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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 September 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 November 4, 2004, 25,439,292 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 September 30, 2004
(unaudited) and December 31, 2003 1
- Unaudited Consolidated Statements of Income for the
three months and nine months ended September 30, 2004
and 2003 2
- Unaudited Consolidated Statements of Cash Flows for
the nine months ended September 30, 2004 and 2003 3
- Unaudited Consolidated Statements of Comprehensive
Income (Loss)for the three months and nine months
ended September 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 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 33
ITEM 4. CONTROLS AND PROCEDURES 35
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 35
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE
OF PROCEEDS 36
ITEM 6. EXHIBITS 37
SIGNATURES
(i)
PARALLEL PETROLEUM CORPORATION
Consolidated Balance Sheets
(dollars in thousands)
September 30, December 31,
Assets 2004 2003
------------- ------------
(unaudited)
Current assets:
Cash and cash equivalents $ 3,712 $ 17,378
Accounts receivable:
Oil and gas 5,235 4,610
Others, net of allowance for doubtful account of $9 881 316
------------- ------------
6,116 4,926
Other current assets 220 210
Deferred tax asset 3,625 1,098
------------- ------------
Total current assets 13,673 23,612
------------- ------------
Property and equipment, at cost:
Oil and gas properties, full cost method 203,104 162,621
Other 2,005 1,414
------------- ------------
205,109 164,035
Less accumulated depreciation and depletion (76,100) (70,070)
------------- ------------
Net property and equipment 129,009 93,965
------------- ------------
Other assets, net of accumulated amortization of $495 and $182 1,263 766
------------- ------------
$ 143,945 $ 118,343
============= ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 5,670 $ 3,965
Asset retirement obligations 180 -
Derivative obligations 10,836 3,231
------------- ------------
Total current liabilities 16,686 7,196
------------- ------------
Long-term debt 55,000 39,750
Asset retirement obligations 1,827 1,701
Derivative obligations 9,329 2,655
Deferred tax liability 5,393 5,809
------------- ------------
Total long-term liabilities 71,549 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 $.10 per share,
(liquidation preference of $10 per share) authorized 10,000,000
shares, issued and outstanding 950,000 and 959,500 95 96
Common stock -- par value $0.01 per share, authorized 60,000,000
shares, issued and outstanding 25,414,292 and 25,216,863 254 253
Additional paid-in capital 48,285 47,544
Retained earnings 20,263 17,060
Accumulated comprehensive loss (13,187) (3,721)
------------- ------------
Total stockholders' equity 55,710 61,232
------------- ------------
$ 143,945 $ 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 September 30, Nine Months Ended September 30,
---------------------------------- ---------------------------------
2004 2003 2004 2003
---------------- ---------------- ---------------- ----------------
Oil and gas revenues $ 7,745 $ 8,731 $ 23,663 $ 25,756
---------------- ---------------- ---------------- ----------------
Cost and expenses:
Lease operating expense 1,894 1,600 5,437 4,231
Production taxes 458 478 1,407 1,488
General and administrative 1,438 1,061 3,881 2,831
Depreciation and depletion 1,984 2,189 6,030 6,244
---------------- ---------------- ---------------- ----------------
Total costs and expenses 5,774 5,328 16,755 14,794
---------------- ---------------- ---------------- ----------------
Operating income 1,971 3,403 6,908 10,962
---------------- ---------------- ---------------- ----------------
Other income (expense), net:
Change in fair market value of derivatives - - - (22)
Ineffective portion of hedges 57 85 64 179
Interest and other income 10 34 168 80
Interest expense (509) (540) (1,464) (1,548)
Other expense (25) (32) (110) (78)
---------------- ---------------- ---------------- ----------------
Total other expense, net (467) (453) (1,342) (1,389)
---------------- ---------------- ---------------- ----------------
Income before income taxes 1,504 2,950 5,566 9,573
Income tax expense, deferred (457) (1,254) (1,934) (2,893)
---------------- ---------------- ---------------- ----------------
Net income before cumulative effect
of change in accounting principle 1,047 1,696 3,632 6,680
Cumulative effect on prior years of a change
in accounting principle, net of tax of $32 - - - (62)
---------------- ---------------- ---------------- ----------------
Net income 1,047 1,696 3,632 6,618
Cumulative preferred stock dividend (142) (147) (429) (439)
---------------- ---------------- ---------------- ----------------
Net income available to common stockholders $ 905 $ 1,549 $ 3,203 $ 6,179
================ ================ ================ ================
Net income per common share:
Basic - before cumulative effect of
a change in accounting principle $ 0.04 $ 0.07 $ 0.13 $ 0.29
Cumulative effect of a change in
accounting principle, net of tax - - - -
---------------- ---------------- ---------------- ----------------
Basic - after cumulative effect
of a change in accounting principle $ 0.04 $ 0.07 $ 0.13 $ 0.29
================ ================ ================ ================
Diluted - before cumulative effect of
a change in accounting principle $ 0.04 $ 0.07 $ 0.13 $ 0.27
Cumulative effect of a change in
accounting principle, net of tax - - - -
---------------- ---------------- ---------------- ----------------
Diluted - after cumulative effect
of a change in accounting principle $ 0.04 $ 0.07 $ 0.13 $ 0.27
================ ================ ================ ================
Weighted average common share outstanding:
Basic 25,382 21,159 25,284 21,149
================ ================ ================ ================
Diluted 28,531 24,162 28,342 24,082
================ ================ ================ ================
The accompanying notes are an integral part of these Consolidated Financial
Statements.
