-----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, N8mZBljlhwLUw1rsOzHBNee5RowhLLGXue9MzDGbU3QsM0udinqmMFUYigvz5Zfp yyCTBiD6B2tffr5WvZ0O5A== 0000033325-99-000005.txt : 19990330 0000033325-99-000005.hdr.sgml : 19990330 ACCESSION NUMBER: 0000033325-99-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990329 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: SEC FILE NUMBER: 000-00610 FILM NUMBER: 99575833 BUSINESS ADDRESS: STREET 1: P O BOX 959 CITY: SALT LAKE CITY STATE: UT ZIP: 84110 BUSINESS PHONE: 8015213515 MAIL ADDRESS: STREET 1: P O BOX 959 CITY: SALT LAKE CITY STATE: UT ZIP: 84110 10-K 1 1998 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, 1998 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) Commission file number 0-610 EQUITY OIL COMPANY [Exact name of registrant as specified in its charter] Colorado 87-0129795 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 10 West Broadway, Suite 806 84101 Salt Lake City, Utah (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (801) 521-3515 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered None None Securities registered pursuant to Section 12(g) of the Act: Common Stock (par value, $1 per share) [Title of class] Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x/ No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ x/ ] As of March 10, 1999, 12,629,440 common shares were outstanding, and the aggregate market value of voting stock held by non-affiliates of the registrant was approximately $15,000,000. Documents Incorporated by Reference 1. Definitive proxy statement to be filed in connection with Issuer's Annual Stockholders' Meeting to be held on May 12, 1999 and more particularly the information contained on pages 2 through 5 are incorporated by reference into Part III of this report. Total Pages 42 PART I ITEM 1. BUSINESS GENERAL DEVELOPMENT OF BUSINESS Equity Oil Company ("Equity" or "the Company") was originally incorporated in the state of Utah in 1923. In 1958, it was merged into its subsidiary, Weber Oil Company, a Colorado corporation. The surviving company adopted the name Equity Oil Company. Equity is an independent oil and gas exploration and production company, currently conducting its business in nine states and two Canadian provinces. Equity is also a 50% shareholder in Symskaya Exploration, Incorporated (Symskaya) which is licensed to operate in Russia. Headquartered in Salt Lake City, Utah, the Company also maintains an exploration office in Denver, Colorado, and a field office in Vernal, Utah. The Company has 16 full-time employees. More than 90% of the Company's revenues come from the sale of crude oil and natural gas. Accordingly, the Company continually seeks to increase its oil and gas production. The keys to increasing production are the replacement, on an annual basis, of current production, as well as achieving additional reserve growth. The Company's strategy to replace production and increase its oil and natural gas reserves on an ongoing basis is comprised of a balanced approach in the areas of focused exploration drilling, development drilling and exploitation and the acquisition of proved reserves. The Company's exploration office in Denver is responsible for the generation and review of exploration prospects, and participates in the planning, where necessary, to drill the prospects. These include prospects developed in-house, as well as those presented by independent third parties. The general drilling practice of the Company is to participate in projects on a 25% to 50% working interest basis. Participation varies with each prospect depending on location and the attendant financial and technical risk. In addition to its exploration ventures, the Company works in conjunction with other working interest owners in producing properties to identify projects that will develop and exploit the productive capacities of existing wells and fields. These projects include development drilling, production enhancement, operating cost reductions, and other types of activities. The Company also investigates opportunities to purchase interests in properties with existing production. During 1996 and 1997, the Company replaced a significant amount of its production through the purchase of producing properties. These purchases have, in turn, produced additional developmental and enhancement projects. No producing properties were purchased in 1998. The Company has conducted international exploration in Russia through its 50% ownership of Symskaya. Symskaya operations were significantly curtailed during 1998 and will be again curtailed in 1999. Further discussion of this venture and other Company activities is found in ITEM 2. Properties, under the caption Present Activity. NARRATIVE DESCRIPTION OF BUSINESS PRINCIPAL PRODUCTS AND MARKETS The Company produces crude oil and natural gas. During the last five years, revenues from the sales of these products have accounted for more than 90% of the total revenues of the Company, while remaining revenues have come from other sources, including interest income on invested funds, partnership income, operating overhead reimbursements, and the sales of various developed and undeveloped properties. The majority of the Company's oil production occurs in Colorado and other Rocky mountain states, and the Canadian provinces of Alberta and British Columbia. The Company's crude oil production is sold under short-term contracts at current posted prices for each geographic area, less applicable quality or transportation tariffs, plus negotiated bonuses. Prices are set by oil purchasers, and, while their methods of determining prices are not within the control of the Company, it is assumed they are influenced by regional, national and international factors relating to oil supply and demand (see discussion under Major Customers). The bulk of the Company's natural gas production occurs in Wyoming, California, the Canadian province of Alberta, and the Gulf Coast of Texas. While the areas where the Company has its major gas reserves are characterized by large reserves of other companies, the Company has historically been able to sell all of its productive capacity, and expects to be able to continue to do so in the near future. The majority of gas sold in Wyoming is marketed under a contract at an index price that changes monthly. The contract is subject to renegotiation on an annual basis. The majority of gas produced by the Company in other geographic areas is sold on the spot market, where prices also vary on a monthly basis. The Company has not historically hedged significant amounts of either oil or gas production. SEASONALITY The Company experiences some seasonality in gas sales revenues. Net sales prices and production tend to rise during the winter months compared to the rest of the year. However, since over 65% of the Company's oil and gas revenues come from the sale of oil, the seasonal impact on total oil and gas sales is not significant. MAJOR CUSTOMERS All oil and gas produced in the U.S. or Canada is sold to unaffiliated pipeline, refining, or crude oil purchasing companies. These companies may be the operators of the fields where the product is produced, owners of the pipelines which transport the products, or other third-party purchasers. While certain entities purchase more than 10% of the Company's oil and gas production, previous changes in purchasers have not resulted in an interruption of production or transportation, and consequently have not had a material adverse effect on the business of the Company. COMPETITION Equity is part of a highly competitive industry composed of many companies that are significantly larger and possess greater resources than the Company. These include major oil companies as well as large independent exploration and production companies. Their size and resources may allow these parties to operate at a greater competitive advantage than Equity. During 1998, the Company did not experience any competitive factors which impaired its production or sale of oil and gas, nor did it experience significant difficulties in contracting for drilling and related equipment. GOVERNMENT REGULATION Drilling activities of the Company are regulated by several governmental agencies in the United States, both federal and state, including the Environmental Protection Agency, Forest Service, Department of Wildlife, and Bureau of Land Management, as well as state oil and gas commissions for those states in which the Company has operations. Canadian and Russian operations are subject to similar requirements. The Company believes that it is currently in compliance with all federal, state, and local environmental regulations, both domestically and abroad. Further, the Company does not believe that any current environmental regulations will have a material impact on its capital expenditures or earnings, nor will they result in any competitive disadvantage to the Company. FINANCIAL INFORMATION ABOUT FOREIGN OPERATIONS Foreign operations of the Company are currently conducted in the Canadian provinces of Alberta and British Columbia. Financial information concerning these operations can be found in Footnotes 5 and 9 to the financial statements. For financial reporting purposes, the Company does not allocate any general and administrative expenses to its Canadian operations, nor are they burdened with indirect exploration overhead expenses. Direct exploration expenses are charged to the geographic area in which they occur. Because the majority of the Company's exploration efforts occur in the United States, very little exploration expenses are allocated to the Canadian operations. As a result of these and other factors, the operating profit of the Canadian operations is significantly greater than the operating profit in the United States. The Company does not believe that its Canadian operations are attended with any more risk than those in the United States. The Company owns a 50% interest in Symskaya Exploration, Incorporated, which is licensed to operate in Russia. Further discussion of this venture is found in ITEM 2. Properties, under the caption Present Activity, and in Footnotes 6 and 9 in the financial statements. ITEM 2. PROPERTIES The principal properties of the Company consist of developed and undeveloped oil and gas leasehold interests. Developed leases are comprised of properties with existing production, where lease terms continue as long as oil and/or gas is produced. Undeveloped leases include unproven acreage on both public and private lands. The leases have set terms and terminate at the time specified in each lease unless oil and gas in commercial quantities are discovered prior to that time. The Company also has a fee interest in 6,996 net acres of oil shale lands in Colorado. These properties have not generated significant revenue for the Company. In 1994, the Company entered into a lease agreement with another company for a five year oil and gas lease on these lands. RESERVES The information found in Footnote 9 to the financial statements concerning proved reserves represents the Company's best estimate of product quantities expected to be produced from the properties based on geologic and engineering data, as well as current economic and operating conditions. The presentation is made in accordance with Securities and Exchange Commission guidelines, and is based on prices and costs in effect on December 31, 1998. No estimates of reserves have been filed with or included in any report to any other federal agency during 1998. PRODUCTION The following table sets forth the Company's production, average sales prices, and average lifting costs by geographic area for 1998, 1997, and 1996:
