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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For quarterly period ended September 30, 2006
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number 0-6529
 DOUBLE EAGLE PETROLEUM CO.
 
 MARYLAND
(State or other jurisdiction of 
incorporation or organization)
    
    83-0214692
(I.R.S. employer
identification no.)777 Overland Trail, P.O. Box 766, Casper, Wyoming
(Address of principal executive offices)
    
    82602
(Zip code)
 307-237-9330
 
 þ o
  o þ o
 o þ
  Class
    
    Outstanding as of October 31, 2006Common stock, $.10 par value
    
    
    8,639,604




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##### 



PagePART I. Financial Information:Item 1. Financial StatementsConsolidated Balance Sheet as of September 30, 2006 (Unaudited)
and December 31, 2005
    
    
    3Consolidated Statement of Operations for the three months and nine months
ended September 30, 2006 and 2005 (Unaudited)
    
    
    4Consolidated Statement of Cash Flows for the nine months
ended September 30, 2006 and 2005 (Unaudited)
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    11Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    20Item 4. Controls and Procedures
    
    
    20PART II. Other Information:Item 1A. Risk Factors
    
    
    21Item 6. Exhibits
    
    
    21Signatures
    
    
    22Certification of CEO Pursuant to Rule 13a-14(a)/15a-14(a)Certification of CFO Pursuant to Rule 13a-14(a)/15a-14(a)Certifications Pursuant to 18 U.S.C. Section 1350
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ITEM 1. FINANCIAL STATEMENTS
 DOUBLE EAGLE PETROLEUM CO.
 
 CONSOLIDATED BALANCE SHEET  (Amounts in thousands of dollars except share and per share data)
 September 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    481
    
    
    $
    1,431Cash held in escrow
    
    
    4,471
    
    
    
    Accounts receivable
    
    
    2,279
    
    
    
    4,248Other current assets
    
    
    586
    
    
    
    218Total current assets
    
    
    7,817
    
    
    
    5,897Oil and gas properties and equipment, successful efforts method:Developed properties
    
    
    47,089
    
    
    
    41,146Wells in progress
    
    
    8,747
    
    
    
    2,946Gas transportation pipeline
    
    
    5,255
    
    
    
    5,379Undeveloped properties
    
    
    3,309
    
    
    
    3,213Corporate and other assets
    
    
    1,024
    
    
    
    74865,424
    
    
    
    53,432Less accumulated depreciation, depletion and amortization
    
    
    (18,641
    )
    
    
    (15,174
    )Net properties and equipment
    
    
    46,783
    
    
    
    38,258Other assets
    
    
    56
    
    
    
    56TOTAL ASSETS
    
    $
    54,656
    
    
    $
    44,211LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    3,601
    
    
    $
    2,798Accrued expenses
    
    
    5,379
    
    
    
    4,246Accrued production taxes
    
    
    1,881
    
    
    
    1,657Total current liabilities
    
    
    10,861
    
    
    
    8,701Line of credit
    
    
    8,320
    
    
    
    3,000Asset retirement obligation
    
    
    597
    
    
    
    513Deferred tax liability
    
    
    2,996
    
    
    
    2,219Total liabilities
    
    
    22,774
    
    
    
    14,433Stockholders equity:Common stock, $0.10 par value; 50,000,000 shares authorized;
8,639,604 and 8,590,604 shares issued and outstanding as of
September 30, 2006 and December 31, 2005, respectively
    
    
    864
    
    
    
    859Additional paid-in capital
    
    
    22,756
    
    
    
    22,101Retained earnings
    
    
    8,262
    
    
    
    6,818Total stockholders equity
    
    
    31,882
    
    
    
    29,778TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    54,656
    
    
    $
    44,211
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DOUBLE EAGLE PETROLEUM CO.
 
 CONSOLIDATED STATEMENT OF OPERATIONS  (Amounts in thousands of dollars except share and per share data)
 Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005RevenuesOil and gas sales
    
    $
    4,163
    
    
    $
    5,233
    
    
    $
    12,808
    
    
    $
    14,131Transportation revenue
    
    
    272
    
    
    
    
    
    
    
    272
    
    
    
    Other income, net
    
    
    17
    
    
    
    14
    
    
    
    53
    
    
    
    31Total revenues
    
    
    4,452
    
    
    
    5,247
    
    
    
    13,133
    
    
    
    14,162Costs and expensesProduction costs
    
    
    849
    
    
    
    930
    
    
    
    2,532
    
    
    
    2,691Production taxes
    
    
    509
    
    
    
    682
    
    
    
    1,527
    
    
    
    1,645Exploration expenses including dry holes
    
    
    406
    
    
    
    306
    
    
    
    512
    
    
    
    433General and administrative
    
    
    858
    
    
    
    760
    
    
    
    2,806
    
    
    
    2,125Depreciation, depletion and amortization and
accretion of asset retirement obligation
    
