-----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, LVihZZuidO/dxUfE2Np9Fh9MShR9Ks6/nC4Ps9Uol7jEbmh+evRJG28ZfTSK3L4n 8FZ6WnAc7AV/4gUAHN8lqg== 0000033325-00-000003.txt : 20000307 0000033325-00-000003.hdr.sgml : 20000307 ACCESSION NUMBER: 0000033325-00-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000302 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: 559597 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 1999 FORM 10K 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, 1999 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 February 28, 2000, 12,643,400 common shares were outstanding, and the aggregate market value of voting stock held by non-affiliates of the registrant was approximately $17,500,000. Documents Incorporated by Reference 1. Definitive proxy statement to be filed in connection with Issuer's Annual Stockholders' Meeting to be held on May 10, 2000 and more particularly the information contained on pages 2 through 6 are incorporated by reference into Part III of this report. Total Pages 50 PART I ITEM 1. BUSINESS GENERAL 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 eight 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 field offices in Cody, Wyoming and Vernal, Utah. The Company has 21 full-time employees. 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. All production activities of the Company are coordinated through the Company's field office in Cody, Wyoming. The office was opened on January 1, 2000, as a result of a property exchange in the Big Horn basin of Wyoming and Montana. Further information concerning the exchange can be found in ITEM 2. PROPERTIES, under the caption PRESENT ACTIVITY. BUSINESS STRATEGY 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 key to increasing production is 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. When conducting its exploration activities, the general 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. 2 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 the last five years, the Company has replaced a significant amount of its production through the purchase of producing properties. These purchases have, in turn, produced additional developmental and enhancement projects. The Company has conducted international exploration in Russia through its 50% ownership of Symskaya. Symskaya operations were significantly curtailed during 1999 and will be again curtailed in 2000. Further discussion of this venture and other Company activities is found in ITEM 2. PROPERTIES, under the caption PRESENT ACTIVITY. 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, 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 and the Canadian province of Alberta. During 1999, the Company sold all of its gas producing properties that were located in 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. 3 The Company periodically enters into hedging activities with a portion of its oil production which are intended to support its oil price at targeted levels, to manage the Company's exposure to oil price fluctuations, and to comply with the terms of its credit facility. Further discussion of the Company's hedging activities can be found in Footnote 1 to the financial statements. 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 70% 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 1999, 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. 4 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. 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 its 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, 1999. No estimates of reserves have been filed with or included in any report to any other federal agency during 1999. 5 PRODUCTION The following table sets forth the Company's production, average sales prices and average lifting costs by geographic area for 1999, 1998 and 1997:
1999 1998 1997 1999 1998 1997 Oil Oil Oil Gas Gas Gas Area (Bbls) (Bbls) (Bbls) (MMCF) (MMCF) (MMCF) Production Colorado 298,507 332,230 366,319 76 117 170 Texas 18,433 22,291 25,359 85 145 211 Montana 19,650 20,434 26,103 28 34 16 Utah 13,120 20,658 18,745 - - - Wyoming 130,453 131,943 76,190 601 733 660 North Dakota 96,068 67,906 7,007 55 31 3 California - - - 923 1,032 560 Other 4 5 442 - - - - --------------- ---------- ---------- ---------- --------- --------- --------- Total U.S. 576,235 595,467 520,165 1,768 2,092 1,620 Alberta 74,257 75,015 92,376 245 277 439 B.C. 11,898 21,352 23,371 20 69 10 - --------------- ---------- ---------- ---------- --------- --------- --------- Total Canada 86,155 96,367 115,747 265 346 449 Grand Total 662,390 691,834 635,912 2,033 2,438 2,069 =============== ========== ========== ========== ========= ========= ========= Average Price U.S. $17.44 $12.28 $19.49 $ 2.11 $1.95 $2.21 Canada $17.12 $11.43 $15.36 $ 1.57 $1.15 $1.34 - --------------- ---------- ---------- ---------- --------- --------- --------- Total $17.40 $12.16 $18.74 $ 2.04 $1.83 $2.02 =============== ========== ========== ========== ========= ========= ========= Lifting Costs U.S. $ 6.86 $ 6.11 $ 7.53 $ .83 $ .97 $ .85 Canada $ 4.87 $ 4.48 $ 4.15 $ .40 $ .40 $ .36 - --------------- ---------- ---------- ---------- --------- --------- --------- Total $ 6.60 $ 5.88 $ 6.92 $ .77 $ .89 $ .75 =============== ========== ========== ========== ========= ========= =========
6 PRODUCTIVE WELLS AND ACREAGE The location and quantity of Equity's productive wells and acreage as of December 31, 1999 are as follows: Productive Wells: Gross Net ------------------------------------------------------------------- Oil: United States 679 96.566 Canada 386 12.905 Gas: United States 64 19.273 Canada 9 1.604 ----- ------- Total Productive Wells 1,138 130.348 ===== ======= Developed Acreage United States 107,788 11,344 Canada 127,120 2,946 ------- ------ Total Developed Acreage 234,908 14,290 ======= ====== UNDEVELOPED LEASEHOLD ACREAGE The following table sets forth the Company's undeveloped oil and gas leasehold acreage as of December 31, 1999 by geographic area: Gross Net Area Acreage Acreage Colorado 19,369 11,978 Texas 1,280 586 Montana 30,001 2,967 Utah 7,950 880 Wyoming 42,413 22,359 California 15,503 4,074 North Dakota 15,105 8,041 ------- ------ Total U.S. 131,621 50,885 Alberta 20,697 3,571 ------- ------ Total Canada 20,697 3,571 ------- ------ Grand Total 152,318 54,456 ======= ====== 7 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 1999, the Company participated in the drilling of 10 gross wells. Of this total, 5 were completed as producing oil and gas wells and 5 were plugged and abandoned as dry holes. Gross exploratory wells drilled: Status 1999 1998 1997 - ----------------------- ------ ---- ---- ---- United States Productive 5 6 13 Dry 5 5 12 Canada Productive - - - Dry - - - Gross development wells drilled: - ----------------------- United States Productive - 1 5 Dry - - - Canada Productive - - - Dry - - - Net exploratory wells drilled: Status 1999 1998 1997 - ----------------------- ------ ---- ---- ---- United States Productive 1.74 2.18 4.21 Dry 2.25 2.10 5.99 Canada Productive - - - Dry - - - Net development wells drilled: - ----------------------- United States Productive - .40 1.74 Dry - - - Canada Productive - - - Dry - - - 8 PRESENT ACTIVITY ACQUISITIONS/DIVESTITURES: In December of 1999, the Company acquired the assets of a private Rocky Mountain production company, that included the operating rights and additional working interests in 14 fields in the Big Horn Basin of Wyoming and Montana where Equity already held working interests. After the acquisition, the Company's working interests in the fields range from 21% to 100%. This