounting principle, net of tax - 62
Changes in assets and liabilities:
Other, net (141) (80)
Increase in accounts receivables (507) (1,728)
Increase in other current assets (87) (111)
Increase in accounts payable and accrued liabilities 1,084 186
------------ -------------
Net cash provided by operating activities 8,587 8,941
------------ -------------
Cash flows from investing activities:
Additions to oil and gas property (14,590) (7,241)
Proceeds from disposition of oil and gas property 25 20
Additions to other property and equipment (516) (292)
------------ -------------
Net cash used in investing activities (15,081) (7,513)
------------ -------------
Cash flows from financing activities:
Net payments on bank line of credit (5,750) (7,000)
Proceeds from exercise of stock options 103 12
Deferred stock offering costs (7) -
Payment of preferred stock dividend (287) (292)
------------ -------------
Cash used in financing activities (5,941) (7,280)
------------ -------------
Net decrease in cash and cash equivalents (12,435) (5,852)
Cash and cash equivalents at beginning of period 17,378 11,812
------------ -------------
Cash and cash equivalents at end of period $ 4,943 $ 5,960
============ =============
Non-cash financing and investing activities:
Oil and gas properties asset retirement obligations, net $ 189 $ 1,221
Accrued preferred stock dividend $ - $ 24
The accompany notes are an integral part of these Consolidated Financial
Statements.
3
PARALLEL PETROLEUM CORPORATION
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
(dollars in thousands)
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------- ------------------------------------
2004 2003 2004 2003
------------------ ------------------ ------------------ -----------------
Net income $ 1,103 $ 2,670 $ 2,585 $ 4,922
------- ------- ------- -------
Other comprehensive loss:
Unrealized losses on derivatives (3,782) (1,214) (8,125) (3,065)
Reclassification adjustments for losses
on derivatives included in net income 1,952 - 3,171 -
------ ------ ------- -------
Change in fair value of derivatives (1,830) (1,214) (4,954) (3,065)
Income tax benefit 624 392 1,685 1,021
------ ------ ------- -------
Total other comprehensive loss (1,206) (822) (3,269) (2,044)
------ ------ ------- -------
Total comprehensive income (loss) $ (103) $ 1,848 $ (684) $ 2,878
====== ======= ======= =======
The accompany notes are an integral part of these Consolidated Financial
Statements.
4
PARALLEL PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS - NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Parallel Petroleum Corporation ("Parallel", "we", "us", or "the
Company") was incorporated in Texas on November 26, 1979, and reincorporated in
the State of Delaware on December 18, 1994.
We are engaged in the acquisition, development, exploitation and
production of oil and natural gas and, to a lesser extent, the domestic
exploration for oil and natural gas. These activities are concentrated in the
Permian Basin of west Texas and New Mexico, east Texas, the onshore gulf coast
area of south Texas and the Fort Worth Basin of north Texas.
The financial information included herein, except the balance sheet as
of December 31, 2003, is unaudited. However, such information includes all
adjustments (consisting solely of normal recurring adjustments), which are, in
the opinion of management, necessary for a fair statement of the results of
operations and financial condition for the interim periods. The results of
operations for the interim period are not necessarily indicative of the results
to be expected for an entire year.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted in this Form 10-Q Report pursuant to
certain rules and regulations of the Securities and Exchange Commission. These
financial statements should be read in conjunction with the financial statements
and notes included in our 2003 Form 10-K Report.
NOTE 2. STOCKHOLDERS' EQUITY
Options
Prior to September 2003, Parallel accounted for stock-based compensation
utilizing the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations. In September, 2003, Parallel adopted the provisions of
Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment to SFAS No. 123, whereby
certain transitional alternatives are available for a voluntary change to the
fair value based method of accounting for stock-based employee compensation.
Parallel uses the prospective method which applies prospectively the fair value
recognition method to all employee and director awards granted, modified or
settled after the beginning of the fiscal year in which the fair value based
method of accounting for stock-based compensation is adopted. The potential
impact of using the fair value method, on a pro forma basis, is presented in the
table that follows. As Parallel adopted the fair value recognition provisions of
SFAS No. 123 prospectively for all employee awards granted, modified or settled
after January 1, 2003, the charge for stock-based compensation included in the
determination of
5
income for the three and six month period ended June 30, 2003 is less than that
which would have been recognized if the fair value method had been applied to
all awards since the original effective date of SFAS No. 123.
For the three and six months ended June 30, 2004, Parallel recognized
compensation expense of approximately $42,000 and $84,000 respectively
associated with its stock option grants. No options were granted during the
quarter ended June 30, 2004.
The following table illustrates the effect on net income and earnings
per share as if the fair value based method had been applied to all outstanding
and unvested awards in each period. The fair value of each grant is estimated on
the date of grant using the Black-Scholes option-pricing model.
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ -------------------------------
2004 2003 2004 2003
--------------- -------------- -------------- --------------
(dollars in thousands, except per share data)
Net income, as reported $ 1,103 $ 2,670 $ 2,585 $ 4,922
Add:
Expense recorded in 2004 42 - 84 -
Deduct:
Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of tax (48) (62) (95) (109)
-------------- ------------- ------------- --------------
Pro forma net income $ 1,097 $ 2,608 $ 2,574 $ 4,813
============== ============= ============= ==============
Net income per common share:
Basic - as reported $ 0.04 $ 0.12 $ 0.09 $ 0.22
============== ============= ============= ==============
Basic - pro forma $ 0.04 $ 0.11 $ 0.09 $ 0.21
============== ============= ============= ==============
Diluted - as reported $ 0.04 $ 0.11 $ 0.09 $ 0.20
============== ============= ============= ==============
Diluted - pro forma $ 0.04 $ 0.10 $ 0.09 $ 0.20
============== ============= ============= ==============
NOTE 3. LONG TERM DEBT
Long term debt as of June 30, 2004, was $34.0 million which is due and
payable in December 2006.
Revolving Credit Facility. Under our revolving credit facility (the
"Facility"), we may borrow the lesser of $100.0 million or the "borrowing base"
then in effect. The borrowing base calculation is based upon the estimated
discounted present value of our oil and gas reserves. The borrowing base at June
30, 2004 was $52.0 million, which was reduced to $51.5 million effective August
5, 2004 following our sale of non-core oil and gas assets. All borrowings are
collateralized by our oil and gas reserves. The total outstanding principal
amount of our bank indebtedness at June 30, 2004 was $34.0 million, excluding
$250,000 reserved for our letters of credit. The borrowing base is subject to
redetermination semi-annually on or about April 1 and October 1 or at other
times required by the banks or at our request. All indebtedness matures December
20, 2006.
6
Unpaid principal balances outstanding under the Facility bear interest,
at our election, at a rate equal to (i) the agent bank's base lending rate, or
(ii) the LIBOR rate plus a LIBOR margin of 2.25% to 2.75%. However, the interest
rate may never be less than 4.50%. Interest is due and payable on the day which
the related LIBOR interest period ends. We are required to pay a commitment fee
of .25% times the daily average of the unadvanced amount of the commitment.
The Facility includes various restrictive covenants and compliance
requirements. Among these restrictions are limitations on our ability to:
. dispose of assets;
. incur additional indebtedness;
. create liens on our assets;
. enter into specified investments or acquisitions;
. repurchase, redeem or retire our capital stock or other securities;
. merge or consolidate, or transfer all or substantially all of our
assets and the assets of our subsidiaries;
. engage in specified transactions with subsidiaries and affiliates;
. engage in other specified corporate activities; and
. the Facility also contains restrictions on all retained earnings and
net income for payment of dividends on our common stock.
Our revolving credit facility also requires that we have:
. at the end of each quarter, a current ratio (as defined in the
credit agreement) of at least 1.1 to 1.0;
. at the end of each quarter, a funded debt ratio (as defined in the
credit agreement) of not more than 3.0 to 1.0; and
. at all times, adjusted consolidated net worth (as defined in the
credit agreement) of at least (a) $40.0 million, plus (b)
seventy-five percent (75%) of the net proceeds from any equity
securities issued by Parallel, plus (c) fifty percent (50%) of
Parallel's consolidated net income for each fiscal quarter, if
positive, and zero percent (0%) if negative.
As of June 30, 2004, we were in compliance with all covenants.
7
NOTE 4. PREFERRED STOCK
We have outstanding 957,000 shares of 6% Convertible Preferred Stock,
$0.10 par value per share. Cumulative annual dividends of $0.60 per share are
payable semi-annually on June 15 and December 15 of each year. Each share of 6%
Convertible Preferred Stock may be converted, at the option of the holder, into
2.8571 shares of common stock at an initial conversion price of $3.50 per share,
subject to adjustment in certain events. The 6% Convertible Preferred Stock has
a liquidation preference of $10 per share and has no voting rights, except as
required by law. We may redeem the 6% Convertible Preferred Stock, in whole or
part, for $10 per share plus accrued and unpaid dividends.
NOTE 5. FULL COST CEILING TEST
We use the full cost method to account for our oil and gas producing
activities. Under the full cost method of accounting, the net book value of oil
and gas properties, less related deferred income taxes and asset retirement
obligations, may not exceed a calculated "ceiling". The ceiling limitation is
the discounted estimated after-tax future net cash flows from proved oil and gas
properties. In calculating future net cash flows, current prices and costs are
generally held constant indefinitely as adjusted for qualifying cash flow
hedges. The net book value of oil and gas properties, less related deferred
income taxes and asset retirement obligation over the ceiling, is compared to
the ceiling on a quarterly and annual basis. Any excess of the net book value,
less related deferred income taxes, is generally written off as an expense.
Under rules and regulations of the SEC, the excess above the ceiling is not
written off if, subsequent to the end of the quarter or year but prior to the
release of the financial results, prices have increased sufficiently that such
excess above the ceiling would not have existed if the increased prices were
used in the calculations.
