e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005 |
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD FROM ______________ TO ________________ |
Commission file number 0-29370
ULTRA PETROLEUM CORP.
(Exact name of registrant as specified in its charter)
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Yukon Territory, Canada
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N/A |
(State or other jurisdiction of
incorporation or organization)
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(I.R.S. employer
identification number) |
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363 North Sam Houston Parkway E., Suite 1200, Houston, Texas
(Address of principal executive offices)
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77060
(Zip code) |
(281) 876-0120
(Registrants telephone number,
including area code)
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 þ NO o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2
of the Exchange Act)
YES þ NO o
The number of common shares, without par value, of Ultra Petroleum Corp., outstanding as of July
29, 2005 was 153,409,036.
PART 1 FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
ULTRA PETROLEUM CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
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For the Three Months Ended |
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For the Six Months Ended |
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June 30, |
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June 30, |
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2005 |
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2004 |
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2005 |
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2004 |
Revenues: |
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Natural gas sales |
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$ |
82,076,643 |
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$ |
43,174,208 |
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$ |
156,027,616 |
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$ |
89,251,431 |
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Oil sales |
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27,421,604 |
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2,936,082 |
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42,311,971 |
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5,477,632 |
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Total operating revenues |
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109,498,247 |
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46,110,290 |
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198,339,587 |
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94,729,063 |
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Expenses: |
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Production expenses and taxes |
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18,489,289 |
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9,424,401 |
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34,581,201 |
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19,149,299 |
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Depletion and depreciation |
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12,656,404 |
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5,415,985 |
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23,895,913 |
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10,896,704 |
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General and administrative |
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3,120,170 |
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1,190,350 |
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5,681,952 |
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2,744,388 |
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General and administrative stock compensation |
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396,083 |
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523,500 |
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1,010,659 |
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623,523 |
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Total operating expenses |
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34,661,946 |
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16,554,236 |
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65,169,725 |
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33,413,914 |
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Operating income |
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74,836,301 |
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29,556,054 |
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133,169,862 |
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61,315,149 |
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Other income (expense): |
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Interest expense |
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(1,167,763 |
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(848,742 |
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(2,068,406 |
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(1,948,912 |
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Interest income |
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118,693 |
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9,910 |
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193,558 |
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22,644 |
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Total other income (expense) |
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(1,049,070 |
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(838,832 |
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(1,874,848 |
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(1,926,268 |
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Income, before income tax provision |
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73,787,231 |
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28,717,222 |
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131,295,014 |
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59,388,881 |
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Income tax provision |
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25,899,316 |
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10,194,718 |
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46,084,550 |
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21,083,159 |
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Net income |
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47,887,915 |
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18,522,504 |
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85,210,464 |
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38,305,722 |
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Retained earnings, beginning of period |
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202,610,860 |
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75,921,734 |
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165,288,311 |
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56,138,516 |
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Retained earnings, end of period |
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$ |
250,498,775 |
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$ |
94,444,238 |
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$ |
250,498,775 |
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$ |
94,444,238 |
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Income per common share basic |
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$ |
0.31 |
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$ |
0.12 |
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$ |
0.56 |
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$ |
0.26 |
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Income per common share fully diluted |
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$ |
0.30 |
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$ |
0.12 |
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$ |
0.53 |
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$ |
0.24 |
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Weighted average common shares outstanding basic |
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152,929,693 |
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149,929,660 |
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151,903,632 |
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149,722,174 |
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Weighted average common shares outstanding fully diluted |
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161,275,842 |
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159,890,858 |
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161,067,073 |
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159,715,394 |
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2
ULTRA PETROLEUM CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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(Expressed in U.S. Dollars) |
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Six Months Ended |
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June 30, |
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2005 |
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2004 |
Cash provided by (used in): |
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Operating activities: |
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Net income |
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$ |
85,210,464 |
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$ |
38,305,722 |
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Add (deduct) items not involving cash: |
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Depletion and depreciation |
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23,895,913 |
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10,896,704 |
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Deferred income taxes |
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46,084,550 |
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21,083,159 |
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Stock compensation |
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1,010,659 |
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623,523 |
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Net changes in non-cash working capital: |
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Restricted cash |
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(878 |
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(629 |
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Accounts receivable |
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(14,652,671 |
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1,588,509 |
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Inventory |
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(155,576 |
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Prepaid expenses and other current assets |
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(17,917 |
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(3,641,480 |
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Accounts payable and accrued liabilities |
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26,105,193 |
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(9,279,205 |
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Other long-term obligations |
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388,552 |
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2,699,709 |
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Taxation-payable |
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(130,000 |
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Cash provided by operating activities |
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167,738,289 |
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62,276,012 |
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Investing activities: |
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Oil and gas property expenditures |
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(111,001,119 |
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(63,673,697 |
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Oil and gas property expenditures in accounts payable |
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(14,171,171 |
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(10,458,509 |
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Inventory |
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(15,185,448 |
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4,073,175 |
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Purchase of capital assets |
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(762,569 |
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(634,196 |
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Cash used in investing activities |
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(141,120,307 |
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(70,693,227 |
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Financing activities: |
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Borrowings on long-term debt, gross |
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13,000,000 |
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24,000,000 |
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Payments on long-term debt, gross |
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(28,000,000 |
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(9,000,000 |
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Proceeds from exercise of options |
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8,423,075 |
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744,413 |
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Cash
provided by (used in) financing activities |
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(6,576,925 |
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15,744,413 |
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Increase in cash during the period |
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20,041,057 |
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7,327,198 |
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Cash and cash equivalents, beginning of period |
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16,932,661 |
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1,834,112 |
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Cash and cash equivalents, end of period |
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$ |
36,973,718 |
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$ |
9,161,310 |
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Supplemental disclosures of cash flow information
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Non-cash tax benefit of stock options exercised |
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$ |
24,547,479 |
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$ |
3,223,453 |
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3
ULTRA PETROLEUM CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
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(Expressed in U.S. Dollars) |
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June 30, |
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December 31, |
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2005 |
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2004 |
Assets |
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Current assets |
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Cash and cash equivalents |
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$ |
36,973,718 |
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$ |
16,932,661 |
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Restricted cash |
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212,839 |
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211,961 |
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Accounts receivable |
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50,401,958 |
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35,749,287 |
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Deferred tax asset |
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1,316,379 |
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1,327,489 |
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Inventory |
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20,491,978 |
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5,180,024 |
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Prepaid expenses and other current assets |
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1,743,760 |
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1,725,843 |
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Total current assets |
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111,140,632 |
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61,127,265 |
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Oil and gas properties, using the full cost method of accounting |
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Proved |
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472,342,128 |
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385,794,926 |
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Unproved |
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90,157,488 |
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88,839,460 |
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Capital assets |
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1,824,906 |
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1,424,367 |
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Total assets |
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$ |
675,465,154 |
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$ |
537,186,018 |
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Liabilities and shareholders equity |
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Current liabilities |
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Accounts payable and accrued liabilities |
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$ |
40,067,492 |
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$ |
14,238,836 |
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Fair value of derivative instrument liability |
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3,750,366 |
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3,739,406 |
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Capital costs accrual |
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38,927,214 |
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53,118,385 |
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Total current liabilities |
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82,745,072 |
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71,096,627 |
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Bank indebtedness |
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87,000,000 |
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102,000,000 |
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Deferred income taxes |
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|
107,882,558 |
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|
86,362,741 |
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Other long-term obligations |
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10,492,380 |
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|
9,734,904 |
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Shareholders equity |
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Share capital |
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140,474,006 |
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|
106,513,852 |
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Treasury stock |
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(1,193,650 |
) |
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|
(1,193,650 |
) |
Other
comprehensive loss fair value of derivative instruments |
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(2,433,987 |
) |
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(2,616,767 |
) |
Retained earnings |
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|
250,498,775 |
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|
165,288,311 |
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Total shareholders equity |
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387,345,144 |
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|
267,991,746 |
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Total liabilities and shareholders equity |
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$ |
675,465,154 |
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|
$ |
537,186,018 |
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4
ULTRA PETROLEUM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(All dollar amounts in this Quarterly Report on Form 10-Q are expressed in U.S. dollars unless
otherwise noted)
DESCRIPTION OF THE BUSINESS:
Ultra Petroleum Corp. (the Company) is an independent oil and gas company engaged in the
acquisition, exploration, development, and production of oil and gas properties. The Company is
incorporated under the laws of the Yukon Territory, Canada. The Companys principal business
activities are in the Green River Basin of Southwest Wyoming and Bohai Bay, China.