acquisition, as well as the separate purchase of a 48% operated working interest in a waterflood adjacent to existing production in central Montana, was accomplished through the exchange of non-operated working interests in other properties previously acquired by Equity, plus cash consideration of $585,000. As a result of the acquisitions, Equity's proved reserve position increased by 314,000 barrels of oil equivalent. The strategic significance of the acquisition is that Equity is now the operator of all of the wells included in the transaction, and has opened a new field office in Cody, Wyoming, which is staffed by a drilling and production manager and seven employees. Furthermore, Equity now operates 50% of its non-Rangely Weber Sand Unit oil production. The Big Horn Basin properties have significant potential for the development of additional reserves, and the Company now has the operational control required to begin exploitation of these fields through drilling, workovers and operating cost reductions. The cash component of the Big Horn Basin acquisition was funded principally by the sale of minor non-operated working interests in oil and gas properties in Texas. The Company will continue to evaluate all of our properties outside our core areas of interest as potential candidates for divestiture. EXPLORATION In 1999, Equity participated in ten exploratory wells, all in California, five of which were completed as gas wells. Of the ten wells, eight wells were drilled on 3D surveys in the Sacramento Basin, and of those, five were completed as gas wells, for a completion percentage of 62.5%. Five of the eight wells were operated by Equity. The other two California wells were drilled on the Sequoia 3D survey in the San Joaquin Basin, and neither well was successful. In 2000, the Company's exploration drilling activity will again be focused in California. Present plans call for the drilling of eleven wells on Sacramento Basin 3D projects, five of which will be operated by Equity. One additional well will be drilled on the Sequoia 3D project. 9 Equity will also initiate two new 3D seismic surveys in 2000, one in the Sacramento Basin, and one in the Williston Basin of North Dakota. The Rancho Colusa 3D survey, located approximately five miles north of the Company's Davis Ranch Survey in the Sacramento Basin will cover 25 square miles and will be operated by Equity. Equity's intent is to sell up to a 50% interest in the project to industry partners. One of the eleven wells scheduled to be drilled in the Sacramento Basin this year is expected to be drilled on this survey. The second Equity operated 3D survey is a 20 square mile survey to be conducted on acreage that includes the prolific 1998 discovery, the Beaver Creek #24-15. This well had cumulative gross production through year-end 1999 in excess of 560,000 barrels, and continues to flow at a rate of 1,100 barrels of oil and 600 MCF per day. The well has been assigned gross recoverable reserves of 2 million barrels. Equity has a 32.5% working interest in the well and Westport Oil and Gas has the remaining interest. The 3D survey area includes the Company's 100% owned 3,520 acre Northwest Beaver Creek Prospect. As with the Rancho Colusa survey, the Company is marketing a 50% interest in the Norwest Beaver Creek Prospect to industry partners. DEVELOPMENT/EXPLOITATION In addition to the exploratory wells drilled, three of the Company's producing wells were successfully recompleted or reworked during the year. The reworked wells included the Beaver Creek #24- 15 well, where gross oil production increased from 800 barrels per day to its current level of 1,100 barrels per day following an acid stimulation. The Company also recompleted two wells at its Merlin project in the Sacramento Basin. Gross gas production from the #1-15 Henning and #1-22 Otto Lohse wells increased from 500 Mcf per day to 3,000 Mcf per day. The Company has a 50% working interest in each well. The Merlin survey has produced in excess of 1 billion cubic feet of gas, with current field production of 3,200 Mcf per day from three wells. The operational control of the Big Horn Basin properties acquired in 1999 should provide development opportunities in 2000 and beyond. The technical evaluation of the opportunities associated with the 14 acquired fields is underway, and the Company expects to initiate the first steps of a coordinated program of development and exploitation by mid-year. 10 SYMSKAYA EXPLORATION While awaiting the results from the Averinskaya well being drilled immediately south of Symskaya's license area by the Geological Committee of the Krasnoyarsk Krai, Equity continues to hold its 50% ownership position in Symskaya Exploration Inc. The Averinskaya well has been drilled to a depth of 3,500 meters to test the same formations that were tested in Symskaya's exploratory well, the Lemok #1, and may be deepened to 4,500 meters. Symskaya was issued a 25 year, 1 million acre License in 1993 to explore for, develop and produce hydrocarbons in the Krasnoyarsk Krai in Russia. We believe that it continues to be in the best interest of our shareholders for Symskaya to hold the License at minimum cost. Barring major developments from the Averinskaya 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 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 in 1998 and 1999, 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. 11 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 1999 and 1998 are as follows: Quarter High Low - ------- ---- --- 1999 - 4th 1 17/32 1 3rd 1 1/2 1 1/8 2nd 1 5/8 1 1st 1 9/16 29/32 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 The approximate number of registered stockholders of the Company as of February 24, 2000 is 1,500. No unregistered equity securities of the registrant have been sold during the period covered by this report. 12 ITEM 6. SELECTED FINANCIAL DATA
1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Oil and Gas Sales ........ $ 15,434,537 $ 12,720,876 $ 16,457,048 $ 16,115,125 $ 12,259,739 Other Income ............. 334,980 377,282 1,023,037 312,759 457,837 Lease Operating Costs .................... 5,948,055 6,233,955 5,940,808 5,912,128 5,093,782 Depreciation, Depletion and Amortization ......... 4,072,278 5,029,119 4,675,411 4,292,237 3,843,442 Impairment of Proved Oil and Gas Properties ........... 313,751 4,015,158 411,894 237,279 2,471,146 Equity Loss and Impairment of Investment in Symskaya Exploration, Inc. ........ 169,933 446,758 356,661 9,204,394 -0- 3-D Seismic .............. 35,200 431,075 626,525 757,964 237,604 Exploration Expense .................. 1,566,521 2,383,163 3,026,550 2,336,405 1,633,612 General and Administrative ........... 1,743,590 1,914,590 2,048,194 2,030,811 1,908,778 Net Income (loss) ........ 403,521 (5,814,884) (211,156) (5,502,646) (1,254,812) Basic and Diluted Net Income (Loss) Per Common Share ......... $ .03 $ (.46) $ (.02) $ (.43) $ (.10) ============ ============ ============ ============ ============ Total Assets ............. $ 46,117,335 $ 47,271,168 $ 53,541,639 $ 50,181,437 $ 53,947,050 Long-Term Debt ........... $ 15,000,000 $ 16,500,000 $ 13,978,830 $ 8,878,830 $ 4,918,830
13 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. 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 1999, 1998 and 1997 (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 Oil(MBBLs) Gas(MMCF) BOE* Oil Gas values per BOE ---------- --------- ---- --- --- ------ ------- 12/31/99 9,293 16,331 12,015 $22.99 $1.93 $63,366 $5.27 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 * - gas converted at 6,000 Mcf per barrel.
