**UNITED STATESFORM 10Q**

 

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D. C. 20549**

 

| **(Mark One)**                                                                                                                                                                                                                                                                                                                                                                                    |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                              |
| **ý**                                                                                                                                                                                                                                                                                                                                                                                        | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                                                                                                                                                                                              |   |
| **For the quarterly period ended   March 31, 2003**                                                                                                                                                                                                                                                                                                                                |
|                                                                                                                                                                                                                                                                                                                                                                                              |
| **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:  0-610**                                                                                                                                                                                                                                                                                                                                                      |

 

| **EQUITY OIL COMPANY**                                                              |
|-------------------------------------------------------------------------------------|
| (Exact name of registrant as specified in its charter)                              |
|                                                                                |
| **COLORADO**                                                                        |   | **87-0129795** |
| (State or other jurisdiction of incorporation or organization)                 |   | (I.R.S. Employer  Identification No.) |
|                                                                                |   |   |
| **Suite 806,   10 West Third South, Salt Lake City, Utah 84101**          |
| (Address of principal executive offices)  (Zip Code)                                |
|                                                                                |   |   |
| **(801) 521-3515**                                                                  |
| Registrant’s telephone number, including area code                             |
|                                                                                |
|                                                                                |
| (Former name, former address and former fiscal year, if changed since  last report) |

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months(or for such shorter period that the registrant was required to file suchreports), and (2) has been subject to such filing requirements for the past 90days.

Yes  ý   No  o

 

Indicate by check mark whetherthe registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act)

Yes  o   No  ý

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCYPROCEEDINGS DURING THE PRECEDING FIVE YEARS:

 

Indicate by check mark whetherthe registrant has filed all documents and reports required to be filed bySections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent tothe distribution of securities under a plan confirmed by a court.

Yes  o   No  o

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of sharesoutstanding of each of the issuer’s classes of common stock, as of the latestpracticable date (May 7, 2003):  12,008,661

 

 

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**PART I - FINANCIAL INFORMATION**

 

**ITEMI:  Financial Statements**

 

EQUITY OIL COMPANYStatements of OperationsFor the three months ended March 31, 2003 and 2002(Unaudited)

 
|                                                                                                 |   | **2003**   |      | **2002**  |   |
|------------------------------------------------------------------------------------------------------|--------|------------|-----------|-----------|--------|
| REVENUES                                                                                             |   |       |      |      |   |
| Oil and gas sales                                                                                    |   | $          | 6,728,397 |      | $      | 3,511,397 |   |
| Other                                                                                                |   | 118,577    |      | 66,210    |   |
|                                                                                                 |   | 6,846,974  |      | 3,577,607 |   |
| EXPENSES                                                                                             |   |       |      |      |   |
| Operating costs                                                                                      |   | 2,003,716  |      | 1,707,062 |   |
| Depreciation, depletion and amortization                                                             |   | 1,925,000  |      | 900,000   |   |
| 3-D seismic                                                                                          |   | 9,917      |      | 14,934    |   |
| Exploration                                                                                          |   | 43,393     |      | 63,659    |   |
| General and administrative                                                                           |   | 795,210    |      | 547,314   |   |
| Production and exploration overhead                                                                  |   | 433,997    |      | 344,425   |   |
| Accretion expense                                                                                    |   | 68,000     |      | —    |   |
| Interest                                                                                             |   | 310,589    |      | 50,889    |   |
|                                                                                                 |   | 5,589,822  |      | 3,628,283 |   |
| Income (loss) from continuing operations before income taxes                                         |   | 1,257,152  |      | (50,676   | )      |
|                                                                                                 |   |       |      |      |   |
| Provision for (benefit from) income taxes                                                            |   | 464,769    |      | (18,696   | )      |
|                                                                                                 |   |       |      |      |   |
| Income (loss) from continuing operations                                                             |   | 792,383    |      | (31,980   | )      |
|                                                                                                 |   |       |      |      |   |
| Discontinued operations (Note 6)                                                                     |   |       |      |      |   |
| Income from operations of properties sold, net of provision for  income taxes of $52,812 and $43,296 |   | 90,041     |      | 73,816    |   |
|                                                                                                 |   |       |      |      |   |
| Gain on sale of properties, net of provision for income taxes of  $415,168                           |   | 655,168    |      | —    |   |
|                                                                                                 |   |       |      |      |   |
| Income before cumulative effect of accounting change                                                 |   | 1,537,592  |      | 41,836    |   |
|                                                                                                 |   |       |      |      |   |
| Cumulative effect of change in accounting,  net of benefit from income taxes of $622,832        |   | (1,061,865 | )         | —    |   |
|                                                                                                 |   |       |      |      |   |
| NET INCOME                                                                                           |   | $          | 475,727   |      | $      | 41,836 |   |
|                                                                                                 |   |       |      |      |   |
| Proforma net income reflecting adoption of SFAS 143                                                  |   |       |      | $         | 23,786 |   |

 

The accompanying notes are an integral part of these statements.