=============================================================================================================================== 1998 1997 1996 1998 1997 1996 Oil Oil Oil Gas Gas Gas Area (Bbls) (Bbls) (Bbls) (MMCF) (MMCF) (MMCF) =============================================================================================================================== Production - ------------------------------------------------------------------------------------------------------------------------------- Colorado 332,230 366,319 363,080 117 170 106 - ------------------------------------------------------------------------------------------------------------------------------- Texas 22,291 25,359 29,186 145 211 315 - ------------------------------------------------------------------------------------------------------------------------------- Montana 20,434 26,103 32,845 34 16 17 - ------------------------------------------------------------------------------------------------------------------------------- Utah 20,658 18,745 16,769 - - - - ------------------------------------------------------------------------------------------------------------------------------- Wyoming 131,943 76,190 68,924 733 660 519 - ------------------------------------------------------------------------------------------------------------------------------- North Dakota 67,906 7,007 6,768 31 3 3 - ------------------------------------------------------------------------------------------------------------------------------- Oklahoma - 435 607 - - - - ------------------------------------------------------------------------------------------------------------------------------- California - - - 1,032 560 365 - ------------------------------------------------------------------------------------------------------------------------------- Other 5 7 13 - - - - ------------------------------------------------------------------------------------------------------------------------------- Total U.S. 595,467 520,165 518,192 2,092 1,620 1,325 - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- Alberta 75,015 92,376 113,756 277 439 586 - ------------------------------------------------------------------------------------------------------------------------------- B.C. 21,352 23,371 4,769 69 10 2 - ------------------------------------------------------------------------------------------------------------------------------- Total Canada 96,367 115,747 118,525 346 449 588 - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- Grand Total 691,834 635,912 636,717 2,438 2,069 1,913 =============================================================================================================================== =============================================================================================================================== Average Price - ------------------------------------------------------------------------------------------------------------------------------- U.S. $12.28 $19.49 $21.49 $ 1.95 $2.21 $1.79 - ------------------------------------------------------------------------------------------------------------------------------- Canada $11.43 $15.36 $16.99 $ 1.15 $1.34 $1.01 - ------------------------------------------------------------------------------------------------------------------------------- Total $12.16 $18.74 $20.65 $ 1.83 $2.02 $1.55 - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- Lifting Costs - ------------------------------------------------------------------------------------------------------------------------------- U.S. $ 6.11 $ 7.53 $ 7.92 $ .97 $ .85 $ .66 - ------------------------------------------------------------------------------------------------------------------------------- Canada $ 4.48 $ 4.15 $ 6.09 $ .40 $ .36 $ .37 - ------------------------------------------------------------------------------------------------------------------------------- Total $ 5.88 $ 6.92 $ 7.58 $ .89 $ .75 $ .57 ===============================================================================================================================
PRODUCTIVE WELLS AND ACREAGE The location and quantity of Equity's productive wells and acreage as of December 31, 1998 are as follows: ================================================================== Productive Wells: Gross Net - ------------------------------------------------------------------ Oil: - ------------------------------------------------------------------ United States 686 88.311 - ------------------------------------------------------------------ Canada 384 11.896 - ------------------------------------------------------------------ Gas: - ------------------------------------------------------------------ United States 71 18.872 - ------------------------------------------------------------------ Canada 11 2.209 - ------------------------------------------------------------------ Total Productive Wells 1,152 121.288 - ------------------------------------------------------------------ - ------------------------------------------------------------------ Developed Acreage - ------------------------------------------------------------------ United States 118,128 13,046 - ------------------------------------------------------------------ Canada 127,120 2,946 - ------------------------------------------------------------------ Total Developed Acreage 245,248 15,992 ================================================================== UNDEVELOPED LEASEHOLD ACREAGE The following table sets forth the Company's undeveloped oil and gas lease acreage as of December 31, 1998 by geographic area: ================================================================================ Gross Net Area Acreage Acreage - -------------------------------------------------------------------------------- Colorado 23,389 15,480 - -------------------------------------------------------------------------------- Texas 2,647 1,257 - -------------------------------------------------------------------------------- Montana 31,678 3,164 - -------------------------------------------------------------------------------- Utah 7,950 880 - -------------------------------------------------------------------------------- Wyoming 52,724 34,646 - -------------------------------------------------------------------------------- California 32,714 8,447 - -------------------------------------------------------------------------------- North Dakota 15,105 8,041 - -------------------------------------------------------------------------------- Total U.S. 166,207 71,915 - -------------------------------------------------------------------------------- Alberta 20,697 3,571 - -------------------------------------------------------------------------------- Total Canada 20,697 3,571 - -------------------------------------------------------------------------------- Grand Total 186,904 75,486 ================================================================================ Through its 50% ownership in Symskaya, the Company also has an indirect 50% interest in an additional 1,100,000 gross acres in Russia. Further discussion of this venture is found in ITEM 2. Properties, under the caption Present Activity, and in Footnotes 6 and 9 to the financial statements. DRILLING ACTIVITY During 1998, the Company participated in the drilling of 12 gross wells. Of this total, 7 were completed as producing oil and gas wells and 5 were plugged and abandoned as dry holes. ================================================================================ Gross exploratory wells drilled: Status 1998 1997 1996 - -------------------------------------------------------------------------------- United States Productive 6 13 15 - -------------------------------------------------------------------------------- Dry 5 12 6 - -------------------------------------------------------------------------------- Canada Productive - - - - -------------------------------------------------------------------------------- Dry - - - - -------------------------------------------------------------------------------- Gross development wells drilled: - -------------------------------------------------------------------------------- United States Productive 1 5 3 - -------------------------------------------------------------------------------- Dry - - - - -------------------------------------------------------------------------------- Canada Productive - - 1 - -------------------------------------------------------------------------------- Dry - - - ================================================================================ ================================================================================ Net exploratory wells drilled: Status 1998 1997 1996 - -------------------------------------------------------------------------------- United States Productive 2.18 4.21 3.95 - -------------------------------------------------------------------------------- Dry 2.10 5.99 1.64 - -------------------------------------------------------------------------------- Canada Productive - - - - -------------------------------------------------------------------------------- Dry - - - - -------------------------------------------------------------------------------- Net development wells drilled: - -------------------------------------------------------------------------------- United States Productive .40 1.74 1.19 - -------------------------------------------------------------------------------- Dry - - - - -------------------------------------------------------------------------------- Canada Productive - - .50 - -------------------------------------------------------------------------------- Dry - - - ================================================================================ PRESENT ACTIVITY In 1998, eleven of the twelve wells that the Company participated in were exploration wells and one was a development well. The drilling resulted in the completion of six gas wells, one oil well and five dry holes. Five of the gas wells were drilled on 3-D geophysical surveys in the Sacramento Basin of northern California, and the oil well was completed in Golden Valley County, North Dakota. Although total drilling activity decreased by 60% from the 30 wells drilled in 1997, the seven wells completed in 1998 added new reserves of 361,000 barrels of oil and 2.5 billion cubic feet of gas to the company's reserve base, compared to 41,000 barrels and 2.4 billion cubic feet added by the completion of eighteen wells in 1997. The projects in the Sacramento Basin are becoming increasingly important to the Company. Gas production from the basin now makes up 40% of total Company gas production. The Company's drilling efforts there are focused on prospects defined by 131 square miles on nine 3-D seismic surveys conducted during the last four years. Including the 6 wells drilled in 1998, 31 of 49 wells drilled in the basin have been completed as gas wells; an overall drilling success ratio of 63%. Equity's working interest in the wells and 3-D surveys ranges from 18.75 to 60%. Gross production at December 31, 1998 from the wells completed in 1998 was approximately 13.1 million cubic feet per day, 3.2 million cubic feet net to Equity. Of particular importance to the Company, three of the 1998 gas completions are on two 3-D surveys operated by Equity where the Company has a higher working interest, and further, these wells are three of the most productive wells drilled to date on the Sacramento Basin 3-D surveys. Two of the Sacramento Basin gas discoveries were on the Company's 16 square mile Merlin 3-D project. The initial discovery, the #1-15 Henning, was completed in the Forbes formation in February, and since completion has recorded cumulative production of 607 million cubic feet of gas and continues to produce at a rate of 900,000 cubic feet per day. The second well, the Equity #1-22 Otto Lohse, is presently producing at a rate of 300,000 cubic feet per day with cumulative gas sales to date of 230 million cubic feet. In addition, a second Forbes reservoir in this well drill stem tested at a rate of 7.5 million cubic feet per day proving additional behind pipe reserves. Equity operates and has a 50% working interest in the wells and the Merlin survey. Two additional wells on the Merlin survey are planned for 1999. A third gas discovery, the Equity #1-8 Wescott, was drilled on the Company's 17 square mile Davis Ranch 3-D survey in the Sacramento Basin. The well is presently producing at a rate of 2 million cubic feet per day and has cumulative gas sales of 481 million cubic feet since August. Equity operates and maintains a 60% working interest in the well. One additional well on the Davis Ranch survey is planned for 1999. In addition to further drilling on Company operated 3-D projects in the Sacramento Basin in 1999, Equity expects to participate in additional drilling on non-operated projects. At year end 1998, the Company estimates that seven 3-D surveys in which it currently has an interest may contain as many as 30 prospects that may be drilled over the next several years. In 1999, Equity also expects to participate in at least one well on the Sequoia prospect in 1999. Sequoia is a 36 square mile 3-D survey in the northern San Joaquin Basin of California. Seismic processing and interpretation of the survey data was completed early in 1998, and the analysis of the data developed 21 seismic leads that may develop into drillable prospects. Equity has a 30% interest in the survey. Equity participated in the drilling of one of the most prolific wells in its history in North Dakota during 1998. The Westport #24- 15 Beaver Creek in Golden Valley County, North Dakota, was initially completed as a pumping oil well in the Duperow formation at a rate of 390 barrels per day. After production testing for one month, the Duperow producing zone was isolated and the well was recompleted as a flowing oil well in the Nisku formation at an initial rate of 1,800 barrels and 1.3 million cubic feet of gas per day. At year end the well was still flowing at a rate of 1,000 barrels and 250,000 cubic feet per day and had gross cumulative production of 223,000 barrels and 94 million cubic feet of gas. Equity has a 32.5 % working interest in the well. Westport Oil and Gas Company operates the well and holds the remaining working interest. The Company is presently evaluating further drilling opportunities associated with the Beaver Creek discovery. COST CONTROLS Operating with low oil prices requires strict attention to cost control at all levels in the Company. Equity has been successful in reducing operating costs in each of the last two years, and will endeavor to make additional reductions during 1999. In addition, the Company has taken steps to further reduce 1999 general and administrative overhead, including a freeze on salaries, a 50% cut in payroll benefits, and staff reductions. SYMSKAYA EXPLORATION In 1998, Symskaya entered into a Bottom Hole Contribution Agreement with the Committee for Natural Resources of the Krasnoyarsk Krai in Eastern Siberia to support the drilling of the Averinskaya - 150 well, an exploratory well that is being drilled near the town of Yeniseysk. The well is adjacent to the southern block of acreage that Symskaya holds as part of its 1.1 million acre exploration, development and production license. The well is being drilled to evaluate the oil and gas potential of the same geologic section that Symskaya targeted in the drilling of its Lemok No. 1 well on the northern acreage block of its license area. In exchange for a nominal payment, Symskaya will receive all pre- drilling data from the well, drilling data acquired during the drilling of the well, and all final reports on the well including logs, test results, core and drill cutting samples, and samples of any oil, water or gas recovered during drilling. In addition, Symskaya personnel will have complete access to the drill site during drilling, the right to collect drill cuttings and other samples, and the right to witness all coring and testing. The well, which is expected to be completed during 1999, is projected to be drilled to a total depth of 11,500 feet. Barring major developments from the Averinskaya-150 well and changes in federal and local policies regarding production sharing, further attempts to drill Symskaya's prospect are unlikely, absent additional outside financing. The economy of the Russian Federation is currently in a period of instability. The impact includes a severe devaluation of the currency and an increasing rate of inflation. The return to economic stability is dependent to a large extent on the effectiveness of the fiscal measures taken by the government and other actions beyond the Company's control. Russia's current economic environment, coupled with the depression in world oil markets, has made it difficult for Symskaya to attract interested parties in their project. DELIVERY COMMITMENTS The Company is not obligated to provide any fixed or determinable quantity of oil or gas in the future under any existing contracts or agreements. ITEM 3. LEGAL PROCEEDINGS No material legal proceedings are pending. