Of the $51,040,378 of domestic unproved property costs (primarily seismic and lease acquisition costs) at December 31, 1998, excluded from the amortizable base, $33,360,518 was incurred in 1998, $11,966,626 was incurred in 1997, $3,260,112 was incurred in 1996, and $2,953,122 was incurred in prior years. When the Company is in an active drilling mode, it has evaluated the majority of these unproved costs within a two to three year time frame. In response to current market conditions, the Company has decreased its planned 1999 drilling expenditures when compared to recent years, which when coupled with the $15.2 million of leasehold properties acquired in the Toledo Bend Properties acquisition may extend the evaluation timeframe of such costs.

Of the $5,001,508 of net foreign unproved property costs at December 31, 1998, being excluded from the amortizable base, $2,521,761 was incurred in 1998, $1,731,561 was incurred in 1997, $545,980 was incurred in 1996, and $202,206 was incurred in 1995. All of these costs are costs incurred in New Zealand, as the costs incurred in Russia and Venezuela were impaired in the third quarter of 1998 (see Note 1 to the Company’s financial statements). The Company expects it will complete its evaluation of the New Zealand properties as wells are drilled over the next two to three years.

Capital Expenditures. The following table sets forth capital expenditures related to the Company’s oil and gas operations:

	Year Ended December 31,
	1998	1997	1996
	-----------------	-----------------	-----------------
Acquisition of proved properties	$ 59,487,524	$ 8,417,318	$ 1,529,611
Lease acquisitions1,2	38,658,047	21,603,732	16,426,327
Exploration	12,578,124	10,705,115	2,704,281
Development	54,821,131	82,885,549	69,067,024
	-----------------	-----------------	-----------------
Total acquisition, exploration, and development3	$ 165,544,826	$ 123,611,714	$ 89,727,243
	-----------------	-----------------	-----------------
Processing plants	$15,000,000	$                   ---	$                 ---
Field compression facilities	2,228,101	7,444,070	---
	-----------------	-----------------	-----------------
Total plants and facilities	$17,228,101	$7,444,070	$                 ---
	-----------------	-----------------	-----------------
Total capital expenditures	$182,772,927	$131,055,784	$89,727,243
	==========	==========	==========

¹Lease acquisitions for 1998, 1997, and 1996 include expenditures of: $2,521,761, $1,731,561, and $545,980, respectively, relating to the Company’s initiatives in New Zealand; $421,602, $828,133, and $487,597, respectively, relating to initiatives in Venezuela; and $592,841, $658,145, and $2,712,278, respectively, relating to initiatives in Russia.

²These are actual amounts as incurred by year, including both proved and unproved lease costs. The annual lease acquisition amounts added to proved oil and gas properties (being amortized) for 1998, 1997, and 1996, were $13,853,129, $7,384,385, and $9,458,016, respectively.

³Includes capitalized general and administrative costs directly associated with the acquisition, exploration, and development efforts of approximately $12,300,000, $11,700,000, and $7,400,000 in 1998, 1997, and 1996, respectively. In addition, total includes $3,849,665, $2,326,691, and $1,549,575 in 1998, 1997, and 1996, respectively, of capitalized interest on unproved properties.

 

Results of Operations. The following table sets forth results of the Company's oil and gas operations:

	Year Ended December 31,
	1998	1997	1996
	---------------------	---------------------	---------------------
Oil and gas sales	$ 80,067,837	$ 69,015,189	$ 52,770,672
Oil and gas production costs	(13,138,980)	(8,778,876)	(6,141,941)
Depreciation, depletion, and amortization	(38,069,355)	(23,443,273)	(15,812,134)
Write-down of oil and gas properties	(90,772,628)	---	---
	---------------------	---------------------	---------------------
	(61,913,126)	36,793,040	30,816,597
Provision (benefit) for income taxes	(21,236,202)	12,015,816	10,448,917
	---------------------	---------------------	---------------------
Results of producing activities	$ (40,676,924)	$ 24,777,224	$ 20,367,680
	============	============	============
Amortization per physical unit of production
(equivalent Mcf of gas)	$ 0.98	$ 0.92	$ 0.81
	============	============	============

 