 

2

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EQUITY OIL COMPANYStatements of OperationsFor the three months ended March 31, 2003 and 2002Continued(Unaudited)

 
|                                                           |   | **2003**   |   | **2002**   |   |
|----------------------------------------------------------------|--------|------------|--------|------------|--------|
| Basic income (loss) per common share                           |   |       |   |       |   |
| Income (loss) from continuing operations                       |   | $          | .07    |       | $      | (.00 | ) |
|                                                           |   |       |   |       |   |
| Income from discontinued operations                            |   | $          | .06    |       | $      | .01 |   |
|                                                           |   |       |   |       |   |
| Income before cumulative effect of accounting change           |   | $          | .13    |       | $      | .00 |   |
|                                                           |   |       |   |       |   |
| Cumulative effect of change in accounting                      |   | $          | (.09   | )          | — |   |
|                                                           |   |       |   |       |   |
| NET INCOME                                                     |   | $          | .04    |       | $      | .00 |   |
|                                                           |   |       |   |       |   |
| Diluted income (loss) per common share                         |   |       |   |       |   |
|                                                           |   |       |   |       |   |
| Income (loss) from continuing operations                       |   | $          | .07    |       | $      | (.00 | ) |
|                                                           |   |       |   |       |   |
| Income from discontinued operations                            |   | $          | .06    |       | $      | .01 |   |
|                                                           |   |       |   |       |   |
| Income before cumulative effect of accounting change           |   | $          | .13    |       | $      | .00 |   |
|                                                           |   |       |   |       |   |
| Cumulative effect of change in accounting                      |   | $          | (.09   | )          | — |   |
|                                                           |   |       |   |       |   |
| NET INCOME                                                     |   | $          | .04    |       | $      | .00 |   |
|                                                           |   |       |   |       |   |
| Proforma net income per share, reflecting adoption of SFAS 143 |   |       |   |       |   |
| Basic                                                          |   | —     |   | $          | .00    |   |
|                                                           |   |       |   |       |   |
| Diluted                                                        |   | —     |   | $          | .00    |   |
|                                                           |   |       |   |       |   |
| Weighted average shares outstanding                            |   |       |   |       |   |
|                                                           |   |       |   |       |   |
| Basic                                                          |   | 12,008,661 |   | 12,687,061 |   |
|                                                           |   |       |   |       |   |
| Diluted                                                        |   | 12,231,505 |   | 12,813,446 |   |

 

The accompanying notes are an integral part of these statements.

 

3

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EQUITY OIL COMPANYStatements of Comprehensive IncomeFor the three months ended March 31, 2003 and 2002(Unaudited)

 
|                                                                                      |   | **2003** |     | **2002** |   |
|-------------------------------------------------------------------------------------------|--------|----------|----------|----------|--------|
|                                                                                      |   |     |     |     |   |
| Net income                                                                                |   | $        | 475,727  |     | $      | 41,836 |   |
|                                                                                      |   |     |     |     |   |
| Other Comprehensive Loss                                                                  |   |     |     |     |   |
|                                                                                      |   |     |     |     |   |
| Unrealized losses on financial instruments, net of benefit from  income taxes of $125,733 |   | $        | (214,363 | )        | — |   |
|                                                                                      |   |     |     |     |   |
| Comprehensive income                                                                      |   | 261,364  |     | $        | 41,836 |   |

 

The accompanying notes are an integral part of these statements.

 

4

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EQUITY OIL COMPANYBalance Sheetsas of March 31, 2003 and December 31,2002(Unaudited)

