**UNITED STATESFORM 10Q**

 

**SECURITIES ANDEXCHANGE COMMISSION**

**Washington,D. C. 20549**

** **

**(MarkOne)**

** **
| **ý**                                                                                                                                                                           |   | **QUARTERLY REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**  |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                 |   |                                                                                           |
| **For the  quarterly period ended September 30, 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 registrantas 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 markwhether the registrant (1) has filed all reports required to be filed by Section13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

Yes  ý  No  o

 

Indicate by check markwhether the registrant is an accelerated file (as defined in Rule 12b-2 of theexchange Act)

Yes  o   No  ý

 

APPLICABLE ONLY TO ISSUERSINVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THEPRECEDING FIVE YEARS:

 

Indicate by check markwhether the registrant has filed all documents and reports required to be filedby Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequentto the distribution of securities under a plan confirmed by a court.

Yes o     No o

 

APPLICABLE ONLY TOCORPORATE ISSUERS:

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date (November 6, 2003): **12,029,661**

 

 

----

 

**PART I -FINANCIAL INFORMATION**

 

**ITEMI:  Financial Statements**

 

EQUITY OIL COMPANY

Statements of Operations

For the nine months endedSeptember 30, 2003 and 2002

(Unaudited)

 
|                                                                                                   |   | **2003**   |       | **2002**   |    |
|--------------------------------------------------------------------------------------------------------|--------|------------|------------|------------|---------|
| REVENUES                                                                                               |   |       |       |       |    |
| Oil  and gas sales                                                                                     |   | $          | 20,100,598 |       | $       | 16,413,589 |   |
| Other                                                                                                  |   | 213,872    |       | 169,635    |    |
|                                                                                                   |   | 20,314,470 |       | 16,583,224 |    |
| EXPENSES                                                                                               |   |       |       |       |    |
| Operating  costs                                                                                       |   | 6,541,335  |       | 5,654,175  |    |
| Depreciation,  depletion and amortization                                                              |   | 5,675,000  |       | 5,400,000  |    |
| 3-D  seismic                                                                                           |   | 18,081     |       | 14,934     |    |
| Exploration                                                                                            |   | 400,061    |       | 908,284    |    |
| General  and administrative                                                                            |   | 2,489,013  |       | 1,744,733  |    |
| Production  and exploration overhead                                                                   |   | 1,300,072  |       | 966,352    |    |
| Accretion  expense                                                                                     |   | 204,001    |       | —     |    |
| Interest                                                                                               |   | 841,467    |       | 804,130    |    |
|                                                                                                   |   | 17,469,030 |       | 15,492,608 |    |
| Income  from continuing operations before income taxes                                                 |   | 2,845,440  |       | 1,090,616  |    |
|                                                                                                   |   |       |       |       |    |
| Provision  for income taxes                                                                            |   | 972,850    |       | 492,684    |    |
|                                                                                                   |   |       |       |       |    |
| Income  from continuing operations                                                                     |   | 1,872,590  |       | 597,932    |    |
|                                                                                                   |   |       |       |       |    |
| Discontinued  operations (Note 6)                                                                      |   |       |       |       |    |
| Income  from operations of properties sold, net of provision for income taxes of  $52,812 and $144,718 |   | 90,041     |       | 306,005    |    |
|                                                                                                   |   |       |       |       |    |
| Gain  on sale of properties, net of provision for income taxes of $453,940                             |   | 655,168    |       | —     |    |
|                                                                                                   |   |       |       |       |    |
| Income  before cumulative effect of accounting change                                                  |   | 2,617,799  |       | 903,937    |    |
|                                                                                                   |   |       |       |       |    |
| Cumulative  effect of change in accounting, net of benefit from income taxes of $622,832               |   | (1,061,865 | )          | —     |    |
|                                                                                                   |   |       |       |       |    |
| NET  INCOME                                                                                            |   | $          | 1,555,934  |       | $       | 903,937 |   |
|                                                                                                   |   |       |       |       |    |
| Proforma  net income reflecting adoption of SFAS 143                                                   |   |       |       | $          | 854,786 |   |

 

The accompanying notes arean integral part of these statements.

 

2

----

 
|                                                            |   | **2003**   |   | **2002**   |   |
|-----------------------------------------------------------------|--------|------------|--------|------------|--------|
| Basic  income per common share                                  |   |       |   |       |   |
| Income  from continuing operations                              |   | $          | .16    |       | $      | .05 |   |
|                                                            |   |       |   |       |   |
| Income  from discontinued operations                            |   | .06        |   | .02        |   |
|                                                            |   |       |   |       |   |
| Income  before cumulative effect of accounting change           |   | .22        |   | .07        |   |
|                                                            |   |       |   |       |   |
| Cumulative  effect of change in accounting                      |   | (.09       | )      | —     |   |
|                                                            |   |       |   |       |   |
| NET  INCOME                                                     |   | $          | .13    |       | $      | .07 |   |
|                                                            |   |       |   |       |   |
| Diluted  income per common share                                |   |       |   |       |   |
|                                                            |   |       |   |       |   |
| Income  from continuing operations                              |   | $          | .16    |       | $      | .05 |   |
|                                                            |   |       |   |       |   |
| Income  from discontinued operations                            |   | .06        |   | .02        |   |
|                                                            |   |       |   |       |   |
| Income  before cumulative effect of accounting change           |   | .22        |   | .07        |   |
|                                                            |   |       |   |       |   |
| Cumulative  effect of change in accounting                      |   | (.09       | )      | —     |   |
|                                                            |   |       |   |       |   |
| NET  INCOME                                                     |   | $          | .13    |       | $      | .07 |   |
|                                                            |   |       |   |       |   |
| Proforma  net income per share, reflecting adoption of SFAS 143 |   |       |   |       |   |
| Basic                                                           |   | —     |   | $          | .07    |   |
|                                                            |   |       |   |       |   |
| Diluted                                                         |   | —     |   | $          | .07    |   |
|                                                            |   |       |   |       |   |
| Weighted  average shares outstanding                            |   |       |   |       |   |
|                                                            |   |       |   |       |   |
| Basic                                                           |   | 12,014,065 |   | 12,395,821 |   |
|                                                            |   |       |   |       |   |
| Diluted                                                         |   | 12,310,682 |   | 12,553,960 |   |

 

The accompanying notes arean integral part of these statements.