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of the fiscal year covered by this report, no matters were submitted to the security holders for a vote, and no proxies were solicited. PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED MATTERS The Company's stock is traded on the over-the-counter market and quoted over the NASDAQ National Market System using the symbol EQTY. High and low closing prices for 1998 and 1997 are as follows: ================================================================================ Quarter High Low - -------------------------------------------------------------------------------- 1998 - 4th 1 15/16 21/32 - -------------------------------------------------------------------------------- 3rd 2 7/16 1 13/16 - -------------------------------------------------------------------------------- 2nd 2 13/16 2 - -------------------------------------------------------------------------------- 1st 3 1/16 2 1/2 - -------------------------------------------------------------------------------- 1997 - 4th 3 15/16 2 3/4 - -------------------------------------------------------------------------------- 3rd 4 1/8 3 3/16 - -------------------------------------------------------------------------------- 2nd 3 3/8 2 3/4 - -------------------------------------------------------------------------------- 1st 4 5/16 2 11/16 ================================================================================ The approximate number of registered stockholders of the Company as of March 10, 1999 is 1,574. No unregistered equity securities of the registrant have been sold during the period covered by this report. ITEM 6. SELECTED FINANCIAL DATA
1998 1997 1996 1995 1994 - --------------------------------------------------------------------------------------------------------- Oil and Gas Sales ........ $ 12,720,876 $ 16,457,048 $ 16,115,125 $ 12,259,739 $ 11,713,498 Other Income ............. 377,282 1,023,037 312,759 457,837 196,431 Lease Operating Costs .................... 6,233,955 5,940,808 5,912,128 5,093,782 4,658,115 DD&A ..................... 5,029,119 4,675,411 4,292,237 3,843,442 5,011,155 Impairment of Proved Oil and Gas Properties ........... 4,015,158 411,894 237,279 2,471,146 -0- Equity Loss and Impairment of Investment in Symskaya Exploration, Inc. ........ 446,758 356,661 9,204,394 -0- -0- 3-D Seismic .............. 431,075 626,525 757,964 237,604 -0- Exploration Expense .................. 2,383,163 3,026,550 2,336,405 1,633,612 1,718,339 General and Administrative ........... 1,914,590 2,048,194 2,030,811 1,908,778 1,560,675 Loss Before Cumulative Effect of Accounting Changes .................. (5,814,884) (211,156) (5,502,646) (1,254,812) (360,830) Basic Loss Per Common Share Before Cumulative Effect of Accounting Changes ....... $ (.46) $ (.02) $ (.43) $ (.10) $ (.03) ============ ============ ============ ============ ============ Total Assets ............. $ 47,271,168 $ 53,541,639 $ 50,181,437 $ 53,947,050 $ 51,908,336 Long-Term Debt ........... $ 16,500,000 $ 13,978,830 $ 8,878,830 $ 4,918,830 $ 460,000
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL. The profitability of the Company's operations in any particular accounting period will be directly related to the average realized prices of oil and gas sold, the volume of oil and gas produced and the results of acquisition, development and exploration activities. The average realized prices of oil and gas will fluctuate from one period to another due to market conditions. The aggregate amount of oil and gas produced may fluctuate based on development and exploitation of oil and gas reserves and other factors. Production rates, value-based production taxes, labor and maintenance expenses are expected to be the principal influences on operating costs. Accordingly, the results of operations of the Company may fluctuate from period to period. OIL AND GAS RESERVES. During 1998, crude oil prices reached 12 year lows, and remained near those levels for much of the year. Natural gas prices in 1998 were 9% lower than 1997. This decrease in prices had a significant effect on the volumes and values of the Company's reserves. Estimates of reserve quantities and related future net cash flows are calculated using unescalated year-end oil and gas prices and operating costs, and may be subject to substantial fluctuations based on the prices in effect at the end of each year. The following table sets forth a comparison of year-end reserves, the weighted average prices used in calculating estimated reserve quantities and future net cash flows, pre-tax future net cash flows discounted at 10%, and per barrel of oil equivalent discounted cash flows at the end of 1998, 1997 and 1996 (quantities in thousands, except for pricing and per barrel of oil equivalent amounts): SEC-10 Year-end Year-end SEC-10 pre-tax proved reserves prices pre-tax values (MBBLs) (MMCF) Oil Gas BOE* Oil Gas values per BOE --- --- ---- --- --- ------ ------- 12/31/98 6,193 19,010 9,361 $10.80 $1.95 $25,210 $2.69 12/31/97 8,420 18,909 11,571 $14.99 $2.03 $37,409 $3.23 12/31/96 8,369 17,617 11,305 $24.36 $2.84 $79,002 $7.00 * - gas converted at 6,000 Mcf per barrel. Reserve revisions occur when the economic limit of a property is lengthened or shortened due to changes in commodity pricing. The following excerpt from the footnotes to the Company's financial statements shows the effect of depressed oil prices on the volume of oil reserves (shown in thousands of barrels): Year ended December 31, 1998 1997 1996 ---- ---- ---- Proved oil reserves (000's): Beginning of year 8,420 8,369 7,750 Revisions of previous estimates (1,896) (555) 225 Extensions and discoveries 361 202 88 Acquisitions of minerals in place - 1,085 949 Sales of minerals in place - (45) (6) Production (692) (636) (637) ---- ---- ---- End of year 6,193 8,420 8,369 ===== ===== ===== The negative revisions of 1,896,000 and 555,000 barrels in 1998 and 1997, respectively, are primarily price-related and take into account those properties where production has been shut-in due to marginal economics. Excluding revisions to previous estimates, the Company's drilling program in 1998 added 779,000 barrels of oil equivalent reserves, 71% of 1998 production. The Company did not make any producing property acquisitions in 1998. Should oil and gas prices remain at their current low levels for the balance of 1999, further reductions in capital spending for 1999 are likely, which may impact the Company's ability to replace production. The Company continues to high-grade both exploratory and development projects based on their assumed risks and rewards, balancing this with projects that have specific lease related drilling commitments. Other projects have been delayed or deferred until oil prices strengthen and cash flows increase. 1997 drilling and acquisition activities in the United States and Canada added 1.72 million barrels of oil equivalent to the Company's proved reserve base, replacing 175% of 1997 production. In 1996, the Company added 1.30 million barrels of oil equivalent, equal to 136% of 1996 oil and gas production. Further information concerning the Company's reserve volumes and values can be found in Footnote 9 to the financial statements. IMPAIRMENT OF PROVED OIL AND GAS PROPERTIES. As a result of depressed year-end oil prices, the Company recorded an impairment of proved oil and gas properties of $4,015,158 ($2,529,550 net of tax) as of December 31, 1998. Statement of Financial Accounting Standards No. 121 requires successful efforts companies to evaluate the recoverability of the carrying costs of their proved oil and gas properties by comparing the expected undiscounted future net revenues from each producing field with the related net capitalized costs at the end of each period. When the net capitalized costs exceed the undiscounted future net revenues, the cost of the property is written down to fair value, which is determined using discounted future net revenues from the producing field. During 1998, the Company wrote down the costs of several properties characterized by low-margin production, where low oil prices have severely reduced the economic value of their reserves. During 1997 and 1996, the Company recorded proved property impairment charges of $411,894 and $237,279, respectively. EQUITY LOSS AND IMPAIRMENT OF INVESTMENT IN SYMSKAYA EXPLORATION, INCORPORATED. In 1996, Symskaya plugged and abandoned the Lemok #1 well, and charged the drilling costs of the well to expense. Due to the uncertainty relating to Symskaya's obtaining additional outside financing and proceeding with development of the License area, all other capitalized costs related to the Company's investment in and advances to Symskaya were also written off, resulting in a total charge to expense of $9,204,394. The Company has no current plans to fund future exploratory drilling in Russia. The Company's 50% share of Symskaya's net losses in 1998 and 1997 were $446,758 and $356,661, respectively, which resulted primarily from administrative related expenses. The 1998 amount includes a write off of approximately $125,000 in interest income on a senior note between Symskaya and the Company that had been accrued in prior periods, as well as the Company's share of the bottom hole contribution discussed earlier. Further discussion of this venture is found in ITEM 2. Properties, under the caption Present Activity, and in Footnotes 6 and 9 to the financial statements. RESULTS OF OPERATIONS COMPARISON OF 1998 WITH 1997 OIL AND GAS PRODUCTION AND SALES. Despite record gas production and higher oil production, lower oil and gas prices during 1998 resulted in a 23% drop in oil and gas sales. Gas production of 2.4 Bcf in 1998, the highest level in company history, was 14% higher than 2.1 Bcf produced in 1997. Oil production of 692,000 barrels was 9% higher than the 636,000 barrels produced in 1997. Average oil prices for 1998 were 35% lower than those of 1997. The Company's average oil price received for 1998 was $12.16 per barrel, compared to $18.74 per barrel in 1997. Gas prices also dipped by 9%, averaging $1.83 in 1998, compared to $2.02 in 1997. Further details of production and pricing are found in Item 2. Properties, under the caption Production. OTHER INCOME. During 1997, the Company recorded a gain on the sale of certain oil and gas properties of approximately $325,000. In addition, the Company sold its minority interest in an oil field technology research company. In connection with the sale, the Company recognized a gain of approximately $200,000. There were no corresponding events in 1998. LEASE OPERATING COSTS. Lease operating costs continued to decline on a per-unit basis in 1998. Costs per barrel of oil equivalent during 1998 of $5.68 were 6% lower than costs of $6.06 per barrel of oil equivalent during 1997. During much of 1998, the Company shut-in several high-cost, marginally economic wells whose profitability was severely curtailed by low oil prices. Another factor in the decline was a reduction in value-based production taxes. As the majority of the Company's production on a barrel of oil equivalent basis comes from crude oil, the decline in average oil prices in 1998 brought about declines in production taxes. In addition, operating costs associated with natural gas properties are lower on a barrel of oil equivalent basis than for oil producing properties. The Company's ratio of gas to oil production continued to rise in 1998 compared to prior years, and as it did so, per barrel of oil equivalent operating costs declined. DEPRECIATION, DEPLETION, AND AMORTIZATION (DD&A). DD&A charges in 1998 declined slightly to $4.58 per barrel of oil equivalent from $4.77 per barrel of oil equivalent in 1997. IMPAIRMENT OF PROVED OIL AND GAS PROPERTIES. As discussed previously, included in the Statement of Operations for 1998 and 1997 are non-cash charges for the impairment of proved oil and gas properties in the amount of $4,015,158 and $411,894, respectively. EQUITY LOSS AND IMPAIRMENT OF INVESTMENT IN SYMSKAYA EXPLORATION, INCORPORATED. The Company is continuing to pursue additional outside financing for its Symskaya project in Russia. The Company announced in 1998 that its 50% owned subsidiary, Symskaya, entered into a bottom hole contribution agreement to support the drilling of an exploratory well that is being drilled near the southern block of acreage that Symskaya holds as part of its 1.1 million acre exploration, development and production License. The equity loss in Symskaya increased by approximately $90,000 during 1998. This increase included a write down of approximately $125,000 of accrued interest income on a senior note between Symskaya and the Company that had been recognized in prior periods. In addition, the 1998 increase includes the Company's share of the bottom hole contribution. There were no corresponding events in 1997. 