 
|                                                      |   | **March 31,  2003** |       | **December 31,  2002** |   |
|-----------------------------------------------------------|--------|---------------------|------------|------------------------|--------|
|                                                      |   |                |       |                   |   |
| ASSETS                                                    |   |                |       |                   |   |
|                                                      |   |                |       |                   |   |
| Current assets:                                           |   |                |       |                   |   |
| Cash and cash equivalents                                 |   | $                   | 2,126,490  |                   | $      | 1,348,024 |   |
| Accounts and advances receivable                          |   | 4,736,386           |       | 4,396,473              |   |
| Income taxes receivable                                   |   | 1,055,499           |       | 1,054,927              |   |
| Deferred income taxes                                     |   | 28,460              |       | 28,460                 |   |
| Other current assets                                      |   | 221,455             |       | 215,177                |   |
|                                                      |   | 8,168,290           |       | 7,043,061              |   |
|                                                      |   |                |       |                   |   |
| Property and equipment, at cost                           |   | 144,968,920         |       | 147,174,977            |   |
| Less accumulated depreciation, depletion and amortization |   | (76,269,140         | )          | (78,148,866            | )      |
|                                                      |   | 68,699,780          |       | 69,026,111             |   |
|                                                      |   |                |       |                   |   |
| Other assets                                              |   | 671,935             |       | 731,184                |   |
|                                                      |   |                |       |                   |   |
| TOTAL ASSETS                                              |   | $                   | 77,540,005 |                   | $      | 76,800,356 |   |
|                                                      |   |                |       |                   |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                 |   |                |       |                   |   |
|                                                      |   |                |       |                   |   |
| Current liabilities:                                      |   |                |       |                   |   |
| Accounts payable                                          |   | $                   | 1,391,424  |                   | $      | 2,157,291 |   |
| Accrued liabilities                                       |   | 166,697             |       | 406,681                |   |
| Income taxes payable                                      |   | 196,143             |       | 170,399                |   |
| Fair value of financial instruments                       |   | 2,120,584           |       | 1,584,988              |   |
|                                                      |   | 3,874,848           |       | 4,319,359              |   |
|                                                      |   |                |       |                   |   |
| Fair value of financial instruments                       |   | 137,500             |       | 333,000                |   |
| Asset retirement obligation                               |   | 3,215,061           |       | —                 |   |
| Revolving credit facility                                 |   | 32,500,000          |       | 34,500,000             |   |
| Deferred income taxes                                     |   | 4,301,554           |       | 4,398,319              |   |
|                                                      |   |                |       |                   |   |
| Total liabilities                                         |   | 44,028,963          |       | 43,550,678             |   |
|                                                      |   |                |       |                   |   |
| Stockholders’ Equity:                                |   |                |       |                   |   |
| Common stock                                              |   | 12,856,661          |       | 12,856,661             |   |
| Paid in capital                                           |   | 3,738,263           |       | 3,738,263              |   |
| Less cost of treasury stock                               |   | (1,991,444          | )          | (1,991,444             | )      |
| Retained earnings                                         |   | 20,330,833          |       | 19,855,106             |   |
| Accumulated other comprehensive loss                      |   | (1,423,271          | )          | (1,208,908             | )      |
|                                                      |   | 33,511,042          |       | 33,249,678             |   |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY           |   | $                   | 77,540,005 |                   | $      | 76,800,356 |   |

 

The accompanying notes are an integral part of these statements.

 

5

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EQUITY OIL COMPANYStatements of Cash FlowsFor the three months ended March 31, 2003 and 2002(Unaudited)

 
|                                                |   | **2003**   |      | **2002**   |   |
|-----------------------------------------------------|--------|------------|-----------|------------|--------|
| CASH FLOWS FROM OPERATING ACTIVITIES:               |   |       |      |       |   |
| Net income                                          |   | $          | 475,727   |       | $      | 41,836 |   |
| Adjustments                                         |   |       |      |       |   |
| Depreciation, depletion and amortization            |   | 1,925,000  |      | 900,000    |   |
| Accretion expense                                   |   | 68,000     |      | —     |   |
| Cumulative effect of change in accounting           |   | 1,061,865  |      | —     |   |
| Gain on sale of properties                          |   | (1,278,426 | )         | —     |   |
| Change in other assets                              |   | 59,249     |      | 14,693     |   |
| Equity loss in Symskaya Exploration                 |   | —     |      | 40,398     |   |
| Change in deferred income taxes                     |   | 651,800    |      | 24,600     |   |
|                                                |   |       |      |       |   |
| Increase (decrease) from changes in:                |   |       |      |       |   |
| Accounts and advances receivable                    |   | (339,913   | )         | 155,765    |   |
| Other current assets                                |   | (6,278     | )         | 25,893     |   |
| Accounts payable and accrued liabilities            |   | (1,005,851 | )         | (210,345   | )      |
| Income taxes receivable/payable                     |   | 25,172     |      | 1,297      |   |
| Net cash provided by operating   activities    |   | 1,636,345  |      | 994,137    |   |
|                                                |   |       |      |       |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:               |   |       |      |       |   |
| Advances to Symskaya Exploration                    |   | —     |      | (40,398    | )      |
| Capital expenditures                                |   | (1,190,261 | )         | (1,446,126 | )      |
| Proceeds from sale of assets                        |   | 2,332,382  |      | —     |   |
| Net cash provided by (used in) investing activities |   | 1,142,121  |      | (1,486,524 | )      |
|                                                |   |       |      |       |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:               |   |       |      |       |   |
|                                                |   |       |      |       |   |
| Payment of credit facility fees                     |   | —     |      | (75,424    | )      |
| Payments on credit facility                         |   | (2,000,000 | )         | —     |   |
|                                                |   |       |      |       |   |
| Net cash used in financing activities               |   | (2,000,000 | )         | (75,424    | )      |
|                                                |   |       |      |       |   |
| NET (DECREASE) INCREASE IN CASH                     |   | 778,466    |      | (567,811   | )      |
|                                                |   |       |      |       |   |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD    |   | 1,348,024  |      | 960,970    |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD          |   | $          | 2,126,490 |       | $      | 393,159 |   |

 

The accompanying notes are an integral part of these statements.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

**Note 1.****          Interim FinancialStatements**

 

In the opinion of the Company’smanagement, the accompanying interim financial statements reflect the necessaryadjustments, all of which are of a normal and recurring nature, to presentfairly the financial position of Equity Oil Company (the Company) as of March31, 2003, and the results of its operations and its cash flows for the threemonth periods ended March 31, 2003 and 2002.