1. SIGNIFICANT ACCOUNTING POLICIES:
The accompanying financial statements, other than the balance sheet data as of December 31, 2004,
are unaudited and were prepared from the Companys records. Balance sheet data as of December 31,
2004 was derived from the Companys audited financial statements, but does not include all
disclosures required by U.S. generally accepted accounting principles. The Companys management
believes that these financial statements include all adjustments necessary for a fair presentation
of the Companys financial position and results of operations. All adjustments are of a normal and
recurring nature unless specifically noted. The Company prepared these statements on a basis
consistent with the Companys annual audited statements and Regulation S-X. Regulation S-X allows
the Company to omit some of the footnote and policy disclosures required by generally accepted
accounting principles and normally included in annual reports on Form 10-K. You should read these
interim financial statements together with the financial statements, summary of significant
accounting policies and notes to the Companys most recent annual report on Form 10-K.
(a) Basis of presentation and principles of consolidation:
The consolidated financial statements include the accounts of the Company and its wholly owned
subsidiaries UP Energy Corporation, Ultra Resources, Inc. and Sino-American Energy Corporation. The
Company presents its financial statements in accordance with U.S. GAAP. All material inter-company
transactions and balances have been eliminated upon consolidation.
(b) Accounting principles:
The consolidated financial statements are prepared in accordance with accounting principles
generally accepted in the United States.
(c) Cash and cash equivalents:
We consider all highly liquid investments with an original maturity of three months or less to be
cash equivalents.
(d) Restricted cash:
Restricted cash represents cash received by the Company from production sold where the final
division of ownership of the production is unknown or in dispute. Wyoming law requires that these
funds be held in a federally insured bank in Wyoming.
(e) Capital assets:
Capital assets are recorded at cost and depreciated using the declining-balance method based on a
seven-year useful life.
(f) Oil and gas properties:
The Company uses the full cost method of accounting for exploration and development activities as
defined by the Securities and Exchange Commission (SEC). Under this method of accounting, the costs
of unsuccessful, as well as successful, exploration and development activities are capitalized as
properties and equipment. This includes any internal costs that are directly related to exploration
and development activities but does not include any costs related to production, general corporate
overhead or similar activities. Effective with the adoption of SFAS No. 143 in 2003, the carrying
amount of oil and gas properties also includes estimated asset retirement costs recorded based on
the fair value of the asset retirement obligation when incurred. Gain or loss on the sale or other
disposition of oil and gas properties is not recognized, unless the gain or loss would
significantly alter the relationship between capitalized costs and proved reserves of oil and
natural gas attributable to a country.
The sum of net capitalized costs and estimated future development costs of oil and gas properties
are amortized using the unit-of-production method based on the proven reserves as determined by
independent petroleum engineers. Oil and gas reserves and production are converted into equivalent
units based on relative energy content. Operating fees received related to the properties in which
the Company owns an interest are netted against expenses. Fees received in excess of costs incurred
are recorded as a reduction to the full cost pool. Effective with the adoption of SFAS 143, asset
retirement obligations are included in the base costs for calculating depletion.
Oil and gas properties include costs that are excluded from capitalized costs being amortized.
These amounts represent investments in unproved properties and major development projects. The
Company excludes these costs on a country-by-country basis until proved reserves are found or until
it is determined that the costs are impaired. All costs excluded are reviewed at least quarterly to
determine if impairment has occurred. The amount of any impairment is transferred to the
capitalized costs being amortized (the depreciation, depletion and amortization (DD&A) pool) or a
charge is made against earnings for those international operations where a reserve base has not yet
been established. For international operations where a reserve base has not yet been established,
an impairment requiring a charge to earnings may be indicated through evaluation of drilling
results, relinquishing drilling rights or other information.
5
Under the full cost method of accounting, a ceiling test is performed each quarter. The full cost
ceiling test is an impairment test prescribed by SEC Regulation S-X Rule 4-10. The ceiling test
determines a limit, on a country-by-country basis, on the book value of oil and gas properties. The
capitalized costs of proved oil and gas properties, net of accumulated DD&A and the related
deferred income taxes, may not exceed the estimated future net cash flows from proved oil and gas
reserves, generally using prices in effect at the end of the period held flat for the life of
production excluding the estimated abandonment cost for properties with asset retirement
obligations recorded on the balance sheet and including the effect of derivative contracts that
qualify as cash flow hedges, discounted at 10%, net of related tax effects, plus the cost of
unevaluated properties and major development. The effect of implementing SFAS 143 has no effect on
the ceiling test calculation as the future cash outflows associated with settling asset retirement
obligations are excluded from this calculation.
(g) Inventories:
Crude oil
products and material and supplies inventories are carried at the lower of current market value or
cost. Inventory costs include expenditures and others charges directly and indirectly incurred in
bringing the inventory to its existing condition and location. Selling expenses and general and
administrative expenses are reported as period costs and excluded from inventory cost. Inventories
of materials and supplies are valued at cost or less. Crude oil product inventory at June 30, 2005
includes depletion and lease operating expenses of $754,817, associated with the Companys crude
oil production in China. Materials and supplies inventory of $19.7 million primarily includes the cost of
pipe that will be utilized during the remainder of the Companys 2005 drilling program and the
beginning of the 2006 drilling program.
