-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HYheRcR14I9OI9C7Q1B7p/hgw+lE3vDZQZUSix4OqhZbbu2NJG14eUBKk3/RRBp5 a5sMwtl+gRT4AaUz0bA/iQ== 0000033325-97-000003.txt : 19970311 0000033325-97-000003.hdr.sgml : 19970311 ACCESSION NUMBER: 0000033325-97-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970310 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: EQUITY OIL CO CENTRAL INDEX KEY: 0000033325 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 870129795 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-00610 FILM NUMBER: 97553445 BUSINESS ADDRESS: STREET 1: 10 W THIRD S STE 806 CITY: SALT LAKE CITY STATE: UT ZIP: 84101 BUSINESS PHONE: 8015213515 MAIL ADDRESS: STREET 1: P O BOX 959 CITY: SALT LAKE CITY STATE: UT ZIP: 84110 10-K 1 1996 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the fiscal year ended December 31, 1996 OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) Commission file number 0-610 EQUITY OIL COMPANY [Exact name of registrant as specified in its charter] Colorado 87-0129795 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 10 West Broadway, Suite 806 84101 Salt Lake City, Utah (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (801) 521-3515 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered None None Securities registered pursuant to Section 12(g) of the Act: Common Stock (par value, $1 per share) [Title of class] Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes X No As of February 24, 1997, 12,751,100 common shares were outstanding, and the aggregate market value of voting stock held by non-affiliates of the registrant was approximately $41,000,000. Documents Incorporated by Reference 1. Definitive proxy statement to be filed in connection with Issuer's Annual Stockholders' Meeting to be held on May 14, 1997 and more particularly the information contained on pages 2 through 5 are incorporated by reference into Part III of this report. Total Pages 59 INDEX TO EXHIBITS IS FOUND ON PAGE 45 PART I ITEM 1. Business GENERAL DEVELOPMENT OF BUSINESS Equity Oil Company ("Equity" or "the Company") was originally incorporated in the state of Utah in 1923. In 1958, it was merged into its subsidiary, Weber Oil Company, a Colorado corporation. The surviving company adopted the name Equity Oil Company. Equity is an independent oil and gas exploration and production company, currently conducting its business in nine states and two Canadian provinces. Equity is also a 50% shareholder in Symskaya Exploration, Inc., which has operations in Russia. Headquartered in Salt Lake City, Utah, the Company also maintains an exploration office in Denver, Colorado, and a field office in Vernal, Utah. The Company has 18 full-time employees. More than 90% of the Company's revenues come from the sale of crude oil and natural gas. Accordingly, the Company continually seeks to increase its oil and gas reserves through exploration, development of existing properties, and/or the purchase of existing producing properties. The Company's exploration office in Denver is responsible for the generation and review of exploration prospects, and participates in the planning, where necessary, to drill the prospects. These include prospects developed in-house, as well as those presented by independent third parties. The general drilling practice of the Company is to participate in projects on a 25% to 50% working interest basis. Participation varies with each prospect depending on location and the attendant financial and technical risk. In addition to its exploration ventures, the Company works in conjunction with other working interest owners in producing properties to identify and develop projects that will enhance and expand the productive capacities of existing wells and fields. The Company also investigates opportunities to purchase interests in properties with existing production. A discussion of the Company's activities during 1996 is set forth below in ITEM 2. Properties, under the caption Present Activity. NARRATIVE DESCRIPTION OF BUSINESS PRINCIPAL PRODUCTS AND MARKETS The Company produces crude oil and natural gas. During the last five years, revenues from the sales of these products have accounted for more than 90% of the total revenues of the Company, while remaining revenues have come from other sources, including interest income on invested funds, partnership income, operating overhead reimbursements, and the sales of various undeveloped properties. The Company's crude oil production is sold under short-term contracts at current posted prices for each geographic area, less applicable quality or transportation tariffs plus negotiated bonuses. Prices are set by oil purchasers, and their methods of determining prices are not within the knowledge of the registrant, but it is assumed they are influenced by regional, national and international factors relating to oil supply and demand. (See discussion under Major Customers) The bulk of the Company's natural gas production is sold in the Gulf Coast of Texas, in the Canadian province of Alberta, in Wyoming, and in California. In the Gulf Coast of Texas, the majority of the Company's gas production is sold on the spot market. Contracts are typically of short duration, and prices received vary in concert with the futures markets. While the areas in Texas where the Company has its major gas reserves are characterized by large reserves of other companies, the Company has historically been able to sell all of its productive capacity, and expects to be able to continue to do so in the near future. The majority of the natural gas produced in Alberta is taken in kind and sold on the spot market under short term contracts. The Company's contracts do not provide for minimum production amounts; however, the Company has historically been able to produce most of the wells at or near capacity, and has been able to sell all of the gas produced. The majority of gas sold in Wyoming is marketed under a contract at an index price that changes monthly. The contract is subject to renegotiation on an annual basis. The Company sells gas produced in California on the spot market, where prices also vary on a monthly basis. The Company has not historically hedged significant amounts of either oil or gas production. SEASONALITY The Company experiences some seasonality in gas sales revenues. Net sales prices and production tend to rise during the winter months compared to the rest of the year. However, since over 80% of the Company's oil and gas revenues come from the sale of oil, the seasonal impact on gas sales is not significant. MAJOR CUSTOMERS All oil and gas produced in the U.S. or Canada is sold to unaffiliated pipeline, refining, or crude oil purchasing companies. These companies may be the operators of the fields where the product is produced, or owners of the pipelines which transport the products. Previous changes of ownership or changes in operator have not resulted in an interruption of production or transportation, and consequently not had a material adverse effect on the business of the Company. Approximately 70% of the Company's total oil production, originating from several different fields, is sold to JN Petroleum Marketing, Inc (JN). The Company does not believe that the loss of JN as a customer would have any material impact on the Company, as oil production from the various fields could readily be sold to other crude oil purchasers. No other customer accounts for more than 10% of the Company's sales. COMPETITION Equity is part of a highly competitive industry composed of many companies that are significantly larger and possess greater resources than the Company. These include major oil companies as well as large independent exploration and production companies. Their size and resources may allow these parties to operate at a greater competitive advantage than Equity. During 1996 the Company did not experience any competitive factors which impaired its production or sale of oil and gas, nor did it experience any difficulties in contracting for drilling and related equipment. GOVERNMENT REGULATION Drilling activities of the Company are regulated by several governmental agencies in the United States, both federal and state, including the Environmental Protection Agency, Forest Service, Department of Wildlife, and Bureau of Land Management, as well as state oil and gas commissions for those states in which the Company has operations. Canadian operations are subject to similar requirements. The Company believes that it is currently in compliance with all federal, state, and local environmental regulations, both domestically and abroad. Further, the Company does not believe that any current environmental regulations will have a material impact on its capital expenditures or earnings, nor will they result in any competitive disadvantage to the Company. FINANCIAL INFORMATION ABOUT FOREIGN OPERATIONS Foreign operations of the Company are currently conducted in the Canadian provinces of Alberta and British Columbia. Financial information concerning these operations can be found in Footnotes 5 and 9 to the financial statements. For financial reporting purposes, the Company does not allocate any general and administrative expenses to its Canadian operations, nor are they burdened with indirect exploration overhead expenses. Direct exploration expenses are charged to the geographic area in which they occur. Because the majority of the Company's exploration efforts occur in the United States, very little exploration expenses are allocated to the Canadian operations. As a result of these and other factors, the operating profit of the Canadian operations is significantly greater than the operating profit in the United States. The Company does not believe that its Canadian operations are attended with any more risk than those in the United States. Symskaya Exploration, Inc., in which the Company owns a 50% interest, is conducting operations in Russia. Further discussion of this venture is found in ITEM 2. Properties, under the caption Present Activity, and in Footnotes 6 and 9 in the financial statements. ITEM 2. PROPERTIES The principal properties of the Company consist of developed and undeveloped oil and gas leasehold interests. Developed leases are comprised of properties with existing production, where lease terms continue as long as oil and/or gas is produced. Undeveloped leases include unproven acreage on both public and private lands. The leases have set terms and terminate at the time specified in each lease unless oil and gas in commercial quantities are discovered prior to that time. The Company also has a fee interest in 3,968 net acres of oil shale lands in Colorado. These properties have not generated significant revenue for the Company. In 1994, the Company entered into a lease agreement with another company for a five year oil and gas lease on these lands. RESERVES The information found in Footnote 9 to the financial statements concerning proved reserves represents the Company's best estimate of product quantities expected to be produced from the properties based on geologic and engineering data, as well as current economic and operating conditions. The presentation is made in accordance with Securities and Exchange Commission guidelines, and is based on prices and costs in effect on December 31, 1996. The calculation of future net cash flows relating to proved oil and gas reserves is sensitive to price variations, and is based on the prices in effect at a specific point in time. The weighted average net prices used for the 1996 reserve calculation were $24.36 per barrel of oil and $2.84 per Mcf of natural gas, which compares to $18.02 and $1.38 in 1995. No estimates of reserves have been filed with or included in any report to any other federal agency during 1996. PRODUCTION The following table sets forth the Company's production, average sales prices, and average lifting costs by geographic area for 1996, 1995, and 1994:
1996 1995 1994 1996 1995 1994 Oil Oil Oil Gas Gas Gas Area (Bbls) (Bbls) (Bbls) (MMCF) (MMCF) (MMCF) Production Colorado 363,080 373,766 387,919 106 84 27 Texas 29,186 32,861 42,603 315 356 439 Montana 32,845 23,385 17,889 17 9 - Utah 16,769 10,069 12,216 - - - Wyoming 68,924 44,283 22,956 519 422 398 North Dakota 6,768 5,869 5,370 3 2 1 Oklahoma 607 640 664 - - - California - - - 365 5 - Other States 13 6 30 - 2 15 ------- ------- ------- ----- --- --- Total U.S. 518,192 490,879 489,647 1,325 880 880 Alberta 113,756 116,252 108,466 586 568 238 B.C. 4,769 12,249 11,430 2 3 2 ----- ------ ------ --- --- --- Total Canada 118,525 128,501 119,896 588 571 240 Grand Total 636,717 619,380 609,543 1,913 1,451 1,120 ======= ======= ======= ===== ===== ===== AVERAGE PRICE U.S. $21.49 $17.44 $15.88 $ 1.79 $1.67 $2.18 Canada $16.99 $15.49 $14.30 $ 1.01 $ .74 $1.57 Total $20.65 $17.00 $15.57 $ 1.55 $1.31 $2.05 LIFTING COSTS U.S. $ 7.92 $ 7.75 $ 6.60 $ .66 $ .74 $ .91 Canada $ 6.09 $ 3.75 $ 4.32 $ .37 $ .19 $ .46 - ------------------------ -------------- -------------- -------------- ------------- ------------- ------------- Total $ 7.58 $ 6.85 $ 6.15 $ .57 $ .53 $ .81 ======================== ============== ============== ============== ============= ============= =============