(2)
PARALLEL PETROLEUM CORPORATION
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2004 and 2003
(Unaudited)
(dollars in thousands)
2004 2003
---------------- ----------------
Cash flows from operating activities:
Net income $ 3,632 $ 6,618
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and depletion 6,030 6,244
Accretion of asset retirement obligation 73 103
Deferred income taxes 1,934 2,893
Change in fair value of derivative instruments - 22
Ineffective portion of hedges (64) (179)
Common stock issued in lieu of cash for directors fees 99 -
Stock option expense 127 56
Cumulative effect on prior years of a change in accounting principle, net of tax - 62
Changes in assets and liabilities:
Other, net (497) (55)
Increase in accounts receivables (1,190) (1,540)
Increase in other current assets (10) (19)
Increase in accounts payable and accrued liabilities 1,563 120
---------------- ----------------
Net cash provided by operating activities 11,697 14,325
---------------- ----------------
Cash flows from investing activities:
Additions to oil and gas property (41,944) (10,354)
Proceeds from disposition of oil and gas property 1,693 20
Additions to other property and equipment (591) (310)
---------------- ----------------
Net cash used in investing activities (40,842) (10,644)
---------------- ----------------
Cash flows from financing activities:
Net borrowing (payments) on bank line of credit 15,250 (10,000)
Proceeds from exercise of stock options 523 55
Deferred stock offering costs (7) -
Payment of preferred stock dividend (287) (292)
---------------- ----------------
Net cash provided by (used in) financing activities 15,479 (10,237)
---------------- ----------------
Net decrease in cash and cash equivalents (13,666) (6,556)
Cash and cash equivalents at beginning of period 17,378 11,812
---------------- ----------------
Cash and cash equivalents at end of period $ 3,712 $ 5,256
================ ================
Non-cash financing and investing activities:
Oil and gas properties asset retirement obligations, net $ 232 $ 1,236
Accrued preferred stock dividend $ 142 $ 171
The accompanying 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 September 30, Nine Months Ended September 30,
----------------------------------- ----------------------------------
2004 2003 2004 2003
---------------- ---------------- ---------------- ----------------
Net income $ 1,047 $ 1,696 $ 3,632 $ 6,618
Other comprehensive income (loss):
Unrealized gain (loss) on derivatives (11,934) 784 (20,059) (671)
Reclassification adjustments for losses
on derivatives included in net income 2,545 (505) 5,716 (2,147)
--------------- ---------------- ---------------- ----------------
Change in fair value of derivatives (9,389) 279 (14,343) (2,818)
Income tax (expense) benefit 3,192 (95) 4,877 958
--------------- ---------------- ---------------- ----------------
Total other comprehensive income (loss) (6,197) 184 (9,466) (1,860)
--------------- ---------------- ---------------- ----------------
Total comprehensive income (loss) $ (5,150) $ 1,880 $ (5,834) $ 4,758
=============== ================ ================ ================
The accompanying 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 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 is unaudited, except the
balance sheet as of December 31, 2003 which has been derived from our audited
Consolidated Financial Statements as of December 31, 2003. 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, accounting policies, and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America 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 audited consolidated financial
statements included in our Annual Report on Form 10-K for the year ended
December 31, 2003.
Unless otherwise indicated or unless the context otherwise
requires, all references in this Quarterly Report on Form 10-Q to "Parallel",
"we", "us", and "our" are to Parallel Petroleum Corporation and its consolidated
subsidiaries, Parallel, L.P. and Parallel, L.L.C.
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
(5)
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 income for the three and nine month period ended September 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 nine months ended September 30, 2004, Parallel
recognized compensation expense of approximately $43,000 and $127,000
respectively associated with its stock option grants. No options were granted
during the quarter ended September 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 September 30, Nine Months Ended September 30,
--------------------------------- -------------------------------------
2004 2003 2004 2003
---------------- ---------------- ---------------- ----------------
(dollars in thousands, except per share data)
Net income, as reported $ 1,047 $ 1,696 $ 3,632 $ 6,618
Add:
Expense recorded in 2004 43 56 127 56
Deduct:
Total stock-based employee compensation
expense determined under fair value
based method for all awards, net of tax (48) (90) (143) (199)
---------------- ---------------- ---------------- ----------------
Pro forma net income $ 1,042 $ 1,662 $ 3,616 $ 6,475
================ ================ ================ ================
Net income per common share:
Basic - as reported $ 0.04 $ 0.07 $ 0.13 $ 0.29
================ ================ ================ ================
Basic - pro forma $ 0.04 $ 0.07 $ 0.13 $ 0.29
================ ================ ================ ================
Diluted - as reported $ 0.04 $ 0.07 $ 0.13 $ 0.27
================ ================ ================ ================
Diluted - pro forma $ 0.04 $ 0.07 $ 0.13 $ 0.27
================ ================ ================ ================
NOTE 3. LONG TERM DEBT
Revolving Credit Facility. On September 27, 2004, Parallel entered
into a Second Amended and Restated Credit Agreement (or the Credit Agreement)
with First American Bank, SSB, BNP Paribas, Citibank, F.S.B. and Western
National Bank.
The Credit Agreement provides for a revolving credit facility
which means that we can borrow, repay and reborrow funds drawn under the credit
facility. The total amount that we can borrow and have outstanding at any one
time is limited to the lesser of $200.0 million or the "borrowing base"
established by our lenders. The current borrowing base is $85.8 million. The
principal amount outstanding under the credit facility at September 30, 2004 was
$55.0 million
(6)
and the principal amount presently outstanding is $74.5 million, excluding
$300,000 reserved for our letters of credit. The amount of the borrowing base is
based primarily upon the estimated value of our oil and gas reserves. The
borrowing base amount is redetermined by the lenders semi-annually on or about
April 1 and October 1 of each year or at other times required by the lenders or
at our request. If, as a result of the lenders' redetermination of the borrowing
base, the outstanding principal amount of our loan exceeds the borrowing base,
we must either provide additional collateral to the lenders or repay the
principal of the note in an amount equal to the excess. Except for the principal
payments that may be required because of our outstanding loans being in excess
of the borrowing base, interest only is payable monthly.
Loans made to us under this credit facility bear 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 sum of (a) the prime rate published in
the Wall Street Journal, and (b) if the principal amount outstanding is equal to
or greater than 85% of the borrowing base established by the lenders, a margin
of 2.00%.
The LIBOR rate is generally equal to the sum of (a) the rate
designated as "British Bankers Association Interest Settlement Rates" and
offered on one, two, three, six or twelve month interest periods for deposits of
$1.0 million, and (b) a margin ranging from 2.25% to 4.75%, depending upon the
outstanding principal amount of the loans. If the principal amount outstanding
is equal to or greater than 85% of the borrowing base established by the
lenders, the margin is 4.75%. If the principal amount outstanding is equal to or
greater than 75% of the borrowing base, but less than 85% of the borrowing base,
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%.
The interest rate we are required to pay, including the applicable
margin, may never be less than 4.50%. At September 30, 2004, our interest rate
was 4.75%.
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 credit facility are
less than the borrowing base, an unused commitment fee is required to be paid to
the lenders. The amount of the fee is .25% of the daily average of the
unadvanced amount of the borrowing base. The fee is payable quarterly.
If the borrowing base is increased, we are required to pay a fee
of .375% on the amount of any increase in the borrowing base.
