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SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-K/A
 (Amendment No. 1)
 þ
    
    Annual Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
 For the fiscal year ended December 31, 2004
 o
    
    Transition Report Pursuant to Section 13 of 15(d) of the
Securities Exchange Act of 1934
 For the transition period from  to
 Commission File Number: 0  13305
 PARALLEL PETROLEUM CORPORATION
  Delaware
    
    75-1971716(State or Other Jurisdiction of
Incorporation or Organization)
    
    (I.R.S. Employer
Identification No.)
 1004 N. Big Spring, Suite 400
Midland, Texas
    
    79701(Address of Principal Executive Offices
    
    (Zip Code)
    
  þ o
 þ
  þ o




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Item No.
    
    PagePART IItem 1. Business
    
    
    1Item 2. Properties
    
    
    33Item 3. Legal Proceedings
    
    
    36Item 4. Submission of Matters to a Vote of Security Holders
    
    
    36PART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
    
    
    37Item 6. Selected Financial Data
    
    
    39Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    41Item 7A. Quantitative and Qualitative Disclosures
About Market Risk
    
    
    63Item 8. Financial Statements and Supplementary Data
    
    
    65Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure
    
    
    66Item 9A. Controls and Procedures
    
    
    67Item 9B. Other Information
    
    
    69PART IIIItem 10. Directors and Executive Officers of the Registrant
    
    
    70Item 11. Executive Compensation
    
    
    75Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters
    
    
    88Item 13. Certain Relationships and Related Transactions
    
    
    91Item 14. Principal Accountant Fees and Services
    
    
    92PART IVItem 15. Exhibits and Financial Statement Schedules
    
    
    94Consent of KPMG LLPConsent of BDO Seidman, LLPConsent of Cawley Gillespie & Associates, Inc.Certification of Principal Executive Officer Pursuant to Section 302Certification of Principal Financial Officer Pursuant to Section 302Certification of Chief Executive Officer Pursuant to Section 906Certification of Chief Financial Officer Pursuant to Section 906




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Cautionary Statement Regarding Forward Looking Statements
  
    
    our future financial and operating performance and results;
    
    our business strategy;
    
    market prices;
    
    sources of funds necessary to conduct operations and complete acquisitions;
    
    development costs;
    
    number and location of planned wells;
    
    our future commodity price risk management activities; and
    
    our plans and forecasts.
   
    
    fluctuations in prices of oil and gas;
    
    demand for oil and natural gas;
    
    losses due to potential or future litigation;
    
    future capital requirements and availability of financing;
    
    geological concentration of our reserves;
    
    risks associated with drilling and operating wells;
    
    competition;
    
    general economic conditions;




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
    
    governmental regulations;
    
    receipt of amounts owed to us by purchasers of our production and counterparties to
our hedging contracts;
    
    hedging decisions, including whether or not to hedge;
    
    events similar to 911;
    
    actions of third party co-owners of interests in properties in which we also own an
interest; and
    
    fluctuations in interest rates and availability of capital.




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PART I
 
 ITEM 1. BUSINESS
 About Our Company
  
    
    Permian Basin of west Texas and New Mexico;
    
    Liberty County in east Texas; and
    
    the onshore Gulf Coast area of south Texas.
    
    
    Bbls    barrels of oil or other liquid hydrocarbons;
    
    Bcf    billion cubic feet of natural gas;
    
    BOE    equivalent barrel of oil or 6 Mcf of natural gas for one barrel of oil;
    
    MBbl    thousand barrels of oil or other liquid hydrocarbons;
    
    MBOE    thousand barrels of oil equivalent;
    
    MMBbl    million barrels of oil or other liquid hydrocarbons;
 (1)




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
    
    MMBOE    million barrels of oil equivalent;
    
    Mcf    thousand cubic feet of natural gas; and
    
    MMcf    million cubic feet of natural gas.
   Available Information
 http://www.sec.gov)
 http://www.plll.com
   Recent Developments
   (2)




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Proved Reserves as of December 31, 2004
   About Our Strategy and Business
    
    
    focuses on projects having less geological risk;
    
    emphasizes exploitation and enhancement activities;
 (3)




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
    
    focuses on acquiring producing properties; and
    
    expands the scope of our operations by diversifying our
exploratory and development
efforts, both in and outside of our current areas of operation.
  
    
    operational enhancements, such as surface facility reconfiguration, and the
installation of new or additional compression equipment;
    
    workovers;
    
    well recompletions;
    
    behind-pipe recompletions;
    
    refracing (restimulating a producing formation within an existing wellbore
to enhance
production and add reserves);
    
    installation of injection wells and related facilities;
    
    development well drilling (infill drilling);
    
    cost reduction programs; and
    
    secondary recovery operations, including waterfloods.
    (4)




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Use Advanced Technologies
 
    
    reduce drilling risks;
    
    lower finding costs;
    
    provide for more efficient production of oil and natural gas from our
properties; and
    
    increase the probability of locating reserves that might not otherwise
be discovered.
   (5)




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Serve as Geophysical Operator
  Conduct Exploratory Activities
 
    
    having known geological and reservoir characteristics;
    
    being in close proximity to existing wells so data from the existing wells can
be correlated with seismic data on or near the prospect being evaluated; and
    
    having a potentially meaningful impact on our reserves.
  Drilling Activities in 2004
  Number of WellsNumber of
    
    Drilling or
    
    GrossDepth Range
    
    Gross
    
    Waiting on Completion
    
    Productive
    
    GrossArea
    
    (feet)
    
    Wells Drilled
    
    at December 31, 2004
    
    Wells
    
    Dry WellsNorth TexasBarnett Shale
    
    
    7,000   8,000
    
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    Permian BasinAbo Gas
    
    
    4,300    4,500
    
    
    
    5
    
    
    
    
    
    
    
    5
    
    
    
    Diamond M (Shallow)
    
    
    2,400    3,500
    
    
    
    30
    
    
    
    
    
    
    
    30
    
    
    
    Fullerton
    
    
    4,000    5,000
    
    
    
    8
    
    
    
    
    
    
    
    8
    
    
    
    East TexasCotton Valley
    
    
    16,000  18,000
    
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    Onshore Gulf Coast of TexasYegua
    
    
    6,300  13,000
    
    
    
    4
    
    
    
    
    
    
    
    4
    
    
    
    Shallow Frio
    
    
    3,000    6,300
    
    
    
    2
    
    
    
    
    
    
    
    1
    
    
    
    1Deep Frio
    
    
    8,000  11,000
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1Cook Mountain
    
    
    11,000  15,000
    
    
    
    8
    
    
    
    
    
    
    
    6
    
    
    
    2Texas Panhandle
    
    
    6,000    6,000
    
    
    
    11
    
    
    
    2
    
    
    
    9
    
    
    
    71
    
    
    
    4
    
    
    
    63
    
    
    
    4
 (6)




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
    
    producing property acquisitions;
    
    recompleting existing wellbores;
    
    restimulating producing reservoirs;
    
    identifying potential infill drilling locations;
    
    making mechanical improvements to surface facilities and downhole equipment; and
    
    reviewing the feasibility of applying new drilling and production technologies that
could either improve recovery potential or result in the discovery of a new reservoir.
  
    
    shutting in temporarily uneconomic properties;
    
    plugging wells we believe to be permanently impaired or depleted;
    
    terminating oil and gas leases that are uneconomic under existing operating
conditions; and/or
 (7)




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
    
    selling properties to third parties.
 Drilling and Acquisition Costs
  Year Ended December 31,2004
    
    2003
    
    2002
    
    2001
    
    2000(in thousands)Transfers from (to) undeveloped
leases held for sale
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    2,128
    (1)Proved property acquisition costs
    
    
    39,763
    
    
    
    2,209
    
    
    
    48,044
    
    
    
    27
    
    
    
    23Unproved property acquisition costs
    
    
    7,400
    
    
    
    3,831
    
    
    
    2,295
    
    
    
    3,420
    
    
    
    3,372Exploration costs
    
    
    6,794
    
    
    
    3,240
    
    
    
    1,291
    
    
    
    6,820
    
    
    
    2,163Development costs
    
    
    13,954
    
    
    
    5,650
    
    
    
    9,308
    
    
    
    1,203
    
    
    
    1,087$
    67,911
    
    
    $
    14,930
    
    
    $
    60,938
    
    
    $
    11,470
    
    
    $
    8,773
 
 (1)
    
    Reflects costs associated with assets being held for sale in 1999
and transferred back to oil and gas property in 2000. Actual
capital expenditures during 2000, excluding transfers, were
approximately $6.6 million. Capital Investments for 2005
   Permian Basin of West Texas
  Fullerton San Andres Field, Andrews County, Texas 
  (8)




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Carm-Ann San Andres Field / N. Means Queen Unit, Andrews & Gaines Counties, Texas 
   Diamond M Shallow Leases, Scurry County, Texas 
   Diamond M Canyon Reef Unit, Scurry County, Texas 
   (9)




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New Mexico Abo Gas Project
   
    Other Permian Basin Projects
  Onshore Gulf Coast of South Texas
 Yegua/Frio Gas Project, Jackson and Wharton Counties, Texas 
 (10)




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Cook Mountain Gas Project, Liberty County, Texas 
  North Texas
 Barnett Shale Gas Project, Tarrant County, Texas
     .
 Other Projects
 Utah/Colorado CBM (Coal Bed Methane) Gas/Conventional Oil and Gas Projects
 (11)




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East Texas Cotton Valley Reef Gas Project
    Oil and Natural Gas Prices
   Average Price Received for theYear Ended December 31,2004
    
    2003
    
    2002Oil (Bbl)
    
    $
    39.05
    
    
    $
    29.11
    
    
    $
    24.59Natural gas (Mcf)
    
    $
    5.85
    
    
    $
    5.40
    
    
    $
    3.33
 (12)




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Employees
   Wells Drilled
  Exploratory Wells (1)
    
    Development W ells(2)Year Ended
    
    Productive
    
    Dry
    
    Productive
    
    DryDecember 31,
    
    Gross
    
    Net
    
    Gross
    
    Net
    
    Gross
    
    Net
    
    Gross
    
    Net2004
    
    
    17.0
    
    
    
    1.68
    
    
    
    4.0
    
    
    
    0.95
    
    
    
    50.0
    
    
    
    31.8
    
    
    
    
    
    
    
    2003
    
    
    15.0
    
    
    
    5.05
    
    
    
    8.0
    
    
    
    2.09
    
    
    
    3.0
    
    
    
    2.6
    
    
    
    1.0
    
    
    
    0.252002
    
    
    12.0
    
    
    
    3.10
    
    
    
    3.0
    
    
    
    0.70
    
    
    
    4.0
    
    
    
    2.3
    
    
    
    
    
    
    
    
 
 (1)
    
    An exploratory well is a well drilled to find and produce oil or natural gas in an unproved area, to
find a new reservoir in a field previously found to be productive of oil or natural gas in another
reservoir, or to extend a known reservoir.(2)
    
    A development well is a well drilled within the proved area of an oil or natural gas reservoir to the
depth of a stratigraphic horizon known to be productive.  (13)




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Volumes, Prices and Lifting Costs
  Year Ended December 31,2004
    
    2003
    
    2002(in thousands except per unit data)Production, Prices and Lifting Costs:Oil (Bbls)
    
    
    729
    
    
    
    629
    
    
    
    131Natural gas (Mcf)
    
    
    2,690
    
    
    
    3,356
    
    
    
    2,670BOE
    

    
    1,177
    
    
    
    1,188
    
    
    
    576Oil price (per Bbl) (1)
    
    $
    39.05
    
    
    $
    29.11
    
    
    $
    24.59Natural gas price (per Mcf)(1)
    
    $
    5.85
    
    
    $
    5.40
    
    
    $
    3.33BOE price (1)
    
    $
    37.55
    
    
    $
    30.66
    
    
    $
    21.03Average Production (lifting) Cost per BOE(2)
    

    $
    8.06
    
    
    $
    7.07
    
    
    $
    5.00
 
 (1)
    
    Average price received at the wellhead for our oil and natural gas.(2)
    
    The increase in 2004 and 2003 is attributable to increased lifting
costs associated with our waterflood projects.  2004
    
    2003
    
    2002(in thousands)Oil revenue
    
    $
    28,455
    
    
    $
    18,300
    
    
    $
    3,217Oil hedge
    
    
    (7,458
    )
    
    
    (1,659
    )
    
    
    Gas revenue
    
    
    15,735
    
    
    
    18,121
    
    
    
    8,889Gas hedge
    
    
    (895
    )
    
    
    (907
    )
    
    
    $
    35,837
    
    
    $
    33,855
    
    
    $
    12,106
  Markets and Customers
  (14)




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2004
    
    2003
    
    2002Allegro Investments, Inc.
    
    
    22
    %
    
    
    30
    %
    
    
    31
    %Pure Resources, Inc.
    
    
    
    
    
    
    
    
    
    
    16
    %Sue Ann Production
    
    
    
    
    
    
    
    
    
    
    11
    %Texland Petroleum, Inc.
    
    
    43
    %
    
    
    33
    %
    
    
    
     Office Facilities
   Competition
  (15)




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
    
    adequate capital resources for projects in our primary areas of operations;
    
    the technological capabilities to conduct a thorough evaluation of a particular
project; and
    
    a small staff that can respond quickly to exploration and acquisition opportunities.
  
    
    leasehold prospects under which oil and natural gas reserves may be discovered;
    
    drilling rigs and related equipment to explore for such reserves; and
    
    knowledgeable and experienced personnel to conduct all phases of oil and
natural gas operations.
 Oil and Gas Regulations
  
    
    price controls;
    
    taxes; and
    
    environmental and other laws relating to the oil and gas industry.
   (16)




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
    
    the unitization or pooling of oil and gas properties;
    
    the establishment of maximum rates of production from oil and gas
wells; and
    
    the regulation of spacing, plugging and abandonment of wells.
    (17)




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Environmental Regulations
  
    
    require prior governmental authorization for certain activities;
    
    limit or prohibit activities because of protected areas or species;
    
    impose substantial liabilities for pollution related to our operations
or properties; and
    
    provide significant penalties for noncompliance.
  
    
    containment or cleanup;
    
    personal injury;
    
    property damage; and
    
    penalties assessed or other claims sought for natural resource damages.
  
    
    Water. The Oil Pollution Act, or OPA, was enacted in 1990 and amends provisions
of the Federal Water Pollution Control Act of 1972 and other statutes as they
pertain to prevention of and response to major oil spills. The OPA subjects
owners of facilities to strict, joint and potentially unlimited liability for
removal costs and certain other consequences of an oil spill, where such spill
is into navigable waters, or along shorelines. In the event of an oil spill
into such waters, substantial liabilities
 (18)




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could be imposed upon Parallel. States in which Parallel operates have
also enacted similar laws. Regulations are currently being developed
under the OPA and similar state laws that may also impose additional
regulatory burdens on Parallel.The FWPCA imposes restrictions and strict controls regarding the
discharge of produced waters, other oil and gas wastes, any form of
pollutant, and, in some instances, storm water runoff, into waters of
the United States. The FWPCA provides for civil, criminal and
administrative penalties for any unauthorized discharges and, along with
the OPA, imposes substantial potential liability for the costs of
removal, remediation or damages resulting from an unauthorized discharge
and, along with the OPA, imposes substantial potential liability for the
costs of removal, remediation or damages resulting from an unauthorized
discharge. State laws for the control of
water pollution also provide civil, criminal and administrative
penalties and liabilities in the case of an unauthorized discharge into
state waters. The cost of compliance
with the OPA and the FWPCA have not historically been material to our
operations, but there can be no assurance that changes in federal, state
or local water pollution control programs will not materially adversely
affect us in the future. Although no assurances can be given, we believe
that compliance with existing permits and compliance with foreseeable
new permit requirements will not have a material
adverse effect on our financial condition or results of operations.
    
    Solid Waste. Parallel generates non-hazardous solid wastes that fall
under the requirements of the Federal Resource Conservation and Recovery
Act and
comparable state statutes. The EPA and the states in which we operate are
considering the adoption of stricter disposal standards for the type of
non-hazardous waste we generate. The Resource Conservation and Recovery
Act also govern the generation, management, and disposal of hazardous
wastes. At present, we are not required to comply with a substantial
portion of the Resource Conservation and Recovery Act requirements
because our operations generate minimal quantities of hazardous wastes.
However, it is anticipated that additional wastes, which could include
wastes currently generated during operations, could in the future be
designated as hazardous wastes. Hazardous wastes are subject to more
rigorous and costly disposal and management requirements than are
non-hazardous wastes. Such changes in the regulations may result in
Parallel incurring additional capital expenditures or operating
expenses.
    
    Superfund. The Comprehensive Environmental Response, Compensation, and
Liability Act, sometimes called CERCLA or Superfund, imposes liability,
without regard to fault or the legality of the original act, on certain
classes of persons in connection with the release of a hazardous
substance into the environment. These persons include the current owner
or operator of any site where a release historically occurred and
companies that disposed or arranged for the disposal of the hazardous
substances found at the site. CERCLA also authorizes the EPA and, in
some
instances, third parties to act in response to threats to the public
health or the environment and to seek to recover from the responsible
classes of persons the costs they incur. In the course of our ordinary
operations, we may have managed
substances that may fall within CERCLAs definition of a hazardous
substance. We may be jointly and severally liable under CERCLA for all
or part of the costs required
 (19)




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cleaning up sites where we disposed of or arranged for the disposal of these
substances. This potential liability extends to properties that we owned or
operated, as well as to properties owned and operated by others at which
disposal of Parallels hazardous substances occurred.
  Risks Related to Our Business
 The volatility of the oil and natural gas industry may have an adverse impact on our operations.
  
    
    the level of oil and natural gas prices, expectations about future oil
and natural gas prices and the ability of international cartels to set
and maintain production levels and prices;
    
    the cost of exploring for, producing and transporting oil and natural gas;
    
    the level and price of foreign oil and natural gas transportation;
    
    available pipeline and other oil and natural gas transportation capacity;
    
    weather conditions;
    
    international political, military, regulatory and economic conditions;
    
    the level of consumer demand;
    
    the price and the availability of alternative fuels;
    
    the effect of worldwide energy conservation measures; and
 (20)




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
    
    the ability of oil and natural gas companies to raise capital.
  
    
    impair our financial condition, liquidity, ability to finance planned
capital expenditures and results of operations;
    
    reduce the amount of oil and natural gas that we can produce economically;
    
    cause us to delay or postpone some of our capital projects;
    
    reduce our revenues, operating income and cash flow; and
    
    reduce the carrying value of our oil and natural gas properties.
  We must replace oil and natural gas reserves that we produce. Failure to replace reserves may
negatively affect our business.
  We are subject to uncertainties in reserve estimates and future net cash flows.
  (21)




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
    
    actual prices we receive for oil and natural gas;
    
    the amount and timing of actual production;
    
    supply and demand of oil and natural gas;
    
    limits of increases in consumption by natural gas purchasers; and
    
    changes in governmental regulations or taxation.
  Competition in the oil and natural gas industry is intense, and many of our competitors have
greater financial, technological and other resources than we do.
  
    
    seeking to acquire desirable producing properties or new leases for
future exploration;
    
    marketing our oil and natural gas production;
    
    integrating new technologies; and
    
    seeking to acquire the equipment and expertise necessary to develop
and operate our properties.
  (22)




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We do not control all of our operations and development projects.
    
    
    timing and amount of capital expenditures;
    
    expertise and financial resources;
    
    inclusion of other participants in drilling wells; and
    
    use of technology.
  Our business involves many operating risks, which may result in substantial losses, and insurance
may be unavailable or inadequate to protect us against these risks.
  
    
    fires;
    
    natural disasters;
    
    explosions;
 (23)




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
    
    pressure forcing oil or natural gas out of the
wellbore at a dangerous velocity coupled with the
potential for fire or explosion;
    
    weather;
    
    failure of oilfield drilling and service tools;
    
    changes in underground pressure in a formation
that causes the surface to collapse or crater;
    
    pipeline ruptures or cement failures;
    
    environmental hazards such as natural gas
leaks, oil spills and discharges of toxic gases;
and
    
    availability of needed equipment at acceptable
prices, including steel tubular products.
  
    
    injury or loss of life;
    
    damage to and destruction of property, natural resources and equipment;
    
    pollution and other environmental damage;
    
    regulatory investigations and penalties;
    
    suspension of our operations; and
    
    repair and remediation costs.
  The oil and natural gas industry is capital intensive.
   (24)




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
    
    our proved reserves;
    
    the level of oil and natural gas we are able to produce from existing
wells;
    
    the prices at which oil and natural gas are sold; and
    
    our ability to acquire, locate and produce new reserves.
   There are risks in acquiring producing properties, including difficulties in integrating acquired
properties into our business, additional liabilities and expenses associated with acquired
properties, diversion of management attention, increasing the scope, geographic
diversity and complexity of our operations and incurrence of additional debt.
    (25)




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The marketability of our natural gas production depends on facilities that we typically do not own
or control.
  We are subject to many restrictions under our revolving credit facility.
   If we default under our revolving credit facility, the lenders could foreclose on, and acquire
control of, substantially all of our assets.
  (26)




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Our producing properties are geographically concentrated.
  Hedging activities create a risk of financial loss.
  
    
    production is less than expected;
    
    there is a widening of price differentials between delivery points for our
production and the delivery point assumed in the arrangement which might result
in hedge ineffectiveness;
    
    the counterparties to our future contracts fail to perform under the contract; or
    
    a sudden, unexpected event materially impacts oil or natural gas prices.
  (27)




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We are subject to complex federal, state and local laws and regulations that could adversely affect
our business.
  
    
    discharge permits for drilling operations;
    
    drilling bonds;
    
    spacing of wells;
    
    unitization and pooling of properties;
    
    environmental protection;
    
    reports concerning operations; and
    
    taxation.
  
    
    personal injuries;
    
    property damage;
    
    oil spills;
    
    discharge of hazardous materials;
    
    reclamation costs;
    
    remediation and clean-up costs; and
    
    other environmental damages.
  (28)




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Declining oil and natural gas prices may cause us to record ceiling test write-downs .
    Terrorist activities may adversely affect our business.
  We are highly dependent upon key personnel.
    (29)




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Part of our business is seasonal in nature.
  Our Oil and Natural gas Operations Are Subject to Many Inherent Risks
   
    
    encountering unusual or unexpected formations and pressures;
    
    explosions, blowouts and fires;
    
    pipe and tubular failures and casing collapses;
    
    environmental pollution; and
    
    personal injuries.
    (30)




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##### Table of Contents



Restrictive debt covenants could limit our growth and our ability to finance our operations, fund
our capital needs, respond to changing conditions and engage in other business activities that may
be in our best interests.
  
    
    dispose of assets;
    
    incur additional indebtedness;
    
    restrictions on all retained earnings and net income for payment of
dividends on our common stock;
    
    create liens on our assets;
    
    enter into specified investments or acquisitions;
    
    repurchase, redeem or retire our capital stock or other securities;
    
    merge or consolidate, or transfer all or substantially all of our
assets and the assets of our subsidiaries;
    
    engage in specified transactions with subsidiaries and affiliates; or
    
    engage in other specified corporate activities.
 
