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SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-K
 þ
    
    Annual Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
 For the fiscal year ended December 31, 2006
 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
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)
 1004 N. Big Spring, Suite 400Midland, Texas
    
    79701(Address of Principal Executive
Offices)
    
    (Zip Code)
   
   o þ
  o þ
  þ o
 o
  þ o þ
  o þ




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##### 



Item No.
    
    PagePART IItem 1. Business
    
    
    1Item 1A. Risk Factors
    
    
    13Item 1B. Unresolved Staff Comments
    
    
    23Item 2. Properties
    
    
    23Item 3. Legal Proceedings
    
    
    25Item 4. Submission of Matters to a Vote of Security Holders
    
    
    26PART IIItem 5. Market for Registants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    27Item 6. Selected Financial Data
    
    
    28Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    29Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    44Item 8. Financial Statements and Supplementary Data
    
    
    47Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    47Item 9A. Controls and Procedures
    
    
    47Item 9B. Other Information
    
    
    49PART IIIItem 10. Directors, Executive Officers and Corporate Governance
    
    
    50Item 11. Executive Compansation
    
    
    54Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    79Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    
    81Item 14. Principal Accountant Fees and Services
    
    
    84PART IVItem 15. Exhibits and Financial Statement Schedules
    
    
    85BylawsPurchase Warrant AgreementFirst Amendment to Warrant Agreement1998 Stock Option PlanIncentive and Retention PlanGuarantyThird Amended and Restated Pledge AgreementSecond Lien Guarantee and Collateral AgreementConsent 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 Principal Executive Officer Pursuant to Section 906Certification of Principal 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 natural 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;
    
    governmental regulations;
    
    receipt of amounts owed to us by purchasers of our production and counterparties to
our derivative contracts;
    
    decisions to either enter into derivative contracts or not;
    
    events similar to September 11, 2001;
    
    actions of third party co-owners of interests in properties in which we also own an interest;
    
    fluctuations in interest rates;
    
    weaknesses in our internal controls; and
    
    the inherent variability in early production tests.




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PART I
 
 ITEM 1. BUSINESS
 About Our Company
  
    
    Permian Basin of west Texas and New Mexico;
    
    Fort Worth Basin of north Texas; and
    
    the onshore gulf coast area of south Texas.
   
    
    Bbl or Bbls  barrel or 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;
    
    MBbls  thousand barrels of oil or other liquid hydrocarbons;
    
    MBoe  thousand barrels of oil equivalent;
    
    MMBbls  million barrels of oil or other liquid hydrocarbons;
    
    MMBoe  million barrels of oil equivalent;
    
    MMBtu  million British thermal units;
    
    Mcf  thousand cubic feet of natural gas; and
    
    MMcf  million cubic feet of natural gas.
   Available Information
 (http://www.sec.gov)
 (1)




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http://www.plll.com.
  cindyt@plll.com
 Developments in 2006; 2007 Capital Budget
   Proved Reserves as of December 31, 2006
   About Our Strategy and Business
    
    
    focuses on projects having less geological risk;
    
    emphasizes acquisition, exploitation, development and enhancement activities;
 (2)




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
    
    includes the utilization of horizontal and fracture stimulation technologies on
certain types of reservoirs;
    
    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 core 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.
       (3)




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(1) Use Horizontal Drilling and Fracture Stimulations -
 (2) 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 and producing reserves that might not otherwise be discovered.
   (3) Serve as Geophysical Operator -
  (4) 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.
 (4)




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Drilling Activities in 2006
  Number of WellsNumber of
    
    Drilling or
    
    GrossDepth
    
    Gross
    
    Waiting on Completion
    
    Productive
    
    GrossArea
    
    Range (feet)
    
    Wells Drilled
    
    at December 31, 2006
    
    Wells
    
    Dry WellsNorth TexasBarnett Shale
    
    
    7,000 -  8,000
    
    
    
    13
    
    
    
    2
    
    
    
    11
    
    
    
    0Permian Basin of west Texas and New MexicoCarm-Ann/Means
    
    
    4,000 - 4,500
    
    
    
    15
    
    
    
    2
    
    
    
    13
    
    
    
    0Harris
    
    
    4,000 - 4,500
    
    
    
    30
    
    
    
    3
    
    
    
    27
    
    
    
    0Fullerton
    
    
    4,000 - 5,000
    
    
    
    6
    
    
    
    0
    
    
    
    6
    
    
    
    0Wolfcamp Gas
    
    
    4,300 - 4,500
    
    
    
    59
    
    
    
    16
    
    
    
    42
    
    
    
    1Diamond M (Deep )
    
    
    6,500 - 7,000
    
    
    
    2
    
    
    
    0
    
    
    
    2
    
    
    
    0Onshore Gulf Coast of Texas
    
    
    Frio/Yegua/Wilcox
    
    
    5,000 - 10,000
    
    
    
    4
    
    
    
    0
    
    
    
    2
    
    
    
    2Cotton Valley
    
    
    16,000 - 18,000
    
    
    
    1
    
    
    
    1
    
    
    
    0
    
    
    
    0Utah
    
    
    4,000 - 5,000
    
    
    
    1
    
    
    
    0
    
    
    
    0
    
    
    
    1131
    
    
    
    24
    
    
    
    103
    
    
    
    4
 Drilling and Acquisition Costs
  Year Ended December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002($ in thousands)Proved property acquisition costs
    
    $
    27,370
    
    
    $
    23,763
    
    
    $
    39,763
    
    
    $
    2,209
    
    
    $
    48,044Unproved property acquisition costs
    
    
    30,058
    
    
    
    11,743
    
    
    
    7,400
    
    
    
    3,831
    
    
    
    2,295Exploration costs
    
    
    71,003
    
    
    
    15,455
    
    
    
    6,794
    
    
    
    3,240
    
    
    
    1,291Development costs
    
    
    66,965
    
    
    
    26,390
    
    
    
    13,954
    
    
    
    5,650
    
    
    
    9,308$
    195,396
    
    
    $
    77,351
    
    
    $
    67,911
    
    
    $
    14,930
    
    
    $
    60,938
 Current Drilling Projects
  Resource Natural Gas Projects
   (5)




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Fort Worth Basin of North Texas and Permian Basin of New Mexico
  Barnett Shale Gas Project, Tarrant County, Texas
 .
  Wolfcamp Gas Project, Eddy and Chavez Counties, New Mexico
  Permian Basin of West Texas
   Fullerton San Andres Field, Andrews County, Texas
   Carm-Ann San Andres Field / N. Means Queen Unit, Andrews & Gaines Counties ,Texas
   Harris San Andres Field, Andrews and Gaines Counties, Texas 
   Diamond M Canyon Reef Unit, Scurry County, Texas
  (6)




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Onshore Gulf Coast of South Texas
  Yegua/Frio/Wilcox Gas Project, Jackson, Wharton and Liberty Counties, Texas
  Other Projects
  Utah/Colorado CBM (Coal Bed Methane) Gas/Conventional Oil and Natural Gas Projects,
Uinta Basin
   Oil and Natural Gas Prices
  Average Price Received for theYear Ended December 31,2006
    
    2005
    
    2004Oil (Bbl)
    
    $
    59.86
    
    
    $
    51.78
    
    
    $
    39.05Natural gas (Mcf)
    
    $
    6.19
    
    
    $
    8.54
    
    
    $
    5.85
   Employees and Consultants
   (7)




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Wells Drilled
  Exploratory Wells (1)
    
    Development Wells (2)Year Ended
    
    Productive
    
    Dry
    
    Productive
    
    DryDecember 31,
    
    Gross
    
    Net
    
    Gross
    
    Net
    
    Gross
    
    Net
    
    Gross
    
    Net2006
    
    
    5.0
    
    
    
    2.87
    
    
    
    3.0
    
    
    
    1.42
    
    
    
    122.0
    
    
    
    68.4
    
    
    
    1.00
    
    
    
    0.082005
    
    
    21.0
    
    
    
    5.32
    
    
    
    6.0
    
    
    
    0.64
    
    
    
    48.0
    
    
    
    27.5
    
    
    
    
    
    
    
    2004
    
    
    17.0
    
    
    
    1.68
    
    
    
    4.0
    
    
    
    0.95
    
    
    
    50.0
    
    
    
    31.8
    
    
    
    
    
    
    
    
 
 (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.   Volumes, Prices and Lifting Costs
  Year Ended December 31,2006
    
    2005
    
    2004(in thousands, except per unit data)Production, Prices and Lifting Costs:Oil (Bbls)
    
    
    1,137
    
    
    
    923
    
    
    
    729Natural gas (Mcf)
    
    
    6,539
    
    
    
    3,592
    
    
    
    2,690BOE
    
    
    2,227
    
    
    
    1,522
    
    
    
    1,177Oil price (per Bbl)(1)
    
    $
    59.86
    
    
    $
    51.78
    
    
    $
    39.05Natural gas price (per Mcf)(1)
    
    $
    6.19
    
    
    $
    8.54
    
    
    $
    5.85BOE price(1)
    
    $
    48.73
    
    
    $
    51.57
    
    
    $
    37.55Average Lifting Cost (including production taxes) per BOE
    
    $
    9.91
    
    
    $
    9.24
    
    
    $
    8.06
 
 (1)
    
    Average price received at the wellhead for our oil and natural gas.  (8)




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2006
    
    
    2005
    
    
    2004($ in thousands)Oil revenue
    
    $
    68,076
    
    
    $
    47,800
    
    
    $
    28,455Effect of oil hedges
    
    
    (11,512
    )
    
    
    (12,139
    )
    
    
    (7,458
    )Natural gas revenue
    
    
    40,461
    
    
    
    30,690
    
    
    
    15,735Effect of natural gas hedges
    
    
    
    
    
    
    (201
    )
    
    
    (895
    )$
    97,025
    
    
    $
    66,150
    
    
    $
    35,837
  Markets and Customers
   2006
    
    2005
    
    2004Allegro Investments, Inc.
    
