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U.S. SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-K
 (Mark One)
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2005
 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 0-7406
 PrimeEnergy Corporation
 (Exact name of registrant as specified in its charter)
 Delaware
    
    84-0637348(state or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 One Landmark Square, Stamford, CT
    
    06901(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (203) 358-5700
 Securities registered pursuant to Section 12(b) of the Act: None
 Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.10 per share
(Title of Class)
 o þ
 o þ
 þ o
 o þ
  o o þ
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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TABLE OF CONTENTS
 PART IItem 1. BUSINESSItem 1A. RISK
FACTORSItem 1B.
UNRESOLVED STAFF COMMENTSItem 2. PROPERTIESItem 3. LEGAL PROCEEDINGSItem 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART IIItem 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIESItem 6. SELECTED FINANCIAL DATAItem 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSItem 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKItem 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAItem 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREItem 9A. INTERNAL CONTROLS AND PROCEDURESItem 9B. OTHER INFORMATIONPART IIIItem 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTItem 11. EXECUTIVE COMPENSATIONItem 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERSItem 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONSItem 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESPART IVItem 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULESSIGNATURESSubsidiariesConsent of Ryder Scott & Company L.P.Certification of CEO Pursuant to Rule 13(a)-14(a)/15d-14(a)Certification of CFO Pursuant to Rule 13(a)-14(a)/15d-14(a)Certification of CEO Pursuant to 18 U.S.C. Section 1350Certification of CFO Pursuant to 18 U.S.C. Section 1350




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PrimeEnergy Corporation
 FORM 10-K ANNUAL REPORT
For the Fiscal Year Ended
December 31, 2005
 
 PART I
 
 Item 1. BUSINESS.
 General
    Exploration, Development and Recent Activities
    1




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Significant 2005 transactions
          Well Operations
  2




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The Partnerships, Trusts and Joint Ventures
   Regulation
      3




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4




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Taxation
   Competition and Markets
   5




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Oil Purchasers:Texon Distributing L.P.
    
    
    26.69
    %Plains All American Inc.
    
    
    31.97
    %TEPPCO Crude Oil, L.L.C.
    
    
    20.71
    %LPC Crude Oil, Inc.
    
    
    11.87
    %Gas Purchasers:Unimark LLC
    
    
    43.79
    %Enterprise Products Operation
    
    
    17.27
    %
  Environmental Matters
  
    
    restrict the types, quantities and concentration of various substances that can be
released into the environment in connection with drilling and production activities;
    
    limit or prohibit drilling activities on certain lands lying within wilderness, wetlands and other protected areas; and
    
    Impose substantial liabilities for pollution resulting from our operations.
   
    
    unit production expenses primarily related to the control and limitation of air
emissions and the disposal of produced water;
    
    capital costs to drill exploration and development wells primarily related to the
management and disposal of drilling fluids and other oil and natural gas exploration
wastes; and
    
    Capital costs to construct, maintain and upgrade equipment and facilities.
  6




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
    
    to remove or remediate previously disposed wastes, including wastes disposed or released
by prior owners or operators;
    
    To clean up contaminated property, including contaminated groundwater; or to perform
remedial operations to prevent future contamination.
     7




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8




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Employees
  
 Item 1A.
RISK FACTORS.
 Natural gas and oil prices fluctuate widely, and low prices for an extended period of time are
likely to have a material adverse impact on our business.
   
    
    the level of consumer product demand;
    
    weather conditions;
    
    political conditions in natural gas and oil producing regions, including the Middle East;
    
    the ability of the members of the Organization of Petroleum Exporting Countries to agree
to and maintain oil price and production controls;
    
    the price of foreign imports;
    
    actions of governmental authorities;
    
    pipeline capacity constraints;
    
    inventory storage levels;
    
    domestic and foreign governmental regulations;
    
    the price, availability and acceptance of alternative fuels; and
    
    overall economic conditions
 9




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Drilling natural gas and oil wells is a high-risk activity.
  
    
    unexpected drilling conditions, pressure or irregularities in formations;
    
    equipment failures or accidents;
    
    adverse weather conditions;
    
    compliance with governmental requirements; and
    
    shortages or delays in the availability of drilling rigs or crews and the delivery of equipment.
  
    
    the results of exploration efforts and the acquisition, review and analysis of the seismic data;
    
    the availability of sufficient capital resources to us and the other participants for the drilling of the prospects;
    
    the approval of the prospects by other participants after additional data has been compiled;
    
    economic and industry conditions at the time of drilling, including prevailing and
anticipated prices for natural gas and oil and the availability of drilling rigs and crews;
    
    our financial resources and results; and
    
    the availability of leases and permits on reasonable terms for the prospects.
  Reserve estimates depend on many assumptions that may prove to be inaccurate. Any material
inaccuracies in our reserve estimates or underlying assumptions could cause the quantities and net
present value of our reserves to be overstated.
  
    
    the quality and quantity of available data;
    
    the interpretation of that data
    
    the accuracy of various mandated economic assumptions; and
    
    the judgment of the persons preparing the estimate.
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Our future performance depends on our ability to find or acquire additional natural gas and
oil reserves that are economically recoverable.
    We face a variety of hazards and risks that could cause substantial financial losses.
  
    
    blowouts, cratering and explosions;
    
    mechanical problems;
    
    uncontrolled flows of natural gas, oil or well fluids;
    
    formations with abnormal pressures;
    
    pollution and other environmental risks; and
    
    natural disasters.
   We have limited control over the activities on properties we do not operate.
  11




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Terrorist activities and the potential for military and other actions could adversely affect
our business.
  Our ability to sell our natural gas and oil production could be materially harmed if we fail
to obtain adequate services such as transportation and processing .
  Competition in our industry is intense, and many of our competitors have substantially greater
financial and technological resources than we do, which could adversely affect our competitive
position.
  We may have hedging arrangements that expose us to risk of financial loss and limit the
benefit to us of increases in prices for natural gas and oil.
  The loss of key personnel could adversely affect our ability to operate.
  We are subject to complex laws and regulations, including environmental regulations, which can
adversely affect the cost, manner or feasibility of doing business.
  12




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Item 1
B. UNRESOLVED STAFF COMMENTS.
  
 Item 2. PROPERTIES.
      2005
    
    2004
    
    2003
    
    2002
    
    2001Gross
    
    Net
    
    Gross
    
    Net
    
    Gross
    
    Net
    
    Gross
    
    Net
    
    Gross
    
    NetExploratory:Oil
    
    
    1
    
    
    
    .500
    
    
    
    2
    
    
    
    .400
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1.000
    
    
    
    1
    
    
    
    1.000Gas
    
    
    11
    
    
    
    3.510
    
    
    
    10
    
    
    
    2.850
    
    
    
    4
    
    
    
    1.565
    
    
    
    1
    
    
    
    .250
    
    
    
    1
    
    
    
    .602Dry
    
    
    1
    
    
    
    1.000
    
    
    
    4
    
    
    
    1.594
    
    
    
    6
    
    
    
    1.400
    
    
    
    4
    
    
    
    2.500
    
    
    
    
    
    
    
    Development:Oil
    
    
    17
    
    
    
    8.500
    
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    2.561
    
    
    
    2
    
    
    
    1.250
    
    
    
    1
    
    
    
    .500Gas
    
    
    15
    
    
    
    7.790
    
    
    
    7
    
    
    
    3.993
    
    
    
    8
    
    
    
    4.478
    
    
    
    10
    
    
    
    7.590
    
    
    
    7
    
    
    
    4.926Dry
    
    
    4
    
    
    
    2.410
    
    
    
    2
    
    
    
    1.594
    
    
    
    1
    
    
    
    .500
    
    
    
    6
    
    
    
    5.300
    
    
    
    2
    
    
    
    1.585Total:Oil
    
    
    18
    
    
    
    9.000
    
    
    
    2
    
    
    
    .400
    
    
    
    6
    
    
    
    2.560
    
    
    
    3
    
    
    
    2.250
    
    
    
    2
    
    
    
    1.500Gas
    
    
    26
    
    
    
    11.300
    
    
    
    17
    
    
    
    6.843
    
    
    
    12
    
    
    
    6.042
    
    
    
    11
    
    
    
    7.840
    
    
    
    8
    
    
    
    5.528Dry
    
    
    5
    
    
    
    3.410
    
    
    
    6
    
    
    
    2.722
    
    
    
    7
    
    
    
    1.900
    
    
    
    10
    
    
    
    7.800
    
    
    
    2
    
    
    
    1.58549
    
    
    
    23.710
    
    
    
    25
    
    
    
    9.965
    
    
    
    25
    
    
    
    10.504
    
    
    
    24
    
    
    
    17.890
    
    
    
    12
    
    
    
    8.613
 Oil and Gas Production
  Gross
    
    NetProducing wells (1)Oil Wells
    
    
    892
    
    
    
    282Gas Wells
    
    
    1,170
    
    
    
    381Producing Acres
    
    
    329,790.26
    
    
    
    80,954.27
 
 (1)
    
    A gross well or gross acre is a well or an acre in which a working interest is owned. A net
well or net is the sum of the fractional revenue interests owned in gross wells or gross
acres. Wells are classified by their primary product. Some wells produce both oil and gas. 13




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2005
    
    2004
    
    2003
    
    2002
    
    2001Oil (barrels)
    
    
    361,000
    
    
    
    371,000
    
    
    
    370,000
    
    
    
    321,000
    
    
    
    306,000Gas (Mcf)
    
    
    4,758,000
    
    
    
    5,138,000
    
    
    