(h) Derivative transactions:
The Company has entered into commodity price risk management transactions to manage its exposure to
gas price volatility. These transactions are in the form of price swaps with financial institutions
and other credit worthy counterparties. These transactions have been designated by the Company as
cash flow hedges. As such, unrealized gains and losses related to the change in fair market value
of the derivative contracts are recorded in other comprehensive income in the balance sheet to the
extent the hedges are effective.
(i) Income taxes:
Income taxes are accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax
basis and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period that includes the
enactment date.
(j) Earnings per share:
Basic earnings per share is computed by dividing net earnings attributable to common stock by the
weighted average number of common shares outstanding during each period. Diluted earnings per
share is computed by adjusting the average number of common shares outstanding for the dilutive
effect, if any, of stock options. The Company uses the treasury stock method to determine the
dilutive effect.
The following table provides a reconciliation of the components of basic and diluted net income per
common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, 2005 |
|
June 30, 2004 |
|
June 30, 2005 |
|
June 30, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
47,887,915 |
|
|
$ |
18,522,504 |
|
|
$ |
85,210,464 |
|
|
$ |
38,305,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
during the period |
|
|
152,929,693 |
|
|
|
149,929,660 |
|
|
|
151,903,632 |
|
|
|
149,722,174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive instruments |
|
|
8,346,149 |
|
|
|
9,961,198 |
|
|
|
9,163,441 |
|
|
|
9,993,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
during the period including the effects of dilutive
Instruments |
|
|
161,275,842 |
|
|
|
159,890,858 |
|
|
|
161,067,073 |
|
|
|
159,715,394 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.31 |
|
|
$ |
0.12 |
|
|
$ |
0.56 |
|
|
$ |
0.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.30 |
|
|
$ |
0.12 |
|
|
$ |
0.53 |
|
|
$ |
0.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On May 9, 2005 the outstanding shares of the Company were doubled as the result of a two for one
stock split. The prior year numbers have been adjusted to reflect this change for comparative
purposes.
(k) Use of estimates:
Preparation of consolidated financial statements in accordance with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the 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.
(l) Reclassifications:
Certain amounts in the financial statements of the prior periods have been reclassified to conform
to the current period financial statement presentation.
6
(m) Accounting for stock-based compensation:
Statement of Financial Accounting Standards No. 123, Accounting for StockBased Compensation
(SFAS No. 123), defines a fair value method of accounting for employee stock options and similar
equity instruments. SFAS No. 123 allows for the continued measurement of compensation cost for
such plans using the intrinsic value based method prescribed by APB Opinion No. 25, Accounting for
Stock Issued to Employees (APB No. 25), provided that pro forma results of operations are
disclosed for those options granted. The Company accounts for stock options granted to employees
and directors of the Company under the intrinsic value method. Had the Company reported
compensation costs as determined by the fair value method of accounting for option grants to
employees and directors, net income and net income per common share would approximate the following
pro forma amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, 2005 |
|
June 30, 2004 |
|
June 30, 2005 |
|
June 30, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
47,887,915 |
|
|
$ |
18,522,504 |
|
|
$ |
85,210,464 |
|
|
$ |
38,305,722 |
|
Deduct: Fair value of stock options issued
net of tax, |
|
|
(1,649,332 |
) |
|
|
(575,202 |
) |
|
|
(3,492,631 |
) |
|
|
(1,132,978 |
) |
Pro forma |
|
$ |
46,238,583 |
|
|
$ |
17,947,302 |
|
|
$ |
81,717,833 |
|
|
$ |
37,172,744 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
0.31 |
|
|
$ |
0.12 |
|
|
$ |
0.56 |
|
|
$ |
0.26 |
|
Pro forma |
|
$ |
0.30 |
|
|
$ |
0.12 |
|
|
$ |
0.54 |
|
|
$ |
0.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
0.30 |
|
|
$ |
0.12 |
|
|
$ |
0.53 |
|
|
$ |
0.24 |
|
Pro forma |
|
$ |
0.29 |
|
|
$ |
0.11 |
|
|
$ |
0.51 |
|
|
$ |
0.23 |
|
For purposes of pro forma disclosures, the estimated fair value of options is amortized to expense
over the options vesting period. The weighted-average fair value of each option granted is
estimated on the date of grant using the Black Scholes option pricing model with the following
assumptions: at June 30, 2005, expected volatility of 30.8% and a risk free rate of 3.830% -
4.320%at June 30, 2004, expected volatility of 25.0% and a risk free rate of 4.35%. At June 30,
2005 options have expected lives of 6.5 years, and at June 30, 2004 options had expected lives of
ten years.
(n) Revenue Recognition. Natural gas revenues are recorded on the entitlement method. Under the
entitlement method, revenue is recorded when title passes based on the Companys net interest. The
Company records its entitled share of revenues based on estimated production volumes. Subsequently,
these estimated volumes are adjusted to reflect actual volumes that are supported by third party
pipeline statements or cash receipts. Since there is a ready market for natural gas, the Company
sells the majority of its products soon after production at various locations at which time title
and risk of loss pass to the buyer. Gas imbalances occur when the Company sells more or less than
its entitled ownership percentage of total gas production. Any amount received in excess of the
Companys share is treated as a liability. If the Company receives less than its entitled share,
the underproduction is recorded as a receivable.
Oil revenues are recognized when production is sold to a purchaser at a fixed or determinable
price, when delivery has occurred and title is transferred.
(o) Other comprehensive earnings (loss) is a term used to define revenues, expenses, gains and
losses that under generally accepted accounting principles are reported as separate components of
shareholders equity instead of net earnings (loss). The loss depicted on the balance sheet as
other comprehensive loss is associated with unrealized losses related to the change in fair value
of derivative instruments designated as cash flow hedges.
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
June 30, 2005 |
|
June 30, 2004 |
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
85,210,464 |
|
|
$ |
38,305,722 |
|
|
|
|
|
|
|
|
|
|
Unrealized loss on derivative
instruments, net of tax |
|
|
(2,433,987 |
) |
|
|
(6,800,695 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
82,776,477 |
|
|
$ |
31,505,027 |
|
|
|
|
|
|
|
|
|
|
(p) Impact of recently issued accounting pronouncements: In December 2004, the Financial Accounting
Standards Board (FASB) issued a revised Statement of Financial Accounting Standards No. 123 (FAS
123R), Share-based Payment. FAS 123R requires compensation costs related to share-based payments
to be recognized in the income statement over the vesting period. The amount of the compensation
cost will be measured based on the grant-date fair value of the instrument issued. FAS 123R is
effective as of January 1, 2006, for all awards granted or modified after that date and for those
awards granted prior to that date that have not vested. Beginning after January 1, 2006 the Company
will begin expensing share based compensation. All outstanding awards issued prior to this date
will have fully vested.
2. ASSET RETIREMENT OBLIGATIONS:
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations (SFAS No.