 We do not pay dividends on our common stock.
  (31)




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##### Table of Contents



Changes in control may be discouraged.
    
    
    restrictions on dividends on common stock and other series of
preferred stock if dividends on any new series of preferred stock have
not been paid;
    
    dilution of the voting power of common stock and other series of
preferred stock to the extent that a new series of preferred stock has
voting rights, or to the extent that any new series of preferred stock
is convertible into common stock;
    
    dilution of the equity interest of common stock and other series of
preferred stock; and
    
    limitation on the right of holders of common stock and other series of
preferred stock to share in Parallels assets upon liquidation until
satisfaction of any liquidation preference attributable to any new
series of preferred stock.
 (32)




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##### Table of Contents



ITEM 2. PROPERTIES
 General
  Producing Wells and Acreage
  Producing Wells
    
    AcreageOil(1)
    
    Gas
    
    Developed
    
    UndevelopedGross
    
    Net(2)
    
    Gross
    
    Net(2)
    
    Gross
    
    Net(3)
    
    Gross
    
    Net(3)Texas
    
    
    570
    
    
    
    280.4
    
    
    
    93
    
    
    
    34.02
    
    
    
    64,582
    
    
    
    36,126
    
    
    
    53,805
    
    
    
    5,820Colorado
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,080
    
    
    
    14,080New Mexico
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    0.51
    
    
    
    1,277
    
    
    
    109
    
    
    
    121,222
    
    
    
    30,355Utah
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    123,864
    
    
    
    122,800Total
    
    
    570
    
    
    
    280.4
    
    
    
    99
    
    
    
    34.53
    
    
    
    65,859
    
    
    
    36,235
    
    
    
    312,971
    
    
    
    173,055
 
 (1)
    
    Does not include 356 wells that were shut in or temporarily abandoned as of December 31, 2004.(2)
    
    Net wells are computed by multiplying the number of gross wells by our working interest in the gross wells.(3)
    
    Parallels net acres are computed by multiplying the number of lease net acres by our working interest.  (33)




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##### Table of Contents



Title to Properties
  Oil and Natural Gas Reserves
   (34)




---



##### Table of Contents



Proved
    
    ProvedDeveloped
    
    Undeveloped
    
    Total(in thousands)Oil (MBbls)
    
    
    13,210
    
    
    
    5,706
    
    
    
    18,916Gas (MMcf)
    
    
    13,158
    
    
    
    3,667
    
    
    
    16,825MBOE
    
    
    15,403
    
    
    
    6,317
    
    
    
    21,720
      (35)




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##### Table of Contents



ITEM 3. LEGAL PROCEEDINGS
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  (36)




---



##### Table of Contents



PART II
 
 ITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
 Market Information
  Price Per ShareHigh
    
    Low2002First Quarter
    
    $
    4.38
    
    
    $
    3.08Second Quarter
    
    $
    3.41
    
    
    $
    2.60Third Quarter
    
    $
    2.95
    
    
    $
    2.15Fourth Quarter
    
    $
    2.91
    
    
    $
    2.032003First Quarter
    
    $
    3.10
    
    
    $
    2.51Second Quarter
    
    $
    4.03
    
    
    $
    2.40Third Quarter
    
    $
    3.86
    
    
    $
    3.15Fourth Quarter
    
    $
    4.49
    
    
    $
    3.192004First Quarter
    
    $
    4.67
    
    
    $
    3.60Second Quarter
    
    $
    5.35
    
    
    $
    3.83Third Quarter
    
    $
    5.68
    
    
    $
    4.38Fourth Quarter
    
    $
    5.60
    
    
    $
    4.83
   Dividends
  (37)




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##### Table of Contents



Equity Compensation Plans
   (a)
    
    (b)
    
    (c)Plan Category
    
    Number of
    
    Weighted-average
    
    Number of securitiessecurities to be
    
    exercise price of
    
    remaining available forissued upon exercise
    
    outstanding
    
    future issuance underof outstanding
    
    options, warrants
    
    equity compensationoptions, warrants
    
    and rights
    
    plans (excludingand rights
    
    
    
    securities reflected incolumn (a))Equity compensation
plans approved by
security holders(1)
    
    
    1,739,638
    
    
    $
    3.87
    
    
    
    312,612Equity compensation
plans not approved by
security holders
    
    
    575,000

(2)
    
    $
    3.83
    
    
    
    Total
    
    
    2,314,638
    
    
    $
    3.85
    
    
    
    312,612
 
 (1)
    
    Includes the following plans: 2004 Non-Employee Director Stock
Grant Plan; 1992 Stock Option Plan; 1997 Non-employee Directors
Stock Option Plan; 1998 Stock Option Plan; and 2001 Non-employee
Directors Stock Option Plan.(2)
    
    These shares include an aggregate of 200,000 shares of common
stock underlying stock options granted in June, 2001 to
non-officer employees pursuant to Parallels Employee Stock Option
Plan. The Employee Stock Option Plan is the only equity
compensation plan in effect that was adopted without approval of
our stockholders. Directors and officers of Parallel are not
eligible to participate in this plan. A description of the
material features of this plan can be found under the caption
Employee Stock Option Plan on page 86. The total number of
shares shown also includes 275,000 shares of common stock
underlying a stock purchase warrant we issued to an investment
banking firm in November, 2001 and 100,000 shares of common stock
underlying a stock purchase warrant we issued to the same
investment banking firm in December, 2003. These warrants were
issued under financial advisory services agreements with the
investment banking firm, and not under employee or director
compensation plans. The warrants issued in (38)




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##### Table of Contents



November, 2001 are exercisable, in whole or in part, at an
exercise price equal to $2.95 per share, the fair market value of
the common stock on the date of issuance of warrants, and are
exercisable at any time during the four-year period commencing on
November 20, 2002. The warrants issued in December, 2003 are
exercisable, in whole or in part, at an exercise price equal to
$3.98 per share, the fair market value of the common stock on the
date of issuance of the warrants, and are exercisable at any time
during the four-year period commencing on December 23, 2004. All
of the warrants contain customary provisions providing for
adjustment of the exercise price and the number and type of
securities issuable upon exercise of the warrants if any one or
more of certain specified events occur. The warrants also grant to
the holder certain registration rights for the securities issuable
upon exercise of the warrants. Sale of Unregistered Securities
  Repurchase of Equity Securities
  
 ITEM 6. SELECTED FINANCIAL DATA
  (39)




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##### Table of Contents



Year Ended December 31,2004
    
    2003
    
    2002(1)
    
    2001(2)
    
    2000(in thousands, except per share and per unit data)Consolidated Income Statements Data:Operating revenues
    
    $
    35,837
    
    
    $
    33,855
    
    
    $
    12,106
    
    
    $
    17,840
    
    
    $
    17,134Operating expenses
    
    $
    23,571
    
    
    $
    21,138
    
    
    $
    11,250
    
    
    $
    28,405
    
    
    $
    9,530Income (loss) before cumulative effect
of change in accounting principle
    
    $
    5,585
    
    
    $
    7,664
    
    
    $
    18,701
    
    
    $
    (4,708
    )
    
    $
    5,977Net income (loss)
    
    $
    5,585
    
    
    $
    7,602
    
    
    $
    18,701
    
    
    $
    (4,708
    )
    
    $
    5,977Cumulative preferred stock dividend
    
    $
    (572
    )
    
    $
    (580
    )
    
    $
    (585
    )
    
    $
    (585
    )
    
    $
    (585
    )Net income (loss) available to common stockholders
    
    $
    5,013
    
    
    $
    7,022
    
    
    $
    18,116
    
    
    $
    (5,292
    )
    
    $
    5,393Net income (loss) per common share before
cumulative effect of change in accounting
principleBasic
    
    $
    0.20
    
    
    $
    0.33
    
    
    $
    0.88
    
    
    $
    (0.26
    )
    
    $
    0.26Diluted
    
    $
    0.20
    
    
    $
    0.31
    
    
    $
    0.79
    
    
    $
    (0.26
    )
    
    $
    0.25Weighted average common stock and common stock
equivalents outstandingBasic
    
    
    25,323
    
    
    
    21,264
    
    
    
    20,680
    
    
    
    20,458
    
    
    
    20,332Diluted
    
    
    28,402
    
    
    
    24,175
    
    
    
    23,549
    
    
    
    20,458
    
    
    
    23,465Cash dividends  common stock
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Consolidated Balance Sheet Data:Total assets
    
    $
    170,671
    
    
    $
    118,343
    
    
    $
    102,351
    
    
    $
    41,760
    
    
    $
    46,456Total liabilities
    
    $
    110,677
    
    
    $
    57,111
    
    
    $
    56,852
    
    
    $
    15,446
    
    
    $
    15,288Long-term debt, less current maturities
    
    $
    79,000
    
    
    $
    39,750
    
    
    $
    45,604
    
    
    $
    9,600
    
    
    $
    11,624Total stockholders equity
    
    $
    59,994
    
    
    $
    61,232
    
    
    $
    45,499
    
    
    $
    26,314
    
    
    $
    31,168Consolidated Statement of Cash Flow Data:Cash provided (used) byOperating activities
    
    $
    17,727
    
    
    $
    19,465
    
    
    $
    1,528
    
    
    $
    13,383
    
    
    $
    10,694Investing activities
    
    $
    (69,518
    )
    
    $
    (15,494
    )
    
    $
    (30,277
    )
    
    $
    (11,357
    )
    
    $
    (5,846
    )Financing activities
    
    $
    39,194
    
    
    $
    1,595
    
    
    $
    37,210
    
    
    $
    (676
    )
    
    $
    (4,123
    )Operating Data:Product SalesOil (Bbls)
    
    
    729
    
    
    
    629
    
    
    
    131
    
    
    
    138
    
    
    
    165Gas (Mcf)
    
    
    2,690
    
    
    
    3,356
    
    
    
    2,670
    
    
    
    3,266
    
    
    
    2,822BOE
    
    
    1,177
    
    
    
    1,188
    
    
    
    576
    
    
    
    682
    
    
    
    635Average sales priceOil (per Bbl)
    
    $
    39.05
    
    
    $
    29.11
    
    
    $
    24.59
    
    
    $
    24.80
    
    
    $
    28.88Gas (per Mcf)
    
    $
    5.85
    
    
    $
    5.40
    
    
    $
    3.33
    
    
    $
    4.41
    
    
    $
    4.38Proved reservesOil (Bbls)
    
    
    18,916
    
    
    
    12,084
    
    
    
    10,271
    
    
    
    916
    
    
    
    974Gas (Mcf)
    
    
    16,825
    
    
    
    16,271
    
    
    
    15,633
    
    
    
    13,947
    
    
    
    15,686Other Data:Long-term leases(3)
    
    $
    127,087
    
    
    $
    130,043
    
    
    $
    84,046
    
    
    $
    53,851
    
    
    $
    51,064
 (40)




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##### Table of Contents



(1)
    
    Results include a $31.0 million gain attributable to equity in
income of First Permian, L.P. See Note 6 to the consolidated
financial statements. Results also include noncash charges of
$717,000 on the sale of Energen stock, $509,000 for the change in
fair value of derivatives and $440,000 for the change in fair
market value of our crude oil swaps.(2)
    
    Results include noncash charges of $2.2 million in the fiscal
quarter ended September 30, 2001 and $14.6 million in the fourth
quarter ended December 31, 2001, in each case related to the
impairment of oil and natural gas properties incurred in 2001 and
primarily a result of a decrease in year-end reserves and lower
oil and natural gas prices.(3)
    
    Excludes our two field offices in Andrews and Snyder, Texas as the
lease costs for these office facilities are billed to
nonaffiliated third party working interest owners under our joint
operating agreements with these third parties. 
 ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
   Overview and Strategy
  (41)




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##### Table of Contents




    
    focuses on projects having less geological risk;
    
    emphasizes exploitation and enhancement activities;
    
    focuses on acquiring producing properties; and
    
    expands the scope of operations by diversifying our exploratory and
development efforts, both in and outside of our current areas of
operation.
   
    
    the prices we receive for the oil and natural gas we produce;
    
    the results of reprocessing and reinterpreting our 3-D seismic data;
    
    the results of our drilling activities;
    
    the costs of obtaining high quality field services;
    
    our ability to find and consummate acquisition opportunities; and
    
    our ability to negotiate and enter into work to earn arrangements,
joint venture or other similar agreements on terms acceptable to us.
  (42)




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##### Table of Contents



Operating Performance
  
    
    seasonal demand;
    
    weather;
    
    hurricane conditions in the Gulf of Mexico;
    
    availability of pipeline transportation to end users;
    
    proximity of our wells to major transportation pipeline
infrastructures; and
    
    world oil prices.
  
    
    production expenses;
    
    overhead requirements; and
    
    costs of capital.
  
    
    cash flow from operations;
    
    sales of our equity securities;
    
    bank borrowings; and
    
    industry joint ventures.
   (43)




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##### Table of Contents



Results of Operations
  (44)




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##### Table of Contents



Years Ended December 31,2004
    
    2003
    
    2002(in thousands except per unit data)Production VolumesOil (Bbls)
    
    
    729
    
    
    
    629
    
    
    
    131Natural gas (Mcf)
    
    
    2,690
    
    
    
    3,356
    
    
    
    2,670BOE
    
    
    1,177
    
    
    
    1,188
    
    
    
    576Sales PriceOil (per Bbl) (1)
    
    $
    39.05
    
    
    $
    29.11
    
    
    $
    24.59Natural gas (per Mcf) (1)
    
    $
    5.85
    
    
    $
    5.40
    
    
    $
    3.33BOE Price (1)
    
    $
    37.55
    
    
    $
    30.66
    
    
    $
    21.03BOE Price (2)
    
    $
    30.45
    
    
    $
    28.50
    
    
    $
    21.03Operating RevenuesOil
    
    $
    28,455
    
    
    $
    18,300
    
    
    $
    3,217Oil hedges
    
    
    (7,458
    )
    
    
    (1,659
    )
    
    
    Natural gas
    
    
    15,735
    
    
    
    18,121
    
    
    
    8,889Natural gas hedge
    
    
    (895
    )
    
    
    (907
    )
    
    
    $
    35,837
    
    
    $
    33,855
    
    
    $
    12,106Operating ExpensesLease operating expense
    
    $
    7,373
    
    
    $
    6,458
    
    
    $
    2,081Production taxes
    
    
    2,108
    
    
    
    1,946
    
    
    
    796General and administrative:General and administrative
    
    
    3,123
    
    
    
    3,019
    
    
    
    1,287Public reporting
    
    
    2,255
    
    
    
    1,325
    
    
    
    866Depreciation and Depletion
    
    
    8,712
    
    
    
    8,390
    
    
    
    6,220$
    23,571
    
    
    $
    21,138
    
    
    $
    11,250Operating income
    
    $
    12,266
    
    
    $
    12,717
    
    
    $
    856
 
 (1)
    
    Excludes hedge transactions.(2)
    
    Includes hedge transactions. Critical Accounting Policies and Practices
 Full Cost and Impairment of Assets .
 (45)




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##### Table of Contents



Depletion
 Proved Reserve Estimates.
   (46)




---



##### Table of Contents



Use of Estimates.
 Derivatives.
 Overhead Reimbursement  Joint Operations.
   Incentive and Retention Plan.
 Years Ended December 31, 2004 and December 31, 2003
  (47)




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##### Table of Contents



Oil and Gas Revenues
 Revenues(1)
    
    Production2004
    
    2003
    
    2004
    
    2003Oil (Bbls)
    
    
    59
    %
    
    
    49
    %
    
    
    62
    %
    
    
    53
    %Natural gas (Mcf)
    
    
    41
    %
    
    
    51
    %
    
    
    38
    %
    
    
    47
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 
 (1)
    
    Includes hedge transactions  Year Ended December 31
    
    Increase
    
    % Increase2004
    
    2003
    
    (Decrease)
    
    (Decrease)(in thousands except per unit data)Production VolumesOil (Bbls)
    
    
    729
    
    
    
    629
    
    
    
    100
    
    
    
    16
    %Natural gas (Mcf)
    
    
    2,690
    
    
    
    3,356
    
    
    
    (666
    )
    
    
    (20
    )%BOE
    
    
    1,177
    
    
    
    1,188
    
    
    
    (11
    )
    
    
    (1
    )%Sales PriceOil (per Bbl) (1)
    
    $
    39.05
    
    
    $
    29.11
    
    
    $
    9.94
    
    
    
    34
    %Natural gas (per Mcf) (1)
    
    $
    5.85
    
    
    $
    5.40
    
    
    $
    0.45
    
    
    
    8
    %BOE price (1)
    
    $
    37.55
    
    
    $
    30.66
    
    
    $
    6.89
    
    
    
    22
    %BOE price (2)
    
    $
    30.45
    
    
    $
    28.50
    
    
    $
    1.95
    
    
    
    7
    %Operating RevenuesOil
    
    $
    28,455
    
    
    $
    18,300
    
    
    $
    10,155
    
    
    
    55
    %Oil hedges
    
    $
    (7,458
    )
    
    $
    (1,659
    )
    
    $
    (5,799
    )
    
    
    (350
    )%Natural gas
    
    $
    15,735
    
    
    $
    18,121
    
    
    $
    (2,386
    )
    
    
    (13
    )%Natural gas hedges
    
    $
    (895
    )
    
    $
    (907
    )
    
    $
    12
    
    
    
    1
    %Total
    
    $
    35,837
    
    
    $
    33,855
    
    
    $
    1,982
    
    
    
    6
    %
 
 (1)
    
    Excludes hedge transactions.(2)
    
    Includes hedge transactions.  (48)




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##### Table of Contents



Cost and Expenses
 Year Ended December 31,
    
    Increase
    
    % Increase2004
    
    2003
    
    (Decrease)
    
    (Decrease)(dollars in thousands)Lease operating expense
    
    $
    7,373
    
    
    $
    6,458
    
    
    $
    915
    
    
    
    14
    %Production taxes
    
    
    2,108
    
    
    
    1,946
    
    
    
    162
    
    
    
    8
    %General and administrative:General and administrative
    
    
    3,123
    
    
    
    3,019
    
    
    
    104
    
    
    
    3
    %Public reporting
    
    
    2,255
    
    
    
    1,325
    
    
    
    930
    
    
    
    70
    %Total general and administrative
    
    
    5,378
    
    
    
    4,344
    
    
    
    1,034
    
    
    
    24
    %Depreciation and depletion
    
    
    8,712
    
    
    
    8,390
    
    
    
    322
    
    
    
    4
    %Total
    
    $
    23,571
    
    
    $
    21,138
    
    
    $
    2,433
    
    
    
    12
    %
  (49)




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##### Table of Contents



Other income (expense)
 Year Ended December 31,
    
    Increase
    
    % Increase2004
    
    2003
    
    (Decrease)
    
    (Decrease)(dollars in thousands)Change in fair market
value of derivatives
    
    $
    
    
    
    $
    (22
    )
    
    $
    22
    
    
    
    Gain (loss) on ineffective
portion of hedges
    
    
    (945
    )
    
    
    191
    
    
    
    (1,136
    )
    
    
    (595
    )%Interest and other income
    
    
    189
    
    
    
    116
    
    
    
    73
    
    
    
    63
    %Interest expense
    
    
    (2,732
    )
    
    
    (2,048
    )
    
    
    (684
    )
    
    
    (33
    )%Other expense
    
    
    (324
    )
    
    
    (259
    )
    
    
    (65
    )
    
    
    (25
    )%Total
    
    $
    (3,812
    )
    
    $
    (2,022
    )
    
    $
    (1,790
    )
    
    
    (89
    )%
  (50)




---



##### Table of Contents



Years Ended December 31, 2003 and December 31, 2002
  Oil and Gas Revenues
 Revenues (1)
    
    Production2003
    
    2002
    
    2003
    
    2002Oil (Bbls)
    
    
    49
    %
    
    
    27
    %
    
    
    53
    %
    
    
    23
    %Natural gas (Mcf)
    
    
    51
    %
    
    
    73
    %
    
    
    47
    %
    
    
    77
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 
 (1)
    
    Includes hedge transactions (51)




---



##### Table of Contents



Year Ended December 31,
    
    Increase
    
    % Increase2003
    
    2002
    
    (Decrease)
    
    (Decrease)(in thousands except per unit data)Production VolumesOil (Bbls )
    
    
    629
    
    
    
    131
    
    
    
    498
    
    
    
    380
    %Natural gas (Mcf)
    
    
    3,356
    
    
    
    2,670
    
    
    
    686
    
    
    
    26
    %BOE
    
    
    1,188
    
    
    
    576
    
    
    
    612
    
    
    
    106
    %Sales PriceOil (per Bbl) (1)
    
    $
    29.11
    
    
    $
    24.59
    
    
    $
    4.52
    
    
    
    18
    %Natural gas (per Mcf) (1)
    
    $
    5.40
    
    
    $
    3.33
    
    
    $
    2.07
    
    
    
    62
    %BOE price (1)
    
    $
    30.66
    
    
    $
    21.03
    
    
    $
    9.63
    
    
    
    46
    %BOE price (2)
    
    $
    28.50
    
    
    $
    21.03
    
    
    $
    7.47
    
    
    
    36
    %Operating RevenuesOil
    
    $
    18,300
    
    
    $
    3,217
    
    
    $
    15,083
    
    
    
    469
    %Oil hedges
    
    $
    (1,659
    )
    
    $
    
    
    
    $
    (1,659
    )
    
    
    Natural gas
    
    $
    18,121
    
    
    $
    8,889
    
    
    $
    9,232
    
    
    
    104
    %Natural gas hedges
    
    $
    (907
    )
    
    $
    
    
    
    $
    (907
    )
    
    
    Total
    
    $
    33,855
    
    
    $
    12,106
    
    
    $
    21,749
    
    
    
    180
    %
 
 (1)
    
    Excludes hedge transactions.(2)
    
    Includes hedge transactions. We did not apply hedge accounting in 2002.    (52)




---



##### Table of Contents



Cost and Expenses
 Year Ended December 31,
    
    Increase
    
    % Increase2003
    
    2002
    
    (Decrease)
    
    (Decrease)(dollars in thousands)Lease operating expense
    
    $
    6,458
    
    
    $
    2,081
    
    
    $
    4,377
    
    
    
    210
    %Production taxes
    
    
    1,946
    
    
    
    796
    
    
    
    1,150
    
    
    
    144
    %General and administrative:General and administrative
    
    
    3,019
    
    
    
    1,287
    
    
    
    1,732
    
    
    
    135
    %Public reporting
    
    
    1,325
    
    
    
    866
    
    
    
    459
    
    
    
    53
    %Total general and administrative
    
    
    4,344
    
    
    
    2,153
    
    
    
    2,191
    
    
    
    102
    %Depreciation and depletion
    
    
    8,390
    
    
    
    6,220
    
    
    
    2,170
    
    
    
    35
    %Total
    
    $
    21,138
    
    
    $
    11,250
    
    
    $
    9,888
    
    
    
    88
    %
     (53)




---



##### Table of Contents



Other income (expense)
 Year Ended December 31,
    
    Increase
    
    % Increase2003
    
    2002
    
    (Decrease)
    
    (Decrease)(dollars in thousands)Equity in income of
First Permian, L.P.
    