All outstanding principal under the revolving credit facility is
due and payable on December 20, 2008. The maturity date of our outstanding loans
may be accelerated by the lenders upon the occurrence of an event of default
under the Credit Agreement. Generally, the events of default specified in the
Credit Agreement include:
. failure to timely pay the interest on and principal of the
loans;
(7)
. any representation or warranty being untrue in any material
respect;
. failure to observe or perform any of the covenants contained in
the loan documents;
. default on indebtedness (other than under the Credit Agreement)
of $250,000 or more;
. liquidation or reorganization under any insolvency loan;
. final judgment against us in the amount of $250,000 or more;
. the occurrence of an event of default under any of our hedging
transactions;
. the occurrence of a change of control;
. the imposition of any lien for failure to pay income, payroll or
similar taxes; or
. any of the loan documents between us and the lenders ceasing to
be in full force and effect.
Parallel, L.L.C., a subsidiary of Parallel Petroleum Corporation,
guaranteed payment of the loans.
Our obligations to the lenders are secured by substantially all of
our oil and gas properties.
In addition to customary affirmative covenants, the Credit
Agreement contains various restrictive covenants and compliance requirements.
Among these restrictions are limitations on our ability to:
In addition to customary affirmative covenants, the credit
agreement contains 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;
(8)
. 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;
. for each twelve month period ending on September 30, December
31, March 31 and June 30 of each year, 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) $50.0 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 part of the closing transactions under the Credit Agreement,
Parallel and its subsidiaries also entered into a separate commitment letter
with the lenders. Under the commitment letter, the lenders agreed to make
available an additional $20.5 million under the Credit Agreement for Parallel's
completion of the purchase of oil and gas properties from third parties. The
commitment is subject to certain conditions, including:
. title to, and the environmental condition of, all of the
properties being satisfactory to the lenders;
. completion of the property acquisitions by December 31, 2004;
and
. other customary closing conditions.
The commitment letter also provides that the borrowing base under
the Credit Agreement will be automatically reduced by $10.0 million on April 1,
2005 if all of our proposed property acquisitions are completed.
On October 27, 2004, we advised our agent bank, based on our
preliminary calculation, that we would not meet the funded debt ratio covenant
for the twelve-month period ended September 30, 2004. On November 4, 2004, we
received from the banks a consent to our deviation from the required funded debt
ratio and we are negotiating the removal or amendment
(9)
of this particular financial ratio covenant. Our deviation from the funded debt
ratio did not result in the acceleration of our obligations under the credit
facility.
NOTE 4. ACQUISITIONS
On September 27, 2004, Parallel acquired from Chevron U.S.A. Inc.
additional interests in the Fullerton Field of Andrews County, Texas in the
Permian Basin of west Texas. The net purchase price was $15.3 million and funded
through borrowings under our revolving credit facility. The net purchase price
was recorded in oil and gas properties on the balance sheet.
The unaudited pro forma results summarized below reflects our
consolidated pro forma results of operations for three months and nine months
ended September 30, 2004 and 2003.
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2004 2003 2004 2003
-------------- -------------- -------------- --------------
(in thousands, except per share data)
Oil and gas revenue $ 8,694 $ 9,321 $ 26,241 $ 27,578
Operating income $ 2,572 $ 3,680 $ 8,475 $ 11,940
Net income available to common shareholders $ 1,346 $ 1,756 $ 4,316 $ 7,005
Net income per common share:
Basic - after cumulative effect of a change
in accounting principle $ 0.05 $ 0.08 $ 0.17 $ 0.33
Diluted - after cumulative effect of a change
in accounting principle $ 0.05 $ 0.07 $ 0.15 $ 0.29
NOTE 5. PREFERRED STOCK
We have outstanding 950,000 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 September 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 6. 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
(10)
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 September 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.
NOTE 7. 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 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 September 30, 2004, we have recorded unrealized losses of
$20.0 million ($13.2 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 $10.8 million and long-term
liabilities of $9.3 million and $13.2 million, net of tax, as accumulated
comprehensive loss in Stockholders' Equity. We recorded an ineffective portion
of the derivative instruments of approximately $138,000 in current liabilities.
During the twelve month period ending September 30, 2005, we expect
approximately $7.0 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.
(11)
Under our Revolving Credit Facility, we may elect an interest rate
based upon the agent bank's base lending rate plus a base rate margin of up to
2.00%, or the LIBOR rate, plus a margin ranging from 2.25% to 4.75% 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%.
A recap for the period of time, notional amounts and LIBOR fixed
interest rates for the contract is as follows:
Libor
Notional Fixed
Period of Time Amounts Interest Rates (1)
- ----------------------------------------------- ----------------- -------------------
October 1, 2004 thru December 31, 2004 $ 30,000,000 2.660%
January 1, 2005 thru December 31, 2005 $ 20,000,000 4.050%
January 1, 2006 thru December 20, 2006 $ 10,000,000 4.050%
___________________
(1) Parallel's swap contract with BNP Paribas.
See Note 11 for subsequent interest rate swap transactions.
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 costless
Houston ship channel gas collars and west Texas intermediate light sweet crude
oil collars.
A recap for the period of time, number of MMBtu's and average gas
prices is as follows:
Houston Ship Channel
NyMex oil prices gas prices
Barrels of --------------------------- MMBtu of ---------------------------
Period of Time Oil Floor Cap Natural Gas Floor Cap
- ------------------------------------------ ---------- ------------- ------------- ------------- ------------- -------------
October 31, 2004 - $ - $ - 31,000 $ 4.40 $ 5.50
April 1, 2005 thru October 31, 2005 $ - $ - 428,000 $ 5.00 $ 7.26
January 1, 2005 thru December 31, 2005 73,000 $ 36.00 $ 49.50 - $ - $ -
January 1, 2006 thru December 31, 2006 70,800 $ 35.00 $ 44.00 - $ - $ -
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.
