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U.S. 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 March 31, 2006
 Commission File Number 0-6529
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 DOUBLE EAGLE PETROLEUM CO.
 
 MARYLAND
(State or other jurisdiction of
incorporation or organization)
    
    83-0214692
(I.R.S. Employer
Identification No.)
 
 
 
 
 þ o
  o þ o
  o þ




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##### 



PagePART I. FINANCIAL INFORMATION:Item 1. Financial StatementsBalance Sheets as of March 31, 2006 (Unaudited) and December 31, 2005
    
    
    4Statements of Operations for the three months ended March 31, 2006 and 2005 (Unaudited)
    
    
    5Statements of Cash Flows for the three months ended March 31, 2006 and 2005 (Unaudited)
    
    
    6Notes to Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Conditions and Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    19Item 4. Controls and Procedures
    
    
    19PART II. OTHER INFORMATIONItem 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    20Item 6. Exhibits
    
    
    20Signatures
    
    
    20Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15a-14(a)Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15a-14(a)Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906
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March 31,
    
    
    December 31,2006
    
    
    2005ASSETS
    
    (Unaudited)Current assetsCash and cash equivalents
    
    $
    1,136,882
    
    
    $
    1,430,977Accounts receivable
    
    
    2,414,587
    
    
    
    4,247,573Other current assets
    
    
    134,393
    
    
    
    217,703Total current assets
    
    
    3,685,862
    
    
    
    5,896,253Oil and gas properties and equipment, successful efforts methodDeveloped properties
    
    
    41,944,832
    
    
    
    41,145,800Wells in progress
    
    
    4,178,974
    
    
    
    2,946,260Gas Pipeline
    
    
    5,378,589
    
    
    
    5,378,589Undeveloped properties
    
    
    3,245,926
    
    
    
    3,212,955Corporate and other assets
    
    
    990,627
    
    
    
    748,43255,738,948
    
    
    
    53,432,036Less accumulated depreciation, depletion and impairment
    
    
    (16,170,264
    )
    
    
    (15,173,628
    )Net properties and equipment
    
    
    39,568,684
    
    
    
    38,258,408Other assets
    
    
    56,079
    
    
    
    56,079Total assets
    
    $
    43,310,625
    
    
    $
    44,210,740LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    1,316,048
    
    
    $
    2,009,527Accrued expenses
    
    
    1,603,850
    
    
    
    5,033,521Accrued production taxes
    
    
    1,678,642
    
    
    
    1,657,164Total current liabilities
    
    
    4,598,540
    
    
    
    8,700,212Noncurrent liabilitiesLine of credit
    
    
    4,500,000
    
    
    
    3,000,000Asset retirement obligation
    
    
    519,272
    
    
    
    513,272Deferred tax liability
    
    
    2,671,000
    
    
    
    2,219,000Total noncurrent liabilities
    
    
    7,690,272
    
    
    
    5,732,272Total liabilities
    
    
    12,288,812
    
    
    
    14,432,484Commitments and contingencies (Notes 3, 4 and 7)Stockholders EquityCommon stock, $0.10 par value; 50,000,000 shares authorized; issued and
outstanding 8,628,604 and 8,590,604 shares as of March 31, 2006 and
December 31, 2005, respectively
    
    
    862,860
    
    
    
    859,060Capital in excess of par value
    
    
    22,502,425
    
    
    
    22,100,867Retained earnings
    
    
    7,656,528
    
    
    
    6,818,329Total stockholders equity
    
    
    31,021,813
    
    
    
    29,778,256Total liabilities and stockholders equity
    
    $
    43,310,625
    
    
    $
    44,210,740
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2006
    
    
    2005RevenuesOil and gas sales
    
    $
    4,593,191
    
    
    $
    4,563,950Other income
    
    
    13,560
    
    
    
    11,188Total revenues
    
    
    4,606,751
    
    
    
    4,575,138Costs and ExpensesProduction costs
    
    
    875,776
    
    
    
    830,662Production taxes
    
    
    523,138
    
    
    
    491,044Exploration expenses including dry holes
    
    
    31,588
    
    
    
    77,734General and administrative
    
    
    868,394
    
    
    
    589,432Depreciation, depletion and amortization
of oil and gas properties
    
    
    996,635
    
    
    
    983,344Impairment of equipment and properties
    
    
    
    
    
    
    357,000Total costs and expenses
    
    
    3,295,531
    
    
    
    3,329,216Income from operations
    
    
    1,311,220
    
    
    
    1,245,922Other income (expense)
    
    
    
    
    
    
    (6,854
    )Interest income (expense), net
    
    
    (21,021
    )
    
    
    10,446Income before income taxes
    
    
    1,290,199
    
    
    