    $
    
    
    
    $
    31,044
    
    
    
    (31,044
    )
    
    
    Incentive awards attributable to
the sale of First Permian, L.P.
    
    
    
    
    
    
    (1,382
    )
    
    
    1,382
    
    
    
    Loss on sale of marketable securities
    
    
    
    
    
    
    (717
    )
    
    
    717
    
    
    
    Change in fair market
value of derivatives
    
    
    (22
    )
    
    
    (948
    )
    
    
    926
    
    
    
    98
    %Gain (loss) on ineffective
portion of hedges
    
    
    191
    
    
    
    
    
    
    
    191
    
    
    
    Interest and other income
    
    
    116
    
    
    
    93
    
    
    
    23
    
    
    
    25
    %Dividend income
    
    
    
    
    
    
    371
    
    
    
    (371
    )
    
    
    Interest expense
    
    
    (2,048
    )
    
    
    (601
    )
    
    
    (1,447
    )
    
    
    (241
    )%Other expense
    
    
    (259
    )
    
    
    (332
    )
    
    
    73
    
    
    
    22
    %Total
    
    $
    (2,022
    )
    
    $
    27,528
    
    
    $
    (29,550
    )
    
    
    (107
    )%
     (54)




---



##### Table of Contents



Capital Resources and Liquidity
    Year ended December 31,2004
    
    2003
    
    2002(in thousands)Operating activities
    
    $
    17,727
    
    
    $
    19,465
    
    
    $
    1,528Investing activities
    
    $
    (69,518
    )
    
    $
    (15,494
    )
    
    $
    (30,277
    )Financing activities
    
    $
    39,194
    
    
    $
    1,595
    
    
    $
    37,210
  (55)




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##### Table of Contents



Bank Borrowings
    (56)




---



##### Table of Contents




    
    at the end of each quarter, a current ratio (as defined in the credit agreement)
of at
least 1.1 to 1.0;
 
    
    for each period (as calculated in the Credit Agreement) ending on December 31,
March 31, June 30 and September 30, a funded debt ratio (as defined in the Credit
 (57)




---



##### Table of Contents



Agreement) of not more than 3.70, 3.60 and 3.50, respectively, for December 31,
2004, 2005, 2006 and 2007; and
 
    
    at all times, adjusted consolidated net worth (as defined in the
Credit Agreement) of at least (a) $50.0 million, plus (b) seventy-five
percent (75%) of the net proceeds from any equity securities issued by
Parallel, plus (c) fifty percent (50%) of consolidated net income for
each fiscal quarter, if positive, and zero percent (0%) if negative.
     
    
    interpretation and processing of 3-D seismic survey data;
 
    
    lease acquisitions and drilling activities;
 
    
    acquisitions of producing properties or companies owning
producing properties; and,
 
    
    general corporate purposes.
 Preferred Stock
  
    
    required us to pay dividends of $.60 per annum, semi-annually on June
15 and December 15 of each year;
 
    
    is convertible into common stock at any time, at the option of the
holder, into 2.8751 shares of common stock at an initial conversion
price of $3.50 per share, subject to adjustment in certain events;
 
    
    is redeemable at our option, in whole in part, for $10 per share, plus
accrued dividends;
 
    
    has no voting rights, except as required by applicable law, and except
that as long as any shares of preferred stock remain outstanding, the
holders of a majority of the
 (58)




---



##### Table of Contents



outstanding shares of the preferred stock may vote on any proposal to change any
provision of the preferred stock which materially and adversely affects the rights,
preferences or privileges of the preferred stock;
 
    
    is senior to the common stock with respect to dividends and on
liquidation, dissolution or winding up of Parallel;
 
    
    has a liquidation value of $10 per share, plus accrued and unpaid
dividends.
 Commodity Price Risk Management Transactions
       Future Capital Requirements
  (59)




---



##### Table of Contents




    
    internally generated cash flows;
 
    
    availability of borrowing under our revolving credit facility;
 
    
    additional sources of funding; and
 
    
    future drilling successes.
  Contractual Obligations, Commitments and Off-Balance Sheet Arrangements
   Obligation Due in PeriodAfter 5Contractual Cash Obligations
    
    2005
    
    2006
    
    2007
    
    2008
    
    2009
    
    years
    
    Total(in thousands)Revolving Credit Facility (secured)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    79,000
    
    
    $
    
    
    
    $
    
    
    
    $
    79,000Office Lease (Dinero Plaza)
    
    
    157
    
    
    
    105
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    262Andrews and Snyder Field Offices
    
    
    23
    
    
    
    23
    
    
    
    23
    
    
    
    14
    
    
    
    14
    
    
    
    

(1)
    
    
    97Preferred Stock Dividend
    
    
    570
    
    
    
    570
    
    
    
    570
    
    
    
    570
    
    
    
    570
    
    
    
    

(2)
    
    
    2,850Asset retirement obligations(3)
    
    
    150
    
    
    
    58
    
    
    
    222
    
    
    
    41
    
    
    
    146
    
    
    
    1,515
    
    
    
    2,132Derivative Obligations
    
    
    7,965
    
    
    
    5,270
    
    
    
    2,208
    
    
    
    2,048
    
    
    
    
    
    
    
    
    
    
    
    17,491Total
    
    $
    8,865
    
    
    $
    6,026
    
    
    $
    3,023
    
    
    $
    81,673
    
    
    $
    730
    
    
    $
    1,515
    
    
    $
    101,832
 
 (1)
    
    The Snyder field office lease remains in effect until the termination of our trade agreement with
a third party working interest owner in the Diamond M project. The Andrews field office lease
expires in December 2007. The lease cost for these two office facilities are billed to
nonaffiliated third party working interest owners under our joint operating agreements with
these third parties.(2)
    
    Payments of preferred dividends so long as preferred stock remains outstanding and not converted.(3)
    
    Assets retirement obligations of oil and natural gas assets, excluding salvage value and accretion. (60)




---



##### Table of Contents



Outlook
  
    
    internally generated cash from operations;
    
    proceeds from bank borrowings; and
    
    proceeds from sales of equity securities.
  
    
    our proved reserves;
    
    the volumes of oil and natural gas we produce from existing wells;
    
    the prices at which we sell oil and natural gas; and
    
    our ability to acquire, locate and produce new reserves.
  
    
    increased bank borrowings;
    
    sales of Parallels securities;
    
    sales of non-core properties; or
    
    other forms of financing.
 (61)




---



##### Table of Contents



Inflation
  Recent Accounting Pronouncements
 Staff Accounting Bulletin
No. 106
 Share-Based Payment
 Application on FASB
Statement No. 109, Accounting for Income Taxes, for the Tax Deduction Provided to U.S. Based
Manufacturers by the American Jobs Creation Act of 2004
 Effects of Derivative Instruments
   (62)




---



##### Table of Contents



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Interest Rate Sensitivity as of December 31, 2004
  2005
    
    2006
    
    2007
    
    2008
    
    2009
    
    Total(dollars in thousands)Variable rate debt
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    79,000
    
    
    $
    
    
    
    $
    79,000Revolving Facility (secured)
    
    
    7.25
    %
    
    
    7.25
    %
    
    
    7.25
    %
    
    
    7.25
    %
    
    
    
    
    
    
    Average interest rate
   (63)




---



##### Table of Contents



Notional
    
    
    
    
    
    FairPeriod of Time
    
    Amounts
    
    Fixed Interest Rates
    
    Market Value($ in millions)
    
    
    
    
    
    ($ in millions)January 1, 2005 thru December 31, 2005
    
    $
    50
    
    
    
    3.36
    %
    
    $
    (0.140
    )January 1, 2006 thru December 31, 2006
    
    $
    50
    
    
    
    3.82
    %
    
    
    (0.028
    )January 1, 2007 thru December 31, 2007
    
    $
    50
    
    
    
    4.30
    %
    
    
    (0.109
    )January 1, 2008 thru December 30, 2008
    
    $
    50
    
    
    
    4.74
    %
    
    
    (0.167
    )Total fair market value
    
    
    
    
    
    
    
    
    
    $
    (0.444
    )
 Commodity Price Sensitivity as of December 31, 2004
  Put Options
  Costless Collar.
 (64)




---



##### Table of Contents



Houston Ship ChannelBarrels of
    
    Ny Mex oil prices

    
    MMBtu of
    
    gas prices
    
    FairPeriod of Time
    
    Oil
    
    Floor
    
    Cap
    
    Natural Gas
    
    Floor
    
    Cap
    
    Market Value($ in thousands)April 1, 2005 thru October 31, 2005
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    428,000
    
    
    $
    5.00
    
    
    $
    7.26
    
    
    $
    (34
    )January 1, 2005 thru December 31, 2005
    
    
    73,000
    
    
    $
    36.00
    
    
    $
    49.60
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    (13
    )January 1, 2006 thru December 31, 2006
    
    
    70,800
    
    
    $
    35.00
    
    
    $
    44.00
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    (100
    )Total fair market value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (147
    )
 Swaps.
  Barrels
    
    
    
    
    
    
    
    
    
    Houston Ship
    
    Fairof
    
    Nymex Oil
    
    MMBtu of
    
    Channel
    
    MarketPeriod of Time
    
    Oil
    
    Swap Price
    
    Natural Gas
    
    Gas Swap Price
    
    Value($ in thousands)January 1, 2005 thru December 31, 2005
    
    
    620,500
    
    
    $
    30.19
    
    
    
    
    
    
    $
    
    
    
    $
    (7,583
    )January 1, 2006 thru December 20, 2006
    
    
    448,000
    
    
    $
    28.46
    
    
    
    
    
    
    $
    
    
    
    
    (5,142
    )January 1, 2007 thru December 31, 2007
    
    
    474,500
    
    
    $
    34.36
    
    
    
    
    
    
    $
    
    
    
    
    (2,099
    )January 1, 2008 thru December 31, 2008
    
    
    439,200
    
    
    $
    33.37
    
    
    
    
    
    
    $
    
    
    
    
    (1,880
    )Total oil fair market value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,704
    )January 1, 2005 thru March 31, 2005
    
    
    
    
    
    $
    
    
    
    
    180,000
    
    
    $
    4.075
    
    
    
    (195
    )Total natural gas fair market value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (195
    )Total fair market value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (16,899
    )
 
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  (65)




---



##### Table of Contents



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 Resignation of KPMG LLP
     Engagement of BDO Seidman, LLP
   (66)




---



##### Table of Contents



ITEM 9A. CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
   Managements Report on Internal Control Over Financial Reporting
   (67)




---



##### Table of Contents



Internal Control Integrated Framework.
  Report of Independent Registered Public Accounting Firm on Internal Control over Financial
Reporting
 
   (68)




---



##### Table of Contents



/s/ BDO Seidman, LLPHouston, TexasFebruary 28, 2005
 
 ITEM 9B. OTHER INFORMATION
  (69)




---



##### Table of Contents



PART III
 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
  Name
    
    Age
    
    Since
    
    Position with CompanyThomas R. Cambridge (1)
    
    69
    
    1985
    
    Chairman of the Board of DirectorsLarry C. Oldham (1)
    
    51
    
    1979
    
    Director, President and Chief Executive OfficerDewayne E. Chitwood (2)(3)(4)
    
    68
    
    2000
    
    DirectorMartin B. Oring (1)(2)(3)(4)
    
    59
    
    2001
    
    DirectorRay M. Poage (1)(2)(3)(4)
    
    57
    
    2003
    
    DirectorJeffrey G. Shrader (1)(2)(4)
    
    54
    
    2001
    
    DirectorDonald E. Tiffin
    
    47
    
    
    
    Chief Operating OfficerEric A. Bayley
    
    56
    
    
    
    Vice President of Corporate EngineeringJohn S. Rutherford
    
    45
    
    
    
    Vice President of Land and AdministrationSteven D. Foster
    
    49
    
    
    
    Chief Financial Officer
 
 (1)
    
    Member of Hedging and Acquisition Committee(2)
    
    Member of Compensation Committee(3)
    
    Member of Audit Committee(4)
    
    Member of Corporate Governance and Nominating Committee   (70)




---



##### Table of Contents



(71)




---



##### Table of Contents



Consulting Arrangements
  Corporate Governance
   
    
    The Audit Committee;
    
    The Corporate Governance and Nominating Committee;
    
    The Compensation Committee; and
    
    The Hedging and Acquisitions Committee.
 (72)




---



##### Table of Contents



Audit Committee
    Corporate Governance and Nominating Committee
   
    
    a statement that the writer is a stockholder and is proposing a
candidate for consideration by the committee;
 (73)




---



##### Table of Contents




    
    the name of and contact information for the candidate;
    
    a statement of the candidates age, business and educational experience;
    
    information sufficient to enable the committee to evaluate the candidate;
    
    a statement detailing any relationship between the candidate and any
joint interest owners, customer, supplier or competitor of Parallel;
    
    detailed information about any relationship or understanding between the
proposing stockholder and the candidate; and
    
    a statement that the candidate is willing to be considered and willing
to serve as a Director if nominated and elected.
 Compensation Committee
  Hedging and Acquisitions Committee
  Code of Ethics
  (74)




---



##### Table of Contents



Stockholder Communications with Directors
   
    
    if you request, forward the communication to the other Directors;
    
    request that management handle the inquiry directly, for example where
it is a request for information about the company or it is a
stock-related matter; or
    
    not forward the communication to the other Directors or management if
it is primarily commercial in nature or if it relates to an improper
or irrelevant topic.
 Director Attendance at Annual Meetings
  
 ITEM 11. EXECUTIVE COMPENSATION
 Summary of Annual Compensation
  (75)




---



##### Table of Contents



Compensation TableLong-Term CompensationAnnual Compensation
    
    Awards
    
    PayoutsOther
    
    Restricted
    
    Securities
    
    
    
    

    
    AllAnnual
    
    Stock
    
    Underlying
    
    LTIP
    
    OtherName and
    
    
    
    
    
    Salary
    
    Bonus
    
    Compensation
    
    Awards
    
    Options/
    
    Payouts
    
    CompensationPrincipal Position(1)
    
    Year
    
    ($)
    
    ($)(2)
    
    ($)(3)
    
    ($)
    
    SAR (#)
    
    ($)
    
    ($)T. R. Cambridge
    
    
    2004
    
    
    $
    110,000
    
    
    $
    10,000
    
    
    $
    
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Chairman of the Board
    
    
    2003
    
    
    $
    110,000
    
    
    $
    25,000
    
    
    $
    
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    02002
    
    
    $
    106,284
    
    
    $
    158,888
    
    
    $
    450
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0L. C. Oldham
    
    
    2004
    
    
    $
    250,000
    
    
    $
    11,019
    
    
    $
    27,183
    (4)
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    $
    15,000
    (5)President , Chief Executive
    
    
    2003
    
    
    $
    191,000
    
    
    $
    61,391
    
    
    $
    22,802
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    $
    11,460Officer and Director
    
    
    2002
    
    
    $
    187,316
    
    
    $
    555,674
    
    
    $
    22,474
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    $
    11,113D. E. Tiffin
    
    
    2004
    
    
    $
    220,000
    
    
    $
    10,015
    
    
    $
    23,560
    (6)
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    $
    13,560
    (7)Chief Operating Officer
    
    
    2003
    
    
    $
    171,140
    
    
    $
    44,391
    
    
    $
    17,464
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    $
    10,2682002
    
    
    $
    99,832
    
    
    $
    47,421
    
    
    $
    8,257
    
    
    
    0
    
    
    
    50,000
    
    
    
    0
    
    
    $
    5,990E. A. Bayley
    
    
    2004
    
    
    $
    140,000
    
    
    $
    7,101
    
    
    $
    24,500
    (8)
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    $
    8,400
    (9)Vice President
    
    
    2003
    
    
    $
    110,000
    
    
    $
    23,391
    
    
    $
    16,470
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    $
    6,6002002
    
    
    $
    111,792
    
    
    $
    172,178
    
    
    $
    16,127
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    $
    6,303J. S. Rutherford
    
    
    2004
    
    
    $
    140,000
    
    
    $
    7,062
    
    
    $
    23,357
    (10)
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    $
    8,400
    (11)Vice President
    
    
    2003
    
    
    $
    110,000
    
    
    $
    23,391
    
    
    $
    15,763
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    $
    6,6002002
    
    
    $
    110,384
    
    
    $
    410,352
    
    
    $
    16,540
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    $
    6,488S. D. Foster
    
    
    2004
    
    
    $
    140,000
    
    
    $
    7,033
    
    
    
    27,983
    (12)
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    $
    8,760
    (13)Chief Financial Officer
 
 (1)
    
    Mr. Cambridges position as Chief Executive Officer ceased on January 1, 2004 when Mr. Oldham became
Chief Executive Officer.(2)
    
    The bonuses paid to Messrs. Cambridge, Oldham, Bayley and Rutherford during 2002 includes payments made
to them under Incentive Award Agreements as a result of the sale of First Permians assets. Parallel
entered into these Incentive Award Agreements with Messrs. Cambridge, Oldham, Bayley, Rutherford and
four other employees in December 2001 to provide an incentive to the participants and to reward
outstanding efforts and achievements by them when a material contribution to Parallels success
resulted from an Award Event. An Award Event generally meant an acquisition of First Permian, a sale of
substantially all of First Permians assets, or Parallels sale or other disposition of its 30.675%
ownership interest in First Permian. The agreements awarded Unit Equivalent Rights to the recipients. A
Unit Equivalent Right was essentially equivalent to a Common Unit of common membership interest in
First Permian. At March 1, 2002, First Permian had outstanding 1,140,992 Common Units and 1,350,000
Preferred Units. Parallel owned 350,000 Common Units of First Permian. The Unit Equivalent Rights
entitled the recipient to a one-time cash bonus. Payment of the bonus was triggered by the occurrence
of an Award Event. The amount of a bonus payment was defined as the difference between $30.00 per
Common Unit and the price per Common Unit received by First Permians holders of Common Units in a
transaction constituting an Award Event, multiplied by the number of Unit Equivalent Rights granted to
the recipient. To illustrate, assuming the holders of First Permians Common Units received $100.00 per
Common Unit from a sale of assets, a recipient of 1,000 Unit Equivalent Rights would be entitled to
receive a cash payment equal to $70.00 ($100.00 minus $30.00) multiplied by 1,000, or $70,000. Under
these Incentive Award Agreements, 9,565 Unit Equivalent Rights were granted to Mr. Oldham; 2,394 were
granted to Mr. Cambridge; 2,869 to Mr. Bayley; and 7,173 to Mr. Rutherford. In April, 2002 an Award
Event occurred when First Permian sold all of its oil and gas properties to Energen Corporation.
Because shares of Energen Corporations common stock were a component of the total purchase price for
First
Permians properties, the portion of the bonus payments attributable to the Energen stock was based upon
the price at which we sold our shares of Energen stock. Under these agreements, Mr. Cambridge received
$132,480; Mr. Oldham  $529,266; Mr. Bayley  $158,770; and Mr. Rutherford  $396,944. The Incentive
Award Agreements automatically terminated upon payment of the bonuses. Mr. Tiffin received a signing
and inducement bonus in the amount of $46,013 when he joined Parallel in June 2002.(3)
    
    Under rules of the Securities and Exchange Commission, the dollar value of perquisites and personal
benefits may be excluded from this column if the aggregate amount of such compensation is the lesser of
either $50,000 or 10% of the total (76)




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##### Table of Contents



annual salary and bonus reported for the named executive officers. However, for 2004 we have identified
the following amounts: Mr.
    