    
    1,304
    
    
    
    1,099
    
    
    
    3,468
    
    
    
    3,036Impairment of equipment and properties
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    357Total costs and expenses
    
    
    3,926
    
    
    
    3,777
    
    
    
    10,845
    
    
    
    10,287Income from operations
    
    
    526
    
    
    
    1,470
    
    
    
    2,288
    
    
    
    3,875Interest (expense) income, net
    
    
    (2
    )
    
    
    7
    
    
    
    (67
    )
    
    
    27Income before income taxes
    
    
    524
    
    
    
    1,477
    
    
    
    2,221
    
    
    
    3,902Provision for deferred taxes
    
    
    (183
    )
    
    
    (502
    )
    
    
    (777
    )
    
    
    (1,327
    )NET INCOME
    
    $
    341
    
    
    $
    975
    
    
    $
    1,444
    
    
    $
    2,575Net income per common share:Basic
    
    $
    0.04
    
    
    $
    0.11
    
    
    $
    0.17
    
    
    $
    0.30Diluted
    
    $
    0.04
    
    
    $
    0.11
    
    
    $
    0.17
    
    
    $
    0.30Weighted average shares outstanding:Basic
    
    
    8,639,604
    
    
    
    8,575,604
    
    
    
    8,629,860
    
    
    
    8,558,018Diluted
    
    
    8,666,900
    
    
    
    8,764,472
    
    
    
    8,660,696
    
    
    
    8,632,579
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DOUBLE EAGLE PETROLEUM CO.
 
 CONSOLIDATED STATEMENT OF CASH FLOWS  (Amounts in thousands of dollars)
 Nine months ended September 30,2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    1,444
    
    
    $
    2,575Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation, depletion, amortization and accretion of
asset retirement obligation
    
    
    3,471
    
    
    
    3,050Abandonment of non-producing properties
    
    
    14
    
    
    
    41Impairment of equipment and properties
    
    
    273
    
    
    
    357Provision for deferred taxes
    
    
    777
    
    
    
    1,327Directors fees paid in stock
    
    
    97
    
    
    
    160Non-cash employee stock option expense
    
    
    342
    
    
    
    19Other
    
    
    
    
    
    
    7Changes in current assets and liabilities:Increase in deposit held in escrow
    
    
    (4,471
    )
    
    
    Decrease (increase) in accounts receivable
    
    
    1,969
    
    
    
    (1,148
    )Increase in other current assets
    
    
    (368
    )
    
    
    (401
    )Decrease in accounts payable
    
    
    (62
    )
    
    
    (644
    )Increase in accrued expenses
    
    
    3,651
    
    
    
    1,172Increase in accrued production taxes
    
    
    224
    
    
    
    364NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    7,361
    
    
    
    6,879Cash flows from investing activities:Proceeds from sales of properties and assets
    
    
    
    
    
    
    291Other assets
    
    
    
    
    
    
    (15
    )Additions of producing properties and equipment
    
    
    (13,466
    )
    
    
    (10,212
    )Additions of corporate and non-producing properties
    
    
    (386
    )
    
    
    (543
    )NET CASH USED IN INVESTING ACTIVITIES
    
    
    (13,852
    )
    
    
    (10,479
    )Cash flows from financing activities:Exercise of options
    
    
    325
    
    
    
    510Settlement of options
    
    
    (104
    )
    
    
    Net borrowings on line of credit
    
    
    5,320
    
    
    
    NET CASH PROVIDED BY FINANCING ACTIVITIES
    
    
    5,541
    
    
    
    510Change in cash and cash equivalents
    
    
    (950
    )
    
    
    (3,090
    )Cash and cash equivalents at beginning of period
    
    
    1,431
    
    
    
    3,670CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    481
    
    
    $
    580Supplemental disclosure of cash and non-cash transactions:Cash paid for interest
    
    $
    45
    
    
    $
    9Additions to developed properties included in current
liabilities
    
    $
    3,105
    
    
    $
    4,758Additions to developed properties for retirement obligations
    
    $
    80
    
    
    $
    4Directors fees paid in stock
    
    $
    97
    
    
    $
    160Stock option expense
    
    $
    342
    
    
    $
    
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DOUBLE EAGLE PETROLEUM CO.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Amounts in thousands of dollars except share and per share data)
 1.
    
