Parallel Petroleum - Recent Material Event(i)
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Cautionary Statement Regarding Forward -Looking Statements
Some statements contained in this Annual Report on Form 10-K are “forward-looking statements”.
These forward-looking statements relate to, among others, the following:
We have based these forward-looking statements on our current assumptions, expectations and
projections about future events.
We use the words “may”, “will”, “expect”, “could,” “anticipate,” “estimate”, “believe”,
“continue”, “intend”, “plan”, “budget”, “future”, “reserves” and other similar words to identify
forward-looking statements. These statements also involve risks and uncertainties that could cause
our actual results or financial condition to materially differ from our expectations. We believe
the assumptions and expectations reflected in these forward-looking statements are reasonable.
However, we cannot give any assurance that our assumptions and expectations will prove to be
correct or that we will be able to take any actions that are presently planned. All of these
statements involve assumptions of future events and risks and uncertainties. Risks and
uncertainties associated with forward-looking statements include, but are not limited to:
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For these and other reasons, actual results may differ materially from those projected or
implied. We believe it is important to communicate our expectations of future performance to our
investors. However, events may occur in the future that we are unable to accurately predict or
over which we have no control. We caution you against putting undue reliance on forward-looking
statements or projecting any future results based on such statements.
Before you invest in our common stock or our 101/4% senior notes, you should be aware that there
are various risks associated with an investment. We have described some of these risks in other
sections of this Annual Report on Form 10-K and under Item 1A. Risk Factors, beginning on page 13.
Unless the context requires otherwise, references in this Annual Report on Form 10-K to “we”,
“us”, “our”, “Parallel” or “Company” mean the registrant, Parallel Petroleum Corporation and, where
applicable, its former consolidated subsidiaries.
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PART I
ITEM 1. BUSINESS
About Our Company
We are a Midland, Texas-based independent oil and natural gas exploration and production
company focused on the acquisition, development and exploitation of long-lived oil and natural gas
reserves and, to a lesser extent, exploring for new oil and natural gas reserves. The majority of
our current producing properties are in the Permian Basin of West Texas and New Mexico, the Fort
Worth Basin of North Texas, and the onshore Gulf Coast area of South Texas. We are a publicly
traded company listed on Nasdaq under the ticker symbol PLLL.
Throughout this report, we refer to some terms that are commonly used and understood in the
oil and natural gas industry. These terms are:
Parallel was incorporated in Texas on November 26, 1979, and reincorporated in the State of
Delaware on December 18, 1984.
Our executive offices are located at 1004 N. Big Spring, Suite 400, Midland, Texas 79701. Our
telephone number is (432) 684-3727.
Available Information
You may read and copy any materials we file with, or furnish to, the Securities and Exchange
Commission at the SEC’s public reference facilities at 100 F Street, N.E., Room 1580, Washington,
D.C. 20549. You may obtain information on the operation of the public reference facilities by
calling the SEC at 1-800-SEC-0330. The SEC maintains a website (www.sec.gov) that contains
reports, proxy and information statements, and other information regarding issuers, including
Parallel, that file electronically with the SEC.
Our website address is www.plll.com. Information on our website or any other website
is not incorporated by reference into this Annual Report on Form 10-K and does not constitute a
part of this Annual Report on Form 10-K.
We make available free of charge on our Internet website our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed
or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as
reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
We will provide electronic or paper copies of our SEC filings free of charge upon request made
to Cindy Thomason, Manager of Investor Relations, cindyt@plll.com, 1-800-299-3727.