PRODUCTIVE WELLS AND ACREAGE The location and quantity of Equity's productive wells and acreage as of December 31, 1996 are as follows: Productive Wells: Gross Net Oil: United States 714 77.772 Canada 243 11.625 Gas: United States 57 14.565 Canada 11 2.159 -- ----- Total Productive Wells 1,025 106.121 ===== ======= Developed Acreage United States 123,584 9,562 Canada 126,960 2,981 ------- ----- Total Developed Acreage 250,544 12,543 ======= ====== UNDEVELOPED ACREAGE The following table sets forth the Company's undeveloped oil and gas lease acreage as of December 31, 1996 by geographic area: Gross Net Area Acreage Acreage Colorado 12,518 10,419 Texas 4,427 975 Montana 62,087 8,167 Utah 7,156 880 Wyoming 12,550 3,880 California 13,909 3,040 North Dakota 7,863 3,359 Other States 40 8 ------- ------ Total U.S. 120,550 30,728 Alberta 29,573 3,573 ------ ----- Total Canada 29,573 3,573 ------ ----- Grand Total 150,123 34,301 ======= ====== Through its 50% ownership in Symskaya Exploration, Inc., the Company also has an indirect 50% interest in an additional 1,100,000 gross acres in Russia. Further discussion of this venture is found in ITEM 2. Properties, under the caption Present Activity, and in Footnotes 6 and 9 to the financial statements. DRILLING ACTIVITY During 1996, the Company participated in the drilling of 25 gross wells. Of this total, 19 were completed as producing oil and gas wells and 6 were plugged and abandoned as dry holes. Gross exploratory wells Status 1996 1995 1994 drilled: ------ ---- ---- ---- United States Productive 15 8 7 Dry 6 4 6 Canada Productive - - - Dry - - - Gross development wells drilled: United States Productive 3 3 5 Dry - - - Canada Productive 1 5 2 Dry - - - Net exploratory wells Status 1996 1995 1994 drilled: United States Productive 3.95 1.05 1.10 Dry 1.64 1.08 1.48 Canada Productive - - - Dry - - - Net development wells drilled: United States Productive 1.19 1.30 .80 Dry - - - Canada Productive .50 2.14 .90 Dry - - - PRESENT ACTIVITY In 1996, by following the growth strategy implemented in 1994, the Company completed the second consecutive year of reserve replacement in excess of 150% of production. The Company's strategy to replace its oil and natural gas reserves is comprised of a balanced approach in four areas. The four elements of that strategy are: *Focused exploration drilling in North America *Development drilling and exploitation in North America *Acquisition of proved reserves in North America *International exploration in Russia Following is background information concerning the Company's current and expected activities as they relate to this strategy: FOCUSED EXPLORATION IN NORTH AMERICA The principal focus of 1996 exploration was the Sacramento Basin in California, where 17 wells were drilled, resulting in 13 gas completions. Each of these wells was drilled using 3-D seismic data acquired in 1995 and 1996. Including the 3 wells completed in this area in 1995, the Company now has working interests in 16 gas wells. 12 wells are on production at a combined daily rate of 9.4 million cubic feet per day. Since many of these wells were drilled in the fourth quarter of 1996, and have been on production for a very short time, the Company's ability to accurately assess overall long term production rates and ultimate recoverable reserves is somewhat limited. During 1995 and 1996 the Company participated in the acquisition of 98 square miles of 3-D seismic data in 6 different surveys in the Sacramento Basin. 40 possible additional drill sites have been identified, and present plans call for the drilling of 20 exploratory wells on those surveys in 1997. A seventh 17 square mile survey on the Company's Davis Ranch prospect should be completed in the first quarter of 1997, and the Company expects to drill 2 wells on that survey in 1997. Equity's working interest in the completed wells and the prospects vary from a high of 70% in the Davis Ranch prospect to a low of 18.75% in the Moon Bend prospect. During the past several years, the Company has relied to a great extent on third party prospect generation for its exploration program. Equity began again in 1996 to actively promote and participate in drilling prospects that were generated by the Company. One of these prospects, the North Riley Ridge in Southwestern Wyoming, may represent a significant discovery. The No. 1-35 North Riley Ridge well was drilled and completed in the 1st Frontier formation, and tested at a rate of 3.6 million cubic feet per day from an estimated 48 feet of net pay. It is currently shut in awaiting a pipeline connection. Drilled on a 17,160 acre Federal oil and gas unit, the well is located on a prospect developed by Equity. Equity has an 18.75% working interest in the well. Other working interest owners include Griggs Oil, Inc., who is the operator, with a 15.625% interest, and Nuevo Energy Company with a 50% interest. The timing and extent of further drilling on the Unit will depend upon testing results, but the potential may exist for additional development locations associated with this new field discovery. In addition to 1997 drilling in the Sacramento Basin of California, and additional drilling that may take place at the North Riley Ridge Unit, the Company has present plans to participate in 6 other exploratory tests, 5 in the Rocky Mountains and one in Texas. DEVELOPMENT DRILLING AND EXPLOITATION IN NORTH AMERICA The logical outgrowth of any exploration or acquisition program is the ongoing development of reserves and production that were not developed by initial drilling. Prior to 1994, the Company had three core properties that had specific development and/or exploitation potential: the Cessford field in Alberta, the Siberia Ridge field in Wyoming, and the Ashley Valley field in Utah. Since 1994, development activities have been focused on these three areas. The Company has recorded nearly 100% development drilling success at Cessford and Siberia Ridge, participating in a total of 13 wells. During 1996, the Company successfully drilled 4 development wells with a 100% success rate, resulting in 3 oil wells and 1 gas well. The first of the oil wells was an infill well drilled on the Cessford property in Alberta, Canada, the second was drilled on the Sage Creek field in Big Horn County, Wyoming on a property acquired in 1995, and the third was an extension well drilled adjacent to the Spearhead Ranch Field in Converse County, Wyoming. The single gas well was a development well drilled with Marathon Oil Company at the Siberia Ridge field in Sweetwater County, Wyoming. In addition, prior to beginning exploitation work at the Ashley Valley field located near Vernal, Utah, the Company doubled its working interest there in 1996 through a series of acquisitions. As a result of exploration drilling and acquisitions in the last three years, the list of properties slated for development drilling and exploitation work has grown to include the Mountain Oil and Gas properties in Wyoming, where a comprehensive reservoir study of the Sage Creek Field was recently completed, the West Padroni property in Colorado, the East Rangely Field in Colorado, and the North Riley Ridge Unit in Wyoming. In 1997, the Company is planning additional development drilling in the Siberia Ridge Field, the Cessford field, and the Sage Creek field. Equity also expects to see the initial implementation of a water flood project in the Michelle Kay Field in Kent County, Texas where Equity has a 27.5% working interest. ACQUISITION OF PROVED RESERVES IN NORTH AMERICA As the Company developed its growth strategy in 1994, it recognized that the replacement of reserves through drilling alone would not be adequate to replace production and increase the Company's declining reserve base. Accordingly, the Company adopted a strategy element of reserve acquisition to be financed in its initial stages by the use of a $20 million revolving credit facility. That program has resulted in net acquisitions of 1.7 million barrels of oil and 1.3 MMCF of gas in 1995 and 1996, for a total original investment of $5.1 million, or a net acquisition cost of $2.65 per barrel of oil equivalent. These properties will produce approximately 23% of forecast oil production in 1997, and 17% of total BOE production. In addition, the properties have contributed in excess of $1 million in incremental discretionary cash flow. The Company made two principal acquisitions in 1996, both in Colorado. The first, the purchase of 14 wells in Rio Blanco County, added 332,000 barrels of proved developed reserves at a cost of $1.4 million, or $4.22 per barrel, and added approximately 100 barrels per day of production. The wells are adjacent to the Rangely Weber Sand Unit, where Equity participated in the first commercial well in 1946. The Company believes that its knowledge of the area will allow it to enhance production and develop additional reserves associated with the wells purchased. The second, the purchase of 8 producing wells in the West Padroni field in Logan County, added 292,000 barrels of proved developed heavy oil reserves at a cost of $386,000, or $1.32 per barrel, and added approximately 130 barrels per day of production. In each case, the Company has a 100% working interest and operates the properties. INTERNATIONAL EXPLORATION IN RUSSIA Equity began its efforts to explore for oil in Russia in December of 1991. Over a period of five years, Symskaya Exploration, Inc., which is a 50% owned subsidiary, has been able to obtain a 25 year License and Production Sharing Contract to explore, develop and produce hydrocarbons on a 1.1 million acre tract in the Krasnoyarsk Krai of Eastern Siberia. During 1996, the drilling and testing of a 14,100 foot exploratory well was completed. Unfortunately, the well did not reach the principal objective at an estimated depth of 14,500 feet as drilling was terminated due to mechanical problems that occurred at 14,100 feet. Nevertheless, the well enabled Symskaya to collect a large amount of geologic and geochemical data related to the Symskaya area. This data appears to support the presence of a major structure on the concession drilled, as well as the possibility for the development of oil accumulations in the zones that were tested at a higher structural location. No assurance can be given, however, that any hydrocarbons will be discovered. Through the end of 1996, Symskaya has invested a total of $15.5 million ($9.2 million net to Equity) in its Russian operations, and has fulfilled the specific obligations of its License and Production Sharing Contract which called for the investment of $12 million in the first five years of the License term. The License was issued in November of 1993, and, consequently, as of December 31, 1996, Symskaya has a paid-up 22 year right to continue its exploration efforts on the 1.1 million acre license area. The only specific financial commitment for maintenance of the License is the payment of an annual License fee of $100,000, which Symskaya intends to pay. Symskaya remains convinced of the project's geologic merit, and is actively engaged in the pursuit of additional financing. However, because of the uncertainty regarding further exploration activities, and the probability that the Company will not recover its investment in and advances to Symskaya, the Company charged its remaining investment in and advances to Symskaya to expense as of December 31, 1996. The Company has no current plans to fund future exploratory drilling on the Symskaya concession. The License area is located in a country that may be considered economically and politically unstable. As a result, the Symskaya project is subject to all the risks of an exploratory well in addition to the economic and political risks associated with the Russian Federation and local government, including but not necessarily limited to the cancellation or renegotiation of contracts, expropriation, tax and royalty increases, foreign exchange controls, import and export regulations, environmental regulations and other laws that may have an adverse impact on the operation. There are also increased logistical problems and costs associated with exploration activities in such a remote region. Further information concerning the Company's investment in Symskaya Exploration, Inc. may be found in Footnotes 6 and 9 to the financial statements. DELIVERY COMMITMENTS The Company is not obligated to provide any fixed or determinable quantity of oil or gas in the future under any existing contracts or agreements. ITEM 3. LEGAL PROCEEDINGS No material legal proceedings are pending. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of the fiscal year covered by this report, no matters were submitted to the security holders for a vote, and no proxies were solicited. PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED MATTERS The Company's stock is traded on the over-the-counter market and quoted over the NASDAQ National Market System using the symbol EQTY. High and low prices for 1996 and 1995 are as follows: Quarter High Low - ------- ---- --- 1996 - 4th 3 5/8 2 13/16 3rd 5 3 1/16 2nd 6 1/2 4 3/8 1st 5 7/8 4 1995 - 4th 6 1/8 3 3/4 3rd 7 1/8 4 2nd 4 5/8 3 1/8 1st 4 3 3/8 The approximate number of registered stockholders of the Company as of February 24, 1997 is 1,847. No unregistered equity securities of the registrant have been sold during the period covered by this report. ITEM 6. SELECTED FINANCIAL DATA