    3,991,000
    
    
    
    3,540,000
    
    
    
    3,764,000
  2005
    
    2004
    
    2003
    
    2002
    
    2001Average sales price per barrel
    
    $
    52.91
    
    
    
    40.45
    
    
    
    28.90
    
    
    
    23.37
    
    
    
    24.92Average sales price Per Mcf
    
    $
    7.33
    
    
    
    5.64
    
    
    
    4.80
    
    
    
    3.06
    
    
    
    4.08Average production costs per net equivalent barrel (1)
    
    $
    16.10
    
    
    
    12.17
    
    
    
    12.42
    
    
    
    11.80
    
    
    
    11.88
 
 (1)
    
    Net equivalent barrels are computed at a rate of 6 Mcf per barrel. Undeveloped Acreage
  Leasehold
    
    Mineral
    
    RoyaltyInterests
    
    Interests
    
    InterestsGross
    
    Net
    
    Gross
    
    Net
    
    Gross
    
    NetState
    
    Acres
    
    Acres
    
    Acres
    
    Acres
    
    Acres
    
    AcresColorado
    
    
    
    
    
    
    
    
    
    
    799.00
    
    
    
    23.00Gulf of Mexico
    
    
    104,067.12
    
    
    
    67,155.58Montana
    
    
    
    
    
    
    
    
    
    
    13,984.00
    
    
    
    59.00
    
    
    
    786.00
    
    
    
    5.00Nebraska
    
    
    
    
    
    
    
    
    
    
    2,553.00
    
    
    
    331.00North Dakota
    
    
    
    
    
    
    
    
    
    
    640.00
    
    
    
    1.00Oklahoma
    
    
    5,771.02
    
    
    
    3,451.27
    
    
    
    320.00
    
    
    
    1.00Texas
    
    
    16,259.24
    
    
    
    6,059.93
    
    
    
    680.00
    
    
    
    16.34New Mexico
    
    
    188.41
    
    
    
    62.17Wyoming
    
    
    1,000.00
    
    
    
    125.00
    
    
    
    5,043.00
    
    
    
    35.00
    
    
    
    140.00
    
    
    
    35.00TOTAL
    
    
    127,285.80
    
    
    
    76,853.97
    
    
    
    24,019.00
    
    
    
    466.34
    
    
    
    926.00
    
    
    
    40.00
 Reserves
  Reserve CategoryProved Developed
    
    Proved Undeveloped
    
    TotalAs of
    
    Oil
    
    Gas
    
    Oil
    
    Gas
    
    Oil
    
    Gas12-31
    
    (bbls)
    
    (Mcf)
    
    (bbls)
    
    (Mcf)
    
    (bbls)
    
    (Mcf)2001
    
    
    1,996,000
    
    
    
    24,266,000
    
    
    
    
    
    
    
    453,000
    
    
    
    1,996,000
    
    
    
    24,719,0002002
    
    
    2,319,000
    
    
    
    29,917,000
    
    
    
    
    
    
    
    
    
    
    
    2,319,000
    
    
    
    29,917,0002003
    
    
    2,865,000
    
    
    
    34,045,000
    
    
    
    40,000
    
    
    
    4,960,000
    
    
    
    2,905,000
    
    
    
    39,005,0002004
    
    
    2,926,000
    
    
    
    37,728,000
    
    
    
    6,000
    
    
    
    7,142,000
    
    
    
    2,932,000
    
    
    
    44,870,0002005
    
    
    3,504,000
    
    
    
    43,976,000
    
    
    
    183,000
    
    
    
    968,000
    
    
    
    3,687,000
    
    
    
    44,944,000
 14




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Proved Developed
    
    Proved Undeveloped
    

    TotalPresent Value
    
    
    
    
    
    Present Value 10
    
    
    
    
    
    Present Value 10
    
    Present Value 10
    
    StandardizedAs of
    
    Future Net
    
    Of Future
    
    Future Net
    
    Of Future
    
    Future Net
    
    Of Future
    
    Of Future
    
    Measure of12-31
    
    Revenue
    
    Net Revenue
    
    Revenue
    
    Net Revenue
    
    Revenue
    
    Net Revenue
    
    Income Taxes
    

Discounted
Cash flow2001
    
    $
    41,086,000
    
    
    
    24,653,000
    
    
    
    957,000
    
    
    
    629,000
    
    
    
    42,043,000
    
    
    
    25,282,000
    
    
    
    4,316,000
    
    
    
    20,966,0002002
    
    $
    97,600,000
    
    
    
    56,855,000
    
    
    
    
    
    
    
    
    
    
    
    97,600,000
    
    
    
    56,855,000
    
    
    
    14,079,000
    
    
    
    42,776,0002003
    
    $
    141,194,000
    
    
    
    85,695,000
    
    
    
    22,891,000
    
    
    
    17,401,000
    
    
    
    164,085,000
    
    
    
    103,096,000
    
    
    
    29,844,000
    
    
    
    73,252,0002004
    
    $
    177,916,000
    
    
    
    107,116,000
    
    
    
    33,484,000
    
    
    
    26,796,000
    
    
    
    211,400,000
    
    
    
    133,912,000
    
    
    
    39,501,000
    
    
    
    94,411,0002005
    
    $
    349,816,000
    
    
    
    201,883,000
    
    
    
    12,510,000
    
    
    
    6,663,000
    
    
    
    362,326,000
    
    
    
    208,546,000
    
    
    
    63,067,000
    
    
    
    145,479,000
        
 Item 3. LEGAL PROCEEDINGS
  
 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
  15




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PART II
 
 Item 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES.
  2005
    
    High
    
    LowFirst Quarter
    
    $
    22.99
    
    
    $
    19.50Second Quarter
    
    $
    47.09
    
    
    $
    19.77Third Quarter
    
    $
    52.49
    
    
    $
    28.12Fourth Quarter
    
    $
    52.52
    
    
    $
    36.00
 2004
    
    High
    
    LowFirst Quarter
    
    $
    15.15
    
    
    $
    15.05Second Quarter
    
    $
    18.16
    
    
    $
    17.91Third Quarter
    
    $
    19.21
    
    
    $
    19.06Fourth Quarter
    
    $
    19.64
    
    
    $
    18.61
    Issuer Purchases of Equity Securities
  Maximum Number ofShares that May YetAverage Price Paid
    
    Be Purchased Under The2005 Month
    
    Number of Shares
    
    per share
    

ProgramJanuary
    
    
    14,375
    
    
    
    19.53
    
    
    
    341,294February
    
    
    
    
    
    
    
    
    
    
    326,919March
    
    
    
    
    
    
    
    
    
    
    326,919April
    
    
    74,731
    
    
    
    20.00
    
    
    
    326,919May
    
    
    14,003
    
    
    
    20.10
    
    
    
    252,188June
    
    
    14,500
    
    
    
    20.36
    
    
    
    238,185July
    
    
    4,313
    
    
    
    35.13
    
    
    
    223,685August
    
    
    12,429
    
    
    
    46.23
    
    
    
    219,372September
    
    
    13,573
    
    
    
    45.28
    
    
    
    206,943October
    
    
    7,769
    
    
    
    45.77
    
    
    
    193,370November
    
    
    943
    
    
    
    40.38
    
    
    
    185,601December
    
    
    7,774
    
    
    
    47.52
    
    
    
    184,658Total/Average
    
    
    164,410
    
    
    
    27.10
    
    
    
    176,884
 16




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Item 6. SELECTED FINANCIAL DATA
  2005
    
    2004
    
    2003
    
    2002
    
    2001Revenues
    
    $
    75,946,000
    
    
    
    62,428,000
    
    
    
    46,719,000
    
    
    
    34,186,000
    
    
    
    42,408,000Income from operations
    
    $
    22,151,000
    
    
    
    11,359,000
    
    
    
    8,047,000
    
    
    
    2,168,000
    
    
    
    6,968,000Net income
    
    $
    25,955,000
    
    
    
    7,275,000
    
    
    
    5,702,000
    
    
    
    1,757,000
    
    
    
    5,413,000Income per common share
    
    $
    7.64
    
    
    
    2.04
    
    
    
    1.56
    
    
    
    0.47
    
    
    
    1.39Diluted net income per common share
    
    $
    6.27
    
    
    
    1.70
    
    
    
    1.31
    
    
    
    0.40
    
    
    
    1.18Total assets
    
    $
    109,383,000
    
    
    
    69,926,000
    
    
    
    58,255,000
    
    
    
    44,887,000
    
    
    
    35,816,000Long-term obligations
    
    $
    44,126,000
    
    
    
    30,290,000
    
    
    
    26,925,000
    
    
    
    23,734,000
    
    
    
    16,958,000Cash dividends
    
    None
    
    None
    
    None
    
    None
    
    None
 
 Item 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Liquidity And Capital Resources:
        17




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Critical Accounting Estimates:
 Proved Oil and Gas Reserves
  Depreciation, Depletion and Amortization for Oil and Gas Properties
   Repurchase of limited partners interests
  18




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Results of Operations:
 2005 as compared to 2004
  Oil and gas sales
 2005
    
    
    2004
    
    
    Increase (Decrease)Barrels of Oil Produced
    
    
    361,000
    
    
    
    371,000
    
    
    
    (10,000
    )Average Price Received (rounded)
    
    $
    52.91
    
    
    $
    40.45
    
    
    $
    12.46Oil Revenue
    
    $
    19,100,000
    
    
    $
    15,006,000
    
    
    $
    4,094,000Mcf of Gas Produced
    
    
    4,758,000
    
    
    
    5,138,000
    
    
    