    
    (1)

    

    
    
    14
    %
    
    
    22
    %Conoco, Inc.
    
    
    20
    %
    
    
    12
    %
    
    

    (1)Texland Petroleum, Inc.
    
    
    30
    %
    
    
    40
    %
    
    
    43
    %Tri-C Resources, Inc.
    
    
    12
    %
    
    

    (1)
    

    
    

    (1)Dale Op erating Comp any
    
    
    10
    %
    

    
    (1)
    

    

    
    (1)
 
 (1)
    
    Less than 10%.    Office Facilities
   (9)




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Competition
    
    
    adequate capital resources for projects in our core 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 or developed;
    
    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 Natural Gas Regulations
  
    
    price controls;
    
    taxes; and
    
    environmental and other laws relating to the oil and natural gas industry.
    
    
    the unitization of pooling of oil and natural gas properties;
 (10)




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
    
    the establishment of maximum rates of production from oil and natural gas wells; and
    
    the regulation of spacing, plugging and abandonment of wells.
     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.
  (11)




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
    
    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 (FWPCA) 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 could be imposed upon us. States in which we operate 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 us.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. 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.We generate non-hazardous solid waste that fall under the
requirements of the Federal Resource Conservation and Recovery Act and comparable state
statues. 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 governs 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 us
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 to clean up sites
where
 (12)




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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 our hazardous substances occurred.We currently own or lease numerous properties that for many years have been used for
exploring and producing oil and natural gas. Although we believe we use operating and
disposal practices standard in the industry, hydrocarbons or other wastes may have been
disposed of or released by us on or under properties that we have owned or leased. In
addition, many of these properties have been previously owned or operated by third
parties who may have disposed of or released hydrocarbons or other wastes at these
properties. Under CERCLA, and analogous state laws, we could be required to remove or
remediate previously disposed wastes, including wastes disposed of or released by prior
owners or operators, to clean up contaminated property, including contaminated
groundwater, or to perform remedial plugging operations to prevent future contamination.
 
 ITEM 1A. RISK FACTORS
  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
    
    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;
 (13)




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
    
    reduce our revenues, operating income and cash flow; and
    
    reduce the recorded 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.
   
    
    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.
  (14)




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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.
  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;
 (15)




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
    
    natural disasters;
    
    explosions;
    
    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 equipment and 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.
    
    
    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.
  (16)




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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.
    The marketability of our natural gas production depends on facilities that we typically do not own
or control.
  If we default under either our revolving credit facility or our term loan facility, the lenders
could foreclose on, and acquire control of, substantially all of our assets.
  We are subject to many restrictions under our two credit facilities.
  (17)




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Our producing properties are geographically concentrated.
  Our derivative activities create a risk of financial loss.
  
    
    the counterparties to our future contracts fail to perform under the contract; or
    
    a sudden, unexpected event materially impacts oil or natural gas prices.
  We are subject to complex federal, state and local laws and regulations that could adversely affect
our business.
  
    
    permits for drilling operations;
    
    drilling bonds;
    
    spacing of wells;
 (18)




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
    
    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.
  Declining oil and natural gas prices may cause us to record ceiling test write-downs.
    Terrorist activities may adversely affect our business.
  (19)




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We are highly dependent upon key personnel.
    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.
    (20)




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Failure to maintain effective internal controls could have a material adverse effect on our
operations.
  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;
    
    use our 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.
  (21)




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##### Table of Contents



Our stockholders rights plan, provisions in our corporate governance documents and Delaware law
may delay or prevent an acquisition of Parallel, which could decrease the value of our common
stock.
   
    
    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.
  Future sales of our common stock could adversely affect our stock prices.
  Our business can be adversely impacted by downward changes in oil and natural gas prices, and most
significantly by declines in oil prices.
  (22)




---



##### Table of Contents



The price of our common stock may fluctuate which may cause our common stock to trade at a
substantially lower price than the price which you paid for our common stock.
  If securities analysts downgrade our stock or cease coverage of us, the price of our stock could
decline.
  
 ITEM 1B. UNRESOLVED STAFF COMMENTS
  
 ITEM 2. PROPERTIES
 General
  Producing Wells and Acreage
  (23)




---



##### Table of Contents



Producing Wells(1)
    
    AcreageOil(2)
    
    Gas
    
    Developed
    
    UndevelopedGross
    
    Net(3)
    
    Gross
    
    Net(3)
    
    Gross
    
    Net(4)
    
    Gross
    

    Net(4)TexasBarnett Shale
    
    
    
    
    
    
    
    
    
    
    21
    
    
    
    6.69
    
    
    
    1,150
    
    
    
    363
    
    
    
    18,037
    
    
    
    4,765Carm-Ann/M eans
    
    
    90
    
    
    
    74.85
    
    
    
    
    
    
    
    
    
    
    
    5,560
    
    
    
    4,843
    
    
    
    235
    
    
    
    235Cook Mountain
    
    
    
    
    
    
    
    
    
    
    14
    
    
    
    1.39
    
    
    
    1,044
    
    
    
    238
    
    
    
    74
    
    
    
    33Cotton Valley
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    0.13
    
    
    
    40
    
    
    
    5
    
    
    
    9,365
    
    
    
    968Diamond M
    
    
    97
    
    
    
    64.03
    
    
    
    
    
    
    
    
    
    
    
    5,805
    
    
    
    3,809Fullerton
    
    
    151
    
    
    
    127.86
    
    
    
    
    
    
    
    
    
    
    
    3,683
    
    
    
    3,155
    
    
    
    
    
    
    
    Harris
    
    
    65
    
    
    
    54.72
    
    
    
    
    
    
    
    
    
    
    
    1,179
    
    
    
    1,044
    
    
    
    2,586
    
    
    
    2,484Other Permian
    
    
    243
    
    
    
    34.94
    
    
    
    27
    
    
    
    11.74
    
    
    
    23,079
    
    
    
    15,469
    
    
    
    280
    
    
    
    280Ganado Lake WI
    
    
    8
    
    
    
    4.80
    
    
    
    5
    
    
    
    3.00
    
    
    
    12,732
    
    
    
    5,958
    
    
    
    
    
    
    
    Yegua/Frio/Wilcox
    
    
    4
    
    
    
    1.03
    
    
    
    42
    
    
    
    11.16
    
    
    
    5,616
    
    
    
    2,113
    
    
    
    2,632
    
    
    
    934Total
    
    
    658
    
    
    
    362.23
    
    
    
    110
    
    
    
    34.11
    
    
    
    59,888
    
    
    
    36,997
    
    
    
    33,209
    
    
    
    9,699Colorado
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,080
    
    
    
    14,080New Mexico
    
    
    
    
    
    
    
    
    
    
    52
    
    
    
    14.08
    
    
    
    20,800
    
    
    
    5,914
    
    
    
    109,523
    
    
    
    56,745Utah
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    145,813
    
    
    
    138,243Total
    
    
    658
    
    
    
    362.23
    
    
    
    162
    
    
    
    48.19
    
    
    
    80,688
    
    
    
    42,911
    
    
    
    302,625
    
    
    
    218,767
 
 (1)
    
    Does not include 383 gross (162.43 net) wells that were shut in or temporarily
abandoned as of December 31, 2006.(2)
    
    Does not include 222 gross (120.61 net) injection wells as of December 31,
2006.(3)
    
    Net wells are computed by multiplying the number of gross wells by our working
interest in the gross wells.(4)
    
    Net acres are computed by multiplying the number of gross acres by our working
interest in the gross acres.    Title to Properties
  (24)




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##### Table of Contents



Oil and Natural Gas Reserves
    Proved Developed
    
    Proved Developed
    
    Proved
    
    TotalProducing
    
    Non-Producing
    
    Undeveloped
    
    Proved($ in thousands)Oil (MBbls)
    
    
    14,118
    
    
    
    814
    
    
    
    13,789
    
    
    
    28,721Gas (MMcf)
    
    
    25,380
    
    
    
    3,361
    
    
    
    30,155
    
    
    