1996 1995 1994 1993 1992 Net Sales $16,115,125 $12,259,739 $11,713,498 $12,729,899 $15,222,887 Other Income 312,759 457,837 196,431 43,096 277,289 Lease Operating Costs 5,912,128 5,093,782 4,658,115 5,293,628 5,481,102 DD&A 4,292,237 3,843,442 5,011,155 5,090,744 4,868,084 Impairment of Proved Oil and Gas Properties 237,279 2,471,146 -0- -0- -0- Equity Loss and Impairment of Investment in Symskaya Exploration, Inc. 9,204,394 -0- -0- -0- -0- Property Writedowns -0- -0- -0- 3,292,624 -0- 3-D Seismic 757,964 237,604 -0- -0- -0- Exploration Expense 2,336,405 1,633,612 1,718,339 1,737,923 2,459,873 General and Administrative 2,030,811 1,908,778 1,560,675 1,607,892 1,939,682 Income (Loss) Before Cumulative Effect of Accounting Changes (5,502,646) (1,254,812) (360,830) (2,476,631) 801,440 Income (Loss) Per Common Share Before Cumulative Effect of Accounting Changes $ (.43) $ (.10) $ (.03) $ (.20) $ .07 ===== ===== ===== ===== ==== Total Assets $50,181,437 $53,947,050 $51,908,336 $53,322,749 $58,154,880 Long Term Debt 8,878,830 4,918,830 460,000 920,000 1,380,000 Cash dividends per share $.00 $.00 $.00 $.05 $.20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL. The following discussion provides information on the results of operations for the three years ended December 31, 1996 and the financial condition, liquidity and capital resources as of December 31, 1996. The financial statements and the notes thereto contain detailed information that should be referred to in conjunction with this discussion. The profitability of the Company's operations in any particular accounting period will be directly related to the average realized prices of oil and gas sold, the volume of oil and gas produced and the results of acquisition, development and exploration activities. The average realized prices of oil and gas will fluctuate from one period to another due to market conditions. The aggregate amount of oil and gas produced may fluctuate based on development and exploitation of oil and gas reserves and other factors. Production rates, value-based production taxes, labor and maintenance expenses are expected to be the principal influences on operating costs. Accordingly, the results of operations of the Company may fluctuate from period to period based on the foregoing and other factors. OIL AND GAS RESERVES. 1996 drilling and acquisition activities in the United States and Canada added 1.51 million barrels of oil equivalent to the Company's proved reserve base, resulting in a net 5% gain in its reserves, replacing 158% of 1996 oil and gas production. At year end 1996, proved reserves stood at 8.37 million barrels of oil and 17.6 billion cubic feet of natural gas. Using a 10% discount rate and year end oil and gas prices and operating costs as prescribed by the Securities and Exchange Commission, the pre-tax net present value of the Company's reserves at year end 1996 totaled $79 million, an 84% increase over the year end value in 1995 of $43 million. After-tax values were $55 million and $30 million, respectively. In 1995 the Company added 1.44 million barrels of oil equivalent, equal to 167% of 1995 oil and gas production. Year end 1995 proved reserves of oil were 7.75 million barrels, an increase of 6% over year end 1994 reserves of 7.31 million barrels. Natural gas proved reserves at year end 1995 were 18.02 billion cubic feet, 5% higher than at year end 1994. Barrel equivalent reserves of 10.75 million barrels were 6% higher on a year to year basis. EQUITY LOSS AND IMPAIRMENT OF INVESTMENT IN SYMSKAYA EXPLORATION, INC. In August of 1996, Symskaya Exploration, Inc., the Company's 50% owned subsidiary, plugged and abandoned the Lemok #1 well. Symskaya subsequently charged the drilling costs of the well to expense. The Company's equity share of the loss in Symskaya of $5,250,000 was reflected in the Statement of Operations for the quarter ended September 30, 1996. Due to the amount of uncertainty relating to Symskaya's obtaining additional outside financing and proceeding with development of the License area, and the probability that the Company will not recover its investment, the remaining capitalized costs were written off in the fourth quarter of 1996, resulting in a charge to expense of $3,954,394. Further discussion of this venture is found in ITEM 2. Properties, under the caption Present Activity, and in Footnotes 6 and 9 to the financial statements. ADOPTION OF SFAS NO. 121. As discussed in Note 2 to the financial statements, the Company adopted SFAS No. 121, Accounting for the Impairment of Long Lived Assets and Assets Held for Disposal, effective July 1, 1995. The adoption of this accounting standard resulted in non-cash charges for the impairment of proved oil and gas properties in the amount of $2,471,146 ($1,557,563 after tax) in 1995. Non-cash impairment charges of $237,279 ($149,557 after tax) were recorded during 1996. SFAS No. 121 requires successful efforts companies to evaluate the recoverability of the carrying costs of their proved oil and gas properties at a field level, rather than on a company-wide level as previously allowed by the Securities and Exchange Commission. The SFAS No. 121 test compares the expected undiscounted future net revenues from each producing field with the related net capitalized costs at the end of each period. When the net capitalized costs exceed the undiscounted future net revenues, the cost of the property is written down to fair value, which is determined using discounted future net revenues from the producing field. These are non-cash financial statement events only. There has been no decrease in the quantity or expected future net revenue from the Company's reserves, nor is there any impact on the Company's cash flows. RESULTS OF OPERATIONS - --------------------- COMPARISON OF 1996 WITH 1995 OIL AND GAS PRODUCTION AND SALES. The Company recorded increases in oil and gas production and sales during 1996. Oil production rose 3%, from 619,380 barrels in 1995 to 636,717 barrels in 1996. Gas production rose 32%, from 1.45 Bcf in 1995 to 1.91 Bcf in 1996. The production increases were a direct result of the Company's successful exploration and development drilling and acquisition programs. Increases in production were augmented by increases in both oil and gas average prices received during the year. The Company's average gas price received during 1996 was $1.55, up 18% from $1.31 received during 1995. Oil prices increased 21% from $17.00 in 1995 to $20.65 in 1996. The combination of increased production and increased prices resulted in an increase of 31% in oil and gas sales for 1996. Further details of production and pricing are found in Item 2. Properties, under the caption Production. OTHER INCOME. Other income in 1995 includes the recognition of $178,553 of lease revenue deferred in 1994. There was no similar transaction in 1996. This reduction in other income was partially offset by increased overhead fees from operated properties. LEASE OPERATING COSTS. Lease operating costs increased 16% in 1996 over 1995 levels. The increase was directly attributable to the increases in production discussed above, higher value-based production taxes associated with increased product prices, and a greater number of wells on production. 1996 was the first full year of operations for the wells drilled and acquired during 1995. In addition, the Company added approximately 40 additional wells during 1996. DEPRECIATION, DEPLETION, AND AMORTIZATION (DD&A). Increased DD&A charges in 1996 are a direct reflection of increased production and the addition of new wells to the Company's depletion base. As discussed above, 1996 was the first full year of operations for the wells drilled and acquired during 1995. In addition, the Company added approximately 40 additional wells during 1996. IMPAIRMENT OF PROVED OIL AND GAS PROPERTIES. As discussed previously, included in the Statement of Operations for 1996 and 1995 are non-cash charges for the impairment of proved oil and gas properties in the amount of $237,279 and $2,471,146, respectively. The 1995 charge resulted from the Company's adoption of SFAS No. 121, effective July 1, 1995. EQUITY LOSS AND IMPAIRMENT OF INVESTMENT IN SYMSKAYA EXPLORATION, INC. As discussed above, the Company recorded an equity loss in Symskaya of $5,250,000 for the quarter ended September 30, 1996. In the fourth quarter of 1996, the Company's remaining capitalized costs were written off, resulting in a charge to expense of $3,954,394. The total charge to earnings related to Symskaya Exploration, Inc. for 1996 was $9,204,394 ($6,592,206 after tax). 3-D SEISMIC AND EXPLORATION EXPENSES. During 1996, the Company incurred $757,964 in 3-D seismic costs related to its California exploration programs, compared to $237,604 in 1995. Exploration expenses increased as the Company drilled 6 dry holes in 1996, including one dry hole which cost approximately $500,000, compared to 4 dry holes in 1995. GENERAL AND ADMINISTRATIVE EXPENSES. The Company recorded increases in compensation expense, along with small increases in other administrative charges during 1996. INTEREST EXPENSE. Subsequent to the plugging of the Lemok #1, the Company discontinued capitalizing interest expense on the investment in Symakaya Exploration, Inc. Along with increased borrowing on the Company's revolving credit facility, this caused interest expense to increase 126% during 1996. The Company does not currently expect to capitalize any interest during 1997. INCOME TAX BENEFIT. The Company's income tax benefit is a functionof the loss in 1996. Details concerning the components of the tax benefit can be found in Footnote 3 to the financial statements. COMPARISON OF 1995 WITH 1994 OIL AND GAS PRODUCTION AND SALES. The Company recorded increases in oil and gas production and sales during 1995. Oil production rose 2%, from 609,543 barrels in 1994 to 619,380 barrels in 1995. Gas production rose 30%, from 1.12 Bcf in 1994 to 1.45 Bcf in 1995. The production increases were a direct result of the Company's successful development drilling and acquisition programs. While increased gas production was offset by falling gas prices, oil prices rose slightly during the year. The Company's average gas price received during 1995 was $1.31, down 36% from $2.05 received during 1994. Conversely, oil prices increased 9% from $15.57 in 1994 to $17.00 in 1995. The increases in production and oil prices were able to more than offset lower gas prices, resulting in an increase of 5% in oil and gas sales for 1995. Net oil and gas sales for the year were $12,259,739, compared to $11,713,498 in 1994. Further details of production and pricing are found in Item 2. Properties, under the caption Production. OTHER INCOME. Other income in 1995 includes the recognition of $178,553 of lease revenue deferred in 1994. In addition, the Company had begun to operate a greater number of properties, and 1995 figures include increased overhead fees. LEASE OPERATING COSTS. Lease operating costs increased 9% over 1994 levels. The increase was directly attributable to the increases in production discussed above, along with a greater number of wells on production. Through it's successful acquisition and drilling programs, the Company acquired interests in more than 50 additional wells, most of which were added as of July 1, 1995. DEPRECIATION, DEPLETION, AND AMORTIZATION (DD&A). Decreased DD&A charges in 1995 were a direct reflection of the adoption of SFAS No. 121 as discussed above. The Company removed almost $2.5 million from its depletion base effective July 1, 1995, most of which was associated with high cost, marginally economic wells. IMPAIRMENT OF PROVED OIL AND GAS PROPERTIES. As discussed previously, included in the Statement of Operations for 1995 is a non-cash charge for the impairment of proved oil and gas properties in the amount of $2,471,146 ($1,557,563 after tax), which results from the Company's adoption of SFAS No. 121, effective July 1, 1995. 3-D SEISMIC AND EXPLORATION EXPENSES. During 1995, the Company incurred $237,604 of 3-D seismic costs, while no such costs were incurred in 1994. Exploration expenses decreased in 1995 due to fewer dry holes. The Company drilled 4 dry holes in 1995, compared to 6 in 1994. GENERAL AND ADMINISTRATIVE EXPENSES. The Company recorded increases in insurance expense, research expense, and legal fees associated with its increased activities during 1995, causing general and administrative expenses to increase 22% over 1994 levels. INCOME TAX BENEFIT. The Company's income tax benefit was a function of the loss in 1995. Details concerning the components of the tax benefit can be found in Footnote 3 to the financial statements. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- 1996 1995 1994 - ----------------------------------------------------------------- Cash, cash equivalents, and temporary cash investments $ 837,763 $ 1,467,219 $ 2,830,070 Working capital 2,809,086 3,721,049 4,841,243 Cash provided by operating activities 5,807,986 4,143,390 3,747,669 Cash used in investing activities 9,476,999 8,414,086 8,092,488 Cash provided by (used in) financing activities 3,945,722 4,418,606 (485,852) CASH AND WORKING CAPITAL. Total cash balances dropped by 43% from 1995, as a result of a combination of several events discussed in the following paragraphs. Working capital decreased by 25%. The Company's ratio of current assets to current liabilities was 2.17 to 1 at December 31, 1996. The Company believes that existing cash balances, cash flow from operating activities, and the remaining borrowing capacity under its revolving credit facility will provide adequate resources to meet its capital, exploration, and acquisition spending objectives in 1997. CASH FLOW FROM OPERATING ACTIVITIES. Higher oil and gas sales, which were mainly a function of increased oil and gas production and higher product prices, were the principal factors behind a 40% increase in cash flow from operating activities during 1996. 