    Mr.
    
    Mr.
    
    Mr.
    
    Mr.
    
    Mr.Cambridge
    
    Oldham
    
    Tiffin
    
    Bayley
    
    Rutherford
    
    FosterPersonal use of club memberships (a)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    113
    
    
    $
    3,672
    
    
    $
    4,407Personal use of company car(b)
    
    $
    
    
    
    $
    2,507
    
    
    $
    
    
    
    $
    6,189
    
    
    $
    3,107
    
    
    $
    Car allowance
    
    $
    
    
    
    $
    
    
    
    $
    6,000
    
    
    $
    
    
    
    $
    
    
    
    $
    6,000Personal income tax preparation
and financial planning services
    
    $
    
    
    
    $
    3,588
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
 
 (a)
    
    The value of personal use of club memberships was determined by multiplying monthly dues by a fraction equal to
actual personal expenses divided by total expenses. All employees reimbursed us for their personal expenses.(b)
    
    Personal use of a company car is based on the lease value method published by the Internal Revenue Service for fringe benefits. (4)
    
    These amounts include insurance premiums for nondiscriminatory group life, medical, disability, long-term care and dental
insurance as follows: $21,088 for 2004; $19,697 for 2003; and $17,647 for 2002.(5)
    
    This amount represents Parallels contribution to Mr. Oldhams individual retirement account maintained under the 408(k)
simplified employee pension plan/individual retirement account.(6)
    
    This amount includes insurance premiums for nondiscriminatory group life, medical, disability and dental insurance as
follows: $17,560 for 2004; $16,964 for 2003; and $8,150 for 2002.(7)
    
    This amount represents Parallels contribution to Mr. Tiffins individual retirement account maintained under the 408(K)
simplified employee premium plan/individual retirement account.(8)
    
    This amount includes insurance premiums for nondiscriminatory group life, medical, disability, long-term care and dental
insurance as follows: $18,198 for 2004; $16,470 for 2003; and $15,150 for 2002.(9)
    
    This amount represents Parallels contribution to Mr. Bayleys individual retirement account maintained under the 408(k)
simplified employee pension plan/individual retirement account.(10)
    
    This amount includes insurance premiums for nondiscriminatory group life, medical, disability and dental insurance as
follows: $16,578 for 2004; $15,763 for 2003; and $14,221 for 2002.(11)
    
    This amount represents Parallels contribution to Mr. Rutherfords individual retirement account maintained under the
408(k) simplified employee premium plan/individual retirement account.(12)
    
    This amount includes insurance premiums for nondiscriminatory group life, medical, disability, long-term care and dental
insurance as follows: $17,576 for 2004.(13)
    
    This amount represents Parallels contribution to Mr. Fosters individual retirement account maintained under the 408(k)
simplified employee premium plan/individual retirement account.
 Stock Options
  (77)




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Value ofNumber of Securities Underlying
    
    UnexercisedShares Acquired
    
    Value
    
    Unexercised Options at Fiscal
    
    in-the-Money Optionson
    
    Realized
    
    Year-End (#)
    
    at Fiscal Year-End ($)(2)Name
    
    Exercise
    
    ($)(1)
    
    Exercisable
    
    Unexercisable
    
    Exercisable
    
    UnexercisableT.R. Cambridge
    
    
    0
    
    
    
    0
    
    
    
    300,000
    
    
    
    0
    
    
    
    440,000
    
    
    
    0L.C. Oldham
    
    
    0
    
    

    
    0
    
    
    
    347,500
    
    
    
    52,500
    
    
    
    613,650
    
    
    
    22,050E. A. Bayley
    
    
    0
    
    
    
    0
    
    
    
    165,000
    
    
    
    0
    
    
    
    230,330
    (3)
    
    
    0J.S. Rutherford
    
    
    0
    
    
    
    0
    
    
    
    158,750
    
    
    
    0
    
    
    
    230,330
    (4)
    
    
    0D.E. Tiffin
    
    
    0
    
    
    
    0
    
    
    
    50,000
    
    
    
    0
    
    
    
    160,500
    
    
    
    0S.D. Foster
    
    
    0
    
    
    
    0
    
    
    
    35,000
    
    
    
    0
    
    
    
    112,350
    
    
    
    0
 
 (1)
    
    The value realized is equal to the fair market value of a share of common stock on the date of exercise, less the
exercise price of the stock options exercised.(2)
    
    The value of unexercised in-the-money options is equal to the fair market value of a share of common stock at fiscal
year-end ($5.39 per share), based on the last sale price of Parallels common stock, less the exercise price.(3)
    
    At December 31, 2004, the exercise prices of exercisable options to purchase a total of 25,000 shares of common stock
held by Mr. Bayley exceeded $5.39, the fair market value of our common stock on that date.(4)
    
    At December 31, 2004, the exercise prices of exercisable options to purchase a total of 18,750 shares of common stock
held by Mr. Rutherford exceeded $5.39, the fair market value of our common stock on that date. Change of Control Arrangements
 Stock Option Plans
  
    
    Parallel is not the surviving entity in a merger or consolidation;
    
    Parallel sells, leases or exchanges all or substantially all of its assets;
    
    Parallel is to be dissolved and liquidated;
    
    any person or group acquires beneficial ownership of more than 50% of
Parallels common stock; or
 (78)




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
    
    in connection with a contested election of directors, the persons who
were directors of Parallel before the election cease to constitute a
majority of the Board of Directors.
  
    
    accelerate the time at which options may be exercised;
    
    require optionees to surrender some or all of their options and pay to each optionee
the change of control value;
    
    make adjustments to the options to reflect the change of control; or
    
    permit the holder of the option to purchase, instead of the shares of common stock
as
to which the option is then exercisable, the number and class of shares of stock or
other securities or property which the optionee would acquire under the terms of
the merger, consolidation or sale of assets and dissolution if, immediately before
the merger, consolidation or sale of assets or dissolution, the optionee had been
the
holder of record of the shares of common stock as to which the option is then
exercisable.
  
    
    the per share price offered to Parallels stockholders in a merger, consolidation, sale
of assets or dissolution transaction;
 
    
    the price per share offered to Parallels stockholders in a tender offer or exchange
offer where a change of control takes place; or
 
    
    if a change of control occurs, other than from a tender or exchange offer, the fair
market value per share of the shares into which the options being surrendered are
exercisable, as determined by the Committee.
 Incentive and Retention Plan
   
    
    an acquisition of Parallel by way of purchase, merger, consolidation, reorganization
or other business combination, whether by way of tender offer or negotiated
 (79)




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transaction, as a result of which Parallels outstanding securities
are exchanged or converted into cash, property and/or securities not
issued by Parallel;
 
    
    a sale, lease, exchange or other disposition by Parallel of all or
substantially all of its assets;
    
    the stockholders of Parallel approving a plan or proposal for the
liquidation or dissolution of Parallel; or
    
    any combination of any of the foregoing.
    
    
    the payment of a one-time performance bonus to eligible officers and
employees upon the occurrence of a corporate transaction; or
    
    a one time retention payment upon a change of control of Parallel. A change of
control is generally defined as the acquisition of beneficial ownership of
60% or more of the voting power of Parallels outstanding voting securities
by any person or group of persons, or a change in the composition of the
Board of Directors of Parallel such that the individuals who, at the
effective date of the plan, constitute the Board of Directors cease for any
reason to constitute at least a majority of the Board of Directors.
  (80)




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##### Table of Contents




    
    designate the officers and employees of Parallel and its subsidiaries who
participate in the plan, in addition to the Executive Group;
    
    maintain records and data necessary for proper administration of the plan;
    
    adopt rules of procedure and regulations necessary for the proper and
efficient administration of the plan;
    
    enforce the terms of the plan and the rules and regulations it adopts;
    
    employ agents, attorneys, accountants or other persons; and
    
    perform any other acts necessary or appropriate for the proper management
and administration of the plan.
  Compensation of Directors
 Stock
  (81)




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Cash
  
    
    $375 per meeting for service on the Compensation Committee, with the
Chairman of the Compensation Committee being entitled to receive an
additional fee of $2,500 per year;
    
    $375 per meeting for service on the Audit Committee, with the Chairman
of the Audit Committee being entitled to receive an additional fee of
$5,000 per year and each other Audit Committee member receiving $2,500
per year;
    
    $375 per meeting for service on the Corporate Governance and
Nominating Committee, with the Chairman of the Corporate Governance
and Nominating Committee being entitled to receive an additional fee
of $2,500 per year; and
    
    $375 per meeting for service on the Hedging and Acquisitions Committee.
  Options
  2004 Non-Employee Director Stock Grant Plan
  (82)




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Stock Option Plans
 1992 Stock Option Plan
 (83)




---



##### Table of Contents



1997 Nonemployee Directors Stock Option Plan
  (84)




---



##### Table of Contents



1998 Stock Option Plan
     2001 Nonemployee Directors Stock Option Plan
 (85)




---



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Employee Stock Option Plan
      (86)




---



##### Table of Contents



Section 408(k) Retirement Plan
       Section 401(k) Retirement Plan
  (87)




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##### Table of Contents



ITEM 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
  (88)




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##### Table of Contents



Name and Address
    
    Amount and Nature
    
    Percentof
    
    of
    
    ofBeneficial Owner
    
    Beneficial Ownership(1)
    
    Class(2)Thomas R. Cambridge
2201 Civic Circle, Suite 216
Amarillo, Texas 79109
    
    1,057,045(3)
    
    
    3.36
    %Dewayne E. Chitwood
400 Pine St., Suite 700
Abilene, Texas 79601
    
    1,686,279(4)
    
    
    5.28
    %Larry C. Oldham
1004 N. Big Spring, Suite 400 
Midland, Texas 79701
    
    892,090(5)
    
    
    2.83
    %Martin B. Oring 
706 Cinnamon Lane 
Franklin Lakes, New Jersey 07417
    
    220,888(6)
    
    
    *Ray M. Poage
4711 Meandering Way 
Colleyville, Texas 76034
    
    61,690(7)
    
    
    *Jeffrey G. Shrader 
801 S. Filmore, Suite 600 
Amarillo, Texas 79105
    
    130,222(8)
    
    
    *Eric A. Bayley 
1004 N. Big Spring, Suite 400
Midland, Texas 79701
    
    203,490(9)
    
    
    *John S. Rutherford 
1004 N. Big Spring, Suite 400
Midland, Texas 79701
    
    166,300(10)
    
    
    *Donald E. Tiffin 
1004 N. Big Spring, Suite 400
Midland, Texas 79701
    
    60,415(11)
    
    
    *Steven D. Foster 
1004 N. Big Spring, Suite 400 
Midland, Texas 79701
    
    43,000(12)
    
    
    *Wellington Management Company, LLP 
75 State Street 
Boston, Massachusetts 02109
    
    3,555,800(13)
    
    
    11.40
    %All Executive Officers and Directors 
as a Group (10 persons)
    
    4,521,419(14)
    
    
    13.57
    %
 
 *
    
    Less than one percent(1)
    
    Unless otherwise indicated, all shares of common stock are held directly with sole voting and investment powers.(2)
    
    Securities not outstanding, but included in the beneficial ownership of each such person, are deemed to be
outstanding for the purpose of computing the percentage of outstanding securities of the class owned by such
person, but are not deemed to be outstanding for the purpose of computing the percentage of the class owned by
any other person. Shares of common stock that may be acquired within sixty days upon exercise of outstanding
stock options and warrants or upon conversion of preferred stock are deemed to be outstanding. (89)




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##### Table of Contents



(3)
    
    Includes 757,045 shares of common stock held indirectly through Cambridge Collateral
Services, Ltd., a limited partnership of which Mr. Cambridge and his wife are the
general partners. Also included are 300,000 shares of common stock underlying
presently exercisable stock options held by Mr. Cambridge.(4)
    
    Includes 932,488 shares of common stock held directly by Wes-Tex Drilling Company,
L.P., a limited partnership, and 314,285 shares of common stock that may be acquired
by Wes-Tex Drilling Company, L.P. upon conversion of 110,000 shares of preferred
stock. In his capacity as president, chief executive officer and a manager of Wes-Tex
Holdings, LLC, the general partner of Wes-Tex Drilling Company, L.P., Mr. Chitwood may
be deemed to have shared voting and investment powers with respect to such shares. See
note 13 below. Also included are 20,000 shares of common stock held by the Estate of
Myrle Greathouse (the Estate); 157,142 shares that may be acquired by the Greathouse
Charitable Remainder Trust (the Trust) upon conversion of 55,000 shares of preferred
stock; and 157,142 shares of common stock that may be acquired by the Greathouse
Foundation (the Foundation) upon conversion of 55,000 shares of preferred stock. Mr.
Chitwood is the executor (but not a beneficiary) of the Estate,
the trustee (but not a beneficiary) of the Trust and the executive director and a
director of the Foundation. In these capacities, Mr. Chitwood may also be deemed to
have shared voting and investment powers with respect to the shares of common stock
beneficially owned by the Estate, the Trust and the Foundation. However, Mr. Chitwood
disclaims beneficial ownership of all shares of common stock held by Wes-Tex Drilling
Company, L.P., the Estate, Trust and Foundation. Also included are 100,000 shares of
common stock underlying presently exercisable stock options held by Mr. Chitwood.(5)
    
    Includes 200,000 shares of common stock held indirectly through Oldham Properties,
Ltd., a limited partnership of which Mr. Oldham is the general partner and he and his
wife are the limited partners. Also included are 355,000 shares of common stock
underlying presently exercisable stock options held by Mr. Oldham.(6)
    
    Of the total number of shares shown, 24,000 shares are held directly by Mr. Orings
wife; 100,000 shares may be acquired by Mr. Oring upon exercise of stock options held
by Mr. Oring; and 91,666 shares may be acquired upon exercise of a stock purchase
warrant.(7)
    
    Includes 25,000 shares that may be acquired upon exercise of a presently exercisable
stock option and an additional 25,000 shares with respect to which such stock option
will become exercisable within the next sixty days.(8)
    
    Includes 100,000 shares of common stock underlying presently exercisable stock options.(9)
    
    Includes 165,000 shares of common stock underlying presently exercisable stock
options. A total of 6,790 shares of common stock are held indirectly by Mr. Bayley
through individual retirement accounts and Parallels 408(K) Plan.(10)
    
    Includes 158,750 shares of common stock underlying presently exercisable stock
options. Also included are 7,550 shares held indirectly by Mr. Rutherford through his
408(k) Plan.(11)
    
    Of the total number of shares shown 6,500 shares are held indirectly through Mr.
Tiffins individual retirement account. Includes 50,000 shares of common stock
underlying presently exercisable stock options.(12)
    
    Includes 35,000 shares of common stock underlying presently exercisable stock options.(13)
    
    The number of shares reported is based on information, as of December 31, 2004,
contained in Schedule 13G filed by Wellington Management Company LLP (Wellington)
with the Securities and Exchange Commission on February 14, 2005. Wellington reported
that, in its capacity as investment advisor, it may be deemed to beneficially own such
shares which are held of record by clients of Wellington; that those clients have the
right to receive, or the power to direct the receipt of, dividends from, or the
proceeds from the sale of, such securities; and that no such client is known to have
such right or power with respect to more than five percent of this class of
securities. Wellington reported shared dispositive power with respect to all of such
shares and shared voting power with respect to 2,951,300 shares.(14)
    
    Includes 1,505,416 shares of common stock underlying stock options and warrants that
are presently exercisable or that become exercisable within sixty days and 628,569
shares of common stock that may be acquired upon conversion of 220,000 shares of
preferred stock. Section 16(a) Beneficial Ownership Reporting Compliance
  (90)




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##### Table of Contents



ITEM 13.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    (91)




---



##### Table of Contents



ITEM 14.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
  (92)




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##### Table of Contents



BDO
    
    KPMGTypes of Fees
    
    2004
    
    2003
    
    2004
    
    2003(dollars in thousands)Audit fees
    
    $
    551
    (1)
    
    $
    140
    
    
    $
    
    
    
    $
    120Audit-related fees
    
    
    9
    (2)
    
    
    
    
    
    
    23
    
    
    
    61Tax fees
    
    
    
    
    
    
    
    
    
    
    48
    
    
    
    28All other fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    560
    
    
    $
    140
    
    
    $
    71
    
    
    $
    209
 
 (1)
    
    Such amount includes $320,000 for
professional services in connection
with the audit of the internal
control over financial reporting
under Section 404 of the
Sarbanes-Oxley of 2002. This amount
includes associated expenses in the
amount of approximately $40,000.(2)
    
    Includes fees associated with our
abandoned senior debt offering and
our incentive and retention plan.    (93)




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##### Table of Contents



PART IV
 
 ITEM 15.
    
    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
        No.
    
    Description of Exhibit3.1
    
    Certificate of Incorporation of Registrant (Incorporated by reference
to Exhibit 3.1 to Form 10-Q of the Registrant for the fiscal quarter
ended June 30, 2004)3.2
    
    Bylaws of Registrant (Incorporated by reference to Exhibit 3 of the
Registrants Form 8-K, dated October 9, 2000, as filed with the
Securities and Exchange Commission on October 10, 2000)3.3
    
    Certificate of Formation of Parallel, L.L.C. (Incorporated by
reference to Exhibit No. 3.3 of the Registrants Registration
Statement on Form S-3, No. 333-119725 filed on October 13, 2004)3.4
    
    Limited Liability Company Agreement of Parallel, L.L.C. (Incorporated
by reference to Exhibit No. 3.4 of the Registrants Statement on Form
S-3, No. 333-119725 filed on October 13, 2004)
 (94)




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##### Table of Contents



No.
    
    Description of Exhibit3.5
    
    Certificate of Limited Partnership of Parallel, L.P. (Incorporated by
reference to Exhibit No. 3.5 of the Registrants Registration
Statement on Form S-3, No. 333-119725 filed on October 13, 2004)3.6
    
    Agreement of Limited Partnership of Parallel, L.P. (Incorporated by
reference to Exhibit No. 3.6 of the Registrants Registration
Statement on Form S-3, No. 333-119725 filed on October 13, 2004)4.1
    
    Certificate of Designations, Preferences and Rights of Serial
Preferred Stock  6% Convertible Preferred Stock (Incorporated by
reference to Exhibit 4.1 of Form 10-Q of the Registrant for the
fiscal quarter ended June 30, 2004)4.2
    
    Certificate of Designation, Preferences and Rights of Series A
Preferred Stock (Incorporated by reference to Exhibit 4.2 of Form
10-K of the Registrant for the fiscal year ended December 31, 2000)4.3
    
    Rights Agreement, dated as of October 5, 2000, between the Registrant
and Computershare Trust Company, Inc., as Rights Agent (Incorporated
by reference to Exhibit 4.3 of Form 10-K of the Registrant for the
fiscal year ended December 31, 2000)4.4
    
    Form of Indenture relating to senior debt securities of the
Registrant (Incorporated by reference to Exhibit No. 4.4 of the
Registrants Statement on Form S-3, No. 333-119725 filed on October
13, 2004)4.5
    
    Form of Indenture relating to subordinated debt securities of the
Registrant (Incorporated by reference to Exhibit No. 4.5 of the
Registrants Registration Statement on Form S-3, No. 333-119725 filed
on October 13, 2004)4.6
    
    Form of common stock certificate of the Registrant (Incorporated by
reference to Exhibit No. 4.6 of the Registrants Registration
Statement on Form S-3, No. 333-119725 filed on October 13, 2004)4.7
    
    Warrant Purchase Agreement, dated November 20, 2001, between the
Registrant and Stonington Corporation (Incorporated by reference to
Exhibit 4.7 of Form 10-K of the Registrant for the fiscal year ended
December 31, 2004 and filed with the Securities and Exchange
Commission on March 16, 2005)4.8
    
    Warrant Purchase Agreement, dated December 23, 2003, between the
Registrant and Stonington Corporation (Incorporated by reference to
Exhibit 4.8 of Form 10-K of the Registrant for the fiscal year ended
December 31, 2004 and filed with the Securities and Exchange
Commission on March 16, 2005)Executive Compensation Plans and Arrangements (Exhibit No.s 10.1
through 10.8):10.1
    
    1992 Stock Option Plan (Incorporated by reference to Exhibit 10.1 of
Form 10-K of the Registrant for the fiscal year ended December 31,
2004 and filed with the Securities and Exchange Commission on March
16, 2005)
 (95)




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##### Table of Contents



No.
    