    58,896MBOE
    
    
    18,348
    
    
    
    1,374
    
    
    
    18,815
    
    
    
    38,537
       
 ITEM 3. LEGAL PROCEEDINGS
  (25)




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##### Table of Contents



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  (26)




---



##### 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
    
    Low2004First Quarter
    
    $
    4.67
    
    
    $
    3.60Second Quarter
    
    $
    5.35
    
    
    $
    3.83Third Quarter
    
    $
    5.68
    
    
    $
    4.38Fourth Quarter
    
    $
    5.60
    
    
    $
    4.832005First Quarter
    
    $
    7.60
    
    
    $
    5.01Second Quarter
    
    $
    9.00
    
    
    $
    6.26Third Quarter
    
    $
    14.15
    
    
    $
    8.29Fourth Quarter
    
    $
    18.52
    
    
    $
    11.412006First Quarter
    
    $
    21.13
    
    
    $
    15.67Second Quarter
    
    $
    25.56
    
    
    $
    18.47Third Quarter
    
    $
    26.39
    
    
    $
    18.90Fourth Quarter
    
    $
    20.96
    
    
    $
    16.34
   Dividends
  Sale of Unregistered Securities
  (27)




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##### Table of Contents



Repurchase of Equity Securities
  
 ITEM 6. SELECTED FINANCIAL DATA
  Year Ended December 31,2006(1)
    
    2005
    
    2004
    
    2003
    

2002(2)($ in thousands, except per share and per unit data)Consolidated Income Statements Data:Operating revenues
    
    $
    97,025
    
    
    $
    66,150
    
    
    $
    35,837
    
    
    $
    33,855
    
    
    $
    12,106Operating expenses
    
    $
    56,606
    
    
    $
    32,805
    
    
    $
    23,571
    
    
    $
    21,138
    
    
    $
    11,250Income (loss) before cumulative effect
of change in accounting principle
    
    $
    26,155
    
    
    $
    (1,589
    )
    
    $
    2,271
    
    
    $
    7,664
    
    
    $
    18,701Net income (loss)
    
    $
    26,155
    
    
    $
    (1,589
    )
    
    $
    2,271
    
    
    $
    7,602
    
    
    $
    18,701Cumulative preferred stock dividend
    
    $
    
    
    
    $
    (271
    )
    
    $
    (572
    )
    
    $
    (580
    )
    
    $
    (585
    )Net income (loss) available to common stockholders
    
    $
    26,155
    
    
    $
    (1,860
    )
    
    $
    1,699
    
    
    $
    7,022
    
    
    $
    18,116Income (loss) per common share before cumulative
effect of change in accounting principleBasic
    
    $
    0.73
    
    
    $
    (0.06
    )
    
    $
    0.07
    
    
    $
    0.33
    
    
    $
    0.88Diluted
    
    $
    0.71
    
    
    $
    (0.06
    )
    
    $
    0.07
    
    
    $
    0.31
    
    
    $
    0.79Weighted average common stock and common stock
equivalents outstandingBasic
    
    
    35,888
    
    
    
    32,253
    
    
    
    25,323
    
    
    
    21,264
    
    
    
    20,680Diluted
    
    
    36,756
    
    
    
    32,253
    
    
    
    25,688
    
    
    
    24,175
    
    
    
    23,549Cash dividends  common stock
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Consolidated Balance Sheet Data:Total assets
    
    $
    442,818
    
    
    $
    253,008
    
    
    $
    170,671
    
    
    $
    118,343
    
    
    $
    102,351Total liabilities
    
    $
    259,036
    
    
    $
    163,506
    
    
    $
    110,677
    
    
    $
    57,111
    
    
    $
    56,852Long-term debt, less current maturities
    
    $
    165,000
    
    
    $
    100,000
    
    
    $
    79,000
    
    
    $
    39,750
    
    
    $
    45,604Total stockholders equity
    
    $
    183,782
    
    
    $
    89,502
    
    
    $
    59,994
    
    
    $
    61,232
    
    
    $
    45,499
 (28)




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##### Table of Contents



Year Ended December 31,2006(1)
    
    
    2005
    
    
    2004
    
    
    2003
    
    

2002(2)($ in thousands, except per share and per unit data)Consolidated Statement of Cash Flow Data:Cash provided by (used in)Operating activities
    
    $
    74,186
    
    
    $
    37,118
    
    
    $
    18,156
    
    
    $
    19,493
    
    
    $
    1,528Investing activities
    
    $
    (200,548
    )
    
    $
    (84,949
    )
    
    $
    (69,518
    )
    
    $
    (15,494
    )
    
    $
    (30,277
    )Financing activities
    
    $
    125,854
    
    
    $
    49,468
    
    
    $
    38,765
    
    
    $
    1,567
    
    
    $
    37,210Operating Data:Product SalesOil (Bbls)
    
    
    1,137
    
    
    
    923
    
    
    
    729
    
    
    
    629
    
    
    
    131Gas (Mcf)
    
    
    6,539
    
    
    
    3,592
    
    
    
    2,690
    
    
    
    3,356
    
    
    
    2,670BOE
    
    
    2,227
    
    
    
    1,522
    
    
    
    1,177
    
    
    
    1,188
    
    
    
    576Average sales priceOil (per Bbl)
    
    $
    59.86
    
    
    $
    51.78
    
    
    $
    39.05
    
    
    $
    29.11
    
    
    $
    24.59Gas (per Mcf)
    
    $
    6.19
    
    
    $
    8.54
    
    
    $
    5.85
    
    
    $
    5.40
    
    
    $
    3.33Proved reservesOil (Bbls)
    
    
    28,721
    
    
    
    21,192
    
    
    
    18,916
    
    
    
    12,084
    
    
    
    10,271Gas (Mcf)
    
    
    58,896
    
    
    
    25,237
    
    
    
    16,825
    
    
    
    16,271
    
    
    
    15,633
 
 (1)
    
    Results include $9.0 million of equity in income of pipeline
and gathering systems representing Parallels shares of net gain
on sale of certain pipeline assets.(2)
    
    Results include a $31.0 million gain attributable to equity in income of First
Permian, L.P. 
 ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
   Overview and Strategy
   
    
    focuses on projects having less geologic risk;
    
    emphasizes acquisition, exploitation, development and enhancement activities;
    
    includes the utilization of horizontal and fracture stimulation technologies on
certain types of reservoirs;
 (29)




---



##### Table of Contents




    
    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.
  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.
 (30)




---



##### Table of Contents




    
    cash flow from operations;
    
    sales of our equity securities;
    
    bank borrowings; and
    
    industry joint ventures.
  Results of Operations
  (31)




---



##### Table of Contents



Years Ended December 31,2006
    
    
    2005
    
    
    2004($ in thousands, except per unit data)Production VolumesOil (Bbls)
    
    
    1,137
    
    
    
    923
    
    
    
    729Natural gas
(Mcf)
    
    
    6,539
    
    
    
    3,592
    
    
    
    2,690BOE
    
    
    2,227
    
    
    
    1,522
    
    
    
    1,177Sales PriceOil (per Bbl)(1)
    
    $
    59.86
    
    
    $
    51.78
    
    
    $
    39.05Natural gas
(per Mcf)(1)
    
    $
    6.19
    
    
    $
    8.54
    
    
    $
    5.85BOE Price(1)
    
    $
    48.73
    
    
    $
    51.57
    
    
    $
    37.55BOE Price(2)
    
    $
    43.56
    
    
    $
    43.46
    
    
    $
    30.45Operating RevenuesOil
    
    $
    68,076
    
    
    $
    47,800
    
    
    $
    28,455Effect of oil hedges
    
    
    (11,512
    )
    
    
    (12,139
    )
    
    
    (7,458
    )Natural gas
    
    
    40,461
    
    
    
    30,690
    
    
    
    15,735Effect of natural gas hedges
    
    
    
    
    
    
    (201
    )
    
    
    (895
    )97,025
    
    
    
    66,150
    
    
    
    35,837Operating ExpensesLease operating expense
    
    
    16,819
    
    
    
    9,947
    
    
    
    7,373Production taxes
    
    
    5,577
    
    
    
    4,102
    
    
    
    2,108General and administrative:General and administrative
    
    
    5,885
    
    
    
    4,289
    
    
    
    3,123Public reporting
    
    
    3,638
    
    
    
    2,423
    
    
    
    2,255Depreciation, depletion and amortization
    
    
    24,687
    
    
    
    12,044
    
    
    
    8,71256,606
    
    
    
    32,805
    
    
    
    23,571Operating income
    
    $
    40,419
    
    
    $
    33,345
    
    
    $
    12,266
 
 (1)
    
    Excludes hedge transactions.(2)
    
    Includes hedge transactions. Critical Accounting Policies and Practices
 Full Cost and Impairment of Assets.
  (32)




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##### Table of Contents



Depletion.
 Proved Reserve Estimates.
   Use of Estimates.
 Derivatives.
    (33)




---



##### Table of Contents



Years Ended December 31, 2006 and December 31, 2005
  Revenues(1)
    
    Production2006
    
    2005
    
    2006
    
    2005Oil (Bbls)
    
    
    58
    %
    
    
    54
    %
    
    
    51
    %
    
    
    61
    %Natural gas
(Mcf)
    
    
    42
    %
    
    
    46
    %
    
    
    49
    %
    
    
    39
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 
 (1)
    
    Includes the effects of derivative transactions accounted for
as hedges.