1995 cash flow from operating activities likewise increased over 1994 levels due to overall higher product prices and increases in production. The Company is unable to accurately predict future cash flows because of oil and gas price fluctuations. CASH FLOWS FROM INVESTING ACTIVITIES. In 1996, the Company maintained the pace of capital expenditures recorded during 1995. Capital expenditures increased 2% to $7,339,212 compared to $7,179,528 in 1995. Included in the 1996 amount was approximately $2 million associated with proved property acquisitions. The Company spent approximately $3.1 million on proved property acquisitions in 1995. Funds advanced to Symskaya Exploration increased from $2,745,319 in 1995 to $3,043,952 in 1996, an increase of 11%. Funds advanced to Symskaya were $1,696,261 in 1994. The Company expects that advances to Symskaya in 1997 will be minimal as the Company has no current plans to fund any exploratory drilling. CASH FLOWS FROM FINANCING ACTIVITIES. During 1995, current and former employees of the Company exercised both Incentive and Non-Qualified Stock Options for 171,000 shares of common stock under the Company's Incentive Stock Option Plans. These exercises generated $681,525 in cash for the Company. Option exercises in 1996 generated $84,375 in cash. There were no option exercises in 1994. In March of 1995, the Company obtained a $20 million Borrowing Base Credit Facility (the Facility), with an initial commitment of $10 million. The Company used proceeds of $3,960,000 and $4,918,830 in 1996 and 1995 respectively, from the Facility to fund capital expenditures, retire its previous outstanding Note Payable in the amount of $920,000, and for working capital purposes. As of December 31, 1996 the outstanding balance under the Facility was $8,878,830 at an average interest rate of 7.69%. COMMITMENTS. Under the terms of Symskaya's License and Production Sharing Contract (PSC), Equity was committed to advance Symskaya a minimum of $6 million during the first 5 contract years, representing 50% of the minimum expenditures called for in the License and PSC, with the remainder being funded by Leucadia National Corporation, Symskaya's other 50% shareholder. The first contract year began November 15, 1993. The amounts spent through November 14, 1996, the end of the third contract year, have satisfied all minimum commitments required. Further discussion of this venture is found in ITEM 2. Properties, under the caption Present Activity, and in Footnotes 6 and 9 to the financial statements. OTHER ITEMS. The Company has reviewed all recently issued, but not yet adopted, accounting standards in order to determine their effects, if any, on the results of operations or financial position of the Company. Based on that review, the Company believes that none of these pronouncements will have any significant effects on current or future earnings or operations. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders and Board of Directors of Equity Oil Company: We have audited the financial statements of Equity Oil Company as listed in Item 14(a) of this Form 10-K. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Equity Oil Company as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. As discussed in Note 2 to the financial statements, in 1995 the Company changed its method of measuring impairment of proved oil and gas properties. Coopers & Lybrand L.L.P. Salt Lake City, Utah February 5, 1997 EQUITY OIL COMPANY BALANCE SHEET December 31, 1996 and 1995 ASSETS 1996 1995 ---- ---- Current assets: Cash and cash equivalents $ 787,961 $ 511,252 Temporary cash investments 49,802 955,967 Accounts receivable 2,911,637 2,620,865 Operator advances 749,033 633,000 Federal, state and foreign income taxes receivable 311,393 264,300 Deferred income taxes 31,053 - Other current assets 372,701 378,594 ---------- ---------- Total current assets 5,213,580 5,363,978 ---------- ---------- Property and equipment, at cost (successful efforts method): Unproved oil and gas properties 2,565,727 2,468,412 Proved oil and gas properties: Developed leaseholds 10,548,580 8,622,146 Intangible drilling costs 65,983,136 62,346,421 Equipment 26,284,602 25,127,047 Other property and equipment 765,100 678,728 ----------- ----------- 106,147,145 99,242,754 Less accumulated depreciation, depletion and amortization (61,732,014) (57,549,855) ---------- ---------- 44,415,131 41,692,899 ---------- ---------- Other assets: Investment in Raven Ridge Pipeline Partnership 405,328 540,220 Investment in and notes receivable from Symskaya Exploration - 6,160,442 Other assets 147,398 189,511 ---------- ---------- 552,726 6,890,173 ---------- ---------- Total assets $50,181,437 $53,947,050 ========== ========== EQUITY OIL COMPANY BALANCE SHEET December 31, 1996 and 1995 LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995 ---- ---- Current liabilities: Accounts payable $ 1,880,418 $ 1,182,877 Accrued liabilities 153,467 145,422 Federal, state and foreign income taxes payable 191,509 155,063 Accrued profit-sharing contribution 179,100 148,771 Deferred income taxes - 10,796 --------- --------- Total current liabilities 2,404,494 1,642,929 --------- --------- Revolving credit facility 8,878,830 4,918,830 Deferred income taxes 5,565,973 8,654,698 ---------- ---------- 14,444,803 13,573,528 ---------- ---------- Commitments (Note 6) Stockholders' equity: Common stock, $1 par value: Authorized: 25,000,000 shares Issued: 12,751,100 shares in 1996 and 12,711,100 shares in 1995 12,751,100 12,711,100 Paid in capital 3,648,333 3,485,487 Retained earnings 17,031,360 22,534,006 ---------- ---------- 33,430,793 38,730,593 Less treasury stock, at cost (98,653) - ---------- ---------- 33,332,140 38,730,593 ---------- ---------- Total liabilities and stockholders' equity $50,181,437 $53,947,050 ========== ========== The accompanying notes are an integral part of the financial statements EQUITY OIL COMPANY STATEMENT OF OPERATIONS for the years ended December 31, 1996, 1995 and 1994
1996 1995 1994 ---- ---- ---- Revenues: Oil and gas sales $16,115,125 $12,259,739 $11,713,498 Partnership income 306,114 311,960 306,221 Interest 140,053 221,020 244,054 Other income 312,759 457,837 196,431 ---------- ---------- ---------- 16,874,051 13,250,556 12,460,204 ---------- ---------- ---------- Expenses: Oil and gas leasehold operating costs 5,912,128 5,093,782 4,658,115 Depreciation, depletion and amortization 4,292,237 3,843,442 5,011,155 Impairment of proved oil and gas properties 237,279 2,471,146 - Equity loss and impairment of investment in Symskaya Exploration, Inc. 9,204,394 - - Leasehold abandonments 87,464 30,597 60,545 3-D seismic 757,964 237,604 - Exploration 2,336,405 1,633,612 1,718,339 General and administrative 2,030,811 1,908,778 1,560,675 Interest, net of interest capitalized of $364,637 in 1996 and$70,000 in 1995 164,678 72,625 87,308 ---------- ---------- ---------- 25,023,360 15,291,586 13,096,137 ---------- ---------- ---------- Loss before income taxes (8,149,309) (2,041,030) (635,933) Benefit from income taxes (2,646,663) (786,218) (275,103) ---------- ---------- ---------- Net loss $(5,502,646) $(1,254,812) $ (360,830) ========== ========== ========== Net loss per common share $ (0.43) $ (.10) $ (.03) ========== ========== ========== Weighted average shares outstanding 12,733,864 12,597,238 12,540,594 ========== ========== ==========
The accompanying notes are an integral part of the financial statements EQUITY OIL COMPANY STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY for the years ended December 31, 1996, 1995 and 1994
Common Stock Paid in Retained Treasury Stock Shares Amount Capital Earnings Shares Cost ------ ------ --------- ---------- ------ ---- Balance at December 31, 1993 12,583,631 $12,583,631 $2,904,792 $24,149,648 45,931 $ (86,358) Net loss (360,830) Treasury stock purchased, $4.24 per share 6,100 (25,852) Common stock issued for services, $4.00 per share 10,000 10,000 30,000 ---------- ---------- --------- ---------- ------ ------- Balance at December 31, 1994 12,593,631 12,593,631 2,934,792 23,788,818 52,031 (112,210) Net loss (1,254,812) Treasury stock purchased, $3.79 per share 13,500 (51,181) Common stock issued for services, $3.88 per share 12,000 12,000 34,500 Treasury stock canceled, $2.49 per share (65,531) (65,531) (97,860) (65,531) 163,391 Common stock issued on exercise of incentive stock options 171,000 171,000 510,525 Income tax benefit from exercise of incentive stock options 103,530 ---------- ---------- --------- ---------- ------ ------- Balance at December 31, 1995 12,711,100 12,711,100 $3,485,487 $ 22,534,006 - - Net loss (5,502,646) Treasury stock purchased, $3.40 per share 29,000 (98,653) Common stock issued for services, $5.04 per share 20,500 20,500 82,813 Common stock issued on exercise of incentive stock options 19,500 19,500 64,875 Income tax benefit from exercise of incentive stock options 15,158 ---------- ---------- --------- ---------- ------ ------- Balance at December 31, 1996 12,751,100 $12,751,100 $3,648,333 $ 17,031,360 29,000 $ (98,653) ========== ========== ========= ========== ====== ======
The accompanying notes are an integral part of the financial statements EQUITY OIL COMPANY STATEMENT OF CASH FLOWS for the years ended December 31, 1996, 1995 and 1994
1996 1995 1994 ---- ---- ---- Cash flows from operating activities: Net loss $(5,502,646) $ (1,254,812) $(360,830) Adjustments to reconcile net loss to net cash provided by operating activities: Impairment of proved oil and gas properties 237,279 2,471,146 - Equity loss and impairment of investment in Symskaya Exploration, Inc. 9,204,394 - - Depreciation, depletion and amortization 4,292,237 3,843,442 5,011,155 Partnership distributions in excess of income 134,892 144,717 137,023 Property dispositions 87,464 43,227 60,545 Change in other assets 42,113 21,057 - Decrease in deferred income taxes (3,130,574) (1,374,414) (474,950) Common stock issued for services 103,313 46,500 40,000 Increase (decrease) from changes in: Accounts receivable and operator advances (406,805) 133,624 (471,691) Other current assets 5,893 (784) (78,015) Accounts payable and accrued liabilities 735,915 11,438 (368,649) Deferred lease rental revenue - (178,553) 178,553 Income taxes payable/receivable 4,511 236,802 74,528 --------- --------- --------- Net cash provided by operating activities 5,807,986 4,143,390 3,747,669 --------- --------- --------- Cash flows from investing activities: Sale of temporary cash investments 906,165 1,510,761 - Purchase of temporary cash investments - - (2,466,728) Advances to Symskaya Exploration (3,043,952) (2,745,319) (1,696,261) Capital expenditures (7,339,212) (7,179,528) (4,027,752) Proceeds from sale of property - - 98,253 --------- --------- --------- Net cash used in investing activities (9,476,999) (8,414,086) (8,092,488) --------- --------- --------- Cash flows from financing activities: Exercise of incentive stock options 84,375 681,525 - Increase in other assets - (210,568) - Purchase of treasury stock (98,653) (51,181) (25,852) Borrowings under revolving credit facility 3,960,000 4,918,830 - Payments on note payable - (920,000) (460,000) --------- --------- --------- Net cash provided by (used in) financing activities 3,945,722 4,418,606 (485,852) --------- --------- --------- Net increase (decrease) in cash and cash equivalents 276,709 147,910 (4,830,671) Cash and cash equivalents at beginning of year 511,252 363,342 5,194,013 --------- --------- --------- Cash and cash equivalents end of year $ 787,961 $ 511,252 $ 363,342 ========= ========= ========= Cash, cash equivalents and temporary cash investments at end of year $ 837,763 $ 1,467,219 $ 2,830,070 ========= ========= ========== Supplemental disclosures of cash flow information: Cash paid during the year for: Income taxes $ 419,121 $ 355,993 $ 103,745 Interest $ 164,678 $ 72,625 $ 87,308