143). SFAS No. 143 requires the Company to record the fair value of an asset retirement obligation
as a liability in the period in which it incurs a legal obligation associated with the retirement
of tangible long-lived assets that result from the acquisition, construction, development and/or
normal use of the assets. The Company has recorded a liability of $1,113,436 ($690,429 U.S. and
$423,007 China) to account for future obligations associated with its assets in both the United
States and China.
7
3. OIL AND GAS PROPERTIES:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
|
2005 |
|
2004 |
Developed Properties: |
|
|
|
|
|
|
|
|
Acquisition, equipment, exploration, drilling and environmental
costs Domestic |
|
$ |
529,444,138 |
|
|
$ |
429,597,822 |
|
Acquisition, equipment, exploration, drilling and environmental
costs China |
|
|
34,685,173 |
|
|
|
24,552,316 |
|
Less accumulated depletion, depreciation and amortization Domestic |
|
|
(84,570,680 |
) |
|
|
(65,099,325 |
) |
Less accumulated depletion, depreciation and amortization China |
|
|
(7,216,503 |
) |
|
|
(3,255,887 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
472,342,128 |
|
|
|
385,794,926 |
|
|
|
|
|
|
|
|
|
|
Unproven Properties: |
|
|
|
|
|
|
|
|
Acquisition and exploration costs Domestic |
|
|
17,378,645 |
|
|
|
16,910,010 |
|
Acquisition and exploration costs China |
|
|
72,778,843 |
|
|
|
71,929,450 |
|
|
|
|
|
|
|
|
|
|
Net oil and gas properties |
|
$ |
562,499,616 |
|
|
$ |
474,634,386 |
|
|
|
|
|
|
|
|
|
|
4. LONG-TERM LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
|
2005 |
|
2004 |
|
|
|
|
|
|
|
|
|
Bank indebtedness |
|
$ |
87,000,000 |
|
|
$ |
102,000,000 |
|
Other long-term obligations |
|
|
10,492,380 |
|
|
|
9,734,904 |
|
|
|
|
|
|
|
|
|
|
Total long-term debt |
|
$ |
97,492,380 |
|
|
$ |
111,734,904 |
|
|
|
|
|
|
|
|
|
|
Bank indebtedness: The Company (through its subsidiary) participates in a revolving
credit facility with a group of banks led by JP Morgan Chase Bank. On May 5, 2005 the
Company signed a third amendment to second amended and restated credit agreement. The
agreement specifies an aggregate borrowing base of $500 million and a commitment amount of
$200 million. The commitment amount may be increased up to $500 million at any time at the
request of the Company. Each bank shall have the right, but not the obligation, to increase
the amount of their commitment as requested by the Company. In the event that the existing
banks increase their commitment to an amount less than the requested commitment amount, then
it would be necessary to bring additional banks into the facility. At June 30, 2005, the
Company had $87 million outstanding and $113 million unused and available under the current
committed amount.
The credit facility matures on May 1, 2010. The note bears interest at either the banks
prime rate with no margin added up to the prime rate plus a margin of three-quarters of
one percent (0.75%) based on the percentage of available credit drawn or at LIBOR plus a
margin of one percent (1.00%) to one and three-quarters of one percent (1.75%) based on the
percentage of available credit drawn. For the purposes of calculating interest, the
available credit is equal to the borrowing base. An average annual commitment fee of 0.25%
to 0.375%, depending on the percentage of available credit drawn, is charged quarterly for
any unused portion of the commitment amount.
The borrowing base is subject to periodic (at least semi-annual) review and re-determination
by the banks and may be decreased or increased depending on a number of factors, including
the Companys proved reserves and the banks forecast of future oil and gas prices. If the
borrowing base is reduced to an amount less than the balance outstanding, the Company has
sixty days from the date of written notice of the reduction in the borrowing base to pay the
difference. Additionally, the Company is subject to quarterly reviews of compliance with the
covenants under the bank facility including minimum coverage ratios relating to interest,
working capital and advances to Sino-American Energy Corporation, the Companys U.S.
subsidiary in which the China asset is held. In the event of a default under the covenants,
the Company may not be able to access funds otherwise available under the facility. The
notes are collateralized by a majority of the Companys proved domestic oil and gas
properties. At June 30, 2005, the Company had $87.0 million of outstanding borrowings under
this credit facility, with a current average interest rate of approximately 4.4%. The
Company was in compliance with all loan covenants at June 30, 2005.
Other long-term obligations: These costs relate to the long-term portion of production taxes
payable, a liability associated with imbalanced production, the long-term portion of the
fair value estimate of our hedging liability and our asset retirement obligations discussed
in Note 2.
5. DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED
STATES:
In September 2003, the AcSB (Accounting Standards Board) released revised transitional
provisions for Stock-Based Compensation and Other Stock-Based Payments, Section 3870, to
provide the same alternative methods of transition as is provided in the US for voluntary
adoption of the fair value based method of accounting. These provisions permit either
retroactive (with or without restatement) or prospective application of the recognition
provisions to awards not previously accounted for at fair value. Prospective application is
only available to enterprises that elect to apply the fair value based method of accounting
to that type of award for fiscal years beginning before January 1, 2004.
The AcSB has also amended Section 3870 to require that all transactions whereby goods and
services are received in exchange for stock-based compensation and other payments result in
expenses that should be recognized in financial statements, and that this requirement would
be applicable for financial periods beginning on or after January 1, 2004. Section 3870
requires that share-based transactions be measured on a fair value basis.
As described in Note 1, had the Company expensed the fair value of options vested during the
period, net income would have been reported as $46,238,583 for the quarter ended June 30,
2005 and $81,717,833 for the six months ended June 30, 2005.
Recorded in other comprehensive loss in the equity section of the Companys balance sheet is
an offset of $2,433,987 to a liability that measures the future effect of the fixed price to
index price swap agreements that the Company currently has in place. The Company has
recorded this in compliance with SFAS 133 which addresses accounting impacts of derivative
instruments.
8
The AcSB issued a new Accounting Guideline (Guideline), AcG-13, Hedging Relationships, in
December 2001 in connection with amendments to CICA Handbook Section 1650, Foreign Currency
Translation. The Guideline is applicable to hedging relationships in effect in fiscal years
beginning on or after July 1, 2003 (the AcSB changed the original effective date of January 1, 2002 in
its December 2001 meeting, and further deferred the effective date in its September 2002
meeting). The Guideline is not applicable to prior periods, but requires the discontinuance
of hedge accounting for hedging relationships established in prior periods that do not meet
the conditions for hedge accounting at the date it is first applied.
The Guideline supplements some of the requirements on accounting for hedges of foreign
currency items in Section 1650, but is equally applicable to accounting for hedges of other
types of risk exposure. The Guideline deals with the identification, documentation,
designation and effectiveness of hedges and also the discontinuance of hedge accounting, but
does not specify hedge accounting methods.