 

The financial statements andthe accompanying notes to financial statements have been prepared according torules and regulations of the Securities and Exchange Commission.  Accordingly, certain notes and otherinformation have been condensed or omitted from the interim financialstatements presented in this Quarterly Report on Form 10-Q.  These financial statements should be read inconjunction with the Company’s 2002 Annual Report on Form 10-K.

 

The results for the three monthperiod ended March 31, 2003 are not necessarily indicative of future results.

 

**Note 2.****          Net Income Per Share**

 

Basicnet income per share is computed using the weighted average number of commonshares outstanding during the period. Diluted net income per share is computedusing the weighted average number of common and, if dilutive, common equivalentshares outstanding during the period. Common equivalent shares consist of theincremental common shares issuable upon the exercise of stock options (usingthe treasury stock method).Options to purchase approximately 1,750,000 sharesof common stock at prices of $1.06 to $5.125 per share were outstanding atMarch 31, 2003, of which, 222,844 incremental shares (768,800 options) wereincluded in the computation of diluted net income per share for the firstquarter of 2003. 

 

Options to purchaseapproximately 1,993,000 shares of common stock at prices of $1.06 to $5.50 pershare were outstanding at March 31, 2002, of which, 126,385 incrementalshares (417,800 options) were included in the computation of diluted net incomeper share for the first quarter of 2002.

 

**Note 3.****          Hedging Activities**

 

The Company periodically entersinto oil and gas financial instruments to manage its exposure to oil and gasprice volatility.  The instruments areusually placed with counterparties that the Company believes are minimal creditrisks.  It is the Company’s policy toonly enter into derivative contracts with investment grade rated counterpartiesdeemed by management to be competent and competitive market makers.  The oil and gas reference prices upon whichthe price 

 

7

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hedging instruments are basedreflect various market indices that have historically correlated with actual prices received by the Company.

 

As of March 31, 2003, theCompany had commodity price hedges in place for 1,100 barrels of oil per dayand 6,000 MMBTU of natural gas per day under costless collars.  The oil hedge has a floor of $23.00 and aceiling of $27.10 and the gas hedges ranged from $3.00 per MMBTU to $4.915 perMMBTU.  The settlement price for thehedges during the quarter ended March 31, 2003 resulted in cash payments of$1,762,445 from the Company to the counterparty.  The fair value of these financial instruments at March 31, 2003,as computed by the counterparty, was ($2,258,084).  This amount is shown on the balance sheet as a current liabilityof $2,120,584 and a long term liability of $137,500.  There were no financial instruments in place during the firstquarter of 2002.

 

**Note 4.****          Asset RetirementObligations**

 

In August 2001, the FASB issuedSFAS No. 143 (SFAS 143), “Accounting for Asset Retirement Obligations.” SFAS143 is effective for the Company beginning January 1, 2003. The mostsignificant impact of this standard on the Company was a change in the methodof accruing for site restoration costs. Under SFAS 143, the fair value of assetretirement obligations is recorded as a liability when incurred, which istypically at the time the assets are placed in service. Amounts recorded for therelated assets are increased by the amount of these obligations. Over time, theliabilities are accreted for the change in their present value and the initialcapitalized costs are depreciated over the useful lives of the related assets.

 

The Company used an expectedcash flow approach to estimate its asset retirement obligations under SFAS143.  Upon adoption at January 1, 2003,the Company recorded a retirement obligation of $3,147,061, an increase inproperty and equipment cost of $1,997,619, an increase in accumulateddepreciation, depletion and amortization of $535,255 and a cumulative effect ofaccounting change loss, net of tax, of $1,061,865.  As a result of adoption of SFAS 143, the Company estimates thataccretion expense will be approximately $273,000 in 2003.

 

At January 1, 2003, there areno assets legally restricted for purposes of settling asset retirementobligations.  There was no impact on theCompany’s cash flows as a result of adopting SFAS 143 since the cumulativeeffect of change in accounting method is a non-cash transaction.

 

The Company’s estimated assetretirement obligation liability at January 1, 2002 was approximately $2.9million.

 

**Note 5.****          Stock Based CompensationPlans**

 

At March 31, 2003, the Companyhad one stock-based compensation plan. The Company applies APB Opinion No. 25 and related interpretations in 

 

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accounting for this plan.Accordingly, no compensation cost has been recognized for options granted toemployees under its fixed stock option plan.