 

3

----

 

EQUITY OIL COMPANY

Statements ofComprehensive Income (Loss)

For the nine months endedSeptember 30, 2003 and 2002

(Unaudited)

 
|                                                                                                                                                                 |   | **2003** |      | **2002** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|-----------|----------|--------|
|                                                                                                                                                                 |   |     |      |     |   |
| Net  income                                                                                                                                                          |   | $        | 1,555,934 |     | $      | 903,937 |   |
|                                                                                                                                                                 |   |     |      |     |   |   |   |
| Other  comprehensive loss                                                                                                                                            |   |     |      |     |   |
|                                                                                                                                                                 |   |     |      |     |   |
| Unrealized  gains (losses) on financial instruments, net of provision for income taxes of  $405,566 in 2003 and net of benefit from income taxes of $125,733 in 2002 |   | 691,448  |      | (961,964 | )      |
|                                                                                                                                                                 |   |     |      |     |   |
| Comprehensive  income (loss)                                                                                                                                         |   | $        | 2,247,382 |     | $      | (58,027 | ) |

 

 

The accompanying notes arean integral part of these statements.

 

4

----

 

EQUITY OIL COMPANY

Statements of Operations

For the three months endedSeptember 30, 2003 and 2002

(Unaudited)

 
|                                                                                      |   | **2003**  |      | **2002**  |    |
|-------------------------------------------------------------------------------------------|--------|-----------|-----------|-----------|---------|
| REVENUES                                                                                  |   |      |      |      |    |
| Oil  and gas sales                                                                        |   | $         | 6,704,523 |      | $       | 6,036,244 |   |
| Other                                                                                     |   | 14,923    |      | 70,116    |    |
|                                                                                      |   | 6,719,446 |      | 6,106,360 |    |
| EXPENSES                                                                                  |   |      |      |      |    |
|                                                                                      |   |      |      |      |    |
| Operating  costs                                                                          |   | 2,147,490 |      | 2,015,582 |    |
| Depreciation,  depletion and amortization                                                 |   | 1,850,000 |      | 2,100,000 |    |
| 3-D  seismic                                                                              |   | 5,750     |      | —    |    |
| Exploration                                                                               |   | 246,181   |      | 782,523   |    |
| General  and administrative                                                               |   | 805,762   |      | 605,345   |    |
| Production  and exploration overhead                                                      |   | 423,486   |      | 314,296   |    |
| Accretion  expense                                                                        |   | 68,000    |      | —    |    |
| Interest                                                                                  |   | 252,776   |      | 433,432   |    |
|                                                                                      |   | 5,799,445 |      | 6,251,178 |    |
| Income  (loss) from continuing operations before income taxes                             |   | 920,001   |      | (144,818  | )       |
|                                                                                      |   |      |      |      |    |
| Provision  for (benefit from) income taxes                                                |   | 343,483   |      | (40,954   | )       |
|                                                                                      |   |      |      |      |    |
| Income  (loss)  from continuing operations                                           |   | 576,518   |      | (103,864  | )       |
|                                                                                      |   |      |      |      |    |
| Discontinued  operations (Note 6)                                                         |   |      |      |      |    |
| Income  from operations of properties sold, net of provision for income taxes of  $41,436 |   | —    |      | 104,776   |    |
|                                                                                      |   |      |      |      |    |
| NET  INCOME                                                                               |   | $         | 576,518   |      | $       | 912 |   |
|                                                                                      |   |      |      |      |    |
| Proforma  net loss reflecting adoption of SFAS 143                                        |   |      |      | $         | (12,139 | ) |

 

 

The accompanying notes arean integral part of these statements.

 

5

----

 
|                                                          |   | **2003**   |   | **2002**   |   |
|---------------------------------------------------------------|--------|------------|--------|------------|--------|
| Basic  income (loss) per common share                         |   |       |   |       |   |
| Income  (loss) from continuing operations                     |   | $          | .05    |       | $      | (.01 | ) |
|                                                          |   |       |   |       |   |
| Income  from discontinued operations                          |   | —     |   | .01        |   |
|                                                          |   |       |   |       |   |
| NET  INCOME                                                   |   | $          | .05    |       | $      | .00 |   |
|                                                          |   |       |   |       |   |
| Diluted  income per common share                              |   |       |   |       |   |
|                                                          |   |       |   |       |   |
| Income  (loss) from continuing operations                     |   | $          | .05    |       | $      | (.01 | ) |
|                                                          |   |       |   |       |   |
| Income  from discontinued operations                          |   | —     |   | .01        |   |
|                                                          |   |       |   |       |   |
| NET  INCOME                                                   |   | $          | .05    |       | $      | .00 |   |
|                                                          |   |       |   |       |   |
| Proforma  net loss per share, reflecting adoption of SFAS 143 |   |       |   |       |   |
| Basic                                                         |   | —     |   | $          | .00    |   |
|                                                          |   |       |   |       |   |
| Diluted                                                       |   | —     |   | $          | .00    |   |
|                                                          |   |       |   |       |   |
| Weighted  average shares outstanding                          |   |       |   |       |   |
|                                                          |   |       |   |       |   |
| Basic                                                         |   | 12,014,861 |   | 12,046,161 |   |
|                                                          |   |       |   |       |   |
| Diluted                                                       |   | 12,403,254 |   | 12,379,677 |   |

 

 

The accompanying notes arean integral part of these statements.

 

6

----

 

EQUITY OIL COMPANY

Statements ofComprehensive Income (Loss)

For the three months endedSeptember 30, 2003 and 2002

(Unaudited)

 
|                                                                                                                                                                 |   | **2003** |      | **2002** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|-----------|----------|--------|
|                                                                                                                                                                 |   |     |      |     |   |
| Net  income                                                                                                                                                          |   | $        | 576,518   |     | $      | 912 |   |
|                                                                                                                                                                 |   |     |      |     |   |   |   |
| Other  comprehensive income (loss)                                                                                                                                   |   |     |      |     |   |
|                                                                                                                                                                 |   |     |      |     |   |
| Unrealized  gains (losses) on financial instruments, net of provision for income taxes of  $500,292 in 2003 and net of benefit from income taxes of $309,582 in 2002 |   | 852,946  |      | (527,805 | )      |
|                                                                                                                                                                 |   |     |      |     |   |
| Comprehensive  income (loss)                                                                                                                                         |   | $        | 1,429,464 |     | $      | (526,893 | ) |

 

 

The accompanying notes arean integral part of these statements.