    (380,000
    )Average Price Received (rounded)
    
    $
    7.33
    
    
    $
    5.64
    
    
    $
    1.69Gas Revenue
    
    $
    34,888,000
    
    
    $
    28,961,000
    
    
    $
    5,297,000Total Oil & Gas Revenue
    
    $
    53,988,000
    
    
    $
    43,967,000
    
    
    $
    10,021,000
 Changes in Production
 Field Service Revenue
 Lease operating expenses
 General and administrative expenses
 Depreciation and depletion
 Exploration costs
 Interest expense
 Income tax expense
 19




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2004 as compared to 2003
  Oil and gas sales
 2004
    
    
    2003
    
    
    IncreaseBarrels of Oil Produced
    
    
    371,000
    
    
    
    370,000
    
    
    
    1,000Average Price Received
    
    $
    40.45
    
    
    $
    28.90
    
    
    $
    11.55Oil Revenue
    
    $
    15,006,000
    
    
    $
    10,693,000
    
    
    $
    4,313,000Mcf of Gas Produced
    
    
    5,138,000
    
    
    
    3,991,000
    
    
    
    1,147,000Average Price Received
    
    $
    5.64
    
    
    $
    4.80
    
    
    $
    0.84Gas Revenue
    
    $
    28,961,000
    
    
    $
    19,162,000
    
    
    $
    9,799,000Total Oil & Gas Revenue
    
    $
    43,967,000
    
    
    $
    29,855,000
    
    
    $
    14,112,000
 Field Service Revenue
 Lease operating expenses
 General and administrative expenses
 Depreciation and depletion
 Exploration costs
 Interest expense
 Income tax expense
  
 Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
  20




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##### Table of Contents



Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
  
 Item 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
  
 Item 9A. INTERNAL CONTROLS AND PROCEDURES.
 (a) Evaluation of disclosure controls and procedures.
   (b) Changes in internal control over financial reporting.
   
 Item 9B. OTHER INFORMATION.
  
 PART III
 
 Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
  Item 11. EXECUTIVE COMPENSATION.
  Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
  Item 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS.
  Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
  21




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##### Table of Contents



PART IV
 
 Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
     3.1
    
    Restated Certificate of Incorporation of PrimeEnergy Corporation
(Incorporated by reference to Exhibit 3.1 of PrimeEnergy
Corporation Form 10-K for the year ended December 31, 2004)3.2
    
    Bylaws of PrimeEnergy Corporation (Incorporated by reference to
Exhibit 3.2 of PrimeEnergy Corporation Form 10-K for the year ended
December 31, 2004)10.3.1
    
    Adoption Agreement #003 dated 4/23/2002, MassMutual Life Insurance
Company Flexinvest Prototype Non-Standardized 401(k) Profit-Sharing
Plan; EGTRRA Amendment to the PrimeEnergy employees 401(k) Savings
Plan; MassMutual Retirement Services Flexinvest Defined
Contribution Prototype Plan; Protected Benefit Addendum; Addendum
to the Administrative Services Agreement Loan Agreement; Addendum
to Administrative Services Agreement GUST Restatement Provisions;
General Trust Agreement (Incorporated by reference to Exhibit
10.3.1 of PrimeEnergy Corporation Form 10-K for the year ended
December 31, 2002) (1)10.4
    
    Amended and Restated Agreement of Limited Partnership, FWOE
Partners L.P., dated as of August 22, 2005 (Incorporated by
reference to Exhibit 10.3 of PrimeEnergy Corporation Form 8-K for
events of August 22, 2005)10.4.1
    
    Contribution Agreement between F-W Oil Exploration L.L.C. and FWOE
Partners L.P. dated as of August 22, 2005 (Incorporated by
reference to exhibit 10.4 of PrimeEnergy Corporation Form 8-K for
events of August 22, 2005)10.18
    
    Composite copy of Non-Statutory Option Agreements (Incorporated by
reference to Exhibit 10.18 of PrimeEnergy Corporation Form 10-K for
the year ended December 31, 2004) (1)10.22
    
    Credit Agreement dated as of December 19, 2002, between PrimeEnergy
Corporation, PrimeEnergy Management Corporation, Prime Operating
Company, Eastern Oil Well Service Company, Southwest Oilfield
Construction Company, EOWS Midland Company and Guaranty Bank , FSB
(incorporated by reference to Exhibit 10.22 of PrimeEnergy
Corporation Form 10-K for the year ended December 31, 2002)
 22




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##### Table of Contents



10.22.1
    
    First Amendment to Credit Agreement effective as of June 1, 2003,
between PrimeEnergy Corporation, PrimeEnergy Management
Corporation, Prime Operating Company, Eastern Oil Well Service
Company, Southwest Oilfield Construction Company, EOWS Midland
Company and Guaranty Bank , FSB (Incorporated by reference to
Exhibit 10.22.1 of PrimeEnergy Corporation Form 10-K for the year
ended December 31, 2003)10.22.2
    
    Second Amendment to Credit Agreement effective as of September
22, 2003, between PrimeEnergy Corporation, PrimeEnergy Management
Corporation, Prime Operating Company, Eastern Oil Well Service
Company, Southwest Oilfield Construction Company, EOWS Midland
Company, F-W Oil Exploration Company L.L.C. and Guaranty Bank ,
FSB (Incorporated by reference to exhibit 10.2.2 of PrimeEnergy
Corporation Form 10-K for the year ended December 31, 2003)10.22.3
    
    Third Amendment to Credit Agreement effective as of February 17,
2004, between PrimeEnergy Corporation, PrimeEnergy Management
Corporation, Prime Operating Company, Eastern Oil Well Service
Company, Southwest Oilfield Construction Company, EOWS Midland
Company, F-W Oil Exploration Company, L.L.C. and Guaranty Bank,
FSB (Incorporated by reference to Exhibit 10.22.3 of PrimeEnergy
Corporation Form 10-K for the year ended December 31, 2004)10.22.4
    
    Fourth Amendment to Credit Agreement effective as of December 28,
2004, between PrimeEnergy Corporation, PrimeEnergy Management
Corporation, Prime Operating Company, Eastern Oil Well Service
Company, Southwest Oilfield Construction Company, EOWS Midland
Company and Guaranty Bank, FSB (Incorporated by reference to
Exhibit 10.22.4 of PrimeEnergy Corporation for the year ended
December 31, 2004)10.23
    
    Mortgage, Deed of Trust, Security Agreement, Financing Statement
and Assignment of Production from PrimeEnergy Corporation and
PrimeEnergy Management Corporation for the benefit of Guaranty
Bank, FSB (Incorporated by reference to Exhibit 10.23 of
PrimeEnergy Corporation 10-K for the year ended December 31, 2002)10.23.1
    
    Mortgage, Deed of Trust, Security Agreement, Financing Statements
and Assignment of Production effective as of September 22, 2003,
by and among F-W Oil Exploration L.L.C., PrimeEnergy Corporation,
PrimeEnergy Management Corporation, Prime Operating Company,
Eastern Oil Well Service Company, EOWS Midland Company and
Southwest Oilfield Construction Company for benefit of Guaranty
Bank, FSB (Incorporated by reference to exhibit 10.23.1 to
PrimeEnergy Corporation Form 10-K for the year ended December 31,
2003)10.24
    
    Act of Mortgage and Security Agreement, by PrimeEnergy Corporation
and PrimeEnergy Management Corporation to Guaranty Bank, FSB
(Incorporated by reference to Exhibit 10.24 of PrimeEnergy
Corporation 10-K for the year ended December 31, 2002)21
    
    Subsidiaries (filed herewith)23
    
    Consent of Ryder Scott & Company L.P. (filed herewith)31.1
    
    Certification of Chief Executive Officer pursuant to
Rule13(a)-14(a)/15d-14(a) of the Securities Exchange Act of 1934,
as amended (filed herewith)31.2
    
    Certification of Chief Financial Officer pursuant to
Rule13(a)-14(a)/15d-14(a) of the Securities Exchange Act of 1934,
as amended (filed herewith)
 23




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##### Table of Contents



32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, adopted pursuant to Section 906 of the
Sarbanes-OxleyAct of 2002 (filed herewith)32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, adopted pursuant to Section 906 of the
Sarbanes-OxleyAct of 2002 (filed herewith)
 
 (1)
    
    Management contract or compensatory plan or arrangement required to be filed as an Exhibit to
this Form 10-K 24




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##### Table of Contents



SIGNATURES
  PrimeEnergy CorporationBy:
    
    /s/ CHARLES E. DRIMAL, JRCharles E. Drimal, Jr.
President
  /s/ CHARLES E.DRIMAL, JR.
    
    Director and President;Charles E. Drimal, Jr.
    