    Description of Exhibit10.2
    
    Merrill Lynch, Pierce, Fenner & Smith Incorporated Prototype
Simplified Employee Pension Plan (Incorporated by reference to
Exhibit 10.6 of the Registrants Form 10-K for the fiscal year ended
December 31, 1995)10.3
    
    Non-Employee Directors Stock Option Plan (Incorporated by reference
to Exhibit 10.6 of the Registrants Form 10-K Report for the fiscal
year ended December 31, 1997)10.4
    
    1998 Stock Option Plan (Incorporated by reference to Exhibit 10.7 of
Form 10-K of the Registrant for the fiscal year ended December 31,
1998)10.5
    
    Form of Incentive Award Agreements, dated December 12, 2001, between
the Registrant and Thomas R. Cambridge, Larry C. Oldham, Eric A.
Bayley and John S. Rutherford granting 2,394 Unit Equivalent Rights
to Mr. Cambridge; 9,564
Unit Equivalent Rights to Mr. Oldham; 2,869 Unit Equivalent Rights
to Mr. Bayley; and 7,173 Unit Equivalent Rights to Mr. Rutherford
(Incorporated by reference to Exhibit 10.8 of Form 10-K of the
Registrant for the fiscal year ended December 31, 2001)10.6
    
    2001 Non-Employee Directors Stock Option Plan (Incorporated by
reference to Exhibit 10.7 of the Registrants Form 10-Q Report for
the first fiscal quarter
ended March 31, 2004)10.7
    
    2004 Non-Employee Director Stock Grant Plan (Incorporated by
reference to Exhibit 10.1 of the Registrants Form 8-K Report dated
September 22, 2004)10.8
    
    Incentive and Retention Plan (Incorporated by reference to Exhibit
10.1 of the Registrants Form 8-K Report dated September 23, 2004
and filed with the Securities and Exchange Commission on September
29, 2004)10.9
    
    Certificate of Formation of First Permian, L.L.C. (Incorporated by
reference to Exhibit 10.1 of the Registrants Form 8-K Report dated
June 30, 1999)10.10
    
    Limited Liability Company Agreement of First Permian, L.L.C.
(Incorporated by reference to Exhibit 10.2 of the Registrants Form
8-K Report dated June 30,
1999)10.11
    
    Amended and Restated Limited Liability Company Agreement of First
Permian, L.L.C. dated as of May 31, 2000 (Incorporated by reference
to Exhibit 10.16 of Form 10-K of the Registrant for the fiscal year
ended December 31, 2000)10.12
    
    Credit Agreement, dated June 30, 1999, by and among First Permian,
L.L.C., Parallel Petroleum Corporation, Baytech, Inc., and Bank One,
Texas, N.A.
 (96)




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##### Table of Contents



No.
    
    Description of Exhibit(Incorporated by reference to Exhibit 10.6 of the Registrants Form
8-K Report dated June 30, 1999)10.13
    
    Limited Guaranty, dated June 30, 1999, by and among First Permian,
L.L.C., Parallel Petroleum Corporation and Bank One, Texas, N.A.
(Incorporated by reference to Exhibit 10.7 of the Registrants Form
8-K Report dated June 30, 1999)10.14
    
    Second Restated Credit Agreement, dated October 25, 2000, among
First Permian, L.L.C., Bank One, Texas, N.A., and Bank One Capital
Markets, Inc. (Incorporated by reference to Exhibit 10.22 of Form
10-K of the Registrant for the fiscal year ended December 31, 2000)10.15
    
    Loan Agreement, dated as of January 25, 2002, between the Registrant
and First American Bank, SSB (Incorporated by reference to Exhibit
10.25 of Form 10-K of the Registrant for the fiscal year ended
December 31, 2001)10.16
    
    Purchase and Sale Agreement, dated as of November 27, 2002, among
JMC Exploration, Inc., Arkoma Star L.L.C., Parallel, L.P. and
Texland Petroleum, Inc. (Incorporated by reference to Exhibit 10.1
of Form 8-K of the Registrant, dated December 20, 2002)10.17
    
    First Amended and Restated Credit Agreement, dated December 20,
2002, by and among Parallel Petroleum Corporation, Parallel, L.P.,
Parallel, L.L.C., First American Bank, SSB, Western National Bank
and BNP Paribas (Incorporated by reference to Exhibit 10.2 of Form
8-K of the Registrant, dated December 20, 2002)10.18
    
    Guaranty dated December 20, 2002, between Parallel, L.L.C. and First
American Bank, SSB, as Agent (Incorporated by reference to Exhibit
10.3 of Form 8-K of the Registrant, dated December 20, 2002)10.19
    
    First Amendment to First Amended and Restated Credit Agreement,
dated as of September 12, 2003, by and among Parallel Petroleum
Corporation, Parallel, L.P., Parallel, L.L.C., First American Bank,
SSB, Western National Bank, and BNP Paribas (Incorporated by
reference to Exhibit 10.29 of Form 10-Q of the Registrant for the
quarter ended September 30, 2003)10.20
    
    Second Amended and Restated Credit Agreement, dated September 27,
2004, by and among Parallel Petroleum Corporation, Parallel, L.P.,
Parallel, L.L.C., First American Bank, SSB, BNP Paribas, Citibank,
F.S.B. and Western National Bank (Incorporated by reference to
Exhibit 10.1 of the Registrants Form 8-K Report dated September 27,
2004 and filed with the Securities and Exchange Commission on
October 1, 2004)10.21
    
    Agreement of Limited Partnership of West Fork Pipeline Company LP
(Incorporated by reference to Exhibit 10.21 of Form 10-K of the
Registrant for the fiscal year ended December 31, 2004 and filed
with the Securities and Exchange Commission on March 16, 2005)
 (97)




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##### Table of Contents



No.
    
    Description of Exhibit14
    
    Code of Ethics (Incorporated by reference to Exhibit No. 14 of the Registrants
Form 10-K Report for the fiscal year ended December 31, 2003 and filed with the
Securities and Exchange Commission on March 22, 2004)21
    
    Subsidiaries (Incorporated by reference to Exhibit No. 21 of the Registrants
Form 10-K Report for the fiscal year ended December 31, 2003 and filed with the
Securities and Exchange Commission on March 22, 2004)* 23.1
    
    Consent of KPMG LLP* 23.2
    
    Consent of BDO Seidman, LLP* 23.3
    
    Consent of Cawley Gillespie & Associates, Inc. Independent Petroleum Engineers* 31.1
    
    Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 302 of the 
Sarbanes-Oxley Act of 2002* 31.2
    
    Certification of Principal Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 302 of the 
Sarbanes-Oxley Act of 2002* 32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the 
Sarbanes-Oxley Act of 2002.* 32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the 
Sarbanes-Oxley Act of 2002.
 
 *
    
    Filed herewith. (98)




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##### Table of Contents



PARALLEL PETROLEUM CORPORATION
 Index to the Consolidated Financial Statements
 PageReport of Independent Registered Public Accounting Firm  BDO Seidman, LLP
    
    
    F-2Report of Independent Registered Public Accounting Firm  KPMG LLP
    
    
    F-3Financial Statements:Consolidated Balance Sheets at December 31, 2004 and 2003
    
    
    F-4Consolidated Statements of Income for the years ended December 31, 2004, 2003, and 2002
    
    
    F-5Consolidated Statements of Stockholders Equity for the years ended December 31, 2004, 2003, and 2002
    
    
    F-6Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003, and 2002
    
    
    F-7Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2004, 2003, and 2002
    
    
    F-8Notes to Consolidated Financial Statements
    
    
    F-9
  F-1




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
     /s/ BDO Seidman, LLP
 
 F-2




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
    /s/ KPMG LLP
 
 F-3




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##### Table of Contents



PARALLEL PETROLEUM CORPORATION
 
 Consolidated Balance Sheets
 December 31, 2004 and 2003
 (dollars in thousands)
 2004
    
    2003AssetsCurrent assets:Cash and cash equivalents
    
    $
    4,781
    
    
    $
    17,378Accounts receivable:Oil and gas
    
    
    6,642
    
    
    
    4,610Other, net of allowance for doubtful account of $9
    
    
    389
    
    
    
    316Affiliates
    
    
    7
    
    
    
    7,038
    
    
    
    4,926Other current assets
    
    
    179
    
    
    
    210Deferred tax asset
    
    
    2,531
    
    
    
    1,098Total current assets
    
    
    14,529
    
    
    
    23,612Property and equipment, at cost:Oil and gas properties, full cost method (including $9,526 and $2,334
not subject to depletion)
    
    
    229,245
    
    
    
    162,621Other
    
    
    2,062
    
    
    
    1,414231,307
    
    
    
    164,035Less accumulated depreciation, depletion and amortization
    
    
    (78,782
    )
    
    
    (70,070
    )Net property and equipment
    
    
    152,525
    
    
    
    93,965Restricted cash
    
    
    2,287
    
    
    
    Investment in Westfork Pipeline
    
    
    595
    
    
    
    297Other assets, net of accumulated amortization of $581 and $182
    
    
    735
    
    
    
    469$
    170,671
    
    
    $
    118,343Liabilities and Stockholders EquityCurrent liabilities:Accounts payable and accrued liabilities
    
    $
    5,568
    
    
    $
    3,965Asset retirement obligations
    
    
    150
    
    
    
    Derivative obligations
    
    
    7,965
    
    
    
    3,231Total current liabilities
    
    
    13,683
    
    
    
    7,196Revolving Credit Facility
    
    
    79,000
    
    
    
    39,750Asset retirement obligations
    
    
    1,982

    
    
    
    1,701Derivative obligations
    
    
    9,525
    
    
    
    2,655Deferred tax liability
    
    
    6,487
    
    
    
    5,809Total long-term liabilities
    
    
    96,994
    
    
    
    49,915Commitments and contingenciesStockholders equity:Series A preferred stock  par value $0.10 per share, authorized
50,000 shares
    
    
    
    
    
    
    Preferred stock  $0.60 cumulative convertible preferred stock  par
value
of $0.10 per share, (liquidation preference of $10 per share)
authorized 10,000,000 shares, issued and outstanding 950,000 and
959,500
    
    
    95
    
    
    
    96Common stock  par value $0.01 per share, authorized 60,000,000
shares, issued and outstanding 25,439,292 and 25,216,863
    
    
    254
    
    
    
    253Additional paid-in capital
    
    
    48,328
    
    
    
    47,544Retained earnings
    
    
    22,073
    
    
    
    17,060Accumulated other comprehensive loss
    
    
    (10,756
    )
    
    
    (3,721
    )Total stockholders equity
    
    
    59,994
    
    
    
    61,232$
    170,671
    
    
    $
    118,343
  F-4




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##### Table of Contents



PARALLEL PETROLEUM CORPORATION
 
 Consolidated Statements of Income
 Years ended December 31, 2004, 2003, 2002
 (dollars in thousands, except per share data)
 2004
    
    2003
    
    2002Oil and gas revenues
    
    $
    35,837
    
    
    $
    33,855
    
    
    $
    12,106Cost and expenses:Lease operating expense
    
    
    7,373
    
    
    
    6,458
    
    
    
    2,081Production taxes
    
    
    2,108
    
    
    
    1,946
    
    
    
    796General and administrative
    
    
    5,378
    
    
    
    4,344
    
    
    
    2,153Depreciation, depletion and amortization
    
    
    8,712
    
    
    
    8,390
    
    
    
    6,220Total costs and expenses
    
    
    23,571
    
    
    
    21,138
    
    
    
    11,250Operating income
    
    
    12,266
    
    
    
    12,717
    
    
    
    856Other income (expense), net:Equity in income of First Permian, L.P.
    
    
    
    
    
    
    
    
    
    
    31,044Incentive awards attributable to the sale of First Permian, L.P.
    
    
    
    
    
    
    
    
    
    
    (1,382
    )Loss on sale of marketable securities
    
    
    
    
    
    
    
    
    
    
    (717
    )Change in fair market value of derivatives
    
    
    
    
    
    
    (22
    )
    
    
    (948
    )Gain (loss) on ineffective portion of hedges
    
    
    (945
    )
    
    
    191
    
    
    
    Interest and other income
    
    
    189
    
    
    
    116
    
    
    
    93Dividend income
    
    
    
    
    
    
    
    
    
    
    371Interest expense
    
    
    (2,732
    )
    
    
    (2,048
    )
    
    
    (601
    )Other expense
    
    
    (324
    )
    
    
    (259
    )
    
    
    (332
    )Total other income (expense), net
    
    
    (3,812
    )
    
    
    (2,022
    )
    
    
    27,528Income before income taxes
    
    
    8,454
    
    
    
    10,695
    
    
    
    28,384Income tax expense, deferred
    
    
    (2,869
    )
    
    
    (3,031
    )
    
    
    (9,683
    )Income before cumulative effect of change in accounting principle
    
    
    5,585
    
    
    
    7,664
    
    
    
    18,701Cumulative effect on prior years of a change in accounting principle,
net of tax of $32
    
    
    
    
    
    
    (62
    )
    
    
    Net income
    
    
    5,585
    
    
    
    7,602
    
    
    
    18,701Cumulative preferred stock dividend
    
    
    (572
    )
    
    
    (580
    )
    
    
    (585
    )Net income available to common stockholders
    
    $
    5,013
    
    
    $
    7,022
    
    
    $
    18,116Net income per common share:Basic  before cumulative effect of a change in accounting principle
    
    $
    0.20
    
    
    $
    0.33
    
    
    $
    0.88Cumulative effect of a change in accounting principle, net of tax
    
    
    
    
    
    
    
    
    
    
    Basic  after cumulative effect of a change in accounting principle
    
    $
    0.20
    
    
    $
    0.33
    
    
    $
    0.88Diluted  before cumulative effect of a change in accounting principle
    
    $
    0.20
    
    
    $
    0.31
    
    
    $
    0.79Cumulative effect of a change in accounting principle, net of tax
    
    
    
    
    
    
    
    
    
    
    Diluted  after cumulative effect of a change in accounting principle
    
    $
    0.20
    
    
    $
    0.31
    
    
    $
    0.79
  F-5




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##### Table of Contents



PARALLEL PETROLEUM CORPORATION
 
 Consolidated Statements of Stockholders Equity
 Years ended December 31, 2004, 2003 and 2002
 (amounts in thousands)
 Preferred stock
    
    Common stock
    
    Additional
    
    
    
    
    
    Accumulated
    
    TotalNumber of
    
    
    
    
    
    Number of
    
    
    
    
    
    paid-in
    
    Retained
    
    Comprehensive
    
    stockholdersshares
    
    Amount
    
    shares
    
    Amount
    
    capital
    
    earnings (deficit)
    
    Loss
    
    equityBalanceJanuary 1, 2002
    
    
    975
    
    
    $
    97
    
    
    
    20,664
    
    
    $
    207
    
    
    $
    34,111
    
    
    $
    (8,078
    )
    
    $
    
    
    
    $
    26,337Common stock issued as
part of asset purchase
    
    
    
    
    
    
    
    
    
    
    454
    
    
    
    5
    
    
    
    995
    
    
    
    
    
    
    
    
    
    
    
    1,000Options exercised,
including income tax benefit of $16
    
    
    
    
    
    
    
    
    
    
    25
    
    
    
    
    
    
    
    46
    
    
    
    
    
    
    
    
    
    
    
    46Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,701
    
    
    
    
    
    
    
    18,701Dividends on preferred stock
($0.60 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (585
    )
    
    
    
    
    
    
    (585
    )Balance,December 31, 2002
    
    
    975
    
    
    
    97
    
    
    
    21,143
    
    
    
    212
    
    
    
    35,152
    
    
    
    10,038
    
    
    
    
    
    
    
    45,499Common stock issued for cash
    
    
    
    
    
    
    
    
    
    
    4,000
    
    
    
    40
    
    
    
    12,080
    
    
    
    
    
    
    
    
    
    
    
    12,120Preferred stock converted
    
    
    (15
    )
    
    
    (1
    )
    
    
    43
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Warrants issued for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    157
    
    
    
    
    
    
    
    
    
    
    
    157Options exercised,
including income tax benefit of $19
    
    
    
    
    
    
    
    
    
    
    31
    
    
    
    
    
    
    
    57
    
    
    
    
    
    
    
    
    
    
    
    57Stock option expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    98
    
    
    
    
    
    
    
    
    
    
    
    98Decrease in value of cash flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,721
    )
    
    
    (3,721
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,602
    
    
    
    
    
    
    
    7,602Dividends on preferred stock
($0.60 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (580
    )
    
    
    
    
    
    
    (580
    )BalanceDecember 31, 2003
    
    
    960
    
    
    
    96
    
    
    
    25,217
    
    
    
    253
    
    
    
    47,544
    
    
    
    17,060
    
    
    
    (3,721
    )
    
    
    61,232Common stock issued for services
    
    
    
    
    
    
    
    
    
    
    21
    
    
    
    
    
    
    
    99
    
    
    
    
    
    
    
    
    
    
    
    99Preferred stock converted
    
    
    (10
    )
    
    
    (1
    )
    
    
    27
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    Options exercised,
including income tax benefit of $177
    
    
    
    
    
    
    
    
    
    
    174
    
    
    
    1
    
    
    
    522
    
    
    
    
    
    
    
    
    
    
    
    523Deferred stock offering costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7
    )
    
    
    
    
    
    
    
    
    
    
    (7
    )Stock option expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    169
    
    
    
    
    
    
    
    
    
    
    
    169Decrease in value of cash flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,035
    )
    
    
    (7,035
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,585
    
    
    
    
    
    
    
    5,585Dividends on preferred stock
($0.60 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (572
    )
    
    
    
    
    
    
    (572
    )BalanceDecember 31, 2004
    
    
    950
    
    
    $
    95
    
    
    
    25,439
    
    
    $
    254
    
    
    $
    48,328
    
    
    $
    22,073
    
    
    $
    (10,756
    )
    
    $
    59,994
  F-6




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##### Table of Contents



PARALLEL PETROLEUM CORPORATION
 
 Consolidated Statements of Cash Flows
 Years ended December 31, 2004, 2003 and 2002
 (in thousands)
 2004
    
    2003
    
    2002Cash flows from operating activities:Net income
    
    $
    5,585
    
    
    $
    7,602
    
    
    $
    18,701Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation, depletion and amortization
    
    
    8,712
    
    
    
    8,390
    
    
    
    6,220Accretion of asset retirement obligation
    
    
    92
    
    
    
    139
    
    
    
    Equity in income of First Permian, L.P.
    
    
    
    
    
    
    
    
    
    
    (31,044
    )Loss on sale of marketable securities
    
    
    
    
    
    
    
    
    
    
    717Deferred income taxes
    
    
    2,869
    
    
    
    3,031
    
    
    
    9,683Change in fair value of derivative instruments
    
    
    
    
    
    
    22
    
    
    
    508(Gain) loss on ineffective portion of hedges
    
    
    945
    
    
    
    (191
    )
    
    
    440Common stock issued in lieu of cash for directors fees
    
    
    99
    
    
    
    
    
    
    
    Stock option expense
    
    
    169
    
    
    
    98
    
    
    
    Stock-based financial advisory services
    
    
    
    
    
    
    157
    
    
    
    Cumulative effect on prior years of a change in accounting
principle, net of tax
    
    
    
    
    
    
    62
    
    
    
    Changes in assets and liabilities:Other, net
    
    
    (266
    )
    
    
    139
    
    
    
    (549
    )Increase in accounts receivable
    
    
    (2,112
    )
    
    
    (783
    )
    
    
    (1,608
    )(Increase) decrease in other current assets
    
    
    31
    
    
    
    (132
    )
    
    
    (621
    )Increase (decrease) in accounts payable and accrued liabilities
    
    
    1,603
    
    
    
    931
    
    
    
    (388
    )Purchase of derivative instruments
    
    
    
    
    
    
    
    
    
    
    (531
    )Net cash provided by operating activities
    
    
    17,727
    
    
    
    19,465
    
    
    
    1,528Cash flows from investing activities:Additions to oil and gas properties
    
    
    (67,911
    )
    
    
    (14,930
    )
    
    
    (61,240
    )Restricted cash
    
    
    (2,287
    )
    
    
    
    
    
    
    Proceeds from disposition of oil and gas properties
    
    
    1,625
    
    
    
    64
    
    
    
    693Proceeds from disposition of Energen Stock
    
    
    
    
    
    
    
    
    
    
    24,863Additions to other property and equipment
    
    
    (647
    )
    
    
    (331
    )
    
    
    (531
    )Distribution received from investment of First Permian, LLC
    
    
    
    
    
    
    
    
    
    
    5,938Investment in Westfork Pipeline
    
    
    (298
    )
    
    
    (297
    )
    
    
    Net cash used in investing activities
    
    
    (69,518
    )
    
    
    (15,494
    )
    
    
    (30,277
    )Cash flows from financing activities:Net borrowing (payments) on revolving line of credit
    
    
    39,250
    
    
    
    (10,000
    )
    
    
    37,750Proceeds from exercise of stock options
    
    
    523
    
    
    
    55
    
    
    
    45Proceeds (net) from common stock issued
    
    
    
    
    
    
    12,120
    
    
    
    Payment of preferred stock dividend
    
    
    (572
    )
    
    
    (580
    )
    
    
    (585
    )Deferred stock offering costs
    
    
    (7
    )
    
    
    
    
    
    
    Net cash provided by financing activities
    
    
    39,194
    
    
    
    1,595
    
    
    
    37,210Net increase (decrease) in cash and cash equivalents
    
    
    (12,597
    )
    
    
    5,566
    
    
    
    8,461Cash and cash equivalents at beginning of year
    
    
    17,378
    
    
    
    11,812
    
    
    
    3,351Cash and cash equivalents at end of year
    
    $
    4,781
    
    
    $
    17,378
    
    
    $
    11,812Non-cash financing and investing activities:Oil and gas properties asset retirement obligation
    
    $
    338
    
    
    $
    1,075
    
    
    $
    (Non-cash) proceeds from sale of investment of First Permian, L.P.
    
