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FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 2001
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Commodity Risk. Our
major market risk exposure is the commodity pricing applicable to our oil and
natural gas production. Realized commodity prices received for such production
are primarily driven by the prevailing worldwide price for crude oil and spot
prices applicable to natural gas. The effects of such pricing volatility are
discussed above, and such volatility is expected to continue.
Our price risk program permits the utilization of
agreements and financial instruments (such as futures, forward and options
contracts, and swaps) to mitigate price risk associated with fluctuations in
oil and natural gas prices. Below is a description of the financial
instruments we have utilized to hedge our exposure to price risk.
- Price
Floors – In 2001 we elected not to designate our price floors for
special hedge accounting treatment, and instead used mark-to-market accounting
treatment. Our adoption of SFAS No. 133, as amended, is discussed in Note 1 to
the Consolidated Financial Statements. Below is a summary of the utilization
of price floors for the years ending December 31, 2001, 2000, and 1999.
- During 2001 we
recognized net gains of $1,173,094 related to our hedging activities, with
$16,784 of losses unrealized at year-end 2001. This activity is recorded in
Price-risk management and other, net on the accompanying statements of income.
At December 31, 2001, we had open price floor contracts covering notional
volumes of 2.0 million MMBtu of natural gas. These contracts relate to the
NYMEX contract months of February and March 2002 at an average price of $2.33
per MMBtu. The fair value of our open contracts at December 31, 2001, totaled
$296,000 and is included in the Other current assets account on the
accompanying balance sheet.
Prior to adopting SFAS No. 133 in 2001, costs and any
benefits derived from price floors were recorded as a reduction or increase,
as applicable, in oil and gas sales revenues for 2000 and 1999. The costs to
purchase put options were amortized over the option periods in 2000 and 1999.
- The costs
related to 2000 hedging activities totaled approximately $1,083,000, with
benefits of approximately $579,000 being received, resulting in a net cash
outlay of approximately $504,000, or $0.012 per Mcfe. The costs related to the
open contracts as of December 31, 2000, totaled approximately $823,000, which
was our maximum exposure under those contracts. Those open contracts covering
production for 2001 had a fair market value of approximately $209,000 at that
date. Each of those contracts expired on or before March 31, 2001.
- The costs
related to 1999 hedging activities totaled approximately $909,000, with
benefits of approximately $348,000 being received, resulting in a net cash
outlay of approximately $561,000, or $0.013 per Mcfe. The costs related to the
open contracts as of December 31, 1999, totaled approximately $98,000 and had
a fair market value of $112,500.
- Participating
Collars – During the fourth quarter of 1999, we entered into
participating collars to hedge oil production through June 2000. Below is a
summary of the collar arrangements for 2000. The participating collars were
designated as hedges, and realized losses were recognized in oil and gas
revenues when the associated production occurred.
- We hedged
100,000 Bbls of oil per month for the months January through June 2000, with a
floor price of $19.00 per Bbl and a ceiling price of $23.60 per Bbl, whereby
we participate in 75% of any amount above the $23.60 ceiling price. These
participating collars closed with our recording a loss of approximately
$610,000, or $0.014 per Mcfe produced. There were no open participating
collars at either year-end 2000 or 2001.
Interest Rate Risk. Our Senior Notes have a fixed
interest rate, so consequently we are not exposed to cash flow or fair value
risk from market interest rate changes on our Senior Notes. At December 31,
2001, we had $134.0 million borrowed under our credit facility, which is
subject to floating rates and therefore susceptible to interest rate
fluctuations. The result of a 10% fluctuation in the bank’s base rate would
constitute 48 basis points and would impact 2002 cash flows by approximately
$0.6 million based on this same level of borrowing.
Financial Instruments & Debt Maturities.
Our financial instruments
consist of cash and cash equivalents, accounts receivable, accounts payable,
bank borrowings, and notes. The carrying amounts of cash and cash equivalents,
accounts receivable, and accounts payable approximate fair value due to the
highly liquid nature of these short-term instruments. The fair values of the
bank borrowings approximate the carrying amounts as of December 31, 2001 and
2000, and were determined based upon interest rates currently available to us
for borrowings with similar terms. Based on quoted market prices as of the
respective dates, the fair value of our Senior Notes was $126.5 million at
December 31, 2001, and $115.1 million at December 31, 2000. Our credit
facility with the banks expires October 1, 2005. Our $125.0 million Senior
Notes mature on August 1, 2009.
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