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Developments in 2007; 2008 Capital Budget
On July 31, 2007, we completed a private offering of unsecured senior notes (the “senior
notes” or “101/4% senior notes”) in the principal amount of $150.0 million. The senior notes mature
on August 1, 2014 and bear interest at 10.25% which is payable semi-annually beginning on February
1, 2008. Prior to August 1, 2010, we may redeem up to 35% of the senior notes for a price equal to
110.250% of the original principal amount of the senior notes with the proceeds of certain equity
offerings. On or after August 1, 2011 we may redeem all or some of the senior notes at a redemption
price that will decrease from 105.125% of the principal amount of the senior notes to 100% of the
principal amount on August 1, 2013. In addition, prior to August 1, 2011, we may redeem some or all
of the senior notes at a redemption price equal to 100% of the principal amount of the senior notes
to be redeemed, plus a make-whole premium, plus any accrued and unpaid interest. We have agreed to
use our reasonable best efforts to exchange the senior notes for registered, freely tradable notes
which otherwise have substantially identical terms to the senior notes within 210 days of July 31,
2007. A registration statement on Form S-4 allowing holders of the senior notes to exchange the
notes for freely tradable notes became effective on January 29, 2008.
On November 30, 2007, we entered into a Fourth Amendment to our Third Amended and Restated
Credit Agreement, dated December 23, 2005. In addition to amending certain covenants, our
borrowing base under the revolving credit facility was increased from $150.0 million to $200.0
million.
On December 6, 2007, we sold 3,000,000 shares of our common stock in an underwritten public
offering.
Our 2008 capital investment budget for properties we owned at February 1, 2008 is estimated to
be approximately $127.2 million, which includes $18.4 million for the purchase of leasehold and
seismic in our areas of activity. The budget will be funded from our estimated operating cash flows
and our bank borrowings. If our cash flows and bank borrowings are not sufficient to fund all of
our estimated capital expenditures, we may fund any shortfall with proceeds from the sale of our
debt or equity securities, reduce our capital budget or effect a combination of these alternatives.
The amount and timing of our expenditures are subject to change based upon market conditions,
results of expenditures, new opportunities and other factors.
Proved Reserves as of December 31, 2007
Cawley Gillespie & Associates, Inc., our independent petroleum engineers, estimated the total
proved reserves attributable to all of our oil and natural gas properties to be approximately 28.4
MMBbls of oil and approximately 57.2 Bcf of natural gas as of December 31, 2007.
Approximately 75% of our proved reserves are oil and approximately 56% are categorized as
proved developed reserves.
About Our Business and Strategy
We have positioned our property portfolio on premier acreage in established geologic trends
where we use our engineering, operational, financial and technical expertise to provide consistent
long-term production and attractive returns on our investments. We prefer obtaining positions in
long-lived oil and natural gas reserves to properties that have shorter reserve lives. We manage
financial, reservoir, drilling and geological risks by emphasizing lower-risk acquisition,
exploitation, enhancement and development drilling opportunities over higher-risk exploration
projects. Furthermore, aggressive application of advanced technologies and production techniques,
such as horizontal drilling and multi-stage fracture stimulation techniques have allowed us to
achieve what we believe to be best-in-class productivity in our Barnett Shale natural gas resource
play.
Our experienced executive management team, together with our technical staff, has
significantly grown our asset base, accumulating large acreage positions and working interests in
high-quality oil and natural gas properties that demonstrate attractive returns on investment. From
2001 to 2007, we have replaced approximately 456% of our production. For the year ended December
31, 2007, our depletion per BOE was $13.02, and our related lifting costs, excluding production
taxes, were $9.70 per BOE. Our long-lived Permian Basin reserves demonstrate shallow decline
profiles, high margins, low replacement costs and consistent positive cash flows. We continue to
utilize this reliable stream of cash flows from our oil production to support the development of
our natural gas resource plays. We believe we are positioned in some of the most attractive areas
of both the Barnett Shale and Wolfcamp Carbonate plays, and we have experienced a 95% drilling
success rate in these projects as of December 31, 2007. Chesapeake Energy Corporation, or
Chesapeake, as the operator of the majority of our interests in the Barnett Shale,
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provides substantial operating expertise in the development of this project. We believe
through the development of our existing core oil and gas properties we have significant growth
potential.