 

7

----

 

EQUITY OIL COMPANY

Balance Sheets

as of September 30, 2003and December 31,2002

(Unaudited)

 
|                                                       |   | **September 30,2003** |       | **December 31,2002** |   |
|------------------------------------------------------------|--------|-----------------------|------------|----------------------|--------|
| ASSETS                                                     |   |                  |       |                 |   |
|                                                       |   |                  |       |                 |   |
| Current  assets:                                           |   |                  |       |                 |   |
| Cash  and cash equivalents                                 |   | $                     | 2,785,669  |                 | $      | 1,348,024 |   |
| Accounts  and advances receivable                          |   | 3,939,252             |       | 4,396,473            |   |
| Income  taxes receivable                                   |   | 956,181               |       | 1,054,927            |   |
| Deferred  income taxes                                     |   | 28,460                |       | 28,460               |   |
| Other  current assets                                      |   | 86,104                |       | 215,177              |   |
|                                                       |   | 7,795,666             |       | 7,043,061            |   |
|                                                       |   |                  |       |                 |   |
| Property  and equipment, at cost                           |   | 147,448,275           |       | 147,174,977          |   |
| Less  accumulated depreciation, depletion and amortization |   | (80,019,140           | )          | (78,148,866          | )      |
|                                                       |   | 67,429,135            |       | 69,026,111           |   |
|                                                       |   |                  |       |                 |   |
| Other  assets                                              |   | 553,435               |       | 731,184              |   |
|                                                       |   |                  |       |                 |   |
| TOTAL  ASSETS                                              |   | $                     | 75,778,236 |                 | $      | 76,800,356 |   |
|                                                       |   |                  |       |                 |   |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                 |   |                  |       |                 |   |
|                                                       |   |                  |       |                 |   |
| Current  liabilities:                                      |   |                  |       |                 |   |
| Accounts  payable                                          |   | $                     | 1,368,619  |                 | $      | 2,157,291 |   |
| Accrued  liabilities                                       |   | 291,815               |       | 406,681              |   |
| Income  taxes payable                                      |   | 415,238               |       | 170,399              |   |
| Fair  value of financial instruments                       |   | 820,974               |       | 1,584,988            |   |
|                                                       |   | 2,896,646             |       | 4,319,359            |   |
|                                                       |   |                  |       |                 |   |
| Fair  value of financial instruments                       |   | —                |       | 333,000              |   |
| Asset  retirement obligation                               |   | 3,351,062             |       | —               |   |
| Revolving  credit facility                                 |   | 29,000,000            |       | 34,500,000           |   |
| Deferred  income taxes                                     |   | 5,009,563             |       | 4,398,319            |   |
|                                                       |   |                  |       |                 |   |
| Total  liabilities                                         |   | 40,257,271            |       | 43,550,678           |   |
|                                                       |   |                  |       |                 |   |
| Stockholders’  equity:                                |   |                  |       |                 |   |
| Common  stock                                              |   | 12,871,661            |       | 12,856,661           |   |
| Paid  in capital                                           |   | 3,747,168             |       | 3,738,263            |   |
| Less  cost of treasury stock                               |   | (1,991,444            | )          | (1,991,444           | )      |
| Retained  earnings                                         |   | 21,411,040            |       | 19,855,106           |   |
| Accumulated  other comprehensive loss                      |   | (517,460              | )          | (1,208,908           | )      |
|                                                       |   | 35,520,965            |       | 33,249,678           |   |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY           |   | $                     | 75,778,236 |                 | $      | 76,800,356 |   |

 

 

The accompanying notes arean integral part of these statements.

 

8

----

 

 

EQUITY OIL COMPANY

Statements of Cash Flows

For the nine months endedSeptember 30, 2003 and 2002

(Unaudited)

 
|                                                 |   | **2003**   |      | **2002**    |   |
|------------------------------------------------------|--------|------------|-----------|-------------|--------|
| CASH  FLOWS FROM OPERATING ACTIVITIES:               |   |       |      |        |   |
| Net  income                                          |   | $          | 1,555,934 |        | $      | 903,937 |   |
| Adjustments                                          |   |       |      |        |   |
| Depreciation,  depletion and amortization            |   | 5,675,000  |      | 5,400,000   |   |
| Accretion  expense                                   |   | 204,001    |      | —      |   |
| Cumulative  effect of change in accounting           |   | 1,061,865  |      | —      |   |
| (Gain)  loss on sale of properties                   |   | (1,264,555 | )         | 4,338       |   |
| Change  in other assets                              |   | 177,749    |      | 79,140      |   |
| Equity  loss in Symskaya Exploration                 |   | 48,000     |      | 159,341     |   |
| Change  in deferred income taxes                     |   | 828,510    |      | 513,697     |   |
| Increase  (decrease) from changes in:                |   |       |      |        |   |
| Accounts  and advances receivable                    |   | 457,220    |      | (621,970    | )      |
| Other  current assets                                |   | 129,073    |      | (37,791     | )      |
| Accounts  payable and accrued liabilities            |   | (903,538   | )         | (1,645,179  | )      |
| Income  taxes receivable/payable                     |   | 343,585    |      | 125,909     |   |
| Net  cash provided by operating activities           |   | 8,312,844  |      | 4,881,422   |   |
|                                                 |   |       |      |        |   |
| CASH  FLOWS FROM INVESTING ACTIVITIES:               |   |       |      |        |   |
| Advances  to Symskaya Exploration                    |   | (48,000    | )         | (159,341    | )      |
| Capital  expenditures                                |   | (3,683,486 | )         | (34,155,025 | )      |
| Proceeds  from sale of properties                    |   | 2,332,382  |      | —      |   |
|                                                 |   |       |      |        |   |
| Net  cash used in investing activities               |   | (1,399,104 | )         | (34,314,366 | )      |
|                                                 |   |       |      |        |   |
| CASH  FLOWS FROM FINANCING ACTIVITIES:               |   |       |      |        |   |
|                                                 |   |       |      |        |   |
| Proceeds  from exercise of stock options             |   | 23,905     |      | 7,500       |   |
| Treasury  stock purchase, 608,400 shares at cost     |   | —     |      | (1,463,142  | )      |
| Credit  facility borrowing                           |   | —     |      | 37,000,000  |   |
| Payments  on credit facility                         |   | (5,500,000 | )         | (6,500,000  | )      |
| Net  cash provided by (used in) financing activities |   | (5,476,095 | )         | 29,044,358  |   |
|                                                 |   |       |      |        |   |
| NET  INCREASE (DECREASE) IN CASH                     |   | 1,437,645  |      | (388,586    | )      |
|                                                 |   |       |      |        |   |
| CASH  AND CASH EQUIVALENTS AT BEGINNING OF PERIOD    |   | 1,348,024  |      | 960,970     |   |
| CASH  AND CASH EQUIVALENTS AT END OF PERIOD          |   | $          | 2,785,669 |        | $      | 572,384 |   |

 

 

The accompanying notes arean integral part of these statements.

 

9

----

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

In the opinion of the Company's management, the accompanying interimfinancial statements reflect the necessary adjustments, all of which are of anormal and recurring nature, to present fairly the financial position of EquityOil Company (the Company) as of September 30, 2003, and the results of itsoperations and its cash flows for the three and nine month periods endedSeptember 30, 2003 and 2002.