The Guideline is intended to improve the quality and consistency of hedge accounting under
Canadian GAAP. The Guideline incorporates certain features of the U.S. hedge accounting
standards as requirements. The AcSB has attempted to avoid creating any additional GAAP
differences, i.e., requirements that prevent an entity from adopting a U.S. requirement.
However, Canadian hedge accounting remains inconsistent with U.S. GAAP in some fundamental
ways.
6. SEGMENT INFORMATION
The Company has two reportable operating segments, one domestic and one foreign, which are
in the business of natural gas and crude oil exploration and production. The accounting
policies of the segments are the same as those described in the summary of significant
accounting policies. The Company evaluates performance based on profit or loss from oil and
gas operations before price-risk management and other, general and administrative expenses
and interest expense. The Companys reportable operating segments are managed separately
based on their geographic locations. Financial information by operating segment is
presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
2005 |
|
2004 |
|
|
Domestic |
|
China |
|
Total |
|
Domestic |
|
China |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and gas sales |
|
$ |
87,899,347 |
|
|
$ |
21,598,900 |
|
|
$ |
109,498,247 |
|
|
$ |
46,110,290 |
|
|
|
|
|
|
$ |
46,110,290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depletion and depreciation |
|
|
10,236,718 |
|
|
|
2,419,686 |
|
|
|
12,656,404 |
|
|
|
5,415,985 |
|
|
|
|
|
|
|
5,415,985 |
|
Lease operating expenses |
|
|
2,032,364 |
|
|
|
2,166,000 |
|
|
|
4,198,364 |
|
|
|
1,246,745 |
|
|
|
|
|
|
|
1,246,745 |
|
Production taxes |
|
|
10,204,694 |
|
|
|
|
|
|
|
10,204,694 |
|
|
|
5,430,719 |
|
|
|
|
|
|
|
5,430,719 |
|
Gathering |
|
|
4,086,231 |
|
|
|
|
|
|
|
4,086,231 |
|
|
|
2,746,937 |
|
|
|
|
|
|
|
2,746,937 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
61,339,340 |
|
|
|
17,013,214 |
|
|
|
78,352,554 |
|
|
|
31,269,904 |
|
|
|
|
|
|
|
31,269,904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
|
|
|
|
|
|
|
|
3,516,253 |
|
|
|
|
|
|
|
|
|
|
|
1,713,850 |
|
Other expense |
|
|
|
|
|
|
|
|
|
|
1,049,070 |
|
|
|
|
|
|
|
|
|
|
|
838,832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
|
|
|
|
|
|
|
$ |
73,787,231 |
|
|
|
|
|
|
|
|
|
|
$ |
28,717,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
$ |
53,416,720 |
|
|
$ |
3,768,152 |
|
|
$ |
57,184,872 |
|
|
$ |
27,358,587 |
|
|
$ |
1,326,262 |
|
|
$ |
28,684,849 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net oil and gas properties |
|
$ |
462,252,103 |
|
|
$ |
100,247,513 |
|
|
$ |
562,499,616 |
|
|
$ |
273,757,358 |
|
|
$ |
87,493,335 |
|
|
$ |
361,250,693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
2005 |
|
2004 |
|
|
Domestic |
|
China |
|
Total |
|
Domestic |
|
China |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and gas sales |
|
$ |
166,809,736 |
|
|
$ |
31,529,851 |
|
|
$ |
198,339,587 |
|
|
$ |
94,729,063 |
|
|
|
|
|
|
$ |
94,729,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depletion and depreciation |
|
|
19,906,227 |
|
|
|
3,989,686 |
|
|
|
23,895,913 |
|
|
|
10,896,704 |
|
|
|
|
|
|
|
10,896,704 |
|
Lease operating expenses |
|
|
4,017,670 |
|
|
|
3,620,000 |
|
|
|
7,637,670 |
|
|
|
2,529,669 |
|
|
|
|
|
|
|
2,529,669 |
|
Production taxes |
|
|
19,226,756 |
|
|
|
|
|
|
|
19,226,756 |
|
|
|
11,100,496 |
|
|
|
|
|
|
|
11,100,496 |
|
Gathering |
|
|
7,716,775 |
|
|
|
|
|
|
|
7,716,775 |
|
|
|
5,519,134 |
|
|
|
|
|
|
|
5,519,134 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
115,942,308 |
|
|
|
23,920,165 |
|
|
|
139,862,473 |
|
|
|
64,683,060 |
|
|
|
|
|
|
|
64,683,060 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
|
|
|
|
|
|
|
|
6,692,611 |
|
|
|
|
|
|
|
|
|
|
|
3,367,911 |
|
Other expense |
|
|
|
|
|
|
|
|
|
|
1,874,848 |
|
|
|
|
|
|
|
|
|
|
|
1,926,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
|
|
|
|
|
|
|
$ |
131,295,014 |
|
|
|
|
|
|
|
|
|
|
$ |
59,388,881 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
$ |
100,018,868 |
|
|
$ |
10,982,251 |
|
|
$ |
111,001,119 |
|
|
$ |
57,150,607 |
|
|
$ |
6,523,090 |
|
|
$ |
63,673,697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net oil and gas properties |
|
$ |
462,252,103 |
|
|
$ |
100,247,513 |
|
|
$ |
562,499,616 |
|
|
$ |
273,757,358 |
|
|
$ |
87,493,335 |
|
|
$ |
361,250,693 |
|
9
ITEM 2
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and operating results of the Company
should be read in conjunction with the consolidated financial statements and related notes
of the Company. Except as otherwise indicated all amounts are expressed in U.S. dollars.
We operate in one segment, natural gas and oil exploration and development with two
geographical segments; the United States and China.
The discussion and analysis of the Companys financial condition and results of operations
is based upon consolidated financial statements, which have been prepared in accordance with
U.S. GAAP. In addition, application of generally accepted accounting principles requires
the use of estimates, judgments and assumptions that affect the reported amounts of assets
and liabilities as of the date of the financial statements as well as the revenues and
expenses reported during the period. Changes in these estimates, judgments and assumptions
will occur as a result of future events, and, accordingly, actual results could differ from
amounts estimated.
The Company currently generates the majority of its revenue, earnings and cash from the
production and sales of natural gas and oil from its property in southwestern Wyoming. The
price of natural gas in the southwest Wyoming region is a critical factor to the Companys
business. The price of gas in southwest Wyoming historically has been volatile. The
average annual realizations for the period 2003-2005 have ranged from $3.84 to $5.85 per
Mcf. This volatility could be very detrimental to the Companys financial performance. The
Company seeks to limit the impact of this volatility on its results by entering into
derivative and forward sales contracts for gas in southwest Wyoming. The average
realization for the Companys gas during the first six months of 2005 was $5.72 per Mcf,
basis Opal, Wyoming, including the effect of hedges. The Company continued producing from
the first of the nine fields discovered on its oil properties offshore Bohai Bay, China.