 

On December 31, 2002, the FASBissued SFAS 148, “Accounting for Stock Based Compensation Transition andDisclosure,” which amends SFAS 123. SFAS 148 requires more prominent andfrequent disclosures about the effects of stock-based compensation.  The Company adopted, SFAS 148 for the yearended December 31, 2002. The Company will continue to account for its stockbased compensation according to the provisions of APB Opinion No. 25.

 

Had compensation cost for theCompany’s stock options been recognized based on the estimated fair value onthe grant date under the fair value methodology prescribed by SFAS No. 123, asamended, the Company’s net earnings and earnings per share would have been asfollows:

 
|                                                                                                                                            |        | **2003** |    | **2002** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------|-------------|----------|---------|----------|--------|
|                                                                                                                                            |        |     |    |     |   |
| Net income, as reported                                                                                                                         |        | $        | 475,727 |     | $      | 41,836 |   |
|                                                                                                                                            |        |     |    |     |   |
| Less: Total stock-based employee compensation expense determined  under the fair value based method for all awards, net of related tax effects. |        | 36,772   |    | 53,362   |   |
|                                                                                                                                            |        |     |    |     |   |
| Pro forma net income (loss)                                                                                                                     |        | $        | 438,955 |     | $      | (11,526 | ) |
|                                                                                                                                            |        |     |    |     |   |
| Net income (loss) per share                                                                                                                     |        |     |    |     |   |
|                                                                                                                                            |        |     |    |     |   |
| Basic                                                                                                                                           | As reported |     | $       | .04      |   | $ | (.00 | ) |
|                                                                                                                                            | Pro forma   |     | $       | .04      |   | $ | (.00 | ) |
|                                                                                                                                            |        |     |    |     |   |   |
| Diluted                                                                                                                                         | As reported |     | $       | .04      |   | $ | (.00 | ) |
|                                                                                                                                            | Pro forma   |     | $       | .04      |   | $ | (.00 | ) |
|                                                                                                                                                 |             |          |         |          |        |  |  |  |  |

 

**Note6. Discontinued Operations**

 

During February and March 2003,three packages of Canadian oil and gas properties were sold for approximately$2.4 million, resulting in a gain of approximately $1.2 million ($805,800 netof tax). In accordance with the provisions of SFAS 144, “Accounting for theImpairment or Disposal of Long-Lived Assets”, the results of operations andgain on sale of these properties have been reflected as discontinuedoperations.  Revenue from these Canadianoil and gas 

 

9

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properties was approximately$147,000 and $154,000 for the three month periods March 31, 2003 and March 31,2002.  After the sales, the Company’sremaining Canadian asset is its 50% interest in the Cessford Field located insouthern Alberta.

 

**ITEM2**

 

**Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

**RESULTSOF OPERATIONS**

 

Gas sales from the recentSacramento Basin gas acquisition and higher crude oil and natural gas pricesaccounted allowed for higher oil and gas revenues for the first quarter of 2003as compared to the first quarter of 2002. Oil and gas sales were 92% higher inthe first quarter of 2003 as compared to the first quarter of 2002. Total oiland gas sales for the three month period ended March 31, 2003 were $6,728,397,compared to $3,511,397 during the first quarter of 2002.  The recent Sacramento Basin acquisitionaccounted for $3.1 million of the 2003 oil and gas sales.

 

The Company recorded net incomefor the 2003 first quarter of $475,727 or $.04 per share. This compares to netincome for the first quarter of 2002 of $41,836, or $.00 per share.  For the first quarter of 2003 higher gasproduction, higher gas prices, higher crude oil prices and the gain from thesale of certain Canadian properties were partially offset by payments madeunder commodity hedging agreements and the cumulative effect of change inaccounting method.

 

Excluding the impact of thenon-cash charge for the change in accounting method relating to the adoption ofSFAS 143, income before cumulative effect for the first quarter of 2003 was$1,537,592 or $.13 per share.  Thisincludes income from discontinued operations of $745,209, net of incometaxes.  Also included in the income fromcontinuing operations are payments made under hedging contracts of$1,762,445.  These payments are nettedagainst oil and gas sales revenue.

 

Oil production in the 2003first quarter was 145,000 barrels, compared to 156,000 in the fourth quarter of2002 and 163,000 in the first quarter of 2002. The decrease from quarter to quarter is attributable to the normalproduction declines of our properties as they mature.   Gas production decreased during the quarter from 1.16 billioncubic feet in the fourth quarter of 2002 to 898,000 million cubic feet during thefirst quarter of 2003.  Due to TheSacramento Basin acquisition in April 2002 resulted in a gas productionincrease of 189% for the first quarter of 2003 over the same period of the 2002first quarter production of 311,000 Mcf.