    Summary of Significant Accounting PoliciesBasis of presentationThe accompanying unaudited interim consolidated financial statements were prepared by Double
Eagle Petroleum Co. (Double Eagle or the Company) pursuant to the rules and regulations of
the Securities and Exchange Commission (SEC). Certain information and note disclosures
normally included in the annual consolidated financial statements prepared in accordance with
accounting principles generally accepted in the United States of America have been condensed or
omitted as allowed by such rules and regulations. These consolidated financial statements
include all of the adjustments, which, in the opinion of management, are necessary for a fair
presentation of the financial position and results of operations. All such adjustments are of a
normal recurring nature only, except for the impairment charge noted below. The results of
operations for the interim periods are not necessarily indicative of the results to be expected
for the full fiscal year.On February 10, 2006, Eastern Washakie Midstream LLC was formed as a wholly owned subsidiary of
Double Eagle. In the second quarter of 2006, the assets held by Double Eagle related to its
13-mile intrastate gas pipeline (the Pipeline) were transferred to the newly formed entity.
The Pipeline, which was constructed in late 2005, became operational in January 2006, and
connects the Cow Creek field to the pipeline system owned by Southern Star Central Gas Pipeline,
Inc. Beginning in the second quarter of fiscal year 2006, Double Eagle presented unaudited
consolidated financial statements to reflect the consolidation of the two entities for reporting
purposes. Beginning in the third quarter of 2006, fees received for transporting third-party
natural gas through the Pipeline were disclosed in the Consolidated Statement of Operations as
Transportation revenue. The total cost of the Pipeline was $5,255. Depreciation is recorded
using the straight-line method over a 25 year estimated useful life.Certain amounts in the 2005 financial statements were reclassified to conform to the 2006
unaudited consolidated financial statement presentation.The accounting policies followed by the Company are set forth in Note 2 to the Companys
consolidated financial statements in the Form 10-K for the year ended December 31, 2005 and are
supplemented throughout the notes to this quarterly report on Form 10-Q.The interim consolidated financial statements presented herein should be read in conjunction
with the financial statements and notes thereto for the year ended December 31, 2005, included
in the Form 10-K filed with the SEC.New accounting pronouncementsIn September 2006, the SEC issued Staff Accounting Bulletin No. 108 (SAB 108) to address
diversity in practice in quantifying financial statement misstatements. SAB 108 requires
registrants to quantify errors using both a balance sheet and an income statement approach and
to evaluate whether either approach results in quantifying a misstatement that, when all
relevant quantitative and qualitative factors are considered, is material. SAB 108 is effective
for fiscal years ending after November 15, 2006, allowing a one-time transitional cumulative
effect adjustment to retained earnings as of January 1, 2006 for errors that were not previously
deemed material, but are material under the guidance in SAB 108. The Company has applied the
guidance in SAB 108, and there are no material effects on the Companys financial position,
results of operations or cash flows.In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 157 (SFAS 157). The Statement defines fair value,
establishes a framework for measuring fair value in generally accepted accounting principles
(GAAP), and expands disclosures about fair value measurements. This Statement is effective
for financial statements issued for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. The adoption of
SFAS 157 is not expected to have a material effect on the Companys financial position, results
of operations or cash flows.In July 2006, the FASB released FASB Interpretation No. 48  Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the
accounting and reporting for uncertainties in income taxes recognized in an enterprises
financial statements in accordance with Statement of Financial Accounting Standards No. 109 
Accounting for Income Taxes (SFAS 109) and prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of a tax position taken or
expected to be
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taken in a tax return. FIN 48 is effective for fiscal years beginning after
December 15, 2006 with the impact of adoption to be reported as a cumulative effect of an
accounting change. The adoption of FIN 48 is not expected to have a material effect on the
Companys financial position, results of operations or cash flows.In March 2006, the FASB issued Statement of Financial Accounting Standards No. 156  Accounting
for Servicing of Financial Assets (SFAS 156), which requires all separately recognized
servicing assets and servicing liabilities to be initially measured at fair value. SFAS 156 also
permits, but does not require, the subsequent measurement of servicing assets and servicing
liabilities measured at fair value with changes in fair value reported in earnings. Adoption is
required as of the beginning of the first fiscal year that begins after September 15, 2006. The
adoption of SFAS 156 is not expected to have a material effect on the Companys financial
position, results of operations or cash flows.In February 2006, the FASB issued Statement of Financial Accounting Standards No. 155 
Accounting for Certain Hybrid Financial Instruments (SFAS 155), which eliminates the exemption
from applying Statement of Financial Accounting Standards No. 133  Accounting for Derivative
Instruments and Hedging Activities (SFAS 133) to interests in securitized financial assets so
that similar instruments are accounted for similarly regardless of the form of the instruments.
SFAS 155 also allows the election of fair value measurement at acquisition, at issuance, or when
a previously recognized financial instrument is subject to a re-measurement event. Adoption is
effective for all financial instruments acquired or issued after the beginning of the first
fiscal year that begins after September 15, 2006. The adoption of SFAS 155 is not expected to
have a material effect on the Companys financial position, results of operations or cash flows.2.
    