3-D SEISMIC AND EXPLORATION EXPENSES. During 1998, the Company incurred $431,075 in 3-D seismic costs related to its exploration programs, compared to $626,525 in 1997. The bulk of 1998 3-D costs were associated with its Sequoia project in the San Joaquin Basin of California. The initial well at Sequoia has been delayed until the first half of 1999. Exploration expenses decreased as the Company drilled 5 exploratory dry holes in 1998, compared to 12 dry holes in 1997. Successful efforts accounting, the method used by the Company, requires both 3-D seismic costs and exploratory dry hole costs to be charged to expense on a current basis. INTEREST AND INCOME TAXES. Higher interest costs in 1998 reflect the higher amount of debt outstanding under the Company's credit facility. The income tax benefits recorded for both periods result primarily from the deferred tax benefits associated with net losses reported. Details concerning the components of the tax provision can be found in Footnote 3 to the financial statements. COMPARISON OF 1997 WITH 1996 OIL AND GAS PRODUCTION AND SALES. The Company's 1997 increases in oil and gas and sales were due largely to increases in natural gas production and prices. During 1997, the Company's gas production increased 8%, from 1.9 Bcf in 1996 to 2.1 Bcf in 1997. Average prices of $2.02 per Mcf in 1997 were 30% higher than the $1.55 received in 1996. The increase in gas production reflected the contribution from the Company's exploration and development programs in California and Wyoming. Offsetting the increases in gas production and pricing, oil production was essentially flat from year to year, with 636,000 barrels produced in 1997, compared to 637,000 barrels in 1996. While 1997 year-end oil prices experienced a sharp decline from the prior year, the decline in average prices received throughout the year was somewhat milder. Average prices of $18.74 per barrel were 10% lower than the $20.65 per barrel received in 1996. Further details of production and pricing are found in Item 2. Properties, under the caption Production. OTHER INCOME. During the first half of 1997, the Company recorded a gain on the sale of certain oil and gas properties of approximately $325,000. The properties sold had reserves of less than 15,000 barrels of oil. There was no corresponding event in 1996. In addition, during the third quarter of 1997, the Company sold its minority interest in an oil field technology research company. In connection with the sale, the Company recognized a gain of approximately $200,000. These two transactions combined to increase other income by 227% over 1996 levels. LEASE OPERATING COSTS. Despite a higher number of wells on production during 1997 as compared to 1996, lease operating costs declined on a per-unit basis. The primary factor in the decline was a reduction in value-based production taxes. As the majority of the Company's production on a barrel of oil equivalent basis comes from crude oil, the decline in average oil prices in 1997 brought about a similar decline in production taxes. In addition, operating costs associated with natural gas properties were lower on a barrel of oil equivalent basis than for oil producing properties. The Company's ratio of gas to oil production continued to rise in 1997, and as it did so, per barrel of oil equivalent costs declined. DEPRECIATION, DEPLETION, AND AMORTIZATION (DD&A). Increased DD&A charges in 1997 were a direct reflection of lower year-end oil prices used in calculating reserves. Generally speaking, as oil prices decline, economic oil reserves also decline. As these reserves decline, extraction percentages increase, resulting in higher DD&A charges. IMPAIRMENT OF PROVED OIL AND GAS PROPERTIES. As discussed previously, included in the Statement of Operations for 1997 and 1996 are non-cash charges for the impairment of proved oil and gas properties in the amount of $411,894 and $237,239, respectively. EQUITY LOSS AND IMPAIRMENT OF INVESTMENT IN SYMSKAYA EXPLORATION, INCORPORATED. As discussed above, in 1996, Symskaya plugged and abandoned the Lemok #1 well, and charged the drilling costs of the well to expense. Due to the uncertainty relating to Symskaya's obtaining additional outside financing and proceeding with development of the License area, all other capitalized costs related to the Company's investment in and advances to Symskaya were also written off, resulting in a total charge to expense in 1996 of $9,204,394 ($6,592,206 after tax). The Company's 50% share of Symskaya's net loss in 1997 was $356,661, which resulted primarily from administrative related expenses. 3-D SEISMIC AND EXPLORATION EXPENSES. During 1997, the Company incurred $626,525 in 3-D seismic costs related to its exploration programs, compared to $757,964 in 1996. Exploration expenses increased as the Company drilled 12 exploratory dry holes in 1997, compared to 6 dry holes in 1996. Successful efforts accounting, the method used by the Company, requires both 3-D seismic costs and exploratory dry hole costs to be charged to expense on a current basis. GENERAL AND ADMINISTRATIVE EXPENSES. The Company recorded increases in compensation expense, along with small increases in other administrative charges during 1997. INTEREST EXPENSE. During 1996, because of its ongoing exploration project in Russia, the Company was required to capitalize all interest expense. With activity in Russia curtailed in 1997, interest was charged to expense. Along with increased borrowing on the Company's revolving credit facility, this caused interest expense to increase during 1997 over 1996 levels. INCOME TAXES. Income tax expense for 1997 includes additional taxes arising from an audit of the Company's Canadian tax returns. The adjustment resulted in the accrual of approximately $175,000 in additional Canadian taxes related to prior years. The income tax benefit in 1996 resulted primarily from the deferred tax benefit associated with the net loss reported. Details concerning the components of the tax expense can be found in Footnote 3 to the financial statements. LIQUIDITY AND CAPITAL RESOURCES CASH AND WORKING CAPITAL. Total cash balances increased 17% from 1997, as a result of a combination of several events discussed in the following paragraphs. Working capital decreased by 39% primarily due to lower accrued oil and gas sales. The Company's ratio of current assets to current liabilities was 1.76 to 1 at December 31, 1998, compared to 2.33 to 1 at December 31, 1997. CASH FLOWS FROM OPERATING ACTIVITIES. Cash flows from operating activities declined 54% in 1998 compared to 1997 levels, primarily as a result of lower revenues caused by depressed oil and gas prices. Despite higher oil and gas production in 1998, oil and gas sales dropped by $3.7 million. 1997 cash flows decreased from 1996 levels as a result of a reduction in accounts payable balances, which is mainly a function of timing. CASH FLOWS FROM INVESTING ACTIVITIES. Capital expenditures in 1998 were 57% lower than in 1997. Excluding 1997 property acquisitions, expenditures in 1998 were down 21%. This decrease in capital spending is a direct result of decreased revenues resulting from lower oil and gas prices. Should oil prices remain at their current low levels for the balance of 1999, the Company expects further reductions in capital spending for 1999. The Company continues to high-grade both exploratory and development projects based on their assumed risks and rewards, balancing this with projects that have specific lease related drilling commitments. Other projects have been delayed or deferred until oil prices strengthen and cash flows increase. Capital expenditures in 1997 were 30% higher than the amount recorded in 1996. Included in the 1997 figures were $3.2 million associated with proved property acquisitions, and $1.2 million associated with unproved property acquisitions. During 1996, the Company incurred $2 million and $.5 million, respectively, for these property acquisitions. Subsequent to the plugging of the Lemok #1 in 1996, the Company's advances to Symskaya Exploration, Inc. decreased significantly. During 1998 and 1997 the Company advanced approximately $319,000 and $357,000 to Symskaya, respectively, compared to approximately $3.0 million in 1996. The Company expects that advances to Symskaya in 1999 will again be minimal as the Company has no current plans to fund any exploratory drilling in Russia. The equity loss in Symskaya Exploration for 1998 includes a writedown of approximately $125,000 in interest income on a senior note between Symskaya and the Company that had been accrued in prior periods. In addition, the 1998 amount included the Company's share of a bottom hole contribution discussed earlier. Neither of these two events are recurring. CASH FLOWS FROM FINANCING ACTIVITIES. The Company used proceeds of $2,521,170, $5,100,000 and $3,960,000 in 1998, 1997 and 1996 respectively, from its Revolving Credit Facility to fund capital expenditures. The Company purchased 135,600 shares of its stock on the open market during 1997 at an average price of $3.17 per share. The purchases were made pursuant to a share repurchase program adopted by the Company in June of 1997. No treasury stock was purchased during 1998. The Company purchased 29,000 shares of its stock during 1996 at an average price of $3.40 per share. CREDIT FACILITY. In March of 1995, the Company obtained a $20 million Borrowing Base Credit Facility (the Facility). On March 30, 1998, the Company amended its credit agreement, setting the current commitment under the Facility at $18 million. In addition, on June 24, 1998, the Facility was further amended in order to set the first principal payment date to July 1, 2001 from July 1, 1999. The Company's commitment under the Facility is subject to a redetermination as of July 1 and January 1 of each year, with reserve values calculated using estimated future prices determined by the Company's lender. Using a reduced oil price deck, brought about by continued low oil prices, the Company's borrowing base was lowered to $17 million after the July 1, 1998 redetermination, and the Company was notified to this effect in September of 1998. As of December 31, 1998 the outstanding balance under the Facility was $16.5 million at an average interest rate of 7.26%. Accordingly, at the end of 1998, the Company had approximately $500,000 of remaining availability on the Facility. Primarily as a result of the $4 million property impairment charge, as of December 31, 1998 the Company was in violation of the "Tangible Net Worth" covenant contained in the Facility. In March 1999, the Company's bank amended the Facility to remedy the covenant violation. The Company is now in compliance with all covenants in the Facility. The Company believes that existing cash balances, cash flows from operating activities, and funds available under the Company's credit facility will provide adequate resources to fund on-going operations and will allow the Company to meet limited capital and exploration spending objectives for 1999. The Company's drilling plans for 1999 have been significantly curtailed due to low oil prices. The ability of the Company to replace its 1999 production volumes through drilling with curtailed budgets may be significantly impaired. Should the low oil price environment continue for an extended period of time, the Company may have difficulty in meeting its ongoing exploration and development drilling objectives. The Company has adequate liquidity to maintain its operations as they currently exist. COMMITMENTS. Under the terms of Symskaya's License and Production Sharing Contract (PSC), Equity was committed to advance Symskaya a minimum of $6 million during the first 5 contract years, representing 50% of the minimum expenditures called for in the License and PSC, with the remainder being funded by Leucadia National Corporation, Symskaya's other 50% shareholder. The first contract year began November 15, 1993. The amounts spent through November 14, 1998, the end of the fifth contract year, have satisfied all minimum commitments required. Further discussion of this venture is found in ITEM 2. Properties, under the caption Present Activity, and in Footnotes 6 and 9 to the financial statements. OTHER ITEMS. The Company has reviewed all recently issued, but not yet adopted, accounting standards in order to determine their effects, if any, on the results of operations or financial position of the Company. Based on that review, the Company believes that none of these pronouncements will have any significant effects on current or future earnings or operations. YEAR 2000 In 1998, the Company began a project to ensure that its computer