    The Principal Executive Officer/s/ BEVERLY A. CUMMINGS
    
    Director, Vice President and
Treasurer;Beverly A. Cummings
    
    The Principal Financial and AccountingOfficer/s/ MATTHIAS ECKENSTEIN
    
    Director
    
    /s/ CLINT HURT
    
    DirectorMatthias Eckenstein
    
    
    
    Clint Hurt/s/ H. GIFFORD FONG
    
    Director
    
    /s/ JAN K. SMEETS
    
    DirectorH. Gifford Fong
    
    
    
    Jan K. Smeets/s/ THOMAS S.T. GIMBEL
    
    Director
    
    /s/ GAINES WEHRLE
    
    DirectorThomas S.T. Gimbel
    
    
    
    Gaines Wehrle
 25




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##### Table of Contents



INDEX TO FINANCIAL STATEMENTS
 Report of Independent Registered Public Accounting Firm
    
    
    F-2Financial StatementsConsolidated Balance Sheets  December 31, 2005 and 2004
    
    
    F-3Consolidated Statements of Operations  for the years ended December 31, 2005, 2005 and 2003
    
    
    F-4Consolidated Statement of Stockholders Equity  for the years ended December 31, 2005, 2004 and 2003
    
    
    F-5Consolidated Statements of Cash Flows  for the years ended December 31, 2005, 2004 and 2003
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-7Supplementary Information:Capitalized Costs Relating to Oil and Gas Producing Activities, years ended December 31, 2005, 2004 and 2003
    
    
    F-16Costs Incurred in Oil and Gas Property Acquisition, Exploration and Development Activities, years ended
December 31, 2005, 2004 and 2003
    
    
    F-17Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves, years
ended December 31, 2005, 2004 and 2003
    
    
    F-18Standardized Measure of Discounted Future Net Cash Flows and Changes Therein Relating to Proved Oil an Gas
Reserves, years ended December 31, 2005, 2004 and 2003
    
    
    F-19Reserve Quantity Information, years ended December 31, 2005, 2004 and 2003
    
    
    F-20Results of Operations from Oil and Gas Producing Activities, years ended December 31, 2005, 2004 and 2003
    
    
    F-21Notes to Supplementary Information
    
    
    F-22
 F-1




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##### Table of Contents



F-2




---



##### Table of Contents



2005
    
    
    2004ASSETS:Current assets:Cash and cash equivalents
    
    $
    11,119,000
    
    
    $
    6,476,000Restricted cash and cash equivalents
    
    
    1,797,000
    
    
    
    1,864,000Accounts receivable, net
    
    
    16,497,000
    
    
    
    8,694,000Due from related parties
    
    
    985,000
    
    
    
    Prepaid expenses
    
    
    7,517,000
    
    
    
    447,000Other current assets
    
    
    498,000
    
    
    
    433,000Deferred income taxes
    
    
    454,000
    
    
    
    409,000Total current assets
    
    
    33,867,000
    
    
    
    18,323,000Property and equipment, at cost :Proved oil and gas properties at cost
    
    
    125,248,000
    
    
    
    95,018,000Unproved oil and gas properties at cost
    
    
    6,166,000
    
    
    
    13,149,000Less, accumulated depletion and depreciation
    
    
    (65,234,000
    )
    
    
    (60,098,000
    )66,180,000
    
    
    
    48,069,000Field and office equipment
    
    
    11,427,000
    
    
    
    9,610,000Less, accumulated depreciation
    
    
    (7,461,000
    )
    
    
    (6,307,000
    )3,966,000
    
    
    
    3,303,000Total net property and equipment
    
    
    70,146,000
    
    
    
    51,372,000Other assets
    
    
    370,000
    
    
    
    231,000Total assets
    
    $
    109,383,000
    
    
    $
    69,926,000
 2005
    
    
    2004LIABILITIES and STOCKHOLDERS EQUITY:Current liabilities:Accounts payable
    
    $
    15,105,000
    
    
    $
    9,929,000Current portion of asset retirement and other long-term obligations
    
    
    378,000
    
    
    
    12,000Accrued liabilities:Payroll, Benefits, Interest and Other
    
    
    8,606,000
    
    
    
    3,228,000Due to related parties
    
    
    1,432,000
    
    
    
    600,000Total current liabilities
    
    
    25,521,000
    
    
    
    13,769,000Long-term bank debt
    
    
    28,050,000
    
    
    
    29,900,000Asset retirement obligations
    
    
    2,216,000
    
    
    
    390,000Deferred income taxes
    
    
    13,860,000
    
    
    
    7,630,000Total liabilities
    
    
    69,647,000
    
    
    
    51,689,000Stockholders equity:Preferred stock, $.10 par value, authorized 5,000,000 shares; none issued
    
    
    
    
    
    
    Common stock, $.10 par value, authorized 10,000,000 shares; issued 7,694,970
in 2005 & 2004
    
    
    769,000
    
    
    
    769,000Paid in capital
    
    
    11,024,000
    
    
    
    11,024,000Retained earnings
    
    
    48,608,000
    
    
    
    22,653,00060,401,000
    
    
    
    34,446,000Treasury stock, at cost 4,367,155 common shares in 2005 and 4,202,745 in 2004
    
    
    (20,665,000
    )
    
    
    (16,209,000
    )Total stockholders equity
    
    
    39,736,000
    
    
    
    18,237,000Total liabilities and stockholders equity
    
    $
    109,383,000
    
    
    $
    69,926,000
  F-3




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##### Table of Contents



2005
    
    
    2004
    
    
    2003Revenue:Oil and gas sales
    
    $
    53,988,000
    
    
    $
    43,967,000
    
    
    $
    29,855,000Field service revenue
    
    
    15,182,000
    
    
    
    11,965,000
    
    
    
    11,013,000Administrative overhead fees
    
    
    7,068,000
    
    
    
    6,317,000
    
    
    
    5,723,000Gains/(losses) on derivative instruments, net
    
    
    (415,000
    )
    
    
    
    
    
    
    (52,000
    )Interest and other income
    
    
    123,000
    
    
    
    179,000
    
    
    
    180,00075,946,000
    
    
    
    62,428,000
    
    
    
    46,719,000Costs and expenses:Lease operating expense
    
    
    18,573,000
    
    
    
    14,939,000
    
    
    
    12,783,000Field service expense
    
    
    12,791,000
    
    
    
    10,939,000
    
    
    
    9,970,000Depreciation, depletion and amortization
    
    
    11,274,000
    
    
    
    12,156,000
    
    
    
    7,525,000General and administrative expense
    
    
    10,493,000
    
    
    
    7,536,000
    
    
    
    6,995,000Exploration costs
    
    
    664,000
    
    
    
    5,499,000
    
    
    
    519,00053,795,000
    
    
    
    51,069,000
    
    
    
    37,792,000Income from operations
    
    
    22,151,000
    
    
    
    11,359,000
    
    
    
    8,927,000Other income and expense:Interest expense
    
    
    1,531,000
    
    
    
    1,136,000
    
    
    
    880,000Gain on sale and exchange of assets
    
    
    20,334,000
    
    
    
    75,000
    
    
    
    101,000Income before provision for income taxes
    
    
    40,954,000
    
    
    
    10,298,000
    
    
    
    8,148,000Provision for income taxes
    
    
    14,999,000
    
    
    
    3,023,000
    
    
    
    2,446,000Net income
    
    $
    25,955,000
    
    
    $
    7,275,000
    
    
    $
    5,702,000Basic net income per common share
    
    $
    7.64
    
    
    $
    2.04
    
    
    $
    1.56Diluted net income per common share
    
    $
    6.27
    
    
    $
    1.70
    
    
    $
    1.31
  F-4




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##### Table of Contents



AdditionalCommon Stock
    
    
    Paid In
    
    
    Retained
    
    
    TreasuryShares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    Stock
    
    
    TotalBalance at December 31, 2002
    
    
    7,694,970
    
    
    $
    769,000
    
    
    $
    11,024,000
    
    
    $
    9,676,000
    
    
    $
    (13,094,000
    )
    
    $
    8,375,000Purchased 63,804 shares of common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (641,000
    )
    
    
    (641,000
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,702,000
    
    
    
    
    
    
    
    5,702,000Balance at December 31, 2003
    
    
    7,694,970
    
    
    $
    769,000
    
    
    $
    11,024,000
    
    
    $
    15,378,000
    
    
    $
    (13,735,000
    )
    
    $
    13,436,000Purchased 136,977 shares of common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,474,000
    )
    
    
    (2,474,000
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,275,000
    
    
    
    
    
    
    
    7,275,000Balance at December 31, 2004
    
    
    7,694,970
    
    
    $
    769,000
    
    
    $
    11,024,000
    
    
    $
    22,653,000
    
    
    $
    (16,209,000
    )
    
    $
    18,237,000Purchased 164,410 shares of common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,456,000
    )
    
    
    (4,456,000
    )Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,955,000
    
    
    
    
    
    
    
    25,955,000Balance at December 31, 2005
    
    
    7,694,970
    
    
    $
    769,000
    
    
    $
    11,024,000
    
    
    $
    48,608,000
    
    
    $
    (20,665,000
    )
    
    $
    39,736,000
  F-5




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##### Table of Contents



2005
    
    
    2004
    
    
    2003Cash flows from operating activities:Net income
    
    $
    25,955,000
    
    
    $
    7,275,000
    
    
    $
    5,702,000Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation, depletion and amortization
    
    
    11,274,000
    
    
    
    12,156,000
    
    
    
    7,525,000Dry hole and abandonment costs
    
    
    262,000
    
    
    
    5,499,000
    
    
    
    519,000Gain on sale of properties
    
    
    (20,334,000
    )
    
    
    (75,000
    )
    
    
    (101,000
    )Provision for deferred income taxes
    
    
    6,230,000
    
    
    
    3,358,000
    
    
    
    1,580,000Changes in assets and liabilities:(Increase) decrease in accounts receivable
    
    
    (7,803,000
    )
    
    
    (1,586,000
    )
    
    
    (2,982,000
    )(Increase) decrease in due from related parties
    
    
    (985,000
    )
    
    
    209,000
    
    
    
    4,562,000(Increase) decrease in other assets
    
    
    (139,000
    )
    
    
    (137,000
    )
    
    
    3,000(Increase) decrease in prepaid expenses
    
    
    (7,181,000
    )
    
    
    (111,000
    )
    