 

The average crude oil pricereceived in the first quarter 2003 was $24.88 per barrel, compared to $17.35per barrel received during the 

 

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same period of 2002.  Gas prices also increased in the firstquarter of 2003, averaging $3.36 per Mcf, compared to $1.87 per Mcf receivedduring the first quarter of 2002.  Thereceived prices are calculated net of payments made under hedgingagreements.  During the first quarter of2003, the Company made payments to the counterparty for oil hedges of $663,366and natural gas hedges of $1,099,079. No hedge settlement payments were made in 2002.

 

As of March 31, 2003, theCompany had commodity price hedges in place for 1,100 barrels of oil per dayand 6,000 MMBTU of natural gas per day under costless collars.  The oil hedge has a floor of $23.00 and aceiling of $27.10 and runs from May 2002 through April 2003.  One gas hedge for 5,000 MMBTU has a floor of$3.00 and a ceiling of $4.43 per MMBTU for the period May 2002 through April2004.  The second gas hedge, for 1,000MMBTU, has a floor of $3.50 and a ceiling of $4.915 per MMBTU and runs fromJanuary 2003 through December 2003.  The fair value of the hedges as computed by the counterparty at March31, 2003 was ($2,258,084).  This amountis shown on the balance sheet as a current liability of $2,120,584 and a longterm liability of $137,500.

 

Operating expenses were higherin 2003 than 2002.  Lease operatingcosts increased from $1,707,062 in 2002 to $2,003,716 in 2003, a 17%increase.  The increase is attributableto the operating costs on the Sacramento Basin properties acquired during the second quarter of2002.  Costs associated with theseproperties totaled approximately $505,000 during the first quarter of2003.  We were successful during thefirst quarter of 2003 in reducing operating costs on our other operatedproperties.

 

Depreciation, depletion andamortization (DD&A) charges during the 2003 quarter were substantiallyhigher than the amount recorded during the same quarter of 2002.  This increase is attributable to DD&Acharges on the recently acquired gas properties in California which have areserve life which is shorter than our other oil and gas properties.  DD&A for these assets was approximately$1.0 Million for the first quarter of 2003.

 

The increase in general andadministrative expenses is primarily attributable to increases in salaries andemployee benefits, general liability, control of well and other insurancecosts, and investor relations costs. Also contributing to the increase were costs associated with pursuingacquisition and divestiture opportunities.

 

The increase in production andexploration overhead is attributable to increased salary and employee benefitcosts.

 

Higher interest costs in 2003reflect the increased balance of the debt outstanding under the Company’scredit facility. Our current average interest rate on debt outstanding isapproximately 3.55%.

 

During February and March 2003,three packages of Canadian oil and gas properties were sold for approximately$2.4 million, resulting in 

 

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a gain of approximately $1.2million ($805,800 net of tax). In accordance with the provisions of SFAS 144,“Accounting for the Impairment or Disposal of Long-Lived Assets”, the resultsof operations and gain on sale of these properties have been reflected asdiscontinued operations.  Revenue fromthese Canadian oil and gas properties was approximately $147,000 and $154,000for the three month periods March 31, 2003 and March 31, 2002.  After the sales, the Company’s remainingCanadian asset is its 50% interest in the Cessford Field located in southernAlberta.

 

Other comprehensive loss of$214,363 for the first quarter of 2003 represents the Company’s unrealized losson commodity hedges, net of income taxes, that were in place at March 31, 2003.As a requirement of our new credit facility, we were required to hedge certainamounts of our production in an effort to remove commodity price volatilityfrom our cash flows.  The counterpartyvalued the hedges at March 31, 2003 at ($2,258,084).  Therefore, a liability was recorded and the tax effectedunrealized net loss is included in other comprehensive loss.

 

**CAPITALRESOURCES AND LIQUIDITY**

 

The Company’s cash balancesincreased 58% from December 31, 2002 due principally to higher oil and gassales revenues and net proceeds from the sale of certain Canadian oil and gasproperties offset by capital expenditures and payments on our revolving creditfacility. Cash flow from operating activities for the first three months of2003 increased $642,209 or 65% to $1,636,346 from $994,137 for the first threemonths of 2002.

 

Investment in property andequipment for the first three months of 2003 totaled $1,190,262 compared to$1,446,126 during the same period of 2002.

 

Debt outstanding at March 31,2003 was $32.5 million, a decrease of $2.0 million from year-end 2002amounts.  We will continue to utilizefuture excess operating cash flow to reduce the amount outstanding under our creditfacility.

 

We believe that existing cashbalances, cash flow from operating activities, and funds available under ourcredit facility will provide adequate resources to meet our capital andexploration spending objectives for 2003.

 

**OTHERITEMS**

 

The Company has reviewed allother recently issued, but not yet adopted, accounting standards in order todetermine their effects, if any, on the results of operations or financialposition of the Company.  Based on thatreview, the Company believes that none of these pronouncements will have asignificant effect on current or 

 

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future financial position orresults of operations.