systems were year 2000 compliant. The Company identified this project as a priority and has allocated personnel and financial resources to it in an effort to minimize the impact of year 2000 date related problems. An officer of the Company is supervising the project. In addition, the Company is conducting a year 2000 compliance assessment of those of its vendors and customers whose relationship, in the Company's business judgment, is material. Although the Company's assessment of its year 2000 issues is not complete, the Company has made a preliminary determination of its mission-critical and non-mission-critical items. The Company's mission-critical items include its financial accounting, engineering, and lease/land software. Each of these items has either been certified by the vendor as year 2000 compliant, or the vendor has certified that a compliant version of the software will be in place before June 30, 1999. All non- mission-critical systems have been certified as being compliant. The Company is conducting tests to support these claims. The Company does not anticipate incurring any significant expense to ensure year 2000 compliance. Although the Company is undertaking this project, no assurance can be given that such a program will be able to solve the year 2000 issues applicable to the Company or that failure to solve will not have a material adverse effect on the Company. FORWARD LOOKING STATEMENTS The preceding discussion and analysis should be read in conjunction with the consolidated financial statements, including the notes thereto, appearing elsewhere in this annual report on Form 10-K. Except for the historical information contained herein, the matters discussed in this annual report contain forward-looking statements within the meaning of section 27a of the securities act of 1933, as amended, and section 21e of the securities exchange act of 1934, as amended, that are based on management's beliefs and assumptions, current expectations, estimates, and projections. Statements that are not historical facts, including without limitation statements which are preceded by, followed by or include the words "believes," "anticipates," "plans," "expects," "may," "should" or similar expressions are forward-looking statements. Many of the factors that will determine the Company's future results are beyond the ability of the Company to control or predict. These statements are subject to risks and uncertainties and, therefore, actual results may differ materially. The Company disclaims any obligation to update any forward-looking statements whether as a result of new information, future events or otherwise. Important factors that may effect future results include, but are not limited to: the risk of a significant natural disaster, the inability of the Company to insure against certain risks, fluctuations in commodity prices, the inherent limitations in the ability to estimate oil and gas reserves, changing government regulations, as well as general market conditions, competition and pricing, and other risks detailed from time to time in the Company's SEC reports, copies of which are available upon request from the Company's investor relations department. ITEM 7(a). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The answers to items listed under Item 7(a) are inapplicable or negative. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Independent Accountants To the Stockholders and Board of Directors of Equity Oil Company: In our opinion, the financial statements as listed in Item 14 (a) of this Form 10-K, present fairly, in all material respects, the financial position of Equity Oil Company (the "Company") at December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Salt Lake City, Utah March 10, 1999
EQUITY OIL COMPANY BALANCE SHEETS December 31, 1998 and 1997 ASSETS 1998 1997 Current assets: Cash and cash equivalents ......................................... $ 444,476 $ 378,801 Accounts receivable ............................................... 1,933,686 2,957,677 Operator advances ................................................. 762,474 683,858 Federal, state and foreign income taxes receivable ............................................... 291,597 88,174 Deferred income taxes ............................................. 19,417 18,934 Other current assets .............................................. 318,904 514,713 ------------- ------------- Total current assets ..................................... 3,770,554 4,642,157 ------------- ------------- Property and equipment, at cost (successful efforts method): Unproved oil and gas properties ................................... 3,003,223 3,504,362 Proved oil and gas properties: Developed leaseholds ........................................... 9,994,273 13,049,597 Intangible drilling costs ...................................... 64,845,202 68,324,359 Equipment ...................................................... 25,731,345 27,733,805 Other property and equipment ..................................... 833,772 759,768 ------------- ------------- 104,407,815 113,371,891 Less accumulated depreciation, depletion and amortization ............................... (61,191,368) (64,846,514) ------------- ------------- 43,216,447 48,525,377 ------------- ------------- Other assets: Investment in Raven Ridge Pipeline Partnership .................................................... 220,997 268,821 Other assets ...................................................... 63,170 105,284 ------------- ------------- 284,167 374,105 ------------- ------------- Total assets ............................................. $ 47,271,168 $ 53,541,639 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997 Current liabilities: Accounts payable .................................................. $ 1,675,758 $ 1,327,120 Accrued liabilities ............................................... 164,163 120,039 Federal, state and foreign income taxes payable .................................................. 212,583 354,002 Accrued profit-sharing contribution ............................... 90,413 188,973 ------------- ------------- Total current liabilities ................................ 2,142,917 1,990,134 ------------- ------------- Revolving credit facility ........................................... 16,500,000 13,978,830 Deferred income taxes ............................................... 1,642,700 4,851,966 ------------- ------------- 18,142,700 18,830,796 ------------- ------------- Commitments (Note 6) Stockholders' equity: Common stock, $1 par value: Authorized: 25,000,000 shares Issued: 12,794,040 shares in 1998 and 12,761,100 shares in 1997 ............................... 12,794,040 12,761,100 Paid in capital ................................................... 3,714,493 3,667,707 Retained earnings ................................................. 11,005,320 16,820,204 ------------- ------------- 27,513,853 33,249,011 Less treasury stock, at cost ...................................... (528,302) (528,302) ------------- ------------- 26,985,551 32,720,709 ------------- ------------- Total liabilities and stockholders' equity ..................................... $ 47,271,168 $ 53,541,639 ============= =============
EQUITY OIL COMPANY STATEMENTS OF OPERATIONS for the years ended December 31, 1998, 1997 and 1996
1998 1997 1996 ---- ---- ---- Revenues: Oil and gas sales ......................... $ 12,720,876 $ 16,457,048 $ 16,115,125 Partnership income ........................ 19,334 311,215 306,114 Interest .................................. 60,491 153,672 140,053 Other income .............................. 377,282 1,023,037 312,759 ------------ ------------ ------------ 13,177,983 17,944,972 16,874,051 ------------ ------------ ------------ Expenses: Oil and gas leasehold operating costs ..... 6,233,955 5,940,808 5,912,128 Depreciation, depletion and amortization .. 5,029,119 4,675,411 4,292,237 Impairment of proved oil and gas properties 4,015,158 411,894 237,279 Equity loss and impairment of investment in Symskaya Exploration, Inc ........... 446,758 356,661 9,204,394 Leasehold abandonments .................... 162,754 86,542 87,464 3-D seismic ............................... 431,075 626,525 757,964 Exploration ............................... 2,383,163 3,026,550 2,336,405 General and administrative ................ 1,914,590 2,048,194 2,030,811 Interest, net of interest capitalized of $364,637 in 1996 .................... 1,298,061 733,980 164,678 ------------ ------------ ------------ 21,914,633 17,906,565 25,023,360 ------------ ------------ ------------ Income (loss) before income taxes .... (8,736,650) 38,407 (8,149,309) Provision for (benefit from) income taxes .. (2,921,766) 249,563 (2,646,663) ------------ ------------ ------------ Net loss ............................. $ (5,814,884) $ (211,156) $ (5,502,646) ============ ============ ============ Basic and diluted net loss per common share $ (.46) $ (.02) $ (.43) ============ ============ ============ Basic and diluted weighted average shares outstanding .............. 12,623,041 12,686,211 12,733,864 ============ ============ ============
The accompanying notes are an integral part of the financial statements EQUITY OIL COMPANY STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY for the years ended December 31, 1998, 1997 and 1996
Common Stock Paid in Retained Treasury Stock Shares Amount Capital Earnings Shares Cost ------ ------ ------- -------- ------ ---- Balance at January 1, 1996 12,711,100 $12,711,100 $3,485,487 $22,534,006 - $ - Net loss (5,502,646) Treasury stock purchased, $3.40 per share 29,000 (98,653) Common stock issued for services, $5.04 per share 20,500 20,500 82,813 Common stock issued on exercise of incentive stock options 19,500 19,500 64,875 Income tax benefit from exercise of incentive stock options 15,158 ---------- ---------- --------- ---------- -------- -------- Balance at December 31, 1996 12,751,100 12,751,100 3,648,333 17,031,360 29,000 (98,653) Net loss (211,156) Treasury stock purchased, $3.17 per share 135,600 (429,649) Common stock issued for services, $2.94 per share 10,000 10,000 19,374 ---------- ---------- --------- ---------- -------- -------- Balance at December 31, 1997 12,761,100 12,761,100 3,667,707 16,820,204 164,600 (528,302) Net loss (5,814,884) Common stock issued for services, $2.42 per share 32,940 32,940 46,786 ---------- ---------- --------- ---------- -------- -------- Balance at December 31, 1998 12,794,040 $12,794,040 $3,714,493 $11,005,320 164,600 $(528,302) ========== ========== ========= ========== ======= ========
EQUITY OIL COMPANY STATEMENTS OF CASH FLOWS for the years ended December 31, 1998, 1997 and 1996 1998 1997 1996 ---- ---- ---- Cash flows from operating activities: Net loss .................................................................... $(5,814,884) $ (211,156) $(5,502,646) Adjustments to reconcile net loss to net cash provided by operating activities: Impairment of proved oil and gas properties ............................. 4,015,158 411,894 237,279 Equity loss and impairment of investment in Symskaya Exploration, Inc. ......................................... 446,758 356,661 9,204,394 Depreciation, depletion and amortization ................................ 5,029,119 4,675,411 4,292,237 Partnership distributions in excess of income ........................... 47,824 136,508 134,892 (Gain) loss on property dispositions .................................... 325,558 (243,423) 87,464 Change in other assets .................................................. 42,114 42,114 42,113 Deferred income tax benefit ............................................. (3,209,749) (701,888) (3,130,574) Common stock issued for services ........................................ 79,726 29,374 103,313 ----------- ----------- ----------- 961,624 4,495,495 5,468,472 Increase (decrease) from changes in: Accounts receivable and operator advances ............................. 817,827 19,135 (406,805) Other current assets .................................................. 195,809 (142,012) 5,893 Accounts payable and accrued liabilities .............................. 294,202 (576,853) 735,915 Income taxes payable/receivable ....................................... (344,842) 385,712 4,511 ----------- ----------- ----------- Net cash provided by operating activities .......................... 1,924,620 4,181,477 5,807,986 ----------- ----------- ----------- Cash flows from investing activities: Sale of temporary cash investments .......................................... -- 49,802 906,165 Advances to Symskaya Exploration, Inc. ...................................... (319,210) (356,661) (3,043,952) Capital expenditures ........................................................ (4,126,630) (9,547,036) (7,339,212) Proceeds from sale of oil and gas properties ................................ 65,725 592,907 -- ----------- ----------- ----------- Net cash used in investing activities .............................. (4,380,115) (9,260,988) (9,476,999) ----------- ----------- ----------- Cash flows from financing activities: Exercise of incentive stock options ......................................... -- -- 84,375 Purchase of treasury stock .................................................. -- (429,649) (98,653) Borrowings under revolving credit facility .................................. 2,521,170 5,100,000 3,960,000 ----------- ----------- ----------- Net cash provided by financing activities .......................... 2,521,170 4,670,351 3,945,722 ----------- ----------- ----------- Net (decrease) increase in cash and cash equivalents ......................... 65,675 (409,160) 276,709 Cash and cash equivalents at beginning of year ............................... 378,801 787,961 511,252 ----------- ----------- ----------- Cash and cash equivalents at end of year ..................................... $ 444,476 $ 378,801 $ 787,961 =========== =========== =========== Supplemental disclosures of cash flow information: Cash paid during the year for: Income taxes .............................................................. $ 495,882 $ 701,694 $ 419,121 Interest .................................................................. $ 1,298,061 $ 733,980 $ 164,678