    1,249,514Provision for deferred taxes
    
    
    (452,000
    )
    
    
    (425,000
    )Net income
    
    $
    838,199
    
    
    $
    824,514Net income per common share  basic
    
    $
    .10
    
    
    $
    .10Net income per common share  diluted
    
    $
    .10
    
    
    $
    .09Weighted average shares outstanding  basic
    
    
    8,616,693
    
    
    
    8,534,682Weighted average shares outstanding  diluted
    
    
    8,655,616
    
    
    
    8,755,847
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2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    838,199
    
    
    $
    824,514Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation, depletion, amortization and accretion of asset
retirement obligation
    
    
    1,002,636
    
    
    
    987,095Abandonment of non-producing properties
    
    
    299
    
    
    
    17,176Impairment of equipment
    
    
    
    
    
    
    357,000Deferred income taxes
    
    
    452,000
    
    
    
    425,000Noncash employee stock option expense
    
    
    112,357
    
    
    
    Decrease (increase) in operating assets and liabilities:Accounts receivable
    
    
    1,832,986
    
    
    
    21,456Other current assets
    
    
    83,310
    
    
    
    (38,021
    )Accounts payable and accrued expenses
    
    
    (825,148
    )
    
    
    (165,891
    )Accrued production taxes
    
    
    21,478
    
    
    
    56,993Net cash provided by operating activities
    
    
    3,518,117
    
    
    
    2,485,322Cash flows from investing activities:Proceeds from sales of properties and assets
    
    
    
    
    
    
    10,934Other assets
    
    
    
    
    
    
    (25,000
    )Additions of producing properties and equipment
    
    
    (5,329,747
    )
    
    
    (3,292,527
    )Additions of corporate and non-producing properties
    
    
    (275,465
    )
    
    
    (224,931
    )Net cash used in investing activities
    
    
    (5,605,212
    )
    
    
    (3,531,524
    )Cash flows from financing activities:Exercise of options and warrants
    
    
    293,000
    
    
    
    380,048Borrowings on line of credit
    
    
    1,500,000
    
    
    
    Net cash provided by financing activities
    
    
    1,793,000
    
    
    
    380,048Change in cash and cash equivalents
    
    
    (294,095
    )
    
    
    (666,154
    )Cash and cash equivalents at beginning of period
    
    
    1,430,977
    
    
    
    3,669,950Cash and cash equivalents at end of period
    
    $
    1,136,882
    
    
    $
    3,003,796Supplemental disclosures of cash and non-cash transactions:Cash paid for interest
    
    $
    69,063
    
    
    $
    Additions to developed properties included in current liabilities
    
    $
    1,460,000
    
    
    $
    2,474,000Equity contributions related to non-qualified options
    
    $
    
    
    
    $
    71,000
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1.
    
    Summary of Significant Accounting PoliciesThe financial statements have been prepared by the Company without audit pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in the financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted as allowed by such rules and
regulations, and management believes that the disclosures are adequate to make the information
presented not misleading. These financial statements include all of the adjustments, which, in
the opinion of management, are necessary to a fair presentation of financial position and
results of operations. All such adjustments are of a normal and 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. These
financial statements should be read in conjunction with the audited financial statements at
December 31, 2005, included in the Companys Annual Report on Form 10-K.New Accounting PronouncementsIn February 2006, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standard 155  Accounting for Certain Hybrid Financial Instruments (SFAS
155), which eliminates the exemption from applying 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. Early adoption is
permitted. The adoption of SFAS 155 is not expected to have a material effect on our
consolidated financial position, results of operations or cash flows.In March 2006, the FASB issued Statement of Financial Accounting Standard 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 permits, but
does not require, the subsequent measurement of servicing assets and servicing liabilities to be
initially measured at fair value. Adoption is required as of the beginning of the first fiscal
year that begins after September 15, 2006. Early adoption is permitted. The adoption of SFAS 156
is not expected to have a material effect on our consolidated financial position, results of
operations or cash flows.2.
    