 

The financial statements and the accompanying notes to financialstatements have been prepared according to rules and regulations of theSecurities and Exchange Commission. Accordingly, certain notes and other information have been condensed oromitted from the interim financial statements presented in this QuarterlyReport on Form 10-Q.  These financialstatements should be read in conjunction with the Company's 2002 Annual Reporton Form 10-K and the Form 10-Q for the prior quarters.

 

The results for the three and nine month period ended September 30,2003 are not necessarily indicative of future results.

 

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

 

Basic net income per share iscomputed using the weighted average number of common shares outstanding duringthe period. Diluted net income per share is computed using the weighted averagenumber of common and, if dilutive, common equivalent shares outstanding duringthe period. Common equivalent shares consist of the incremental common sharesissuable upon the exercise of stock options (using the treasury stock method).

 

Options to purchase approximately 1,958,400 shares of common stock atprices of $1.06 to $5.125 per share were outstanding at September 30, 2003, ofwhich, 301,489 incremental shares (1,114,179 options)and 393,013 incrementalshares (1,098,483 options) were included in the computation of diluted netincome per share for the three and nine month periods ended September 30, 2003.Options to purchase approximately 1,833,800 shares of common stock at prices of$1.06 to $5.50 per share were outstanding at September 30, 2002, of which,175,377 incremental shares (412,800 options) and 158,139 incremental shares(415,602 options) were included in the computation of diluted net income pershare for the three and nine month periods ended September 30, 2002. 

 

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

 

The Company periodically enters into oil and gas financial instruments

 

10

----

 

to manage its exposure to oil and gas price volatility.  The instruments are usually placed withcounterparties that the Company believes are minimal credit risks.  It is the Company’s policy to only enterinto derivative contracts with investment grade rated counterparties deemed bymanagement to be competent and competitive market makers.  The oil and gas reference prices upon whichthe price hedging instruments are based reflect various market indices thathave historically correlated with actual prices received by the Company.

 

As of September 30, 2003, the Company had commodity price hedges inplace for 6,000 MMBTU of natural gas per day under costless collars (5,000MMBTU through April 30, 2004 and 1,000 MMBTU through December 31, 2003).  The hedges ranged from a floor of $3.00 perMMBTU and a ceiling of $4.915 per MMBTU. The settlement price for the hedges during the quarter ended September30, 2003 resulted in cash payments of $368,527 from the Company to thecounterparty, which are reflected as a reduction of oil and gas sales.  The fair value of these financialinstruments at September 30, 2003, as computed by the counterparty, was($820,974).  This amount is shown on thebalance sheet as a current liability. 

 

**Note 4.****          Asset RetirementObligation**

 

In August 2001, the FASB issued SFAS No. 143 (SFAS 143),"Accounting for Asset Retirement Obligations." SFAS 143 was effectivefor the Company beginning January 1, 2003. The most significant impact of thisstandard on the Company was a change in the method of accruing for siterestoration costs associated with its oil and gas properties. Under SFAS 143,the fair value of asset retirement obligations is recorded as a liability whenincurred, which is typically at the time the assets are placed in service.Amounts recorded for the related assets are increased by the amount of theseobligations. Over time, the liabilities are accreted for the change in theirpresent value and the initial capitalized costs are depreciated over the usefullives of the related assets. 

 

The Company used an expected cash flow approach to estimate its assetretirement obligations under SFAS 143. Upon adoption at January 1, 2003, the Company recorded a retirementobligation of $3,147,061, an increase in property and equipment cost of$1,997,619, an increase in accumulated depreciation, depletion and amortizationof $535,255 and a cumulative effect of accounting change, net of benefit fromtaxes, of $1,061,865.  The Companyestimates that accretion expense will be approximately $273,000 in 2003.

 

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The following table summarizes the Company’s asset retirementobligation liability as of September 30, 2003:

 
| Balance, December 31, 2002                    |   | $         | — |   |
|-----------------------------------------------|--------|-----------|--------|--------|
| Liability recorded upon adoption of SFAS  143 |   | 3,147,061 |   |
| Accretion expense                             |   | 204,001   |   |
| Payments                                      |   | —    |   |
| Balance, September 30, 2003                   |   | 3,351,062 |   |

 

At September 30, 2003, there are no assets legally restricted forpurposes of settling asset retirement obligations.  There was no impact on the Company’s cash flows as a result ofadopting SFAS 143 since the cumulative effect of change in accounting methodand the charges to expense for depreciation and accretion are non-cashtransactions.

 

The Company’s estimated asset retirement obligation liability atJanuary 1, 2002 was approximately $2.9 million.

 

The SFAS 143 impact on net income for the three and nine month periodsending September 30, 2003 was additional expense of approximately $94,600 and$296,000 or $0.01 and $0.02 per common share.

 

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

 

At September 30, 2003, the Company had one stock-based compensationplan.  The Company applies APB OpinionNo. 25 and related interpretations in accounting for this plan. Accordingly, nocompensation cost has been recognized for options granted to employees underits fixed stock option plan.

 

On December 31, 2002, the FASB issued SFAS 148, "Accounting forStock Based Compensation Transition and Disclosure (SFAS 148)," whichamends SFAS 123. SFAS 148 requires more prominent and frequent disclosuresabout the effects of stock-based compensation. The Company adopted the disclosure provision of 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 the Company’s stock options been recognizedbased on the estimated fair value on the grant date under the fair valuemethodology prescribed by SFAS 123, the Company’s net earnings and earnings pershare would have been as follows:

 

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|                                                                                                                                                           |        | **Nine  Months Ended  September 30,** |      | **Three  Months Ended  September 30,** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------|---------------------------------------|-----------|----------------------------------------|--------|
|                                                                                                                                                           |        | **2003**                              |      | **2002**                               |   | **2003** |   | **2002** |   |
|                                                                                                                                                           |        |                                  |      |                                   |   |   |   |   |   |
| Net income, as reported                                                                                                                                        |        | $                                     | 1,555,934 |                                   | $      | 903,937 |   | $ | 576,518 |   | $ | 912 |   |
|                                                                                                                                                           |        |                                  |      |                                   |   |   |   |   |   |
| Less: Total stock-based employee  compensation expense determined under the fair value based method for all  awards, net of related provision for income taxes |        | 89,040                                |      | 154,589                                |   | 25,647 |   | 50,458 |   |
|                                                                                                                                                           |        |                                  |      |                                   |   |   |   |   |   |
| Pro forma net income (loss)                                                                                                                                    |        | $                                     | 1,466,894 |                                   | $      | 749,348 |   | $ | 550,871 |   | $ | (49,546 | ) |
|                                                                                                                                                           |        |                                  |      |                                   |   |   |   |   |   |
| Net income (loss) per share                                                                                                                                    |        |                                  |      |                                   |   |   |   |   |   |
|                                                                                                                                                           |        |                                  |      |                                   |   |   |   |   |   |
| Basic                                                                                                                                                          | As reported |                                  | $         | .13                                    |   | $ | .07 |   | $ | .05 |   | $ | .00 |   |
|                                                                                                                                                           | Pro forma   |                                  | $         | .12                                    |   | $ | .06 |   | $ | .04 |   | $ | .00 |   |
|                                                                                                                                                           |        |                                  |      |                                   |   |   |   |   |   |
| Diluted                                                                                                                                                        | As reported |                                  | $         | .13                                    |   | $ | .07 |   | $ | .05 |   | $ | .00 |   |
|                                                                                                                                                           | Pro forma   |                                  | $         | .12                                    |   | $ | .06 |   | $ | .04 |   | $ | .00 |   |