(12)
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
- -------------------------------------------- ------------- ---------------- ------------- -----------------
October 1, 2004 thru December 31, 2004 110,400 $ 24.23 215,000 $ 4.699
January 1, 2005 thru December 31, 2005 620,500 $ 30.19 - $ -
January 1, 2005 thru March 31, 2005 - $ - 180,000 $ 4.705
January 1, 2006 thru December 20, 2006 448,000 $ 28.46 - $ -
January 1, 2007 thru December 31, 2007 474,500 $ 34.36 - $ -
January 1, 2008 thru December 31, 2008 439,200 $ 33.37 - $ -
NOTE 8. 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 nine months ended September 30,
2004 and 2003:
(13)
Three Months Ended Nine Months Ended
September 30, September 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 $ 1,047 $ 1,696 $ 3,632 $ 6,680
Cumulative effect of a change in accounting principle,
net of tax - - - (62)
------------- ------------- ------------- -------------
1,047 1,696 3,632 6,618
Preferred stock dividend (142) (146) (429) (438)
------------- ------------- ------------- -------------
Net income available to common stockholders $ 905 $ 1,550 $ 3,203 $ 6,180
============= ============= ============= =============
Denominator-
Weighted average common shares outstanding 25,382 21,159 25,284 21,149
============= ============= ============= =============
Basic Earnings Per Share:
Income before cumulative effect of a change
in accounting principle $ 0.04 $ 0.07 $ 0.13 $ 0.29
Cumulative effect of a change in accounting principle,
net of tax - - - -
------------- ------------- ------------- -------------
Net income per common share $ 0.04 $ 0.07 $ 0.13 $ 0.29
============= ============= ============= =============
Diluted Earnings Per Share Computation:
Numerator-
Income before cumulative effect of a change
in accounting principle $ 1,047 $ 1,696 $ 3,632 $ 6,680
Cumulative effect of a change in accounting principle,
net of tax - - - (62)
------------- ------------- ------------- -------------
1,047 1,696 3,632 6,618
Preferred stock dividend - - - -
------------- ------------- ------------- -------------
Net income available to common stockholders $ 1,047 $ 1,696 $ 3,632 $ 6,618
============= ============= ============= =============
Denominator -
Weighted average common shares outstanding 25,382 21,159 25,284 21,149
Employee stock options 346 219 274 149
Warrants 89 - 70 -
Preferred stock 2,714 2,784 2,714 2,784
------------- ------------- ------------- -------------
Weighted average common shares for diluted
earnings per share assuming conversion 28,531 24,162 28,342 24,082
============= ============= ============= =============
Diluted Earnings Per Share:
Income before cumulative effect of a change
in accounting principle $ 0.04 $ 0.07 $ 0.13 $ 0.27
Cumulative effect of a change in accounting principle,
net of tax - - - -
------------- ------------- ------------- -------------
Net income per common share $ 0.04 $ 0.07 $ 0.13 $ 0.27
============= ============= ============= =============
(14)
NOTE 9: 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 Nine Months Ended
September 30, September 30,
---------------------------------- -------------------------------------
2004 2003 2004 2003
--------------- ----------------- ----------------- ------------------
(in thousands)
Beginning asset retirement obligation $ 1,943 $ 1,777 $ 1,701 $ 1,693
Additions related to new properties 204 50 435 66
Deletions related to property disposals (160) (35) (202) (35)
Accretion expense 20 35 73 103
--------------- ----------------- ----------------- ------------------
Ending asset retirement obligation $ 2,007 $ 1,827 $ 2,007 $ 1,827
=============== ================= ================= ==================
NOTE 10. COMMITMENTS AND CONTINGENCIES
Litigation
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.
Incentive and Retention Plan
On September 22, 2004, the Compensation Committee of the Board of
Directors approved and adopted an incentive and retention plan, or the Plan, for
Parallel's officers and employees. On September 23, 2004, the Board of Directors
adopted the Plan upon recommendation by the Compensation Committee.
The purpose of the Plan is to advance the interests of Parallel
and its stockholders by providing officers and employees with incentive bonus
compensation which is linked to a corporate transaction. As defined in the Plan,
a corporate transaction means:
. an acquisition of Parallel by way of purchase, merger,
consolidation, reorganization or other business combination,
whether by way of tender offer or negotiated transaction, as a
result of which Parallel's outstanding securities are
(15)
exchanged or converted into cash, property and/or securities not
issued by Parallel;
. a sale, lease, exchange or other disposition by Parallel of all
or substantially all of its assets;
. the stockholders of Parallel approving a plan or proposal for
the liquidation or dissolution of Parallel; or
. any combination of any of the foregoing.
The Plan recognizes the possibility of a proposed or threatened
corporate transaction and the need to be able to rely upon officers and
employees continuing their employment, and that Parallel be able to receive and
rely upon their advice as to the best interests of Parallel and its stockholders
without concern that they might be distracted by the personal uncertainties and
risks created by any such corporate transaction. In this regard, the Plan also
provides for a retention payment upon the occurrence of a change of control. A
change of control is generally defined as:
. the acquisition of beneficial ownership of 60% or more of the
voting power of Parallel's outstanding voting securities; or
. a change in the composition of the Board of Directors of
Parallel such that the individuals who, at September 23, 2004,
constituted the Board of Directors cease for any reason (other
than by way of voluntary resignation) to constitute at least a
majority of the Board of Directors.
In summary, the Plan provides for the payment to eligible officers
and employees of:
. a one-time performance bonus upon the occurrence of a corporate
transaction; and
. a one-time retention payment upon the occurrence of a change of
control.
In the case of a corporate transaction, the total amount of cash
available for performance bonuses is equal to the per share price received by
all stockholders minus a base price of $3.73 per share, multiplied by 1,080,362
shares. The $3.73 base price represents the volume weighted average closing
price per share of Parallel's common stock for the fiscal quarter ended December
31, 2003 and the 1,080,362 shares represents the weighted average number of
shares of common stock (basic) outstanding for the same period. As an example,
if the stockholders of the company received a per share price of $6.00 in a
merger, tender offer or other corporate transaction, the total amount of cash
available for payment to all plan participants would be [$6.00 - $3.73] x
1,080,362, or $2,452,422. If a change of control occurs, the total amount of
cash available for retention payments to all plan participants is equal to the
per share closing price of Parallel's common stock on the day immediately
preceding the change of control minus the base price of $3.73 per share,
multiplied by 1,080,362.
(16)
NOTE 11. SUBSEQUENT EVENTS
On October 4, 2004, we entered into an interest rate swap
transaction with BNP Paribas as the counterparty. A recap for the period of
time, notional amounts and LIBOR fixed interest rates are as follows:
Libor
Notional Fixed
Period of Time Amounts Interest Rates
- ----------------------------------------------- ----------------- -------------------
December 31, 2004 thru December 30, 2005 $ 30,000,000 2.89%
December 31, 2005 thru December 30, 2006 $ 40,000,000 3.76%
December 31, 2006 thru December 30, 2007 $ 50,000,000 4.30%
December 31, 2007 thru December 30, 2008 $ 50,000,000 4.74%
On October 8, 2004, we acquired additional interests in oil and
gas properties located in the Fullerton Field of Andrews County, Texas in the
Permian Basin of west Texas. Parallel purchased the properties from
Kaiser-Francis Oil Company and KF Energy Limited Partnership. The net purchase
price for the properties was approximately $5.63 million. The additional
interests acquired in this transaction represent an estimated 540,000 equivalent
barrels of proved oil and gas reserves of which approximately 73% is proved
developed producing reserves. Daily production attributable to the acquired
interests is approximately 100 equivalent barrels of oil per day. The purchase
price was financed with loan proceeds drawn under our revolving credit facility.