Supplemental Reserve Information. The following information presents estimates of the Company’s proved oil and gas reserves, which are all located onshore in the United States. All of the Company’s reserves were determined by the Company and audited by H. J. Gruy and Associates, Inc. ("Gruy"), independent petroleum consultants. Gruy’s summary report dated January 27, 1999, is set forth as an exhibit to the Form 10-K Report for the year ended December 31, 1998, and includes definitions and assumptions that served as the basis for the estimates of proved reserves and future net cash flows. Such definitions and assumptions should be referred to in connection with the following information:

Estimates of Proved Reserves
		Oil and
	Natural Gas	Condensate
	(Mcf)	(Bbls)
	---------------	---------------
Proved reserves as of December 31, 19951	143,567,520	5,421,981
Revisions of previous estimates2	(9,544,391)	(816,065)
Purchases of minerals in place	2,676,393	97,178
Sales of minerals in place	(4,163,770)	(340,706)
Extensions, discoveries, and other additions	107,762,886	1,745,307
Production3	(14,540,437)	(623,386)
	---------------	---------------
Proved reserves as of December 31, 19961	225,758,201	5,484,309
Revisions of previous estimates2	(22,774,899)	(427,412)
Purchases of minerals in place	30,342,398	580,278
Sales of minerals in place	(1,155,706)	(50,909)
Extensions, discoveries, and other additions	102,479,883	2,945,037
Production3	(20,344,208)	(672,385)
	---------------	---------------
Proved reserves as of December 31, 19971	314,305,669	7,858,918
Revisions of previous estimates2	(42,958,447)	(2,291,223)
Purchases of minerals in place	54,189,901	7,237,298
Sales of minerals in place	(1,727,878)	(39,932)
Extensions, discoveries, and other additions	55,951,332	2,993,540
Production3	(27,359,742)	(1,800,676)
	---------------	---------------
Proved reserves as of December 31, 19981	352,400,835	13,957,925
	============	============
Proved developed reserves,
December 31, 1995	81,532,025	3,313,226
December 31, 1996	135,424,880	3,622,480
December 31, 1997	191,108,214	4,288,696
December 31, 1998	197,105,963	7,142,566

¹Proved reserves exclude quantities subject to the Company’s volumetric production payment agreement.

²Revisions of previous estimates are related to upward or downward variations based on current engineering information for production rates, volumetrics, and reservoir pressure. Additionally, changes in quantity estimates are affected by the increase or decrease in crude oil and natural gas prices at each year end. Proved reserves, as of December 31, 1998, were based upon prices of $2.23 per Mcf of natural gas and $11.23 per barrel of oil, compared to $2.78 per Mcf and $15.76 per barrel as of December 31, 1997.

³Natural gas production for 1996, 1997, and 1998 excludes 1,156,361, 1,015,226, and 866,232 Mcf, respectively, delivered under the Company’s volumetric production payment agreement.

 

Standardized Measure of Discounted Future Net Cash Flows. The standardized measure of discounted future net cash flows relating to proved oil and gas reserves is as follows:

	Year Ended December 31,
	1998	1997	1996
	------------------------	------------------------	------------------------
Future gross revenues	$ 972,852,038	$ 994,828,072	$ 1,141,831,786
Future production costs	(294,307,549)	(273,475,056)	(228,626,881)
Future development costs	(118,420,782)	(92,946,811)	(59,988,855)
	------------------------	------------------------	------------------------
Future net cash flows before income taxes	560,123,707	628,406,205	853,216,050
Future income taxes	(123,875,660)	(135,587,216)	(211,375,632)
	------------------------	------------------------	------------------------
Future net cash flows after income taxes	436,248,047	492,818,989	641,840,418
Discount at 10% per annum	(145,974,944)	(199,980,649)	(274,608,116)
	------------------------	------------------------	------------------------
Standardized measure of discounted future net cash flows
relating to proved oil and gas reserves	$ 290,273,103	$ 292,838,340	$ 367,232,302
	==============	==============	==============

 

The standardized measure of discounted future net cash flows from production of proved reserves was developed as follows:

1. Estimates are made of quantities of proved reserves and the future periods during which they are expected to be produced based on year-end economic conditions.

2. The estimated future gross revenues of proved reserves are priced on the basis of year-end prices, except in those instances where fixed and determinable gas price escalations are covered by contracts limited to the price the Company reasonably expects to receive.

3. The future gross revenue streams are reduced by estimated future costs to develop and to produce the proved reserves, as well as certain abandonment costs based on year-end cost estimates and the estimated effect of future income taxes.