PercentYear Ended December 31,
    
    
    Increase
    
    
    Increase2006
    
    
    2005
    
    
    (Decrease)
    
    
    (Decrease)($ in thousands, except per unit data)Production
VolumesOil (Bbls)
    
    
    1,137
    
    
    
    923
    
    
    
    214
    
    
    
    23
    %Natural gas
(Mcf)
    
    
    6,539
    
    
    
    3,592
    
    
    
    2,947
    
    
    
    82
    %BOE
    
    
    2,227
    
    
    
    1,522
    
    
    
    705
    
    
    
    46
    %Sales
PriceOil (per Bbl)(1)
    
    $
    59.86
    
    
    $
    51.78
    
    
    $
    8.08
    
    
    
    16
    %Natural gas
(per Mcf)(1)
    
    $
    6.19
    
    
    $
    8.54
    
    
    $
    (2.35
    )
    
    
    (28
    )%BOE price(1)
    
    $
    48.73
    
    
    $
    51.57
    
    
    $
    (2.84
    )
    
    
    (6
    )%BOE price(2)
    
    $
    43.56
    
    
    $
    43.46
    
    
    $
    0.10
    
    
    
    0
    %Operating
RevenuesOil
    
    $
    68,076
    
    
    $
    47,800
    
    
    $
    20,276
    
    
    
    42
    %Effect of oil hedges
    
    
    (11,512
    )
    
    
    (12,139
    )
    
    
    627
    
    
    
    (5
    )%Natural gas
    
    
    40,461
    
    
    
    30,690
    
    
    
    9,771
    
    
    
    32
    %Effect of natural gas hedges
    
    
    
    
    
    
    (201
    )
    
    
    201
    
    
    
    (100
    )%Total
    
    $
    97,025
    
    
    $
    66,150
    
    
    $
    30,875
    
    
    
    47
    %





|    |  |                             
|--- |  | ----------------------------
|(1) |  | Excludes hedge transactions.
|   
|(2) |  | Includes hedge transactions.





(34)



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##### Table of Contents



Costs and Expenses
 PercentYear Ended December 31,
    
    
    Increase
    
    
    Increase2006
    
    
    2005
    
    
    (Decrease)
    
    
    (Decrease)($ in thousands)Lease operating expense
    
    $
    16,819
    
    
    $
    9,947
    
    
    $
    6,872
    
    
    
    69
    %Production taxes
    
    
    5,577
    
    
    
    4,102
    
    
    
    1,475
    
    
    
    36
    %General and administrative:General and administrative
    
    
    5,885
    
    
    
    4,289
    
    
    
    1,596
    
    
    
    37
    %Public reporting
    
    
    3,638
    
    
    
    2,423
    
    
    
    1,215
    
    
    
    50
    %Total general and administrative
    
    
    9,523
    
    
    
    6,712
    
    
    
    2,811
    
    
    
    42
    %Depreciation, depletion and amortization
    
    
    24,687
    
    
    
    12,044
    
    
    
    12,643
    
    
    
    105
    %Total
    
    $
    56,606
    
    
    $
    32,805
    
    
    $
    23,801
    
    
    
    73
    %
      (35)




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##### Table of Contents



Other income (expense)
 PercentYear Ended December 31,
    
    
    Increase
    
    
    Increase2006
    
    
    2005
    
    
    (Decrease)
    
    
    (Decrease)($ dollars in thousands)Gain (loss) on derivatives not classified as hedges
    
    $
    2,802
    
    
    $
    (31,669
    )
    
    $
    34,471
    
    
    
    109
    %Gain (loss) on ineffective portion of hedges
    
    
    626
    
    
    
    (137
    )
    
    
    763
    
    
    
    557
    %Interest and other income
    
    
    158
    
    
    
    167
    
    
    
    (9
    )
    
    
    (5
    )%Interest expense
    
    
    (12,360
    )
    
    
    (4,780
    )
    
    
    (7,580
    )
    
    
    159
    %Other expense
    
    
    (189
    )
    
    
    (102
    )
    
    
    (87
    )
    
    
    85
    %Equity in income (loss) of pipelines
and gathering system ventures
    
    
    8,593
    
    
    
    (89
    )
    
    
    8,682
    
    
    
    9,755
    %Total
    
    $
    (370
    )
    
    $
    (36,610
    )
    
    $
    36,240
    
    
    
    99
    %
       Years Ended December 31, 2005 and December 31, 2004
  Revenues(1)
    
    Production2005
    
    2004
    
    2005
    
    2004Oil (Bbls)
    
    
    54
    %
    
    
    59
    %
    
    
    61
    %
    
    
    62
    %Natural gas
(Mcf)
    
    
    46
    %
    
    
    41
    %
    
    
    39
    %
    
    
    38
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 
 (1)
    
    Includes hedge transactions. (36)




---



##### Table of Contents



PercentYear Ended December 31,
    
    
    Increase
    
    
    Increase2005
    
    
    2004
    
    
    (Decrease)
    
    
    (Decrease)($ in thousands, except per unit data)Production
VolumesOil (Bbls)
    
    
    923
    
    
    
    729
    
    
    
    194
    
    
    
    27
    %Natural gas
(Mcf)
    
    
    3,592
    
    
    
    2,690
    
    
    
    902
    
    
    
    34
    %BOE
    
    
    1,522
    
    
    
    1,177
    
    
    
    345
    
    
    
    29
    %Sales
PriceOil (per Bbl)(1)
    
    $
    51.78
    
    
    $
    39.05
    
    
    $
    12.73
    
    
    
    33
    %Natural gas
(per Mcf)(1)
    
    $
    8.54
    
    
    $
    5.85
    
    
    $
    2.69
    
    
    
    46
    %BOE price(1)
    
    $
    51.57
    
    
    $
    37.55
    
    
    $
    14.02
    
    
    
    37
    %BOE price(2)
    
    $
    43.46
    
    
    $
    30.45
    
    
    $
    13.01
    
    
    
    43
    %Operating
RevenuesOil
    
    $
    47,800
    
    
    $
    28,455
    
    
    $
    19,345
    
    
    
    68
    %Oil hedges
    
    
    (12,139
    )
    
    
    (7,458
    )
    
    
    (4,681
    )
    
    
    (63
    )%Natural gas
    
    
    30,690
    
    
    
    15,735
    
    
    
    14,955
    
    
    
    95
    %Natural gas hedges
    
    
    (201
    )
    
    
    (895
    )
    
    
    694
    
    
    
    78
    %Total
    
    $
    66,150
    
    
    $
    35,837
    
    
    $
    30,313
    
    
    
    85
    %
 
 (1)
    
    Excludes hedge transactions.(2)
    
    Includes hedge transactions.    (37)




---



##### Table of Contents



Costs and Expenses
 PercentYear Ended December 31,
    
    
    Increase
    
    
    Increase2005
    
    
    2004
    
    
    (Decrease)
    
    
    (Decrease)($ in thousands)Lease operating expense
    
    $
    9,947
    
    
    $
    7,373
    
    
    $
    2,574
    
    
    
    35
    %Production taxes
    
    
    4,102
    
    
    
    2,108
    
    
    
    1,994
    
    
    
    95
    %General and administrative:General and administrative
    
    
    4,289
    
    
    
    3,123
    
    
    
    1,166
    
    
    
    37
    %Public reporting
    
    
    2,423
    
    
    
    2,255
    
    
    
    168
    
    
    
    7
    %Total general and administrative
    
    
    6,712
    
    
    
    5,378
    
    
    
    1,334
    
    
    
    25
    %Depreciation, depletion and amortization
    
    
    12,044
    
    
    
    8,712
    
    
    
    3,332
    
    
    
    38
    %Total
    
    $
    32,805
    
    
    $
    23,571
    
    
    $
    9,234
    
    
    
    39
    %
     Other income (expense)
 PercentYear Ended December 31,
    
    
    Increase
    
    
    Increase2005
    
    
    2004
    
    
    (Decrease)
    
    
    (Decrease)($ in thousands)Gain (loss) on derivatives not classified as hedges
    
    $
    (31,669
    )
    
    $
    (5,726
    )
    
    $
    (25,943
    )
    
    
    (453
    )%Gain (loss) on ineffective portion of hedges
    
    
    (137
    )
    
    
    (240
    )
    
    
    103
    
    
    
    43
    %Interest and other income
    
    
    167
    
    
    
    189
    
    
    
    (22
    )
    
    
    (12
    )%Interest expense
    
    
    (4,780
    )
    
    
    (2,732
    )
    
    
    (2,048
    )
    
    
    75
    %Other expense
    
    
    (191
    )
    