The Companys average realized crude oil price on its Boahi Bay production was $39.50 USD
per barrel for the six months ended June 30, 2005.
The Company has grown its natural gas and oil production significantly over the past three
years and management believes it has the ability to continue growing production by drilling
already identified locations on its leases in Wyoming and by bringing into production the
already discovered oilfields in China. The Company delivered 72% production growth on an
Mcfe basis during the six months ended June 30, 2005 as compared to the same six months in
2004.
The Company uses the full cost method of accounting for oil and gas operations whereby all
costs associated with the exploration for and development of oil and gas reserves are
capitalized to the Companys cost centers. Such costs include land acquisition costs,
geological and geophysical expenses, carrying charges on non-producing properties, costs of
drilling both productive and non-productive wells and overhead charges directly related to
acquisition, exploration and development activities. The Company conducts operations in
both the United States and China. Separate cost centers are maintained for each country in
which the Company has operations. Substantially all of the oil and gas activities are
conducted jointly with others and, accordingly, the amounts reflect only the Companys
proportionate interest in such activities.
RESULTS OF OPERATIONS
QUARTER ENDED JUNE 30, 2005 VS. QUARTER ENDED JUNE 30, 2004
During the quarter, production increased 84% on an equivalent basis to 17.7 Bcfe from 9.6
Bcfe for the same quarter in 2004 attributable to the Companys successful drilling
activities along with continued production in China which commenced in July of 2004. This
increased production coupled with average realized prices for natural gas increasing 24% to
$5.85 per Mcf along with average realized prices for oil increasing 48% to $53.99 per barrel resulted in a 138% increase
in revenues to $109.5 million.
In Wyoming, production costs increased to $16.3 million for the quarter ended June 30, 2005
compared to $9.4 million for the quarter ended June 30, 2004 due to increased production
along with increased prices received for that production. On a unit of production basis,
LOE costs increased slightly to $0.14 per Mcfe for the quarter June 30, 2005 compared to
$0.13 per Mcfe for the same quarter in 2004. During the second quarter of 2005 production
taxes were $10.2 million compared to $5.4 million for the same quarter in 2004, or $0.70 per
Mcfe, compared to $0.57 per Mcfe. Production taxes are calculated based on a percentage of
revenue from production. Therefore, higher prices received increased the costs on a per
unit basis. Gathering fees were $4.1 million for the quarter ended June 30, 2005 compared
to $2.8 million for the quarter ended June 30, 2004 which decreased slightly to $0.28 per
Mcfe compared to $0.29 for the quarter ended June 30, 2004.
In Wyoming, depletion, depreciation and amortization (DD&A) expenses increased to $10.2
million during the quarter ended June 30, 2005 from $5.4 million for the same period in
2004, attributable to increased production volumes and a higher depletion rate, which is
primarily associated with forecasted increased future development costs. On a unit basis,
DD&A increased to $0.70 per Mcfe for the quarter ended June 30, 2005 from $0.56 for the
quarter ended June 30, 2004.
In China, production costs were $2.2 million for the quarter ended June 30, 2005 ($0.72 per
Mcfe or $4.32 per BOE). DD&A was $2.4 million ($0.80 per Mcfe or $4.80 per BOE).
For the quarter ended June 30, 2005, net income before income taxes increased 157% to $73.8
million and income tax provision increased 154% to $25.9 million. Net income increased
159% to $47.9 million or $0.30 per diluted share.
General and administrative expenses increased 162% to $3.1 million during the quarter ended
June 30, 2005 compared to $1.2 million for the same period in 2004. This increase was
primarily attributable to increased audit fees associated with the implementation of an
internal audit function implemented by the Company to support its compliance with the
Sarbanes-Oxley Act coupled with increased external audit fees.
Income tax
provision for the period increased to $25.9 million during the second
quarter of 2005 compared to $10.2 million during the second quarter of 2004. This increase
was attributable to an increase in net income from continuing
operations. The Companys effective tax rate was 35.1% at June 30, 2005 compared to 35.5% at June 30, 2004.
SIX-MONTHS ENDED JUNE 30, 2005 VS. SIX-MONTHS ENDED JUNE 30, 2004
During the six-months ended June 30, 2005, production increased 72% on an equivalent basis
to 33.3 Bcfe from 19.3 Bcfe for the same six-months in 2004. The increase is primarily
attributable to the additional wells drilled and completed during 2004 along with the
increased drilling and completion during the first six-months of the year. Increased
production coupled with average realized prices for natural gas increasing 18% on an
equivalent basis to $5.72 per Mcf during the six-month period ended June 30, 2005 from $4.84 per Mcf for
the same period in 2004 resulted in a 109% increase in revenues to
$198.3 million. For the six months ended June 30, 2005 oil prices increased 41% to $51.98 per barrel compared to $36.77 per barrel for the same six months of 2004.
10
In Wyoming, production costs increased 62% to $30.9 million primarily due to the 48%
increase in production and higher production taxes driven by the 76% increase in revenues.
Production taxes are calculated as a percentage of revenue. Therefore, higher prices
received increased the costs on a per unit basis. On a unit of production basis, production
costs increased to $1.09 per Mcfe during the first six months of 2005 compared to $0.99 per
Mcfe for the first six months of 2004. The increase in production costs was attributable
almost wholly to the increase in production taxes arising from higher revenues.
In China, the Company produced 798,253 barrels of crude oil for the six months ended June
30, 2005 with an average realized price of $39.50 per barrel resulting in revenues of $31.5
million. Production costs for the first six months of 2005 were $3.6 million ($0.76 per
Mcfe or $4.56 per BOE). DD&A was $4.0 million ($0.83 per Mcfe or $4.98 per BOE).
For the six months ended June 30, 2005 net income before income taxes increased 121% to
$131.3 million and income tax provision increased by 119% to $46.1 million. Net income
increased 123% to $85.2 million, or $0.53 per diluted share.
General and administrative expenses increased 107% to $5.7 million for the six months ended
June 30, 2005 compared to $2.7 million for the same period in 2004. This increase was
primarily attributable to increased audit fees associated with the implementation of an
internal audit function implemented by the Company to support its compliance with the
Sarbanes-Oxley Act coupled with increased external audit fees.
The
Companys income tax provision increased to $46.1 million during the first six months of 2005
compared to $21.1 million for the same period in 2004. This increase was attributable to an
increase in net income from continuing operations. The
Companys effective tax rate was 35.1% at June 30, 2005 compared to 35.5% at June 30, 2004.