    Share-Based PaymentsDouble Eagle has outstanding stock options issued to certain employees under four stock option
plans, approved by the Companys shareholders (collectively the Plans). The options have been
granted with an exercise price equal to the market price of Double Eagles stock on the date of
grant, vest annually over various periods from two to five years of continuous service, and
expire over various periods up to ten years from the date of grant.Effective January 1, 2006, Double Eagle adopted the provisions of Statement of Financial
Accounting Standards No. 123 (revised 2004)  Share-Based Payment (SFAS 123(R)), which
requires the measurement and recognition of compensation expense for all share-based payment
awards (including stock options) made to employees and directors based on estimated fair value.
The Company previously accounted for the Plans under Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, (APB 25), and related interpretations and
disclosure requirements established by SFAS 123  Accounting for Stock-Based Compensation, as
amended by SFAS No. 148  Accounting for Stock-Based Compensation  Transition and Disclosure.
In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB 107), relating to SFAS
123(R). Double Eagle considered the guidance of SAB 107 in our adoption of
 SFAS 123 (R).Under APB 25, no compensation expense was recorded for Double Eagles stock options issued under
the qualified Plans. The pro forma effects on net income and earnings per share for qualified
stock options were disclosed in a footnote to the financial statements. Under APB 25,
compensation expense for non-qualified stock options with stock appreciation rights features was
recorded utilizing the market price of Double Eagles stock at each period-end to determine the
vested intrinsic value of the stock appreciation rights.Under SFAS 123(R), compensation expense for equity-classified awards, such as Double Eagles
stock options issued under the Plans, is measured at the grant date based on the fair value of
the award and is recognized as an expense in earnings over the requisite service period using a
graded vesting method.The Company adopted SFAS 123(R) using the modified prospective transition method. Under this
transition method, compensation cost recognized in the first three quarters of 2006 includes the
cost for options which were granted prior to January 1, 2006, as determined under the provisions
of SFAS 123(R). There was no cumulative effect of the impact of adoption of SFAS 123(R) on
liability-classified awards to the consolidated financial statements. During the three and nine
months ended September 30, 2006, total share-based compensation expense for equity-classified
awards, was $94 and $342, respectively, and is reflected in General and administrative expense
in the Consolidated Statement of Operations. There was no impact on income tax expense. As of
September 30, 2006, total estimated unrecognized compensation expense from unvested stock
options was $1,408, which is expected to be recognized over a period of five years.The Company uses the Black-Scholes valuation model to determine the fair value of each option
award. Expected volatilities are based on the historical volatility of Double Eagles stock over
a period consistent with that of the expected terms of the options. The expected terms of the
options are estimated based on factors such as vesting periods,
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contractual expiration dates,
historical trends in Double Eagles stock price and historical exercise behavior. The risk-free
rates for periods within the contractual life of the options are based on the yields of U.S.
Treasury instruments with terms comparable to the estimated option terms. The following
assumptions were used in estimating fair value of share-based awards for the periods indicated:
 Nine Months Ended
    
    Nine Months EndedSeptember 30, 2006
    
    September 30, 2005Weighted-average volatility
    
    
    44% - 48%
    
    
    
    42%Expected dividends
    
    
    0.00%
    
    
    
    0.00%Expected term (in years)
    
    
    2 - 5
    
    
    
    3 - 8Risk-free rate
    
    
    4.68% - 5.10%
    
    
    
    3.50%
  Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2005
    
    
    September 30, 2005Net income, as reported
    
    $
    975
    
    
    $
    2,575Add: Share-based employee
compensation expense
included in reported net
income
    
    
    6
    
    
    
    179Deduct: Total share-based
employee compensation
expense determined under
the fair value based method
for all awards
    
    
    (108
    )
    
    
    (671
    )Pro forma net income
    
    $
    873
    
    
    $
    2,083Basic Earnings Per Share:As reported
    
    $
    0.11
    
    
    $
    0.30Pro forma
    
    $
    0.10
    
    
    $
    0.24Diluted Earnings Per Share:As reported
    
    $
    0.11
    
    
    $
    0.30Pro forma
    
    $
    0.10
    
    
    $
    0.24
  Weighted-AverageWeighted-Average
    
    
    RemainingExercise
    
    
    Contractual Term
    
    
    AggregateShares
    
    
    Price
    
    
    (in years)
    
    
    Intrinsic ValueOptions:Outstanding at January 1, 2006
    
    
    354,243
    
    
    $
    15.38
    
    
    
    3.8Granted
    
    
    82,500
    
    
    $
    18.05Exercised
    
    
    (43,000
    )
    
    $
    7.55Cancelled/expired
    
    
    (92,243
    )
    
    $
    16.24Outstanding at September 30, 2006
    
    
    301,500
    
    
    $
    16.86
    
    
    
    3.8
    
    
    $
    573Exerciseable at September 30, 2006
    
    
    102,000
    
    
    $
    16.48
    
    
    
    3.2
    
    
    $
    251
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OptionsOutstanding
    
    
    
    
    
    Options ExerciseableWeighted Average
    
    Weighted
    
    
    
    
    
    WeightedNumber of
    
    Remaining
    
    Average
    
    Number of
    
    AverageRange of Exercise
    
    Options
    
    Contractual Life
    
    Exercise Price
    
    Options
    
    Exercise PricePrices per Share
    
    Outstanding
    
    (in years)
    
    per Share
    
    Exerciseable
    
    per Share$14.00    $16.21
    
    
    105,000
    
    
    
    4.0
    
    
    $
    14.32
    
    
    
    54,000
    
    
    $
    14.61$18.01    $20.43
    
    
    196,500
    
    
    
    3.7
    
    
    $
    18.56
    
    
    
    48,000
    
    
    $
    18.59301,500
    
    
    
    3.8
    
    
    $
    17.08
    
    
    
    102,000
    
    
    $
    16.48
 3.
    