14 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 changing oil prices on the volume of oil reserves (shown in thousands of barrels): Year ended December 31, 1999 1998 1997 ---- ---- ---- Proved oil reserves (000's): Beginning of year 6,193 8,420 8,369 Revisions of previous estimates 3,442 (1,896) (555) Extensions and discoveries 6 361 202 Acquisition of minerals in place 563 - 1,085 Sales of minerals in place (249) - (45) Production (662) (692) (636) ----- ----- ----- End of year 9,293 6,193 8,420 ===== ===== ===== The revisions of 3,442,000 and (1,896,000) barrels in 1999 and 1998, respectively, are primarily price-related. Excluding revisions to previous estimates, the Company's 1999 drilling and acquisition activities, which were curtailed for much of the year, added 663,000 barrels of oil equivalent reserves, 66% of 1999 total oil and gas production. 1998 drilling and acquisition activities, which were also reduced in that year from prior years, added 779,000 barrels of oil equivalent to the Company's proved reserve base, replacing 71% of 1998 production. The Company did not make any producing property acquisitions in 1998. In 1997, the Company added 1.76 million barrels of oil equivalent, equal to 179% of 1997 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. Statement of Financial Accounting Standards 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 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 1999, the Company recorded an impairment of proved oil and gas properties of $313,751 ($196,094 net of tax) associated with certain properties that experienced increased operating costs, declining production and other technical problems that reduced their economic reserves. Primarily as a result of depressed year-end oil prices, the Company recorded proved property impairment charges of $4,015,158 in 1998. During 1997, the Company recorded proved property impairment charges of $411,894. 15 RESULTS OF OPERATIONS COMPARISON OF 1999 WITH 1998 OIL AND GAS PRODUCTION AND SALES. Oil and gas sales increased more than 20% in 1999 over 1998 levels. Higher oil and gas prices were offset somewhat by decreases in both oil and gas production. Total revenues increased 20% from 1998 to 1999. Oil production decreased 4% in 1999, as a number of the Company's high-cost, low-margin oil wells were shut-in during the first several months of the year. Oil production was 662,000 barrels, compared to 692,000 barrels in 1998. Gas production decreased 17% to 2.0 Bcf in 1999 from 2.4 Bcf in 1998. Gas production declined primarily as a result of reduced drilling in California during 1998 and 1999, as well as the sale of the Company's Texas gas properties during the fourth quarter of 1999. While average year-end oil prices in 1999 were more than double those of year-end 1998, the average price received for the entire year increased a more modest 43%. Higher second half prices were offset by abnormally low prices in the first half of the year. The Company's average oil price for the full year of 1999 was $17.40 compared to $12.16 per barrel realized during 1998. Gas prices were also higher, averaging $2.04 per Mcf in 1999 compared to $1.83 per Mcf in 1998. LEASE OPERATING COSTS. Lease operating costs decreased 5% over the prior year. Higher per unit costs were offset by reduced volumes. Per unit costs rose as the Company recorded higher value-based production taxes associated with higher oil prices. DEPRECIATION, DEPLETION AND AMORTIZATION (DD&A).DD&A per unit charges decreased from $4.58 per BOE in 1998 to $4.07 per BOE in 1999. The primary reason for the per unit decrease was the elimination of approximately $4 million from the Company's depletable base through a property impairment charge in the fourth quarter of 1998. In addition, higher oil prices enabled the Company to record positive reserve revisions, which in turn decreased DD&A rates for many of the Company's oil properties. IMPAIRMENT OF PROVED OIL AND GAS PROPERTIES. As discussed previously, included in the statement of operations for 1999 and 1998 are non-cash charges for the impairment of proved oil and gas properties in the amount of $313,751 and $4,015,158, respectively. 16 EQUITY LOSS IN SYMSKAYA EXPLORATION, INCORPORATED. The equity loss in Symskaya Exploration decreased by $276,825 during 1999. As operations continue to be curtailed at the project, Symskaya terminated its only domestic employee, and further reduced administrative expenses in 1999. The 1998 loss included $125,000 of accrued interest income on a senior note between Symskaya and the Company that had been recognized in prior periods. The 1998 amount also included the Company's share of a bottom hole contribution that was not repeated in 1999. 3-D SEISMIC AND EXPLORATION EXPENSES. Lower exploration costs in 1999 resulted from the Company's reduced drilling program. During 1999, the Company incurred approximately $470,000 in dry hole costs compared to approximately $875,000 in 1998. In addition, as a result of the Company's cost cutting measures in 1999, the Company reduced other exploratory geological and administrative costs by 23%. In 1998, the Company incurred 3-D seismic charges in the amount of $431,000 associated with its Sequoia prospect in California. The Company curtailed its use of 3-D seismic in 1999 in response to low oil prices during the first part of the year. GENERAL AND ADMINISTRATIVE EXPENSES. The Company cut its general and administrative expenses by $171,000, or 9%, from 1998 levels. In response to abnormally low oil prices in the beginning of 1998, the Company made a concerted effort to reduce overhead costs through staff reductions, lower compensation costs, reduced employee benefits and other costs. INTEREST AND INCOME TAXES. Lower interest costs in 1999 reflect lower average interest rates on the debt outstanding under the Company's credit facility. The income tax expense (benefits) recorded for both periods reflect the results of operations, as well as various credits available to the Company. Details concerning the components of the tax provision can be found in Footnote 3 to the financial statements. COMPARISON OF 1998 WITH 1997 OIL AND GAS PRODUCTION AND SALES. Lower oil and gas prices offset higher oil and gas production during 1998, resulting in a 23% drop in oil and gas sales. Gas production of 2.4 Bcf in 1998 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 dropped 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. 17 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 declined on a per-unit basis in 1998. Costs per BOE during 1998 of $5.68 were 6% lower than costs of $6.06 per BOE 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 BOE basis than for oil producing properties. The Company's ratio of gas to oil production rose in 1998 compared to prior years, and as it did so, per BOE 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 IN SYMSKAYA EXPLORATION, INCORPORATED. In 1998, Symskaya entered into a bottom hole contribution agreement to support the drilling of an exploratory well 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 included the Company's share of the bottom hole contribution. There were no corresponding events in 1997. 18 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. Exploration expenses decreased as the Company drilled 5 exploratory dry holes in 1998, compared to 12 dry holes in 1997. 