Approximately 90% of our proved undeveloped reserves are assigned to our Permian Basin
long-lived oil properties and 10% are assigned to our two emerging resource gas projects. As of
December 31, 2007, our standardized measure of discounted future net cash flows was $634.4 million.
The following table presents proved reserves as of December 31, 2007 by our areas of operation.
In 2007, we spent $154.3 million on oil and natural gas related capital expenditures, and our
2008 capital budget is $127.2 million. We have primarily focused our efforts on achieving
substantial growth in our production and proved reserves including our growth gas resource plays in
the North Texas Barnett Shale and New Mexico Wolfcamp Carbonate regions. In 2008, we plan to drill
over 108 gross infill wells, extension wells or well deepenings and to perform approximately 67
gross well workovers, refracs or restimulations. We plan to allocate our $127.2 million capital
budget for 2008 as follows:
Our Strategy
Conduct Exploitation Activities on Our Existing Assets. We seek to maximize economic return on
our existing assets by maximizing production rates and ultimate recovery, while managing
operational efficiency to minimize direct lifting costs. For the year ended December 31, 2007, our
lease operating expense per BOE produced was approximately $9.70, excluding production taxes.
Development and production growth activities include infill and extension drilling of new wells,
re-completion, pay adds and re-stimulation of existing wells and implementation and management of
enhanced oil recovery projects such as waterflood operations. Operational efficiencies and cost
reduction measures include optimization of surface facilities, such as fluid handling systems, gas
compression or artificial lift installations. Efficiencies are also increased through aggressive
monitoring and management of electrical power consumption, injection water quality programs,
chemical and corrosion prevention programs and the use of production surveillance equipment and
software. In all instances, a proactive approach is taken to achieve the desired result while
ensuring minimal environmental impact.
Accelerate Horizontal Drilling and Fracture Stimulation Activities in Gas Resource Plays. We
believe the use of horizontal drilling and fracture stimulations has enabled us to develop reserves
economically. The successful
application of these technologies has increased net production in these resource plays from
inception in July 2004 in the Wolfcamp to 9,306 Mcf per day and from inception in August 2005 in
the Barnett Shale to 10,068 Mcf per day
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during the quarter ended December 31, 2007. Based on this
success, we plan to continue our activities in these two plays in 2008. Our current budget calls
for the drilling and completing of 53 gross (20.0 net) wells in the Barnett Shale and the drilling
and completing of 18 gross (15.3 net) wells in the Wolfcamp Carbonate. In addition to the drilling
of these new wells, we intend to invest $19.9 million for leasehold, pipeline, gathering, seismic,
and other infrastructure in these plays.
Use Advanced Technologies and Production Techniques. We believe that 3-D seismic surveys,
horizontal drilling, fracture stimulation and other advanced technologies and production techniques
are useful tools that help improve normal drilling operations and enhance our production and
returns. We believe that our use of these technologies and production techniques in exploring for,
developing and exploiting oil and natural gas properties can: reduce drilling risks, lower finding
costs, provide for more efficient production of oil and natural gas from our properties and
increase the probability of locating and producing reserves that might not otherwise be discovered.
Acquire Long-Lived Properties with Enhancement Opportunities. Our acquisition strategy is
focused on leveraging our geographical expertise in our core areas of operation and seeking assets
located in and around these areas. We selectively evaluate acquisition opportunities and expect
that they will continue to play a role in increasing our reserve base and future drilling
inventory. When identifying target assets, we focus primarily on
reserve quality and assets in new
developing plays with upside potential. Through this approach, we have traditionally targeted
smaller asset acquisitions which allow us to absorb, enhance and exploit properties without taking
on significant integration risk.
Conduct Exploratory Activities. Although we do not emphasize exploratory drilling, we will
selectively undertake exploratory projects that have known geological and reservoir characteristics
are in close proximity to existing wells so data from the existing wells can be correlated with
seismic data on or near the prospect being evaluated, and that could have a potentially meaningful
impact on our reserves.