    Earnings per shareBasic earnings per share (EPS) is calculated by dividing net income (the numerator) by the
weighted average number of shares of common stock outstanding during the period (the
denominator). Diluted earnings per share incorporates the dilutive impact of outstanding stock
options by including the effect of outstanding vested and unvested options in the average
number of common shares outstanding during the period.The following is the calculation of basic and diluted weighted average shares outstanding and
EPS for the periods indicated:
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    341
    
    
    $
    975
    
    
    $
    1,444
    
    
    $
    2,575Weighted average shares:Weighted average shares  basic
    
    
    8,639,604
    
    
    
    8,575,604
    
    
    
    8,629,860
    
    
    
    8,558,018Dilution effect of stock options
outstanding at the end of period
    
    
    27,296
    
    
    
    188,868
    
    
    
    30,836
    
    
    
    74,561Weighted average shares  diluted
    
    
    8,666,900
    
    
    
    8,764,472
    
    
    
    8,660,696
    
    
    
    8,632,579Earnings per share:Basic
    
    $
    0.04
    
    
    $
    0.11
    
    
    $
    0.17
    
    
    $
    0.30Diluted
    
    $
    0.04
    
    
    $
    0.11
    
    
    $
    0.17
    
    
    $
    0.30
 4.
    
    Impairment of Long-Lived AssetsStatement of Financial Accounting Standards No. 144  Accounting for the Impairment or Disposal
of Long-Lived Assets (SFAS 144) requires that an asset be evaluated for impairment when the
carrying amount of an asset exceeds the sum of the undiscounted estimated future cash flows of
the asset. In accordance with the provisions of SFAS 144, the Company reviews the carrying
values of its long-lived assets whenever events or changes in circumstances indicate that such
carrying values may not be recoverable. If, upon review, the sum of the undiscounted pretax
cash flows is less than the carrying value of the asset group, the carrying value is written
down to estimated fair value.Individual assets are grouped for impairment purposes at the lowest level for which there are
identifiable cash flows that are largely independent of the cash flows of other groups of
assets, generally on a field-by-field basis. The fair value of impaired assets is determined
based on quoted market prices in active markets, if available, or upon the present values of
expected future cash flows using discount rates commensurate with the risks involved in the
asset group. The long-lived assets of the Company, which are subject to evaluation, consist
primarily of oil and gas properties. During the three and nine months ended September 30, 2006,
the Company did not recognize any impairment of its long-lived assets. During the three and
nine months ended September 30, 2005, the Company recognized $0 and $357, respectively, in
impairment charges. The $357 charge related to electrical generating equipment at the Cow Creek
field which was replaced in the second quarter of 2005.
 9




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##### Table of Contents



5.
    
    Income TaxesAt December 31, 2005, the Company had a net operating loss carryforward for regular income
tax reporting purposes of approximately $8,650 that will begin expiring in 2017. Although
Double Eagle is required to record income tax expense for financial reporting purposes, we do
not anticipate any payments of current tax liabilities in the near future.A reconciliation of the Companys effective tax rate to the expected federal tax rate is as
follows:
 For the Nine Months EndedSeptember 30,2006
    
    2005Expected federal tax rate
    
    
    35
    %
    
    
    34
    %Change in valuation allowance and other
    
    
    0
    %
    
    
    0
    %Effective tax rate
    
    
    35
    %
    
    
    34
    %
 6.
    
    Line of CreditAs part of its cash management program, effective August 1, 2006, the Company entered into a new
$50,000 revolving line of credit collateralized by oil and gas producing properties, replacing
the previously existing revolving line of credit, as described below. The initial borrowing
base is $25,000
and all outstanding balances on the line of credit mature on July 31, 2010. As of September 30,
2006, the interest rate on the line of credit, calculated in accordance with the agreement at
1.125% below the posted Wall Street Journal Prime Rate, was 7.125%, and the outstanding balance
of $8,320 was used to fund capital expenditures.The Company is subject to certain financial and non-financial covenants with respect to the
above credit facility, including a requirement to maintain a current ratio, plus the line of
credit availability, of 1.0 to 1.0. As of September 30, 2006, the Company was in compliance
with all such covenants. If our covenants are violated, and we are unable to negotiate a waiver
or amendment thereof, the lender would have the right to declare an event of default, terminate
the remaining commitment and accelerate all principal and interest outstanding.Prior to August 1, 2006, the Company maintained a $9,000 revolving line of credit collateralized
by oil and gas producing properties. The interest rate on the line of credit was 0.5% below the
posted Wall Street Journal Prime Rate. On August 1, 2006, all borrowings outstanding under this
facility were transferred to the new credit facility described above.For the three and nine months ended September 30, 2006, interest expense totaled $160 and $264,
respectively, and capitalized interest totaled $93 and $197, respectively.7.
    