The accompanying notes are an integral part of the financial statements EQUITY OIL COMPANY NOTES TO FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES: A. Equity Oil Company (the Company) is a Colorado corporation engaged in oil and gas exploration, development and production in the United States, Canada and Russia. B. TEMPORARY CASH INVESTMENTS AND CASH EQUIVALENTS: Temporary cash investments consist of U.S. Treasury Notes stated at cost which approximates market. The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. C. ACCOUNTING FOR OIL AND GAS OPERATIONS: The Company reports using the "successful efforts" method of accounting for oil and gas operations. The use of this method results in capitalization of those costs identified with the acquisition, exploration and development of properties that produce revenue or, if in the development stage, are anticipated to produce future revenue. Costs of unsuccessful exploration efforts are expensed in the period in which it is determined that such costs are not recoverable through future revenues. Geological and geophysical costs are expensed as incurred. The costs of development wells are capitalized whether productive or nonproductive. The Company annually assesses undeveloped oil and gas properties for impairment. The annual impairment represents management's estimate of the decline in realizable value experienced during the year. The costs of proved properties which management determines are not recoverable are written down in the period such determination is made. The net capitalized costs of proved oil and gas properties are measured for impairment in accordance with SFAS No. 121 (see Note 2). The provision for depreciation, depletion and amortization of proved oil and gas properties is computed using the units of production method, based on proved oil and gas reserves. Estimated dismantlement, restoration and abandonment costs are expected to be offset by estimated residual values of lease and well equipment. Thus, no accrual for such costs has been recorded. EQUITY OIL COMPANY NOTES TO FINANCIAL STATEMENTS, Continued 1. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: D. CONCENTRATION OF CREDIT RISK: Substantially all of the Company's accounts receivable are within the oil and gas industry, primarily from purchasers of oil and gas (see Note 6). Although diversified within many companies, collectibility is dependent upon the general economic conditions of the industry. The receivables are not collateralized and, to date, the Company has experienced minimal bad debts. The majority of the Company's cash, cash equivalents and temporary cash investments is held by three financial institutions located in Salt Lake City, Utah. E. EQUIPMENT: The provision for depreciation of equipment (other than oil and gas equipment) is based on the straight-line method using asset lives as follows: Office equipment 10 years Automobiles 3 years When equipment is retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the Statement of Operations. F. FOREIGN OPERATIONS: Operations and investments in Canada have been translated into U.S. dollar equivalents at the average rate of exchange in effect at the transaction date. Foreign exchange gains or losses during 1996, 1995 and 1994 were not material. Through December 31, 1996, the Company's investment in Russia was composed of U.S. dollar expenditures (see Note 6). EQUITY OIL COMPANY NOTES TO FINANCIAL STATEMENTS, Continued 1. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: G. INCOME (LOSS) PER COMMON SHARE: Net income (loss) per common share is computed based on the weighted average number of common shares and common share equivalents outstanding during the year. Primary and fully diluted net income (loss) per common share are essentially the same. H. ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. I. RECLASSIFICATIONS: Certain balances in the December 31, 1995 and 1994 financial statements have been reclassified to conform with the current year presentation. These changes had no effect on the previously reported net loss, total assets, liabilities or stockholders' equity. 2. IMPAIRMENT OF PROVED OIL AND GAS PROPERTIES: Included in the Statement of Operations for 1995 is a non-cash charge for the impairment of proved oil and gas properties in the amount of $2,471,146 ($1,557,563 after tax), which results from the Company's adoption of SFAS No.121, Accounting for the Impairment of Long Lived Assets and for Assets Held for Disposal (SFAS No. 121), effective July 1, 1995. SFAS No.121 requires successful efforts companies to evaluate the recoverability of the net capitalized costs of their proved oil and gas properties at a field level, rather than on a company-wide level as previously allowed by the Securities and Exchange Commission. The SFAS No.121 impairment test compares the expected undiscounted future net revenues from each producing field with the related net capitalized costs at the end of each period. When the net capitalized costs exceed the undiscounted future net revenues, the cost of the property is written down to fair value, which is determined using discounted future net revenues from the producing field. The Company recorded a non-cash impairment charge of $237,279 ($149,557 after tax) for 1996. EQUITY OIL COMPANY NOTES TO FINANCIAL STATEMENTS, Continued 3. INCOME TAXES: The benefit from income taxes consists of the following: 1996 1995 1994 ---- ---- ---- Currently payable (receivable): U.S. income taxes (including alternative minimum tax) $ 185,082 $ 188,666 $ (92,726) State income taxes 108,463 26,262 36,058 Canadian income taxes 190,366 373,268 256,515 Deferred tax benefit (3,130,574) (1,374,414) (474,950) --------- --------- ------- $(2,646,663) $ (786,218) $(275,103) ========= ======== ======== The Company accounts for income taxes in accordance with SFAS No. 109. Deferred income taxes are provided on the difference between the tax basis of an asset or liability and its reported amount in the financial statements that will result in taxable or deductible amounts in future years when the reported amount of the asset or liability is recovered or settled, respectively. The components of the net deferred tax liability as of December 31, 1996 and 1995 were as follows: 1996 1995 ---- ---- Deferred tax assets: AMT credit and ITC carryforwards $ 326,104 $ 670,771 State income taxes 42,347 9,709 Deferred compensation 9,211 - Geological and geophysical costs 439,306 181,989 Capitalized interest 204,755 8,957 Foreign tax credit (FTC) carryforward 265,301 442,942 Equity loss and impairment of investment in Symskaya Exploration, Inc. 3,283,105 - Other - 34,296 ---------- ------------ 4,570,129 1,348,664 Valuation allowance (992,458) (442,942) ---------- ----------- Total deferred tax asset $3,577,671 $ 905,722 ========= =========== Deferred tax liabilities: Deferred income 20,505 20,505 Property and equipment 9,012,408 9,420,819 Pipeline partnership 79,678 129,892 ----------- ----------- Total deferred tax liability 9,112,591 9,571,216 --------- ---------- Net deferred tax liability $5,534,920 $8,665,494 ========= ========= The net deferred tax liability as of December 31, 1996 and 1995 is reflected in the balance sheet as follows: Current deferred tax liability $ - $ 10,796 Current deferred tax asset (31,053) - Long-term deferred tax liability 5,565,973 8,654,698 --------- --------- $5,534,920 $8,665,494 ========= ========= EQUITY OIL COMPANY NOTES TO FINANCIAL STATEMENTS, Continued . INCOME TAXES, Continued: The benefit from income taxes differs from the amount that would be provided by applying the statutory U.S. Federal income tax rate to the loss before income taxes for the following reasons:
1996 1995 1994 ---- ---- ---- Federal statutory tax benefit $(2,770,765) $(693,948) $(216,217) Increase (reduction) in taxes resulting from: State taxes (net of federal benefit) (198,849) (68,376) (11,161) Canadian taxes (net of foreign tax credits) (107,549) 287,670 169,300 Excess allowable percentage depletion (171,724) (166,509) (186,418) Investment tax and other credits (124,933) (145,055) (30,607) Unrecognized capital loss related to impairment of investment in Symskaya Exploration, Inc. 727,157 - - --------- -------- -------- Benefit from income taxes $(2,646,663) $ (786,218) $ (275,103) ========= ======== ========
At December 31, 1996, the Company had approximately $122,000 of investment tax credit carryforwards that will expire in 2001, approximately $204,000 of alternative minimum tax credit carryforwards which can be carried forward indefinitely, and approximately $265,000 of foreign tax credit carryforwards which expire in 2000. 4. STOCK-BASED COMPENSATION PLAN At December 31, 1996, the Company has one stock-based compensation plan, which is described below. The Company applies APB Opinion No. 25 and related Interpretations in accounting for its plan. Accordingly, no compensation cost has been recognized for its fixed stock option plan. Had compensation cost for the Company's stock-based compensation plan been determined based on the fair value at the grant dates for awards under the plan consistent with the method of FASB Statement 123, the Company's net loss and loss per share would have been increased to the pro forma amounts indicated below: 1996 1995 ---- ---- Net loss As reported $(5,502,646) $(1,254,812) Pro forma $(5,635,133) $(1,297,811) Loss per share As reported $(.43) $(.10) Pro forma $(.44) $(.10) Note:Primary and fully diluted loss per share are essentially the same. Under the 1993 Equity Oil Company Incentive Stock Option Plan, the Company may grant options to its employees for up to 1.4 million shares of common stock. The options may take the form of incentive stock options, non-qualified stock options, and non-qualified stock options with tandem stock appreciation rights. The exercise price of each option equals the market price of the Company's stock on the date of grant, and an option's maximum term is 10 years. Options are granted from time to time at the discretion of the Board of Directors, and vest over periods of one to five years from the grant date. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1995 and 1996, respectively: expected volatility of 65 and 67 percent, risk-free interest rates of 7.2 and 5.4 percent; expected lives of 5 and 5 years; dividend yield of zero for both years. EQUITY OIL COMPANY NOTES TO FINANCIAL STATEMENTS, Continued 4. STOCK-BASED COMPENSATION PLAN, Continued:
1996 1995 1994 ------------------------------------------------------------------------------------------- Shares Weighted-Average Shares Weighted-Average Shares Weighted-Average Fixed Options (000) Exercise Price (000) Exercise Price (000) Exercise Price - ------------- --------- --------------------------- --------------------------- ---------------- Outstanding at beginning of year 904 $4.22 1,047 $4.28 817 $4.29 Granted 222 5.13 102 3.63 247 4.25 Exercised (39) 3.94 (171) 3.98 - Forfeited (11) 4.38 (74) 4.75 (17) 4.17 --- --- --- Outstanding at end of year 1,076 4.42 904 4.22 1,047 4.28 ------ ---- ------ Options exercisable at year-end 775 743 788 Weighted-average fair value of options granted during the year $5.13 $3.63 $4.25
The following table summarizes information about fixed stock options outstanding at December 31, 1996:
Options Outstanding Options Exercisable Number Weighted-Average Number Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average Exercise Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price - ------------------- --------------- -------------------- ------------------ --------------- ---------------- $3.56 to $3.63 238,000 7.69 years $3.59 202,800 $3.58 $3.88 to $4.25 421,000 6.42 $4.12 377,800 $4.40 $4.63 to $5.00 113,000 6.23 $4.96 113,000 $4.96 $5.13 to $5.13 227,500 10.27 $5.13 5,000 $5.13 $5.50 to $6.00 76,000 3.62 $5.77 76,000 $5.77 ----------- ---- ----- --------- ----- 1,075,500 7.30 $4.42 774,600 $4.26 ========= ==== ===== ======= =====
5. GEOGRAPHIC SEGMENT INFORMATION: The Company has oil and gas operations in the U.S., Canada, and Russia. Operating profit is total revenue less operating expenses. In computing operating profit, general and administrative expenses and interest expense have not been deducted. Identifiable assets are those assets of the Company that are identifiable with the operations of each geographical area. Revenue from a major U.S. oil company accounted for approximately 45 percent of total revenues in 1996, 51 percent of total revenues in 1995, and 50 percent of total revenues in 1994.
Information about the Company's operations in the U.S., Canada and Russia for the years ended December 31, 1996, 1995, and 1994 is as follows: 1996: United States Canada Russia Total ----- ------------- ------ ------ ----- Revenues $14,230,763 $ 2,643,288 $ - $ 16,874,051 ========== ========= = ========== Operating profit (loss) $ 2,024,752 $ 1,225,822 $ (9,204,394) $ (5,953,820) General and administrative expenses (2,030,811) - - (2,030,811) Interest expense (164,678) - - (164,678) --------- -------- --------- --------- Income (loss) before income taxes $ (170,737) $ 1,225,822 $ (9,204,394) $ (8,149,309) ========= ========= ========= ========= Identifiable assets at December 31, 1996 $46,031,896 $ 4,149,541 $ - $ 50,181,437 ========== ========= = ========== Additions to property and equipment $ 7,241,452 $ 97,760 $ - $ 7,339,212 ========= ========= = ========= Depreciation, depletion and amortization $ 3,838,202 $ 454,035 $ - $ 4,292,237 ========= ========= = =========
EQUITY OIL COMPANY NOTES TO FINANCIAL STATEMENTS, Continued
5. GEOGRAPHIC SEGMENT INFORMATION, Continued: 1995: United States Canada Russia Total ----- ------------- ------ ------ ----- Revenues $10,819,553 $ 2,431,003 - $13,250,556 ========== ========= ========== Operating profit (loss) $(1,391,469) $ 1,331,842 - $ (59,627) General and administrative expenses (1,908,778) - - (1,908,778) Interest expense (72,625) - - (72,625) --------- --------- --------- Income (loss) before income taxes $(3,372,872) $ 1,331,842 - $(2,041,030) ========= ========= ========= Identifiable assets at December 31, 1995 $43,512,850 $ 4,273,758 $ 6,160,442 $53,947,050 ========== ========= ========= ========== Additions to property and equipment $ 6,127,455 $ 1,052,073 - $ 7,179,528 ========= ========= ========= Depreciation, depletion and amortization $ 3,406,947 $ 436,495 - $ 3,843,442 ========= ========= ========= 1994: United States Canada Russia Total ----- ------------- ------ ------ ----- Revenues $10,414,683 $ 2,045,521 - $12,460,204 ========== ========= ========== Operating profit (loss) $ (38,477) $ 1,050,527 - $ 1,012,050 General and administrative expenses (1,560,675) - - (1,560,675) Interest expense (87,308) - - (87,308) --------- --------- --------- Income (loss) before income taxes $(1,686,460) $ 1,050,527 - $ (635,933) ========= ========= ======= Identifiable assets at December 31, 1994 $45,066,213 $ 3,427,000 $ 3,415,123 $51,908,336 ========== ========= ========= ========== Additions to property and equipment $ 3,576,119 $ 451,633 - $ 4,027,752 ========= ========= ========= Depreciation, depletion and amortization $ 4,668,497 $ 342,658 - $ 5,011,155 ========= ========= =========