LIQUIDITY AND CAPITAL RESOURCES
During the six month period ended June 30, 2005, the Company relied on cash provided by
operations to finance its capital expenditures. The Company participated in the drilling
and completion of 46 wells in Wyoming and continued to participate in the exploration and
development processes in the China blocks including the ongoing batch drilling program for
the development wells. For the six-month period ended June 30, 2005, net capital
expenditures were $111 million. At June 30, 2005, the Company reported a cash position of
$37.0 million compared to $9.2 million at June 30, 2004. Working capital at June 30, 2005
was $28.4 million as compared to $2.1 million at June 30, 2004. As of June 30, 2005, the
Company had incurred bank indebtedness of $87.0 million compared to $114 million during the
same six months in 2004. The company incurred other long-term obligations of $10.5 million
comprised of items payable in more than one year, primarily related to production taxes.
The Companys positive cash provided by operating activities, along with the availability
under the senior credit facility, are projected to be sufficient to fund the Companys
budgeted capital expenditures for 2005, which are currently projected to be $290 million.
Of the $290 million budget, the Company plans to spend approximately $270 million of its
2005 budget in Wyoming and approximately $20 million in China. Of the $270 million for
Wyoming, the Company plans to drill or participate in an estimated 105 gross wells in 2005,
of which approximately 18% will be for exploration wells and the remaining will be for
development wells. Of the $20 million budgeted for China, approximately $15 million will be
for development activity and the balance will be for exploratory/appraisal activity. The
Company currently has no budget for acquisitions in 2005.
The Company (through its subsidiary) participates in a revolving credit facility with a
group of banks led by JP Morgan Chase Bank. On May 5, 2005 the Company signed a third
amendment to second amended and restated credit agreement. The agreement specifies an
aggregate borrowing base of $500 million and a commitment amount of $200 million. The
commitment amount may be increased up to $500 million at any time at the request of the
Company. Each bank shall have the right, but not the obligation, to increase the amount of
their commitment as requested by the Company. In the event that the existing banks increase
their commitment to an amount less than the requested commitment amount, then it would be
necessary to bring additional banks into the facility. The credit facility matures on May 1,
2010. The note bears interest at either the banks prime rate with no margin added up to
prime rate plus a margin of three-quarters of one percent (0.75%) based on the
percentage of available credit drawn or at LIBOR plus a margin of one percent (1.00%) to one
and three-quarters of one percent (1.75%) based on the percentage of available credit drawn.
For the purposes of calculating interest, the available credit is equal to the borrowing
base. An average annual commitment fee of 0.25% to 0.375%, depending on the percentage of
available credit drawn, is charged quarterly for any unused portion of the commitment
amount. The borrowing base is subject to periodic (at least semi-annual) review and
re-determination by the banks and may be increased or decreased depending on a number of
factors including the Companys proved reserves and the banks forecast of future oil and
gas prices. Additionally, the Company is subject to compliance with the covenants under the
bank facility including minimum coverage ratios relating to interest, working capital and
advances to Sino-American Energy Corporation, the Companys U.S. subsidiary in which the
China asset is held. In the event of a default under the covenants, the Company may not be
able to access funds otherwise available under the facility and may, in certain
circumstances including a reduction in the borrowing base, be required to repay the credit
facility. The notes are collateralized by a majority of the Companys proved domestic oil
and gas properties. At June 30, 2005, the Company had $87.0 million of outstanding
borrowings under this credit facility, with a current average interest rate of approximately
4.4%. The Company was in compliance with all loan covenants at June 30, 2005.
During the six-months ended June 30, 2005, net cash provided by operating activities was
$167.7 million as compared to $62.3 million for the six-months ended June 30, 2004. The
increase in cash provided by operating activities was attributable to the increase in
earnings.
During the six-months ended June 30, 2005, cash used in investing activities was $141.1
million as compared to $70.7 million for the six-months ended June 30, 2004. The change is
primarily attributable to increased activity for drilling and completion activity in
Wyoming and China.
During the six-months ended June 30, 2005, cash provided by (used in) financing activities
was $(6.6) million as compared to $15.7 million for the six-months ended June 30, 2004.
The change is primarily attributable to decreased borrowings under the senior credit
facility.
11
OFF BALANCE SHEET ARRANGEMENTS
The Company did not have any off-balance sheet arrangements as of June 30, 2005.
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISION OF THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995
This report contains or incorporates by reference forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the
Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995.
All statements other than statements of historical facts included in this document,
including without limitation, statements in Managements Discussion and Analysis of
Financial Condition and Results of Operations regarding our financial position, estimated
quantities and net present values of reserves, business strategy, plans and objectives of
the Companys management for future operations, covenant compliance and those statements
preceded by, followed by or that otherwise include the words believe, expects,
anticipates, intends, estimates, projects, target, goal, plans, objective,
should, or similar expressions or variations on such expressions are forward-looking
statements. The Company can give no assurances that the assumptions upon which such
forward-looking statements are based will prove to be correct nor can the Company assure
adequate funding will be available to execute the Companys planned future capital program.
Other risks and uncertainties include, but are not limited to, fluctuations in the price
the Company receives for oil and gas production, reductions in the quantity of oil and gas
sold due to increased industry-wide demand and/or curtailments in production from specific
properties due to mechanical, marketing or other problems, operating and capital
expenditures that are either significantly higher or lower than anticipated because the
actual cost of identified projects varied from original estimates and/or from the number of
exploration and development opportunities being greater or fewer than currently anticipated
and increased financing costs due to a significant increase in interest rates. See the
Companys annual report on Form 10-K for the year ended December 31, 2004 for additional
risks related to the Companys business.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Companys major market risk exposure is in the pricing applicable to its gas and oil
production. Realized pricing is primarily driven by the prevailing price for crude oil and
spot prices applicable to the Companys U.S. natural gas production, which contributes the
majority of the Companys oil and gas revenue. Historically, prices received for gas
production have been volatile and unpredictable. Pricing volatility is expected to
continue. Gas price realizations averaged $5.72 per Mcf during the six months ended June
30, 2005. This average price includes the effects of hedging and gas balancing between
working interest owners.
The Company periodically enters into commodity derivative contracts and fixed-price
physical contracts to manage its exposure to oil and natural gas price volatility. The
Company primarily utilizes fixed price physical contracts as well as price swaps, which are
placed with major financial institutions or with counter-parties of high credit quality
that it believes are minimal credit risks. The oil and natural gas reference prices of
these commodity derivatives contracts are based upon crude oil and natural gas futures,
which have a high degree of historical correlation with actual prices the Company receives.
Under SFAS 133 all derivative instruments are recorded on the balance sheet at fair value.
Changes in the derivatives fair value are recognized currently in earnings unless
specific hedge accounting criteria are met. For qualifying cash flow hedges, the gain or
loss on the derivative is deferred in accumulated other comprehensive income (loss) to the
extent the hedge is effective. For qualifying fair value hedges, the gain or loss on the
derivative is offset by related results of the hedged item in the income statement. Gains
and losses on hedging instruments included in accumulated other comprehensive income (loss)
are reclassified to oil and natural gas sales revenue in the period that the related
production is delivered. Derivative contracts that do not qualify for hedge accounting
treatment are recorded as derivative assets and liabilities at market value in the
consolidated balance sheet, and the associated unrealized gains and losses are recorded as
current expense or income in the consolidated statement of operations. The Company
currently does not have any derivative contracts in place that do not qualify as a cash
flow hedge.