    $
    
    
    
    $
    
    
    
    $
    (25,580
    )Accrued preferred stock dividend
    
    $
    
    
    
    $
    
    
    
    $
    24Issuance of stock for purchase of oil and gas property
    
    $
    
    
    
    $
    
    
    
    $
    1,000
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PARALLEL PETROLEUM CORPORATION
 
 Consolidated Statements of Comprehensive Income (Loss)
 Years ended December 31, 2004, 2003 and 2002
 (dollars in thousands)
 2004
    
    2003
    
    2002Net income
    
    $
    5,585
    
    
    $
    7,602
    
    
    $
    18,701Other comprehensive loss:Unrealized losses on derivatives
    
    
    (19,378
    )
    
    
    (8,336
    )
    
    
    Reclassification adjustment for losses
on derivatives included in net income
    
    
    8,719
    
    
    
    2,699
    
    
    
    Change in fair value of derivatives
    
    
    (10,659
    )
    
    
    (5,637
    )
    
    
    Income tax benefit
    
    
    3,624
    
    
    
    1,916
    
    
    
    Total other comprehensive loss
    
    
    (7,035
    )
    
    
    (3,721
    )
    
    
    Total comprehensive income (loss)
    
    $
    (1,450
    )
    
    $
    3,881
    
    
    $
    18,701
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PARALLEL PETROLEUM CORPORATION
 
   (1)
    
    Organization, Business and Summary of Significant Accounting Policies
 (a)
    
    Basis of ConsolidationThe accompanying financial statements present the consolidated results of Parallel
Petroleum Corporation, a Delaware Corporation, and its wholly owned subsidiaries,
Parallel L.P. and Parallel, L.L.C (collectively the Company or Parallel). All
significant inter-company account balances and transactions have been eliminated. The
Company accounts for its interests in oil and gas joint ventures and working interests
using the proportionate consolidation method. Under this method, the Company records
its proportionate share of assets, liabilities, revenues and expenses.(b)
    
    Nature of OperationThe Companys focus is on the acquisition, development and exploitation of long-lived
oil and
natural gas reserves and, to a lesser extent, exploration for new oil and natural gas
reserves. The Companys business activities are carried out primarily in Texas. The
Companys activities are
focused in the Permian Basin of west Texas and New Mexico, Liberty County in east Texas
and the onshore Gulf Coast area of south Texas. The Company is actively evaluating,
leasing, drilling and preparing to drill new projects located in New Mexico, the Fort
Worth Basin of Texas, the Cotton Valley Reef trend of east Texas and the Uinta Basin of
Utah.(c)
    
    Concentration of Credit RiskFinancial instruments that potentially expose the Company to concentrations of credit
risk consist primarily of unsecured accounts receivable from unaffiliated working
interest owners and crude oil
and natural gas purchasers. A substantial portion of Parallels oil and natural gas
reserves are located
in the Permian Basin and the Company may be disproportionally exposed to the impact of
delays or interruptions of production from these wells due to mechanical problems,
damages to the current producing reservoirs and significant governmental regulation,
including any curtailment of production or interruption of transportation of oil or gas
produced from the wells.(d)
    
    Property and EquipmentOil and gas properties:The Company uses the full cost method of accounting for its oil and gas producing
activities. Accordingly, all costs associated with acquisition, exploration, and
development of oil and gas reserves, including directly related overhead costs, are
capitalized.Management and service fees received for contractual arrangements, if any, are treated
as reimbursement of costs, offsetting the costs incurred to provide those services.
Specifically, from time to time, the Company serves as operator of its oil and gas
properties in which it owns an interest. Under operating agreements naming the Company
as operator, the Company is reimbursed for certain specified direct charges and overhead
charges. Amounts received in reimbursement for drilling activities are applied as a
reduction to Parallels capital costs, and amounts received in reimbursement for
producing activities are applied to reduce the Companys general and administrative
expenses.Depletion is provided using the unit-of-production method based upon estimates of proved
oil and gas reserves with oil and gas production being converted to a common unit of
measure based upon their relative energy content. Investments in unproved properties and
major development projects are not amortized until proved reserves associated with the
projects can be determined or until impairment
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PARALLEL PETROLEUM CORPORATION
 
 occurs. If the results of an assessment indicate that the properties are impaired, the
amount of the impairment is added to the capitalized costs to be amortized. There was no
impairment recorded for 2004, 2003 and 2002.If the net investment in oil and gas properties in a cost center, as adjusted for asset
retirement obligations, exceeds an amount equal to the sum of (1) the standardized
measure of discounted future net cash flows from proved reserves (see Note 15) and (2)
the lower of cost or fair market value of
properties in process of development and unexplored acreage, the excess is charged to
expense as additional depletion. The standardized measure is calculated using a 10%
discount rate and is based
on unescalated prices in effect at year-end with effect given to the Companys cash flow
hedge positions.Sales of proved and unproved properties are accounted for as adjustments of capitalized
costs with no gain or loss recognized, unless such adjustments would significantly alter
the relationship between capitalized costs and proved oil and gas reserves, in which
case the gain or loss is recognized in income. Abandonments of properties are accounted
for as adjustments of capitalized costs subject to amortization.Other:Maintenance and repairs are charged to operations. Renewals and betterments are
capitalized to the appropriate property and equipment accounts.Upon retirement or disposition of assets other than oil and gas properties, the cost and
related accumulated depreciation are removed from the accounts with the resulting gains
or losses, if any, recognized in income. Depreciation of other property and equipment is
computed using the straight-line method based on the estimated useful lives of the
property and equipment.(e)
    
    Income TaxesThe Company accounts for federal income taxes using the liability method. Under the
liability
method, deferred tax assets and liabilities are recognized for the future tax
consequences attributable
to differences between financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. Under the
liability method, the effect on previously recorded deferred tax assets and liabilities
resulting from a change in tax rates is recognized in earnings in the period in which
the change is enacted.(f)
    
    InvestmentsInvestments in affiliated companies with a 20% to 50% ownership interest are accounted
for on the equity basis and, accordingly, net income includes the Companys share of
their income or loss.(g)
    
    Stock-Based CompensationPrior to 2003, Parallel accounted for stock-based compensation utilizing the intrinsic
value method prescribed by Accounting Principles Board Opinion No. 25 Accounting for
Stock Issued to Employees(APB 25) and related interpretations. In September, 2003,
Parallel adopted the provisions of Statement of Financial Accounting Standards No. 148,
Accounting for Stock-Based Compensation  Transition and Disclosure,an amendment to
SFAS No. 123, whereby certain transitional alternatives are available for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. Parallel used the prospective method which applied prospectively the fair
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PARALLEL PETROLEUM CORPORATION
 
 value recognition method to all employee and director awards granted, modified or
settled after the beginning of the fiscal year in which the fair value based method of
accounting for stock-based compensation was adopted. The potential impact of using the
fair value method for all options, on a pro forma basis, is presented in the table that
follows. As Parallel adopted the fair value recognition provisions of SFAS No. 123 prospectively for all employee awards granted, modified or
settled after January 1, 2003, the charge for stock-based compensation included in the
determination of income in 2003 and 2002 is less than that which would have been
recognized if the fair value method had been applied to all awards since the original
effective date of SFAS No. 123.Parallel recognized compensation expense of $169,000 in 2004 and $98,000 in 2003
associated with
its stock option grants in 2003. The total number of options granted during 2003
was 180,000. There were no options granted during 2004.The following table illustrates the effect on net income and earnings per share as if
the fair value based method had been applied to all outstanding and unvested awards in
each period. The fair value of each grant is estimated on the date of grant using the Black-Scholes option-pricing
model.
 2004
    
    2003
    
    2002(in thousands, except per share data)Net income as reported
    
    $
    5,585
    
    
    $
    7,602
    
    
    $
    18,701Add:Expense recorded in 2004 and 2003
    
    
    169
    
    
    
    98
    
    
    
    Deduct:Total stock-based employee compensation expense
determined under fair value method for all awards,
net of related tax effects
    
    
    (360
    )
    
    
    (587
    )
    
    
    (757
    )Pro forma net income
    
    $
    5,394
    
    
    $
    7,113
    
    
    $
    17,944Earnings per share:Basic  as reported
    
    $
    0.20
    
    
    $
    0.33
    
    
    $
    0.88Basic  pro forma
    
    $
    0.20
    
    
    $
    0.33
    
    
    $
    0.87Diluted  as reported
    
    $
    0.20
    
    
    $
    0.31
    
    
    $
    0.79Diluted  pro forma
    
    $
    0.20
    
    
    $
    0.29
    
    
    $
    0.74
 (h)
    
    Environmental ExpendituresThe Company is subject to extensive federal, state and local environmental laws and
regulations.
These laws regulate the discharge of materials into the environment and may require the
Company to remove or mitigate the environmental effects of the disposal or release of
petroleum or chemical substances at various sites. Environmental expenditures are
expensed or capitalized depending on their future economic benefit. Expenditures that
relate to an existing condition caused by past
operations and that have no future economic benefits are expensed.Liabilities for expenditures of a noncapital nature are recorded when environmental
assessment and/or remediation is probable, and the costs can be reasonably estimated.
Such liabilities are generally
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PARALLEL PETROLEUM CORPORATION
 
 undiscounted unless the timing of cash payments for the liability or component are fixed
or reliably determinable.(i)
    
    Earnings Per ShareBasic earnings per share excludes any dilutive effects of option, warrants and
convertible securities and is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the period.
Diluted earnings per share are computed
similar to basic earnings per share; however, diluted earnings per share reflect the
assumed
conversion of all potentially dilutive securities.The following table provides the computation of basic and diluted earnings per share for
the year ended December 31:
 2004
    
    2003
    
    2002(in thousands except per share data)Basic EPS Computation:Numerator-Net income before cumulative effect of a change in accounting
principle
    
    $
    5,585
    
    
    $
    7,664
    
    
    $
    18,701Cumulative effect of a change in accounting principle, net of tax
    
    
    
    
    
    
    (62
    )
    
    
    5,585
    
    
    
    7,602
    
    
    
    18,701Preferred stock dividend
    
    
    (572
    )
    
    
    (580
    )
    
    
    (585
    )Net income available to common stockholders
    
    $
    5,013
    
    
    $
    7,022
    
    
    $
    18,116Denominator-Weighted average common shares outstanding
    
    
    25,323
    
    
    
    21,264
    
    
    
    20,680Basic EPS:Net income before cumulative effect of a change in accounting
principle
    
    $
    0.20
    
    
    $
    0.33
    
    
    $
    0.88Cumulative effect of a change in accounting principle, net of tax
    
    
    
    
    
    
    
    
    
    
    Basic net earnings per share
    
    $
    0.20
    
    
    $
    0.33
    
    
    $
    0.88Diluted EPS Computation:Numerator-Net income before cumulative effect of a change in accounting
principle
    
    $
    5,585
    
    
    $
    7,664
    
    
    $
    18,701Cumulative effect of a change in accounting principle, net of tax
    
    
    
    
    
    
    (62
    )
    
    
    5,585
    
    
    
    7,602
    
    
    
    18,701Preferred stock dividend
    
    
    
    
    
    
    
    
    
    
    Net income available to common stockholders
    
    $
    5,585
    
    
    $
    7,602
    
    
    $
    18,701Denominator -Weighted average common shares outstanding
    
    
    25,323
    
    
    
    21,264
    
    
    
    20,680Employee stock options
    
    
    289
    
    
    
    150
    
    
    
    85Warrants
    
    
    76
    
    
    
    20
    
    
    
    Preferred stock
    
    
    2,714
    
    
    
    2,741
    
    
    
    2,784Weighted average common shares for diluted
earnings per share assuming conversion
    
    
    28,402
    
    
    
    24,175
    
    
    
    23,549Diluted EPS:Net income before cumulative effect of a change in accounting principle
    
    $
    0.20
    
    
    $
    0.31
    
    
    $
    0.79Cumulative effect of a change in accounting principle, net of tax
    
    
    
    
    
    
    
    
    
    
    Diluted net earnings per share
    
    $
    0.20
    
    
    $
    0.31
    
    
    $
    0.79
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PARALLEL PETROLEUM CORPORATION
 
 Some stock options and warrants during 2004, 2003 and 2002, approximately 664,000, 1.4
million and 1.9 million shares, respectively, were not included in the computation of diluted
net earnings per share because the stock options exercise price was greater than the
average market price of common stock of the Company.(j)
    
    Use of Estimates in the Preparation of Consolidated Financial StatementsPreparation of the accompanying Consolidated Financial Statements in conformity with
accounting principles generally accepted in the United States of America 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
Consolidated Financial Statements and the reported amounts of revenues and expenses
during the reporting period. The oil and gas reserve estimates, and the related future
net cash flows derived from those reserves, are used in the determination of depletion
expense and the full-cost ceiling test and are inherently imprecise. Actual results
could differ from those estimates.(k)
    
    Cash EquivalentsFor purposes of the statements of cash flows, the Company considers all demand deposits,
money market accounts and certificates of deposit purchased with an original maturity of
three months or less to be cash equivalents.(l)
    
    Restricted CashRestricted cash includes cash held in escrow for the purchase of producing properties
(see Note 3).(m)
    
    ReclassificationsCertain reclassifications have been made to 2003 amounts to conform to the 2004
presentation.(n)
    
    Derivative Financial InstrumentsDerivative financial instruments, utilized to manage or reduce commodity price risk
related to the Companys production and interest rate risk related to the Companys
long-term debt, are accounted for under the provisions of Statement of Financial
Accounting Standards No. 133(SFAS No. 133), Accounting for Derivative Instruments and
for Hedging Activities, and related interpretations.
Under this statement, all derivatives are carried on the balance sheet at fair value. If
the derivative is designated as a fair value hedge, the changes in the fair value of the
derivative and of the hedged item attributable to the hedged risk are recognized in
earnings. If the derivative is designated as a cash
flow hedge, the effective portions of changes in the fair value of the derivative are
recorded in other comprehensive income (OCI) and are recognized in the statement of
operations when the hedged item affects earnings. If the derivative is not designated as
a hedge, changes in the fair value are recognized in other expense. Ineffective portions
of changes in the fair value of cash flow hedges are also recognized in other expense.
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PARALLEL PETROLEUM CORPORATION
 
 (o)
    
    Revenue RecognitionOil and natural gas revenues are recorded using the sales method, whereby the Company
recognizes oil and natural gas revenue based on the amount of oil and gas sold to
purchasers. For the period ended December 31, 2004, the Company did not have any oil or
gas imbalances recorded. The Company does not recognize revenues until they are realized
or realizable and earned. Revenues are considered realized or realizable and earned
when: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or
services have been rendered; (iii) the sellers price to the buyer is fixed or
determinable and (iv) collectibility is reasonably assured.The following summarizes revenue for each of the three years ended December 31 by
product sold.
 2004
    
    2003
    
    2002(in thousands)Oil revenue
    
    $
    28,455
    
    
    $
    18,300
    
    
    $
    3,217Oil hedge
    
    
    (7,458
    )
    
    
    (1,659
    )
    
    
    Gas revenue
    
    
    15,735
    
    
    
    18,121
    
    
    
    8,889Gas hedge
    
    
    (895
    )
    
    
    (907
    )
    
    
    $
    35,837
    
    
    $
    33,855
    
    
    $
    12,106
 (p)
    
    Recent Accounting PronouncementsIn September 2004, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 106(SAB No. 106). SAB No. 106 applies to companies using the full cost
method of accounting
for oil and gas properties and equipment costs. SAB No. 106 affected the way in which
the Company calculates its full cost ceiling limitation (the Company excluded asset
retirement costs related to
proved developed properties in the calculation of the ceiling) and the way the Company
calculated depletion on its gas properties (only asset retirement costs for new
recompletions and new wells will
be included in future development costs in calculating depletion rates). The Company
adopted SAB No. 106 on October 1, 2004.In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 123 (revised 2004), Share- Based Payment(SFAS No.
123(R)) . SFAS No. 123(R) requires an entity to recognize the grant-date fair value of
stock options and other equity-based compensation issued to employees in the income
statement. SFAS No.
123(R) will be effective for the Company beginning July 1, 2005. The Company does not
expect
SFAS No. 123(R) to have a material impact on its results of operations.In December 2004, the FASB issued FASB Staff Position FAS 109-1, Application on FASB
Statement No. 109, Accounting for Income Taxes, for the Tax Deduction Provided to U.S.
Based Manufacturers by the American Jobs Creation Act of 2004(FSP 109-1). FSP 109-1
clarifies how to apply Statement No. 109 to the new laws tax deduction for income
attributable to Domestic production activities. The Company is currently evaluating
the impact of the new law.
 (2)
    
    Fair Value of Financial InstrumentsThe carrying amount of cash, accounts receivable, accounts payable, and accrued liabilities
approximates fair value because of the short maturity of these instruments.
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PARALLEL PETROLEUM CORPORATION
 
 The carrying amount of long-term debt approximates fair value because the Companys current
borrowing rate is based on a variable market rate of interest. The Company also has derivative
instruments which are described in Footnote 5.(3)
    
    Oil and Gas PropertiesThe following table reflects capitalized costs related to the oil and gas properties as of
December 31:
 2004
    
    2003(in thousands)Proved properties
    
    $
    219,719
    
    
    $
    160,287Unproved properties , not subject to depletion
    
    
    9,526
    
    
    
    2,334229,245
    
    
    
    162,621Accumulated depletion
    
    
    (77,623
    )
    
    
    (69,726
    )$
    151,622
    
    
    $
    92,895
 The following table reflects, by category of cost, amounts excluded from the depletion base
for the periods presented:
 Year
    
    Leasehold
    
    Geological andIncurred
    
    Costs
    
    Geophysical
    
    Total($ in thousands)2004
    
    $
    6,816
    
    
    $
    786
    
    
    $
    7,6022003
    
    
    1,195
    
    
    
    327
    
    
    
    1,5222002
and prior
    
    
    199
    
    
    
    203
    
    
    
    402$
    8,210
    
    
    $
    1,316
    
    
    $
    9,526
 At December 31, 2004 and 2003, unevaluated costs of approximately $9.5 million and $2.3
million were excluded from the depletion base. These costs consist primarily of acreage
acquisition and related geological and geophysical costs. The majority of these costs relate
to the Companys New Mexico and Utah leasehold positions which include federal leases with ten
year terms. Although the Company expects transfers of cost to the full cost pool to commence
in 2005 and continue throughout the term of the leases, timing is highly dependent on current
and future drilling success rates.Certain directly identifiable internal costs of property acquisition, exploration, and
development activities
are capitalized. Such costs capitalized in 2004, 2003 and 2002 totaled $1.0 million, $0.9
million and $1.3 million, respectively.Depletion per equivalent unit of production (BOE) was $7.05, $6.83 and $10.52 for 2004, 2003,
and 2002, respectively.The following table reflects costs incurred in oil and gas property acquisition, exploration,
and development activities for each of the years in the three year period ended December 31:
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PARALLEL PETROLEUM CORPORATION
 
 2004
    
    2003
    
    2002(in thousands)Proved property acquisition costs
    
    $
    39,763
    
    
    $
    2,209
    
    
    $
    48,044Unproved property acquisitions costs
    
    
    7,400
    
    
    
    3,831
    
    
    
    2,295Exploration
    
    
    6,794
    
    
    
    3,240
    
    
    
    1,291Development
    
    
    13,954
    
    
    
    5,650
    
    
    
    9,308$
    67,911
    
    
    $
    14,930
    
    
    $
    60,938
 On December 20, 2002, Parallel purchased a majority non-operated interest in producing oil and
gas properties located in the Fullerton Field of Andrews County, Texas in the Permian Basin of
west Texas. The total purchase price for this interest in the Fullerton properties was $46.0 million.In September and October 2004, in two separate transactions, Parallel purchased additional
non-operated working interests in the Fullerton Field properties. The net purchase price for
these two transactions was approximately $20.9 million.In October and December 2004, Parallel purchased producing properties in the Carm-Ann San
Andres and North Means Queen Unit located in Andrews and Gaines counties, Texas. The combined
net purchase price was approximately $16.5 million. In January 2005, Parallel acquired additional interest,
in these properties for a net purchase price of approximately $1.5 million. The 2005 purchase
was made out of restricted cash.(4)
    
    Asset Retirement ObligationOn January 1, 2003, the Company adopted Statement of Financial Accounting Standards No. 143,
Accounting for Asset Retirement Obligations(SFAS 143). SFAS 143 requires companies to
recognize a liability for the present value of all legal obligations associated with the
retirement of tangible long-lived assets and to capitalize an equal amount as part of the cost
of the related oil and gas properties.The adoption of SFAS 143 required the Company to record a non-cash expense, net of tax, of
approximately $62,000 as a cumulative effect of change in accounting principle in the first
quarter of 2003, as well as a non-current liability of approximately $1.5 million and an addition to oil and
gas properties of approximately $1.5 million. The following table summarizes the Companys
asset retirement obligation transactions as if SFAS No. 143 had been applied during all
periods presented.
 2004
    
    2003
    
    2002(in thousands)Pro FormaBeginning asset retirement obligation
    
    $
    1,701
    
    
    $
    1,469
    
    
    $
    897Additions related to new properties
    
    
    886
    
    
    
    345
    
    
    
    498Deletions related to property disposals
    
    
    (547
    )
    
    
    (252
    )
    
    
    Accretion expense
    
    
    92
    
    
    
    139
    
    
    
    74Ending asset retirement obligation
    
    $
    2,132
    
    
    $
    1,701
    
    
    $
    1,469
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PARALLEL PETROLEUM CORPORATION
 
 The table below reflects, on a pro forma basis, the net income and net income per share
amounts as if the provisions of SFAS No. 143 had been applied during all the periods
presented.
 2004
    
    2003
    
    2002(dollars in thousands except per share data)Pro FormaNet income, as reported
    
    $
    5,585
    
    
    $
    7,602
    
    
    $
    18,701Accretion of asset retirement obligation, net of tax
    
    
    
    
    
    
    
    
    