    Cash Held in EscrowThe Company has received deposits representing partial prepayments of the expected total capital
expenditures from third party working interest owners in the Christmas Meadows exploration
project. The unexpended portion of the deposits at September 30, 2006 totaled $4,471.
 10




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 (Amounts in thousands of dollars, except amounts per unit of production)
 This Quarterly Report on Form 10-Q includes forward-looking statements as defined by the
Securities and Exchange Commission, or SEC. We make these forward-looking statements in reliance
on the safe harbor protections provided under the Private Securities Litigation Reform Act of 1995.
All statements, other than statements of historical facts, included in this Form 10-Q that address
activities, events or developments that we expect, believe or anticipate will or may occur in the
future are forward-looking statements. These forward-looking statements are based on assumptions
which we believe are reasonable based on current expectations and projections about future events
and industry conditions and trends affecting our business. However, whether actual results and
developments will conform to our expectations and predictions is subject to a number of risks and
uncertainties that, among other things, could cause actual results to differ materially from those
contained in the forward-looking statements, including the risk factors described in Item 1A. of
Part I of our 2005 Annual Report on Form 10-K and in Item 1A. of Part II of this Quarterly Report
on Form 10-Q filed with the SEC, and the following:
 
    
    Our ability to obtain, or a decline in, oil or gas production, or a decline in oil or gas prices;
    
    Incorrect estimates of required capital expenditures;
    
    Increases in the cost of drilling, completion and gas collection or other costs of production and
operations ;
    
    Our ability to meet growth projections;
    
    The amount and timing of capital deployment in new investment opportunities;
    
    The volumes of production from our oil and gas development properties, which may be dependent upon
issuance by federal, state, and tribal governments, or agencies thereof, of drilling, environmental and other permits, and
the availability of specialized contractors, work force, and equipment;
    
    Our ability to successfully integrate and profitably operate any future acquisitions;
    
    The possibility that we may be required to take impairment charges to reduce the carrying value of
some of our long-lived assets when indicators of impairment emerge;
    
    Numerous uncertainties inherent in estimating quantities of proved oil and gas reserves and actual
future production rates and associated costs;
    
    Our ability to remedy any deficiencies that may be identified in the review of our internal controls;
    
    General economic and political conditions, including tax rates or policies and inflation rates;
    
    Changes in or compliance with laws and regulations, particularly those relating to taxation, safety
and protection of the environment;
    
    Weather and other natural phenomena;
    
    Industry and market changes, including the impact of consolidations and changes in competition;
    
    The effect of accounting policies issued periodically by accounting standard-setting bodies;
    
    The cost and effects on our business, including insurance, resulting from terrorist actions or
natural disasters and responses to such actions or events; and
    
    The outcome of any future litigation or similar disputes and the impact on any such outcome or
related settlements.
 New factors that could cause actual results to differ materially from those described in
forward-looking statements emerge from time to time, and it is not possible for us to predict all
such factors, or the extent to which any such factor or combination of factors may cause actual
results to differ from those contained in any forward-looking statement. We assume no obligation to
update publicly any such forward -looking statements, whether as a result of new information,
future events, or otherwise.
 The following discussion should be read in conjunction with Item 7.  Managements Discussion and
Analysis of Financial Condition and Results of Operations  included in our 2005 Annual Report on
Form 10-K filed with the Securities and Exchange Commission.
 11