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. LIQUIDITY AND CAPITAL RESOURCES Higher oil prices, lower expenses and improved financial results have led to an overall strengthening in the Company's financial position at December 31, 1999. The Company's cash balances increased by 126% from December 31, 1998. Working capital at December 31, 1999 was 76% higher than that at December 31, 1998. The Company's ratio of current assets to current liabilities also improved, reaching 2.40 to 1 at December 31, 1999 compared to 1.76 to 1 at the end of 1998. Cash flow from operating activities more than doubled in 1999, increasing 128% over 1998 levels. During 1999, the Company cut its capital spending by 33% compared to 1998. The reduction reflected lower first half oil and gas prices, as well as the uncertainty surrounding the futures markets. As oil prices strengthened during the year, the Company increased its capital spending; 57% of total 1999 capital spending occurred in the fourth quarter. The Company's 1999 capital expenditures were partially offset by proceeds from the sale of certain oil and gas properties. The Company sold all of its Texas gas producing properties during 1999. In September of 1999, the Company announced a new $50 million reducing revolving credit facility with Bank One Texas, N.A. The facility has an initial commitment of $17 million, and replaces a prior facility with HSBC Investment Bank. The maturity date of the facility is September 9, 2002, three years from the date of closing. The new facility has a LIBOR or a prime interest rate option; the average interest rate on debt outstanding at December 31, 1999 was 8.42 percent. The Company's commitment under its credit facility is subject to a redetermination as of May 1 and November 1 of each year, with estimated future oil and gas prices used in the evaluation determined by the Company's lender. As of December 31, 1999, the Company had $2,000,000 of remaining availability on the facility. The Company is in compliance with all its facility covenants. 19 During 1998, the Company increased borrowings under its credit facility by $2,521,170, which were used to fund investments in property and equipment and for working capital purposes. Higher revenues and cash flows in 1999 enabled the Company to make principal payments of $1,500,000 on its facility. As part of the new credit facility, the Company is required to hedge at least 50% but not more than 75% of its daily oil production, at a price not lower than the lowest price used in the bank's price deck, for a period between 12 and 18 months. The Company has 120 days after the closing date to have the hedge or hedges in place. The Company entered into one collar agreement for 12 months effective October 1, 1999, covering 400 barrels per day with a floor at $18.00 per barrel and a ceiling at $25.30 per barrel. The Company entered into a second collar agreement for 12 months effective January 1, 2000, covering 500 barrels per day with a floor at $18.00 per barrel and a ceiling at $27.22 per barrel. As a result of the hedge entered into effective October 1, 1999, revenues were reduced by $9,784 during 1999. The fair value of this hedge at December 31, 1999 was approximately $(64,000). No hedging transactions occurred in 1998 and 1997. The Company believes that existing cash balances, cash flow from operating activities, and funds available under the Company's credit facility will provide adequate resources to meet its capital and exploration spending objectives for 2000. 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. 20 YEAR 2000 REVIEW The Company has not experienced any disruptions from year 2000 date related computer problems. All of its mission-critical and non- mission-critical systems are functioning properly. In addition, the Company is not aware of any year 2000 problems associated with any of its suppliers, partners, or entities in other business relationships. 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. All subsequent written and oral forward- looking statements attributable to the Company, or persons acting on its behalf, are expressly qualified in their entirety by these cautionary statements. 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. 21 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, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. 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 auditing standards generally accepted in the United States 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 January 31, 2000 22 EQUITY OIL COMPANY BALANCE SHEETS December 31, 1999 and 1998
ASSETS 1999 1998 ---- ---- Current assets: Cash and cash equivalents ............................... $ 1,006,602 $ 444,476 Accounts receivable ..................................... 2,896,558 1,933,686 Operator advances ....................................... 485,803 762,474 Federal, state and foreign income taxes receivable ...................................... 221,199 291,597 Deferred income taxes ................................... 19,632 19,417 Other current assets .................................... 277,595 318,904 ------------- ------------- Total current assets ............................ 4,907,389 3,770,554 ------------- ------------- Property and equipment, at cost (successful efforts method): Unproved oil and gas properties ......................... 2,388,819 3,003,223 Proved oil and gas properties: Developed leaseholds .................................. 10,265,095 9,994,273 Intangible drilling costs ............................. 64,282,028 64,845,202 Equipment ............................................. 25,671,687 25,731,345 Other property and equipment ............................ 966,997 833,772 ------------- ------------- 103,574,626 104,407,815 Less accumulated depreciation, depletion and amortization ...................... (62,800,100) (61,191,368) ------------- ------------- 40,774,526 43,216,447 ------------- ------------- Other assets ............................................... 435,420 284,167 ------------- ------------- Total assets .................................... $ 46,117,335 $ 47,271,168 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ........................................ $ 1,541,834 $ 1,675,758 Accrued liabilities ..................................... 177,550 254,576 Federal, state and foreign income taxes payable ......................................... 321,981 212,583 ------------- ------------- Total current liabilities ....................... 2,041,365 2,142,917 ------------- ------------- Revolving credit facility .................................. 15,000,000 16,500,000 Deferred income taxes ...................................... 1,667,648 1,642,700 ------------- ------------- 16,667,648 18,142,700 ------------- ------------- Commitments (Note 6) Stockholders' equity: Common stock, $1 par value: Authorized: 25,000,000 shares Issued: 12,808,040 shares in 1999 and 12,794,040 shares in 1998 ...................... 12,808,040 12,794,040 Paid in capital ......................................... 3,719,743 3,714,493 Retained earnings ....................................... 11,408,841 11,005,320 ------------- ------------- 27,936,624 27,513,853 Less treasury stock, at cost ............................ (528,302) (528,302) ------------- ------------- 27,408,322 26,985,551 ------------- ------------- Total liabilities and stockholders' equity ............................ $ 46,117,335 $ 47,271,168 ============= =============