During the first six months of 2005, the total impact of the Companys price swaps was a
reduction in gas revenues of $2.4 million. The effect of fixed price physical contracts is
not included in this amount. The Company does not currently hedge its oil production.
At June 30, 2005, the Company had the following open derivative contracts to manage price
risk on a portion of its natural gas production whereby the Company receives the fixed
price and pays the variable price (all prices southwest Wyoming basis).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
Unrealized |
|
|
Remaining Contract |
|
Volume- |
|
Price / |
|
loss at |
Type |
|
Period |
|
MMBTU / day |
|
MMBTU |
|
6/30/05* |
Swap |
|
Jul 2005 Dec 2005 |
|
|
10,000 |
|
|
$ |
4.42 |
|
|
$ |
3,750,367 |
|
*
Unrealized losses are not adjusted for income tax effect
The Company also utilizes fixed price forward gas sales contracts at southwest Wyoming
delivery points to hedge its commodity exposure. In addition to the derivative contracts
discussed above, the Company had the following fixed price physical delivery contracts in
place on behalf of its interest and those of other parties at June 30, 2005.
|
|
|
|
|
|
|
|
|
Remaining Contract |
|
Volume - |
|
Average |
Period |
|
MMBTU / day |
|
Price / MMBTU |
Calendar 2005
|
|
|
70,000 |
|
|
$ |
5.03 |
|
Apr Oct 2005
|
|
|
10,000 |
|
|
$ |
6.03 |
|
Calendar 2006
|
|
|
60,000 |
|
|
$ |
5.60 |
|
The above derivative and forward gas sales contracts represent approximately 45% of the
Companys currently forecasted gas production for the balance of 2005, and 22% for calendar
year 2006.
12
ITEM 4 CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. The Companys management,
including the Companys principal executive and financial officer has evaluated the
effectiveness of the Companys disclosure controls and procedures (as defined in Rules
13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934) as of the end of the
period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, the
Companys principal executive and financial officer has concluded that the disclosure
controls and procedures were effective to ensure that information required to be disclosed
by the Company in reports that it files or submits under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods specified in
the rules and forms of the Securities and Exchange Commission as of the end of the period
covered by this Quarterly Report on Form 10-Q.
(b) Changes in Internal Controls. There were no changes in the Companys internal
control over financial reporting that occurred during the Companys last fiscal quarter
that has materially affected, or is reasonably likely to materially affect, the Companys
internal control over financial reporting.
PART 2 OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is currently involved in various routine disputes and allegations incidental to
its business operations. While it is not possible to determine the ultimate disposition of
these matters, the Company believes that the resolution of all such pending or threatened
litigation is not likely to have a material adverse effect on the Companys financial
position, or results of operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS
The Company held its annual meeting on April 29, 2005. At the annual meeting the entire
board of directors of the Company was elected. The votes cast for each of the directors
proposed by the Companys definitive proxy statement on Schedule 14A was as follows:
Michael D. Watford 52,208,800 voted in favor, 535,381 voted against and 1,039,656 votes abstained.
W. Charles Helton 52,669,344 voted in favor, 79,302 voted against and 1,035,191 votes abstained.
James E. Nielson 52,660,816 voted in favor, 73,690 voted against and 1,049,331 votes abstained.
James C. Roe 52,674,628 voted in favor, 73,628 voted against and 1,035,581 votes abstained.
Robert E. Rigney 52,662,071 voted in favor, 89,425 voted against and 1,032,341 votes abstained.
The shareholders of the Company also approved the re-appointment of KPMG, LLP as the
Companys independent auditors for 2005. There were 56,319,762 votes in favor of approval
of the re-appointment of KPMG, LLP as the Companys auditors, 0 votes against and
1,078,422 votes abstained.
The shareholders of the Company approved a two for one forward stock split with 56,320,334
votes in favor of the stock split and 107,834 votes abstaining.
The shareholders approved the Companys 2005 Stock Incentive Plan with 17,323,157 shares
voting to approve the Plan and 13,092,960 shares voting against the Plan. The Plan was
therefore approved by a majority of the votes cast.
A total of 57,494,735 shares were voted by 293 shareholders, representing 76% of the
Companys outstanding shares.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
(a) Exhibits
3.1 Articles of Incorporation of Ultra Petroleum Corp. (incorporated by reference to
Exhibit 3.1 of the Companys Quarterly Report on Form 10Q for the period ended June 30,
2001.)
3.2 By-Laws of Ultra Petroleum Corp (incorporated by reference to Exhibit 3.2 of the
Companys Quarterly Report on Form 10Q for the period ended June 30, 2001.)
4.1 Specimen Common Share Certificate (incorporated by reference to Exhibit 4.1 of the
Companys Quarterly Report on Form 10Q for the period ended June 30, 2001.)
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10.1 Third to Amendment to Second Amended and Restated Credit Agreement dated May 5, 2005
among Ultra Resources, Inc., JPMorgan Chase Bank N.A., Union Bank of California N.A.,
Hibernia National Bank, Guaranty Bank FSB, Compass Bank, Bank of Scotland and Bank of
America, N.A.
31.1 Certification of Chief Executive Officer and Principle Financial Officer pursuant to Rule
13(a) 14(a)
32.1 Certification of Chief Executive Officer and Principle Financial Officer pursuant to Rule
13(a) 14(b)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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ULTRA PETROLEUM CORP. |
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Date July 29, 2005
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By: |
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Name: Michael D. Watford |
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Title: Chief Executive Officer |
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(on behalf of the registrant and as the Principal Financial Officer) |
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Index to Exhibits
3.1 Articles of Incorporation of Ultra Petroleum Corp. (incorporated by reference to
Exhibit 3.1 of the Companys Quarterly Report on Form 10Q for the period ended June 30,
2001.)
3.2 By-Laws of Ultra Petroleum Corp (incorporated by reference to Exhibit 3.2 of the
Companys Quarterly Report on Form 10Q for the period ended June 30, 2001.)
4.1 Specimen Common Share Certificate (incorporated by reference to Exhibit 4.1 of the
Companys Quarterly Report on Form 10Q for the period ended June 30, 2001.)
10.1 Third to Amendment to Second Amended and Restated Credit Agreement dated May 5, 2005
among Ultra Resources, Inc., JPMorgan Chase Bank N.A., Union Bank of California N.A.,
Hibernia National Bank, Guaranty Bank FSB, Compass Bank, Bank of Scotland and Bank of
America, N.A.
31.1 Certification of Chief Executive Officer and Principle Financial Officer pursuant to Rule
13(a) 14(a)
32.1 Certification of Chief Executive Officer and Principle Financial Officer pursuant to Rule
13(a) 14(b)