    
    (39
    )Cumulative effect of change in
accounting principle, net of tax
    
    
    
    
    
    
    62
    
    
    
    Pro forma net income
    
    $
    5,585
    
    
    $
    7,664
    
    
    $
    18,662Basic net income per share, as reported
    
    $
    0.20
    
    
    $
    0.33
    
    
    $
    0.88Basic net income per share, pro forma
    
    $
    0.20
    
    
    $
    0.33
    
    
    $
    0.88Diluted net income per share, as reported
    
    $
    0.20
    
    
    $
    0.31
    
    
    $
    0.79Diluted net income per share, pro forma
    
    $
    0.20
    
    
    $
    0.31
    
    
    $
    0.79
 (5)
    
    Derivative InstrumentsThe Company enters into derivative contracts to provide a measure of stability in the
Companys oil and
gas revenues and interest rate payments and to manage exposure to commodity price and interest
rate risk. The Companys objective is to lock in a range of oil and gas prices and fixed
interest rate.. The Companys line of credit agreement as of December 31, 2004 required at
least 50% of the Companys estimated
monthly crude oil produced from proved producing oil and gas properties during 2005 calendar
year and thereafter until the maturity date to be hedged. The Company designates its interest
rate swaps, costless collars and commodity swaps as cash flow hedges. The effective portion of
the unrealized gain or loss on cash flow hedges is recorded in other comprehensive income
until the forecasted transaction occurs.
During the term of a cash flow hedge, the effective portion of the change in the fair value of
the derivatives
is recorded in stockholders equity as other comprehensive income (loss) and then transferred
to oil and gas revenues when the production is sold and interest expense as the interest
accrues. Ineffective portions of hedges (changes in realized prices that do not match the
changes in the hedge price) are recognized in other expense as they occur. While the hedge
contract is open, the ineffective gain or loss may increase or
decrease until settlement of the contract.As of December 31, 2004 and 2003, the Company had recorded unrealized losses of $16.3 million
and $5.9 million, respectively, related to its derivative instruments, which represented the
estimated aggregate fair values of the Companys open derivative contracts as of that date. In
addition, the Company recorded
realized losses related to the ineffective portion of derivative instruments aggregating
approximately $1.2 million for December 31, 2004, and a gain or reversal of ineffectiveness,
of $0.2 million at December 31, 2003. These unrealized and realized losses are presented on
the Consolidated Balance Sheet ending December 31, 2004 and 2003, as a current liability of
$8.0 million and $3.2 million and long-term liabilities of $9.5 million and $2.7 million,
respectively. The unrealized losses are presented in stockholders equity in the Consolidated
Balance Sheets as accumulated other comprehensive loss of $10.8 million, net of income taxes
of $5.5 million for December 31, 2004 and $3.7 million, net of income taxes of $1.9 million
for December 31, 2003. During the twelve month period ending December 31, 2005, the Company
expects approximately $4.9 million, net of income taxes, to be transferred out of accumulated
comprehensive loss
and charged to earnings.
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PARALLEL PETROLEUM CORPORATION
 
 The Company is exposed to credit risk in the event of nonperformance by BNP Paribas, a
counterparty, in
its derivative instruments. However, the Company periodically assesses its credit worthiness
to mitigate
this credit risk.Interest Rate SensitivitySwaps. The Company entered into 48-month LIBOR fixed interest rate swap contracts with
BNP Paribas. The Company will pay a fixed interest rate, as noted in the table below, for the
48-month period beginning January 1, 2005 through December 30, 2008.Under the Companys revolving credit facility, the Company may elect an interest rate based
upon the agent banks base lending rate plus a base rate margin of up to 2.00%, or the LIBOR
rate, plus a margin ranging from 2.25% to 4.75% per annum, depending on the Companys
borrowing base usage. The interest rate the Company is required to pay, including the
applicable margin, may never be less than 4.50%.The Company entered into fixed rate swap contracts with BNP Paribas based on the 90-day LIBOR
rates at the time of the contract. The effect of the Swap is that the Company converted its
variable rate debt into
fixed rate debt. The Company will receive variable interest rates as previously described and
pay fixed
rates as shown in the table below.
 Period of Time
    

Notional
Amounts
    
    Fixed Interest Rates$ in millionsJanuary 1, 2005 thru December 31, 2005
    
    $
    50
    
    
    
    3.36
    %January 1, 2006 thru December 31, 2006
    
    $
    50
    
    
    
    3.82
    %January 1, 2007 thru December 31, 2007
    
    $
    50
    
    
    
    4.30
    %January 1, 2008 thru December 30, 2008
    
    $
    50
    
    
    
    4.74
    %
 Commodity Price SensitivityPuts. On May 24, 2002 the Company purchased put floors on volumes of 100,000 Mcf per
month for a total of 700,000 Mcf during the seven month period from April, 2003 through October, 2003 at a
floor price of $3.00 per Mcf for a total consideration of approximately $139,500. These
derivatives were not held for trading purposes.A decrease in fair value of the put floors of $22,000 and $508,000 was recognized in the
Consolidated Statements of Operations for the years ended 2003 and 2002, respectively.Costless Collars. Collars are created by purchasing puts to establish a floor price
and then selling a call which establishes a maximum amount the Company will receive for the
oil or gas hedged. Calls are sold to offset the premium paid for buying the put. The Company
has entered into costless gas collars and light sweet crude oil collars.A recap for the period of time, number of MMBtus, number of barrels, and oil and gas prices
is as follows:
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PARALLEL PETROLEUM CORPORATION
 
 Houston Ship ChannelBarrels of
    
    NyMex oil prices
    
    M M Btu of
    
    gas pricesPeriod of Time
    
    Oil
    
    Floor
    
    Cap
    
    Natural Gas
    
    Floor
    
    CapApril 1, 2005 thru October 31, 2005
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    428,000
    
    
    $
    5.00
    
    
    $
    7.26January 1, 2005 thru December 31, 2005
    
    
    73,000
    
    
    $
    36.00
    
    
    $
    49.60
    
    
    
    
    
    
    $
    
    
    
    $
    January 1, 2006 thru December 31, 2006
    
    
    70,800
    
    
    $
    35.00
    
    
    $
    44.00
    
    
    
    
    
    
    $
    
    
    
    $
    
 Swaps.
  Barrels
    
    
    
    
    
    
    
    
    
    Houston Shipof
    
    Nymex Oil
    
    M MBtu of
    
    ChannelPeriod of Time
    
    Oil
    
    Swap Price
    
    Natural Gas
    
    Gas Swap PriceJanuary 1, 2005 thru December 31, 2005
    
    
    620,500
    
    
    $
    30.19
    
    
    
    
    
    
    $
    January 1, 2005 thru March 31, 2005
    
    
    
    
    
    $
    
    
    
    
    180,000
    
    
    $
    4.705January 1, 2006 thru December 20, 2006
    
    
    448,000
    
    
    $
    28.46
    
    
    
    
    
    
    $
    January 1, 2007 thru December 31, 2007
    
    
    474,500
    
    
    $
    34.36
    
    
    
    
    
    
    $
    January 1, 2008 thru December 31, 2008
    
    
    439,200
    
    
    $
    33.37
    
    
    
    
    
    
    $
    
 (6)
    
    Equity Investments and Property Acquisitions
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PARALLEL PETROLEUM CORPORATION
 
     2004
    
    2003Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    TotalPLLL
    
    Fullerton
    
    Carm Ann
    
    Pro Forma
    
    PLLL
    
    Fullerton
    
    Carm Ann
    
    Pro Forma(in thousands, except per share data)
    
    (in thousands, except per share data)Oil and gas revenue
    
    $
    35,837
    
    
    $
    3,484
    
    
    $
    2,311
    
    
    $
    41,632
    
    
    $
    33,855
    
    
    $
    3,320
    
    
    $
    2,473
    
    
    $
    39,648Operating income
    
    $
    12,266
    
    
    $
    1,876
    
    
    $
    587
    
    
    $
    14,729
    
    
    $
    12,717
    
    
    $
    1,228
    
    
    $
    933
    
    
    $
    14,878Net income available
to common stockholders
    
    $
    5,013
    
    
    $
    785
    
    
    $
    (28
    )
    
    $
    5,770
    
    
    $
    7,022
    
    
    $
    207
    
    
    $
    138
    
    
    $
    7,367Net income
per common share:Basic
    
    $
    0.20
    
    
    $
    0.03
    
    
    $
    
    
    
    $
    0.23
    
    
    $
    0.33
    
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.35Diluted
    
    $
    0.20
    
    
    $
    0.02
    
    
    $
    
    
    
    $
    0.22
    
    
    $
    0.31
    
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.33
  (7)
    
    Revolving Credit Facility
   2004
    
    2003(in thousands)Revolving Facility note payable to banks ,Agent banks base lending rate of 7.25% and 4.50%
    
    $
    5,000
    
    
    $
    39,750Libor No. 1 at 6.73% (maturing January 3, 2005)
    
    
    55,000
    
    
    
    Libor No. 2 at 7.29% (maturing May 23, 2005)
    
    
    19,000
    
    
    
    Total note payable to banks
    
    $
    79,000
    
    
    $
    39,750
  F-20




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PARALLEL PETROLEUM CORPORATION
 
           F-21




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PARALLEL PETROLEUM CORPORATION
 
  
    
    at the end of each quarter, a current ratio (as
defined in the credit agreement) of at least 1.1 to
1.0;
    
    for each period (as calculated in the Credit
Agreement) ending on December 31, March 31, June 30
and September 30, a funded debt ratio (as defined
in the Credit Agreement) of not more than 3.70,
3.60 and 3.50 respectively for December 31, 2004,
2005, 2006 and 2007; and
    
    at all times, adjusted consolidated net worth (as
defined in the Credit Agreement) of at least (a)
$50.0 million, plus (b) seventy-five percent (75%)
of the net proceeds from any equity securities
issued by the Company, plus (c) fifty percent (50%)
of the Companys consolidated net income for each
fiscal quarter, if positive, and zero percent (0%)
if negative.
     
    
    interpretation and processing of 3-D seismic survey data;
    
    lease acquisitions and drilling activities;
    
    acquisitions of producing properties or companies owning
producing properties; and,
    
    general corporate purposes.
 (8)
    
    Income Taxes
  Years ended December 31,2004
    
    2003
    
    2002(dollars in thousands)Income tax expense, all deferred
    
    $
    2,869
    
    
    $
    3,031
    
    
    $
    9,683Cumulative effect of change in accounting principle
    
    
    
    
    
    
    (32
    )
    
    
    Losses on derivatives recognized in other
comprehensive income
    
    
    (3,624
    )
    
    
    (1,916
    )
    
    
    Total income tax provision (benefit), all deferred
    
    $
    (755
    )
    
    $
    1,083
    
    
    $
    9,683
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PARALLEL PETROLEUM CORPORATION
 
  Year ended December 31,2004
    
    2003
    
    2002(in thousands)Income tax expense at statutory rate
    
    $
    2,874
    
    
    $
    3,700
    
    
    $
    9,651Statutory depletion
    
    
    (29
    )
    
    
    (96
    )
    
    
    (360
    )State tax, net of federal benefit (1)
    
    
    6
    
    
    
    (594
    )
    
    
    370Nondeductible expenses and other
    
    
    18
    
    
    
    21
    
    
    
    22Income tax expense
    
    $
    2,869
    
    
    $
    3,031
    
    
    $
    9,683
 
 (1)
    
    The state tax benefit in 2003 resulted from a reversal of a prior year estimate.  2004
    
    2003(in thousands)Current:Deferred tax assets:Losses on derivatives recognized in other comprehensive income
    
    $
    2,531
    
    
    $
    1,098Noncurrent:Deferred tax assets:Net operating loss carryforwards, state and federal
    
    $
    4,196
    
    
    $
    3,104Statutory depletion carryforwards
    
    
    2,019
    
    
    
    1,724Alternative minimum tax credit carryforward
    
    
    118
    
    
    
    118Equity investment in First Permian, LLC
    
    
    
    
    
    
    16Losses on derivatives recognized in other comprehensive income
    
    
    3,010
    
    
    
    818Crude oil mark-to-market
    
    
    407
    
    
    
    85Asset retirement obligations
    
    
    110
    
    
    
    79Other
    
    
    39
    
    
    
    5Total noncurrent deferred tax assets
    
    
    9,899
    
    
    
    5,949Deferred tax liabilities:Property and equipment, principally due to differences in
basis, expensing of intangible drilling costs for tax
purposes and depletion
    
    
    (16,386
    )
    
    
    (11,758
    )Total deferred tax liabilities
    
    
    (16,386
    )
    
    
    (11,758
    )Net noncurrent deferred income tax liability
    
    $
    (6,487
    )
    
    $
    (5,809
    )
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PARALLEL PETROLEUM CORPORATION
 
  Net operating
    
    A M Tloss
    
    operating loss(in thousands)2019
    
    $
    4,435
    
    
    $
    4,8692021
    
    
    4,576
    
    
    
    4,4982022
    
    
    44
    
    
    
    442023
    
    
    7
    
    
    
    3322024
    
    
    3,089
    
    
    
    3,118$
    12,151
    
    
    $
    12,861
  (9)
    
    Equity Transactions
 Preferred Stock
   Sale of Equity Securities
  F-24




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PARALLEL PETROLEUM CORPORATION
 
  (10)
    
    Stock Options, Warrants and Rights
   2003
    
    2002Risk-free interest rate
    
    
    3.7
    %
    
    
    2.5
    %Expected life
    
    8 years
    
    
    8 yearsExpected volatility
    
    
    45.3
    %
    
    
    45.2
    %
  Year ended
    
    Year ended
    
    Year endedDecember 31, 2004
    
    December 31, 2003
    
    December 31, 2002Number of
    
    Weighted
    
    Number of
    
    Weighted
    
    Number of
    
    Weightedshares
    
    average price
    
    shares
    
    average price
    
    shares
    
    average priceStock options:Outstanding at beginning of year
    
    
    2,138,150
    
    
    $
    3.65
    
    
    
    2,338,750
    
    
    $
    2.71
    
    
    
    2,103,750
    
    
    $
    3.74Options granted
    
    
    
    
    
    
    
    
    
    
    180,000
    
    
    
    2.96
    
    
    
    345,000
    
    
    
    2.54Options exercised
    
    
    (174,400
    )
    
    
    (3.00
    )
    
    
    (30,600
    )
    
    
    (1.82
    )
    
    
    (25,000
    )
    
    
    (1.82
    )Options cancelled
    
    
    
    
    
    
    
    
    
    
    (100,000
    )
    
    
    (4.97
    )
    
    
    
    
    
    
    Options expired
    
    
    (45,000
    )
    
    
    (4.29
    )
    
    
    (250,000
    )
    
    
    (3.94
    )
    
    
    (85,000
    )
    
    
    (1.75
    )Outstanding at end of year
    
    
    1,918,750
    
    
    $
    3.71
    
    
    
    2,138,150
    
    
    $
    3.65
    
    
    
    2,338,750
    
    
    $
    2.71Exercisable at end of year
    
    
    1,776,250
    
    
    $
    3.50
    
    
    
    1,785,650
    
    
    $
    3.85
    
    
    
    1,656,250
    
    
    $
    2.82Weighted average fair value of
options granted during the year
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    1.64
    
    
    
    
    
    
    $
    1.66
 F-25




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PARALLEL PETROLEUM CORPORATION
 
  Options outstanding
    
    Options exercisableNumber
    
    Weighted
    
    
    
    
    
    NumberOutstanding at
    
    average
    
    Weighted
    
    exercisable at
    
    WeightedRange of
    
    December 31,
    
    remaining
    
    average
    
    December 31,
    
    averageexercise prices
    
    2004
    
    contractual life
    
    exercise price
    
    2004
    
    exercise price$1.81  $3.60
    
    
    990,000
    
    
    7 years
    
    $
    2.67
    
    
    
    900,000
    
    
    $
    2.64$4.09  $5.40
    
    
    928,750
    
    
    5 years
    
    $
    4.83
    
    
    
    876,250
    
    
    $
    4.821,918,750
    
    
    
    
    
    
    
    
    
    
    
    1,776,250
 (a)
    
    Stock Warrants
    (b)
    
    Stock Rights
  F-26




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PARALLEL PETROLEUM CORPORATION
 
 Series A Preferred Stock, par value $0.10 per share, at an exercise price of $26.00 per one
one-thousandth of a share, subject to adjustment.Initially, the Rights attach to all common stock certificates representing shares then
outstanding, and no separate Rights certificates will be distributed. The Rights separate from
the common stock upon the earlier of (1) ten business days following a public announcement
that a person or group of affiliated or associated persons has acquired or obtained the right
to acquire, beneficial ownership of 15% or more of the
outstanding shares of common stock or (2) ten business days (or such later date as the board
of directors
shall determine) following the commencement of a tender or exchange offer that would result in
a person or group beneficially owning 15% or more of such outstanding shares of common stock.
The date the Rights separate is referred to as the distribution date.Under certain circumstances the Rights entitle the holders to buy the Companys stock at a 50%
discount.
In the event that (1) the Company is the surviving corporation in a merger or other business
combination
with an entity that owns 15% or more of the Companys outstanding stock; (2) any person shall
acquire beneficial ownership of 15% of the Companys outstanding stock; or, (3) there is any
type of
recapitalization of the Company that results in an increase by more than 1% the proportionate
share of
equity securities of the Company owned by a person who owns 15% or more of the Companys
outstanding stock, each Right holder will have the option to buy for the purchase price common
stock of the Company having a value equal to two times the purchase price of the Right.Under certain circumstances the Rights entitle the holders to buy shares of the acquirers
common stock at a 50% discount. In the event that, at any time after a person has acquired 15%
or more of the Companys common stock, (1) the Company enters into a merger or other business
combination transaction in which
the Company is not the surviving corporation; (2) the Company is the surviving corporation in
a transaction in which all or part of the common stock is exchanged for cash, property or
securities of any other person;
or, (3) more than 50% of the assets, cash flow or earning power of the Company is sold, each
right holder
will have the option to buy for the purchase price stock of the acquiring company having a
value equal to
two times the purchase price of the Right.The Rights are not exercisable until the distribution date and will expire at the close of
business on
October 5, 2010, unless earlier redeemed by the Company for $0.001 per Right.(11)
    
    Related Party TransactionsAn entity owned by Thomas R. Cambridge, the Companys Chairman of the board of directors, is
the owner and acted as the Companys agent in performing the routine day to day operations on
2 wells. In 2004, 2003 and 2002 the Company was billed approximately $15,000, $51,000 and
$85,000, respectively, for the Companys pro rata share of lease operating and drilling
expenses and received approximately $165,000, $198,000 and $187,000 in 2004, 2003, and 2002,
respectively, in oil and gas revenues related to these wells. These 2 wells were acquired in
1984.An entity, in which Mr. Cambridge is the President, owned interests in certain wells that are
administered
by the Company. During 2004 the Company charged approximately $4,000 for lease operating
expense and paid approximately $3,000 in oil and gas revenues related to these wells.Dewayne E. Chitwood, a Director of the Company, also serves as director of an entity which
owns 110,000 shares of preferred stock of the Company. In addition, a Foundation, where Mr.
Chitwood is the
Chairman of the board of directors of the Foundation; and a Trust, where he is Trustee,
owns a total of
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PARALLEL PETROLEUM CORPORATION
 
 55,000 shares each of preferred stock of the Company. These shares of preferred stock of the
Company
were purchased in 1998 at a price of $10 per share on the same terms as all other unaffiliated
purchasers.An entity, in which Mr. Chitwood is an officer of the managing general partner, owned
interests in certain wells that are operated by the Company. During 2004, 2003 and 2002 the
Company charged approximately $14,000, $23,000 and $34,000, respectively, for lease operating
expenses and paid approximately $48,000, $74,000, and $69,000, respectively, in oil and gas
revenues related to these wells.In December, 2001, and prior to his employment with Parallel, Donald E. Tiffin, our Chief
Operating
Officer, received a 3% working interest from an unaffiliated third party in the Diamond M
Project in Scurry County, Texas for services rendered in connection with assembling the
project. In August, 2002, shortly
after his employment with Parallel, and due to the personal financial exposure in the Diamond
M Project
and to prevent the interest from being acquired by a third party, Mr. Tiffin assigned
two-thirds of his ownership interest in the project to Parallel at no cost, leaving him with a
1% working interest. Parallel acquired its initial interest in the Diamond M Project in
December, 2001. During 2004, the Company
charged approximately $115,000 for capital expenditures and lease operating expenses and paid
approximately $29,000 in oil and gas revenues related to this project.(12)
    
    Statements of Cash FlowsNo Federal income taxes were paid in 2004, 2003 and 2002.The Company made interest payments of approximately $2.7 million, $2.0 million, and $601,000
in 2004, 2003 and 2002, respectively.At December 31, 2004, 2003 and 2002, there were $741,000, $600,000 and $301,000, respectively,
of property additions accrued in accounts payable.(13)
    
    Major CustomersThe following purchasers accounted for 10% or more of the Companys oil and gas sales for the
years
ended December 31:
 2004
    
    2003
    
    2002Company A
    
    
    22
    %
    
    
    30
    %
    
    
    31
    %Company B
    
    
    
    
    
    
    
    
    
    
    16
    %Company C
    
    
    
    
    
    
    
    
    
    
    11
    %Company D
    
    
    43
    %
    
    
    33
    %
    
    
    
 (14)
    