The accompanying notes are an integral part of the financial statements 23 EQUITY OIL COMPANY STATEMENTS OF OPERATIONS for the years ended December 31, 1999, 1998 and 1997
1999 1998 1997 ---- ---- ---- Revenues: Oil and gas sales ......................... $ 15,434,537 $ 12,720,876 $ 16,457,048 Other income .............................. 334,980 457,107 1,487,924 ------------ ------------ ------------ 15,769,517 13,177,983 17,944,972 ------------ ------------ ------------ Expenses: Leasehold operating costs ................. 5,948,055 6,233,955 5,940,808 Depreciation, depletion and amortization .. 4,072,278 5,029,119 4,675,411 Impairment of proved oil and gas properties 313,751 4,015,158 411,894 Equity loss in Symskaya Exploration, Inc. . 169,933 446,758 356,661 Leasehold abandonments .................... 68,965 162,754 86,542 3-D seismic ............................... 35,200 431,075 626,525 Exploration ............................... 1,566,521 2,383,163 3,026,550 General and administrative ................ 1,743,590 1,914,590 2,048,194 Interest, net of interest capitalized of $364,637 in 1997 ..................... 1,214,600 1,298,061 733,980 ------------ ------------ ------------ 15,132,893 21,914,633 17,906,565 ------------ ------------ ------------ Income (loss) before income taxes .... 636,624 (8,736,650) 38,407 Provision for (benefit from) income taxes ..... 233,103 (2,921,766) 249,563 ------------ ------------ ------------ Net income (loss) .................... $ 403,521 $ (5,814,884) $ (211,156) ============ ============ ============ Basic and diluted net income (loss) per common share ........................... $ .03 $ (.46) $ (.02) ============ ============ ============ Basic and diluted weighted average shares outstanding ................. 12,638,377 12,623,041 12,686,211 ============ ============ ============ The accompanying notes are an integral part of the financial statements
24
EQUITY OIL COMPANY STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY for the years ended December 31, 1999, 1998 and 1997 Common Stock Paid in Retained Treasury Stock Shares Amount Capital Earnings Shares Cost ------ ------ ------- -------- ------ ---- Balance at January 1, 1997 ...................... 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) Net income ...................................... 403,521 Common stock issued for services, $1.38 per share 14,000 14,000 5,250 ---------- ---------- --------- ---------- ------- ------- Balance at December 31, 1999 .................... 12,808,040 $12,808,040 $3,719,743 $11,408,841 164,600 $(528,302) ========== ========== ========= ========== ======= ======= The accompanying notes are an integral part of the financial statements
25
EQUITY OIL COMPANY STATEMENTS OF CASH FLOWS for the years ended December 31, 1999, 1998 and 1997 1999 1998 1997 ---- ---- ---- Cash flows from operating activities: Net income (loss) ............................... $ 403,521 $ (5,814,884) $ (211,156) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation, depletion and amortization .... 4,072,278 5,029,119 4,675,411 Impairment of proved oil and gas properties . 313,751 4,015,158 411,894 Equity loss in Symskaya Exploration, Inc. ... 169,933 446,758 356,661 (Gain) loss on property dispositions ........ (12,343) 325,558 (243,423) Change in other assets ...................... 71,151 89,938 178,622 Deferred income tax expense (benefit) ....... 24,733 (3,209,749) (701,888) Common stock issued for services ............ 19,250 79,726 29,374 ------------ ------------ ------------ 5,062,274 961,624 4,495,495 Increase (decrease) from changes in: Accounts receivable and operator advances (686,201) 817,827 19,135 Other current assets ..................... 41,309 195,809 (142,012) Accounts payable and accrued liabilities . (210,950) 294,202 (576,853) Income taxes payable/receivable .......... 179,796 (344,842) 385,712 ------------ ------------ ------------ Net cash provided by operating activities 4,386,228 1,924,620 4,181,477 ------------ ------------ ------------ Cash flows from investing activities: Sale of temporary cash investments .............. -- -- 49,802 Advances to Symskaya Exploration, Inc. .......... (169,933) (319,210) (356,661) Capital expenditures ............................ (2,406,251) (4,126,630) (9,547,036) Proceeds from sale of oil and gas properties .... 474,486 65,725 592,907 ------------ ------------ ------------ Net cash used in investing activities ... (2,101,698) (4,380,115) (9,260,988) ------------ ------------ ------------ Cash flows from financing activities: Payments on revolving credit facility ........... (18,000,000) -- -- Payment of revolving credit facility fees ....... (222,404) Borrowings under revolving credit facility ...... 16,500,000 2,521,170 5,100,000 Purchase of treasury stock ...................... -- -- (429,649) ------------ ------------ ------------ Net cash provided by (used in) financing activities ................ (1,722,404) 2,521,170 4,670,351 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents 562,126 65,675 (409,160) Cash and cash equivalents at beginning of year ..... 444,476 378,801 787,961 ------------ ------------ ------------ Cash and cash equivalents at end of year ........... $ 1,006,602 $ 444,476 $ 378,801 ============ ============ ============ Supplemental disclosures of cash flow information: Cash paid during the year for: Income taxes .................................. $ 148,938 $ 495,882 $ 701,694 Interest ...................................... $ 1,214,600 $ 1,298,061 $ 733,980 Supplemental disclosures of non-cash investing activities: Non-cash proceeds from oil and gas property exchange $ 366,699 $ -- $ -- The accompanying notes are an integral part of the financial statements
26 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 Statement of Financial Accounting Standards (SFAS) No. 121. (See Note 2). The provision for depreciation, depletion and amortization of proved oil and gas properties is computed using the units of production method, based on proved oil and gas reserves. Estimated dismantlement, restoration and abandonment costs are expected to be offset by estimated residual values of lease and well equipment. Thus, no accrual for such costs has been recorded. Continued 27 EQUITY OIL COMPANY NOTES TO FINANCIAL STATEMENTS, Continued 1. Significant Accounting Policies, Continued: D. Concentration of Credit Risk: Substantially all of the Company's accounts receivable are within the oil and gas industry, primarily from purchasers of oil and gas (see Note 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 one financial institution 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 statement of operations. F. Foreign Operations: Operations and investments in Canada have been translated into U.S. dollar equivalents at the average rate of exchange in effect at the transaction date. Foreign exchange gains or losses during 1999, 1998 and 1997 were not material. Continued 28 EQUITY OIL COMPANY NOTES TO FINANCIAL STATEMENTS, Continued 1. Significant Accounting Policies, Continued: G. Net Income (Loss) Per Common Share: Basic earnings per share is computed by dividing