The accompanying notes are an integral part of the financial statements EQUITY OIL COMPANY NOTES TO FINANCIAL STATEMENTS 1. Significant Accounting Policies: A. The Company: Equity Oil Company (the Company) is a Colorado corporation engaged in oil and gas exploration, development and production in the United States, Canada and Russia. B. Cash and Cash Equivalents: The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. C. Accounting for Oil and Gas Operations: The Company reports using the "successful efforts" method of accounting for oil and gas operations. The use of this method results in capitalization of those costs identified with the acquisition, exploration and development of properties that produce revenue or, if in the development stage, are anticipated to produce future revenue. Costs of unsuccessful exploration efforts are expensed in the period in which it is determined that such costs are not recoverable through future revenues. Exploratory geological and geophysical costs are expensed as incurred. The costs of development wells are capitalized whether productive or nonproductive. The Company annually assesses undeveloped oil and gas properties for impairment. Any impairment recorded represents management's estimate of the decline in realizable value experienced during the year. The costs of proved properties which management determines are not recoverable are written off in the period such determination is made. The net capitalized costs of proved oil and gas properties are measured for impairment in accordance with SFAS No. 121 (see Note 2). The provision for depreciation, depletion and amortization of proved oil and gas properties is computed using the unit of production method, based on proved oil and gas reserves. Estimated dismantlement, restoration and abandonment costs are expected to be offset by estimated residual values of lease and well equipment. Thus, no accrual for such costs has been recorded. D. Concentration of Credit Risk: Substantially all of the Company's accounts receivable are within the oil and gas industry, primarily from purchasers of oil and gas (see Note 5). Although diversified within many companies, collectibility is dependent upon the general economic conditions of the industry. The receivables are not collateralized and, to date, the Company has experienced minimal bad debts. The majority of the Company's cash and cash equivalents is held by three financial institutions located in Salt Lake City, Utah, and by one financial institution in Calgary, Alberta. E. Equipment: The provision for depreciation of equipment (other than oil and gas equipment) is based on the straight-line method using asset lives as follows: Office equipment 10 years Automobiles 3 years When equipment is retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the Statements of Operations. F. Foreign Operations: Operations and investments in Canada have been translated into U.S. dollar equivalents at the average rate of exchange in effect at the transaction date. Foreign exchange gains or losses during 1998, 1997 and 1996 were not material. Continued EQUITY OIL COMPANY NOTES TO FINANCIAL STATEMENTS, Continued 1. Significant Accounting Policies, Continued: G. Loss Per Common Share: Basic earnings per share is computed by dividing the net loss by the weighted average number of common shares outstanding. Diluted earnings per share is computed by dividing the net loss by the sum of the weighted average number of common shares and the effect of dilutive unexercised stock options. Options to purchase 1,203,000, 1,141,000 and 1,076,000 shares of common stock at prices ranging from $2.50 to $6.00 per share were outstanding at December 31, 1998, 1997 and 1996, respectively, but were not included in the computation of diluted earnings per share because the effect would have been antidilutive. H. Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates with regard to these financial statements include the estimate of proved oil and gas reserve volumes and the estimated future development, dismantlement, and abandonment costs used in determining amortization provisions. 2. Impairment of Proved Oil and Gas Properties: SFAS No.121, Accounting for the Impairment of Long Lived Assets and for Assets Held for Disposal, requires successful efforts companies to evaluate the recoverability of the net capitalized costs of their proved oil and gas properties at a field level. The SFAS No. 121 impairment test compares the expected undiscounted future net revenues from each producing field with the related net capitalized costs at the end of each period. When the net capitalized costs exceed the undiscounted future net revenues, the carrying value of the property is written down to fair value, which is determined using discounted future net revenues from the producing field. The Company recorded non-cash impairment charges of $4,015,158, $411,894 and $237,279 for 1998, 1997 and 1996, respectively. Continued EQUITY OIL COMPANY NOTES TO FINANCIAL STATEMENTS, Continued 3. Income Taxes: The Company accounts for income taxes in accordance with SFAS No. 109. Deferred income taxes are provided using enacted tax rates on the difference between the tax basis of an asset or liability and its reported amount in the financial statements that will result in taxable or deductible amounts in future years when the reported amount of the asset or liability is recovered or settled, respectively. The provision for (benefit from) income taxes consists of the following:
1998 1997 1996 ---- ---- ---- Currently payable (receivable): U.S. income taxes (including alternative minimum tax) . $ -- $ 18,584 $ 185,082 State income taxes .......... 6,500 70,512 108,463 Canadian income taxes ....... 208,046 471,064 190,366 Prior years taxes ........... 73,437 391,291 -- Deferred tax benefit ........ (3,209,749) (701,888) (3,130,574) ----------- ----------- ----------- $(2,921,766) $ 249,563 $(2,646,663) =========== =========== ===========
The components of the net deferred tax liability as of December 31, 1998 and 1997 were as follows: 1998 1997 ---- ---- Deferred tax assets: AMT credit carryforward ................ $ 311,931 $ 293,789 State income taxes ..................... 2,403 26,068 Deferred compensation .................. 17,014 13,370 Geological and geophysical costs ....... 645,680 637,371 Accrued interest ....................... 660,319 433,750 Foreign tax credit carryforward ........ 699,908 501,257 Statutory depletion carryforward ....... 82,287 -- Equity loss and impairment of investment in Symskaya Exploration, Inc ......... 2,781,918 2,687,806 Net operating loss ..................... 2,271,216 -- --------- --------- 7,472,676 4,593,411 Valuation allowance .................... (699,908) (501,257) --------- --------- Total deferred tax asset ............... 6,772,768 4,092,154 Deferred tax liabilities: Deferred income ........................ 39,402 95,465 Property and equipment ................. 8,321,804 8,802,389 Pipeline partnership ................... 34,845 27,332 --------- --------- Total deferred tax liability ........... 8,396,051 8,925,186 --------- --------- Net deferred tax liability ............... $ 1,623,283 $ 4,833,032 ========= ========= The net deferred tax liability as of December 31, 1998 and 1997 is reflected in the balance sheet as follows: Current deferred tax asset ............... $ (19,417) $ (18,934) Long-term deferred tax liability ......... 1,642,700 4,851,966 --------- --------- $ 1,623,283 $4,833,032 ========= ========= Continued EQUITY OIL COMPANY NOTES TO FINANCIAL STATEMENTS, Continued 3. Income Taxes, Continued: The provision for (benefit from) income taxes differs from the amount that would be provided by applying the statutory U.S. Federal income tax rate to the income (loss) before income taxes for the following reasons:
1998 1997 1996 ----------- ----------- ----------- Federal statutory tax expense (benefit) . $(2,970,461) $ 13,058 $(2,770,765) Increase (reduction) in taxes resulting from: State taxes (net of federal benefit) .......................... (255,742) (5,323) (198,849) Canadian taxes (net of foreign tax credits) .................... 208,046 113,882 (107,549) Excess allowable percentage depletion ......................... (54,059) (162,297) (171,724) Investment tax and other credits ... -- (84,136) (124,933) Taxes due from Canadian audit ...... 150,450 374,379 -- Unrecognized capital loss related to impairment of investment in Symskaya Exploration, Inc. ... -- -- 727,157 ----------- ----------- ----------- Provision for (benefit from) income taxes $(2,921,766) $ 249,563 $(2,646,663) =========== =========== ===========
At December 31, 1998, the Company had approximately $312,000 of alternative minimum tax credit carryforwards which can be carried forward indefinitely, and approximately $700,000 of foreign tax credit carryforwards which begin to expire in 2001. In addition, the Company has approximately $6,150,000 of net operating loss carryforwards which expire in 2018. 4. Stock-Based Compensation Plan: At December 31, 1998, the Company had one stock-based compensation plan, which is described below. The Company applies APB Opinion No. 25 and related Interpretations in accounting for its plan. Accordingly, no compensation cost has been recognized for options granted to employees under its fixed stock option plan. Had compensation cost for the Company's stock-based compensation plan been determined based on the fair value at the grant dates consistent with the method of SFAS No. 123, the Company's net loss and loss per share would have been increased to the pro forma amounts indicated below: Continued EQUITY OIL COMPANY NOTES TO FINANCIAL STATEMENTS, Continued 4. Stock-Based Compensation Plan, Continued:
1998 1997 1996 ---- ---- ---- Net loss As reported $(5,814,884) $(211,156) $(5,502,646) Pro forma $(5,991,191) $(336,511) $(5,635,133) Net loss per share As reported $(.46) $(.02) $(.43) Pro forma $(.47) $(.03) $(.44)
Note: Basic and diluted loss per share are the same. Under the 1993 Equity Oil Company Incentive Stock Option Plan, the Company may grant options to its employees for up to 1.4 million shares of common stock. The options may take the form of incentive stock options, non-qualified stock options, and non-qualified stock options with tandem stock appreciation rights. The exercise price of each option equals the market price of the Company's stock on the date of grant, and an option's maximum term is 10 years. Options are granted from time to time at the discretion of the Board of Directors, and vest over periods of one to five years from the grant date. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1998, 1997 and 1996 respectively: expected volatility of 138, 50 and 67 percent, risk-free interest rates of 5.5, 6.3 and 5.4 percent; expected life of 5 years and dividend yield of zero for all three years. Continued EQUITY OIL COMPANY NOTES TO FINANCIAL STATEMENTS, Continued 4. Stock-Based Compensation Plan, Continued:
1998 1997 1996 ---------------------- ---------------------- ---------------------- Shares Weighted-Average Shares Weighted-Average Shares Weighted-Average Fixed Options (000) Exercise Price (000) Exercise Price (000) Exercise Price - ------------- ----- -------------- ----- -------------- ----- -------------- Outstanding at beginning of year 1,141 $4.33 1,076 $4.42 904 $4.22 Granted 150 2.50 121 3.56 222 5.13 Exercised - - - - (39) 3.94 Forfeited (88) 3.87 (56) 4.37 (11) 4.38 ------- ------- ------ Outstanding at end of year 1,203 4.14 1,141 4.33 1,076 4.42 ====== ====== ====== Options exercisable at year-end 900 880 775 ======= ======= ===== Weighted-average fair value of options granted during the year $2.21 $1.56 $3.06
The following table summarizes information about fixed stock options outstanding at December 31, 1998:
Options Outstanding Options Exercisable ------------------- ------------------- Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average Exercise Prices at 12/31/98 Contractual Life Exercise Price at 12/31/98 Exercise Price $2.50 to $3.56 353,000 7.54 years $3.11 146,200 $3.56 $3.63 to $4.00 281,000 4.03 $3.86 263,400 $3.88 $4.22 to $5.00 283,000 4.69 $4.51 268,600 $4.53 $5.13 to $5.13 209,500 7.15 $5.13 145,900 $5.13 $5.50 to $6.00 76,000 1.62 $5.77 76,000 $5.77 ----------- ---- ----- --------- ----- 1,202,500 5.61 $4.14 900,100 $4.38 ========= ==== ===== ======= =====
5. Geographic Segment Information: During 1998, the Company adopted Statement of Financial Accounting Standards ("FAS") 131, Disclosure about Segments of an Enterprise and Related Information. FAS 131 supersedes FAS 14, Financial Reporting for Segments of a Business Enterprise. The adoption of FAS 131 did not affect the Company's results of operations or financial position. The Company operates in the exploration and production segment of the oil and gas industry. The Company's operations are located in the following geographical areas.