EQUITY OIL COMPANY NOTES TO FINANCIAL STATEMENTS, Continued 6. SYMSKAYA EXPLORATION: The Company conducts operations in Russia through its 50% ownership interest in Symskaya Exploration, Inc. (Symskaya). Symskaya holds a Combined License (the License) which grants it the exclusive right to explore, develop and produce hydrocarbons on a contract area totaling approximately 1,100,000 acres in the Yenisysk District of the Krasnoyarsk Krai in the Russian Federation. The License has a primary term of 25 years. The work to be performed and the obligations and rights of Symskaya are set forth in a License Agreement and a Production Sharing Agreement (PSA) which are integral parts of the License. Under the License and PSA, Symskaya will provide funding for all exploration and development and will recover these costs from 80% of hydrocarbon production after payment of an 8% royalty. The remaining 20% of any hydrocarbon production, net of royalty, will be shared by Symskaya and the Russian government based on the rate of production. Minimum expenditures required under the License and PSA total $12,000,000 during the first five years of the License term, which began on November 15, 1993. As of December 31, 1996, Symskaya had satisfied all of the minimum expenditures required. Leucadia National Corporation (Leucadia) acquired 50% of the stock of Symskaya effective January 1, 1994, in exchange for their commitment to spend up to $6,000,000, in an amount equal to that spent by the Company, towards the Symskaya project through the drilling, completion and/or plugging and abandonment of the initial test well, the Lemok #1. No gain or loss was recognized on the sale of Symskaya stock to Leucadia. Pursuant to a Shareholders' Agreement, Leucadia was not required to pay any part of the amounts previously advanced by the Company under a Loan Agreement with Symskaya, with the exception of one-half (1/2) of the interest on a $1,740,519 loan between the Company and Symskaya. The loan reflects the initial investment by the Company in Symskaya prior to Leucadia's ownership. The interest rate on the loan was fixed by the Company and Leucadia at prime plus two percent (2%), with a cap of twelve percent (12%) from and after January 1, 1994. The interest rate in effect at December 31, 1996 was 10.5%. Amounts advanced by the Company and Leucadia after January 1, 1994 will be treated as interest-bearing advances or equity, as mutually agreed upon by the respective companies. The agreement with Leucadia also requires that Leucadia share equally in the payment of the one (1%) percent royalty obligation in favor of Coastline on future revenues from the Symskaya project. The Company's President serves on Leucadia's Board of Directors. The Company's investment in Symskaya is being accounted for using the equity method of accounting. EQUITY OIL COMPANY NOTES TO FINANCIAL STATEMENTS, Continued 6. SYMSKAYA EXPLORATION, continued: In August of 1996, Symskaya plugged and abandoned the Lemok #1 well. Symskaya subsequently charged the drilling costs of the well to expense. The Company's equity share of the loss in Symskaya of $5,250,000 was reflected in the Statement of Operations for the quarter ended September 30, 1996. Subsequent to the plugging of the Lemok #1 well, the Company and Leucadia agreed to suspend interest payments on Symskaya's note with the Company. Due to the amount of uncertainty relating to Symskaya's obtaining of additional outside financing and proceeding with development of the License area, the remaining capitalized costs were written off in the fourth quarter of 1996, resulting in a charge to expense of $3,954,394. The Company has no current plans to fund future exploratory drilling. Summarized financial information concerning Symskaya Exploration, Inc. is as follows:
As of As of December 31, December 31, 1996 1995 ------------ ----------- Current assets $ 249,692 $ 550,258 Non-current assets 5,876,700 10,329,991 Total assets 6,126,392 10,880,249 Current liabilities 98,210 334,573 Non-current liabilities 12,653,243 10,018,204 Accumulated deficit (11,102,325) (128,205) Total liabilities and stockholders' equity 6,126,392 10,880,249
For the year ended For the year ended December 31, December 31, 1996 1995 ------------------ ------------------ Gross revenues $ 59,405 $ 69,423 Net (loss) $ (10,974,120) $ (1,294) EQUITY OIL COMPANY NOTES TO FINANCIAL STATEMENTS, Continued 7. NOTE PAYABLE: In March of 1995, the Company obtained a $20 million Borrowing Base Credit Facility (the Facility), with an initial commitment of $10 million. The terms of the Facility call for interest payments only, at the lower of prime or LIBOR plus 2%, for 3 years, at which time it converts to a 3 year term note. An unused commitment fee of 3/8% will be charged to the Company based on the average daily unused portion of the Facility. The Facility is collateralized by all assets of the Company. The Company used proceeds from the Facility to retire its previous outstanding Note Payable in the amount of $920,000. As of December 31, 1996 the outstanding balance under the Facility was $8,878,830 at an average interest rate of 7.69%. Future maturities on the Facility as of December 31, 1996 are as follows: 1997 $ - 1998 - 1999 1,479,805 2000 2,959,610 2001 2,959,610 2002 1,479,805 --------- $8,878,830 The Facility contains provisions relating to maintenance of certain financial ratios, as well as restrictions governing its use. Under covenants contained in the Facility, the Company has agreed, among other things, not to advance any proceeds from the Facility to Symskaya, not to pay dividends, and not to merge with or acquire any other company without the prior approval of the bank. As of December 31, 1996, the Company was in compliance with all covenants contained in the Facility. Facility fees, which are reflected as other assets in the accompanying Balance Sheet, are being amortized on a straight line basis over 60 months. EQUITY OIL COMPANY NOTES TO FINANCIAL STATEMENTS, Continued 8. QUARTERLY FINANCIAL DATA (Unaudited): Quarterly financial information for the years ended December 31, 1996 and 1995 is as follows:
1996 Quarter Ended: December 31 September 30 June 30 March 31 ----------------- --------------- ------------------- ------------- Net revenues $ 4,653,388 $ 4,049,173 $ 3,985,332 $ 3,733,346 Gross margin (4,056,478) (4,401,235) 1,372,329 678,753 Net income (loss) (3,563,431) (2,760,271) 715,349 105,707 Net income (loss) per common share $(.28) $(.22) $.06 $ .01 ==== ==== === ====
Note: Third quarter gross margin includes the effects of the equity loss in Symskaya Exploration, Inc. Fourth quarter gross margin includes the writedown of the Company's remaining investment in Symskaya Exploration, Inc. See Note 6.
1995 Quarter Ended: December 31 September 30 June 30 March 31 ----------------- --------------- ------------------- ------------- Net revenues $ 3,230,759 $ 3,062,833 $ 3,180,505 $ 3,097,602 Gross margin 148,738 (1,594,099) 469,916 236,961 Net income (loss) (168,165) (1,258,857) 62,105 110,105 Net income (loss) per common share $(.01) $(.10) $.00 $.01 ==== ==== === ===
Note: Third quarter gross margin includes the effects of the adoption of SFAS No. 121, which was adopted as of July 1, 1995. See Note 2. EQUITY OIL COMPANY NOTES TO FINANCIAL STATEMENTS, Continued 9. DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES:
CAPITALIZED COSTS: United States Canada Russia Total 1996: Unproved oil and gas properties $ 2,532,503 $ 3,224 $ $ 2,565,727 Proved oil and gas properties 93,837,818 8,978,498 102,816,316 ---------- --------- ----------- 96,370,321 9,011,722 105,382,043 Accumulated depreciation, depletion and amortization (55,259,210) (5,996,677) (61,255,887) ---------- --------- ---------- Net capitalized costs $ 41,111,111 $ 3,015,045 $ 44,126,156 ========== ========= =========== Symskaya, equity method (see Note 6) $ - ========= 1995: Unproved oil and gas properties $ 2,378,122 $ 90,290 $ 2,468,412 Proved oil and gas properties 87,200,659 8,894,955 96,095,614 ---------- ---------- ---------- 89,578,781 8,985,245 98,564,026 Accumulated depreciation, depletion and amortization (51,531,172) (5,601,882) (57,133,054) ---------- --------- ---------- Net capitalized costs $ 38,047,609 $ 3,383,363 $ 41,430,972 ========== ========= =========== Symskaya, equity method (see Note 6) $ 6,160,442 $ 6,160,442 ========= =========== 1994: Unproved oil and gas properties $ 2,270,014 $ 99,464 $ 2,369,478 Proved oil and gas properties 84,234,955 7,852,281 92,087,236 ---------- --------- ---------- 86,504,969 7,951,745 94,456,714 Accumulated depreciation, depletion and amortization (48,686,141) (5,174,561) (53,860,702) ---------- --------- ---------- Net capitalized costs $ 37,818,828 $ 2,777,184 $ 40,596,012 ========== ========= ========== Symskaya, equity method (See Note 6) $ 3,415,123 $ 3,415,123 ========= ==========
EQUITY OIL COMPANY NOTES TO FINANCIAL STATEMENTS, Continued 9. DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES, Continued:
COSTS INCURRED IN OIL AND GAS PROPERTY ACQUISITION, EXPLORATION AND DEVELOPMENT ACTIVITIES: 1996: United States Canada Russia Total Acquisition of properties: Proved $ 2,038,244 $ - $ - $ 2,038,244 Unproved 474,757 - - 474,757 Exploration costs 4,492,876 30,838 - 4,523,714 Development costs 3,287,637 43,728 - 3,331,365 Symskaya, equity method - - 3,043,952 3,043,952 1995: Acquisition of properties: Proved $ 2,654,651 $ 405,410 - $ 3,060,061 Unproved 674,146 - - 674,146 Exploration costs 1,654,022 30,969 - 1,684,991 Development costs 2,709,192 835,415 - 3,544,607 Symskaya, equity method - - $ 2,745,319 2,745,319 1994: Acquisition of properties: Proved $ 2,791 - - $ 2,791 Unproved 601,836 - - 601,836 Exploration costs 1,568,654 $ 439,805 - 2,008,459 Development costs 2,803,694 174,639 - 2,978,333 Symskaya, equity method - - $ 1,696,261 1,696,261
EQUITY OIL COMPANY NOTES TO FINANCIAL STATEMENTS, Continued 9. DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES, Continued:
RESULTS OF OPERATIONS (Unaudited): 1996: United States Canada Russia Total - ----- ------------- ------ ------ ----- Oil and gas sales $ 13,508,077 $ 2,607,048 $ 16,115,125 Production costs (4,976,633) (935,495) (5,912,128) Exploration expenses (3,153,897) (27,936) (3,181,833) Depreciation, depletion and amortization (3,838,202) (454,035) (4,292,237) Impairment of proved oil and gas properties (237,279) - (237,279) Equity loss and impairment of investment in Symskaya Exploration, Inc. $ (9,204,394) (9,204,394) ----------- ---------- ----------- ----------- 1,302,066 1,189,582 (9,204,394) (6,712,746) Imputed income tax benefit (expense) (239,514) (258,048) 3,283,105 2,785,543 ----------- ---------- ----------- ----------- Results of operations from producing activities $ 1,062,552 $ 931,534 (5,921,289) $ (3,927,203) ========== ========== =========== ========== 1995: Oil and gas sales $ 9,803,677 $2,456,062 $12,259,739 Production costs (4,455,069) (638,713) (5,093,782) Exploration expenses (1,877,840) (23,973) (1,901,813) Depreciation, depletion and amortization (3,406,947) (436,495) (3,843,442) Impairment of proved oil and gas properties (2,471,146) - (2,471,146) ---------- ----------- ----------- (2,407,325) 1,356,881 (1,050,444) Imputed income tax benefit (expense) 1,056,755 (534,319) 522,436 ---------- ---------- ---------- Results of operations from producing activities $(1,350,570) $ 822,562 $ (528,008) ========== ========== ========== 1994: Oil and gas sales $ 9,648,390 $ 2,065,108 $11,713,498 Production costs (4,031,030) (627,085) (4,658,115) Exploration expenses (1,753,632) (25,252) (1,778,884) Depreciation, depletion and amortization (4,668,497) (342,658) (5,011,155) ----------- ---------- ----------- (804,769) 1,070,113 265,344 Imputed income tax benefit (expense) 625,718 (476,200) 149,518 ----------- ---------- ------------ Results of operations from producing activities $ (179,051) $ 593,913 $ 414,862 =========== ========== ============
The imputed income tax benefit (expense) is hypothetical and determined without regard to the Company's deduction for general and administrative and interest expense. EQUITY OIL COMPANY NOTES TO FINANCIAL STATEMENTS, Continued 9. DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES, Continued: RESERVES AND FUTURE NET CASH FLOWS (Unaudited): ESTIMATES OF PROVED OIL AND GAS RESERVES The following tables present the Company's estimates of its proved oil and gas reserves. The Company emphasizes that reserve estimates are inherently imprecise and that estimates of new discoveries are more imprecise than those of producing oil and gas properties. Accordingly, the estimates are expected to change as future information becomes available. Reserve estimates are prepared by the Company, and audited by the Company's independent petroleum reservoir engineers, Fred S. Reynolds and Associates, who have issued a report expressing their opinion that the reserve information in the following tables complies with the applicable rules promulgated by the Securities and Exchange Commission and the Financial Accounting Standards Board. The volumes presented on the following pages are in thousands of barrels for oil and thousands of mcf for gas.