4. Future income taxes are computed by applying the statutory tax rate to future net cash flows reduced by the tax basis of the properties, the estimated permanent differences applicable to future oil and gas producing activities, and tax carry forwards.

The estimates of cash flows and reserves quantities shown above are based on year-end oil and gas prices for each period. Under Securities and Exchange Commission rules, companies that follow the full-cost accounting method are required to make quarterly Ceiling Test calculations, using prices in effect as of the period end date presented (see Note 1). Application of these rules during periods of relatively low oil and gas prices, even if of short-term seasonal duration, may result in write-downs.

The standardized measure of discounted future net cash flows is not intended to present the fair market value of the Company’s oil and gas property reserves. An estimate of fair value would also take into account, among other things, the recovery of reserves in excess of proved reserves, anticipated future changes in prices and costs, an allowance for return on investment, and the risks inherent in reserve estimates.

The following are the principal sources of change in the standardized measure of discounted future net cash flows:

	Year Ended December 31,
	1998	1997	1996
	------------------------	------------------------	------------------------
Beginning balance	$ 292,838,340	$ 367,232,302	$ 128,904,084
	------------------------	------------------------	------------------------
Revisions to reserves proved in prior years--
Net changes in prices, production costs, and future
development costs	(107,301,930)	(237,149,170)	145,661,994
Net changes due to revisions in quantity estimates	(47,924,995)	(27,188,512)	(25,755,091)
Accretion of discount	35,034,478	47,068,172	14,703,841
Other	(34,966,058)	(37,336,420)	7,609,227
	------------------------	------------------------	------------------------
Total revisions	(155,158,505)	(254,605,930)	142,219,971
New field discoveries and extensions, net of future
production and development costs	73,956,430	110,396,029	208,250,909
Purchases of minerals in place	87,628,829	29,290,334	6,835,362
Sales of minerals in place	(1,928,900)	(2,373,547)	(8,084,581)
Sales of oil and gas produced, net of production costs	(65,680,050)	(58,786,505)	(44,958,559)
Previously estimated development costs incurred	51,622,419	55,742,684	19,883,446
Net change in income taxes	6,994,540	45,942,973	(85,818,330)
	------------------------	------------------------	------------------------
Net change in standardized measure of discounted
future net cash flows	(2,565,237)	(74,393,962)	238,328,218
	------------------------	------------------------	------------------------
Ending balance	$ 290,273,103	$ 292,838,340	$ 367,232,302
	=============	=============	=============

 

Quarterly Results. The following table presents summarized quarterly financial information for the years ended December 31, 1997 and 1998:

			Income (Loss)				Basic Earnings		Diluted Earnings
			Before		Net Income		(Loss)		(Loss)
	Revenues		Income Taxes		(Loss)		Per Share1		Per Share1
	-----------------		-------------------		-----------------		-----------------		-----------------
1997
First Quarter	$ 19,997,502		$ 10,161,045		$ 6,769,263		$          .41		$          .37
Second Quarter	15,653,078		6,007,474		4,113,689		.25		.24
Third Quarter	17,895,979		7,024,524		4,685,689		.29		.27
Fourth Quarter	21,165,621		9,936,563		6,741,548		.41		.37
	-----------------		-----------------		-----------------
Total	$ 74,712,180		$ 33,129,606		$ 22,310,189		$    1.35		$     1.26
	==========		==========		==========
1998
First Quarter	$ 16,475,229		$ 4,835,502		$ 3,229,615		$          .20		$          .20
Second Quarter	16,340,730		4,270,153		2,896,470		.18		.18
Third Quarter2	24,557,553		(87,052,299)		(57,431,015)		(3.50)		(3.50)
Fourth Quarter	25,095,709		4,555,063		3,079,726		.19		.19
	-----------------		-----------------		-----------------
Total	$ 82,469,221		$ (73,391,581)		$ (48,225,204)		$    (2.93)		$    (2.93)
	==========		==========		==========

¹Amounts prior to the fourth quarter of 1997 have been retroactively restated to give recognition to: (a) an equivalent change in capital structure as a result of a 10% stock dividend in October 1997 (see Note 2 to the Company's financial statements); and (b) the adoption of Statement of Financial Accounting Standards No. 128, "Earnings per Share." See Note 2 to the Company’s financial statements.

²The loss in the third quarter of 1998 was the result of a pre-tax write-down of oil and gas properties of $90.8 million ($59.9 million after tax). See Note 1 to the Company’s financial statements.

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