 

**Note 6.  Discontinued Operations**

 

During February and March 2003, three packages of Canadian oil and gasproperties were sold for approximately $2.4 million, resulting in a gain ofapproximately $1.2 million ($745,209 net of tax). In accordance with theprovisions of SFAS No. 144, "Accounting for the Impairment or Disposal ofLong-Lived Assets", the results of operations and gain on sale of theseproperties have been reflected as discontinued operations.  Revenue from these Canadian oil and gasproperties was approximately $222,000 and $654,000 for the three and nine monthperiods ending September 30, 2002. After the sales, the Company’s remaining Canadian asset is its 50%interest in the Cessford Field located in southern Alberta.

 

**Note 7.  Intangible Assets**

 

Statement of Financial Accounting Standards No. 141, BusinessCombinations (SFAS 141) and Statement of Financial Accounting Standards, No.142, Goodwill and Intangible Assets (SFAS 142) were issued by the FinancialAccounting Standards Board (FASB) in June 2001

 

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and became effective for the Company on July 1, 2001 and January 1,2002, respectively.  SFAS 141 requiresall business combinations initiated after June 30, 2001 to be accounted forusing the purchase method. Additionally, SFAS 141 requires companies to disaggregate and reportseparately from goodwill certain intangible assets.  SFAS 142 establishes new guidelines for accounting for goodwilland other intangible assets.  Under SFAS142, goodwill and certain other intangible assets are not amortized, but ratherare reviewed annually for impairment. These oil and gas mineral rights held under lease and other contractualarrangements representing the right to extract such reserves from both undevelopedand developed leaseholds may be classified separately from oil and gasproperties, as intangible assets on the Company’s balance sheets.  In addition, the disclosures required bySFAS 141 and 142 relative to intangible assets would be included in the notesto financial statements.  Historically,the Company, like many other oil and gas companies, has included these oil andgas mineral rights held under lease and other contractual arrangementsrepresenting the right to extract such reserves as part of oil and gasproperties, even after SFAS 141 and 142 became effective.

 

This interpretation of SFAS 141 and 142 would only affect the Company’sbalance sheet classification of oil and gas leaseholds.  The Company’s results of operations and cashflows would not be affected, since these oil and gas mineral rights held underlease and other contractual arrangements representing the right to extract suchreserves would continue to be amortized in accordance with accounting rules foroil and gas companies provided in Statement of Financial Accounting StandardsNo. 19, Financial Accounting and Reporting by Oil and Gas Producing Companies(SFAS 19).

 

At September 30, 2003 we had net undeveloped leaseholds ofapproximately $867,000 that would be classified on the Company’s balance sheetas "intangible undeveloped leasehold" and net developed leaseholds ofan estimated $250,000 that would be classified as "intangible developedleaseholds" if the Company applied the interpretation currently beingdiscussed.

 

The Company will continue to classify its oil and gas mineral rightsheld under lease and other contractual rights representing the right to extractsuch reserves as tangible oil and gas properties until further guidance isprovided.

 

**Note 8.  Investment Advisor**

 

In September 2003 the Company announced that it had retained PetrieParkman & Co. to assist in evaluating strategic alternatives, including apotential merger or sale of the Company. There can be no assurance that a transaction will be entered into orcompleted as a result of this process.

 

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**ITEM 2**

 

**Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

**RESULTS OF OPERATIONS**

**Financial Results**

 

Higher commodity prices particularly natural gas prices were partiallyoffset by the effects of hedging payments and lower production volumes andresulted in higher oil and gas revenues for the first nine months of 2003 ascompared to the first nine months of 2002. Oil and gas sales were 22% higher inthe first nine months of 2003 as compared to the same period of 2002. Totalrevenues for the nine month period ended September 30, 2003 were $20,314,470,compared to $16,583,224 during the first nine months of 2002. The Companyrecorded net income for the first nine months of 2003 of $1,555,934, or $.13per basic share. This compares to net income for the nine month period endingSeptember 30, 2002 of $903,937, or $.07 per basic share.

 

During the third quarter of 2003, the Company recorded net income of$576,518, or $.05 per basic share, compared to net income of $912 during thecorresponding period of 2002, or $.00 per basic share.  Total revenues of $6,719,446 during thethird quarter of 2003 compare to third quarter 2002 revenues of $6,106,360.

 

During February and March 2003, three packages of Canadian oil and gasproperties were sold for approximately $2.4 million, resulting in a gain ofapproximately $1.2 million ($745,209 net of tax). In accordance with theprovisions of SFAS No. 144, "Accounting for the Impairment or Disposal ofLong-Lived Assets", the results of operations and gain on sale of theseproperties have been reflected as discontinued operations.  Revenue from these Canadian oil and gasproperties was approximately $222,000 and $654,000 for the three and nine monthperiods ending September 30, 2002. After the sales, the Company’s remaining Canadian asset is its 50%interest in the Cessford Field located in southern Alberta.

 

**Operating Results**

 

During the third quarter the Company and its partners reported that theFH Petroleum #23-3BR (the Company has a 25% working interest) was drilled andcompleted as a vertical Nisku Formation discovery well in Golden Valley County,ND.  In September the FH Petroleum#11-10 Shieffer (the Company has a 25% working interest) began drilling in thesection immediately south of the #23-3BR as a horizontal test of the sameproductive formation.  As of September30, the #11-10 was drilling the vertical section of the well.  Both the #23-3BR and the #11-10 Shiefferwere drilled to test geologic concepts on the Company’s Roosevelt Creek Areaproprietary 3-D project in the Williston Basin of North Dakota.