On October 14, 2004, we also acquired producing oil and gas
properties located in Andrews and Gaines Counties, Texas in the Permian Basin of
west Texas. Parallel purchased the properties from Caprock Oil & Gas, L.P. and
Bradley W. Bunn, an affiliate and principal of Caprock Oil & Gas, L.P. The net
purchase price for the properties owned by Caprock Oil & Gas, L.P. was
approximately $12.87 million and the net purchase price for the properties owned
by Bradley W. Bunn was approximately $746,000. Proved reserves from the acquired
properties are estimated to be 2.0 million equivalent barrels of oil and the
aggregate daily production from the acquired interest is approximately 200
equivalent barrels of oil per day. The purchase price for both transactions was
financed with loan proceeds drawn under our revolving credit facility.
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.
(17)
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
. 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
(18)
. 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.
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.
(19)
For the three months ended September 30, 2004, the sales price we
received for our crude oil production (excluding hedges) averaged $41.30 per
barrel compared to $31.00 per barrel for the three months ended September 30,
2003. The average sales price we received for natural gas for the three months
ended September 30, 2004 (excluding hedges), was $5.24 per Mcf compared to $4.78
per Mcf for the three months ended September 30, 2003.
For the nine months ended September 30, 2004, the sales price we
received for our crude oil production (excluding hedges) averaged $36.69 per
barrel compared to $29.86 for the nine months period ended September 30, 2003.
The average sales price we received for natural gas for the nine months ended
September 30, 2004 (excluding hedges), was $5.45 per Mcf compared to $5.53 for
the nine months ended September 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 21.
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 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 nine
months ending September 30, 2004 and 2003 was $6.88 and $6.70, 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.
(20)
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
nine months ended September 30, 2004 and 2003.
Three Months Ended Nine Months Ended
-------------------------- --------------------------
9/30/2004 9/30/2003 9/30/2004 9/30/2003
------------ ------------ ------------ ------------
Sales Volumes:
Oil (MBbls) 168 159 495 472
Natural gas (MMcf) 619 895 1,995 2,482
Equivalent barrels of oil (MBOE)(1) 272 308 828 886
Equivalent barrels of oil (BOE) per day 2,954 3,417 3,022 3,279
Average Sales Prices:
per Bbl (unhedged)(2) $ 41.30 $ 31.00 $ 36.69 $ 29.86
per Bbl (hedged)(3) $ 28.50 $ 27.68 $ 27.00 $ 27.78
per MCF (unhedged)(2) $ 5.24 $ 4.78 $ 5.45 $ 5.53
per MCF (hedged)(3) $ 4.75 $ 4.86 $ 5.15 $ 5.10
per BOE (unhedged)(2) $ 37.56 $ 29.87 $ 35.10 $ 31.42
per BOE (hedged)(3) $ 28.49 $ 28.39 $ 28.58 $ 29.09
Revenues:
(dollars in thousands)
Oil revenue $ 6,966 $ 4,909 $ 18,184 $ 14,083
Oil hedge $ (2,159) $ (525) $ (4,805) $ (982)
Gas revenue $ 3,242 $ 4,275 $ 10,882 $ 13,734
Gas hedge $ (304) $ 72 $ (598) $ (1,079)
------------ ------------ ------------ -----------
Total oil and gas revenues $ 7,745 $ 8,731 $ 23,663 $ 25,756
============ ============ ============ ===========
Cost per BOE:
Lease operating expense $ 6.97 $ 5.20 $ 6.57 $ 4.78
Production taxes $ 1.69 $ 1.56 $ 1.70 $ 1.68
General and administrative $ 5.29 $ 3.45 $ 4.68 $ 3.20
Depreciation and depletion $ 7.30 $ 7.12 $ 7.28 $ 7.05
________________
(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.
(21)
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003:
Oil and Gas Revenues. Our combined oil and gas revenues decreased
$986,000 or 11%, to $7.7 million for the three months ended September 30, 2004,
from $8.7 million for the same period of 2003. Derivative transactions resulted
in hedge losses on oil and gas of approximately $2.5 million for the three
months ended September 30, 2004 compared to $453,000 for the same period in
2003. Gas revenue decreased by $1.0 million due to production declines in the
Yegua/Frio, Cook Mountain areas. This decrease was partially offset by an
increase in oil revenue of $2.1 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 $294,000, or 18%, to $1.9 million during the three months ended
September 30, 2004, compared with $1.6 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 $377,000, or 35%, to $1.4 million for the three
months ended September 30, 2004 from $1.1 million for the same period of 2003.
The increase was primarily due to costs associated with increased public
reporting costs and Sarbanes-Oxley Act of 2002, Section 404 (SOX 404)
compliance. General and administrative expense capitalized to oil and gas
properties is approximately $262,000 and approximately $248,000 for 2004 and
2003 respectively.
Depreciation and Depletion. Depreciation and depletion expenses
decreased $205,000 or 9% to $2.0 million for the three months ended September
30, 2004 from $2.2 for the same period of 2003. The decrease was primarily due
to production decreases in our South Texas properties.
Ineffective Portion of Hedges. The ineffective portion of our
hedges was approximately $57,000 for the three months ended September 30, 2004
compared to $85,000 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 $10,000 for the three month period ended September 30, 2004
compared to approximately $34,000 for the same period of 2003.
Interest Expense. Interest expense decreased $31,000, or 6%, to
approximately $509,000 for the three months ended September 30, 2004 compared
with approximately $540,000 for the same period of 2003. Although we increased
borrowings on September 27, 2004 for our property acquisitions, the average
borrowings for 2004 were less than the same period of 2003. Interest rate hedges
added approximately $27,000 to interest expense during the third quarter of
2004.
(22)
Income Tax Expense. Income tax expense decreased approximately
$797,000 or 64%, to $457,000 for the three months ended September 30, 2004
compared to $1.3 million for the same period in 2003. The decrease in income tax
expense was primarily due to the decrease in net income for the quarter ending
September 30, 2004.
Net Income. We reported net income of $1.0 million for the three
months ended September 30, 2004 compared with net income of $1.7 million for the
three months ended September 30, 2003. The decrease of $649,000 or 38% is mainly
associated with the 11% decrease in oil and gas revenues, the 18% increase in
lease operating expense and a 35% increase in general and administrative expense
offset by a 64% decrease in income tax expense.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003:
Oil and Gas Revenues. Our combined oil and gas revenues decreased
$2.1 million or 8%, to $23.7 million for the nine months ended September 30,
2004, from $25.8 million for the same period of 2003. Derivative transactions
resulted in hedge losses on oil and gas of approximately $5.4 million for the
nine months ended September 30, 2004 compared to $2.1 million for the same
period in 2003. Gas revenue decreased by $2.8 million due to decreased prices
and production declines in the Yegua/Frio, Cook Mountain areas in south Texas.