the net income (loss) by the weighted average number of common shares outstanding. Diluted earnings per share is computed by dividing the net income (loss) by the sum of the weighted average number of common shares and the effect of dilutive unexercised stock options. Options to purchase 1,434,000, 1,203,000 and 1,141,000 shares of common stock at prices ranging from $1.06 to $6.00 per share were outstanding at December 31, 1999, 1998 and 1997, 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 estimates of proved oil and gas reserve volumes and future dismantlement and abandonment costs used in determining amortization and impairment provisions. I. Hedging: The Company enters into futures contracts to hedge the price risks associated with oil and gas sales. The Company defers the impact of changes in the market value of these contracts until such time as the hedged transaction is completed. At that time, the impact of the changes in the fair value of these contracts is recognized in income. To qualify as a hedge, the item to be hedged must expose the Company to oil and gas price risk and the hedging instrument must reduce that exposure. Any contracts held or issued that did not meet the requirements of a hedge would be recorded at fair value in the balance sheet and any changes in that fair value recognized in income. If a contract designated as a hedge of price risk is terminated, the associated gain or loss is deferred and recognized in income in the same manner as the hedged item. Also, a contract designated as a hedge of an anticipated transaction that is no longer likely to occur would be recorded at fair value and the associated changes in fair value recognized in income. Continued 29 EQUITY OIL COMPANY NOTES TO FINANCIAL STATEMENTS, Continued 1. Significant Accounting Policies, Continued: Under the terms of its revolving credit facility, the Company is required to hedge at least 50%, but not more than 75%, of its daily oil production at a price not lower than the lowest price used in the bank's price deck, for a period between 12 and 18 months. The Company had 120 days after the closing date in September 1999 to have the hedge or hedges in place. The Company entered into one collar agreement for 12 months effective October 1, 1999, covering 400 barrels per day with a floor at $18.00 per barrel and a ceiling at $25.30 per barrel. The Company entered into a second collar agreement for 12 months effective January 1, 2000, covering 500 barrels per day with a floor at $18.00 per barrel and a ceiling at $27.22 per barrel. As a result of the hedge entered into effective October 1, 1999, revenues were reduced by $9,784 during 1999. The fair value of this hedge at December 31, 1999 was $(64,000). No hedging transactions occurred in 1998 and 1997. 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 SFAS No. 121 non-cash impairment charges of $313,751, $4,015,158 and $411,894 for 1999, 1998 and 1997,respectively. Continued 30 EQUITY OIL COMPANY NOTES TO FINANCIAL STATEMENTS, Continued 3. Income Taxes: The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. Deferred income taxes are provided using enacted tax rates applied to 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:
1999 1998 1997 ---- ---- ---- Currently payable (receivable): U.S. income taxes (including alternative minimum tax) $ 719 $ - $ 18,584 State income taxes 5,000 6,500 70,512 Canadian income taxes 336,167 208,046 471,064 Changes in prior years' taxes, including taxes due from Canadian audit (84,050) 73,437 391,291 Deferred tax benefit (24,733) (3,209,749) (701,888) ---------- ---------- ---------- $ 233,103 $(2,921,766) $ 249,563 ========== ========== ==========
Continued 31 EQUITY OIL COMPANY NOTES TO FINANCIAL STATEMENTS, Continued 3. Income Taxes, Continued: The components of the net deferred tax liability as of December 31, 1999 and 1998 were as follows:
1999 1998 ---- ---- Deferred tax assets: AMT credit carryforward ............................................. $ 312,650 $ 311,931 State income taxes .................................................. 1,849 2,403 Deferred compensation ............................................... 17,783 17,014 Geological and geophysical costs .................................... 600,923 645,680 Accrued interest .................................................... 893,755 660,319 Foreign tax credit carryforward ..................................... 491,862 699,908 Statutory depletion carryforward .................................... -- 82,287 Equity loss and impairment of investment in Symskaya Exploration, Inc. ..................................... 2,844,742 2,781,918 Net operating loss carryforward ..................................... 2,104,119 2,271,216 ----------- ----------- 7,267,683 7,472,676 Valuation allowance ................................................. (491,862) (699,908) ----------- ----------- Total deferred tax asset ............................................ 6,775,821 6,772,768 ----------- ----------- Deferred tax liabilities: Deferred income ..................................................... 42,719 39,402 Property and equipment .............................................. 8,342,487 8,321,804 Other assets ........................................................ 38,631 34,845 ----------- ----------- Total deferred tax liability ........................................ 8,423,837 8,396,051 ----------- ----------- Net deferred tax liability ............................................ $ 1,648,016 $ 1,623,283 =========== =========== The net deferred tax liability as of December 31, 1999 and 1998 is reflected in the balance sheet as follows: Current deferred tax asset .......................................... $ (19,632) $ (19,417) Long-term deferred tax liability .................................... 1,667,648 1,642,700 ----------- ----------- $ 1,648,016 $ 1,623,283 =========== ===========
Continued 32 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:
1999 1998 1997 ---- ---- ---- Federal statutory tax expense (benefit) $216,452 $(2,970,461) $ 13,058 Increase (reduction) in taxes resulting from: State taxes (net of federal benefit) 6,733 (255,742) (5,323) Canadian taxes (net of foreign tax credits) 221,870 208,046 113,882 Excess allowable percentage depletion (124,638) (54,059) (162,297) Investment tax and other credits - - (84,136) Changes in prior years' taxes, including taxes due from Canadian audit (87,314) 150,450 374,379 -------- --------- -------- Provision for (benefit from) income taxes $233,103 $(2,921,766) $249,563 ======== ========= ========
At December 31, 1999, the Company had approximately $312,650 of alternative minimum tax credit carryforwards which can be carried forward indefinitely, and approximately $491,862 of foreign tax credit carryforwards which begin to expire in 2000. In addition, the Company has approximately $5,817,000 of net operating loss carryforwards which expire in 2018. Continued 33 EQUITY OIL COMPANY NOTES TO FINANCIAL STATEMENTS, Continued 4. Stock-Based Compensation Plan: At December 31, 1999, 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 this 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, Accounting for Stock Based Compensation, the Company's net income (loss) and net income (loss) per share would have been changed to the pro forma amounts indicated below:
1999 1998 1997 ---- ---- ---- Net income (loss) As reported $403,521 $(5,814,884) $(211,156) Pro forma $239,294 $(5,991,191) $(336,511) Net income (loss) per share As reported $.03 $(.46) $(.02) Pro forma $.02 $(.47) $(.03)
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 1999, 1998 and 1997 respectively: expected volatility of 112, 138 and 50 percent, risk-free interest rates of 5.1, 5.5 and 6.3 percent; expected life of 5 years and dividend yield of zero for all three years. Continued 34 EQUITY OIL COMPANY NOTES TO FINANCIAL STATEMENTS, Continued 4. Stock-Based Compensation Plan, Continued:
1999 1998 1997 ---------------------------- --------------------------- -------------------------- 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 1,203 $4.14 1,141 $4.33 1,076 $4.42 Granted 323 1.06 150 2.50 121 3.56 Exercised - - - - - - Forfeited (92) 4.08 (88) 3.87 (56) 4.37 ------ ------ ------ Outstanding at end of year 1,434 3.45 1,203 4.14 1,141 4.33 ====== ====== ====== Options exercisable at year-end 973 900 880 ====== ====== ====== Weighted-average fair value of options granted during the year $ .88 $2.21 $1.56
The following table summarizes information about fixed stock options outstanding at December 31, 1999:
Options Outstanding Options Exercisable -------------------------------------------------------- ---------------------------------- Number Weighted-Average Number Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average Exercise Prices at 12/31/99 Contractual Life Exercise Price at 12/31/99 Exercise Price $1.06 to $1.06 323,000 9.25 years $1.06 0 $1.06 $2.50 to $3.56 326,000 6.48 $3.11 230,000 $3.20 $3.63 to $4.00 269,500 2.96 $3.87 262,200 $3.88 $4.25 to $5.00 254,000 3.98 $4.55 254,000 $4.55 $5.13 to $6.00 261,500 4.60 $5.31 226,700 $5.33 --------- ---- ----- ------- ----- 1,434,000 5.66 $3.45 972,900 $4.23 ========= ==== ===== ======= =====
5. Geographic Segment Information: During 1998, the Company adopted SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information. SFAS No. 131 supersedes SFAS No. 14, Financial Reporting for Segments of a Business Enterprise. The adoption of SFAS No. 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, ------------------------------------------------ ----------------------------------------------- 1999 1998 1997 1999 1998 1997 ---- ---- ---- ---- ---- ---- United States $13,625,811 $11,199,836 $14,150,670 $ 94,104,683 $95,009,887 $104,094,883 Canada 1,808,726 1,521,040 2,306,378 9,469,943 9,397,928 9,277,008 ----------- ----------- ----------- ------------ ------------ ------------ Total $15,434,537 $12,720,876 $16,457,048 $103,574,626 $104,407,815 $113,371,891 =========== =========== =========== ============ ============ ============
Continued 35 EQUITY OIL COMPANY NOTES TO FINANCIAL STATEMENTS, Continued 5. Geographic Segment Information, Continued: Revenue from a major U.S. oil company accounted for approximately 31 percent of total revenues in 1999, 32 percent of total revenues in 1998 and 38 percent of total revenues in 1997. 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, 1999, 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, 1999, 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 36 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 all capitalized costs to expense. Subsequent to the plugging of the Lemok #1 well, the Company and Leucadia agreed to suspend interest payments on Symskaya's notes 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, excluding losses related to interest payable to the Company, was $169,933, $446,758 and $356,661 in 1999, 1998 and 1997, respectively. The Company's investment in and advances to Symskaya were charged to expense as of December 31, 1996. 7. Note Payable: In September of 1999, the Company obtained a $50 million Reducing Revolving Credit Facility (the Facility), with a commitment of $17 million as of December 31, 1999, which replaced its prior credit facility. The terms of the Facility call for interest payments only, at the lower of prime or LIBOR plus 2.25%, until September 9, 2002, at which time the principal amount becomes due. An unused commitment fee of 1/2% will be charged to the Company based on the average daily unused portion of the Facility. The Facility is collateralized by essentially all oil and gas assets of the Company. As of December 31, 1999, the outstanding balance under the Facility was $15,000,000 at an average interest rate of 8.42%. Future maturities on the Facility as of December 31, 1999 are as follows: 2000 $ - 2001 - 2002 15,000,000 ---------- $15,000,000 Continued 37 EQUITY OIL COMPANY NOTES TO FINANCIAL STATEMENTS, Continued 7. Note Payable, Continued: The Facility contains provisions relating to maintenance of certain financial ratios, as well as restrictions governing its use. Under covenants contained in the Facility, the Company has agreed, among other things, not to advance any proceeds from the Facility to Symskaya, not to pay dividends, and not to merge with or acquire any other company without the prior approval of the bank. As of December 31, 1999, the Company was in compliance with all covenants in the Facility. Facility fees, which are reflected as other assets in the accompanying balance sheet, are being amortized on a straight line basis over 36 months. 8. Quarterly Financial Data (Unaudited): Quarterly financial information for the years ended December 31, 1999 and 1998 is as follows:
1999 Quarter Ended: December 31 September 30 June 30 March 31 ----------- ----------- ----------- ----------- Net revenues .................. $ 4,995,330 $ 4,311,235 $ 3,515,233 $ 2,618,352 Gross margin .................. 2,032,571 1,645,306 1,195,995 232,194 Net income (loss) ............. 441,743 422,532 111,945 (572,699) Basic and diluted income (loss) per common share ........... $ .03 $ .03 $ .01 $ (.05) =========== =========== =========== =========== 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) =========== =========== =========== ===========
Continued 38 EQUITY OIL COMPANY NOTES TO FINANCIAL STATEMENTS, Continued 9. Disclosures About Oil and Gas Producing Activities:
Capitalized Costs: United States Canada Russia Total ------------- ------ ------ ----- 1999: Unproved oil and gas properties $ 2,358,084 $ 30,735 $ 2,388,819 Proved oil and gas properties 90,779,602 9,439,208 100,218,810 ----------- ---------- ----------- 93,137,686 9,469,943 102,607,629 Accumulated depreciation, depletion and amortization (55,037,943) (7,762,157) (62,800,100) ----------- ---------- ----------- Net capitalized costs $ 38,099,743 $ 1,707,786 $ 39,807,529 =========== ========== =========== Symskaya, equity method (see Note 6) $ - ========== 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) $ - ==========
Continued 39 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: 1999: United States Canada Russia Total ------------- ------ ------ ----- Acquisition of properties: Proved $ 946,665 $ 946,665 Unproved 200,541 200,541 Exploration costs 1,863,875 $ 30,073 1,893,948 Development costs 1,062,408 110,521 1,172,929 Symskaya, equity method $ 169,933 169,933 1998: 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
Continued 40 EQUITY OIL COMPANY NOTES TO FINANCIAL STATEMENTS, Continued 9. Disclosures About Oil and Gas Producing Activities, Continued:
Results of Operations (Unaudited): 1999: United States Canada Russia Total Oil and gas sales $ 13,625,811 $1,808,726 $15,434,537 Production costs (5,422,811) (525,244) (5,948,055) Exploration expenses (1,650,413) (20,273) (1,670,686) Depreciation, depletion and amortization (3,761,339) (310,939) (4,072,278) Impairment of proved oil and gas properties (313,751) - (313,751) Equity loss in Symskaya Exploration, Inc. $ (169,933) (169,933) ---------- --------- --------- ---------- 2,477,497 952,270 (169,933) 3,259,834 Imputed income tax benefit (expense) (677,741) (423,760) 63,725 (1,037,776) ---------- --------- --------- ---------- Results of operations from producing activities $ 1,799,756 $ 528,510 $ (106,208) $ 2,222,058 ========== ========== ========== ========== 1998: 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 ========== ========== ========== ==========
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 41 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 1999, 1998 and 1997:
United States Canada Total Oil Gas Oil Gas Oil Gas --- --- --- --- --- --- December 31, 1999 $23.28 $1.95 $20.40 $1.71 $22.99 $1.93 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
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 42 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, 1999: Oil Gas Oil Gas Oil Gas ------------------ --- --- --- --- --- --- Proved developed and undeveloped reserves: Beginning of year ........................ 5,117 15,411 1,076 3,599 6,193 19,010 Revisions of previous estimates .......... 3,181 274 261 (841) 3,442 (567) Extensions and discoveries ............... 6 529 -- -- 6 529 Acquisition of minerals in place ......... 563 34 -- -- 563 34 Sales of minerals in place ............... (249) (642) -- -- (249) (642) Production ............................... (576) (1,768) (86) (265) (662) (2,033) ------- ------- ------- ------- ------- ------- End of year .............................. 8,042 13,838 1,251 2,493 9,293 16,331 ======= ======= ======= ======= ======= ======= Proved developed reserves: Beginning of year ........................ 4,870 12,683 1,076 3,599 5,946 16,282 End of year .............................. 7,808 13,663 1,017 2,318 8,825 15,981 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
Continued 43 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 United States Canada Total 1999: --------- --------- --------- Future cash inflows ........................... $ 215,342 $ 27,122 $ 242,464 Future production and development costs ....... (108,395) (12,147) (120,542) --------- --------- --------- Future net cash flows before income taxes ..... 106,947 14,975 121,922 10% annual discount for estimated timing of cash flows .............................. (51,627) (6,929) (58,556) --------- --------- --------- Standardized measure of discounted future net cash flows before income taxes ......... 55,320 8,046 63,366 Future income taxes, net of 10% annual discount (13,951) (2,629) (16,580) --------- --------- --------- Standardized measure of discounted future net cash flows ............................. $ 41,369 $ 5,417 $ 46,786 ========= ========= ========= 1998: 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 ========= ========= ========= 1997: 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 ========= ========= =========
Continued 44 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 1999 1998 1997 Sales and transfers of oil and gas produced, net of production costs ................... $ (9,486) $ (6,487) $(10,516) Net changes in prices and production costs ... 29,172 (10,019) (45,280) Extensions and discoveries, less related costs 294 2,098 1,639 Purchases of minerals in place ............... 3,373 -- 3,787 Sales of minerals in place ................... (959) -- (339) Changes in estimated future development costs (3,033) 2,630 (1,447) Revisions of previous quantity estimates ..... 23,747 (4,495) (1,573) Accretion of discount ........................ 2,521 3,558 7,912 Net change in income taxes ................... (15,204) 3,315 18,100 Changes in production rates (timing) and other (6,441) 3,303 1,880 -------- -------- -------- $ 23,984 $ (6,097) $(25,837) ======== ======== ========
45 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 4 in the definitive proxy statement to be filed in connection with the Company's annual meeting on May 10, 2000 is incorporated herein by reference in answer to this item. ITEM 11. EXECUTIVE COMPENSATION The information contained under the heading Executive Compensation on pages 7 through 10 in the definitive proxy statement to be filed in connection with the Company's annual meeting on May 10, 2000 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 5 and 12 in the definitive proxy statement to be filed in connection with the Company's annual meeting on May 10, 2000 is incorporated herein by reference in answer to this item. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. 46 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K: Page: (a) (1) Financial Statements: Report of Independent Accountants 22 Financial Statements: Balance Sheets as of December 31, 1999 and 1998 23 Statements of Operations for the years ended December 31, 1999, 1998 and 1997 24 Statements of Changes in Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997 25 Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 26 Notes to Financial Statements 27 (3) Exhibits (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 (i) Change in Control Compensation Agreements for Paul M. Dougan, James B. Larson, and Clay Newton. Incorporated by reference from the annual report on Form 10-K for the year ended December 31, 1997. (ii) Loan agreement between Equity Oil Company and Bank One Texas, N.A. Incorporated by reference from the quarterly report on Form 10-Q for the period ended September 30, 1999. (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. 47 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 1, 2000 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 1, 2000 March 1, 2000 - ------------------------- ------------------------ Date Date William D. Forster Philip J. Bernhisel - ------------------------- ------------------------ Director Director March 1, 2000 March 1, 2000 - ------------------------- ------------------------ Date Date Randolph G. Abood W. Durand Eppler - ------------------------- ------------------------ Director Director March 1, 2000 March 1, 2000 - ------------------------- ------------------------ Date Date William P. Hartl - ------------------------- Director March 1, 2000 - ------------------------- Date EX-23 2 CONSENT OF INDEPENDENT ACCOUNTANTS Consent of Independent Accountants We hereby consent to the incorporation by reference in the registration statement on Form S-8 (SEC File No. 333- ) of Equity Oil Company of our report dated January 31, 2000 relating to the financial statements, which appears in this Form 10-K. /s/ PricewaterhouseCoopers LLP - ------------------------------ Signature Salt Lake City, Utah March 2, 2000 EX-27 3 FINANCIAL DATA SCHEDULE FOR 1999 FORM 10K
5 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 1,006,602 0 3,382,361 0 0 4,907,389 103,574,626 62,800,100 46,117,335 2,041,365 0 0 0 12,808,040 3,719,743 46,117,335 15,434,537 15,769,517 0 13,918,293 0 0 1,214,600 636,624 233,103 403,521 0 0 0 403,521 .03 .03
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