At June 30, 2004 the net book value of our oil and gas properties, less
related deferred income taxes, was below the calculated ceiling. As a result, we
were not required to record a reduction of our oil and gas properties under the
full cost method of accounting.
Under the full cost method of accounting, all costs incurred in the
acquisition, exploration and development of oil and natural gas properties,
including a portion of our overhead, are capitalized. In the six month periods
ended June 30, 2004 and 2003, overhead costs capitalized were approximately
$522,000 and $431,000 respectively.
NOTE 6. DERIVATIVE INSTRUMENTS
General
We enter into derivative contracts to provide a measure of stability in
our oil and gas revenues and interest rate payments and to manage exposure to
commodity price and interest rate risk. Our objective is to lock in a range of
oil and gas prices and a fixed interest rate for certain notional amounts. We
designate our interest rate swaps, costless collars and commodity swaps as cash
flow hedges. The effective portion of the unrealized gain or loss on cash flow
hedges is
8
recorded in other comprehensive income until the forecasted transaction occurs.
During the term of a cash flow hedge, the effective portion of the quarterly
change in the fair value of the derivatives is recorded in stockholders' equity
as other comprehensive income (loss) and then transferred to oil and gas
revenues when the production is sold and interest expense when the interest
payment is made. Ineffective portions of hedges (changes in realized prices that
do not match the changes in the hedge price) are recognized in other expense as
they occur. While the hedge contract is open, the ineffective gain or loss may
increase or decrease until settlement of the contract.
As of June 30, 2004, we have recorded unrealized losses of $10.6 million
($7.0 million, net of tax) related to our derivative instruments, which
represented the estimated aggregate fair values of our open derivative contracts
as of that date. These unrealized losses are presented on the Consolidated
Balance Sheet as a current liability of $5.9 million and long-term liabilities
of $4.7 million and $7.0 million, net of tax, as accumulated comprehensive loss
in Stockholders' Equity. We recorded an ineffective portion of the derivative
instruments of approximately $200,000 in current liabilities. During the twelve
month period ending June 30, 2005, we expect approximately $3.9 million, net of
tax, to be transferred out of accumulated comprehensive loss and charged to
earnings.
We are exposed to credit risk in the event of nonperformance by the
counterparty to these contracts, BNP Paribas. However, we periodically assess
the creditworthiness of the counterparty to mitigate this credit risk.
Interest Rate Sensitivity
In January, 2003, we entered into a 45-month LIBOR fixed interest rate
swap contract with BNP Paribas. We receive a fixed interest rate, as noted in
the table below, for the 45-month period beginning March 31, 2003 through
December 20, 2006.
Under our Revolving Credit Facility, we may elect an interest rate based
upon the agent bank's base lending rate, or the LIBOR rate, plus a margin
ranging from 2.25% to 2.75% per annum, depending on our borrowing base usage.
The interest rate we are required to pay, including the applicable margin, may
never be less than 4.50%.
9
A recap for the period of time, notional amounts, LIBOR fixed interest
rates, expected margin rates and expected fixed interest rates for the contract
are as follows:
Libor Expected Expected
Notional Fixed Margin Fixed
Period of Time Amounts (1) Interest Rates (2) Rates (3) Interest Rates (4)
- ----------------------------------------------- ----------------- ------------------- ----------- ------------------
July 1, 2004 thru December 31, 2004 $ 30,000,000 2.660% 2.500% 5.160%
January 1, 2005 thru December 31, 2005 $ 20,000,000 4.050% 2.250% 6.300%
January 1, 2006 thru December 20, 2006 $ 10,000,000 4.050% 2.250% 6.300%
___________________
(1) Based on the anticipated principal reductions under our facility.
(2) Parallel's swap contract with BNP Paribas.
(3) Based on the anticipated borrowing base usage under our facility.
(4) Total of the LIBOR fixed rate plus the expected margin rate under our
facility. Our credit agreement requires the interest rate to not be
below 4.50%.
Commodity Price Sensitivity
Costless Collars. Collars are created by purchasing puts to establish a
floor price and then selling a call which establishes a maximum amount the
producer will receive for the oil or gas hedged. Calls are sold to offset the
premium paid for buying the put. We have entered into several costless Houston
ship channel gas collars. A majority of our natural gas production is sold based
on Houston ship channel prices. A recap for the period of time, number of
MMBtu's and average gas prices is as follows:
Houston Ship Channel
gas prices
---------------------------
MMBtu of
Period of Time Natural Gas Floor Cap
- ------------------------------------------- -------------- ------------ -------------
July 1, 2004 thru October 31, 2004 123,000 $ 4.40 $ 5.50
April 1, 2005 thru October 31, 2005 428,000 $ 5.00 $ 7.26
Swaps. Generally, swaps are an agreement to buy or sell a specified
commodity for delivery in the future, but at an agreed fixed price. Swap
transactions convert a floating price into a fixed price. For any particular
swap transaction, the counterparty is required to make a payment to the hedge
party if the reference price for any settlement period is less than the swap
price for such hedge, and the hedge party is required to make a payment to the
counterparty if the reference price for any settlement period is greater than
the swap price for such hedge.
10
We have entered into oil and gas swap contracts with BNP Paribas. A
recap for the period of time, number of MMBtu's, number of barrels, and swap
prices are as follows:
Houston Ship
Barrels of Nymex Oil MMBtu of Channel
Period of Time Oil Swap Prices Natural Gas Gas Swap Price
- -------------------------------------------- ------------ --------------- ------------- -----------------
July 1, 2004 thru December 31, 2004 220,800 $ 24.27 491,000 $ 4.694
January 1, 2005 thru December 31, 2005 365,000 $ 23.35 - $ -
January 1, 2005 thru March 31, 2005 - $ - 180,000 $ 4.705
January 1, 2006 thru December 20, 2006 265,500 $ 23.04 - $ -
NOTE 7. NET INCOME PER COMMON SHARE
Basic net income per share exclude any dilutive effects of option,
warrants and convertible securities and are computed by dividing net income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted net income per share is computed similar to
basic net income per share. However, diluted net income per share reflects the
assumed conversion of all potentially dilutive securities.
The following table provides the computation of basic and diluted net
income per common share for the three and six months ended June 30, 2004 and
2003:
11
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
(dollars in thousands, except per share data)
Basic Earnings Per Share Computation:
Numerator-
Income before cumulative effect of a change
in accounting principle $ 1,103 $ 2,670 $ 2,585 $ 4,984
Cumulative effect of a change in accounting principle,
net of tax - - - (62)
------- ------- ------- -------
1,103 2,670 2,585 4,922
Preferred stock dividend (144) (146) (287) (292)
------- ------- ------- -------
Net income available to common stockholders $ 959 $ 2,524 $ 2,298 $ 4,630
======= ======= ======= =======
Denominator-
Weighted average common shares outstanding 25,246 21,145 25,235 21,144
======= ======= ======= =======
Basic Earnings Per Share:
Income before cumulative effect of a change
in accounting principle $ 0.04 $ 0.12 $ 0.09 $ 0.22
Cumulative effect of a change in accounting principle,
net of tax - - - -
------- ------- ------ -------
Net income per common share $ 0.04 $ 0.12 $ 0.09 $ 0.22
======= ======= ====== =======
Diluted Earnings Per Share Computation:
Numerator-
Income before cumulative effect of a change
in accounting principle $ 1,103 $ 2,670 $ 2,585 $ 4,984
Cumulative effect of a change in accounting principle,
net of tax - - - (62)
------- ------- ------- -------
1,103 2,670 2,585 4,922
Preferred stock dividend - - - -
------- ------- ------- -------
Net income available to common stockholders $ 1,103 $ 2,670 $ 2,585 $ 4,922
======= ======= ======= =======
Denominator -
Weighted average common shares outstanding 25,246 21,144 25,235 21,144
Employee stock options 285 150 268 123
Warrants 65 - 59 -
Preferred stock 2,734 2,784 2,734 2,784
-------- ------- ------- -------
Weighted average common shares for diluted earnings
per share assuming conversion 28,330 24,078 28,296 24,051
======== ======= ======= =======
Diluted Earnings Per Share:
Income before cumulative effect of a change
in accounting principle $ 0.04 $ 0.11 $ 0.09 $ 0.20
Cumulative effect of a change in accounting principle,
net of tax - - - -
-------- ------- ------- -------
Net income per common share $ 0.04 $ 0.11 $ 0.09 $ 0.20
======== ======= ======= =======
12
NOTE 8: ASSET RETIREMENT OBLIGATIONS
On January 1, 2003, we adopted Statement of Financial Accounting
Standards No. 143, Accounting for Asset Retirement Obligations "SFAS No. 143".
SFAS No. 143 requires us to recognize a liability for the present value of all
obligations associated with the retirement of tangible long-lived assets and to
capitalize an equal amount as a cost of the related oil and gas properties
The following table summarizes our asset retirement obligation activity:
Three Months Ended Six Months Ended
---------------------------- ----------------------------
June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003
-------------- ------------- ------------- -------------
(in thousands)
Beginning asset retirement obligation $ 1,864 $ 1,727 $ 1,701 $ 1,693
Additions related to new properties 59 16 231 16
Deletions related to property disposals - - (42) -
Accretion expense 20 34 53 68
------- ------- ------- -------
Ending asset retirement obligation $ 1,943 $ 1,777 $ 1,943 $ 1,777
======= ======= ======= =======
NOTE 9: RECENTLY ANNOUNCED ACCOUNTING PRONOUNCEMENTS
FIN No. 46, Consolidation of Variable Interest Entities. In December
2003, the FASB issued Interpretation No. 46R, which requires the consolidation
of certain entities that are determined to be variable interest entities
("VIE"). An entity is considered to be a VIE when either (i) the entity lacks
sufficient equity to carry on its principal operations, (ii) the equity owners
of the entity cannot make decisions about the entity's activities or (iii) the
entity's equity neither absorbs losses or benefits from gains. We own no
interests in variable interest entities, and therefore this new interpretation
has not affected our consolidated financial statements.