    
    (324
    )
    
    
    133
    
    
    
    (41
    )%Total
    
    $
    (36,610
    )
    
    $
    (8,833
    )
    
    $
    (27,777
    )
    
    
    314
    %
 (38)




---



##### Table of Contents



Capital Resources and Liquidity
    Year ended December 31,2006
    
    2005
    
    2004($ in thousands)Operating activities
    
    $
    74,186
    
    
    $
    37,118
    
    
    $
    18,156Investing activities
    
    $
    (200,548
    )
    
    $
    (84,949
    )
    
    $
    (69,518
    )Financing activities
    
    $
    125,854
    
    
    $
    49,468
    
    
    $
    38,765
 (39)




---



##### Table of Contents



Credit Facilities
  Revolving Credit Facility
      (40)




---



##### Table of Contents



Second Lien Term Loan Facility
 1 2
        (41)




---



##### Table of Contents



Preferred Stock
  
    
    required us to pay dividends of $.60 per annum, semi-annually on June 15 and
December 15 of each year;
  
    
    was 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;
    
    was redeemable at our option, in whole or in part, for $10 per share, plus accrued dividends;
    
    had no voting rights, except as required by applicable law;
    
    was senior to the common stock with respect to dividends and on liquidation,
dissolution or winding up of Parallel;
    
    had a liquidation value of $10 per share, plus accrued and unpaid dividends.
  Commodity Price Risk Management Transactions and Effects of Derivative Instruments
      Future Capital Requirements
  
    
    our internally generated cash flows;
    
    the availability of additional borrowings under our revolving credit facility;
    
    the availability of supplies and services;
 (42)




---



##### Table of Contents




    
    additional sources of funding; and
 
    
    our future drilling successes.
 Contractual Obligations, Commitments and Off-Balance Sheet Arrangements
  Obligation Due in PeriodContractual Cash Obligations
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    After 5 years
    
    
    Total($ in thousands)Revolving Credit Facility (secured)
    
    $
    8,764
    
    
    $
    8,788
    
    
    $
    8,764
    
    
    $
    122,300
    
    
    $
    
    
    
    $
    
    
    
    $
    148,616Term Loan Facility (secured)
    
    
    4,937
    
    
    
    4,951
    
    
    
    4,938
    
    
    
    54,315
    
    
    
    
    
    
    
    
    
    
    
    69,141Office Lease (Dinero Plaza)
    
    
    204
    
    
    
    210
    
    
    
    216
    
    
    
    36
    
    
    
    
    
    
    
    
    
    
    
    666Andrews and Snyder Field Offices (1)
    
    
    23
    
    
    
    14
    
    
    
    14
    
    
    
    14
    
    
    
    14
    
    
    
    530
    
    
    
    609Asset Retirement Obligations(2)
    
    
    701
    
    
    
    33
    
    
    
    89
    
    
    
    53
    
    
    
    45
    
    
    
    4,142
    
    
    
    5,063Derivative Obligations
    
    
    14,109
    
    
    
    13,954
    
    
    
    224
    
    
    
    208
    
    
    
    
    
    
    
    
    
    
    
    28,495Drilling Contract
    
    
    808
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    808Total
    
    $
    29,546
    
    
    $
    27,950
    
    
    $
    14,245
    
    
    $
    176,926
    
    
    $
    59
    
    
    $
    4,672
    
    
    $
    253,398
 
 (1)
    
    The Snyder office lease expires upon the cessation of production from the
Diamond M area wells. 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)
    
    Asset retirement obligations of oil and natural gas assets, excluding salvage value
and accretion.    Outlook
  
    
    internally generated cash from operations;
    
    proceeds from bank borrowings; and
    
    proceeds from sales of equity securities.
  
    
    our proved reserves;
 
 (43)




---



##### Table of Contents




    
    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 our debt and equity securities;
    
    sales of non-core properties; and
    
    other forms of financing.
  Inflation
  Recent Accounting Pronouncements
   
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  (44)




---



##### Table of Contents



Interest Rate Sensitivity as of December 31, 2006
  2006
    
    2007
    
    2008
    
    2009
    
    2010
    
    Total($ in thousands)Variable rate debt
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    165,000
    
    
    $
    165,000Revolving Credit Facility (secured)
Average interest rate
    
    
    7.621
    %
    
    
    7.621
    %
    
    
    7.621
    %
    
    
    7.621
    %
    
    
    7.621
    %Second Lien Term Loan Facility (secured) 
Average interest rate
    
    
    9.875
    %
    
    
    9.875
    %
    
    
    9.875
    %
    
    
    9.875
    %
    
    
    9.875
    %
   EstimatedNotional
    
    
    Weighted Average
    
    
    Fair Market ValuePeriod of Time
    
    Amounts
    
    
    Fixed Interest Rates
    
    
    at December 31, 2006($ in millions)
    
    
    
    
    
    ($ in thousands)January 1, 2007 thru December 31, 2007
    
    $
    100
    
    
    
    4.62
    %
    
    $
    611January 1, 2008 thru December 31, 2008
    
    $
    100
    
    
    
    4.86
    %
    
    
    12January 1, 2009 thru December 31, 2009
    
    $
    50
    
    
    
    5.06
    %
    
    
    (86
    )January 1, 2010 thru October 31, 2010
    
    $
    50
    
    
    
    5.15
    %
    
    
    (71
    )Total Fair Market Value
    
    
    
    
    
    
    
    
    
    $
    466
 Commodity Price Sensitivity as of December 31, 2006
  (45)




---



##### Table of Contents



Collars.
  HoustonNyMex
    
    
    
    
    
    
    Ship Channel
    
    
    WAHA
    
    
    FairBarrels
    
    
    Oil Prices
    
    
    MMBtu of
    
    
    Gas Prices
    
    
    Gas Prices
    
    
    MarketPeriod of Time
    
    of Oil
    
    
    Floor
    
    
    Cap
    
    
    Natural Gas
    
    
    Floor
    
    
    Cap
    
    
    Floor
    
    
    Cap
    
    
    Value($ inthousands)January 1, 2007 thru
December 31, 2007
    
    
    292,000
    
    
    $
    55.63
    
    
    $
    84.88
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    357April 1, 2007 thru
October 31, 2007
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    214,000
    
    
    $
    6.00
    
    
    $
    11.05
    
    
    $
    
    
    
    $
    
    
    
    
    85April 1, 2007 thru
October 31, 2007
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    642,000
    
    
    $
    
    
    
    $
    
    
    
    $
    6.25
    
    
    $
    8.90
    
    
    
    291January 1, 2008 thru
December 31, 2008
    
    
    237,900
    
    
    $
    60.38
    
    
    $
    81.08
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    411January 1, 2009 thru
December 31, 2009
    
    
    620,500
    
    
    $
    63.53
    
    
    $
    80.21
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    1,733January 1, 2010 thru
October 31, 2010
    
    
    486,400
    
    
    $
    63.44
    
    
    $
    78.26
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    1,285Total Fair Market Value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    4,162
 Commodity Swaps.
 (46)




---



##### Table of Contents



Barrels of
    
    
    Nymex Oil
    
    
    Fair MarketPeriod of Time
    
    Oil
    
    
    Swap Price
    
    
    Value($ in thousands)January 1, 2007 thru December 31, 2007
    
    
    474,500
    
    
    $
    34.36
    
    
    $
    (14,109
    )January 1, 2008 thru December 31, 2008
    
    
    439,200
    
    
    $
    33.37
    
    
    
    (13,826
    )Total fair market value
    
    
    
    
    
    
    
    
    
    $
    (27,935
    )
 
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
  
 ITEM 9A. CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
  Managements Report on Internal Control Over Financial Reporting
   
    
    pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of our assets;
    
    provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with accounting principles generally
accepted in the United States of
America, and that our receipts and expenditures are being made only in accordance with
authorizations of management and our Board of Directors; and,
 
 (47)




---



##### Table of Contents




    
    provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have a material
effect on the financial statements.
  Internal Control Integrated Framework,
  Changes in Internal Controls
  Attestation Report
 
 
 Internal ControlIntegrated Framework .
   (48)




---



##### Table of Contents



ITEM 9B. OTHER INFORMATION
  (49)




---



##### Table of Contents



PART III
 
 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
  DirectorName
    
    Age
    
    Since
    
    Position with CompanyThomas R. Cambridge (1)
    
    71
    
    1985
    
    Chairman of the Board of DirectorsLarry C. Oldham(1)
    
    53
    
    1979
    
    Director, President and Chief Executive OfficerMartin B. Oring(1)(2)(3)(4)
    
    61
    
    2001
    
    DirectorRay M. Poage (1)(2)(3)(4)
    
    59
    
    2003
    
    DirectorJeffrey G. Shrader (1)(2)(3)(4)
    
    56
    
    2001
    
    DirectorDonald E. Tiffin
    
    49
    
    
    
    Chief Operating OfficerEric A. Bayley
    
    58
    
    
    