Drilling Activities in 2007
The following table shows our gross and net wells drilled, by geographic area, during 2007 and
the number of wells in process at December 31, 2007.
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Drilling and Acquisition Costs
The table below shows our oil and natural gas property acquisition, exploration and
development costs for the periods indicated.
Current Drilling Projects
Summarized below are our more significant current projects, including our capital budget for
these projects in 2008:
Resource Natural Gas Projects
We have two resource natural gas projects in varying stages of development. They are the
Barnett Shale gas project in the Fort Worth Basin of north Texas and the Wolfcamp gas project in
the Permian Basin of New Mexico.
We have budgeted approximately $100.0 million for these two resource natural gas projects in
2008 for the drilling and completion of approximately 71 new gross wells, leasehold acquisition,
pipeline construction and pipeline compression.
Fort Worth Basin of North Texas and Permian Basin of New Mexico
We have budgeted approximately $60.0 million for this project in 2008 for the drilling and
completion of 53 new gross (20.0 net) wells, pipeline construction and leasehold acquisition. As
of February 1, 2008, there were 3 drilling rigs running and 15 wells awaiting completion and
pipeline connection in the Barnett Shale gas project.
Our New Mexico Wolfcamp gas project consists of three areas of mutual interest in which the
primary target is the Wolfcamp formation at a depth of approximately 4,500 feet. We anticipate
participating in the drilling of approximately 18 gross (15.3 net) operated horizontal wells in New
Mexico during 2008 in the Northern Area. We have budgeted approximately $40.0 million for this
project in 2008 to fund the drilling in the Northern Area, the installation of pipelines and
related infrastructure, the acquisition of additional leasehold, and the acquisition of 3-D seismic
data in the Southern Area. As of February 1, 2008, 1 drilling rig was running, 2 wells were in the
process of completion and 1 well was awaiting completion.
Permian Basin of West Texas
Our significant producing properties in the Permian Basin of west Texas are described below.
We have budgeted approximately $4.0 million in 2008 to fund the drilling of an estimated 7
gross (6.2 net) new wells and the conversion to injection of 2 gross (1.6 net) existing wells. Our
average working interest in the Fullerton properties is approximately 85%.
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We have budgeted approximately $3.3 million for the Carm-Ann/N. Means Queen properties in 2008
for the drilling and completion of 5 gross (4.3 net) wells and the conversion to injection of 6
gross (5.1 net) existing wells. Our average working interest in these properties is approximately
77%.
We have budgeted approximately $5.3 million for the Harris San Andres properties in 2008 for
the drilling of an estimated 7 gross (6.3 net) wells and the re-frac workover or conversion to
injection of 16 gross (14.4 net) existing wells. Our average working interest in these properties
is approximately 90%.
A total of $9.6 million has been budgeted in 2008 for the Diamond M Canyon Reef project for
the drilling and completion of approximately 12 gross (7.9 net) new wells and the workover or
deepening of approximately 18 gross (11.8 net) existing wells. Our average working interest in
these properties is approximately 66% with our work-to-earn arrangement with Southwestern Energy
Company.
A total of $1.3 million has been budgeted in 2008 for the Diamond M Shallow project for the
installation of dual injection strings in approximately 25 gross (16.5 net) existing wells. Our
average working interest in these properties is approximately 66% with our work-to-earn arrangement
with Southwestern Energy Company.
Onshore Gulf Coast of South Texas
We have budgeted approximately $0.7 million for the south Texas projects in 2008 for the
drilling and completion of 2 gross (0.5 net) wells.
Other Projects
We have budgeted approximately $1.5 million for the Utah/Colorado project in 2008 for the
drilling and completion of 3 gross (2.9 net) wells and the acquisition of additional leasehold.
We own and operate 97.5% of this project.