 

**CRITICALACCOUNTING POLICIES**

 

A summary of our significantaccounting policies is included in Note 1 of our financial statements containedin the annual report on Form 10-K for the year ended December 31, 2002.  We believe the application of theseaccounting policies on a consistent basis enables us to provide financialstatement users with useful, reliable and timely information about our resultsof operations, financial condition and cash flows.

 

The preparation of financialstatements in accordance with accounting principles generally accepted in theUnited States of America requires management to make judgements, estimates andassumptions regarding uncertainties that affect the reported amounts presentedand disclosed in the financial statements. Our management reviews these estimates and assumptions based onhistorical experience, changes in business conditions and other relevantfactors that they believe to be reasonable under the circumstances.  In any given reporting period, actualresults could differ from the estimates and assumptions used in preparing ourfinancial statements.

 

Critical accounting policiesare those that may have a material impact on our financial statements and alsorequire management to exercise significant judgement due to a high degree ofuncertainty at the time the estimate is made. Our senior management has discussed the development and selection of ouraccounting policies, related accounting estimates and the disclosures set forthbelow with the Audit Committee of our Board of Directors.  We believe our critical accounting policiesinclude those addressing the recoverability and useful lives of assets, and oiland gas reserve estimates.

 

**FORWARDLOOKING STATEMENTS**

 

The preceding discussion andanalysis should be read in conjunction with the consolidated financialstatements, including the notes thereto, appearing in the Company’s annualreport on Form 10-K.  Except for thehistorical information contained herein, the matters discussed in this reportcontain forward-looking statements within the meaning of Section 27a of the SecuritiesAct of 1933, as amended, and Section 2le of the Securities Exchange Act of1934, as amended, that are based on management’s beliefs and assumptions,current expectations, estimates, and projections.  Statements that are not historical facts, including withoutlimitation statements which are preceded by, followed by or include the words“believes”, “anticipates”, “plans”, “expects”, “may”, “should” or similarexpressions are forward-looking statements. Many of the factors that will determine the Company’s future results arebeyond the ability of the Company to control or predict.  These statements are subject to 

 

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risks and uncertainties and,therefore, actual results may differ materially. All subsequent written andoral forward-looking statements attributable to the Company, or persons actingon its behalf, are expressly qualified in their entirety by these cautionarystatements.  The Company disclaims anyobligation to update any forward-looking statements whether as a result of newinformation, future events or otherwise.

 

Important factors that mayeffect future results include, but are not limited to: drilling success, theavailability of equipment and contract services, environmental risks andimpediments, geologic hazards, the risk of a significant natural disaster, theinability of the Company to insure against certain risks, fluctuations incommodity prices, the inherent limitations in our ability to estimate oil andgas reserves, changing government regulations, as well as general marketconditions, competition and pricing, and other risks detailed from time to timein the Company’s SEC reports, copies of which are available upon request fromthe Company’s investor relations department.

 

**ITEM3**

 

**Quantitativeand Qualitative Disclosures about Market Risk**

 

The answers to items listedunder Item 3 are inapplicable or negative except for items related to interestrate and commodity price risk.

 

Our credit facility hasvariable interest rates and any fluctuation in interest rates will increase ordecrease our interest expense.

 

We have market risk exposurerelated to the prices received for the sale of crude oil and natural gas.  We periodically enter into hedge contractsto manage the commodity price risk.

 

**ITEM4**

 

**Controlsand Procedures**

 

Within 90 days prior to thefiling date of this Report, the Company’s principal executive officer (“CEO”)and principal financial officer (“CFO”) carried out an evaluation of theeffectiveness of the Company’s disclosure controls and procedures. Based onthose evaluations, the Company’s CEO and CFO believe

 

(i) that theCompany’s disclosure controls and procedures are designed to ensure thatinformation required to be disclosed by the Company in the reports it filesunder the Securities Exchange Act of 1934 is recorded, processed, summarizedand reported within the time periods specified in the SEC’s rules and forms andthat such information is accumulated and communicated to the Company’smanagement, including the CEO and CFO, as appropriate to allow timely decisionsregarding required 

 

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disclosure;and

 

(ii) that theCompany’s disclosure controls and procedures are effective.

 

There have been no significantchanges in the Company’s internal controls or in other factors that couldsignificantly affect the Company’s internal controls subsequent to theevaluation referred to in Item 4, above, nor have there been any correctiveactions with regard to significant deficiencies or material weaknesses.

 

**PART II**

 

**OTHER INFORMATION**

 

The answers to items onethrough five listed under Part II are inapplicable or negative, except as shownbelow

 

**ITEM6**.  **Exhibits and Reports on Form 8-K**

 

(a)                                  Exhibits

 

(i)                                RestatedArticles of Incorporation. Incorporated by reference from the annual report onForm 10-K for the year-ended December 31, 1995.