This decrease was partially offset by an increase in oil revenue of $4.1 million
which was due to increased prices and increased production in the Diamond M and
Fullerton Fields.
Lease Operating Costs. Lease operating costs increased $1.2
million or 28%, to $5.4 million during the nine months of 2004, compared with
$4.2 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 $1.0 million, or 37%, to $3.9 million during
the nine months ended September 30, 2004, compared with $2.8 million for the
same period of 2003. The increase was primarily due to increased public
reporting costs and SOX 404 compliance. General and administrative expense
capitalized to oil and gas properties is $798,000 and $679,000 for 2004 and
2003, respectively.
Depreciation and Depletion Expense. Depreciation and depletion
expenses decreased $214,000 or 3% to $6.0 million for the nine months ended
September 30, 2004 from $6.2 million for the same period of 2003. The decrease
was primarily due to production decreases in our South Texas properties.
Change in Fair Market Value of Derivatives. A loss of
approximately $22,000 was recognized for the nine months ended September 30,
2003 along with the expiration of our put options.
Ineffective Portion of Hedges. The ineffective portion of our
hedges was approximately $64,000 for the nine months ending September 30, 2004
compared to $179,000
(23)
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 $168,000
for the nine month period ended September 30, 2004 compared to $80,000 for the
same period of 2003.
Interest Expense. Interest expense was substantially the same for
the nine months ended September 30, 2004 compared with the same period of 2003;
due to decreased bank borrowings during the first and second quarters 2004.
Although we reduced net borrowings the first part of 2004 compared to 2003, we
increased net borrowing by $15.2 million, net of adjustments, for the Fullerton
property acquisition late in the third quarter 2004. Interest rate hedges added
approximately $313,000 to interest expense during the nine months ended
September 30, 2004.
Income Tax Expense. Income tax expense declined $959,000 for the
nine months period ending September 30, 2004 compared to the same period of
2003. Our effective rate for the nine months ended September 30, 2004 was 35%,
which is greater than the 30% 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 $3.6 million for the nine
months ended September 30, 2004 compared to $6.7 million for the nine months
ended September 30, 2003. The decrease of $3.0 million or 45% is primarily
associated with the 8% decrease in oil and gas revenues, 28% increase in lease
operating expense and 37% increase in general and administrative expense offset
by a 33% decrease in income tax 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 118% or approximately $19.4 million as
of September 30, 2004 compared with December 31, 2003. Current liabilities
exceeded current assets by $3.0 million at September 30, 2004. The working
capital decrease was primarily due to payments on our revolving credit facility
of $5.7 million during the first six months of 2004, increased current maturity
of derivative obligations of approximately $7.6 million and working capital
requirements associated with our increased drilling program in 2004.
We incurred net property costs of $40.8 million for the nine
months ended September 30, 2004 compared to $10.6 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 and the purchase of additional
interests in our Fullerton properties in the amount of $15.2 million, net of
adjustments. Included in our property basis for the nine months ending September
30, 2004 and 2003 were asset retirement costs of approximately $232,000 and $1.2
million respectively, net of disposals, for the adoption of SFAS 143 (see Note 9
to Consolidated Financial Statements). Our property purchases, leasehold
acquisitions, development and enhancement activities were
(24)
financed by our revolving credit facility, the utilization of cash flows
provided by operations and cash on hand.
Stockholders' equity is $55.7 million for September 30, 2004,
compared to $61.2 million at December 31, 2003, a decrease of 9%. The decline is
attributable to a reduction in value of our derivative instruments (see Note 7
to Consolidated Financial Statements) which is 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
On September 27, 2004, we entered into a Second Amended and
Restated Credit Agreement (or the Credit Agreement) with First American Bank,
SSB, BNP Paribas, Citibank, F.S.B. and Western National Bank.
The Credit Agreement provides for a revolving credit facility
which means that we can borrow, repay and reborrow funds drawn under the credit
facility. The total amount that we can borrow and have outstanding at any one
time is limited to the lesser of $200.0 million or the "borrowing base"
established by our lenders. The current borrowing base is $85.8 million. The
principal amount outstanding under the credit facility at September 30, 2004 was
$55.0 million and the principal amount presently outstanding is $74.5 million,
excluding $300,000 reserved for our letters of credit. The amount of the
borrowing base is based primarily upon the estimated value of our oil and gas
reserves. The borrowing base amount is redetermined by the lenders semi-annually
on or about April 1 and October 1 of each year or at other times required by the
lenders or at our request. If, as a result of the lenders' redetermination of
the borrowing base, the outstanding principal amount of our loan exceeds the
borrowing base, we must either provide additional collateral to the lenders or
repay the principal of the note in an amount equal to the excess. Except for the
principal payments that may be required because of our outstanding loans being
in excess of the borrowing base, interest only is payable monthly.
Loans made to us under this credit facility bear 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 sum of (a) the prime rate published in
the Wall Street Journal, and (b) if the principal amount outstanding is equal to
or greater than 85% of the borrowing base established by the lenders, a margin
of 2.00%.
The LIBOR rate is generally equal to the sum of (a) the rate
designated as "British Bankers Association Interest Settlement Rates" and
offered on one, two, three, six or twelve month interest periods for deposits of
$1.0 million, and (b) a margin ranging from 2.25% to 4.75%, depending upon the
outstanding principal amount of the loans. If the principal amount outstanding
is equal to or greater than 85% of the borrowing base established by the
lenders, the margin is 4.75%. If the principal amount outstanding is equal to or
greater than 75% of the
(25)
borrowing base, but less than 85% of the borrowing base, 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%.
The interest rate we are required to pay, including the applicable
margin, may never be less than 4.50%. At September 30, 2004, our interest rate
was 4.75%.
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 credit facility are
less than the borrowing base, an unused commitment fee is required to be paid to
the lenders. The amount of the fee is .25% of the daily average of the
unadvanced amount of the borrowing base. The fee is payable quarterly.
If the borrowing base is increased, we are required to pay a fee
of .375% on the amount of any increase in the borrowing base.
All outstanding principal under the revolving credit facility is
due and payable on December 20, 2008. The maturity date of our outstanding loans
may be accelerated by the lenders upon the occurrence of an event of default
under the Credit Agreement. Generally, the events of default specified in the
Credit Agreement include:
. failure to timely pay the interest on and principal of the
loans;
. any representation or warranty being untrue in any material
respect;
. failure to observe or perform any of the covenants contained in
the loan documents;
. default on indebtedness (other than under the Credit Agreement)
of $250,000 or more;
. liquidation or reorganization under any insolvency loan;
. final judgment against us in the amount of $250,000 or more;
. the occurrence of an event of default under any of our hedging
transactions;
. the occurrence of a change of control;
. the imposition of any lien for failure to pay income, payroll or
similar taxes; or
. any of the loan documents between us and the lenders ceasing to
be in full force and effect.