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##### Table of Contents



Business Overview and Strategy
    
    
    Average Daily ProductionDuring the quarter ended September 30, 2006, average daily production decreased 5% to
8,247 mcfe, as compared to 8,643 mcfe during the same prior year period. The decrease
in total gas production is primarily attributable to production at Mesa, which
decreased 30% to a net average daily production of 2,247 mcfe, as compared to 3,228
mcfe in the prior year. The Mesa decreases are a result of normal production
declines; however, the operator at Mesa has informed us that it intends to continue
new drilling projects for the remainder of 2006 to better maintain or increase
production levels. Such projects include four wells that began producing in the
fourth quarter of this year, and currently, seven additional wells are being drilled.
The decreased production at Mesa was partially offset by increased production at Cow
Creek and our other properties. Well maintenance and repairs, completed during the
second quarter at Cow Creek, increased our third quarter 2006 net average daily
production 8% to 4,745 mcfe, as compared to 4,404 mcfe in the same prior year period.
Our other properties, which made up approximately 15% of our production in the third
quarter 2006, increased average daily production volumes by 24% to 1,255 mcfe, due
largely to receipt of initial revenues from Doty Mountain production in the third
quarter of 2006.During the nine months ended September 30, 2006, average daily production decreased 7%
to 7,962 mcfe, as compared to 8,556 mcfe during the same prior year period. The
decrease is primarily due to normal production decline at Mesa, which decreased 17% to
a net average daily production of 2,532 mcfe, as compared to 3,047 mcfe in the prior
year. As mentioned above, the operator at Mesa has informed us that it intends to
continue new drilling projects for the remainder of 2006 to maintain or increase
production. Cow Creek also experienced a 5% decrease in production, to a net average
daily rate of 4,452 mcfe, compared to 4,679 mcfe in the prior year. The decrease was
due primarily to wells shut-in in the first quarter of 2006 while waiting for a
workover rig to become available. Subsequently, we contracted a workover rig for use
at Cow Creek on an ongoing basis to eliminate this potential issue in the future. The
decreased production at Mesa and Cow Creek was partially offset by our other
properties, which made up approximately 12% of our total production in the third
quarter 2006 and increased the related net average daily production 18% to 978 mcfe,
as compared to 830 mcfe during the same prior year period, due largely to receipt of
initial revenues from Doty Mountain production in the third quarter of 2006.
    
    Oil and Gas SalesDuring the quarter ended September 30, 2006, oil and gas sales decreased 20% to
$4,163, as compared to $5,233 during the same prior year period. The decrease in total
revenue was driven somewhat by slightly lower volumes but largely by lower gas prices.
Our natural gas prices decreased 17% during the third quarter of 2006 as compared to
the third quarter of 2005, due largely to the effects of a severe hurricane season in
2005. During the nine months ended September 30, 2006, oil and gas sales decreased 9%
to $12,808, as compared to $14,131 for the same prior year period. The decrease in
total revenue during the nine months ended
September 30, 2006 occurred during the second and third quarters and relates to the
items discussed in the above comments.
    
    Net Cash FlowDuring the nine months ended September 30, 2006, net cash provided by operating
activities increased 7% to $7,361, as compared to $6,879 in the same prior year
period. Net income decreased $936, of which $342 resulted from a non-cash charge to
income related to the implementation of SFAS 123(R) and an additional $160 of
depreciation was charged as a result of the new pipeline. Net cash provided by
operating activities
 12




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##### Table of Contents



also increased due to collections of accounts receivable and an
increase in accrued expenses. The increase was offset, in part, by escrow deposits
representing prepayments of the expected total capital expenditures received from
third party working interest owners in the Christmas Meadows exploration project. The
unexpended portion of the deposits at September 30, 2006 totaled $4,471.
  OVERVIEW OF FINANCIAL CONDITION AND LIQUIDITY
 Liquidity and Capital Resources
 Overview
   September 30,
    
    December 31,2006
    
    2005Financial
Position SummaryCash and cash equivalents
    
    $
    481
    
    
    $
    1,431Working capital
    
    
    (3,044
    )
    
    
    (2,804
    )Line of credit outstanding
    
    
    8,320
    
    
    
    3,000Stockholders equity
    
    
    31,882
    
    
    
    29,778RatiosLong-term debt to total capital ratio
    
    
    20.7
    %
    
    
    9.2
    %Total debt to equity ratio
    
    
    26.1
    %
    
    
    10.1
    %
  13




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##### Table of Contents



Cash flow activities
  Nine months ended September 30,2006
    
    
    2005Cash provided by (used in):Operating Activities
    
    $
    7,361
    
    
    $
    6,879Investing Activities
    
    
    (13,852
    )
    
    
    (10,479
    )Financing Activities
    
    
    5,541
    
    
    
    510Net change in cash
    
    $
    (950
    )
    
    $
    (3,090
    )
    14




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##### Table of Contents



Off-Balance Sheet Financing
  Capital Requirements
   Line of Credit
     15




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##### Table of Contents



RESULTS OF OPERATIONS
 Three months ended September 30, 2006 compared to the three months ended September 30, 2005
 Oil and gas sales volume and price comparisons
 Three Months Ended September 30,
    
    
    
    
    
    Percent
    
    Percent2006
    
    2005
    
    Volume
    
    PriceVolume
    
    Price
    
    Volume
    
    Price
    
    Change
    
    ChangeProduct:Gas (mcf)
    
    
    744,212
    
    
    $
    5.38
    
    
    
    772,167
    
    
    $
    6.50
    
    
    
    -4
    %
    
    
    -17
    %Oil (bbls)
    
    
    2,413
    
    
    $
    64.57
    
    
    
    3,837
    
    
    $
    55.38
    
    
    
    -37
    %
    
    
    17
    %Mcfe
    
    
    758,690
    
    
    $
    5.49
    
    
    