 

(ii)                             AmendedBy-Laws. Incorporated by reference from the annual report on  Form 10-K for the year-ended December 31,1997.

 

(iii)                          Changein Control Compensation Agreement for David P. Donegan incorporated byreference from the Form 10-Q for the period ended June 30, 2001.  Change in Control Compensation Agreement forRussell V. Florence, incorporated by reference from the annual report on Form10-K for the year-ended December 31, 2000. Change in Control CompensationAgreements for Paul M. Dougan and James B. Larson, incorporated by referencefrom the annual report on Form 10-K for the year-ended December 31, 1997.

 

(iv)                         Exhibit99-1 - Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of2002.

 

 

(b)                                 Reportson Form 8-K

 

None.

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned there unto duly authorized.

 
|        |        |   | EQUITY OIL COMPANY              |                     |
|-------------|-------------|--------|---------------------------------|--------------------------|
|        |        |   | (Registrant)                    |
|        |        |   |                            |
|        |        |   |                            |
| DATE:  | May 9, 2003 |   | By                              | /s/ Paul M.  Dougan      |   |
|        |        |   | Paul  M. Dougan, President |
|        |        |   |                            |                     |
|        |        |   |                            |                     |
| DATE:       | May 9, 2003 |   | By                              | /s/ Russell  V. Florence |   |
|        |        |   | Russell V. Florence,  Treasurer |
|             |             |        |                                 |                          |  |  |

 

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**CERTIFICATIONS**

 

 I, Paul M. Dougan, President and Chief Executive Officer of EquityOil Company, certify that:

 

1. I have reviewed thisquarterly report on Form 10-Q of Equity Oil Company (the “Company”):

 

2. Based on my knowledge, thisquarterly report does not contain any untrue statement of a material fact oromit to state a material fact necessary to make the statements made, in lightof circumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3. Based on my knowledge, thefinancial statements, and other financial information included in thisquarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the Company as of, and for,the periods presented in this quarterly report;

 

4. The Company’s othercertifying officer and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the Company and we have:

 

a) designedsuch disclosure controls and procedures to ensure that material informationrelating to the Company, including its consolidated subsidiaries, is made knownto us by others within those entities, particularly during the period in whichthis quarterly report is being prepared;

 

b) evaluatedthe effectiveness of the Company’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c) presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5. The Company’s other certifyingofficer and I have disclosed, based on our most recent evaluation, to theCompany’s auditors and the audit committee of the Company’s board of directors(or persons performing the equivalent function):

 

a) allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the Company’s ability to record, process, summarize andreport financial data and have identified for the Company’s auditors anymaterial weaknesses in internal controls; and

 

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b) any fraud,whether or not material, that involves management or other employees who have asignificant role in the Company’s internal controls; and

 

6. The Company’s othercertifying officer and I have indicated in this quarterly report whether or notthere were significant changes in internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Date: May 9,  2003 | By     | /s/ Paul M. Dougan                                           |   |
|--------------------|--------|--------------------------------------------------------------|--------|
|               |   | Paul  M. Dougan, President and  Chief Executive Officer |

 

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**CERTIFICATIONS**

 

 I, Russell V. Florence, Treasurer of Equity Oil Company, certifythat:

 

1. I have reviewed thisquarterly report on Form 10-Q of Equity Oil Company (the “Company”):

 

2. Based on my knowledge, thisquarterly report does not contain any untrue statement of a material fact oromit to state a material fact necessary to make the statements made, in lightof circumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3. Based on my knowledge, thefinancial statements, and other financial information included in thisquarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the Company as of, and for,the periods presented in this quarterly report;

 

4. The Company’s othercertifying officer and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the Company and we have:

 

a) designedsuch disclosure controls and procedures to ensure that material informationrelating to the Company, including its consolidated subsidiaries, is made knownto us by others within those entities, particularly during the period in whichthis quarterly report is being prepared;

 

b) evaluatedthe effectiveness of the Company’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c) presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5. The Company’s othercertifying officer and I have disclosed, based on our most recent evaluation,to the Company’s auditors and the audit committee of the Company’s board ofdirectors (or persons performing the equivalent function):

 

a) allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the Company’s ability to record, process, summarize andreport financial data and have identified for the Company’s auditors anymaterial weaknesses in internal controls; and

 

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b) any fraud,whether or not material, that involves management or other employees who have asignificant role in the Company’s internal controls; and

 

6. The Company’s othercertifying officer and I have indicated in this quarterly report whether or notthere were significant changes in internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Date: May 9,  2003 | By     | /s/ Russell V. Florence                                       |   |
|--------------------|--------|---------------------------------------------------------------|--------|
|               |   | Russell V.  Florence, Treasurer and   Chief Financial Officer |

 

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