In March 2004, the Financial Accounting Standards Board ("FASB") issued
an exposure draft entitled "Share-Based Payment, an Amendment of FASB Statements
No. 123 and 95." This proposed statement addresses the accounting for
share-based payment transactions in which an enterprise receives employee
services in exchange for (a) equity instruments of the enterprise or (b)
liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
The proposed Statement would eliminate the ability to account for share-based
compensation transactions using APB Opinion No. 25, "Accounting for Stock Issued
to Employees", and generally would require instead that such transactions be
accounted for using a fair-value-based method. As proposed, this statement would
apply to Parallel effective January 1, 2005. We are currently unable to
determine what effect this statement will have on our financial position or
results of operations.
13
NOTE 10.COMMITMENTS AND CONTINGENCIES
From time to time, we are a party to ordinary routine litigation
incidental to our business. We are not currently a party to any pending
litigation, and we are not aware of any threatened litigation. We have not been
a party to any bankruptcy, receivership, reorganization, adjustment or similar
proceeding.
As previously reported, the Compensation Committee has approved in
principle the adoption of an employee incentive and retention plan which,
generally, would provide for a one-time cash payment to all officers and
employees upon the occurrence of a merger, sale or other change of control of
the company. The Committee is still working on finalizing the specific
compensatory features of the plan, which we expect will include features tied
more closely to the market price of Parallel's common stock.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis should be read in conjunction with
our Consolidated Financial Statements and the related notes.
OVERVIEW
Strategy
Our primary objective is to increase stockholder value of our common
stock through increasing reserves, production, cash flow from operations and
earnings. We have shifted the balance of our investments from properties having
high rates of production in early years to properties with more consistent
production over a longer term. We attempt to reduce our financial risks by
dedicating a smaller portion of our capital to high risk projects, while
reserving the majority of our available capital for exploitation and development
drilling opportunities. Obtaining positions in long-lived oil and gas reserves
are given priority over properties that might provide more cash flow in the
early years of production, but which have shorter reserve lives. We also attempt
to further reduce risk by emphasizing acquisition possibilities over high risk
exploration projects.
Since the latter part of 2002, we have reduced our emphasis on high risk
exploration efforts and focused on established geologic trends where we utilize
the engineering, operational, financial and technical expertise of our entire
staff. Although we anticipate participating in exploratory drilling activities
in the future, reducing financial, reservoir, drilling and geological risks and
diversifying our property portfolio are important criteria in the execution of
our business plan. In summary, our current business plan:
. focuses on projects having less geological risk;
. emphasizes exploitation and enhancement activities;
. focuses on acquiring producing properties; and
14
. expands the scope of operations by diversifying our exploratory and
development efforts, both in and outside of our current areas of
operation.
Although the direction of our exploration and development activities has
shifted from high risk exploratory activities to lower risk development
opportunities, we will continue our efforts, as we have in the past, to utilize
advanced technologies, serve as operator in appropriate circumstances, and
reduce operating costs.
The extent to which we are able to pursue our business plan is
influenced by:
. the prices we receive for the oil and gas we produce;
. the results of reprocessing and reinterpreting our 3-D seismic data;
. the results of our drilling activities;
. the costs of obtaining high quality field services;
. our ability to find and consummate acquisition opportunities; and
. our ability to negotiate and enter into work to earn arrangements,
joint venture or other similar agreements on terms acceptable to us.
Significant changes in the prices we receive for the oil and gas we
produce or the occurrence of unanticipated events beyond our control may cause
us to defer or deviate from our business plan, including the amounts we have
budgeted for our activities.
Operating Performance
Our operating performance is influenced by several factors, the most
significant of which are the prices we receive for our oil and gas and the
volumes of oil and gas that we are able to produce. The world price for oil has
overall influence on the prices that we receive for our oil production. The
prices received for different grades of oil are based upon the world price for
oil, which is then adjusted based upon the particular grade. Typically, light
oil is sold at a premium, while heavy grades of crude are discounted. Gas prices
we receive are influenced by:
. seasonal demand;
. weather;
. hurricane conditions in the Gulf of Mexico;
. availability of pipeline transportation to end users; and
. to a lesser extent, world oil prices.
15
Additional factors influencing our overall operating performance
include:
. production expenses;
. overhead requirements; and
. costs of capital.
Our oil and gas exploration, development and acquisition activities
require substantial and continuing capital expenditures. Historically, the
sources of financing to fund our capital expenditures have included:
. cash flow from operations;
. sales of our equity securities;
. bank borrowings; and
. industry joint ventures.
For the three months ended June 30, 2004, the sales price we received
for our crude oil production (excluding hedges) averaged $35.70 per barrel
compared to $26.09 per barrel for the three months ended June 30, 2003. The
average sales price we received for natural gas for the three months ended June
30, 2004 (excluding hedges), was $5.94 per Mcf compared to $6.10 per Mcf for the
three months ended June 30, 2003.
For the six months ended June 30, 2004, the sales price we received for
our crude oil production (excluding hedges) averaged $34.31 per barrel compared
to $29.28 for the six months period ended June 30, 2003. The average sales price
we received for natural gas for the six months ended June 30, 2004 (excluding
hedges), was $5.55 per Mcf compared to $5.96 for the six months ended June 30,
2003. For information regarding prices received, including our hedges, you
should refer to the selected operating data set forth in the table on page 18.
Our oil and gas producing activities are accounted for using the full
cost method of accounting. Under this accounting method, we capitalize all costs
incurred in connection with the acquisition of oil and gas properties and the
exploration for and development of oil and gas reserves. These costs include
lease acquisition costs, geological and geophysical expenditures, costs of
drilling productive and non-productive wells, and overhead expenses directly
related to land and property acquisition and exploration and development
activities. Proceeds from the disposition of oil and gas properties are
accounted for as a reduction in capitalized costs, with no gain or loss
recognized unless a disposition involves a material change in reserves, in which
case the gain or loss is recognized.
Depletion of the capitalized costs of oil and gas properties, including
estimated future development costs, is provided using the equivalent
unit-of-production method based upon
16
estimates of proved oil and gas reserves and production, which are converted to
a common unit of measure based upon their relative energy content. Unproved oil
and gas properties are not amortized, but are individually assessed for
impairment. The cost of any impaired property is transferred to depletable oil
and gas properties. Depletion per BOE for the six months ending June 30, 2004
and 2003 was $6.92 and $7.07, respectively, excluding the FAS 143 adjustment in
2003.
Results of Operations
Our business activities are characterized by frequent, and sometimes
significant, changes in our:
. reserve base;
. sources of production;
. product mix (gas versus oil volumes); and
. the prices we receive for our oil and gas production.
17
Year-to-year or other periodic comparisons of the results of our
operations can be difficult and may not fully and accurately describe our
condition. The following table shows selected operating data for the three and
six months ended June 30, 2004 and 2003.
Three Months Ended Six Months Ended
----------------------- -----------------------
6/30/2004 6/30/2003 6/30/2004 6/30/2003
------------ ---------- ----------- -----------
Sales Volumes:
Oil (MBbls) 166 160 327 313
Natural gas (MMcf) 644 805 1,376 1,587
Equivalent barrels of oil (MBOE)(1) 273 294 556 578
Equivalent barrels of oil (BOE) per day 3,006 3,230 3,057 3,192
Average Sales Prices:
per Bbl (unhedged)(2) $ 35.70 $ 26.09 $ 34.31 $ 29.28
per Bbl (hedged)(3) $ 26.54 $ 24.00 $ 26.21 $ 27.82
per MCF (unhedged)(2) $ 5.94 $ 6.10 $ 5.55 $ 5.96
per MCF (hedged)(3) $ 5.45 $ 5.84 $ 5.34 $ 5.24
per BOE (unhedged)(2) $ 35.72 $ 30.89 $ 33.92 $ 32.25
per BOE (hedged)(3) $ 29.00 $ 29.03 $ 28.63 $ 29.46
Revenues:
(dollars in thousands)
Oil revenue $ 5,928 $ 4,168 $11,218 $ 9,174
Oil hedge $(1,522) $ (335) $(2,646) $ (457)
Gas revenue $ 3,824 $ 4,910 $ 7,640 $ 9,459
Gas hedge $ (313) $ (211) $ (294) $(1,151)
------------ ---------- ----------- -----------
Total oil and gas revenues $ 7,917 $ 8,532 $15,918 $17,025
============ ========== =========== ===========
Cost per BOE:
Lease operating expense $ 7.37 $ 5.92 $ 6.37 $ 4.56
Production taxes $ 1.72 $ 1.51 $ 1.71 $ 1.75
General and administrative $ 4.47 $ 3.36 $ 4.39 $ 3.06
Depreciation and depletion $ 7.20 $ 6.77 $ 7.28 $ 7.02
________________
(1) A BOE means one barrel of oil equivalent using the ratio of
six Mcf of gas to one barrel of oil. "MBOE" means one
thousand BOE.
(2) Unhedged price is the actual price received at the wellhead
for our oil and natural gas.
(3) Hedged price is the actual price received at the wellhead
for our oil and natural gas plus or minus the settlements on
our derivatives.