    Vice President of Corporate EngineeringJohn S. Rutherford
    
    46
    
    
    
    Vice President of Land and AdministrationSteven D. Foster
    
    51
    
    
    
    Chief Financial Officer
 
 (1)
    
    Member of Hedging and Acquisitions Committee(2)
    
    Member of Compensation Committee(3)
    
    Member of Audit Committee(4)
    
    Member of Corporate Governance and Nominating Committee     (50)




---



##### Table of Contents



Consulting Arrangements
  Corporate Governance
  (51)




---



##### Table of Contents




    
    the Audit Committee;
    
    the Corporate Governance and Nominating Committee;
    
    the Compensation Committee; and
    
    the Hedging and Acquisitions Committee.
  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;
    
    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;
 
 (52)




---



##### Table of Contents




    
    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
 www.plll.com
 
 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.
 (53)




---



##### Table of Contents



Director Attendance at Annual Meetings
  Section 16(a) Beneficial Ownership Reporting Compliance
  
 ITEM 11. EXECUTIVE COMPENSATION
 Compensation Discussion and Analysis
 Introduction and Overview
 http://www.plll.com
    Compensation Philosophy and Objectives
  
    
    is competitive with compensation programs offered by comparable companies
engaged in businesses similar to ours;
    
    rewards performance, skills and talents necessary to advance our company
objectives and further the interests of stockholders;
    
    is balanced between a fair and reasonable cash compensation and incentives
linked to Parallels overall operating performance; and
    
    is fair to our executives, but within reasonable limits.
  (54)




---



##### Table of Contents




    
    provide a reasonable and competitive level of current annual income;
    
    provide incentives that encourage our executives to continue their employment with us;
    
    motivate executives to accomplish our company goals and reward performance;
    
    create an environment conducive to company-oriented success rather than individual success;
    
    align compensation and benefits with business strategy and competitive market data; and
    
    encourage the application of prudent decision making processes in an
industry marked by volatility and high risk.
   Compensation Components
  
    
    base salaries;
    
    stock option grants;
    
    annual cash bonuses;
    
    health and life insurance plans which are generally available to all of our employees;
    
    contributions by Parallel to our 401(k) retirement plan;
    
    an equity based cash incentive plan;
 
 (55)




---



##### Table of Contents




    
    change of control arrangements; and
    
    limited perquisites and personal benefits provided by Parallel to our executive officers.
  Used by
    
    Not Used byElements of Compensation
    
    Parallel
    
    ParallelBase salaries
    
    üEmployment agreements
    
    
    
    üCash bonuses
    
    üStock awards
    
    
    
    üChange of
control/severance arrangements
    
    üDefined benefit pension plan
    
    
    
    üDefined contribution plan
    
    üStock options
    
    üTax gross-ups
    
    üEmployee stock purchase/
ownership plan
    
    
    
    üSupplemental executive retirement
plans/benefits
    
    
    
    üDeferred compensation plan
    
    
    
    üIncentive and retention plan
    
    üLimited perquisites and personal benefits
    
    ü
 Evaluation Factors
   (56)




---



##### Table of Contents




    
    growth in the quantity and value of our proved oil and natural gas
reserves;
    
    volumes of oil and natural gas produced by Parallel and our executives
ability to replace oil and natural gas produced with new oil and natural gas reserves;
    
    cash flows from operations;
    
    revenues;
    
    earnings per share;
    
    the market value of our common stock;
    
    the extent to which the officers have been successful in finding and creating
opportunities for Parallel to participate in acquisition, exploitation and drilling
ventures having quality prospects;
    
    the ability of our officers to formulate and maintain sound budgets for our business activities;
    
    the overall financial condition of Parallel;
    
    the achievement by management of specific tasks and goals set by the Board
of Directors from time to time;
    
    the effectiveness of our compensation packages in motivating officers to remain
in Parallels employment;
    
    oil and gas finding costs and operating costs; and
    
    the ability of our executives to effectively implement risk management
practices, including oil and natural gas and interest rate hedging activities.
  
    
    longevity of service; and
    
    the individual performance, leadership, business knowledge and level of
responsibility of our officers.
   (57)




---



##### Table of Contents



Base Salaries
 th
 Mr. Oldham
    
    -- from
    
    $
    300,000
    
    
    to
    
    $
    330,000Mr. Tiffin
    
    -- from
    
    $
    250,000
    
    
    to
    
    $
    275,000Mr. Rutherford
    
    -- from
    
    $
    160,000
    
    
    to
    
    $
    175,000Mr. Foster
    
    -- from
    
    $
    175,000
    
    
    to
    
    $
    190,000Mr. Bayley
    
    -- from
    
    $
    160,000
    
    
    to
    
    $
    175,000Mr. Cambridge
    
    -- from
    
    $
    135,000
    
    
    to
    
    $
    145,000
 Cash Bonuses
 th
  (58)




---



##### Table of Contents



Amount of
    
    Amount ofBonus
    
    Tax Gross-UpMr. Oldham
    
    $
    10,000
    
    
    $
    3,629Mr. Tiffin
    
    $
    10,000
    
    
    $
    1,687Mr. Rutherford
    
    $
    10,000
    
    
    $
    3,697Mr. Foster
    
    $
    10,000
    
    
    $
    3,559Mr. Bayley
    
    $
    10,000
    
    
    $
    3,836Mr. Cambridge
    
    $
    10,000
    
    
    $
    5,152
  Amount ofBonusMr. Oldham
    
    $
    175,000Mr. Tiffin
    
    $
    137,500Mr. Rutherford
    
    $
    50,000Mr. Foster
    
    $
    50,000Mr. Bayley
    
    $
    50,000Mr. Cambridge
    
    $
    50,000
 Stock Options
   (59)




---



##### Table of Contents



Other Compensation
   Allocation of Amounts and Types of Compensation
   (60)




---



##### Table of Contents



Internal and External Assistance
   Change of Control Arrangements
  Stock Option Plans
   (61)




---



##### Table of Contents



Incentive and Retention Plan
     (62)




---



##### Table of Contents



Stock Ownership/Retention Guidelines
   Perquisites and Personal Benefits
  (63)




---



##### Table of Contents



Limit on Deductibility of Certain Compensation
        Members of the Compensation CommitteeJeffrey G. Shrader (Chairman)Martin B. OringRay M. Poage
 (64)




---



##### Table of Contents



Summary of Annual Compensation
   Change inPension ValueandNon-Equity
    
    Nonqualified
    
    AllIncentive
    
    Deferred
    
    OtherStock
    
    Option
    
    Plan Com-
    
    Compensation
    
    Com-Name and
    
    
    
    
    
    Salary
    
    Bonus
    
    Awards
    
    Awards
    
    pensation
    
    Earnings
    
    pensation
    
    TotalPrincipal Position
    
    Year
    
    ($)
    
    ($)
    
    ($)
    
    ($)
    
    ($)
    
    ($)
    
    ($)
    
    ($)(a)
    
    (b)
    
    (c)
    
    (d)
    
    (e)
    
    (f)
    
    (g)
    
    (h)
    
    (i) (1)
    
    (j)L. C. Oldham
    
    
    2006
    
    
    $
    300,000
    
    
    $
    185,000
    
    
    
    0
    
    
    
    16,683
    (2)
    
    
    0
    
    
    
    0
    
    
    $
    51,090
    (3)
    
    $
    552,773President , Chief Executive
Officer and DirectorD. E. Tiffin
    
    
    2006
    
    
    $
    250,000
    
    
    $
    147,500
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    $
    43,247
    (4)
    
    $
    440,747Chief Operating OfficerE. A. Bayley
    
    
    2006
    
    
    $
    160,000
    
    
    $
    60,000
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    $
    39,321
    (5)
    
    $
    259,321Vice President
of Corporate EngineeringJ. S. Rutherford
    
    
    2006
    
    
    $
    160,000
    
    
    $
    60,000
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    $
    38,174
    (6)
    
    $
    258,174Vice President
of Land and AdministrationS. D. Foster
    
    
    2006
    
    
    $
    175,000
    
    
    $
    60,000
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    $
    45,547
    (7)
    
    $
    280,547Chief Financial OfficerT. R. Cambridge
    
    
    2006
    
    
    $
    135,000
    
    
    $
    60,000
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    $
    5,152
    
    
    $
    200,152Chairman of the Board
 
 (1)
    
    This column includes the incremental cost of perquisites and personal benefits received by
the named executive officers. We have included in this column the incremental cost of all
perquisites and personal benefits for each named executive officer and as identified in the
following table: (65)




---



##### Table of Contents



Mr.
    
    Mr.
    
    Mr.
    
    Mr.
    
    Mr.
    