    
    (97,000
    )Increase (decrease) in accounts payable
    
    
    5,510,000
    
    
    
    1,016,000
    
    
    
    1,699,000Increase (decrease) in accrued liabilities
    
    
    5,385,000
    
    
    
    (276,000
    )
    
    
    1,712,000Increase (decrease) in due to related parties
    
    
    431,000
    
    
    
    (333,000
    )
    
    
    (500,000
    )Net cash provided by operating activities
    
    
    18,605,000
    
    
    
    26,995,000
    
    
    
    19,622,000Cash flows from investing activitiesProceeds from sale of properties and equipment
    
    
    46,796,000
    
    
    
    75,000
    
    
    
    101,000Additions to property and equipment
    
    
    (54,440,000
    )
    
    
    (24,696,000
    )
    
    
    (19,835,000
    )Net cash used in investing activities
    
    
    (7,644,000
    )
    
    
    (24,621,000
    )
    
    
    (19,734,000
    )Cash flows from financing activitiesPurchase of stock for treasury
    
    
    (4,456,000
    )
    
    
    (2,474,000
    )
    
    
    (641,000
    )Repayment of long-term bank debt and other long-term obligations
    
    
    (67,432,000
    )
    
    
    (29,837,000
    )
    
    
    (43,679,000
    )Increase in long-term bank debt and other long-term obligations
    
    
    65,570,000
    
    
    
    32,522,000
    
    
    
    46,437,000Net cash provided by (used in) financing activities
    
    
    (6,318,000
    )
    
    
    211,000
    
    
    
    2,117,000Net increase (decrease) in cash
    
    
    4,643,000
    
    
    
    2,585,000
    
    
    
    2,005,000Cash and cash equivalents, beginning of year
    
    
    6,476,000
    
    
    
    3,891,000
    
    
    
    1,886,000Cash and cash equivalents, end of year
    
    $
    11,119,000
    
    
    $
    6,476,000
    
    
    $
    3,891,000Supplemental disclosures:Income taxes paid during the year
    
    $
    5,076,000
    
    
    $
    
    
    
    $
    83,500Net income tax refunds received during the year
    
    $
    
    
    
    $
    172,000
    
    
    $
    Interest paid during the year
    
    $
    1,531,000
    
    
    $
    953,000
    
    
    $
    880,000
  F-6




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##### Table of Contents



1.
    
    Description of Operations and Significant Accounting PoliciesNature of Operations:PrimeEnergy Corporation (PEC), a Delaware corporation, was organized in March 1973. The Company
is engaged in the development, acquisition and production of oil and natural gas properties. The
Company owns leasehold, mineral and royalty interests in producing and non-producing oil and gas
properties across the United States, including Colorado, Kansas, Louisiana, Mississippi, Montana,
Nebraska, New Mexico, North Dakota, Oklahoma, Texas, Utah, West Virginia and Wyoming and the Gulf
of Mexico. The Company operates 1,522 wells and owns non-operating interests in over 852
additional wells. Additionally, the Company provides well-servicing support operations,
site-preparation and construction services for oil and gas drilling and reworking operations,
both in connection with the Companys activities and providing contract services for third
parties. The Company is publicly traded on the NASDAQ under the symbol PNRG.PEC owns Eastern Oil Well Service Company (EOWSC), EOWS Midland Company (EMID) and Southwest
Oilfield Construction Company (SOCC), all of which perform oil and gas field servicing. PEC
also owns Prime Operating Company (POC), which serves as operator for most of the producing oil
and gas properties owned by the Company and affiliated entities. PEC also owns Prime Offshore
L.L.C. (Prime Offshore) formerly F-W Oil Exploration LLC, which owns and operates properties in
the Gulf of Mexico. PrimeEnergy Corporation and its subsidiaries are herein referred to as the
Company. PrimeEnergy Management Corporation (PEMC), a wholly-owned subsidiary, acts as the
managing general partner, providing administration, accounting and tax preparation services for
18 limited partnerships and 2 trusts (collectively, the
Partnerships).The markets for the Companys products are highly competitive, as oil and gas are commodity
products and prices depend upon numerous factors beyond the control of the Company, such as
economic, political and regulatory developments and competition from alternative energy sources.Consolidation and Presentation:The consolidated financial statements include the accounts of PrimeEnergy Corporation, its
subsidiaries and the Partnerships, using the proportionate consolidation method, whereby our
proportionate share of each entitys assets, liabilities, revenue and expenses are included in
the appropriate classifications in the consolidated financial statements. Inter-company balances
and transactions are eliminated in preparing the consolidated financial statements. Certain 2003
and 2004 amounts have been reclassified where appropriate to conform with the 2005 presentation.
These reclassifications had no effect on the Companys net income (loss) or stockholders equity.Use of Estimates:The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.Estimates of oil and gas reserves, as determined by independent petroleum engineers, are
continually subject to revision based on price, production history and other factors. Depletion
expense, which is computed based on the units of production method, could be significantly
impacted by changes in such estimates. Additionally, FAS 144 requires that if the expected future
cash flow from an asset is less than its carrying cost, that asset must be written down to its
fair market value. As the fair market value of an oil and gas property will usually be
significantly less than the total future net revenue expected from that property, small changes
in the estimated future net revenue from an asset could lead to the necessity of recording a
significant impairment of that asset.
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Property and Equipment
:The Company follows the successful efforts method of accounting for its oil and gas properties.
Under the successful efforts method, costs of acquiring undeveloped oil and gas leasehold
acreage, including lease bonuses, brokers fees and other related costs are capitalized.
Provisions for impairment of undeveloped oil and gas leases are based on periodic evaluations.
Annual lease rentals and exploration expenses, including geological and geophysical expenses and
exploratory dry hole costs, are charged against income as incurred. Costs of drilling and
equipping productive wells, including development dry holes and related production facilities,
are capitalized.All other property and equipment are carried at cost. Depreciation and depletion of oil and gas
production equipment and properties are determined under the unit-of-production method based on
estimated proved developed recoverable oil and gas reserves. Depreciation of all other equipment is
determined under the straight-line method using various rates based on useful lives. The cost of
assets and related accumulated depreciation is removed from the accounts when such assets are
disposed of, and any related gains or losses are reflected in current earnings.Impairment of Long-Lived Assets:The Company reviews Long-Lived Assets, including oil and gas properties, for impairment whenever events or changes in circumstances indicate that the carrying
amounts may not be recovered. If the carrying amounts are not expected to be recovered by undiscounted cash flows,
the assets are impaired and an impairment loss is recorded. The amount of impairment is based on the estimated fair
value of the assets determined by discounting anticipated future net cash flows. The amount of impairment of oil and gas
properties recorded for the period ended December 31, 2005, was $1,809,000 and is included in the results of operations
in depreciation, depletion and amortization.Asset Retirement Obligation:Effective January 1, 2003, the Company adopted SFAS No. 143, Accounting for Asset Retirement
Obligations. Our asset retirement obligation primarily represents the estimated present value of
the amount the Company will incur to plug, abandon and remediate our producing properties
(including removal of our offshore platforms) at the end of their productive lives, in accordance
with applicable state laws. The Company determined its asset retirement obligation by calculating
the present value of estimated cash flows related to the liability. The retirement obligation is
recorded as a liability at its estimated present value as of the assets inception, with an
offsetting increase to producing properties. Periodic accretion of discount of the estimated
liability is recorded as an expense in the income statement.Income Taxes:The Company records income taxes in accordance with Statement of Financial Accounting Standards
(SFAS) No. 109, Accounting for Income Taxes. SFAS No. 109 is an asset and liability approach
to accounting for income taxes, which requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been recognized in the
Companys financial statements or tax returns.Deferred tax liabilities or assets are established for temporary differences between financial
and tax reporting bases and are subsequently adjusted to reflect changes in the rates expected to
be in effect when the temporary differences reverse. A valuation allowance is established for any
deferred tax asset for which realization is not likely.General and Administrative Expenses:General and administrative expenses represent costs and expenses associated with the operation of
the Company. Certain of the Partnerships sponsored by the Company reimburse general and
administrative expenses incurred on their behalf.Income Per Common Share:Income per share of common stock has been computed based on the weighted average number of common shares outstanding during the respective periods in accordance with SFAS No. 128, Earnings per
Share.Statements of cash flows:For purposes of the consolidated statements of cash flows, the Company considers short-term,
highly liquid investments with original maturities of less than ninety days to be cash
equivalents.
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Concentration of Credit Risk:The Company maintains significant banking relationships with financial institutions in the State
of Texas. The Company limits its risk by periodically evaluating the relative credit standing of
these financial institutions. The Companys oil and gas production purchasers consist primarily
of independent marketers and major gas pipeline companies.Hedging:The Company periodically enters into oil and gas financial instruments to manage its exposure to
oil and gas price volatility. The oil and gas reference prices upon which the price hedging
instruments are based reflect various market indices that have a high degree of historical
correlation with actual prices received by the Company.The financial instruments are accounted for in accordance with Financial Accounting Standards
(SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, which
established new accounting and reporting requirements for derivative instruments and hedging
activities. SFAS No. 133, as amended by SFAS No. 138 and
149 requires that all derivative instruments
subject to the requirements of the statement be measured at fair market value and recognized as
assets or liabilities in the balance sheet. The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative and the resulting designation is
generally established at the inception of a derivative. For derivatives designated as cash flow
hedges and meeting the effectiveness guidelines of SFAS No. 133, changes in fair value, to the
extent effective, are recognized in other comprehensive income until the hedged item is
recognized in earnings. Hedge effectiveness is measured at least quarterly based on the relative
changes in fair value between the derivative contract and the hedged item over time. Any change
in fair value of a derivative resulting from ineffectiveness or an excluded component of the
gain/loss is recognized immediately in the statement of operations.Recently Issued Accounting Standards:In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment. SFAS 123R revises SFAS
123, Accounting for Stock-Based Compensation, and focuses on accounting for share-based
payments for services by employer to employee. The statement requires companies to expense the
fair value of employee stock options and other equity-based compensation at the grant date. The
statement does not require a certain type of valuation model and either a binomial or
Black-Scholes model may be used. The adoption of this standard did not have a material impact on
the Company.In February 2005, the FASB released for public comment proposed Staff Position FAS 19-a
Accounting for Suspended Well Costs. This proposed staff position would amend FASB Statement
No. 19 Financial Accounting and Reporting by Oil and Gas Producing Companies and provides
guidance about exploratory well costs to companies who use the successful efforts method of
accounting. The proposed position states that exploratory well costs should continue to be
capitalized if: 1) a sufficient quantity of reserves are discovered in the well to justify its
completion as a producing well and 2) sufficient progress is made in assessing the reserves and
the wells economic and operating feasibility. If the exploratory well costs do not meet both of
these criteria, these costs should be expensed, net of any salvage value. Additional disclosures
are required to provide information about managements evaluation of capitalized exploratory well
costs. In addition, the Staff Position requires the disclosure of: 1) net changes from period to
period of capitalized exploratory well costs for wells that are pending the determination of
proved reserves, 2) the amount of exploratory well costs that have been capitalized for a period
greater than one year after the completion of drilling and 3) an aging of exploratory well costs
suspended for greater than one year with the number of wells it related to. Further, the
disclosures should describe the activities undertaken to evaluate the reserves and the projects,
the information still required to classify the associated reserves as proved and the estimated
timing for completing the evaluation.2.
    