Oil and Natural Gas Prices
The average wellhead prices we received for the oil and natural gas we produced in 2007, 2006
and 2005 are shown in the table below.
The average price we received for our oil sales at February 1, 2008 was approximately $85.17
per Bbl. At the same date, the average price we were receiving for our natural gas was
approximately $6.91 per Mcf.
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There is substantial uncertainty regarding future oil and natural gas prices and we can
provide no assurance that prices will remain at current levels. We have entered into derivative
contracts in an attempt to reduce the risk of fluctuating oil and natural gas prices.
Employees and Consultants
At February 1, 2008, we had 43 full time employees. We also retain independent land,
geological, geophysical, engineering, drilling and financial consultants from time to time and
expect to continue to do so in the future. Additionally, we retain contract pumpers on a
month-to-month basis.
Until his retirement on June 26, 2007, Thomas R. Cambridge, our former Chairman of the Board
of Directors, served in the capacity of a geological consultant and not as a full-time employee.
We consider our employee relations to be satisfactory. None of our employees are represented
by a union and we have not experienced work stoppages or strikes.
Wells Drilled
The following table shows certain information concerning the number of gross and net wells we
drilled during the three-year period ended December 31, 2007.
All of our drilling is performed on a contract basis by third-party drilling contractors. We
do not own any drilling equipment. We maintain a limited number of supervisory and field personnel
to oversee drilling and production operations. Our plans to drill additional wells are determined
in part by the anticipated availability of acceptable drilling equipment and crews. We do not
currently have any contractual commitments that ensure we will have adequate drilling equipment or
crews to achieve our drilling plans. As of February 1, 2008, we had 3 drilling rigs in operation at
our Barnett Shale project and 1 drilling rig in operation at our New Mexico project. We believe
that we currently can secure commitments from drilling companies that will make equipment available
to us for drilling wells on our operated projects. In the case of our non-operated properties, we
also believe that the operators of these other properties will be able to secure equipment for
drilling on our non-operated properties. However, we can provide no assurance that our
expectations regarding the availability of drilling equipment from these companies will be met.
At February 1, 2008, we were participating in the completion of 10 gross (4.69 net) wells, 6
gross (1.92 net) wells were awaiting completion, 2 gross (0.66 net) wells were shut-in waiting on
pipelines and 4 gross (1.47 net) wells were in process of drilling.
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Volumes, Prices and Lifting Costs
The following table shows certain information about our oil and natural gas production
volumes, average sales prices per Mcf of natural gas and Bbl of oil and the average lifting
(production) cost per BOE for the three-year period ended December 31, 2007.
In 2007, approximately 46% of the volume of our production was oil and 54% was natural gas.
The majority of the oil production is from our Permian Basin longer-lived oil assets. The majority
of the natural gas production is from our Barnett Shale and New Mexico Wolfcamp assets.
The following table summarizes our revenues by product sold for each year in the three year
period ended December 31, 2007.
Our oil sales in 2007 represented approximately 60% of our combined oil and natural gas
revenues (not considering the effect of hedging) for the year ended December 31, 2007, as compared
to 63% in 2006, and 61% in 2005.
Markets and Customers
Our oil and natural gas production is sold at the well site on an as produced basis at
market-related prices in the areas where the producing properties are located. We do not refine or
process any of the oil or natural gas we produce and all of our production is sold to unaffiliated
purchasers on a month-to-month basis.
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In the table below, we show the purchasers that accounted for 10% or more of our revenues
during the specified years.
We do not believe the loss of any one of our purchasers would materially affect our ability to
sell the oil and natural gas we produce. Other purchasers are available in our areas of operations.
Our future ability to market our oil and natural gas production depends upon the availability
and capacity of natural gas gathering systems and pipelines and other transportation facilities. We
are not obligated to provide a fixed or determinable quantity of oil and natural gas under any
existing arrangements or contracts.
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