    Commitments and ContingenciesFrom time to time, the Company is a party to ordinary routine litigation incidental to its
business. The Company is not currently a party to any pending litigation, and is not aware of
any threatened litigation.
The Company has not been a party to any bankruptcy, receivership, reorganization, adjustment
or similar proceeding.The Company established a simplified employee pension plan (SEP) covering all salaried
employees of
the Company. The employees voluntarily contribute a portion of their eligible compensation,
not to exceed $13,000, to the SEP. In addition to this annual salary deferral limit, employees
who reach age 50 or older
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PARALLEL PETROLEUM CORPORATION
 
 during a calendar year can elect to take advantage of a catch-up salary deferral contribution.
Eligible participants can increase their salary deferral by $3,000 for the year 2004. The
Company may make discretionary contributions to the SEP; however, total contributions cannot
exceed $41,000 per employee. During 2004, 2003 and 2002, the Company contributed an aggregate
of approximately $133,000, $106,000, and $56,000, respectively, to the SEP.On January 1, 2005 the Company established a 401(k) Plan and Trust for eligible employees.
Employees
may not participate in the SEP with the establishment of the 401(k) Plan and Trust.The Company leases office space under a non-cancelable operating lease expiring in 2006.
Future annual payments under this operating lease are $157,000 and $105,000 for the years
ended December 31, 2005 and 2006, respectively. Rental expense under our current and former
lease totaled approximately $127,000, $130,000, and $84,000 for the years ended December 31,
2004, 2003 and 2002, respectively.The Company leases two field offices and storage facilities. These two facilities are located
in Andrews
and Snyder, Texas. The Andrews office is under a non-cancelable commercial lease expiring in
2007 and
the Snyder office ends upon the expiration or termination a trade agreement with the prior
operator. Future annual payments under these lease agreements total approximately $23,000 for
2005, 2006 and 2007 and $14,000 for 2008 and 2009. Rental expense under these two leases
totaled approximately $15,000 and
$2,400 for the year ended December 31, 2004 and 2003, respectively.The Company has an Incentive and Retention Plan which provides for the payment to eligible
officers and employees of a one time performance bonus and retention payment upon the
occurrence of a change of control as defined in the plan. The amount of these bonuses depends
on future prices of the Companys stock which is undeterminable. In the case of a corporate
transaction, the total cash obligation for performance bonuses is equal to the per share price
received by all stockholders minus a base price of $3.73 per share, multiplied by 1,080,362
shares. The $3.73 base price represents the volume weighted average closing price per share of
Parallels common stock for the fiscal quarter ended December 31, 2003 and the 1,080,362
shares represents 5% of the weighted average number of shares of common stock (basic)
outstanding for the same period. If a change of control occurs, the total cash obligation for
retention payments to all plan participants is equal to the per share closing price of
Parallels common stock on the day immediately preceding the change of control minus the base
price of $3.73 per share, multiplied by 1,080,362. Such liability would be recognized at the
time a change of control or corporate transaction occurs.(15)
    
    Supplemental Oil and Gas Reserve Data (Unaudited)The Company has presented the reserve estimates utilizing an oil price of $40.59, $30.63 and
$29.21 per Bbl and a gas price of $5.65, $5.45 and $4.40 per Mcf as of December 31, 2004, 2003
and 2002, respectively. Information for oil is presented in barrels (Bbl) and for gas in
thousands of cubic feet (Mcf).The estimates of the Companys proved natural gas reserves and related future net cash flows
that are presented in the following tables are based upon estimates made by independent
petroleum engineering consultants.The Companys reserve information was prepared as of December 31, 2004, 2003 and 2002. The
Company cautions that there are many inherent uncertainties in estimating proved reserve
quantities, projecting future production rates, and timing of development expenditures.
Accordingly, these estimates are likely to
change as future information becomes available. Proved oil and gas reserves are the estimated
quantities of
crude oil and natural gas which geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under existing economic and
operating conditions.
 F-29




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##### Table of Contents



PARALLEL PETROLEUM CORPORATION
 
   Total proved
    
    Proved developedBBL
    
    MCF
    
    BBL
    
    MCF(in thousands)Reserves as of December 31, 2001
    
    
    916
    
    
    
    13,947
    
    
    
    490
    
    
    
    9,574Purchase of reserves in place
    
    
    9,119
    
    
    
    1,931
    
    
    
    7,513
    
    
    
    1,609Extensions and discoveries
    
    
    323
    
    
    
    2,048
    
    
    
    323
    
    
    
    2,048Revisions of previous estimates
    
    
    44
    
    
    
    377
    
    
    
    67
    
    
    
    640Production
    
    
    (131
    )
    
    
    (2,670
    )
    
    
    (130
    )
    
    
    (2,669
    )Reserves as of December 31, 2002
    
    
    10,271
    
    
    
    15,633
    
    
    
    8,263
    
    
    
    11,202Extensions and discoveries
    
    
    1,412
    
    
    
    1,811
    
    
    
    283
    
    
    
    1,811Revisions of previous estimates
    
    
    1,030
    
    
    
    2,183
    
    
    
    1,027
    
    
    
    2,409Production
    
    
    (629
    )
    
    
    (3,356
    )
    
    
    (629
    )
    
    
    (3,356
    )Reserves as of December 31, 2003
    
    
    12,084
    
    
    
    16,271
    
    
    
    8,944
    
    
    
    12,066Purchase of reserves in place
    
    
    4,982
    
    
    
    1,432
    
    
    
    3,057
    
    
    
    733Sale of reserves in place
    
    
    (18
    )
    
    
    (467
    )
    
    
    (18
    )
    
    
    (468
    )Extensions and discoveries
    
    
    1,159
    
    
    
    4,661
    
    
    
    338
    
    
    
    3,840Revisions of previous estimates
    
    
    1,438
    
    
    
    (2,382
    )
    
    
    1,618
    
    
    
    (323
    )Production
    
    
    (729
    )
    
    
    (2,690
    )
    
    
    (729
    )
    
    
    (2,690
    )Reserves as of December 31, 2004
    
    
    18,916
    
    
    
    16,825
    
    
    
    13,210
    
    
    
    13,158
 Statement of Financial Accounting
Standards No. 69 Disclosures about Oil and Gas Producing Activities
    F-30




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PARALLEL PETROLEUM CORPORATION
 
 Standardized Measure of Discounted Future Net Cash Flows
Relating to Proved Oil and Gas Reserves  (in thousands)
 December 31,2004
    
    2003
    
    2002Future cash inflows
    
    $
    862,945
    
    
    $
    458,723
    
    
    $
    368,835Future costs:Production
    
    
    (260,312
    )
    
    
    (149,548
    )
    
    
    (103,924
    )Development
    
    
    (25,131
    )
    
    
    (15,485
    )
    
    
    (9,440
    )Future income taxes
    
    
    (137,765
    )
    
    
    (66,757
    )
    
    
    (58,622
    )Future net cash flows
    
    
    439,737
    
    
    
    226,933
    
    
    
    196,85010% annual discount for estimated timing of cash flows
    
    
    (233,328
    )
    
    
    (110,667
    )
    
    
    (97,233
    )Standardized measure of discounted future net cash flows
    
    $
    206,409
    
    
    $
    116,266
    
    
    $
    99,616
 Changes in Standardized Measure of
Discounted Future Net Cash Flows From Proved Reserves  (in thousands)
 December 31,2004
    
    2003
    
    2002Increase (decrease):Purchases of minerals in place
    
    $
    47,727
    
    
    $
    
    
    
    $
    85,075Extensions and discoveries and improved recovery,
net of future production and development costs
    
    
    18,984
    
    
    
    9,556
    
    
    
    10,790Accretion of discount
    
    
    14,779
    
    
    
    12,293
    
    
    
    1,707Net change in sales prices net of production costs
    
    
    45,572
    
    
    
    10,832
    
    
    
    16,619Changes in estimated future development costs
    
    
    (8,641
    )
    
    
    (6,948
    )
    
    
    (512
    )Revisions of quantity estimates
    
    
    13,022
    
    
    
    13,520
    
    
    
    1,218Net change in income taxes
    
    
    (28,319
    )
    
    
    (8,204
    )
    
    
    (23,318
    )Sales, net of production costs
    
    
    (26,356
    )
    
    
    (25,451
    )
    
    
    (9,170
    )Changes of production rates (timing) and other
    
    
    13,375
    
    
    
    11,052
    
    
    
    132Net increase (decrease)
    
    
    90,143
    
    
    
    16,650
    
    
    
    82,541Standardized measure of discounted future net cash flows:Beginning of year
    
    
    116,266
    
    
    
    99,616
    
    
    
    17,075End of year
    
    $
    206,409
    
    
    $
    116,266
    
    
    $
    99,616
 F-31




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##### Table of Contents



PARALLEL PETROLEUM CORPORATION
 
 (16)
    
    Selected Quarterly Financial Data (Unaudited)
 QuarterFirst
    
    Second
    
    Third
    
    Fourth(in thousands, except per share data)2004Oil and gas revenues
    
    $
    8,001
    
    
    $
    7,917
    
    
    $
    7,745
    
    
    $
    12,174Total costs and expenses
    
    
    5,306
    
    
    
    5,675
    
    
    
    5,774
    
    
    
    6,816Operating income
    
    
    2,695
    
    
    
    2,242
    
    
    
    1,971
    
    
    
    5,358Net income
    
    $
    1,482
    
    
    $
    1,103
    
    
    $
    1,047
    
    
    $
    1,953Net income available to common stockholders
    
    $
    1,339
    
    
    $
    959
    
    
    $
    905
    
    
    $
    1,810Net income per common share  basic
    
    $
    0.05
    
    
    $
    0.04
    
    
    $
    0.04
    
    
    $
    0.07Net income per common share  diluted
    
    $
    0.05
    
    
    $
    0.04
    
    
    $
    0.04
    
    
    $
    0.072003Oil and gas revenues
    
    $
    8,493
    
    
    $
    8,532
    
    
    $
    8,732
    
    
    $
    8,098Total costs and expenses
    
    
    4,323
    
    
    
    5,143
    
    
    
    5,329
    
    
    
    6,343Operating income
    
    
    4,170
    
    
    
    3,389
    
    
    
    3,403
    
    
    
    1,755Income before cumulative effect of change
in accounting principle
    
    
    2,313
    
    
    
    2,671
    
    
    
    1,695
    
    
    
    985Cumulative effect of change in accounting
principle, net of tax
    
    
    (62
    )
    
    
    
    
    
    
    
    
    
    
    Net income
    
    $
    2,251
    
    
    $
    2,671
    
    
    $
    1,695
    
    
    $
    985Net income after preferred stock dividend
    
    $
    2,105
    
    
    $
    2,525
    
    
    $
    1,549
    
    
    $
    843Net income per share:Basic:Income before cumulative effect of change
in accounting principle
    
    $
    0.10
    
    
    $
    0.12
    
    
    $
    0.07
    
    
    $
    0.04Cumulative effect of change in accounting
principle, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income per common share
    
    $
    0.10
    
    
    $
    0.12
    
    
    $
    0.07
    
    
    $
    0.04Diluted:Income before cumulative effect of change
in accounting principle
    
    $
    0.09
    
    
    $
    0.11
    
    
    $
    0.07
    
    
    $
    0.04Cumulative effect of change in accounting
principle, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income per common share
    
    $
    0.09
    
    
    $
    0.11
    
    
    $
    0.07
    
    
    $
    0.04
 During the fourth quarter of 2003, the Company reduced its estimate of State income tax liability
by $907,000.
 F-32




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##### Table of Contents



PARALLEL PETROLEUM CORPORATIONAugust 22, 2005
    
    By: /s/ Larry C. OldhamLarry C. Oldham,President and Chief Executive Officer(Principal Executive Officer)By: /s/ Steven D. FosterChief Financial Officer(Principal Financial and Accounting Officer)
 S-1




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##### Table of Contents



(a)
    
    Exhibits
 No.
    
    Description of Exhibit3.1
    
    Certificate of Incorporation of Registrant (Incorporated by reference
to Exhibit 3.1 to Form 10-Q of the Registrant for the fiscal quarter
ended June 30, 2004)3.2
    
    Bylaws of Registrant (Incorporated by reference to Exhibit 3 of the
Registrants Form 8-K, dated October 9, 2000, as filed with the
Securities and Exchange Commission on October 10, 2000)3.3
    
    Certificate of Formation of Parallel, L.L.C. (Incorporated by
reference to Exhibit No. 3.3 of the Registrants Registration
Statement on Form S-3, No. 333-119725 filed on October 13, 2004)3.4
    
    Limited Liability Company Agreement of Parallel, L.L.C. (Incorporated
by reference to Exhibit No. 3.4 of the Registrants Statement on Form
S-3, No. 333-119725 filed on October 13, 2004)3.5
    
    Certificate of Limited Partnership of Parallel, L.P. (Incorporated by
reference to Exhibit No. 3.5 of the Registrants Registration
Statement on Form S-3, No. 333-119725 filed on October 13, 2004)3.6
    
    Agreement of Limited Partnership of Parallel, L.P. (Incorporated by
reference to Exhibit No. 3.6 of the Registrants Registration
Statement on Form S-3, No. 333-119725 filed on October 13, 2004)4.1
    
    Certificate of Designations, Preferences and Rights of Serial
Preferred Stock  6% Convertible Preferred Stock (Incorporated by
reference to Exhibit 4.1 of Form 10-Q of
the Registrant for the fiscal quarter ended June 30, 2004)4.2
    
    Certificate of Designation, Preferences and Rights of Series A
Preferred Stock (Incorporated by reference to Exhibit 4.2 of Form 10-K
of the Registrant for the fiscal year ended December 31, 2000)4.3
    
    Rights Agreement, dated as of October 5, 2000, between the Registrant
and Computershare Trust Company, Inc., as Rights Agent (Incorporated
by reference to Exhibit 4.3 of Form 10-K of the Registrant for the
fiscal year ended December 31, 2000)4.4
    
    Form of Indenture relating to senior debt securities of the Registrant
(Incorporated by reference to Exhibit No. 4.4 of the Registrants
Statement on Form S-3, No. 333-119725 filed on October 13, 2004)




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##### Table of Contents



No.
    
    Description of Exhibit4.5
    
    Form of Indenture relating to subordinated debt securities of the Registrant (Incorporated by reference to Exhibit No. 4.5 of the
Registrants Registration Statement on Form S-3, No. 333-119725 filed on October 13, 2004)4.6
    
    Form of common stock certificate of the Registrant (Incorporated by reference to Exhibit No. 4.6 of the Registrants Registration
Statement on Form S-3, No. 333-119725 filed on October 13, 2004)4.7
    
    Warrant Purchase Agreement, dated November 20, 2001, between the Registrant and Stonington Corporation (Incorporated by
reference to Exhibit 4.7 of Form 10-K of the Registrant for the fiscal year ended December 31, 2004 and filed with the Securities
and Exchange Commission on March 16, 2005)4.8
    
    Warrant Purchase Agreement, dated December 23, 2003, between the Registrant and Stonington Corporation (Incorporated by
reference to Exhibit 4.8 of Form 10-K of the Registrant for the fiscal year ended December 31, 2004 and filed with the Securities
and Exchange Commission on March 16, 2005)Executive Compensation Plans and
Arrangements (Exhibit No.s 10.1 through 10.8):10.1
    
    1992 Stock Option Plan (Incorporated by reference to Exhibit 10.1 of Form 10-K of the Registrant for the fiscal year ended
December 31, 2004 and filed with the Securities and Exchange Commission on March 16, 2005)10.2
    
    Merrill Lynch, Pierce, Fenner & Smith Incorporated Prototype Simplified Employee Pension Plan (Incorporated by reference to
Exhibit 10.6 of the Registrants Form 10-K
for the fiscal year ended December 31, 1995)10.3
    
    Non-Employee Directors Stock Option Plan (Incorporated by reference to Exhibit 10.6 of the Registrants Form 10-K Report for the
fiscal year ended December 31, 1997)10.4
    
    1998 Stock Option Plan (Incorporated by reference to Exhibit 10.7 of Form 10-K of the Registrant for the fiscal year ended
December 31, 1998)10.5
    
    Form of Incentive Award Agreements, dated December 12, 2001, between the Registrant and Thomas R. Cambridge, Larry C. Oldham, Eric
A. Bayley and John S. Rutherford granting 2,394 Unit Equivalent Rights to Mr. Cambridge; 9,564 Unit Equivalent Rights
to Mr. Oldham; 2,869 Unit Equivalent Rights to Mr. Bayley; and 7,173 Unit Equivalent Rights to Mr. Rutherford (Incorporated by
reference to Exhibit 10.8 of Form 10-K of the Registrant for the fiscal year ended December 31, 2001)10.6
    
    2001 Non-Employee Directors Stock Option Plan (Incorporated by reference to Exhibit 10.7 of the Registrants Form 10-Q Report for
the first fiscal quarter ended March 31, 2004)10.7
    
    2004 Non-Employee Director Stock Grant Plan (Incorporated by reference to Exhibit
10.1 of the Registrants Form 8-K Report dated September 22, 2004)10.8
    
    Incentive and Retention Plan (Incorporated by reference to Exhibit 10.1 of the




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##### Table of Contents



No.
    
    Description of ExhibitRegistrants Form 8-K Report dated September 23, 2004 and filed with the Securities
and Exchange Commission on September 29, 2004)10.9
    
    Certificate of Formation of First Permian, L.L.C. (Incorporated by reference to Exhibit 10.1 of the Registrants Form 8-K Report
dated June 30, 1999)10.10
    
    Limited Liability Company Agreement of First Permian, L.L.C. (Incorporated by reference to Exhibit 10.2 of the Registrants Form
8-K Report dated June 30, 1999)10.11
    
    Amended and Restated Limited Liability Company Agreement of First Permian, L.L.C. dated as of May 31, 2000 (Incorporated by
reference to Exhibit 10.16 of Form 10-K of
the Registrant for the fiscal year ended December 31, 2000)10.12
    
    Credit Agreement, dated June 30, 1999, by and among First Permian, L.L.C., Parallel Petroleum Corporation, Baytech, Inc., and Bank
One, Texas, N.A. (Incorporated by reference to Exhibit 10.6 of the Registrants Form 8-K Report dated June 30, 1999)10.13
    
    Limited Guaranty, dated June 30, 1999, by and among First Permian, L.L.C., parallel Petroleum Corporation and Bank One, Texas,
N.A. (Incorporated by reference to Exhibit 10.7 of the Registrants Form 8-K Report dated June 30, 1999)10.14
    
    Second Restated Credit Agreement, dated October 25, 2000, among First Permian,
L.L.C., Bank One, Texas, N.A., and Bank One Capital Markets, Inc. (Incorporated by reference to Exhibit 10.22 of Form 10-K of the
Registrant for the fiscal year ended December 31, 2000)10.15
    
    Loan Agreement, dated as of January 25, 2002, between the Registrant and First American Bank, SSB (Incorporated by reference to
Exhibit 10.25 of Form 10-K of the Registrant for the fiscal year ended December 31, 2001)10.16
    
    Purchase and Sale Agreement, dated as of November 27, 2002, among JMC Exploration, Inc., Arkoma Star L.L.C., Parallel, L.P. and
Texland Petroleum, Inc. (Incorporated by reference to Exhibit 10.1 of Form 8-K of the Registrant, dated December 20, 2002)10.17
    
    First Amended and Restated Credit Agreement, dated December 20, 2002, by and among Parallel Petroleum Corporation, Parallel, L.P.,
Parallel, L.L.C., First American Bank, SSB, Western National Bank and BNP Paribas (Incorporated by reference to Exhibit 10.2 of
Form 8-K of the Registrant, dated December 20, 2002)10.18
    
    Guaranty dated December 20, 2002, between Parallel, L.L.C. and First American Bank, SSB, as Agent (Incorporated by reference to
Exhibit 10.3 of Form 8-K of the Registrant, dated December 20, 2002)10.19
    
    First Amendment to First Amended and Restated Credit Agreement, dated as of September 12, 2003, by and among Parallel Petroleum
Corporation, Parallel, L.P., Parallel, L.L.C., First American Bank, SSB, Western National Bank, and BNP Paribas (Incorporated by
reference to Exhibit 10.29 of Form 10-Q of the Registrant for the
quarter ended September 30, 2003)10.20
    
    Second Amended and Restated Credit Agreement, dated September 27, 2004, by and among Parallel Petroleum Corporation, Parallel,
L.P., Parallel, L.L.C., First American Bank, SSB,




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##### Table of Contents



No.
    
    Description of ExhibitBNP Paribas, Citibank, F.S.B. and Western National Bank (Incorporated by
reference to Exhibit 10.1 of the Registrants Form 8-K Report dated September 27, 2004 and filed with the Securities and Exchange
Commission on October 1, 2004)10.21
    
    Agreement of Limited Partnership of West Fork Pipeline Company LP (Incorporated by reference to Exhibit 10.21 of Form 10-K of
the Registrant for the fiscal year ended December 31, 2004 and filed with the Securities and Exchange Commission on March 16,
2005)14
    
    Code of Ethics (Incorporated by reference to Exhibit No. 14 of the Registrants
Form 10-
K Report for the fiscal year ended December 31, 2003 and filed with the Securities
and Exchange Commission on March 22, 2004)21
    
    Subsidiaries (Incorporated by reference to Exhibit No. 21 of the Registrants Form
10-K Report for the fiscal year ended December 31, 2003 and filed with the
Securities and Exchange Commission on March 22, 2004)* 23.1
    
    Consent of KPMG LLP* 23.2
    
    Consent of BDO Seidman, LLP* 23.3
    
    Consent of Cawley Gillespie & Associates, Inc. Independent Petroleum Engineers* 31.1
    
    Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 302 of the 
Sarbanes-Oxley Act of 2002* 31.2
    
    Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 302 of the 
Sarbanes-Oxley Act of 2002* 32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the 
Sarbanes-Oxley Act of 2002.* 32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the 
Sarbanes-Oxley Act of 2002.
 
 *
    
    Filed herewith.