 

The Company conducted two recompletions in wells in the Todhunters LakeField in Yolo County, CA in the third quarter of 2003 in

 

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addition to the four recompletions conducted in the field in the secondquarter.  The recompletions were allsuccessful and collectively added incremental production of 1.6 mmcf/day.  As mentioned in the prior quarter Form 10-Qan exploratory well that was drilled in the Todhunters Lake field was pluggedand abandoned in July.  Dry hole costfor this well of $162,000 is included in exploration expense in the third quarter.

 

The Company is continuing its polymer injection water shut-offtreatment program in the Big Horn Basin. During the third quarter two additional wells were treated in theTorchlight Field and will be tested in the fourth quarter.  The three wells that were treated during thesecond quarter have added incremental production of 63 BOE/day.

 

Oil production in the 2003 third quarter was 139,000 barrels, comparedto 143,000 in the second quarter of 2003. The relatively flat oil production reflects the Company’s success inoffsetting normal production declines through remedial operations of ourproperties as they mature.

 

Gas production declined from 864,000 million cubic feet in the secondquarter to 779,000 million cubic feet in the third quarter.  Gas production from our Sacramento Basinacquisition has decreased from the initial rates when we acquired theproperties as we have changed the operating philosophy to maximize the ultimaterecovery of natural gas from the properties. This has resulted in lower short term production, but should extend theeconomic life of the property.

 

**CAPITAL RESOURCES AND LIQUIDITY**

 

The Company’s cash balances increased 107% from December 31, 2002.  The increase is the result of no paymentsbeing made on the credit facility during the quarter in anticipation of upcomingcapital spending requirements and other corporate requirements.

 

Cash flow from operating activities in the first nine months of 2003increased 70% or $3.4 million from $4,881,422 for the nine months endedSeptember 30, 2002 to $8,312,844 for the nine months ended September 30,2003.  The increase is due primarily tohigher commodity prices received for sales of oil and natural gas.

 

Investment in property and equipment for the nine months endedSeptember 30, 2003 totaled $3,683,486 compared to $34,155,025 during the sameperiod of 2002.  Approximately $30.7million of the prior year expenditures are attributable to the acquisition ofthe Sacramento Basin assets.

 

Debt outstanding at September 30, 2003 was $29 million, a decrease of$5.5 million from year-end 2002 amounts.  At September 30, 2003, our borrowing base as determined by our bank was$36 million; thus we had $7.0 million of remaining availability under thecurrent commitment

 

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on the facility.

 

We believe that existing cash balances, cash flow from operatingactivities, and funds available under the Company’s credit facility willprovide adequate resources to meet our capital and exploration spendingobjectives for 2003 and into 2004.

 

**OFF BALANCE SHEET ARRANGEMENTS**

 

We have no significant off-balance sheet arrangements.

 

**TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS**

 

The following table sets forth payments due by period for contractualobligations as of September 30, 2003:

 
|                      |   | **Total** |       | **0-3 Years** |   |
|---------------------------|--------|-----------|------------|---------------|--------|
| Revolving credit facility |   | $         | 29,000,000 |          | $      | 29,000,000 |   |
|                           |        |           |            |               |        |  |  |

 

**COMPARISON OF THIRD QUARTER 2003 WITH THIRDQUARTER 2002**

 

Total revenues for the period increased 10% to $6,719,446 for the thirdquarter of 2003 compared to $6,106,360 during the same period of 2002.  The increase is attributable to highercommodity prices, primarily natural gas prices.  The higher gas prices offset lower production volumes.

 

Gas production in third quarter 2003 was 779,000 Mcf as compared to 1.2Bcf in 2002.  The reduction in gasproduction is primarily attributable to the properties acquired in 2002.California production declines are principally attributable to a change in ourproduction philosophy to maximize the ultimate recovery of gas from theSacramento Basin properties acquired in 2002. This philosophy has resulted in lower short-term production volumes, butshould result in greater ultimate recovery over the life of the properties.

 

Oil production in the third quarter 2003 of 139,000 barrels was lowerthan the 156,000 barrels in 2002.  The2002 production includes approximately 6,000 barrels of oil from the Canadianproperties that were sold in 2003.   The balance of the decrease is attributable to normal productiondeclines as the Company’s properties mature.

 

The average crude oil price received, net of the effects of hedging, inthe third quarter this year was $26.42 per barrel, compared to $24.53 perbarrel received during the same period of 2002. Gas prices received,  net of the effects of hedging, increased inthe third quarter of 2003, averaging $3.86 per Mcf, compared to $1.99 per Mcfreceived during the third quarter of 2002.

 

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As of September 30, 2003, the Company had commodity price hedges inplace for 6,000 MMBTU of natural gas per day under costless collars.  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.  Thesettlement price of each of the contracts during the quarter resulted in theCompany making payments to the counterparty of $368,527.  The fair value of the hedges, as computed bythe counterparty at September 30, 2003, was ($820,974).  This amount is shown on the balance sheet asa current liability.

 

Operating costs were 7% higher in 2003 than 2002. This increase isprimarily attributable to the payment in 2003 of taxes based on the increase inreserve value associated with the Sacramento Basin properties and other valuebased production taxes as well as nonrecurring well workover expenses.

 

Depreciation, Depletion and Amortization charges were lower in the 2003third quarter as compared to the third quarter 2002 due to lower productionvolumes and lower amounts of fixed assets being depleted.

 

Exploration costs were lower this period than 2002.  The decrease is attributable to lower dryhole costs.  A dry hole was drilled inthe third quarter of each year, but the 2002 dry hole was approximately$671,000 as compared to a $162,000 dry hole in 2003.

 

General and administrative costs and production and explorationoverhead costs were higher (30% and 35%) this period when compared to the prioryear. The increase is due primarily to higher salary and benefit costs, outsideconsulting charges, insurance expense, investor relation related expense,credit facility fees and amortization of capitalized credit facility fees.

 

Lower interest costs in 2003 reflect the decreased balance of the debtoutstanding under the Company’s credit facility and lower interest rates.  Our current average interest rate on debtoutstanding for the 2003 quarter was approximately 3.39% compared to 4.05% in2002.

 

**COMPARISON OF FIRST NINE MONTHS OF 2003 WITHFIRST NINE MONTHS OF 2002**

 

Higher oil and natural gas prices were partially offset by paymentsmade under the Company’s hedging agreements and lower production volumes.  The higher prices allowed the Company to showa year over year increase of 23% in total revenues.  Total revenues for the period were $20,314,470, compared to$16,583,224 during the first nine months of 2002.  The 2002 revenues have been adjusted to account for sale ofcertain Canadian assets in 2003 as discontinued operations.