United States Canada Total December 31, 1996: Oil Gas Oil Gas Oil Gas ------- ------- ------- ------- ------- ------- Proved developed and undeveloped reserves: Beginning of year 6,563 14,819 1,187 3,205 7,750 18,024 Revisions of previous estimates 176 (233) 49 104 225 (131) Acquisitions of minerals in place 949 38 -- -- 949 38 Sales of minerals in place (6) (214) -- (54) (6) (268) Extensions and discoveries 88 1,827 -- 40 88 1,867 Production (518) (1,325) (119) (588) (637) (1,913) ------- ------- ------- ------- ------- ------- End of year 7,252 14,912 1,117 2,707 8,369 17,617 ======= ======= ======= ======= ======= ======= Proved developed reserves: Beginning of year 6,527 11,238 1,139 3,068 7,666 14,306 End of year 7,219 11,133 1,117 2,707 8,336 13,840 December 31, 1995: Proved developed and undeveloped reserves: Beginning of year 6,252 13,673 1,055 3,539 7,307 17,212 Revisions of previous estimates 98 (24) 4 (189) 102 (213) Acquisition of minerals in place 701 1,129 61 152 762 1,281 Extensions and discoveries 3 921 196 274 198 1,195 Production (491) (88) (129) (571) (619) (1,451) ------- ------- ------- ------- ------- ------- End of year 6,563 14,819 1,187 3,205 7,750 18,024 ======= ======= ======= ======= ======= ======= Proved developed reserves: Beginning of year 6,185 8,490 1,042 3,539 7,227 12,029 End of year 6,527 11,238 1,139 3,068 7,666 14,306
EQUITY OIL COMPANY NOTES TO FINANCIAL STATEMENTS, Continued 9. DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES, Continued: RESERVES AND FUTURE NET CASH FLOWS (Unaudited):
ESTIMATES OF PROVED OIL AND GAS RESERVES United States Canada Total December 31, 1994: Oil Gas Oil Gas Oil Gas ------- ------- ------- ------- ------- ------- Proved developed and undeveloped reserves: Beginning of year 6,644 12,969 958 3,798 7,602 16,767 Revisions of previous estimates 80 (482) 139 (131) 219 (613) Acquisition of minerals in place -- 56 -- -- -- 56 Extensions and discoveries 18 2,010 78 112 96 2,122 Production (490) (880) (120) (240) (610) (1,120) ------- ------- ------- ------- ------- ------- End of year 6,252 13,673 1,055 3,539 7,307 17,212 ======= ======= ======= ======= ======= ======= Proved developed reserves: Beginning of year 6,584 8,374 919 3,798 7,503 12,172 End of year 6,185 8,490 1,042 3,539 7,227 12,029
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS AND CHANGES THEREIN RELATING TO PROVED OIL AND GAS RESERVES (Unaudited): Thousands of Dollars 1996: United States Canada Total Future cash inflows $ 230,760 $ 28,073 $ 258,833 Future production and development costs (98,696) (6,263) (104,959) Future income taxes (37,081) (8,872) (45,953) --------- --------- --------- Future net cash flows 94,983 12,938 107,921 10% annual discount for estimated timing of cash flows ($21,687 related to future income taxes) (47,336) (5,849) (53,185) --------- --------- --------- Standardized measure of discounted future net cash flows $ 47,647 $ 7,089 $ 54,736 ========= ========= ========= EQUITY OIL COMPANY NOTES TO FINANCIAL STATEMENTS, Continued 9. DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES, Continued: STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS AND CHANGES THEREIN RELATING TO PROVED OIL AND GAS RESERVES (UNAUDITED), Continued: Thousands of Dollars 1995 United States Canada Total - ---- ------------- ------- ------- Future cash inflows $ 148,257 $ 20,381 $ 168,638 Future production and development costs (76,234) (4,705) (80,939) Future income taxes (16,654) (6,033) (22,687) --------- --------- --------- Future net cash flows 55,369 9,643 65,012 10% annual discount for estimated timing of cash flows ($10,361 related to future income taxes) (30,540) (4,025) (34,565) --------- --------- --------- Standardized measure of discounted future net cash flows $ 24,829 $ 5,618 $ 30,447 ========= ========= ========= 1994: Future cash inflows $ 132,638 $ 20,304 $ 152,942 Future production and development costs (75,306) (5,476) (80,782) Future income taxes (12,531) (5,887) (18,418) --------- --------- --------- Future net cash flows 44,801 8,941 53,742 10% annual discount for estimated timing of cash flows ($8,567 related to future income taxes) (25,688) (3,832) (29,520) --------- --------- --------- Standardized measure of discounted future net cash flows $ 19,113 $ 5,109 $ 24,222 ========= ========= ========= Future net cash flows were computed using year-end prices and costs, and year-end statutory tax rates with consideration of future tax rates already legislated (adjusted for permanent differences that related to proved oil and gas reserves). EQUITY OIL COMPANY NOTES TO FINANCIAL STATEMENTS, Continued 9. DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES, Continued: STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS AND CHANGES THEREIN RELATING TO PROVED OIL AND GAS RESERVES (Unaudited), Continued: Principal sources of change in the standardized measure of discounted future net cash flow are as follows: Thousands of Dollars 1996 1995 1994 ---- ---- ---- Sales and transfers of oil and gas produced, net of production costs $(10,203) $ (7,166) $ (7,055) Net changes in prices and production costs 27,483 3,147 6,363 Extensions and discoveries less related costs 2,374 1,274 1,016 Purchases of minerals in place 7,174 3,804 18 Sales of minerals in place (116) -- -- Changes in estimated future development costs 938 (203) 6,126 Revisions of previous quantity estimates 1,495 369 592 Accretion of discount 4,286 3,409 2,192 Net change in income taxes (12,045) (1,969) (1,812) Changes in production rates (timing) and other 2,903 3,561 377 -------- -------- -------- $ 24,289 $ 6,226 $ 7,817 ======== ======== ======== ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES: None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF COMPANY: The information contained under the headings Election of Directors and Continuing Directors and Executive Officers contained on pages 2 and 3 in the definitive proxy statement to be filed in connection with the Company's annual meeting on May 14, 1997 is incorporated herein by reference in answer to this item. ITEM 11. EXECUTIVE COMPENSATION The information contained under the heading Executive Compensation on pages 6 through 9 in the definitive proxy statement to be filed in connection with the Company's annual meeting on May 14, 1997 is incorporated herein by reference in answer to this item. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT: The information contained under the headings Security Ownership of Management and Voting Securities & Principal Holders Thereof, contained on pages 4 and 11 in the definitive proxy statement to be filed in connection with the Company's annual meeting on May 14, 1997 is incorporated herein by reference in answer to this item. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K: (a) (1) Financial Statements: Page ---- Report of Independent Accountants 19 Financial Statements: Balance Sheet as of December 31, 1996 and 1995 20 Statement of Operations for the years ended December 31, 1996, 1995 and 1994 22 Statement of Changes in Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994 23 Statement of Cash Flows for the years ended December 31, 1996, 1995 and 1994 24 Notes to Financial Statements 25 (2) Financial Statements of Symskaya Exploration, Inc. 47 (3) Exhibits (3) (i) Restated Articles of Incorporation. Incorporated by reference from the annual report on Form 10K for the year ended December 31, 1995. (ii) By-Laws. Incorporated by reference from the annual report on Form 10K for the year ended December 31, 1995. (21) Subsidiaries. Incorporated by reference from the annual report on Form 10K for the year ended December 31, 1995. (23) Consent of Experts. Consent of Coopers & Lybrand L.L.P. regarding Form S-8 Registration 58 (b)Reports on Form 8-K None SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. EQUITY OIL COMPANY By /s/ Paul M. Dougan ------------------ Paul M. Dougan President Chief Executive Officer By /s/ Clay Newton --------------- Clay Newton Treasurer Chief Financial Officer Principal Accounting Officer Date: February 27, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ David W. Allen /s/ Joseph C. Bennett ------------------ --------------------- Signature Signature Director Director -------- -------- Title Title March 3, 1997 March 3, 1997 ------------- ------------- Date Date /s/ Douglas W. Brandrup /s/ William D. Forster ----------------------- ---------------------- Signature Signature Director Director -------- -------- Title Title March 3, 1997 March 3, 1997 ------------- ------------- Date Date EX-99 2 FINANCIAL STATEMENTS OF SYMSKAYA EXPLORATION, INC. SYMSKAYA EXPLORATION INCORPORATED (A Company in the Development Stage) Report on Audits of Financial Statements and Supplemental Data as of December 31, 1996 and 1995 and for the years ended December 31, 1996, 1995 and 1994, and the period from inception (November 25, 1991) to December 31, 1996 Report of Independent Accountants To the Board of Directors of Symskaya Exploration Incorporated: We have audited the accompanying balance sheet of Symskaya Exploration Incorporated (a company in the development stage) as of December 31, 1996 and 1995, and the related statements of operations, changes in stockholders' equity, and cash flows for the years ended December 31, 1996, 1995 and 1994, and the period from inception (November 25, 1991) to December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Symskaya Exploration Incorporated (a company in the development stage) as of December 31, 1996 and 1995, and the results of its operations and its cash flows for the years ended December 31, 1996, 1995 and 1994, and for the period from inception (November 25, 1991) to December 31, 1996 in conformity with generally accepted accounting principles. Salt Lake City, Utah February 13, 1997 SYMSKAYA EXPLORATION, INCORPORATED (A Company in the Development Stage) BALANCE SHEET as of December 31, 1996 and December 31, 1995 1996 1995 ---- ---- ASSETS Current assets: Cash and cash equivalents $ 46,150 $ 171,408 Due from Equity Oil Company 101,771 189,425 Due from Leucadia National Corporation 101,771 189,425 ------------ ------------ Total current assets 249,692 550,258 ------------ ------------ Unproved oil and gas property, at cost (full cost method of accounting) 5,876,700 10,329,991 ------------ ------------ Total assets $ 6,126,392 $ 10,880,249 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 68,476 $ 241,093 Accrued interest payable - Equity Oil Company 29,734 93,480 ------------ ------------ Total current liabilities 98,210 334,573 ------------ ------------ Accrued interest payable 1,105,002 126,306 Notes payable - Equity Oil Company 6,644,380 5,648,922 Notes payable - Leucadia National Corporation 4,903,861 3,908,403 ------------ ------------ Total liabilities 12,751,453 10,018,204 ------------ ------------ Commitments (Note 1) Stockholders' equity: Common stock, no par value: Authorized: 20,000,000 shares; issued 1,000 shares 1,000 1,000 Contributed capital - Equity Oil Company 2,238,132 494,625 Contributed capital - Leucadia National Corporation 2,238,132 494,625 Deficit accumulated during development stage (11,102,325) (128,205) ------------ ------------ (6,625,061) 862,045 ------------ ------------ Total liabilities and stockholders' equit $ 6,126,392 $ 10,880,249 ============ ============ The accompanying notes are an integral part of these financial statements SYMSKAYA EXPLORATION, INCORPORATED (A Company in the Development Stage) STATEMENT OF OPERATIONS for the years ended December 31, 1996, 1995 and 1994 and the period from inception (November 25, 1991) to December 31, 1996
Inception to December 31, 1996 1995 1994 1996 ------------ ------------ ------------ ------------ Revenues: Overhead income $ 47,258 $ 62,097 $ -- $ 109,355 Interest income 12,147 7,146 5,663 24,956 ------------ ------------ ------------ ------------ 59,405 69,243 5,663 134,311 ------------ ------------ ------------ ------------ Expenses: Overhead expenses 64,213 62,106 -- 126,319 Impairment of unproved oil and gas property 10,955,728 -- -- 10,955,728 Interest expense -- -- -- 126,306 Foreign exchange loss 13,584 8,431 6,268 28,283 ------------ ------------ ------------ ------------ 11,033,525 70,537 6,268 11,236,636 ------------ ------------ ------------ ------------ Net (loss) $(10,974,120) $ (1,294) $ (605) $(11,102,325) ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements SYMSKAYA EXPLORATION, INCORPORATED A Company in the Development Stage)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY for the period from inception (November 25, 1991) to December 31, 1996 Contributed Capital Deficit Accumulated Common Stock Equity Oil Leucadia National During the Shares Amount Company Corporation Development Stage Total ------ ------ ------- ----------- ----------------- ----- Contribution of capital - - $ 60,000 - - $ 60,000 Loss from inception to December 31, 1991 - - - - - - ------ ------ -------- --------- ------- -------- Balance at December 31, 1991 - - 60,000 - - 60,000 Issuance of common stock for cash on February 29, 1992 (at $1.00 per share) 1,000 $1,000 - - - 1,000 Conversion of contributed capital to note payable - - (60,000) - - (60,000) 1992 net loss - - - - $ (34,484) (34,484) ------ ------ -------- --------- -------- --------- Balance at December 31, 1992 1,000 1,000 - - (34,484) (33,484) 1993 net loss - - - - (91,822) (91,822) ------ ------ -------- --------- -------- -------- Balance at December 31, 1993 1,000 1,000 - - (126,306) (125,306) Contribution of capital - - 494,625 $494,625 - 989,250 1994 net loss - - - - (605) (605) ------ ------ ------- -------- ----------- -------- Balance at December 31, 1994 1,000 1,000 494,625 494,625 (126,911) 863,339 1995 net loss - - - - (1,294) (1,294) ------ ------ ------- -------- ---------- -------- Balance at December 31, 1995 1,000 $ 1,000 494,625 494,625 (128,205) 862,045 Contribution of capital - - 1,743,507 1,743,507 - 3,487,014 1996 net loss - - (10,974,120) (10,974,120) ------ ------ --------- --------- ---------- ---------- Balance at December 31, 1996 1,000 $ 1,000 $2,238,132 $2,238,132 $(11,102,325) $(6,625,061) ====== ====== ========= ========= ========== ==========