    Stock-Based Compensation and Shared Based PaymentsDouble Eagle has outstanding stock options issued to certain employees under four stock-option
plans, approved by the Companys shareholders (collectively the Stock Option Plans). On
occasion, the Board of Directors also grants stock options not covered under the plans approved
by the shareholders to individuals that perform services for the Company. Options were 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 ten
years from the date of grant.
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Effective January 1, 2006, Double Eagle adopted the provisions of Statement of Financial
Accounting Standard No. 123(R), Share-Based Payment, (SFAS No. 123(R)) for its share-based
compensation plans. Double Eagle previously accounted for these plans under the recognition and
measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, (APB No. 25), and related interpretations and disclosure requirements
established by SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No.
148, Accounting for Stock-Based Compensation  Transition and Disclosure.Under APB No. 25, no compensation expense was recorded for Double Eagles stock options issued
under the qualified plan. The pro forma effects on net earnings and earnings per share for
qualified stock options were instead disclosed in a footnote to the financial statements. Under
APB No. 25, compensation expense for non-qualified stock options with stock appreciation rights
features were 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 No. 123(R), share-based compensation cost is measured at fair value. Double Eagle
utilizes 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, 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. Share-based
compensation expense recognized in earnings for the three months ended March 31, 2006 of
$112,000 is reflected in General and administrative expense in the Condensed Consolidated
Statements of Operations.The following assumptions were used in estimating fair value for all options previously granted
during the three months ended March 31, 2005:
 Weighted-average volatility
    
    53%Expected dividends
    
    0.0%Expected term (in years)
    
    3.0 to 8.0Risk-free rate
    
    3.5%
 Compensation cost for equity-classified awards, such as Double Eagles stock options issued
under the qualified plan, 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. Total share-based compensation expense for equity-classified awards vested in the three
months ended March 31, 2006 was $112,000. There was no impact on income tax expense. During the
three months ended March 31, 2006, the Company recorded stock option exercises and stock option
forfeitures/expirations, as shown in the following table. There were no qualified option grants
during the reporting period.
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Weighted-Weighted-
    
    
    AverageAverage
    
    
    RemainingExercise
    
    
    ContractualOptions
    
    Shares
    
    
    Price
    
    
    Term (Years)Outstanding at January 1, 2006
    
    
    354,243
    
    
    $
    15.38
    
    
    
    4.5Stock Option Grants
    
    
    
    
    
    $
    
    
    
    
    Stock Option Exercises
    
    
    (38,000
    )
    
    $
    7.71
    
    
    
    Stock Option Forfeitures / Expirations
    
    
    (20,000
    )
    
    $
    18.18
    
    
    
    Outstanding at March 31, 2006
    
    
    296,243
    
    
    $
    16.22
    
    
    
    4.7Exercisable at March 31, 2006
    
    
    100,410
    
    
    $
    15.21
    
    
    
    3.5
   Options Outstanding
    
    Options ExercisableWeighted AverageRemaining
    
    Weighted
    
    
    
    
    
    WeightedRange of
    
    Number of
    
    Contractual
    
    Average
    
    Number of
    
    Averageexercise
    
    Options
    
    Life
    
    Exercise
    
    Options
    
    Exerciseprices
    
    Outstanding
    
    (in years)
    
    Price
    
    Exercisable
    
    Price$    6.31 14.83
    
    
    136,743
    
    
    
    5.5
    
    
    $
    13.48
    
    
    
    64,410
    
    
    $
    13.2918.0119.44
    
    
    159,500
    
    
    
    3.3
    
    
    
    18.69
    
    
    
    36,000
    
    
    
    18.66296,243
    
    
    
    4.7
    
    
    $
    16.22
    
    
    
    100,410
    
    
    $
    15.21
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Three months endedMarch 31, 2005Net earnings, as reported
    
    $
    824,514Add: Share-based employee compensation expense included
in reported net earnings
    
    
    6,400Deduct: Total share-based employee compensation expense
determined under the fair value based method for all
awards
    
    
    (189,000
    )Pro forma net earnings
    
    $
    641,914Basic Earnings Per Share:As reported
    
    $
    0.10Pro forma
    
    $
    0.09Diluted Earnings Per Share:As reported
    
    $
    0.08Pro forma
    
    $
    0.07
 3.
  Earnings per share
  10




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Three months endedMarch 31,2006
    
    
    2005Income (numerator)Net Income  basic
    
    $
    838,199
    
    
    $
    824,514Net Income  diluted
    
    $
    838,199
    
    
    $
    824,514Weighted average shares (denominator)Weighted average shares  basic
    
    
    8,616,693
    
    
    
    8,534,682Dilutive effect of stock options
outstanding at the end of period
    
    
    38,923
    
    
    
    221,165Weighted average shares  diluted
    
    
    8,656,616
    
    
    
    8,755,847Earnings per share:Basic
    
    $
    0.10
    
    
    $
    0.10Diluted
    
    $
    0.10
    
    
    $
    0.09
 4. Impairment of Long-Lived Assets
 Accounting for the Impairment or Disposal of Long-Lived Assets
   5. Income Taxes
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For the three months endedMarch 31,2006
    
    
    2005Expected federal tax rate
    
    
    35
    %
    
    
    34
    %Change in valuation allowance
and other
    
    
    
    
    
    
    Effective tax rate
    
    
    35
    %
    
    
    34
    %
 6. Line of Credit
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OVERVIEW
    
    
    Average daily production decreased 21% to 7,121 mcfe per day during the first three
months of 2006, as compared to 8,970 mcfe per day during the first three months of
2005. The decrease in production is attributed to reduced gas flow rates at Cow Creek
and the Mesa field. At Cow Creek, well maintenance and repairs, completed during the
second quarter, have increased average daily production by 33% to 4,800 mcf, net to
the Company, from 3,600 mcf during the first quarter of 2006. At Mesa, the operator
has represented to the Company that new drilling is scheduled later in 2006 to
increase production.
    