Revenues Long-lived Assets for the years ended December 31, as of December 31, ---------------------------------------- ------------------------------- 1998 1997 1996 1998 1997 1996 ----------- ----------- ----------- ----------- ---------- ----------- United States $11,199,836 $14,150,670 $13,508,077 $ 95,009,887 $104,094,883 $ 97,135,423 Canada 1,521,040 2,306,378 2,607,048 9,397,928 9,277,008 9,011,722 ----------- ----------- ----------- ------------ ----------- ----------- Total $12,720,876 $16,457,048 $16,115,125 $104,407,815 $113,371,891 $106,147,145 =========== =========== =========== ============ ============ ===========
Continued EQUITY OIL COMPANY NOTES TO FINANCIAL STATEMENTS, Continued 5. Geographic Segment Information, Continued: Revenue from a major U.S. oil company accounted for approximately 32 percent of total revenues in 1998, 38 percent of total revenues in 1997 and 45 percent of total revenues in 1996. The Company believes this purchaser could be replaced, if necessary, without a loss in revenue. 6. Symskaya Exploration: Symskaya Exploration, Incorporated, a company in the development stage and a Texas corporation (Symskaya), was formed on November 25, 1991, and is engaged in oil and gas exploration in Russia. Symskaya holds a Combined License (License) which grants it the exclusive right to explore, develop and produce hydrocarbons on a contract area totaling approximately 1,100,000 acres in the Yenisysk District of the Krasnoyarsk Krai in the Russian Federation. The License has a primary term of 25 years from November 15, 1993. The work to be performed and the obligations and rights of Symskaya are set forth in the License and a Production Sharing Agreement (PSA) which is an integral part of the License. Under the License and PSA, Symskaya will provide funding for all exploration and development and will recover these costs from 80% of hydrocarbon production after payment of an 8% royalty. The remaining 20% of any hydrocarbon production, net of royalty, will be shared by Symskaya and the Russian government based on the rate of production. As of December 31, 1998, the Symskaya area had not received approval by the Russian federal government as a production sharing area. Minimum expenditures required under the License and PSA total $12,000,000 during the first five years of the License term, which began on November 15, 1993. As of December 31, 1998, Symskaya had satisfied all of the minimum expenditures required. Symskaya is owned 50% each by Equity Oil Company (Equity) and Leucadia National Corporation, (Leucadia). Leucadia acquired 50% of the stock of Symskaya effective January 1, 1994, in exchange for their commitment to spend up to $6,000,000, in an amount equal to that spent by Equity, towards the Symskaya project through the drilling, completion and/or plugging and abandonment of the initial test well, the Lemok #1. Pursuant to a Shareholders' Agreement, Leucadia was not required to pay any part of the amounts previously advanced by Equity under a Loan Agreement with Symskaya, with the exception of one-half (1/2) of the interest on a $1,740,519 loan between Equity and Symskaya. The loan reflects the initial investment by Equity in Symskaya prior to Leucadia's ownership. Continued EQUITY OIL COMPANY NOTES TO FINANCIAL STATEMENTS, Continued 6. Symskaya Exploration, Continued: Amounts advanced by Equity and Leucadia after January 1, 1994 are treated as interest-bearing notes payable or equity, as mutually agreed upon by the respective companies. The Shareholder Agreement with Leucadia also requires that Leucadia share equally in the payment of the one (1%) percent royalty obligation in favor of Coastline Exploration, Inc. on future revenues from the Symskaya project. The Company's President serves on Leucadia's Board of Directors. The Company's investment in Symskaya is being accounted for using the equity method of accounting. In 1996, Symskaya plugged and abandoned the Lemok #1 well, and charged the drilling costs of the well to expense. Due to the uncertainty relating to Symskaya's obtaining additional outside financing and proceeding with development of the License area, all other capitalized costs on the Company's balance sheet were also written off, resulting in a total charge to expense in 1996 of $9,204,394. Subsequent to the plugging of the Lemok #1 well, the Company and Leucadia agreed to suspend interest payments on Symskaya's note with the Company. The Company has no current plans to fund future exploratory drilling by Symskaya. The Company's 50% share of Symskaya's net loss in 1998 and 1997 was $446,758 and $356,661, respectively. Summarized financial information concerning Symskaya is as follows: As of As of December 31, December 31, 1998 1997 ------------ ------------ Current assets ............................ $ 84,614 $ 87,695 Non-current assets ........................ 6,195,471 6,053,629 Total assets .............................. 6,280,085 6,141,324 Current liabilities ....................... -- 13,699 Non-current liabilities ................... 15,811,910 14,242,094 Accumulated deficit ....................... (14,352,655) (12,776,251) Total liabilities and stockholders' deficit $ 6,280,085 $ 6,141,324 For the year For the year Ended Ended December 31, December 31, 1998 1997 ------------ ----------- Gross revenues ............................. $ 13,867 $ 14,217 Net loss ................................... $(1,576,404) $ (1,673,926) Continued EQUITY OIL COMPANY NOTES TO FINANCIAL STATEMENTS, Continued 7. Note Payable: In March of 1995, the Company obtained a $20 million Borrowing Base Credit Facility (the Facility), with a commitment of $17 million as of December 31, 1998. The terms of the Facility call for interest payments only, at the lower of prime or LIBOR plus 2%, until June 30, 2001, at which time it converts to a 4 year term note. An unused commitment fee of 3/8% will be charged to the Company based on the average daily unused portion of the Facility. The Facility is collateralized by all assets of the Company. As of December 31, 1998, the outstanding balance under the Facility was $16,500,000 at an average interest rate of 7.26%. Future maturities on the Facility as of December 31, 1998 are as follows: 1999 $ - 2000 - 2001 2,062,500 2002 4,125,000 2003 4,125,000 2004 4,125,000 2005 2,062,500 --------- $16,500,000 The Facility contains provisions relating to maintenance of certain financial ratios, as well as restrictions governing its use. Under covenants contained in the Facility, the Company has agreed, among other things, not to advance any proceeds from the Facility to Symskaya, not to pay dividends, and not to merge with or acquire any other company without the prior approval of the bank. Primarily as a result of the $4 million property impairment charge, as of December 31, 1998 the Company was in violation of the "Tangible Net Worth" covenant contained in the Facility. In March 1999, the Company's bank amended the Facility to remedy the covenant violation. The Company is now in compliance with all covenants in the Facility. Facility fees, which are reflected as other assets in the accompanying Balance Sheets, are being amortized on a straight line basis over 60 months. Continued EQUITY OIL COMPANY NOTES TO FINANCIAL STATEMENTS, Continued 8. Quarterly Financial Data (Unaudited): Quarterly financial information for the years ended December 31, 1998 and 1997 is as follows: 1998 Quarter Ended: .. December 31 September 30 June 30 March 31 ----------- ----------- ---------- ---------- Net revenues ......... $ 3,093,918 $ 3,113,521 $ 3,024,311 $ 3,508,460 Gross margin ......... 123,384 301,843 442,379 609,530 Net loss ............. (3,028,324) (1,250,826) (893,728) (642,006) Basic and diluted loss per common share .. $ (.24) $ (.10) $ (.07) $ (.05) =========== =========== =========== =========== 1997 Quarter Ended: . December 31 September 30 June 30 March 31 ----------- ----------- ---------- ----------- Net revenues ........ $ 4,038,890 $ 3,833,655 $ 3,978,440 $ 4,917,278 Gross margin ........ 1,242,793 1,252,468 1,382,273 2,274,510 Net income (loss) ... (1,104,583) (48,158) 161,210 780,375 Basic and diluted income (loss) per common share $ (.09) $ (.00) $ .01 $ .06 =========== =========== =========== =========== Continued EQUITY OIL COMPANY NOTES TO FINANCIAL STATEMENTS, Continued 9. Disclosures About Oil and Gas Producing Activities:
Capitalized Costs: United States Canada Russia Total 1998: Unproved oil and gas properties ........................................... $ 2,969,999 $ 33,224 $ 3,003,223 Proved oil and gas properties ........................................... 91,206,116 9,364,704 100,570,820 ------------- ------------- ------------- 94,176,115 9,397,928 103,574,043 Accumulated depreciation, depletion and amortization ........................... (53,212,301) (7,453,705) (60,666,006) ------------- ------------- ------------- Net capitalized costs .................................. $ 40,963,814 $ 1,944,223 $ 42,908,037 ============= ============= ============= Symskaya, equity method (see Note 6) ......................................... $ -- ======= 1997: Unproved oil and gas properties ........................................... $ 3,471,138 $ 33,224 $ 3,504,362 Proved oil and gas properties ........................................... 99,863,977 9,243,784 109,107,761 ------------- ------------- ------------- 103,335,115 9,277,008 112,612,123 Accumulated depreciation, depletion and amortization ........................... (58,065,779) (6,292,480) (64,358,259) ------------- ------------- ------------- Net capitalized costs .................................. $ 45,269,336 $ 2,984,528 $ 48,253,864 ============= ============= ============= Symskaya, equity method (see Note 6) ......................................... $ -- ======= 1996: Unproved oil and gas properties ........................................... $ 2,532,503 $ 33,224 $ 2,565,727 Proved oil and gas properties ........................................... 93,837,818 8,978,498 102,816,316 ------------- ------------- ------------- 96,370,321 9,011,722 105,382,043 Accumulated depreciation, depletion and amortization ........................... (55,259,210) (5,996,677) (61,255,887) ------------- ------------- ------------- Net capitalized costs .................................. $ 41,111,111 $ 3,015,045 $ 44,126,156 ============= ============= ============= Symskaya, equity method (see Note 6) ......................................... $ -- =======
Continued EQUITY OIL COMPANY NOTES TO FINANCIAL STATEMENTS, Continued 9. Disclosures About Oil and Gas Producing Activities, Continued: Costs Incurred in Oil and Gas Property Acquisition, Exploration and Development Activities: 1998: United States Canada Russia Total Acquisition of properties: Proved ................. $ -- -- -- $ -- Unproved ............... 124,066 -- -- 124,066 Exploration costs ........ 4,423,128 $ 27,529 -- 4,450,657 Development costs ........ 2,270,849 267,392 -- 2,538,241 Symskaya, equity method .. -- -- $ 446,758 446,758 1997: Acquisition of properties: Proved ................. $3,226,494 -- -- $3,226,494 Unproved ............... 1,227,117 -- -- 1,227,117 Exploration costs ........ 4,468,531 $ 25,103 -- 4,493,634 Development costs ........ 4,169,802 43,125 -- 4,212,927 Symskaya, equity method .. -- -- $ 356,661 356,661 1996: Acquisition of properties: Proved ................. $2,038,244 -- -- $2,038,244 Unproved ............... 474,757 -- -- 474,757 Exploration costs ........ 4,492,876 $ 30,838 -- 4,523,714 Development costs ........ 3,287,637 43,728 -- 3,331,365 Symskaya, equity method .. -- -- $3,043,952 3,043,952 Continued EQUITY OIL COMPANY NOTES TO FINANCIAL STATEMENTS, Continued 9. Disclosures About Oil and Gas Producing Activities, Continued:
Results of Operations (Unaudited): 1998: United States Canada Russia Total Oil and gas sales ............................. $ 11,199,836 $ 1,521,040 $ 12,720,876 Production costs .............................. (5,665,047) (568,908) (6,233,955) Exploration expenses .......................... (2,954,780) (22,212) (2,976,992) Depreciation, depletion and amortization ...... (4,720,913) (308,206) (5,029,119) Impairment of proved oil and gas properties .................... (4,015,158) (4,015,158) Equity loss in Symskaya Exploration, Inc. ..... $ (446,758) (446,758) ------------ ------------ ------------ ------------ (6,156,062) 621,714 (446,758) (5,981,106) Imputed income tax benefit (expense) .......... 2,308,523 (276,663) 167,534 2,199,394 ------------ ------------ ------------ ------------ Results of operations from producing activities $ (3,847,539) $ 345,051 $ (279,224) $ (3,781,712) ============ ============ ============ ============ 1997: Oil and gas sales ............................. $ 14,150,670 $ 2,306,378 $ 16,457,048 Production costs .............................. (5,300,909) (639,899) (5,940,808) Exploration expenses .......................... (3,718,531) (21,086) (3,739,617) Depreciation, depletion and amortization ...... (4,385,015) (290,398) (4,675,413) Impairment of proved oil and gas properties .................... (411,894) (411,894) Equity loss in Symskaya Exploration, Inc. ..... $ (356,661) (356,661) ------------ ------------ ------------ ------------ 334,321 1,354,995 (356,661) 1,332,655 Imputed income tax benefit (expense) .......... 77,745 (245,790) 133,748 (34,297) ------------ ------------ ------------ ------------ Results of operations from producing activities $ 412,066 $ 1,109,205 $ (222,913) $ 1,298,358 ============ ============ ============ ============ 1996: Oil and gas sales ............................. $ 13,508,077 $ 2,607,048 $ 16,115,125 Production costs .............................. (4,976,633) (935,495) (5,912,128) Exploration expenses .......................... (3,153,897) (27,936) (3,181,833) Depreciation, depletion and amortization ...... (3,838,202) (454,035) (4,292,237) Impairment of proved oil and gas properties .................... (237,279) (237,279) Equity loss in Symskaya Exploration, Inc. ..... $ (9,204,394) (9,204,394) ------------ ------------ ------------ ------------ 1,302,066 1,189,582 (9,204,394) (6,712,746) Imputed income tax benefit (expense) .......... (239,514) (258,048) 3,283,105 2,785,543 ------------ ------------ ------------ ------------ Results of operations from producing activities $ 1,062,552 $ 931,534 $ (5,921,289) $ (3,927,203) ============ ============ ============ ============