    795,189
    
    
    $
    6.58
    
    
    
    -5
    %
    
    
    -17
    %
  Transportation revenue
  Oil and gas production expenses, depreciation, depletion and amortization
 Three Months Ended September 30,2006
    
    
    2005(in dollars per mcfe)Average price
    
    $
    5.49
    
    
    $
    6.58Production costs
    
    
    1.12
    
    
    
    1.17Production taxes
    
    
    0.67
    
    
    
    0.86Depletion and amortization
    
    
    1.47
    
    
    
    1.22Total operating costs
    
    
    3.26
    
    
    
    3.25Gross margin
    
    $
    2.23
    
    
    $
    3.33Gross margin percentage
    
    
    41
    %
    
    
    51
    %
  16




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##### Table of Contents



General and administrative
  Income taxes
  Nine months ended September 30, 2006 compared to the nine months ended September 30, 2005
 Oil and gas sales volume and price comparisons
 Nine Months Ended September 30,
      
    
    
    
    
    Percent
    
    Percent2006
    
    2005
    
    Volume
    
    PriceVolume
    
    Price
    
    Volume
    
    Price
    
    Change
    
    ChangeProduct:Gas (mcf)
    
    
    2,113,057
    
    
    $
    5.78
    
    
    
    2,266,519
    
    
    $
    5.98
    
    
    
    -7
    %
    
    
    -3
    %Oil (bbls)
    
    
    10,098
    
    
    $
    59.84
    
    
    
    11,545
    
    
    $
    49.18
    
    
    
    -13
    %
    
    
    22
    %Mcfe
    
    
    2,173,645
    
    
    $
    5.89
    
    
    
    2,335,789
    
    
    $
    6.05
    
    
    
    -7
    %
    
    
    -3
    %
  Transportation revenue
  17




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##### Table of Contents



Oil and gas production expenses, depreciation, depletion and amortization
 Nine Months Ended September 30,2006
    
    
    2005(in dollars per mcfe)Average price
    
    $
    5.89
    
    
    $
    6.05Production costs
    
    
    1.16
    
    
    
    1.15Production taxes
    
    
    0.70
    
    
    
    0.70Depletion and amortization
    
    
    1.34
    
    
    
    1.14Total operating costs
    
    
    3.20
    
    
    
    2.99Gross margin
    
    $
    2.69
    
    
    $
    3.06Gross margin percentage
    
    
    46
    %
    
    
    51
    %
    General and administrative
  Income taxes
  18




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##### Table of Contents



DELIVERY CONTRACTS
  RemainingContractual
    
    Daily
    
    
    
    
    
    AverageProperty
    
    Volume
    
    Production
    
    Term
    
    PriceCow Creek
    
    
    31,000
    
    
    
    1,000
    
    
    
    07/06  10/06
    
    
    $
    4.93182,000
    
    
    
    1,000
    
    
    
    07/06  03/07
    
    
    $
    5.42182,000
    
    
    
    1,000
    
    
    
    07/06  03/07
    
    
    $
    6.28273,000
    
    
    
    1,000
    
    
    
    07/06  06/07
    
    
    $
    6.32273,000
    
    
    
    1,000
    
    
    
    07/06  06/07
    
    
    $
    5.94Company Total
    
    
    941,000
  RemainingContractual
    
    Daily
    
    
    
    
    
    AverageProperty
    
    Volume
    
    Production
    
    Term
    
    PriceCow Creek
    
    
    365,000
    
    
    
    1,000
    
    
    
    11/06  10/07
    
    
    $
    5.84
  PIPELINE
  CRITICAL ACCOUNTING POLICIES AND ESTIMATES
   19




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Interest Rate Risks
    Commodity Price Risks
   
 ITEM 4. CONTROLS AND PROCEDURES
   20




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##### Table of Contents



ITEM 1A. RISK FACTORS
  
 ITEM 6. EXHIBITS
  Exhibit Number and Description:
 31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15a-14(a) of the
Securities Exchange Act, as amended.31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15a-14(a) of the
Securities Exchange Act, as amended.32
    
    Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 21




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##### Table of Contents



SIGNATURES
  DOUBLE EAGLE PETROLEUM CO.(Registrant)Date: November 8, 2006
    
    By:
    
    /s/ Lonnie R. BrockLonnie R. BrockChief Financial Officer(Principal Financial Officer)
 22




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##### Table of Contents



Exhibit Number
    
    DescriptionExhibit 31.1
    
    Certification of Chief Executive Officer pursuant to
Rule 13a  14(a) and Rule 15a  14(a) of the Securities
Exchange Act, as amended.Exhibit 31.2
    
    Certification of Chief Financial Officer pursuant to
Rule 13a  14(a) and Rule 15a  14(a) of the Securities
Exchange Act, as amended.Exhibit 32
    
    Certification of Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes  Oxley
Act of 2002.
 23