This excerpt taken from the DNE 8-K filed Apr 24, 2007.
Trends Affecting Goldkings Results of Operations
Bayou and Hilcorp Properties Acquisitions. Goldkings results of operations reflect the inclusion of the Bayou Acquisition on October 31, 2005 and the acquisition of the Hilcorp Properties on September 28, 2006. Because of Goldkings growth through acquisitions, its historical results of operations and period-to-period comparison of these results and certain financial data may not be meaningful or indicative of future results.
Production Trends. Average daily production of natural gas increased from 462 Mcf per day during the period from July 27, 2004 (inception) to December 31, 2004 to 1,662 Mcf per day for the year ended December 31, 2005 to 8,242 Mcf per day for the year ended December 31, 2006. Average daily production of oil increased from 77 Bbl per day during the period from July 27, 2004 (inception) to December 31, 2004 to 224 Bbl per day for the year ended December 31, 2005 to 1,458 Bbl per day for the year ended December 31, 2006. Natural gas and oil production has increased since 2004 due to the Live Oak, Bayou and Hilcorp Properties acquisitions. Goldking expects its 2007 natural gas and oil production to increase due to its acquisition of the Hilcorp Properties on September 28, 2006 and combined exploration and development activity of its existing properties.
Natural Gas and Oil Prices. Goldkings revenues are dependent on the prevailing prices of natural gas and oil and its ability to effectively hedge production to minimize adverse fluctuations in prices. Higher natural gas and oil prices have led to a higher demand for drilling rigs, operating personnel and field supplies and services, and have caused increases in the cost of those goods and services. To date, higher sales prices have offset higher field costs. Future earnings and cash flows are dependent on Goldkings ability to manage its overall cost structure to a level that allows for profitable production. Goldkings future earnings and cash flows are dependent on its ability to manage its overall cost structure to a level that allows for profitable production.
Goldkings expectations with respect to future production rates are subject to a number of uncertainties, including those associated with the availability and cost of drilling rigs and third party services, natural gas and oil prices, the potential for mechanical problems, permitting issues, drilling success rates, the availability of acceptable delivery and sales arrangements with respect to the natural gas and crude oil production and the accuracy of its assumptions regarding the sustainability of historical growth rates, weather and other uncertainties. See Risk FactorsRisks Related to Our Business.
Production Expenses. Production expenses, which are driven by industry demand and competition for labor and services from the 2005 hurricane season, have caused substantial product and wage inflation. Also, given the age of much of Goldkings field facilities and the ever-increasing regulatory environment, a company focused on growth such as Goldking can expect to experience increasing production expenditures. However, with anticipated expanding production volumes that should result from exploration, exploitation and development expenditures during 2007, per-unit costs are expected to begin decreasing during the second half of 2007 and on into 2008.
General and Administration Expenses. In order to manage and maximize growth, Goldking increased its professional staff, which has resulted in increased general and administrative costs. In the fourth quarter of 2005 and throughout 2006, Goldking incurred substantial costs associated with the integration of the Bayou and the Hilcorp Properties acquisition, various system conversion costs and professional fees related to its annual
audit and related activities. Additional integration and systems conversion costs will be incurred and substantially completed by the end of the first quarter of 2007.
Debt Service Obligations. The indebtedness Goldking incurred in the acquisition of the Bayou Properties and Hilcorp Properties significantly increased its debt service obligations.