18
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2004 AND 2003:
Oil and Gas Revenues. Our combined oil and gas revenues decreased
$615,000 or 7%, to $7.9 million for the three months ended June 30, 2004, from
$8.5 million for the same period of 2003. Derivative transactions resulted in
hedge losses on oil and gas of approximately $1.8 million for the three months
ended June 30, 2004 compared to $546,000 for the same period in 2003. Gas
revenue decreased by $1.1 million due to decreased prices and natural production
declines in the Yegua/Frio, Cook Mountain areas. This decrease was partially
offset by an increase in oil revenue of $1.8 million which was due to increased
prices and increased production in the Diamond M and Fullerton Fields.
Lease Operating Costs. Lease operating costs increased approximately
$273,000, or 16%, to $2.0 million during the three months ended June 30, 2004,
compared with $1.7 million for the same period of 2003. The increase was
primarily associated with our waterfloods on our oil properties.
General and Administrative Expenses. General and administrative expenses
increased approximately $253,000, or 26%, to $1.2 million for the three months
ended June 30, 2004 from $968,000 for the same period of 2003. The increase was
primarily due to costs associated with additional personnel hired, current year
salary increases and increased public reporting costs. General and
administrative expense capitalized to oil and gas properties is approximately
$235,000 and approximately $167,000 for 2004 and 2003 respectively.
Depreciation and Depletion. Depreciation and depletion expenses were
substantially the same for the three months ended June 30, 2004 compared with
the same period of 2003.
Change in Fair Market Value of Derivatives. A loss of approximately
$105,000 was recognized for the three months ended June 30, 2003 along with the
expiration of our put options.
Ineffective Portion of Hedges. The ineffective portion of our hedges was
approximately $17,000 for the three months ended June 30, 2004 compared to
$379,000 for the same period in 2003. The decrease in the ineffective portion of
our hedges reflects an improved correlation between our hedge contract price and
market price.
Interest and Other Income. Interest and other income is approximately
$18,000 for the three month period ended June 30, 2004 compared to approximately
$1,000 for the same period of 2003.
Interest Expense. Interest expense decreased $35,000, or 7%, to
approximately $487,000 for the three months ended June 30, 2004 compared with
approximately $522,000 for the same period of 2003. Although we reduced
borrowings during the first quarter 2004, our interest rate hedges added
approximately $117,000 to interest expense during the second quarter of 2004.
19
Income Tax Expense. Income tax expense increased approximately $181,000
or 40%, to $628,000 for the three months ended June 30, 2004 compared to
$447,000 for the same period in 2003. For the second quarter 2003, we recognized
state income tax, net operating loss carryover and certain federal income tax
credits not previously recognized.
Net Income. We reported net income of $1.1 million for the three months
ended June 30, 2004 compared with net income of $2.6 million for the three
months ended June 30, 2003. The decrease of $1.5 million or 59% is mainly
associated with the 7% decrease in oil and gas revenues, the 16% increase in
lease operating expense, a 26% increase in general and administrative expense
and a 32% increase in income tax expense.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003:
Oil and Gas Revenues. Our combined oil and gas revenues decreased $1.1
million or 7%, to $15.9 million for the six months ended June 30, 2004, from
$17.0 million for the same period of 2003. Derivative transactions resulted in
hedge losses on oil and gas of approximately $2.9 million for the six months
ended June 30, 2004 compared to $1.6 million for the same period in 2003. Gas
revenue decreased by $1.8 million due to decreased prices and natural production
declines in the Yegua/Frio, Cook Mountain areas. This decrease was partially
offset by an increase in oil revenue of $2.0 million which was due to increased
prices and increased production in the Diamond M and Fullerton Fields.
Lease Operating Costs. Lease operating costs increased $912,000 or 35%,
to $3.5 million during the first six months of 2004, compared with $2.6 million
for the same period of 2003. The increase was primarily due to increased costs
associated with our waterfloods on our oil properties.
General and Administrative Expenses. General and administrative expenses
increased approximately $673,000, or 38%, to $2.4 million during the six months
ended June 30, 2004, compared with $1.8 million for the same period of 2003. The
increase was primarily due to costs associated with additional personnel hired,
current year salary increases and increased public reporting costs. General and
administrative expense capitalized to oil and gas properties is $522,000 and
$431,000 for 2004 and 2003, respectively.
Depreciation and Depletion Expense. Depreciation and depletion expenses
were substantially the same for the six months period ending June 30, 2004
compared to the same period of 2003.
Change in Fair Market Value of Derivatives. A loss of approximately
$124,000 was recognized for the six months ended June 30, 2003 along with the
expiration of our put options.
Ineffective Portion of Hedges. The ineffective portion of our hedges was
approximately $7,000 for the six months ending June 30, 2004 compared to
$196,000 for the
20
same period in 2003. The decrease in the ineffective portion of our hedges
reflects an improved correlation between our hedge contract price and market
price.
Interest and Other Income. Interest and other income is $158,000 for the
six month period ended June 30, 2004 compared to $46,000 for the same period of
2003.
Interest Expense. Interest expense decreased $53,000 or 5%, to $955,000
for the six months ended June 30, 2004 compared with $1.0 million for the same
period of 2003; due to decreased bank borrowings. Although we reduced net
borrowings by approximately $5.7 million, our interest rate hedges added
approximately $231,000 to interest expense during the six months ended June 30,
2004.
Income Tax Expense. Income tax expense declined $162,000 for the six
months period ending June 30, 2004 compared to the same period of 2003. Our
effective rate for the six months ended June 30, 2004 was 36%, which is greater
than the 25% rate in 2003. In 2003, we recognized state income tax, net
operating loss carryover and certain federal income tax credits not previously
recognized.
Net Income. We reported net income of $2.6 million for the six months
ended June 30, 2004 compared to $5.0 million for the six months ended June 30,
2003. The decrease of $2.4 million or 48% is primarily associated with the 7%
decrease in oil and gas revenues, 35% increase in lease operating expense and
38% increase in general and administrative expense.
LIQUIDITY AND CAPITAL RESOURCES
Our capital resources consist primarily of cash flows from our oil and
gas properties and bank borrowings supported by our oil and gas reserves. Our
level of earnings and cash flows depends on many factors, including the prices
we receive for oil and gas we produce.
Working capital decreased 91% or approximately $15.0 million as of June
30, 2004 compared with December 31, 2003. Current assets exceeded current
liabilities by $1.4 million at June 30, 2004. The working capital decrease was
primarily due to the net payments on our revolving credit facility of $5.7
million, increased current maturity of derivative obligations of approximately
$2.8 million and working capital requirements associated with our increased
drilling program in 2004.
We incurred net property costs of $15.0 million for the six months ended
June 30, 2004 compared to $7.5 million for the same period in 2003. This is a
result of our increased capital budget from $15.5 million in 2003 to an
estimated $25.3 million in 2004. Included in our property basis for the six
months ending June 30, 2004 and 2003 were asset retirement costs of
approximately $189,000 and $1.2 million respectively, net of disposals, for the
adoption of SFAS 143 (see Note 8 to Consolidated Financial Statements). Our
property leasehold acquisition, development and enhancement activities were
financed by the utilization of cash flows provided by operations and cash on
hand.
21
Stockholders' equity is $60.4 million for June 30, 2004, compared to
$61.2 million at December 31, 2003, a decrease of 1%. The decline is
attributable to a reduction in value of our derivative instruments (see Note 6
to Consolidated Financial Statements) partially offset by net income.
Based on our projected oil and gas revenues and related expenses,
available bank borrowings and expected cash derived from non-strategic asset
divestitures, we believe that we will have sufficient capital resources to fund
normal operations and capital requirements, interest expense and principal
reduction payments on bank debt, if required, and preferred stock dividends. We
continually review and consider alternative methods of financing.
Bank Borrowings
Parallel and its subsidiary, Parallel, L.P., are parties to a credit
agreement with First American Bank, SSB, Western National Bank and BNP Paribas
which provides for revolving loans. This means that we can borrow, repay and
reborrow funds drawn under the credit facility. However, the aggregate amount
that we can borrow and have outstanding at any one time is subject to a
borrowing base. Generally, we can borrow only up to the borrowing base in effect
from time to time. The borrowing base amount is redetermined by the banks on or
about April 1 and October 1 of each year or at other times required by the banks
or at our request. At June 2004, the borrowing base was $52.0 million, which was
reduced to $51.5 million effective August 5, 2004 following our sale of non-core
oil and gas assets. If, as a result of the banks' redetermination of the
borrowing base, the outstanding principal amount of our loan exceeds the
borrowing base, we must either provide additional collateral to the banks or
prepay the principal of the note in an amount equal to the excess. Except for
principal payments that may be required because of our outstanding loans being
in excess of the borrowing base, interest only is payable monthly.
The principal amount outstanding under the revolving credit facility
bears interest at First American Bank's base rate or the LIBOR rate, at our
election. Generally, First American Bank's base rate is equal to the prime rate
published in the Wall Street Journal, but not less than 4.50%. The LIBOR rate is
generally equal to the sum of (a) the rate designated as "British Bankers
Association Interest Settlement Rates" and offered in one, two, three or six
month interest periods for deposits of $1.0 million, and (b) a margin ranging
from 2.25% to 2.75%, depending upon the outstanding principal amount of the
loans. The interest rate we are required to pay, including the applicable
margin, may never be less than 4.50%. If the principal amount outstanding is
equal to or greater than 75% of the borrowing base established by the banks, the
margin is 2.75%. If the principal amount outstanding is equal to or greater than
50%, but less than 75% of the borrowing base, the margin is 2.50%. If the
principal amount outstanding is less than 50% of the borrowing base, the margin
is 2.25%.
In the case of base rate loans, interest is payable on the last day of
each month. In the case of LIBOR loans, interest is payable on the last day of
each applicable interest period.