 

The average oil price received by the Company in the first nine monthsof 2003 was $25.24 per barrel, compared to $21.41 per barrel during the sameperiod of 2002.  Average gas pricereceived during the first nine

 

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months of 2003 was higher at $3.61 per Mcf compared to the $2.22 perMcf received in 2002.  The average pricereceived for both oil and natural gas are net of payments made under theCompany’s hedging contracts.  During thefirst nine months of 2003, payments of $2,700,427 were made to the counterpartyto settle the hedges that closed during the period.  During the first nine months of 2002, payments of $83,198  were made to the counterparty for hedging.

 

For the first nine months of 2003, oil production of 427,000 wasdown  from 2002 production of 456,000barrels, 2002 production includes approximately 18,000 barrels of oil from theCanadian properties that were sold in 2003. The remaining decline in oil production is related to normal declines asproperties mature.  Natural gasproduction decreased from 3.00 Bcf in 2002 to 2.541 Bcf in 2003, 2002production includes approximately 128,000 Mcf of gas from the Canadian propertiesthat were sold in 2003.  Gas productionfrom our Sacramento Basin acquisition has decreased from the initial rates whenwe acquired the properties as we have changed the operating philosophy tomaximize the ultimate recovery of natural gas from the properties.  This has resulted in lower short termproduction, but should extend the economic life of the properties.

 

Operating costs increased 16% from year to year.  The increase is attributable to the initialyear value based taxes on the acquired Sacramento Basin assets, other valuebased production taxes and non-recurring workover costs.

 

Depreciation, depletion and amortization costs (DD&A) were higherin 2003 when compared to 2002.  Theincrease is attributable to DD&A on the gas properties acquired in2002.  The 2002 DD&A includedexpense associated with the properties for only two quarters as the propertieswere acquired in April 2002, whereas the 2003 DD&A included expense for theentire year.

 

General and administrative expenses of $2,489,013 increased 43% from2002 first nine month amount of $1,744,733. In 2003 we incurred higher compensation costs, employee benefit costs,legal fees, travel expense, insurance costs and annual credit facilityfees.  Higher costs were also incurredin connection with our investor relations program.

 

Production and exploration overhead expense also increased during thefirst nine months of 2003 as compared to the same period of 2002.  The increase in due to higher compensationand benefit charges and geological and geophysical expenses.

 

Higher interest rate charges are related to the higher amountoutstanding under our credit facility, partially offset by lower interestrates.  Funds were borrowed during thesecond quarter of 2002 to finance the Sacramento Basin gas propertyacquisition. Our current average interest rate on debt outstanding isapproximately 3.39% compared to 4.05% in 2002.

 

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**OTHER ITEMS**

 

The Company has reviewed all recently issued, but not yet adopted,accounting standards in order to determine their effects, if any, on theresults of operations or financial position of the Company.  Based on that review, the Company believesthat none of these pronouncements will have a significant effect on our currentor future financial position or results of operations.

 

**CRITICAL ACCOUNTING POLICIES**

 

A summary of our significant accounting policies is included in Note 1of our financial statements contained in the annual report on Form 10-K for theyear ended December 31, 2002.  Webelieve the application of these accounting policies on a consistent basisenables us to provide financial statement users with useful, reliable andtimely information about our results of operations, financial condition andcash flows.

 

The preparation of financial statements in accordance with accountingprinciples generally accepted in the United States of America requiresmanagement to make judgements, estimates and assumptions regardinguncertainties that affect the reported amounts presented and disclosed in thefinancial statements.  Our managementreviews these estimates and assumptions based on historical experience, changesin business conditions and other relevant factors that they believe to bereasonable under the circumstances.  Inany given reporting period, actual results could differ from the estimates andassumptions used in preparing our financial statements.

 

Critical accounting policies are those that may have a material impacton our financial statements and also require management to exercise significantjudgement due to a high degree of uncertainty at the time the estimate ismade.  Our senior management hasdiscussed the development and selection of our accounting policies, relatedaccounting estimates and the related disclosures with the Audit Committee ofour Board of Directors.  We believe ourcritical accounting policies include those addressing the recoverability anduseful lives of assets, and oil and gas reserve estimates.

 

**FORWARD LOOKING STATEMENTS**

 

The preceding discussion and analysis should be read in conjunctionwith the financial statements, including the notes thereto, appearing in theCompany’s annual report on Form 10-K. Except for the historical information contained herein, the mattersdiscussed in this report contain forward-looking statements within the meaningof Section 27a of the Securities Act of 1933, as amended, and Section 2le ofthe Securities Exchange Act of 1934, as amended, that are based on management’sbeliefs and assumptions, current expectations, estimates, and projections.  Statements that are not historical facts,including without limitation statements which are preceded by, followed by orinclude the words "believes", "anticipates","plans", "expects", "may", "should" orsimilar expressions are forward-looking statements.  Many

 

20

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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 risks anduncertainties and, therefore, actual results may differ materially. Allsubsequent written and oral forward-looking statements attributable to theCompany, or persons acting on its behalf, are expressly qualified in theirentirety by these cautionary statements. The Company disclaims any obligation to update any forward-lookingstatements whether as a result of new information, future events or otherwise.

 

Important factors that may affect future results include, but are notlimited to: drilling success, the availability of equipment and contractservices, environmental risks and impediments, geologic hazards, the risk of asignificant natural disaster, the inability of the Company to insure againstcertain risks, fluctuations in commodity prices, the inherent limitations inour ability to estimate oil and gas reserves, changing government regulations,as well as general market conditions, competition and pricing, and other risksdetailed from time to time in the Company’s SEC reports, copies of which areavailable upon request from the Company’s investor relations department.

 

**ITEM 3**

 

**Quantitative and Qualitative Disclosuresabout Market Risk**

 

The primary objective of the following information is to provideforward-looking quantitative and qualitative information about our potentialexposure to market risks.  We areexposed to various market risks, principally fluctuating interest rates andchanges in commodity prices. These risks can impact our results of operations,cash flows and financial position. We manage these risks through regularoperating and financing activities and periodically use derivative financialinstruments such as commodity price hedging agreements.

 

The following analysis presents the effect on earnings, cash flows andfinancial position as if the hypothetical changes in market risk factorsoccurred on September 30, 2003.  Onlythe potential impacts of hypothetical assumptions are analyzed.  This analysis does not consider other possibleeffects that could impact our business.

 

**Interest rate risk.**  At September 30, 2003 the amount outstandingunder our credit facility was $29.0 million. The weighted average interest rate for this facility was 3.39%.  Assuming constant debt levels, earnings andcash flow impacts for the next twelve month period from September 30, 2003 dueto a one percent change in interest rates would be approximately $325,000before taxes.