(26)
Parallel, L.L.C., a subsidiary of Parallel Petroleum Corporation,
guaranteed payment of the loans.
Our obligations to the lenders are secured by substantially all of
our oil and gas properties.
In addition to customary affirmative covenants, the Credit
Agreement contains various restrictive covenants and compliance requirements.
Among these restrictions are limitations on our ability to:
In addition to customary affirmative covenants, the credit
agreement contains 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;
. for each twelve month period ending on September 30, December
31, March 31 and June 30 of each year, 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) $50.0 million, plus (b)
seventy-five percent (75%) of the net proceeds from any equity
securities issued by Parallel, plus (c) fifty percent
(27)
(50%) of Parallel's consolidated net income for each fiscal
quarter, if positive, and zero percent (0%) if negative.
As part of the closing transactions under the Credit Agreement,
Parallel and its subsidiaries also entered into a separate commitment letter
with the lenders. Under the commitment letter, the lenders agreed to make
available an additional $20.5 million under the Credit Agreement for Parallel's
completion of the purchase of oil and gas properties from third parties. The
commitment is subject to certain conditions, including:
. title to, and the environmental condition of, all of the
properties being satisfactory to the lenders;
. completion of the property acquisitions by December 31, 2004;
and
. other customary closing conditions.
The commitment letter also provides that the borrowing base under
the Credit Agreement will be automatically reduced by $10.0 million on April 1,
2005 if all of our proposed property acquisitions are completed.
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.
On October 27, 2004, we advised our agent bank, based on our
preliminary calculation, that we would not meet the funded debt ratio covenant
for the twelve-month period ended September 30, 2004. On November 4, 2004, we
received from the banks a consent to our deviation from the required funded debt
ratio and we are negotiating the removal or amendment of this particular
financial ratio covenant. Our deviation from the funded debt ratio did not
result in the acceleration of our obligations under the credit facility.
(28)
Preferred Stock
At September 30, 2004, we had 950,000 shares of 6% Convertible
Preferred Stock outstanding. The 6% Convertible Preferred Stock:
. requires us to pay dividends of $.60 per annum, semi-annually on
September 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 and Derivative 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 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.
(29)
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.
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.
(30)
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.
Critical Accounting Policies
This discussion should be read in conjunction with the financial
statements and the accompanying notes and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included in our Annual Report
or Form 10-K for the year ended December 31, 2003, filed with the Securities and
Exchange Commission on March 22, 2004.
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.
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 $31.42 (unhedged) per BOE. For the nine months ended September
30, 2004, our average realized price was $35.10 (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.
(31)
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-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
(32)
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
September 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.
Interest Rate Sensitivity as of September 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 September, 2004. You should read
Note 3 to the Consolidated Financial Statements for further discussion of our
debt that is sensitive to interest rates.
December December December December December December
2004 2005 2006 2007 2008 2009 Total
------------ ------------ ------------ ------------ ------------ ------------ ------------
(in thousands, except interest rates)
Variable rate debt: $ - $ - $ - $ - $ 55,000 $ - $ 55,000
Revolving facility (secured)
Average interest rate 4.75% 4.75% 4.75% 4.75% 4.75% -
At September 30, 2004, we had bank loans in the amount of
approximately $55.0 million outstanding under our revolving credit facility at
an average interest rate of 4.75%. Under our revolving credit facility, we may
elect an interest rate based upon the agent lender's base lending rate plus a
base rate margin of up to 2.00%, or the LIBOR rate, plus a margin ranging from
2.25% to 4.75% 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%. 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.
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.
(33)
A recap for the period of time, notional amounts and LIBOR fixed
interest rates for the contract is as follows:
Libor
Notional Fixed
Period of Time Amounts Interest Rates (1)
- ----------------------------------------------- ----------------- -------------------
October 1, 2004 thru December 31, 2004 $ 30,000,000 2.660%
January 1, 2005 thru December 31, 2005 $ 20,000,000 4.050%
January 1, 2006 thru December 20, 2006 $ 10,000,000 4.050%
___________________
(1) Parallel's swap contract with BNP Paribas.
See Note 11 for subsequent interest rate swap transactions.
Commodity Price Sensitivity as of September 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 $22.78 per barrel to a
high of $35.95 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 $44.30. Natural gas
prices we received during 2004 ranged from a low of $2.31 per Mcf to a high of
$8.01 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
costless, Houston ship channel gas collars and west Texas intermediate light
sweet crude oil collars.
A recap for the period of time, number of MMBtu's and gas prices
is as follows:
Houston Ship Channel
NyMex oil prices gas prices
Barrels of --------------------------- MMBtu of ---------------------------
Period of Time Oil Floor Cap Natural Gas Floor Cap
- ------------------------------------------ ---------- ------------- ------------- ------------- ------------- -------------
October 31, 2004 - $ - $ - 31,000 $ 4.40 $ 5.50
April 1, 2005 thru October 31, 2005 $ - $ - 428,000 $ 5.00 $ 7.26
January 1, 2005 thru December 31, 2005 73,000 $ 36.00 $ 49.50 - $ - $ -
January 1, 2006 thru December 31, 2006 70,800 $ 35.00 $ 44.00 - $ - $ -
(34)
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
- -------------------------------------------- ------------- ---------------- ------------- -----------------
October 1, 2004 thru December 31, 2004 110,400 $ 24.23 215,000 $ 4.699
January 1, 2005 thru December 31, 2005 620,500 $ 30.19 - $ -
January 1, 2005 thru March 31, 2005 - $ - 180,000 $ 4.705
January 1, 2006 thru December 20, 2006 448,000 $ 28.46 - $ -
January 1, 2007 thru December 31, 2007 474,500 $ 34.36 - $ -
January 1, 2008 thru December 31, 2008 439,200 $ 33.37 - $ -
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.
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.
(35)
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.
At the annual meeting of stockholders held on June 22, 2004,
Parallel's stockholders approved the 2004 Non-Employee Directors Stock Grant
Plan, or the Plan. Under the Plan, we began paying an annual retainer fee to
each non-employee director in the form of common stock having a value of
$25,000.
Directors of Parallel who are not employees are eligible to
participate in the Plan. Under terms of the Plan, each non-employee director is
entitled to receive an annual retainer fee consisting of shares of common stock
that are automatically granted on the first day of July in each year, commencing
on July 1, 2004. The actual number of shares received is determined by dividing
$25,000 by the average daily closing price of the common stock on the Nasdaq
Stock Market for the ten consecutive trading days commencing fifteen trading
days before the first day of July of each year.