If the total outstanding borrowings under the revolving credit facility
are less than the borrowing base, an unused commitment fee is required to be
paid to the bank lenders. The amount
22
of the fee is .25% of the daily average of the unadvanced amount of the
borrowing base. The fee is payable quarterly. All outstanding principal under
the revolving credit facility is due and payable on December 20, 2006. The loan
is secured by substantially all of our oil and gas properties, including the
properties of Parallel, L.P. Parallel, L.L.C., a subsidiary of Parallel,
guaranteed payment of the loans.
We are highly dependent on bank borrowings to fund our exploration and
drilling activities. Our borrowing base calculation is based upon the estimated
value of oil and gas reserves. If our borrowing base declines significantly, our
liquidity would be suddenly and materially limited.
If the borrowing base is increased, we are required to pay a fee of .25%
on the amount of any increase in the borrowing base.
Our bank borrowings have been incurred to finance our property
acquisition, 3-D seismic surveys, enhancement and drilling activities.
In addition to customary affirmative covenants, the credit agreement
contains various restrictive covenants and compliance requirements, including:
. maintaining certain financial ratios;
. limitations on incurring additional indebtedness;
. prohibiting the payment of dividends on our common stock;
. limitations on the disposition of assets; and
. prohibiting liens (other than in favor of the banks) to exist on any
of our properties.
Our revolving credit facility also requires that we have:
. at the end of each quarter, a current ratio (as defined in the
credit agreement) of at least 1.1 to 1.0;
. at the end of each quarter, a funded debt ratio (as defined in the
credit agreement) of not more than 3.0 to 1.0; and
. at all times, adjusted consolidated net worth (as defined in the
credit agreement) of at least (a) $40.0 million, plus (b)
seventy-five percent (75%) of the net proceeds from any equity
securities issued by Parallel, plus (c) fifty percent (50%) of
Parallel's consolidated net income for each fiscal quarter, if
positive, and zero percent (0%) if negative.
As of June 30, 2004, we were in compliance with all covenants.
23
If we have borrowing capacity under our credit agreement, we intend to
borrow, repay and reborrow under the revolving credit facility from time to time
as necessary, subject to borrowing base limitations, to fund:
. interpretation and processing of 3-D seismic survey data;
. lease acquisitions and drilling activities;
. acquisitions of producing properties or companies owning producing
properties; and
. general corporate purposes.
Preferred Stock
At June 30, 2004, we had 957,000 shares of 6% Convertible Preferred
Stock outstanding. The 6% Convertible Preferred Stock:
. requires us to pay dividends of $.60 per annum, semi-annually on
June 15 and December 15 of each year;
. is convertible into common stock at any time, at the option of the
holder, into 2.8751 shares of common stock at an initial conversion
price of $3.50 per shares, subject to adjustment in certain events;
. is redeemable at our option, in whole or in part, for $10 per share,
plus accrued and unpaid dividends;
. has no voting rights, except as required by applicable law, and
except that as long as any shares of preferred stock remain
outstanding, the holders of a majority of the outstanding shares of
the preferred stock may vote on any proposal to change any provision
of the preferred stock which materially and adversely affects the
rights, preferences or privileges of the preferred stock;.
. is senior to the common stock with respect to dividends and on
liquidation, dissolution or winding up of Parallel; and
. has a liquidation value of $10 per share, plus accrued and unpaid
dividends.
Commodity Price Risk Management Transactions
The purpose of our hedges is to provide a measure of stability in our
oil and gas prices and interest rate payments and to manage exposure to
commodity price and interest rate risk. Our objective is to lock in a range of
oil and gas prices and a fixed interest rate for certain notional amounts.
Under cash flow hedge accounting, the quarterly change in the fair value
of the commodity derivatives is recorded in stockholders' equity as other
comprehensive income (loss) and then transferred to revenue when the production
is sold. Ineffective portions of cash flow hedges (changes in realized prices
that do not match the changes in the hedge price) are
24
recognized in other expense as they occur. While the cash flow hedge contract is
open, the ineffective gain or loss many increase or decrease until settlement of
the contract.
Under cash flow hedge accounting for interest rate swaps, the quarterly
change in the fair value of the derivatives is recorded in stockholders' equity
as other comprehensive income (loss) and then transferred to interest expense
when the contract settles. Ineffective portions of cash flow hedges are
recognized in other expense as they occur.
We are exposed to credit risk in the event of nonperformance by the
counterparty in its derivative instruments. However, we periodically assess
the creditworthiness of the counterparty to mitigate this credit risk.
Certain of our commodity price risk management arrangements have
required us to deliver cash collateral or other assurances of performance to the
counterparties in the event that our payment obligations with respect to our
commodity price risk management transactions exceed certain levels.
Outlook
The oil and gas industry is capital intensive. We make, and anticipate
that we will continue to make, substantial capital expenditures in the
exploration for, development and acquisition of oil and gas reserves.
Historically, our capital expenditures have been financed primarily with:
. internally generated cash from operations;
. proceeds from bank borrowings; and
. proceeds from sales of equity securities.
The continued availability of these capital sources depends upon a
number of variables, including:
. our proved reserves;
. the volumes of oil and gas we produce from existing wells;
. the prices at which we sell oil and gas; and
. our ability to acquire, locate and produce new reserves.
25
Each of these variables materially affects our borrowing capacity. We
may from time to time seek additional financing in the form of:
. increased bank borrowings;
. sales of Parallel's securities;
. sales of non-core properties; or
. other forms of financing.
Except for the revolving credit facility we have with our bank lenders,
we do not have agreements for any future financing and there can be no assurance
as to the availability or terms of any such financing.
Inflation
Inflation has not had a significant impact on our financial condition or
results of operations. We do not believe that inflation poses a material risk to
our business.
Recent Accounting Pronouncements
FIN No. 46, Consolidation of Variable Interest Entities. In December
2003, the FASB issued Interpretation No. 46R, which requires the consolidation
of certain entities that are determined to be variable interest entities
("VIE"). An entity is considered to be a VIE when either (i) the entity lacks
sufficient equity to carry on its principal operations, (ii) the equity owners
of the entity cannot make decisions about the entity's activities or (iii) the
entity's equity neither absorbs losses or benefits from gains. We own no
interests in variable interest entities, and therefore this new interpretation
has not affected our consolidated financial statements.
In March 2004, the Financial Accounting Standards Board ("FASB") issued
an exposure draft entitled "Share-Based Payment, an Amendment of FASB Statements
No. 123 and 95." This proposed statement addresses the accounting for
share-based payment transactions in which an enterprise receives employee
services in exchange for (a) equity instruments of the enterprise or (b)
liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
The proposed Statement would eliminate the ability to account for share-based
compensation transactions using APB Opinion No. 25, "Accounting for Stock Issued
to Employees", and generally would require instead that such transactions be
accounted for using a fair-value-based method. As proposed, this statement would
apply to Parallel effective January 1, 2005. We are currently unable to
determine what effect this statement will have on our financial position or
results of operations.
Effects of Derivative Instruments
As of January 1, 2003, we designated our costless collars, oil and gas
swaps and interest rate swaps as cash flow hedges under the provisions of SFAS
133, as amended. The adoption of cash flow hedge accounting allows us to record
changes in fair value of contracts
26
designated as cash flow hedges through other comprehensive income until
realized. When realized, we reflect the gain or loss on commodity derivatives
designated as cash flow hedges in revenue and on interest rate derivatives
designated as cash flow hedges in interest expense. We utilize mark-to-market
accounting for our put positions. The purpose of our hedges is to provide a
measure of stability in our oil and gas prices and interest rate payments and to
manage exposure to commodity price and interest rate risk. Our objective is to
lock in a range of oil and gas prices and a fixed interest rate for certain
notional amounts.
Under cash flow hedge accounting, the quarterly change in the fair value
of the derivatives is recorded in stockholders' equity as other comprehensive
income (loss) and then transferred to earnings when the production is sold.
Ineffective portions of cash flow hedges (changes in realized prices that do not
match the changes in the hedge price) are recognized in other expense as they
occur. While the cash flow hedge contract is open, the ineffective gain or loss
many increase or decrease until settlement of the contract.
We are exposed to credit risk in the event of nonperformance by the
counterparty in its derivative instruments. However, we periodically assess the
creditworthiness of the counterparty to mitigate this credit risk.
TRENDS AND PRICES
Changes in oil and gas prices significantly affect our revenues, cash
flows and borrowing capacity. Markets for oil and gas have historically been,
and will continue to be, volatile. Prices for oil and gas typically fluctuate in
response to relatively minor changes in supply and demand, market uncertainty,
seasonal, political and other factors beyond our control. We are unable to
accurately predict domestic or worldwide political events or the effects of
other such factors on the prices we receive for our oil and gas.
Our capital expenditure budgets are highly dependent on future oil and
gas prices and will be consistent with internally generated cash flows.
During fiscal year 2003, the average realized sales price for our oil
and gas was $30.66 (unhedged) per BOE. For the six months ended June 30, 2004,
our average realized price was $33.92 (unhedged) per BOE.
Rising costs in the services and supply sectors, including but not
limited to tubular goods, will adversely affect our cash flow and amounts
available for capital expenditures.