The imputed income tax benefit (expense) is hypothetical and determined without regard to the Company's deduction for general and administrative and interest expense. Continued EQUITY OIL COMPANY NOTES TO FINANCIAL STATEMENTS, Continued 9. Disclosures About Oil and Gas Producing Activities, Continued: Reserves and Future Net Cash Flows (Unaudited): Estimates of reserve quantities and related future net cash flows are calculated using unescalated year-end oil and gas prices and operating costs, and may be subject to substantial fluctuations based on the prices in effect at the end of each year. Reserve revisions occur when the economic limit of a property is lengthened or shortened due to changes in commodity pricing. The following table sets forth the weighted average prices used in calculating estimated reserve quantities and future net cash flows at the end of 1998, 1997 and 1996:
United States Canada Total Oil Gas Oil Gas Oil Gas December 31, 1998 $10.97 $2.06 $9.92 $1.49 $10.80 $1.95 December 31, 1997 $15.49 $2.13 $12.35 $1.51 $14.99 $2.03 December 31, 1996 $24.80 $3.28 $22.26 $1.52 $24.36 $2.84
Estimates of Proved Oil and Gas Reserves(Unaudited): The following tables present the Company's estimates of its proved oil and gas reserves. The Company emphasizes that reserve estimates are inherently imprecise and that estimates of new discoveries are more imprecise than those of producing oil and gas properties. Accordingly, the estimates are expected to change as future information becomes available. Reserve estimates are prepared by the Company and audited by the Company's independent petroleum reservoir engineers, Fred S. Reynolds and Associates, who have issued a report expressing their opinion that the reserve information in the following tables complies with the applicable rules promulgated by the Securities and Exchange Commission and the Financial Accounting Standards Board. The volumes presented on the following pages are in thousands of barrels for oil and thousands of mcf for gas. Continued EQUITY OIL COMPANY NOTES TO FINANCIAL STATEMENTS, Continued 9. Estimates of Proved Oil and Gas Reserves, Continued:
Reserves and Future Net Cash Flows (Unaudited): United States Canada Total December 31, 1998: Oil Gas Oil Gas Oil Gas - -------------------------------------------------------- -------- -------- -------- -------- -------- -------- Proved developed and undeveloped reserves: Beginning of year .................................... 7,168 15,457 1,252 3,452 8,420 18,909 Revisions of previous estimates ...................... (1,817) (459) (79) 494 (1,896) 35 Extensions and discoveries ........................... 361 2,505 -- -- 361 2,505 Production ........................................... (595) (2,092) (97) (347) (692) (2,439) -------- -------- -------- -------- -------- -------- End of year .......................................... 5,117 15,411 1,076 3,599 6,193 19,010 ======== ======== ======== ======== ======== ======== Proved developed reserves: Beginning of year .................................... 6,972 11,932 1,252 3,452 8,224 15,384 End of year .......................................... 4,870 12,683 1,076 3,599 5,946 16,282 United States Canada Total December 31, 1997: Oil Gas Oil Gas Oil Gas - -------------------------------------------------------- -------- -------- -------- -------- -------- -------- Proved developed and undeveloped reserves: Beginning of year .................................... 7,252 14,910 1,117 2,707 8,369 17,617 Revisions of previous estimates ...................... (806) (694) 251 1,194 (555) 500 Acquisitions of minerals in place .................... 1,085 438 -- -- 1,085 438 Extensions and discoveries ........................... 202 2,423 -- -- 202 2,423 Sales of minerals in place ........................... (45) -- -- -- (45) -- Production ........................................... (520) (1,620) (116) (449) (636) (2,069) -------- -------- -------- -------- -------- -------- End of year .......................................... 7,168 15,457 1,252 3,452 8,420 18,909 ======== ======== ======== ======== ======== ======== Proved developed reserves: Beginning of year .................................... 7,219 11,133 1,117 2,707 8,336 13,840 End of year .......................................... 6,972 11,932 1,252 3,452 8,224 15,384 United States Canada Total December 31, 1996: Oil Gas Oil Gas Oil Gas - -------------------------------------------------------- -------- -------- -------- -------- -------- -------- Proved developed and undeveloped reserves: Beginning of year .................................... 6,563 14,819 1,187 3,205 7,750 18,024 Revisions of previous estimates ...................... 176 (234) 49 104 225 (130) Acquisition of minerals in place ..................... 949 38 -- -- 949 38 Sales of minerals in place ........................... (6) (214) -- (54) (6) (268) Extensions and discoveries ........................... 88 1,827 -- 40 88 1,867 Production ........................................... (518) (1,326) (119) (588) (637) (1,914) -------- -------- -------- -------- -------- -------- End of year .......................................... 7,252 14,910 1,117 2,707 8,369 17,617 ======== ======== ======== ======== ======== ======== Proved developed reserves: Beginning of year .................................... 6,527 11,238 1,139 3,068 7,666 14,306 End of year .......................................... 7,219 11,133 1,117 2,707 8,336 13,840
Continued EQUITY OIL COMPANY NOTES TO FINANCIAL STATEMENTS, Continued 9. Disclosures About Oil and Gas Producing Activities, Continued:
Standardized Measure of Discounted Future Net Cash Flows and Changes Therein Relating to Proved Oil and Gas Reserves (Unaudited): Thousands of Dollars 1998 United States Canada Total - ---- ------------- ------ ----- Future cash inflows ....................................... $ 88,549 $ 15,442 $ 103,991 Future production and development costs ................... (54,825) (7,811) (62,636) --------- --------- --------- Future net cash flows before income taxes ................. 33,724 7,631 41,355 10% annual discount for estimated timing of cash flows .......................................... (13,176) (2,969) (16,145) --------- --------- --------- Standardized measure of discounted future net cash flows before income taxes ..................... 20,548 4,662 25,210 Future income taxes, net of 10% annual discount ........... (1,479) (929) (2,408) --------- --------- --------- Standardized measure of discounted future net cash flows ......................................... $ 19,069 $ 3,733 $ 22,802 ========= ========= ========= Thousands of Dollars 1997 United States Canada Total - ---- ------------- ------ ----- Future cash inflows ....................................... $ 149,066 $ 19,350 $ 168,416 Future production and development costs ................... (93,945) (8,470) (102,415) --------- --------- --------- Future net cash flows before income taxes ................. 55,121 10,880 66,001 10% annual discount for estimated timing of cash flows .......................................... (24,778) (3,814) (28,592) --------- --------- --------- Standardized measure of discounted future net cash flows before income taxes ..................... 30,343 7,066 37,409 Future income taxes, net of 10% annual discount ........... (6,071) (2,439) (8,510) --------- --------- --------- Standardized measure of discounted future net cash flows ......................................... $ 24,272 $ 4,627 $ 28,899 ========= ========= ========= Thousands of Dollars 1996 United States Canada Total - ---- ------------- ------ ----- Future cash inflows ....................................... $ 230,760 $ 28,073 $ 258,833 Future production and development costs ................... (98,696) (6,263) (104,959) --------- --------- --------- Future net cash flows before income taxes ................. 132,064 21,810 153,874 10% annual discount for estimated timing of cash flows .......................................... (64,955) (9,917) (74,872) --------- --------- --------- Standardized measure of discounted future net cash flows before income taxes ..................... 67,109 11,893 79,002 Future income taxes, net of 10% annual discount ........... (19,462) (4,804) (24,266) --------- --------- --------- Standardized measure of discounted future net cash flows ......................................... $ 47,647 $ 7,089 $ 54,736 ========= ========= =========
Continued EQUITY OIL COMPANY NOTES TO FINANCIAL STATEMENTS, Continued 9. Disclosures About Oil and Gas Producing Activities, Continued: Standardized Measure of Discounted Future Net Cash Flows and Changes Therein Relating to Proved Oil and Gas Reserves (Unaudited), Continued: Future net cash flows were computed using year-end prices and costs, and year-end statutory tax rates with consideration of future tax rates already legislated (adjusted for permanent differences that related to proved oil and gas reserves). Principal sources of change in the standardized measure of discounted future net cash flow are as follows: Thousands of Dollars 1998 1997 1996 Sales and transfers of oil and gas produced, net of production costs ................... $ (6,487) $(10,516) $(10,203) Net changes in prices and production costs ... (10,019) (45,280) 27,483 Extensions and discoveries, less related cost 2,098 1,639 2,374 Purchases of minerals in place ............... -- 3,787 7,174 Sales of minerals in place ................... -- (339) (116) Changes in estimated future development costs 2,630 (1,447) 938 Revisions of previous quantity estimates ..... (4,495) (1,573) 1,495 Accretion of discount ........................ 3,558 7,912 4,286 Net change in income taxes ................... 3,315 18,100 (12,045) Changes in production rates (timing) and other 3,303 1,880 2,903 -------- -------- -------- $ (6,097) $(25,837) $ 24,289 ======== ======== ======== ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES: None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF COMPANY The information contained under the headings Election of Directors and Continuing Directors and Executive Officers contained on pages 2 and 3 in the definitive proxy statement to be filed in connection with the Company's annual meeting on May 12, 1999 is incorporated herein by reference in answer to this item. ITEM 11. EXECUTIVE COMPENSATION The information contained under the heading Executive Compensation on pages 6 through 9 in the definitive proxy statement to be filed in connection with the Company's annual meeting on May 12, 1999 is incorporated herein by reference in answer to this item. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information contained under the headings Security Ownership of Management and Voting Securities & Principal Holders Thereof, contained on pages 4 and 11 in the definitive proxy statement to be filed in connection with the Company's annual meeting on May 12, 1999 is incorporated herein by reference in answer to this item. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K: (a) (1) Financial Statements: Page Report of Independent Accountants 16 Financial Statements: Balance Sheets as of December 31, 1998 and 1997 17 Statements of Operations for the years ended December 31, 1998, 1997 and 1996 18 Statements of Changes in Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996 19 Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 20 Notes to Financial Statements 21 (3) Exhibits 39 (3) (i) Restated Articles of Incorporation. Incorporated by reference from the annual report on Form 10-K for the year ended December 31, 1995. (ii) Amended By-Laws. Incorporated by reference from the annual report on Form 10- K for the year ended December 31, 1997. (10) Material Contracts. Change in Control Compensation Agreements for Paul M. Dougan, James B. Larson, and Clay Newton. Incorporated by ref- erence from the annual report on Form 10-K for the year ended December 31, 1997. (21) Subsidiaries. Incorporated by reference from the annual report on Form 10-K for the year ended December 31, 1995. (23) Consent of Experts. Consent of PricewaterhouseCoopers LLP regarding Form S-8 Registration. (b)Reports on Form 8-K None. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. EQUITY OIL COMPANY By Paul M. Dougan -------------- President Chief Executive Officer By Clay Newton ----------- Treasurer Chief Financial Officer Principal Accounting Officer Date: March 15, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Douglas W. Brandrup Joseph C. Bennett ------------------- ----------------- Director Director March 15, 1999 March 15, 1999 -------------- -------------- Date Date William D. Forster Philip J. Bernhisel ------------------ ------------------- Director Director March 15, 1999 March 15, 1999 -------------- -------------- Date Date Randolph G. Abood W. Durand Eppler ----------------- ---------------- Director Director March 15, 1999 March 15, 1999 -------------- -------------- Date Date William P. Hartl ---------------- Director March 15, 1999 -------------- Date EX-23 2 CONSENT OF INDEPENDENT ACCOUNTANTS 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 March 10, 1999, on our audits of the financial statements of Equity Oil Company as of December 31, 1998 and 1997, and for each of the three years in the period ended December 31, 1998, which report is included in this Annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP - ------------------------------ Signature Salt Lake City, Utah March 29, 1999 EX-27 3 FINANCIAL DATA SCHEDULE FOR 1998 FORM 10-K
5 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 444,476 0 2,696,160 0 0 3,770,554 104,407,815 61,191,368 47,271,168 2,142,917 0 0 0 12,794,040 3,714,493 47,271,168 12,720,876 13,177,983 0 20,616,572 0 0 1,298,061 (8,736,650) (2,921,766) (5,814,884) 0 0 0 (5,814,884) (.46) (.46)
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