    Mr.Oldham
    
    Tiffin
    
    Rutherford
    
    Foster
    
    Bay ley
    
    CambridgePersonal use of club membership s(a)
    
    
    2006
    
    
    $
    
    
    
    $
    
    
    
    $
    3,376
    
    
    $
    3,652
    
    
    $
    
    
    
    $
    Personal use of comp any car(b)
    
    
    2006
    
    
    $
    1,723
    
    
    $
    
    
    
    $
    1,179
    
    
    $
    
    
    
    $
    8,401
    
    
    $
    Car allowance
    
    
    2006
    
    
    $
    
    
    
    $
    6,000
    
    
    $
    
    
    
    $
    6,000
    
    
    $
    
    
    
    $
    Personal use of office sp ace(c)
    
    
    2006
    
    
    $
    2,366
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    CEO life insurance(d)
    
    
    2006
    
    
    $
    3,793
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Personal use of charter aircraft
    
    
    2006
    
    
    
    
    (e)

    
    
    
    (e)
    
    
    
    (e)
    
    $
    
    
    
    $
    
    
    
    $
    Tax gross up (f)
    
    
    2006
    
    
    $
    3,629
    
    
    $
    1,687
    
    
    $
    3,697
    
    
    $
    3,559
    
    
    $
    3,836
    
    
    $
    5,152
 
 (a)
    
    The value of personal use of club memberships represents that portion of annual
club dues determined by multiplying the total annual club dues by a fraction equal
to expenses for personal use divided by total business and personal expenses. All
employees pay or reimburse us for their personal expenses.(b)
    
    Personal use of a company car is based on the sum of the fair lease value of the
car, maintenance expense and gas expense, multiplied by a fraction, the numerator of
which is the number of miles driven for personal use and the denominator of which is
the total number of miles driven in fiscal 2006.(c)
    
    Includes personal use of office space by Mr. Oldhams wife for charitable, civic
and personal activities. The value has been determined by multiplying the number of
square feet in the office by the cost per square foot paid by Parallel under its
lease agreement covering its executive offices.(d)
    
    We provide a $100,000 whole life insurance policy for Mr. Oldham and pay the
premiums for maintaining the policy in force.(e)
    
    From time to time, the executives spouse will accompany the executive on
business trips when there is an unoccupied seat on the aircraft. However, there is
no aggregate incremental cost to us.(f)
    
    The tax gross up payments for each named executive officer were made in
connection with cash bonuses in the amount of $10,000 that were awarded to each
named executive officer on December 6, 2006. (2)
    
    This value is what is also included in our Consolidated Financial Statements in
accordance with FAS 123(R). This option to purchase 37,500 shares of common stock was
granted to Mr. Oldham on June 20, 2001 at an exercise price of $4.97 per share, and is
exercisable in increments of 7,500 shares on the first day of January of each year.
There were no stock option awards to Mr. Oldham in 2006. For a discussion of
valuation assumptions, see Note 11 to our Consolidated Financial Statements included
in this Annual Report on Form 10-K.
 (3)
    
    Such amount includes Parallels 2006 contribution in the amount of $18,000 to Mr.
Oldhams individual retirement account maintained under Parallels 401(k) plan;
insurance premiums in the amount of $21,579 for nondiscriminatory group life, medical,
disability, long-term care and dental insurance; and $11,511 representing the total
value of all perquisites and personal benefits provided to Mr. Oldham as described in
footnote 1.
 (4)
    
    Such amount includes Parallels 2006 contribution in the amount of $15,000 to Mr.
Tiffins individual retirement account maintained under Parallels 401(k) plan;
insurance premiums in the amount of $20,560 for nondiscriminatory group life, medical,
disability, long-term care and dental insurance; and $7,687 representing the total
value of all perquisites and personal benefits provided to Mr. Tiffin as described in
footnote 1.
 (5)
    
    Such amount includes Parallels 2006 contribution in the amount of $9,600 to Mr.
Bayleys individual retirement account maintained under Parallels 401(k) plan;
insurance premiums in the amount of $17,484 for nondiscriminatory group life, medical,
disability, long-term care and dental insurance; and $12,237 representing the total
value of all perquisites and personal benefits provided to Mr. Bayley as described in
footnote 1.
 (6)
    
    Such amount includes Parallels 2006 contribution in the amount of $9,600 to Mr.
Rutherfords individual retirement account maintained under the 401(k) plan; insurance
premiums in the amount of $20,322 for nondiscriminatory group life, medical,
disability and dental insurance; and $8,252 representing the total value of all
perquisites and personal benefits provided to Mr. Rutherford as described in footnote
1.
 (7)
    
    Such amount includes Parallels 2006 contribution in the amount of $10,500 to Mr.
Fosters individual retirement account maintained under Parallels 401(k) plan;
insurance premiums in the amount of $21,836 for nondiscriminatory group life, medical,
disability, long-term care and dental insurance; and $13,211 representing the total
value of all perquisites and personal benefits provided to Mr. Foster as described in
footnote 1.
 (66)




---



##### Table of Contents



Stock Options
    Option Awards
    
    Stock AwardsEquityEquity
    
    IncentiveIncentive
    
    PlanPlan
    
    Awards:Equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Awards:
    
    Market orIncentive
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Number
    
    PayoutPlan
    
    
    
    
    
    
    
    
    
    
    
    
    
    Market
    
    of
    
    Value ofAwards:
    
    
    
    
    
    
    
    
    
    Number
    
    Value
    
    Unearned
    
    UnearnedNumber
    
    Number
    
    Number
    
    
    
    
    
    
    
    
    
    of Shares
    
    of Shares
    
    Shares,
    
    Shares,of
    
    of
    
    of
    
    
    
    
    
    
    
    
    
    or
    
    or Units
    
    Units or
    
    Units orSecurities
    
    Securities
    
    Securities
    
    
    
    
    
    
    
    
    
    Units of
    
    of
    
    Other
    
    OtherUnderlying
    
    Underlying
    
    Underlying
    
    
    
    
    
    
    
    
    
    Stock
    
    Stock
    
    Rights
    
    RightsUnexercised
    
    Unexercised
    
    Unexercised
    
    Option
    
    
    
    
    
    That Have
    
    That Have
    
    That Have
    
    That HaveOptions
    
    Options
    
    Unearned
    
    Exercise
    
    Option
    
    Not
    
    Not
    
    Not
    
    Not(#)
    
    (#)
    
    Options
    
    Price
    
    Expiration
    
    Vested
    
    Vested
    
    Vested
    
    VestedName
    
    Exercisable
    
    Unexercisable
    
    (#)
    
    ($)
    
    Date
    
    (#)
    
    ($)
    
    (#)
    
    ($)(a)
    
    (b)
    
    (c)
    
    (d)
    
    (e)
    
    (f)
    
    (g)
    
    (h)
    
    (i)
    
    (j)T. R. Cambridge
    
    
    100,000
    
    
    
    0
    
    
    
    0
    
    
    
    4.09
    
    
    
    05-17-07
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    050,000
    
    
    
    0
    
    
    
    0
    
    
    
    3.60
    
    
    
    08-04-08
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    050,000
    
    
    
    0
    
    
    
    0
    
    
    
    1.82
    
    
    
    10-28-09
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0100,000
    
    
    
    0
    
    
    
    0
    
    
    
    4.97
    
    
    
    06-20-11
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0L. C. Oldham
    
    
    46,000
    
    
    
    0
    
    
    
    0
    
    
    
    3.60
    
    
    
    08-04-08
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    00
    
    
    
    37,500
    (1)
    
    
    0
    
    
    
    4.97
    
    
    
    06-20-11
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0E. A. Bayley
    
    
    25,000
    
    
    
    0
    
    
    
    0
    
    
    
    4.53
    
    
    
    07-17-07
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    025,000
    
    
    
    0
    
    
    
    0
    
    
    
    3.60
    
    
    
    08-04-08
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    050,000
    
    
    
    0
    
    
    
    0
    
    
    
    4.97
    
    
    
    06-20-11
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0J. S. Rutherford
    
    
    50,000
    
    
    
    0
    
    
    
    0
    
    
    
    4.97
    
    
    
    06-20-11
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0D. E. Tiffin
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0S. D. Foster
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
 
 (1)
    
    This incentive stock option became exercisable as to 7,500 shares on January 1, 2007,
and an additional 7,500 shares become exercisable on the first day of January in each of
the years 2008, 2009, 2010 and 2011. (67)




---



##### Table of Contents



Option Exercises and Stock Vested
  Option Exercises and Stock VestedOption Awards
    
    
    Stock AwardsNumber of
    
    
    
    
    
    
    Number ofShares
    
    
    Value
    
    
    Shares
    
    
    ValueAcquired
    
    
    Realized
    
    
    Acquired
    
    
    Realizedon
    
    
    on
    
    
    on
    
    
    onExercise
    
    
    Exercise
    
    
    Vesting
    
    
    VestingName
    
    (#)
    
    
    ($)
    
    
    (#)
    
    
    ($)(a)
    
    (b)
    
    
    (c)
    
    
    (d)
    
    
    (e)Thomas R. Cambridge
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Larry C. Oldham
    
    
    7,500
    
    
    
    110,850
    (1)
    
    
    0
    
    
    
    0Eric A. Bayley
    
    
    25,000
    
    
    
    428,250
    (2)
    
    
    0
    
    
    