FORWARD-LOOKING STATEMENTS
Cautionary Statement Regarding Forward Looking Statements
Some statements contained in this Quarterly Report on Form 10-Q are
"forward-looking statements". All statements other than statements of historical
facts included in this report, including, without limitation, statements
regarding planned capital expenditures, the availability of capital resources to
fund capital expenditures, estimates of proved reserves, our financial position,
business strategy and other plans and objectives for future operations, are
forward-
27
looking statements. You can identify forward-looking statements by the
use of forward-looking terminology like "may," "will," "expect," "intend,"
"anticipate," "budget", "estimate," "continue," "present value," "future" or
"reserves" or other variations or comparable terminology. We believe the
assumptions and expectations reflected in these forward-looking statements are
reasonable. However, we cannot give any assurance that our expectations will
prove to be correct or that we will be able to take any actions that are
presently planned. All of these statements involve assumptions of future events
and risks and uncertainties. Risks and uncertainties associated with
forward-looking statements include, but are not limited to:
. fluctuations in prices of oil and gas;
. future capital requirements and availability of financing;
. geological concentration of our reserves;
. risks associated with drilling and operating wells;
. competition;
. general economic conditions;
. governmental regulations;
. receipt of amounts owed to us by purchasers of our production and
counterparties to our hedging contracts;
. hedging decisions, including whether or not to hedge;
. events similar to 911;
. actions of third party co-owners of interests in properties in which
we also own an interest; and
. fluctuations in interest rates and availability of capital.
While we believe our forward-looking statements are based upon
reasonable assumptions, these are factors that are difficult to predict and that
are influenced by economic and other conditions beyond our control. Investors
are urged to consider such risks and other uncertainties discussed in documents
filed by us with the SEC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following quantitative and qualitative information is provided about
market risks and derivative instruments to which Parallel was a party at June
30, 2004, and from which Parallel may incur future earnings, gains or losses
from changes in market interest rates and oil and natural gas prices.
28
Interest Rate Sensitivity as of June 30, 2004
Our only financial instrument sensitive to changes in interest rates is
our bank debt. As the interest rate is variable and reflects current market
conditions, the carrying value approximates the fair value. The table below
shows principal cash flows and related weighted average interest rates by
expected maturity dates. Weighted average interest rates were determined using
weighted average interest paid and accrued in June, 2004. You should read Note 2
to the Consolidated Financial Statements for further discussion of our debt that
is sensitive to interest rates.
July July July July July July
2004 2005 2006 2007 2008 2009 Total
---------- ---------- ---------- ---------- --------- --------- ----------
(In 000's, except interest rates)
Variable rate debt:
Revolving facility (secured) $ - $ - $ 34,000 $ - $ - $ - $ 34,000
Average interest rate 4.50% 4.50% 4.50% - - -
______________
At June 30, 2004, we had bank loans in the amount of approximately $34.0
million outstanding under our revolving credit facility at an average interest
rate of 4.50%. Borrowings under our revolving credit facility bear interest, at
our election, at (i) the bank's base rate or (ii) the LIBOR rate, plus LIBOR
margin, but in no event less than 4.50%. As a result, our annual interest cost
in 2004 will fluctuate based on short-term interest rates. As the interest rate
is variable and is reflective of current market conditions, the carrying value
approximates the fair value.
Under our revolving credit facility, we may elect an interest rate based
upon the agent lender's base lending rate, or the LIBOR rate, plus a margin
ranging from 2.25% to 2.75% per annum, depending on our borrowing base usage.
The interest rate we are required to pay, including the applicable margin, may
never be less than 4.50%.
In January, 2003, we entered into a 45-month LIBOR fixed interest rate
swap contract with BNP Paribas. We receive fixed 90-day LIBOR interest rates for
the 45-month period beginning March 31, 2003 through December 20, 2006.
29
A recap for the period of time, notional amounts, LIBOR fixed interest
rates, expected margin rates and expected fixed interest rates for the contract
are as follows:
Libor Expected Expected
Notional Fixed Margin Fixed
Period of Time Amounts (1) Interest Rates (2) Rates (3) Interest Rates (4)
- ----------------------------------------------- ----------------- ------------------- ----------- ------------------
July 1, 2004 thru December 31, 2004 $ 30,000,000 2.660% 2.500% 5.160%
January 1, 2005 thru December 31, 2005 $ 20,000,000 4.050% 2.250% 6.300%
January 1, 2006 thru December 20, 2006 $ 10,000,000 4.050% 2.250% 6.300%
___________________
(1) Based on the anticipated principal reductions under our facility.
(2) Parallel's swap contract with BNP Paribas.
(3) Based on the anticipated borrowing base usage under our facility.
(4) Total of the LIBOR fixed rate plus the expected margin rate under
our facility. Our credit agreement requires the interest rate to not
be below 4.50%.
Commodity Price Sensitivity as of June 30, 2004
Our major market risk exposure is in the pricing applicable to our oil
and natural gas production. Market risk refers to the risk of loss from adverse
changes in oil and natural gas prices. Realized pricing is primarily driven by
the prevailing domestic price for crude oil and spot prices applicable to the
region in which we produce natural gas. Historically, prices received for oil
and gas production have been volatile and unpredictable. We expect pricing
volatility to continue. Oil prices ranged from a low of $16.49 per barrel to a
high of $36.60 per barrel during 2003. Natural gas prices we received during
2003 ranged from a low of $1.98 per Mcf to a high of $10.28 per Mcf. During
2004, oil prices ranged from a low of $26.76 to a high of $40.06. Natural gas
prices we received during 2004 ranged from a low of $2.31 per Mcf to a high of
$7.85 per Mcf. A significant decline in the prices of oil or natural gas could
have a material adverse effect on our financial condition and results of
operations.
Costless Collar. Collars are created by purchasing puts to establish a
floor price and then selling a call which establishes a maximum amount the
producer will receive for the oil or gas hedged. Calls are sold to offset or
reduce the premium paid for buying the put. We have entered into several
costless, Houston ship channel gas collars. A majority of our natural gas
production is sold based on Houston ship channel prices. A recap for the period
of time, number of MMBtu's and gas prices is as follows:
Houston Ship Channel
gas prices
---------------------------
MMBtu of
Period of Time Natural Gas Floor Cap
- ------------------------------------------- -------------- ------------ -------------
July 1, 2004 thru October 31, 2004 123,000 $ 4.40 $ 5.50
April 1, 2005 thru October 31, 2005 428,000 $ 5.00 $ 7.26
30
Swaps. Generally, swaps are an agreement to buy or sell a specified
commodity for delivery in the future, but at an agreed fixed price. Swap
transactions convert a floating price into a fixed price. For any particular
swap transaction, the counterparty is required to make a payment to the hedge
party if the reference price for any settlement period is less than the swap
price for such hedge, and the hedge party is required to make a payment to the
counterparty if the reference price for any settlement period is greater than
the swap price for such hedge.
We have entered into oil and gas swap contracts with BNP Paribas. A
recap for the period of time, number of MMBtu's, number of barrels, and swap
prices are as follows:
Houston Ship
Barrels of Nymex Oil MMBtu of Channel
Period of Time Oil Swap Prices Natural Gas Gas Swap Price
- -------------------------------------------- ------------ --------------- ------------- -----------------
July 1, 2004 thru December 31, 2004 220,800 $ 24.27 491,000 $ 4.694
January 1, 2005 thru December 31, 2005 365,000 $ 23.35 - $ -
January 1, 2005 thru March 31, 2005 - $ - 180,000 $ 4.705
January 1, 2006 thru December 20, 2006 265,500 $ 23.04 - $ -
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this Quarterly Report on Form
10-Q, the effectiveness of our disclosure controls and procedures was evaluated
by our management, with the participation of our chief executive officer, Larry
C. Oldham (principal executive officer), and our chief financial officer, Steven
D. Foster (principal financial officer). Our disclosure controls and procedures
are designed to help ensure that information we are required to disclose in
reports that we file with the SEC is accumulated and communicated to our
management and recorded, processed, summarized and reported within the time
periods prescribed by the SEC. Mr. Oldham and Mr. Foster have concluded that our
disclosure controls and procedures are effective for their intended purposes.
There were no changes in internal control over financial reporting that occurred
during the last fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
While preparing and reviewing this Form 10Q report, we identified a need
to implement a new control procedure. This new control procedure is designed to
help ensure that our accruals for hedge gains or losses are made timely.
31
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are a party to ordinary routine litigation
incidental to our business. We are not currently a party to any pending
litigation, and we are not aware of any threatened litigation. We have not been
a party to any bankruptcy, receivership, reorganization, adjustment or similar
proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Our annual meeting of stockholders was held on June 22, 2004. At
the meeting, the following persons were elected to serve as directors of
Parallel for a term of one year expiring in 2005 and until their respective
successors are duly qualified and elected: (1) Thomas R. Cambridge, (2) Dewayne
E. Chitwood, (3) Larry C. Oldham, (4) Martin B. Oring, (5) Ray M. Poage, and (6)
Jeffrey G. Shrader. Set forth below is a tabulation of votes with respect to
each nominee for director.
BROKER
NAME VOTES CAST FOR VOTES WITHHELD NON-VOTES
- ---------------------------- ------------------------ ----------------------- ----------------
Thomas R. Cambridge 21,108,318 833,955 -
Dewayne E. Chitwood 21,269,825 672,448 -
Larry C. Oldham 21,113,784 828,489 -
Martin B. Oring 21,357,076 585,197 -
Ray M. Poage 21,568,151 374,122 -
Jeffrey G. Shrader 21,275,227 667,046 -
In addition to electing directors, the stockholders also voted to
approve Parallel's Non-Employee Director Stock Grant Plan. Set forth below is a
tabulation of votes with respect to the approval of Parallel's Non-Employee
Director Stock Grant Plan:
BROKER
FOR AGAINST ABSTAIN NON-VOTES
- ---------------------------- ------------------------ ----------------------- ----------------
9,351,440 1,717,791 370,151 10,502,891
Also, the stockholders voted upon and ratified the appointment of BDO
Seidman, LLP to serve as our independent public accountants for 2004. Set forth
below is a tabulation of votes with respect to the proposal to ratify the
appointment of our independent public accountants:
FOR AGAINST ABSTAIN
- ---------------------------- ------------------------ -----------------------
21,358,232 438,218 145,823
32
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
No. Description of Exhibit
- ---- ----------------------
*3.1 Certificate of Incorporation of Registrant
3.2 Bylaws of Registrant (Incorporated by reference to Exhibit 3 to the
Registrant's Form 8-K, dated October 9, 2000, as filed with the
Securities and Exchange Commission on October 10, 2000.)
