Oil and natural gas prices have the potential to be volatile. As of February 2012, the twelve-month
average of the first-day-of-the-month reference price for natural gas has declined from $4.12 per
MMBtu at year-end 2011 to $3.86 per MMBtu, while the comparable price for oil has increased from
$95.99 per Bbl at year-end 2011 to $97.28 per Bbl. Lower oil and natural gas prices not only decrease
our revenues, but also may reduce the amount of hydrocarbons that we can produce economically and
therefore potentially reduce the amount of our proved reserves. Reductions in the amount of our
proved reserves, in turn, may reduce the borrowing base under our senior revolving credit facility. The
borrowing base is determined at the discretion of our lenders based on, among other things, the
collateral value of our proved reserves and is subject to regular redeterminations on May 1 of each
year, as well as unscheduled redeterminations as set forth in the credit agreement.
If we are unable to replace the reserves that we have produced, our reserves and revenues will
decline.
Our future success depends on our ability to find, develop and acquire additional oil and gas
reserves that are economically recoverable which, in itself, is dependent on oil and gas prices. Without
continued successful acquisition or exploration activities, our reserves and revenues will decline as a
result of our current reserves being depleted by production. We may not be able to find or acquire
additional reserves at acceptable costs.
The geographic concentration and lack of marketable characteristics of our oil reserves may
have a greater effect on our ability to sell our oil production.
A substantial portion of our reserves are located in California. Any regional events, including price
fluctuations, natural disasters and restrictive regulations that increase costs, reduce availability of
equipment or supplies, reduce demand or limit our production may impact our operations more than if
our reserves were more geographically diversified.
Our California oil production is, on average, heavier than premium grade light oil and the margin
(sales price minus production costs) is generally less than that of lighter oil sales due to the processes
required to refine this type of oil and the transportation requirements. As such, the effect of material
price decreases will more adversely affect the profitability of heavy oil production compared with lighter
grades of oil.
We could lose all or part of our investment in McMoRan common stock.
We owned approximately 31.6% of the outstanding shares of common stock of McMoRan as of
December 31, 2011. We may sell shares of McMoRan common stock pursuant to underwritten
offerings, in periodic sales under a shelf registration statement to be filed by McMoRan (subject to
certain volume limitations), pursuant to the exercise of piggyback registration rights or as otherwise
permitted by applicable law. Our ability to sell shares of McMoRan common stock could be severely
limited, both as to timing and amount, and as a result of factors beyond our control. In addition, the
market price of shares of McMoRan common stock that we hold may decline substantially before we
sell them.
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