    Significant Acquisitions, Dispositions and Property ActivityIn August 2005, the Company completed a transaction involving its interests in certain offshore
Gulf of Mexico properties effective April 1, 2005 (the Partners transaction). Prime Offshore
L.L.C. (Prime Offshore) formerly, F-W Oil Exploration L.L.C., a subsidiary of the Company,
entered into a limited partnership agreement (the Partners Agreement), wherein Prime Offshore
is the General Partner of FWOE Partners L.P. (Partners) formed for the acquisition, development
and operation of oil and gas properties and pipelines, equipment, facilities and fixtures
appurtenant thereto, in off-shore Gulf of Mexico (the Properties). Prior to entering into the
Partners Agreement, Prime Offshore had distributed interests in the Properties to the
minority shareholders of Prime Offshore and the Company purchased all of the outstanding shares
of such minority shareholders for $250,000, resulting in the Companys 100% ownership of Prime
Offshore.
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Prime Offshore contributed all of its interest in the
Properties to Partners in exchange
for an initial 20% General Partner interest in Partners and a cash distribution of $43.2
million. Partners purchased the interests previously distributed to the former minority
shareholders for $27.7 million. The entire $70.9 million expended by Partners was funded by a
cash contribution by the Limited Partner. The cash distribution includes adjustments for
estimated net revenues from the effective date of April 1, 2005, estimated capital expenditures
and other typical closing adjustments.In July 2005, the Company completed the sale of certain leasehold and exploration rights in
prospects generated in the Companys onshore Texas 2-d Seismic Exploration Program in exchange
for a cash payment of $3.5 million.As more fully described in Note 7, the Company is committed to offer to repurchase the interests
of the partners and trust unit holders in certain of the Partnerships. The Company purchased
such interests in an amount totaling $1,217,416 in 2005, $2,038,305 in 2004 and $695,673 in
2003. The Companys proportionate share of assets, liabilities and results of operations related
to the interests in the Partnerships are included in the consolidated financial statements.3.
    
    Accounts ReceivableAccounts receivable at December 31, 2005 and 2004, consisted of the following:
 December 31,2005
    
    
    2004Joint interest billing
    
    $
    3,100,000
    
    
    $
    1,048,000Trade receivables
    
    
    1,922,000
    
    
    
    1,728,000Oil and gas sales
    
    
    9,926,000
    
    
    
    6,181,000Other
    
    
    2,154,000
    
    
    
    324,00017,102,000
    
    
    
    9,281,000Less: allowance for doubtful accounts
    
    
    (605,000
    )
    
    
    (587,000
    )Total
    
    $
    16,497,000
    
    
    $
    8,694,000
 4.
    
    Other Current AssetsOther current assets at December 31, 2005 and 2004, consisted of the following:
 December 31,2005
    
    
    2004Field service inventory
    
    $
    388,000
    
    
    $
    375,000Other
    
    
    110,000
    
    
    
    58,000$
    498,000
    
    
    $
    433,000
 5.
    
    Long-Term Bank Debt  DebtAs of December 2002, the Company entered into a credit agreement with a new primary lender. The
Company and the lender agreed to amend and restate in its entirety the credit agreement dated
April 26, 1995, between the Company and its predecessor lender. This agreement will continue to
provide for borrowings under a Master Note. Advances under the agreement, as amended, are limited
to the borrowing base as defined in the agreement. The borrowing base is re-determined by the
lender on a semi-annual basis. The Companys borrowing base as
of March 2005, was determined to be
$41,000,000. The credit agreement provides for interest on outstanding borrowings at the banks
base rate, as defined, payable monthly, or at rates 2% over the London Inter-Bank Offered Rate
(LIBO rate) payable at the end of the applicable interest period.As of December 2004, Prime Offshore entered into a stand-alone agreement with the same lender.
The total outstanding borrowings under the Companys amended loan agreement as of December 31,
2004, were $23,600,000 with an additional availability of $12,679,992. The total outstanding
borrowings under the Prime Offshore loan agreement as of
December 31, 2004, were $10,500,000 with
$2,500,000 of additional availability. The Companys proportionate share of amounts owed by Prime
Offshore were included in the consolidated financial statements as of December 2004. In August
2005, all amounts owed under the Prime Offshore agreement were repaid to the lender.The interest rates paid on outstanding borrowings subject to interest at the banks base rate as
of December 31, 2005 and 2004, were 7.75% and 5.75% respectively.
The average rates paid on outstanding borrowings for the years 2005
and 2004 were 5.35%
and 3.91% respectively. As of December 31, 2005 and 2004, the total outstanding consolidated
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borrowings were $28,050,000 and $29,900,000, respectively. All borrowings under the Companys
credit agreements are due March, 2007.The Companys oil and gas properties as well as certain receivables and equipment are pledged as
security under the loan agreement. The agreement requires the Company to maintain, as defined, a
minimum current ratio, tangible net worth, debt coverage ratio and interest coverage ratio, and
restrictions are placed on the payment of dividends and the amount of treasury stock the Company
may purchase.6.
    
    CommitmentsOperating Leases:The Company has several noncancelable operating leases, primarily for rental of office space,
that have a term of more than one year. The future minimum lease payment for the operating
leases are as follows.
 OperatingLeases2006
    
    
    486,0002007
    
    
    504,0002008
    
    
    451,0002009
    
    
    275,000Thereafter
    
    
    8,000Total minimum payments
    
    $
    1,724,000
 Asset Retirement Obligation:
  2005
    
    
    2004Asset retirement obligation  beginning of period
    
    $
    390,000
    
    
    $
    300,000Liabilities incurred
    
    
    1,456,000
    
    
    
    90,000Liabilities settled
    
    
    (116,000
    )
    
    
    (4,900
    )Accretion expense
    
    
    80,000
    
    
    
    13,500Revisions in estimated liabilities
    
    
    784,000
    
    
    
    (8,600
    )Asset retirement obligation  end of period
    
    $
    2,594,000
    
    
    $
    390,000
 The Companys liability is determined using significant assumptions, including current estimates
of plugging and abandonment costs, annual inflation of these costs, the productive life of wells
and our risk-adjusted interest rate. Changes in any of these assumptions can result in
significant revisions to the estimated asset retirement obligation. Revisions to the asset
retirement obligation are recorded with an offsetting change to producing properties, resulting
in prospective changes to depreciation, depletion and amortization expense and accretion of
discount. Because of the subjectivity of assumptions and the relatively long life of most of our
wells, the costs to ultimately retire our wells may vary significantly from previous estimates.7.
    
    Contingent LiabilitiesThe Company, as managing general partner of the affiliated Partnerships, is responsible for all
Partnership activities, including the drilling of development wells and the production and sale of oil and gas from
productive wells. The Company also provides the administration, accounting and tax preparation
work for the Partnerships, and is liable for all debts and liabilities of the affiliated
Partnerships, to the extent that the assets of a given limited Partnership are not sufficient to
satisfy its obligations. As of December 31, 2005, the affiliated Partnerships have established
cash reserves in excess of their debts and liabilities and the Company believes these reserves
will be sufficient to satisfy Partnership obligations.As of December 31, 2005, the Company has a commitment to purchase certain field equipment
requiring a payment in 2006 of $345,000.
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The Company is subject to environmental laws and regulations. Management believes that future
expenses, before recoveries from third parties, if any, will not have a material effect on the
Companys financial condition. This opinion is based on expenses incurred to date for remediation
and compliance with laws and regulations which have not been material to the Companys results of
operations.As a general partner, the Company is committed to offer to purchase the limited partners
interest in certain of its managed Partnerships at various annual intervals. Under the terms of a
partnership agreement, the Company is not obligated to purchase an amount greater than 10% of the
total partnership interest outstanding. In addition, the Company will be obligated to purchase
interests tendered by the limited partners only to the extent of one hundred fifty percent of the
revenues received by it from such partnership in the previous year. Purchase prices are based
upon annual reserve reports of independent petroleum engineering firms discounted by a risk
factor. Based upon historical production rates and prices, management estimates that if all such
offers were to be accepted, the maximum annual future purchase
commitment would be less than $500,000.The Company owns approximately a 27% interest in a limited partnership which owns a shopping
center in Alabama. The Company is a guarantor on a mortgage secured by the shopping center. The
Company believes the cash flow from the center is sufficient to service the mortgage. The market
value of the center is currently substantially higher than the balance owed on the mortgage. If
the partnership were unable to pay its obligations under the mortgage agreement, the maximum
amount the Company is committed to pay is $125,000.8.
    