    Oil and gas revenues remained essentially unchanged at $4.6 million during the
three months ended March 31, 2006 from the same period in 2005. Revenues remained flat
despite a 27% decrease in gas production due to a 26% increase in gas prices.
    
    Net cash provided by operating activities increased 41% to $3.5 million in the
first three months of 2006 from $2.5 million in the first three months of 2005
primarily due to a reduction in accounts receivable.
    
    In early January, 2006, we began transporting our equity gas through our recently
completed intrastate gas pipeline connecting the Cow Creek field with Southern Star
Central Gas Pipeline, Inc. The 13-mile pipeline provides the Company with full access
to the interstate gas markets from southern Wyoming. The pipeline was constructed at a
cost of approximately $5.4 million and will provide reliable transportation for future
development by the Company in the Eastern Washakie Basin.
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FACTORS AFFECTING FINANCIAL CONDITION AND LIQUIDITY
 Liquidity and Capital Resources
    Off-Balance Sheet Financing
  Capital Requirements
  14




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Line of Credit
  RESULTS OF OPERATIONS
 Three months ended March 31, 2006 compared to three months ended March 31, 2005
  Three Months Ended March 31,
    
    Percent
    
    Percent2006
    
    2005
    
    Volume
    
    PriceProduct
    
    Volume
    
    Price
    
    Volume
    
    Price
    
    Change
    
    ChangeGas (mcf) (Mcf)
    
    
    617,897
    
    
    $
    7.10
    
    
    
    781,765
    
    
    $
    5.61
    
    
    
    -21
    %
    
    
    +27
    %Oil (bbls)
    
    
    3,836
    
    
    $
    54.04
    
    
    
    4,262
    
    
    $
    41.65
    
    
    
    -10
    %
    
    
    +30
    %Mcfe
    
    
    640,911
    
    
    $
    7.17
    
    
    
    807,336
    
    
    $
    5.65
    
    
    
    -21
    %
    
    
    +27
    %
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$ Per mcfe2006
    
    
    2005Average price
    
    $
    7.17
    
    
    $
    5.65Production costs
    
    
    1.37
    
    
    
    1.03Production taxes
    
    
    .82
    
    
    
    .61Depreciation, depletion, amortization
    
    
    1.56
    
    
    
    1.22Total operating costs
    
    
    3.75
    
    
    
    2.86Gross margin
    
    $
    3.42
    
    
    $
    2.79Gross margin percentage
    
    
    48
    %
    
    
    49
    %
  Double Eagle Sales ContractsContractual
    
    Daily
    
    
    
    
    
    AverageProperty
    
    Volume
    
    Production
    
    Term
    
    Price ($)Cow Creek
    
    
    214,000
    
    
    
    1,000
    
    
    
    11/04-10/06
    
    
    $
    5.50365,000
    
    
    
    1,000
    
    
    
    04/05-03/07
    
    
    
    6.00Company Total
    
    
    579,000
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
  Reserve Estimates
   
    
    the amount and timing of actual production
    
    supply and demand for natural gas
    
    curtailments or increases in consumption by natural gas purchasers; and
    
    changes in governmental regulations or taxation
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Oil and Gas Properties
  Income Taxes
  18




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Interest Rate Risks
  Commodity Price Risks
   
    19




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Exhibit No.
 31.1
    
    Rule 13a-14(a)/15a-14(a) Certification of Chief Executive Officer31.2
    
    Rule 13a-14(a)/15a-14(a) Certification of Chief Financial Officer32
    
    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.
 
   DOUBLE EAGLE PETROLEUM CO.
(Registrant)Date:  May 10, 2006
    By:
    /s/ David C. MilholmDavid C. MilholmVice President of Finance and
Chief Financial Officer
(Principal Financial Officer) 20




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Exhibit No.
 31.1
    
    Rule 13a-14(a)/15a-14(a) Certification of Chief Executive Officer31.2
    
    Rule 13a-14(a)/15a-14(a) Certification of Chief Financial Officer32
    
    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.