In accordance with the Plan, on July 1, 2004, each non-employee
Director of Parallel, including Martin B. Oring, Dewayne E. Chitwood, Ray M.
Poage and Jeffrey G. Shrader, received 5,222 shares of common stock, or a total
of 20,888 shares for the four non-employee Directors as a group.
The issuance and sale of the common stock was made in reliance
upon the exemption from registration under Section 4(2) of the Securities Act of
1933, as amended, as a transaction not involving a public offering. All of the
shares are "restricted" securities within the meaning of Rule 144 under the
Securities Act and bear a legend to that effect. Shares acquired under the Plan
are non-assignable and non-transferable other than by will or the laws of
descent and distribution and may not be sold, pledged, hypothecated, assigned or
transferred until the non-employee director holding such stock ceases to be a
director, except that the Compensation Committee may permit a transfer of stock
subject to the condition that the Compensation Committee receive evidence
satisfactory to it that the transfer is being made for essentially estate and/or
tax planning purposes or a gratuitous or donative purpose and without
consideration.
In April and October 1998, we privately placed a total of 974,500
shares of 6% Convertible Preferred Stock under our Certificate of Designations,
Preferences and Rights of Serial Preferred Stock - 6% Convertible Preferred
Stock, or the Certificate. The preferred stock was sold to thirteen accredited
investors at a price of $10.00 per share. The issuance and sale of the preferred
stock was made in reliance upon the exemption from registration contained in
Section 4(2) of the Securities Act of 1933 and under Rule 506 of Regulation D
under the Securities Act of 1933, as transactions not involving a public
offering. As provided in the Certificate, the preferred stock is convertible at
the conversion price of $3.50 per share, each share of preferred stock being
valued at $10.00 for the purpose of conversion (equivalent to a conversion rate
of 2.8751 shares of common stock for each share of preferred stock). On July 26,
2004, the Estate of E.R. Duke converted 7,000 shares of preferred stock into
20,000 shares of Parallel's common stock. The shares of common stock are
"restricted" securities within the meaning of Rule 144 under the Securities Act
of 1933, but are eligible for resale under Rule 144(k).
(36)
ITEM 6. EXHIBITS
(a) Exhibits
No. Description of Exhibit
- --- ----------------------
3.1 Certificate of Incorporation of Registrant (Incorporated by
reference to Exhibit 3.1 of the Registrant's Form 10-Q for the
fiscal quarter ended June 30, 2004.)
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 (Incorporated by
reference to Exhibit 4.1 of the Registrant's Form 10-Q for the
fiscal quarter ended June 30, 2004.)
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 10.9):
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.)
(37)
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 September 22, 2004).
10.9 Incentive and Retention Plan (Incorporated by reference to Exhibit
10.1 of the Registrant's Form 8-K Report dated September 23, 2004
and filed with the Securities and Exchange Commission on September
29, 2004.)
10.10 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 September 30, 1999.)
10.11 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 September 30, 1999.)
10.12 Merger Agreement dated September 25, 1999 (Incorporated by
reference to Exhibit 10.3 of the Registrant's Form 8-K report
dated September 30, 1999.)
10.13 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 September 30, 1999.)
10.14 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 September 30, 1999.)
10.15 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.)
10.16 Credit Agreement dated September 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 September 30,
1999.)
(38)
10.17 Limited Guaranty, dated September 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 September 30, 1999.)
10.18 Intercreditor Agreement, dated as of September 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 September 30, 1999.)
10.19 Subordinated Promissory Note, dated September 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 September 30, 1999.)
10.20 Subordinated Promissory Note, dated September 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 September 30, 1999.)
10.21 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.)
10.22 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.)
10.23 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)
10.24 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)
10.25 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)
10.26 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
(39)
quarter ended September 30, 2003).
10.27 Second Amended and Restated Credit Agreement, dated September 27,
2004, by and among Parallel Petroleum Corporation, Parallel, L.P.,
Parallel, L.L.C., First American, SSB, BNP Paribas, Citibank,
F.S.B. and Western National Bank (Incorporated by reference to
Exhibit 10.1 of the Registrant's Form 8-K Report dated September
27, 2004 and filed with the Securities and Exchange Commission on
October 1, 2004.)
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.
(40)
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: November 12, 2004 Larry C. Oldham
President and Chief Executive Officer
Date: November 12, 2004 BY: /s/ Steven D. Foster
-------------------------------
Steven D. Foster,
Chief Financial Officer
(41)
INDEX TO EXHIBITS
(a) Exhibits
No. Description of Exhibit
- --- ----------------------
3.1 Certificate of Incorporation of Registrant (Incorporated by
reference to Exhibit 3.1 of the Registrant's Form 10-Q for the
fiscal quarter ended June 30, 2004.)
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 (Incorporated by
reference to Exhibit 4.1 of the Registrant's Form 10-Q for the
fiscal quarter ended June 30, 2004.)
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 10.9):
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 September 22, 2004).
10.9 Incentive and Retention Plan (Incorporated by reference to Exhibit
10.1 of the Registrant's Form 8-K Report dated September 23, 2004
and filed with the Securities and Exchange Commission on September
29, 2004.)
10.10 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 September 30, 1999.)
10.11 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 September 30, 1999.)
10.12 Merger Agreement dated September 25, 1999 (Incorporated by
reference to Exhibit 10.3 of the Registrant's Form 8-K report
dated September 30, 1999.)
10.13 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 September 30, 1999.)
10.14 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 September 30, 1999.)
10.15 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.)
10.16 Credit Agreement dated September 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 September 30,
1999.)
10.17 Limited Guaranty, dated September 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 September 30, 1999.)
10.18 Intercreditor Agreement, dated as of September 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 September 30, 1999.)
10.19 Subordinated Promissory Note, dated September 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 September 30, 1999.)
10.20 Subordinated Promissory Note, dated September 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 September 30, 1999.)
10.21 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.)
10.22 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.)
10.23 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)
10.24 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)
10.25 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)
10.26 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).
10.27 Second Amended and Restated Credit Agreement, dated September 27,
2004, by and among Parallel Petroleum Corporation, Parallel, L.P.,
Parallel, L.L.C., First American, SSB, BNP Paribas, Citibank,
F.S.B. and Western National Bank (Incorporated by reference to
Exhibit 10.1 of the Registrant's Form 8-K Report dated September
27, 2004 and filed with the Securities and Exchange Commission on
October 1, 2004.)
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: November 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: November 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 September 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: November 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 September 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: November 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.