    Stock Options and Other CompensationIn May 1989, non-statutory stock options were granted by the Company to four key executive
officers for the purchase of shares of common stock. At December 31, 2005 and 2004, options on
767,500 shares were outstanding and exercisable at prices ranging from $1.00 to $1.25.9.
    
    Income TaxesThe components of the provision for income taxes for the years ended December 31, 2005, 2004 and
2003 are as follows:
 2005
    
    
    2004
    
    
    2003Federal:Current
    
    $
    8,011,000
    
    
    $
    187,000
    
    
    $
    696,000Deferred
    
    
    5,429,000
    
    
    
    2,074,000
    
    
    
    1,460,000State:Current
    
    
    803,000
    
    
    
    266,000
    
    
    
    171,000Deferred
    
    
    756,000
    
    
    
    496,000
    
    
    
    119,000Total
    
    $
    14,999,000
    
    
    $
    3,023,000
    
    
    $
    2,446,000
 The components of net deferred tax assets and liabilities are as follows:
 December 31,
    
    
    December 31,2005
    
    
    2004Current assets:Compensation and benefits
    
    $
    226,000
    
    
    $
    196,000Allowance for doubtful accounts
    
    
    229,000
    
    
    
    213,000Total current deferred income tax assets
    
    $
    455,000
    
    
    $
    409,000Noncurrent assets:Alternative minimum tax credits
    
    $
    
    
    
    $
    902,000
    
    
    
    902,000Noncurrent liabilities:Basis differences relating to partnerships
    
    
    6,342,000
    
    
    
    468,000Depletion and depreciation
    
    
    7,518,000
    
    
    
    8,064,00013,860,000
    
    
    
    8,532,000Net noncurrent deferred income tax liabilities
    
    $
    13,860,000
    
    
    $
    7,630,000
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The total provision for income taxes for the years ended December 31, 2005, 2004 and 2003 varies
from the federal statutory tax rate as a result of the following:
 December 31,
    
    
    December 31,
    
    
    December 31,2005
    
    
    2004
    
    
    2003Expected tax expense
    
    $
    14,013,000
    
    
    $
    3,501,000
    
    
    $
    2,770,000State income tax, net of federal benefit
    
    
    1,029,000
    
    
    
    503,000
    
    
    
    195,000Percentage depletion
    
    
    (429,000
    )
    
    
    (811,000
    )
    
    
    (400,000
    )Other, Net
    
    
    386,000
    
    
    
    (170,000
    )
    
    
    (119,000
    )Tax expense
    
    $
    14,999,000
    
    
    $
    3,023,000
    
    
    $
    2,446,000
 The primary reason that the Companys current federal tax expense for both 2005 and 2004 is below
the statutory rate is that the Company is allowed to deduct currently, rather than capitalize,
intangible drilling costs as incurred. The current deduction of these costs, which are
capitalized for financial accounting purposes, is also the primary reason for the increases in
the Companys deferred tax liability in both 2005 and 2004.The Company is entitled to percentage depletion on certain of its wells, which is calculated
without reference to the basis of the property to the extent that such depletion exceeds a
propertys basis they represent a permanent difference which lowers the Companys effective rate.Income taxes payable of $4,275,000 and $537,000 in 2005 and 2004, respectively, are included on
the Balance Sheet in Accrued Liabilities.10.
    
    Segment Information and Major CustomersThe Company operates in one industry  oil and gas exploration, development, operation and
servicing. The Companys oil and gas activities are entirely in the United States.The Company sells its oil and gas production to a number of purchasers. Listed below are the
percent of the Companys total oil and gas sales made to each of the customers whose purchases
represented more than 10% of the Companys oil and gas sales in the year 2005.
  Oil Purchasers:Texon Distributing L.P.
    
    
    26.69
    %Plains All American Inc.
    
    
    31.97
    %TEPPCO Crude Oil, L.L.C.
    
    
    20.71
    %LPC Crude Oil, Inc.
    
    
    11.87
    %Gas Purchasers:Unimark LLC
    
    
    43.79
    %Enterprise Products Operation
    
    
    17.27
    %
 Although there are no long-term oil and gas purchasing agreements with these purchasers, the
Company believes that they will continue to purchase its oil and gas products and, if not, could
be replaced by other purchasers.11.
    
    Related Party TransactionsPEMC acts as the managing general partner, providing administration, accounting and tax
preparation services for the Partnerships. Certain directors have limited and general partnership
interests in several of these Partnerships. As the managing general partner in each of the
Partnerships, PEMC receives approximately 5% to 15% of the net revenues of each Partnership as a
carried interest in the Partnerships properties. As more fully described in Note 7, the Company
is committed to offer to repurchase the interests of the partners and trust unit holders in
certain of the Partnerships. The Company purchased such interests in an amount totaling
$1,217,746 in 2005 and $2,038,305 in 2004.The Partnership agreements allow PEMC to receive reimbursement for property acquisition and
development costs and general and administrative overhead, incurred on behalf of the
Partnerships.Due to related parties at December 31, 2005 and 2004, primarily represents receipts collected by
the Company as agent, for oil and gas sales net of expenses. The amount of such receipts due the
affiliated Partnerships was $1,432,000 and $600,000 at December 31, 2005 and 2004, respectively.
Receivables from related parties consist of reimbursable general and
administrative costs, lease operating expenses and reimbursements for property development, and
related costs. Due from related parties was $985,000 as of December 31, 2005.
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Treasury stock purchases in 2005 and 2004 included shares acquired from related parties.
Purchases from related parties include a total of 92,432 shares purchased for a total
consideration of $2,098,640 in 2005, and 35,000 shares purchased for a total consideration of
$606,100 in 2004.During 2005, the Company purchased certain equipment from a
managing member of FWOE Exploration L.L.C. for $1,200,000.12.
    
    Restricted Cash and Cash EquivalentsRestricted cash and cash equivalents includes $1,797,000 and $1,864,000 at December 31, 2005 and
2004, respectively, of cash primarily pertaining to unclaimed royalty payments. There were
corresponding accounts payable recorded at December 31, 2005 and 2004 for these liabilities.13.
    
    Salary Deferral PlanThe Company maintains a salary deferral plan (the Plan) in accordance with Internal Revenue
Code Section 401(k), as amended. The Plan provides for discretionary and matching contributions
which approximated $319,500 and $292,000 in 2005 and 2004, respectively.14.
    
    Earnings per ShareBasic earnings per share are computed by dividing earnings available to common stockholders by
the weighted average number of common shares outstanding during the period. Diluted earnings per
share reflect per share amounts that would have resulted if dilutive potential common stock had
been converted to common stock. The following reconciles amounts reported in the financial
statements:
 Year ended December 31, 2005Number of
    
    
    Per shareNet Income
    
    
    Shares
    
    
    AmountNet income per common share
    
    $
    25,955,000
    
    
    
    3,397,820
    
    
    $
    7.64Effect of dilutive securities:Options
    
    
    
    
    
    
    742,589Diluted net income per common share
    
    $
    25,955,000
    
    
    
    4,140,410
    
    
    $
    6.27
 Year ended December 31, 2004Number of
    
    
    Per shareNet Income
    
    
    Shares
    
    
    AmountNet income per common share
    
    $
    7,275,000
    
    
    
    3,569,751
    
    
    $
    2.04Effect of dilutive securities:Options
    
    
    
    
    
    
    722,283Diluted net income per common share
    
    $
    7,275,000
    
    
    
    4,292,034
    
    
    $
    1.70
 Year ended December 31, 2003Number of
    
    
    Per shareNet Income
    
    
    Shares
    
    
    AmountNet income per common share
    
    $
    5,702,000
    
    
    
    3,664,627
    
    
    $
    1.56Effect of dilutive securities:Options
    
    
    
    
    
    
    683,409Diluted net income per common share
    
    $
    5,702,000
    
    
    
    4,348,036
    
    
    $
    1.31
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15. Selected Quarterly Financial Information (Unaudited)
 Fourth
    
    Third
    
    Second
    
    First2005
    
    Quarter
    
    Quarter
    
    Quarter
    
    QuarterRevenue
    
    $
    22,967,000
    
    
    $
    19,293,000
    
    
    $
    17,595,000
    
    
    $
    16,091,000Operating income
    
    
    9,344,000
    
    
    
    4,426,000
    
    
    
    4,293,000
    
    
    
    4,088,000Net income
    
    
    6,827,000
    
    
    
    14,554,000
    
    
    
    2,315,000
    
    
    
    2,259,000Net income per common share
    
    $
    2.02
    
    
    $
    4.32
    
    
    $
    0.68
    
    
    $
    0.65Diluted net income per common share
    
    $
    1.65
    
    
    $
    3.54
    
    
    $
    0.56
    
    
    $
    0.54
 Fourth
    
    Third
    
    Second
    
    First2004
    
    Quarter
    
    Quarter
    
    Quarter
    
    QuarterRevenue
    
    $
    18,531,000
    
    
    $
    15,540,000
    
    
    $
    14,985,000
    
    
    $
    13,372,000Operating income
    
    
    3,911,000
    
    
    