 

**Commodity price risk.**  Oil and gas commodity markets are influencedby global as well as regional supply and demand.  Worldwide political events can also impact commodity prices.  Pricing for oil and natural gas productionhas been volatile and unpredictable for many years.  In accordance with our current lending facility and to hedgeexposure to

 

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changing commodity prices we periodically enter into financial hedgecontracts. Hedging may limit the Company’s exposure to adverse price limits,hedging also limits the benefit of price increases and is subject to a numberof risks, including credit risk of the counterparty to the hedge.  For additional information, see note 3 tothe Financial Statements.

 

The terms of our current credit facility require that not later thanthirty days subsequent to the date of the new facility (April 12, 2002) notless than 50% of our projected monthly production be hedged at price levels andterms acceptable to the lender.  During2003, the Company made net payments to the counterparty of $2,700,427 under thehedge agreements in place.  This amountis netted against our oil and gas revenue. During the same period of 2002 payments of $83,198 to the counterparty.

 

We account for our hedging activity pursuant to SFAS 133, accordinglywe include the fair value of these hedges ($820,974 liability at September 30,2003) on our balance sheet.  "Fairvalue" represents the value computed by the counterparty using a financialmodeling technique including a type of Black-Scholes method.  As these contracts qualify and have beendesignated as cash flow hedges, we determine gains and losses on them resultingfrom market price changes at least quarterly and reflect them in accumulatedother comprehensive income (loss) until the period in which the hedge issettled.  At that time, the amount paidto or received from the counterparty is included in oil and gas revenue.  We do not intend to terminate our currentcommodity hedges prior to their expiration date.

 

The hedges we had in place at September 30, 2003 were costlesscollars.  The Company utilizes collarsthat establish a price between a floor and ceiling to hedge oil and natural gasprices.  The table below sets forth ouroil and natural gas collars in place at September 30, 2003.

 
| **Time Period**     |   | **Per  Day  BBL/  MMBTU** |   | **Average  Floor  BBL/  MMBTU** |   | **Average  Ceiling  BBL/  MMBTU** |   | **Fair  Value of  Financial  Instrument  Asset/  (Liability)** |   |
|---------------------|--------|---------------------------|--------|---------------------------------|--------|-----------------------------------|--------|----------------------------------------------------------------|--------|
|                |   |                      |   |                            |   |                              |   | **(thousands)**                                                |   |
|                |   |                      |   |                            |   |                              |   |                                                           |   |
| **Gas**             |   |                      |   |                            |   |                              |   |                                                           |   |
| 05/01/02 - 04/30/04 |   | 5,000                     |   | $                               | 3.00   |                              | $      | 4.43                                                           |   | $ | (799 | ) |
|                |   |                      |   |                            |   |                              |   |                                                           |   |
| 01/01/03 - 12/31/03 |   | 1,000                     |   | $                               | 3.50   |                              | $      | 4.915                                                          |   | $ | (22 | ) |

 

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**ITEM 4**

 

**Controls and Procedures**

 

As of the end of the period covered by this report, the Company’sprincipal executive officer ("CEO") and principal financial officer("CFO") carried out an evaluation of the effectiveness of theCompany’s disclosure controls and procedures. Based on those evaluations, theCompany’s CEO and CFO believe

 

(i) that the Company’s disclosure controls and procedures are designedto ensure that information required to be disclosed by the Company in thereports it files under the Securities Exchange Act of 1934 is recorded,processed, summarized and reported within the time periods specified in theSEC’s rules and forms and that such information is accumulated and communicatedto the Company’s management, including the CEO and CFO, as appropriate to allowtimely decisions regarding required disclosure; and

 

(ii) that the Company’s disclosure controls and procedures areeffective.

 

There have been no significant changes in the Company’s internalcontrols or in other factors that could significantly affect the Company’sinternal controls subsequent to the evaluation referred to in Item 4, above,nor have there been any corrective actions with regard to significantdeficiencies or material weaknesses.

 

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**PARTII**

 

**OTHER INFORMATION**

 

The answers to items one through five listed under Part II areinapplicable or negative, except as shown below

 

**ITEM 6**.            **Exhibitsand Reports on Form 8-K**

 
| (a)    |   | Exhibits            |   |                                                                                                                                   |
|--------|--------|---------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------|
|   |
|   |   | (3)                 | (i)    |                                                                                                                                   | Amendment to Article III of Restated Articles of Incorporation  adopted on May 21, 2003 and Restated Articles of Incorporation as amended  incorporated by reference from the Form 10-Q for the period ended June 30,  2003. |
|   |
|   |   |                | (ii)   |                                                                                                                                   | Amended By-Laws. Incorporated by reference from the annual report  on  Form 10-K for the year-ended  December 31, 1997. |
|   |
|   |   | (10)                | (i)    |                                                                                                                                   | Loan agreement between Equity Oil Company and Bank One, NA.  Incorporated by reference from the Form  10-Q for the period ended June 30, 2002. |
|   |
|   |   |                | (iii)  |                                                                                                                                   | Change in Control Compensation Agreement for David P. Donegan  incorporated by reference from the Form 10-Q for the period ended June 30,  2001.  Change in Control Compensation  Agreement for Russell V. Florence, incorporated by reference from the annual  report on Form 10-K for the year-ended December 31, 2000. Change in Control  Compensation Agreements for Paul M. Dougan and James B. Larson, incorporated  by reference from the annual report on Form 10-K for the year-ended December  31, 1997. |
|   |
|   |   |                |   | Equity Oil Company 2000 Stock Option Plan.  Incorporated by reference from Appendix A of the proxy  statement dated May 10, 2000. |
|   |
|   |   |                |   | Cash bonus plan for key employees.   Incorporated by reference from the Form 10-K for the year ended  December 31, 2002.          |
|   |
|   |   | (31)                |   | Certifications required by Rule 13a-15(e) and 15d-15(e).                                                                               |
|   |
|   |   | (32)                |   | Section 1350 Certifications.                                                                                                           |
|   |
| (b)    |   | Reports on Form 8-K |   |                                                                                                                                   |
|        |        |                     |        |                                                                                                                                        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

24

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| **Filing Date**    |   | **Contents**                                                                    |
|--------------------|--------|---------------------------------------------------------------------------------|
|               |   |                                                                            |
| August 1, 2003     |   | Press release regarding financial results for the quarter ended June  30, 2003. |
|               |   |                                                                            |
| September 12, 2003 |   | Press release announcing the retention of Petrie Parkman & Co.              |

 

**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:  | November 7, 2003 |                                 | By     |    /s/ Paul M. Dougan |   |
|   |             | Paul M. Dougan, President       |
|   |             |                                 |
|   |             |                                 |
| DATE:  | November 7, 2003 |                                 | By     |    /s/ Russell V. Florence |   |
|   |             | Russell V. Florence,                 |
|   |             | Treasurer                            |
|        |                  |                                      |        |  |  |  |  |  |  |

 

25

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