*4.1 Certificate of Designations, Preferences and Rights of Serial Preferred
Stock - 6% Convertible Preferred Stock
4.2 Certificate of Designation, Preferences and Rights of Series A Preferred
Stock. (Incorporated by reference to Exhibit 4.2 of Form 10-K for the
fiscal year ended December 31, 2000.)
4.3 Rights Agreement, dated as of October 5, 2000, between the Registrant
and Computershare Trust Company, Inc., as Rights Agent (Incorporated by
reference to Exhibit 4.3 of Form 10-K for the fiscal year ended December
31, 2000.)
Executive Compensation Plans and Arrangements (Exhibit No.'s 10.1
through 10.8):
10.1 1992 Stock Option Plan (Incorporated by reference to Exhibit 28.1 to
Form S-8 of the Registrant (File No. 33-57348) as filed with the
Securities and Exchange Commission on January 25, 1993.)
10.2 Stock Option Agreement between the Registrant and Thomas R. Cambridge
dated December 11, 1991 (Incorporated by reference to Exhibit 10.4 of
Form 10-K of the Registrant for the fiscal year ended December 31,
1992.)
10.3 Merrill Lynch, Pierce, Fenner & Smith Incorporated Prototype Simplified
Employee Pension Plan (Incorporated by reference to Exhibit 10.6 of the
Registrant's Form 10-K for the fiscal year ended December 31, 1995.)
10.4 Non-Employee Directors Stock Option Plan (Incorporated by reference to
Exhibit 10.6 of the Registrant's Form 10-K Report for the fiscal year
ended December 31, 1997).
10.5 1998 Stock Option Plan (Incorporated by reference to Exhibit 10.7 of
Form 10-K of the Registrant for the fiscal year ended December 31,
1998.)
33
10.6 Form of Incentive Award Agreements, dated December 12, 2001, between the
Registrant and Thomas R. Cambridge, Larry C. Oldham, Eric A. Bayley and
John S. Rutherford granting 2,394 Unit Equivalent Rights to Mr.
Cambridge; 9,564 Unit Equivalent Rights to Mr. Oldham; 2,869 Unit
Equivalent Rights to Mr. Bayley; and 7,173 Unit Equivalent Rights to Mr.
Rutherford. (Incorporated by reference to Exhibit 10.8 of the
Registrant's Form 10-K Report for the fiscal year ended December 31,
2001).
10.7 2001 Non-Employee Directors Stock Option Plan (Incorporated by reference
to Exhibit 10.7 of the Registrant's Form 10-Q Report for the first
fiscal quarter ended March 31, 2004).
10.8 2004 Non-Employee Director Stock Grant Plan (Incorporated by reference
to Exhibit 10.1 of the Registrant's Form 8-K Report dated June 22,
2004).
10.9 Certificate of Formation of First Permian, L.L.C. (Incorporated by
reference to Exhibit 10.1 of the Registrant's Form 8-K report dated June
30, 1999.)
10.10 Limited Liability Company Agreement of First Permian, L.L.C.
(Incorporated by reference to Exhibit 10.2 of the Registrant's Form 8-K
report dated June 30, 1999.)
10.11 Merger Agreement dated June 25, 1999. (Incorporated by reference to
Exhibit 10.3 of the Registrant's Form 8-K report dated June 30, 1999.)
10.12 Agreement and Plan of Merger of First Permian, L.L.C. and Nash Oil
Company, L.L.C. (Incorporated by reference to Exhibit 10.4 of the
Registrant's Form 8-K report dated June 30, 1999.)
10.13 Certificate of Merger of First Permian, L.L.C. and Nash Oil Company,
L.L.C (Incorporated by reference to Exhibit 10.5 of the Registrant's
Form 8-K Report dated June 30, 1999.)
10.14 Amended and Restated Limited Liability Company Agreement of First
Permian, L.L.C. dated as of May 31, 2000. (Incorporated by reference to
Exhibit 10.16 of Form 10-K for the fiscal year ended December 31, 2000.)
10.15 Credit Agreement dated June 30, 1999, by and among First Permian,
L.L.C., Parallel Petroleum Corporation, Baytech, Inc., and Bank One,
Texas, N.A. (Incorporated by reference to Exhibit 10.6 of the
Registrant's Form 8-K report dated June 30, 1999.)
10.16 Limited Guaranty, dated June 30, 1999, by and among First Permian,
L.L.C., Parallel Petroleum Corporation, and Bank One, Texas, N.A.
(Incorporated by reference to Exhibit 10.7 of the Registrant's Form 8-K
report dated June 30, 1999.)
34
10.17 Intercreditor Agreement, dated as of June 30, 1999, by and among First
Permian, L.L.C., Bank One, Texas, N.A., Tejon Exploration Company, and
Mansefeldt Investment Corporation (Incorporated by reference to Exhibit
10.8 of the Registrant's Form 8-K report dated June 30, 1999.)
10.18 Subordinated Promissory Note, dated June 30, 1999, in the original
principal amount of $8.0 million made by First Permian, L.L.C. payable
to the order of Tejon Exploration Company (Incorporated by reference to
Exhibit 10.9 of the Registrant's Form 8-K report dated June 30, 1999.)
10.19 Subordinated Promissory Note, dated June 30, 1999, in the original
principal amount of $8.0 million made by First Permian, L.L.C. payable
to the order of Mansefeldt Investment Corporation (Incorporated by
reference to Exhibit 10.10 of the Registrant's Form 8-K report dated
June 30, 1999.)
10.20 Second Restated Credit Agreement, dated October 25, 2000, among First
Permian, L.L.C., Bank One, Texas, N.A., and Bank One Capital Markets,
Inc. (Incorporated by reference to Exhibit 10.22 of Form 10-K for the
fiscal year ended December 31, 2000.)
10.21 Loan Agreement, dated January 25, 2002, between the Registrant and First
American Bank, SSB (Incorporated by reference to Exhibit 10.25 of Form
10-K for the fiscal year ended December 31, 2001.)
10.22 Purchase and Sale Agreement, dated as of November 27, 2002, among JMC
Exploration, Inc., Arkoma Star L.L.C., Parallel, L.P. and Texland
Petroleum, Inc. (Incorporated by reference to Exhibit 10.1 of Form 8-K
of the Registrant, dated December 20, 2002)
10.23 First Amended and Restated Credit Agreement, dated December 20, 2002, by
and among Parallel Petroleum Corporation, Parallel, L.P. Parallel,
L.L.C., First American Bank, SSB, Western National Bank and BNP Paribas
(Incorporated by reference to Exhibit 10.2 of Form 8-K of the
Registrant, dated December 20, 2002)
10.24 Guaranty dated December 20, 2002, between Parallel, L.L.C. and First
American Bank, SSB, as Agent (Incorporated by reference to Exhibit 10.3
of Form 8-K of the Registrant, dated December 20, 2002)
10.25 First Amendment to First Amended and Restated Credit Agreement, dated as
of September 12, 2003, by and among Parallel Petroleum Corporation,
Parallel, L.P., Parallel, L.L.C., First American, SSB, Western National
Bank, and BNP Paribas (Incorporated by reference to Exhibit 10.29 of
Form 10-Q of the Registrant for the quarter ended September 30, 2003).
35
14 Code of Ethics (Incorporated by reference to Exhibit 14 of Form 10-K of
the Registrant for the fiscal year ended December 31, 2003).
21 Subsidiaries (Incorporated by reference to Exhibit 21 of Form 10-K of
the Registrant for the fiscal year ended December 31, 2003)
*31.1 Certification of Principal Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the Sarbanes - Oxley
Act of 2002.
*31.2 Certification of Principal Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the Sarbanes - Oxley
Act of 2002.
*32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of
2002.
*32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of
2002.
- ---------------
* Filed herewith.
36
(b) Reports on Form 8-K
During the fiscal quarter ended June 30, 2004, we filed two
reports on Form 8-K.
On May 13, 2004, we filed a Current Report on Form 8-K, dated May
13, 2004, reporting matters furnished under Item 7 - Financial Statements and
Exhibits, and Item 12 - Results of Operations and Financial Condition. This
report included our May 13, 2004 press release announcing financial results for
the first quarter ended March 31, 2004.
On June 28, 2004, we filed a Current Report on Form 8-K, dated
June 22, 2004, reporting matters furnished under Item 5 - Other Events. This
report contains the results of voting at the annual meeting of stockholders held
on June 22, 2004.
37
SIGNATURES
Pursuant to the requirements 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.
PARALLEL PETROLEUM CORPORATION
BY: /s/ Larry C. Oldham
Date: August 12, 2004 ---------------------------------
Larry C. Oldham
President and Chief Executive Officer
Date: August 12, 2004 BY: /s/ Steven D. Foster
-----------------------------------
Steven D. Foster,
Chief Financial Officer
38
INDEX TO EXHIBITS
(a) Exhibits
No. Description of Exhibit
- ---- ----------------------
*3.1 Certificate of Incorporation of Registrant
3.2 Bylaws of Registrant (Incorporated by reference to Exhibit 3 to the
Registrant's Form 8-K, dated October 9, 2000, as filed with the
Securities and Exchange Commission on October 10, 2000.)
*4.1 Certificate of Designations, Preferences and Rights of Serial
Preferred Stock - 6% Convertible Preferred Stock
4.2 Certificate of Designation, Preferences and Rights of Series A
Preferred Stock. (Incorporated by reference to Exhibit 4.2 of Form
10-K for the fiscal year ended December 31, 2000.)