    2,935,000
    
    
    
    2,239,000
    
    
    
    1,858,000Net income
    
    
    3,133,000
    
    
    
    1,756,000
    
    
    
    1,232,000
    
    
    
    1,154,000Net income per common share
    
    $
    0.89
    
    
    $
    0.50
    
    
    $
    0.34
    
    
    $
    0.32Diluted net income per common share
    
    $
    0.74
    
    
    $
    0.41
    
    
    $
    0.29
    
    
    $
    0.27
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PRIMEENERGY CORPORATION and SUBSIDIARIES
 
 SUPPLEMENTARY INFORMATION
  
    2005
    
    
    2004
    
    
    2003Developed oil and gas properties
    
    $
    125,248,000
    
    
    $
    95,018,000
    
    
    $
    91,012,000Undeveloped oil and gas properties
    
    
    6,166,000
    
    
    
    13,149,000
    
    
    
    3,091,000131,414,000
    
    
    
    108,167,000
    
    
    
    94,103,000Accumulated depreciation, depletion and valuation allowance
    
    
    65,234,000
    
    
    
    60,098,000
    
    
    
    53,196,000Net capitalized costs
    
    $
    66,180,000
    
    
    $
    48,069,000
    
    
    $
    40,907,000
 F-16




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COSTS INCURRED in OIL and GAS PROPERTY ACQUISITION,
EXPLORATION and DEVELOPMENT ACTIVITIES
 Years ended December 31, 2005, 2004 and 2003
 (Unaudited)
 2005
    
    
    2004
    
    
    2003Acquisition of Properties Developed
    
    $
    1,569,000
    
    
    $
    2,038,000
    
    
    $
    5,023,000Undeveloped
    
    $
    6,166,000
    
    
    $
    10,058,000
    
    
    $
    873,000Exploration Costs
    
    $
    664,000
    
    
    $
    5,499,000
    
    
    $
    519,000Development Costs
    
    $
    44,745,000
    
    
    $
    7,101,000
    
    
    $
    12,294,000
  F-17




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2005
    
    
    2004
    
    
    2003Future cash inflows
    
    $
    618,621,000
    
    
    $
    378,639,000
    
    
    $
    302,876,000Future production and development costs
    
    
    (256,672,000
    )
    
    
    (167,155,000
    )
    
    
    (138,929,000
    )Future income tax expenses
    
    
    (109,571,000
    )
    
    
    (62,819,000
    )
    
    
    (47,696,000
    )Future net cash flows
    
    
    252,378,000
    
    
    
    148,665,000
    
    
    
    116,251,00010% annual discount for estimated timing of cash flow
    
    
    (106,899,000
    )
    
    
    (54,254,000
    )
    
    
    (42,999,000
    )Standardized measure of discounted future net cash flows
    
    $
    145,479,000
    
    
    $
    94,411,000
    
    
    $
    73,252,000
  F-18




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##### Table of Contents



For Year Ended December 31,
    
    2005
    
    
    2004
    
    
    2003Sales of oil and gas produced, net of production costs
    
    $
    (35,415,000
    )
    
    $
    (29,028,000
    )
    
    $
    (17,072,000
    )Net changes in prices and production costs
    
    
    47,729,000
    
    
    
    22,178,000
    
    
    
    24,732,000Extensions, discoveries and improved recovery
    
    
    64,175,000
    
    
    
    18,792,000
    
    
    
    14,133,000Revisions of previous quantity estimates
    
    
    32,060,000
    
    
    
    9,904,000
    
    
    
    2,491,000Reserves purchased, net of development costs
    
    
    927,000
    
    
    
    2,238,000
    
    
    
    9,667,000Net change in development costs
    
    
    7,914,000
    
    
    
    (14,000
    )
    
    
    8,217,000Reserves sold
    
    
    (64,246,000
    )
    
    
    
    
    
    
    Accretion of discount
    
    
    13,391,000
    
    
    
    6,459,000
    
    
    
    4,278,000Net change in income taxes
    
    
    (23,567,000
    )
    
    
    (9,656,000
    )
    
    
    (15,705,000
    )Changes in production rates (timing) and other
    
    
    8,100,000
    
    
    
    286,000
    
    
    
    (265,000
    )Net change
    
    
    51,068,000
    
    
    
    21,159,000
    
    
    
    30,476,000Standardized measure of discounted future net cash flow:Beginning of year
    
    
    94,411,000
    
    
    
    73,252,000
    
    
    
    42,776,000End of year
    
    $
    145,479,000
    
    
    $
    94,411,000
    
    
    $
    73,252,000
   F-19




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##### Table of Contents



2005
    
    
    2004
    
    
    2003Oil
    
    Gas
    
    
    Oil
    
    
    Gas
    
    
    Oil
    
    
    Gas(bbls.)
    
    (Mcf)
    
    
    (bbls.)
    
    
    (Mcf)
    
    
    (bbls.)
    
    
    (Mcf)Proved developed and undeveloped reserves:Beginning of year
    
    2,932,000
    
    44,985,000
    
    
    
    2,905,000
    
    
    
    39,005,000
    
    
    
    2,319,000
    
    
    
    29,917,000Extensions, discoveries and improved recovery
    
    807,000
    
    11,087,000
    
    
    
    42,000
    
    
    
    7,268,000
    
    
    
    541,000
    
    
    
    4,245,000Revisions of previous estimates
    
    373,000
    
    5,929,000
    
    
    
    268,000
    
    
    
    2,806,000
    
    
    
    171,000
    
    
    
    263,000Purchases
    
    25,000
    
    517,000
    
    
    
    88,000
    
    
    
    929,000
    
    
    
    243,000
    
    
    
    8,571,000Reserves sold
    
    (89,000
    )
    (12,726,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Production
    
    (361,000
    
    (4,758,000
    )
    
    
    (371,000
    )
    
    
    (5,138,000
    )
    
    
    (370,000
    )
    
    
    (3,991,000
    )End of year
    
    3,687,000
    
    44,944,000
    
    
    
    2,932,000
    
    
    
    44,870,000
    
    
    
    2,905,000
    
    
    
    39,005,000Proved developed reserves
    
    3,504,000
    
    43,976,000
    
    
    
    2,926,000
    
    
    
    37,728,000
    
    
    
    2,865,000
    
    
    
    34,045,000
  F-20




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##### Table of Contents



2005
    
    
    2004
    
    
    2003Revenue:Oil and gas sales
    
    $
    53,988,000
    
    
    $
    43,967,000
    
    
    $
    29,855,000Costs and expenses:Lease operating expense
    
    
    18,573,000
    
    
    
    14,939,000
    
    
    
    12,783,000Exploration costs
    
    
    664,000
    
    
    
    5,499,000
    
    
    
    519,000Depreciation and depletion
    
    
    10,125,000
    
    
    
    11,021,000
    
    
    
    6,283,000Income tax expense
    
    
    9,604,000
    
    
    
    3,023,000
    
    
    
    2,446,00038,966,000
    
    
    
    34,482,000
    
    
    
    22,031,000Results of operations from producing activities
    
    $
    15,022,000
    
    
    $
    9,485,000
    
    
    $
    7,824,000(excluding corporate overhead and interest costs)
  F-21




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##### Table of Contents



1.
    
    Presentation of Reserve Disclosure InformationReserve disclosure information is presented in accordance with the provisions of Statement of
Financial Accounting Standards No. 69 (SFAS 69), Disclosures About Oil and Gas Producing
Activities.2.
    
    Determination of Proved ReservesThe estimates of the Companys proved reserves were determined by an independent petroleum
engineer in accordance with the provisions of SFAS 69. The estimates of proved reserves are
inherently imprecise and are continually subject to revision based on production history, results
of additional exploration and development and other factors. Estimated future net revenues were
computed by reserves, less estimated future development and production costs based on current
costs.3.
    
    Results of Operations from Oil and Gas Producing ActivitiesThe results of operations from oil and gas producing activities were prepared in accordance with
the provisions of SFAS 69. General and administrative expenses, interest costs and other
unrelated costs are not deducted in computing results of operations from oil and gas activities.4.
    
    Standardized Measure of Discounted Future Net Cash Flows and Changes Therein Relating to
Proved Oil and Gas ReservesThe standardized measure of discounted future net cash flows relating to proved oil and gas
reserves and the changes of standardized measure of discounted future net cash flows relating to
proved oil and gas reserves were prepared in accordance with the provisions of SFAS 69.Future cash inflows are computed as described in Note 2 by applying current prices to year-end
quantities of proved reserves.Future production and development costs are computed estimating the expenditures to be incurred
in developing and producing the oil and gas reserves at year-end, based on year-end costs and
assuming continuation of existing economic conditions.Future income tax expenses are calculated by applying the year-end U.S. tax rate to future
pre-tax cash inflows relating to proved oil and gas reserves, less the tax basis of properties
involved. Future income tax expenses give effect to permanent differences and tax credits and
allowances relating to the proved oil and gas reserves.Future net cash flows are discounted at a rate of 10% annually (pursuant to SFAS 69) to derive
the standardized measure of discounted future net cash flows. This calculation does not
necessarily represent an estimate of fair market value or the present value of such cash flows
since future prices and costs can vary substantially from year-end and the use of a 10% discount
figure is arbitrary.
 F-2