The accompanying notes are an integral part of these financial statements SYMSKAYA EXPLORATION, INCORPORATED (A Company in the Development Stage)
STATEMENT OF CASH FLOWS for the years ended December 31, 1996, 1995 and 1994 and the period from inception (November 25, 1991) to December 31, 1996 Period from inception (November 25, 1991) to December 31, 1996 1995 1994 1996 ------------ ------------ ------------ ------------ Cash flows from operating activities: Net loss $(10,974,120) $ (1,294) $ (605) $(11,102,325) Impairment of unproved oil and gas property 10,955,728 -- -- 10,955,728 Increase (decrease) from changes in: Accrued interest payable - Equity Oil Company -- -- -- 126,306 ------------ ------------ ------------ ------------ Net cash used in operating activities (18,392) (1,294) (605) (20,291) ------------ ------------ ------------ ------------ Cash flows from investing activities: Additions to unproved oil and gas property (5,760,104) (5,057,805) (3,224,241) (15,755,522) ------------ ------------ ------------ ------------ Net cash used in investing activities (5,760,104) (5,057,805) (3,224,241) (15,755,522) ------------ ------------ ------------ ------------ Cash flows from financing activities: Issuance of common stock -- -- -- 1,000 Notes payable - Equity Oil Company 995,458 2,649,047 1,281,013 6,584,380 Notes payable - Leucadia National Corporation 995,458 2,649,047 1,259,356 4,903,861 Contribution of capital - Equity Oil Company 1,743,507 -- 494,625 2,298,132 Contribution of capital - Leucadia National Corporation 1,743,507 -- 494,625 2,238,132 Due from Equity Oil Company and Leucadia National Corporation 175,308 (100,871) (277,979) (203,542) ------------ ------------ ------------ ------------ Net cash provided by financing activities 5,653,238 5,197,223 3,251,640 15,821,963 ------------ ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents (125,258) 138,124 26,794 46,150 Cash and cash equivalents at beginning of period 171,408 33,284 6,490 -- ------------ ------------ ------------ ------------ Cash and cash equivalents at end of period $ 46,150 $ 171,408 $ 33,284 $ 46,150 ============ ============ ============ ============ Supplemental disclosures of cash flow information: Cash paid during the year for: Income taxes - - - - Interest - - - -
Supplemental disclosures of non-cash investing and financing activities: At December 31, 1996, 1995, and 1994 the Company financed $1,047,172, $334,573, and $336,621, respectively, of oil and gas property additions with accounts payable and accrued liabilities. Effective February 29, 1992, the Company converted the original $60,000 capital contribution from Equity Oil Company to an interest bearing note payable to Equity Oil Company. The accompanying notes are an integral part of these financial statements SYMSKAYA EXPLORATION, INCORPORATED (A Company in the Deveopment Stage) NOTES TO FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES: A. Symskaya Exploration, Inc., a company in the development stage, (the Company), a Texas corporation, was formed on November 25, 1991, and is engaged in oil and gas exploration in Russia. Symskaya holds a Combined License which grants it the exclusive right to explore, develop and produce hydrocarbons on a contract area totaling approximately 1,100,000 acres in the Yenisysk District of the Krasnoyarsk Krai in the Russian Federation. The License has a primary term of 25 years. The work to be performed and the obligations and rights of Symskaya are set forth in a License Agreement and a Production Sharing Agreement (PSA) which are integral parts of the License. Under the License and PSA, Symskaya will provide funding for all exploration and development and will recover these costs from 80% of hydrocarbon production after payment of an 8% royalty. The remaining 20% of any hydrocarbon production, net of royalty, will be shared by Symskaya and the Russian government based on the rate of production. Minimum expenditures required under the License and PSA total $12,000,000 during the first five years of the License term, which began on November 15, 1993. As of December 31, 1996, Symskaya had satisfied all of the minimum expenditures required. Symskaya is owned 50% each by Equity Oil Company (Equity) and Leucadia National Corporation, (Leucadia). Leucadia acquired 50% of the stock of Symskaya effective January 1, 1994, in exchange for their commitment to spend up to $6,000,000, in an amount equal to that spent by Equity, towards the Symskaya project through the drilling, completion and/or plugging and abandonment of the initial test well, the Lemok #1. Pursuant to a Shareholders' Agreement, Leucadia was not required to pay any part of the amounts previously advanced by Equity under a Loan Agreement with Symskaya, with the exception of one-half (1/2) of the interest on a $1,740,519 loan between Equity and Symskaya. The loan reflects the initial investment by Equity in Symskaya prior to Leucadia's ownership. NOTES TO FINANCIAL STATEMENTS, Continued: 1. SIGNIFICANT ACCOUNTING POLICIES, Continued: Amounts advanced by Equity and Leucadia after January 1, 1994 are treated as interest-bearing advances or equity, as mutually agreed upon by the respective companies. The agreement with Leucadia also requires that Leucadia share equally in the payment of the one (1%) percent royalty obligation in favor of Coastline Exploration, Inc. on future revenues from the Symskaya project. Equity and Leucadia have agreed to continue funding the operations of Symskaya, through at least December 31, 1997, while the Company conducts its search for additional financing to fund further exploration activity. B. ACCOUNTING FOR OIL AND GAS OPERATIONS: The Company uses the full cost method of accounting, under which the costs of all exploration and development activities (both successful and unsuccessful) are capitalized and subsequently amortized to expense using the units-of-production method, based upon production and estimates of proved reserve quantities. Unevaluated costs and related capitalized interest costs are excluded from the amortization base until the properties associated with these costs are evaluated and determined to be productive or impaired. Should the net evaluated capitalized costs exceed the estimated present value of oil and gas reserves on a country-by-country basis, the excess would be charged to expense. Proceeds from disposals of oil and gas properties are applied as reductions of capitalized costs. Gain or loss is recognized only on the sale of oil and gas properties involving significant amounts of reserves. During the years ended December 31, 1996, 1995 and 1994, the Company capitalized interest of $1,097,994, $188,455 and $158,756, respectively, related to its unproved property. In August of 1996, Symskaya plugged and abandoned the Lemok #1 well, which was the initial test well drilled on the Company's concession. Symskaya subsequently charged the drilling costs of the well to expense. NOTES TO FINANCIAL STATEMENTS, Continued: 1. SIGNIFICANT ACCOUNTING POLICIES, Continued: B. ACCOUNTING FOR OIL AND GAS OPERATIONS, continued: The remaining capitalized costs associated with the Company's uproved oil and gas properties respresent the cost of the concession, as well as related equipment and capitalized interest costs. Future exploration activities are dependent on Symskaya's obtaining additional financing. Should Symskaya be unable to obtain adequate financing, or should Symskaya abandon the license area for whatever reason, the remaining capitalized costs would be charged to expense during the period that determination is made. C. FOREIGN OPERATIONS: The Company's exploration activities are located in Russia and its functional and reporting currency is U.S. dollars. Aggregate exchange gains and losses arising from the translation of foreign currency transactions are included in income. D. CASH AND CASH EQUIVALENTS: The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. The majority of the Company's cash and cash equivalents is held by one financial institution in Salt Lake City, Utah. E. OVERHEAD INCOME AND EXPENSE: Overhead expense represents a monthly charge to the Company for management services provided by Equity. This charge is borne equally by Equity and Leucadia, and is recognized as overhead income by the Company upon issuance of invoices to Equity and Leucadia. F. ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTES TO FINANCIAL STATEMENTS, Continued: 2. NOTES PAYABLE: Through December 31, 1993, the Company borrowed $1,740,519 from Equity under a note payable which bears interest at the rate of prime plus two percent (10.5% at December 31, 1996) with a cap of twelve (12%) percent from and after January 1, 1994. Subsequent to the plugging of the Lemok #1 well, Equity and Leucadia agreed to suspend interest payments on Symskaya's note with Equity. Unpaid interest will continue to accrue until exploration operations resume, or until the sale of, or production of oil and gas from, the Symskaya project. Interest incurred between January 1, 1994 and August 31, 1996 will be repaid using funds advanced by Equity and Leucadia, and is classified as a current liability. The interest accrued before and after this repayment period and the unpaid principal balance will become due upon the receipt of any proceeds by the Company from its Russian project. If no proceeds are received, the principal balance of the note and any unpaid accrued interest will be forfeited by Equity. The unpaid interest accrued and note payable have been classified as long-term as no amounts will be repaid during 1997. As agreed upon by Equity and Leucadia effective January 1, 1994, advances to the Company are treated as interest bearing notes or equity. The notes are evidenced by loan agreements, with interest being accrued at prime rates in effect for the terms of the loans. The loans have a primary term of five years, at which time accrued interest and principal will be repaid. During the years ended December 31, 1995 and 1994, Equity and Leucadia each advanced $2,649,047 and $1,259,356, respectively, to the Company. Such advances were non-interest bearing during 1995 and 1994, but at the option of the stockholders a portion became interest bearing notes as mutually agreed upon by the stockholders during 1996. In addition, Equity and Leucadia have each designated a portion of their advances as contributed capital as of December 31, 1996. 3. INCOME TAXES: The Company accounts for income taxes using the asset and liability approach in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes". The Company had net operating loss carryforwards of approximately $11,102,000 at December 31, 1996, which are available to offset future taxable income through 2007 and 2011. The Company recognized no income tax benefit from its net losses in 1996, 1995 and 1994. NOTES TO FINANCIAL STATEMENTS, Continued: 3. INCOME TAXES, continued: The components of the net deferred tax asset as of December 31, 1996 and December 31, 1995 are as follows: December 31, December 31, 1996 1995 Deferred tax asset: Net operating loss carryforwards $ 4,163,400 $ 48,000 Valuation allowance (4,163,400) (48,000) ---------- ------- Net deferred tax asset $ - $ - ========== ======= The valuation allowance increased by $4,115,400, $400 and $350 during the years ended December 31, 1996, 1995 and 1994, respectively. EX-23 3 CONSENT OF EXPERTS Consent of Independent Accountants We consent to the incorporation by reference in the registration statment of Equity Oil Company on Form S-8 of our report dated February 5, 1997, on our audits of the financial statements of Equity Oil Company as of December 31, 1996 and 1995, and for each of the three years in the period ended December 31, 1996, which report is included in this Annual Report on Form 10-K. /s/ Coopers & Lybrand, L.L.P. - ----------------------------- Signature Salt Lake City, Utah March 7, 1997 EX-27 4 FINANCIAL DATA SCHEDULE FOR 1996 FORM 10-K
5 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 787,961 0 2,911,637 0 0 5,213,580 106,147,145 61,732,014 50,181,437 2,404,494 0 0 0 12,751,100 0 50,181,437 16,115,125 16,874,051 0 24,858,682 0 0 164,678 (8,149,309) (2,646,663) (5,502,646) 0 0 0 (5,502,646) (.43) (.43)
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