4.3 Rights Agreement, dated as of October 5, 2000, between the Registrant
and Computershare Trust Company, Inc., as Rights Agent (Incorporated
by reference to Exhibit 4.3 of Form 10-K for the fiscal year ended
December 31, 2000.)
Executive Compensation Plans and Arrangements
(Exhibit No.'s 10.1 through 10.8):
10.1 1992 Stock Option Plan (Incorporated by reference to Exhibit 28.1 to
Form S-8 of the Registrant (File No. 33-57348) as filed with the
Securities and Exchange Commission on January 25, 1993.)
10.2 Stock Option Agreement between the Registrant and Thomas R. Cambridge
dated December 11, 1991 (Incorporated by reference to Exhibit 10.4 of
Form 10-K of the Registrant for the fiscal year ended December 31,
1992.)
10.3 Merrill Lynch, Pierce, Fenner & Smith Incorporated Prototype
Simplified Employee Pension Plan (Incorporated by reference to Exhibit
10.6 of the Registrant's Form 10-K for the fiscal year ended December
31, 1995.)
10.4 Non-Employee Directors Stock Option Plan (Incorporated by reference to
Exhibit 10.6 of the Registrant's Form 10-K Report for the fiscal year
ended December 31, 1997).
10.5 1998 Stock Option Plan (Incorporated by reference to Exhibit 10.7 of
Form 10-K of the Registrant for the fiscal year ended December 31,
1998.)
10.6 Form of Incentive Award Agreements, dated December 12, 2001, between
the Registrant and Thomas R. Cambridge, Larry C. Oldham, Eric A.
Bayley and John S. Rutherford granting 2,394 Unit Equivalent Rights to
Mr. Cambridge; 9,564 Unit Equivalent Rights to Mr. Oldham; 2,869 Unit
Equivalent Rights to Mr. Bayley; and 7,173 Unit Equivalent Rights to
Mr. Rutherford. (Incorporated by reference to Exhibit 10.8 of the
Registrant's Form 10-K Report for the fiscal year ended December 31,
2001).
10.7 2001 Non-Employee Directors Stock Option Plan (Incorporated by
reference to Exhibit 10.7 of the Registrant's Form 10-Q Report for the
first fiscal quarter ended March 31, 2004).
10.8 2004 Non-Employee Director Stock Grant Plan (Incorporated by reference
to Exhibit 10.1 of the Registrant's Form 8-K Report dated June 22,
2004).
10.9 Certificate of Formation of First Permian, L.L.C. (Incorporated by
reference to Exhibit 10.1 of the Registrant's Form 8-K report dated
June 30, 1999.)
10.10 Limited Liability Company Agreement of First Permian, L.L.C.
(Incorporated by reference to Exhibit 10.2 of the Registrant's Form
8-K report dated June 30, 1999.)
10.11 Merger Agreement dated June 25, 1999. (Incorporated by reference to
Exhibit 10.3 of the Registrant's Form 8-K report dated June 30, 1999.)
10.12 Agreement and Plan of Merger of First Permian, L.L.C. and Nash Oil
Company, L.L.C. (Incorporated by reference to Exhibit 10.4 of the
Registrant's Form 8-K report dated June 30, 1999.)
10.13 Certificate of Merger of First Permian, L.L.C. and Nash Oil Company,
L.L.C (Incorporated by reference to Exhibit 10.5 of the Registrant's
Form 8-K Report dated June 30, 1999.)
10.14 Amended and Restated Limited Liability Company Agreement of First
Permian, L.L.C. dated as of May 31, 2000. (Incorporated by reference
to Exhibit 10.16 of Form 10-K for the fiscal year ended December 31,
2000.)
10.15 Credit Agreement dated June 30, 1999, by and among First Permian,
L.L.C., Parallel Petroleum Corporation, Baytech, Inc., and Bank One,
Texas, N.A. (Incorporated by reference to Exhibit 10.6 of the
Registrant's Form 8-K report dated June 30, 1999.)
10.16 Limited Guaranty, dated June 30, 1999, by and among First Permian,
L.L.C., Parallel Petroleum Corporation, and Bank One, Texas, N.A.
(Incorporated by reference to Exhibit 10.7 of the Registrant's Form
8-K report dated June 30, 1999.)
10.17 Intercreditor Agreement, dated as of June 30, 1999, by and among First
Permian, L.L.C., Bank One, Texas, N.A., Tejon Exploration Company, and
Mansefeldt Investment Corporation (Incorporated by reference to
Exhibit 10.8 of the Registrant's Form 8-K report dated June 30, 1999.)
10.18 Subordinated Promissory Note, dated June 30, 1999, in the original
principal amount of $8.0 million made by First Permian, L.L.C. payable
to the order of Tejon Exploration Company (Incorporated by reference
to Exhibit 10.9 of the Registrant's Form 8-K report dated June 30,
1999.)
10.19 Subordinated Promissory Note, dated June 30, 1999, in the original
principal amount of $8.0 million made by First Permian, L.L.C. payable
to the order of Mansefeldt Investment Corporation (Incorporated by
reference to Exhibit 10.10 of the Registrant's Form 8-K report dated
June 30, 1999.)
10.20 Second Restated Credit Agreement, dated October 25, 2000, among First
Permian, L.L.C., Bank One, Texas, N.A., and Bank One Capital Markets,
Inc. (Incorporated by reference to Exhibit 10.22 of Form 10-K for the
fiscal year ended December 31, 2000.)
10.21 Loan Agreement, dated January 25, 2002, between the Registrant and
First American Bank, SSB (Incorporated by reference to Exhibit 10.25
of Form 10-K for the fiscal year ended December 31, 2001.)
10.22 Purchase and Sale Agreement, dated as of November 27, 2002, among JMC
Exploration, Inc., Arkoma Star L.L.C., Parallel, L.P. and Texland
Petroleum, Inc. (Incorporated by reference to Exhibit 10.1 of Form 8-K
of the Registrant, dated December 20, 2002)
10.23 First Amended and Restated Credit Agreement, dated December 20, 2002,
by and among Parallel Petroleum Corporation, Parallel, L.P. Parallel,
L.L.C., First American Bank, SSB, Western National Bank and BNP
Paribas (Incorporated by reference to Exhibit 10.2 of Form 8-K of the
Registrant, dated December 20, 2002)
10.24 Guaranty dated December 20, 2002, between Parallel, L.L.C. and First
American Bank, SSB, as Agent (Incorporated by reference to Exhibit
10.3 of Form 8-K of the Registrant, dated December 20, 2002)
10.25 First Amendment to First Amended and Restated Credit Agreement, dated
as of September 12, 2003, by and among Parallel Petroleum Corporation,
Parallel, L.P., Parallel, L.L.C., First American, SSB, Western
National Bank, and BNP Paribas (Incorporated by reference to Exhibit
10.29 of Form 10-Q of the Registrant for the quarter ended September
30, 2003).
14 Code of Ethics (Incorporated by reference to Exhibit 14 of Form 10-K
of the Registrant for the fiscal year ended December 31, 2003).
21 Subsidiaries (Incorporated by reference to Exhibit 21 of Form 10-K of
the Registrant for the fiscal year ended December 31, 2003)
*31.1 Certification of Principal Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the Sarbanes -
Oxley Act of 2002.
*31.2 Certification of Principal Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the Sarbanes -
Oxley Act of 2002.
*32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act
of 2002.
*32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act
of 2002.
- --------------------
*Filed herewith.
EXHIBIT 31.1
CERTIFICATIONS
I, Larry C. Oldham, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Parallel Petroleum
Corporation.
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report.
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
control over financial reporting.
Dated: August 12, 2004 /s/ Larry C. Oldham
----------------------------------------
Larry C. Oldham, President and
Chief Executive Officer
(principal executive officer)
EXHIBIT 31.2
CERTIFICATIONS
I, Steven D. Foster, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Parallel Petroleum
Corporation.
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report.
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
control over financial reporting.
Dated: August 12, 2004 /s/ Steven D. Foster
------------------------------------------
Steven D. Foster
Chief Financial Officer
(principal financial officer)
Exhibit 32.1
CERTIFICATION
(Not filed pursuant to the Securities Exchange Act of 1934)
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, the undersigned, Larry C. Oldham, the
President and Chief Executive Officer of Parallel Petroleum Corporation
("Parallel"), hereby certifies that the Quarterly Report on Form 10-Q of
Parallel for the quarter ended June 30, 2004 fully complies with the periodic
reporting requirements of the Securities Exchange Act of 1934, as amended, and
the information contained in that Form 10-Q Report fairly presents, in all
material respects, the financial condition and results of operations of
Parallel.
Dated: August 12, 2004
/s/ Larry C. Oldham
-----------------------------------------
Larry C. Oldham,
President and Chief Executive Officer
A signed original of this written statement required by Section 906
has been provided to Parallel Petroleum Corporation and will be retained by
Parallel Petroleum Corporation and furnished to the Securities and Exchange
Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION
(Not filed pursuant to the Securities Exchange Act of 1934)
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, the undersigned, Steven D. Foster, the Chief
Financial Officer of Parallel Petroleum Corporation ("Parallel"), hereby
certifies that the Quarterly Report on Form 10-Q of Parallel for the quarter
ended June 30, 2004 fully complies with the periodic reporting requirements of
the Securities Exchange Act of 1934, as amended, and the information contained
in that Form 10-Q Report fairly presents, in all material respects, the
financial condition and results of operations of Parallel.
Dated: August 12, 2004
/s/ Steven D. Foster
----------------------------------------
Steven D. Foster,
Chief Financial Officer
A signed original of this written statement required by Section 906
has been provided to Parallel Petroleum Corporation and will be retained by
Parallel Petroleum Corporation and furnished to the Securities and Exchange
Commission or its staff upon request.