    0John S. Rutherford
    
    
    25,000
    
    
    
    509,250
    (3)
    
    
    0
    
    
    
    018,750
    
    
    
    365,625
    (4)Donald E. Tiffin
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Steven D.
Foster
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
 
 (1)
    
    The value realized on exercise is equal to the closing price of our common stock on the
date of exercise ($19.75), less the exercise price ($4.97) of the stock option exercised.(2)
    
    The value realized on exercise is equal to the closing price of our common stock on the date
of exercise ($22.53), less the exercise price ($5.40) of the stock option exercised.(3)
    
    The value realized on exercise is equal to the closing price of our common stock on the date
of exercise ($24.90), less the exercise price ($4.53) of the stock option exercised.(4)
    
    The value realized on exercise is equal to the closing price of our common stock on the date
of exercise ($24.90), less the exercise price ($5.40) of the stock option exercised. Change of Control Arrangements
 Stock Option Plans
  
    
    Parallel is not the surviving entity in a merger or consolidation (or survives only
as a subsidiary of another entity);
    
    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
    
    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.
 (68)




---



##### Table of Contents




    
    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 our stockholders in a merger, consolidation, sale of
assets or dissolution transaction;
    
    the price per share offered to our 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
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.
 (69)




---



##### Table of Contents




    
    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.
      (70)




---



##### Table of Contents




    
    designate the officers and employees of, and consultants to,  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.
  Non-Officer Severance Plan
  (71)




---



##### Table of Contents



Compensation of Directors
   Change inFees
    
    
    
    
    
    
    
    
    
    
    
    
    
    PensionEarned
    
    
    
    
    
    
    
    
    
    
    
    
    
    Value andor
    
    
    
    
    
    
    
    
    
    Non-Equity
    
    NonqualifiedPaid in
    
    Stock
    
    Option
    
    Incentive Plan
    
    Deferred
    
    All OtherCash
    
    Awards
    
    Awards
    
    Compensation
    
    Compensation
    
    Compensation
    
    TotalName
    
    ($)
    
    ($)
    
    ($)
    
    ($)
    
    ($)
    
    ($)
    
    ($)(a)
    
    (b)
    
    (c)(1)
    
    (d)(2)
    
    (e)
    
    (f)
    
    (g)
    
    (h)D.E. Chitwood
    
    
    34,000
    
    
    
    29,620
    
    
    
    143,160
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    206,780M.B. Oring
    
    
    42,250
    
    
    
    29,620
    
    
    
    143,160
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    215,030R.M . Poage
    
    
    40,625
    
    
    
    29,620
    
    
    
    143,160
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    213,405J.G. Shrader
    
    
    29,500
    
    
    
    29,620
    
    
    
    143,160
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    202,280
 
 (1)
    
    On the first day of July of each year, beginning July 1, 2004, our non-employee directors
are automatically granted shares of common stock having a value of $25,000. The actual number
of shares granted is determined by dividing $25,000 by the average daily closing price of the
common stock for ten consecutive trading days commencing fifteen trading days before the first
day of July of each year. Under this plan, each of Messrs. Chitwood, Oring, Poage and Shrader
have been granted a total of 9,295 shares of common stock since inception of the plan, which
includes 1,174 shares granted to each of them on the July 1, 2006 grant date. For the July 1,
2006 grant, the 1,174 shares were calculated by dividing $25,000 by $21.294, the ten trading
day average closing price of the stock, beginning on June 12, 2006. Since July 1, 2006 was not
a business day, the amount set forth in this column is based on the closing price of our
common stock on July 3, 2006, the first business day following the grant date. The amounts
set forth in this column represent the dollar amount we recognized for financial statement
reporting purposes with respect to 2006 in accordance with FAS 123R and also represents the
aggregate grant date fair value computed in accordance with FAS 123R.(2)
    
    On August 23, 2005, each of our non-employee Directors was granted a nonqualified stock
option to purchase 50,000 shares of common stock at an exercised price of $12.27 per share.
The options are exercisable in five equal annual installments beginning August 23, 2006. This
value is what is also included in our Consolidated Financial Statements in accordance with FAS
123(R). For a discussion of valuation assumptions, see Note 11 to our Consolidated Financial
Statements included in this Annual Report on Form 10-K. (72)




---



##### Table of Contents



Option Awards
    
    Stock AwardsEquityEquity
    
    IncentiveIncentive
    
    PlanPlan
    
    Awards:Equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Awards:
    
    Market orIncentive
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Number
    
    Pay outPlan
    
    
    
    
    
    
    
    
    
    
    
    
    
    Market
    
    of
    
    Value ofAwards:
    
    
    
    
    
    
    
    
    
    Number
    
    Value
    
    Unearned
    
    UnearnedNumber
    
    Number
    
    Number
    
    
    
    
    
    
    
    
    
    of Shares
    
    of Shares
    
    Shares,
    
    Shares,of
    
    of
    
    of
    
    
    
    
    
    
    
    
    
    or
    
    or Units
    
    Units or
    
    Units orSecurities
    
    Securities
    
    Securities
    
    
    
    
    
    
    
    
    
    Units of
    
    of
    
    Other
    
    OtherUnderlying
    
    Underlying
    
    Underlying
    
    
    
    
    
    
    
    
    
    Stock
    
    Stock
    
    Rights
    
    RightsUnexercised
    
    Unexercised
    
    Unexercised
    
    Option
    
    
    
    
    
    That Have
    
    That Have
    
    That Have
    
    That HaveOptions
    
    Options
    
    Unearned
    
    Exercise
    
    Option
    
    Not
    
    Not
    
    Not
    
    Not(#)
    
    (#)
    
    Options
    
    Price
    
    Expiration
    
    Vested
    
    Vested
    
    Vested
    
    VestedName
    
    Exercisable
    
    Unexercisable
    
    (#)
    
    ($)
    
    Date
    
    (#)
    
    ($)
    
    (#)
    
    ($)(a)
    
    (b)
    
    (c)(1)
    
    (d)
    
    (e)
    
    (f)
    
    (g)
    
    (h)
    
    (i)
    
    (j)D. E. Chitwood
    
    
    25,000
    
    
    
    0
    
    
    
    0
    
    
    
    4.58
    
    
    

05-02-11(2)
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    025,000
    
    
    
    0
    
    
    
    0
    
    
    
    4.97
    
    
    

06-21-11(2)
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    050,000
    
    
    
    0
    
    
    
    0
    
    
    
    2.80
    
    
    

12-18-12(2)
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    010,000
    
    
    
    40,000
    
    
    
    0
    
    
    
    12.27
    
    
    

08-23-15(2)
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0M. B. Oring
    
    
    5,000
    
    
    
    0
    
    
    
    0
    
    
    
    4.58
    
    
    
    05-02-11
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    025,000
    
    
    
    0
    
    
    
    0
    
    
    
    4.97
    
    
    
    06-21-11
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    050,000
    
    
    
    0
    
    
    
    0
    
    
    
    2.80
    
    
    
    12-18-12
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    020,000
    
    
    
    0
    
    
    
    0
    
    
    
    4.61
    
    
    
    05-07-11
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    010,000
    
    
    
    15,000
    
    
    
    0
    
    
    
    12.27
    
    
    
    08-23-15
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    25,000
    
    
    
    0
    
    
    
    12.27
    
    
    
    08-23-15
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0R. M . Poage
    
    
    50,000
    
    
    
    0
    
    
    
    0
    
    
    
    2.61
    
    
    
    04-28-13
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    010,000
    
    
    
    40,000
    
    
    
    0
    
    
    
    12.27
    
    
    
    08-23-15J. G. Shrader
    
    
    10,000
    
    
    
    40,000
    
    
    
    0
    
    
    
    12.27
    
    
    
    08-23-15
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
 
 (1)
    
    The nonqualified stock options included in this column are exercisable with respect to
10,000 shares on August 23, 2007, and an additional 10,000 shares become exercisable on
the twenty-third day of August in each of the years 2008 through 2010.(2)
    
    As a result of Mr. Chitwoods resignation from the
Board of Directors on January 24, 2007, this option is scheduled to expire on April 24,
2007, except in the case of Mr. Chitwoods death prior to that
time in which event the option will expire one year from date of
death. (73)




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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, with the
Chairman of the Hedging and Acquisition Committee being entitled to receive an
additional fee of $2,500 per year.
  Stock Options
  Other
    2004 Non-Employee Director Stock Grant Plan
   (74)




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Stock Option Plans
 1992 Stock Option Plan.
     1997 Nonemployee Directors Stock Option Plan.
 (75)




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1998 Stock Option Plan.
     2001 Nonemployee Directors Stock Option Plan.
  (76)




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##### Table of Contents



Employee Stock Option Plan.
      Section 408(k) Retirement Plan
     (77)




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st
  Section 401(k) Retirement Plan
       (78)




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##### Table of Contents



ITEM 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
  Name and Address
    
    Amount and Nature
    
    Percentof
    
    of
    
    ofBeneficial Owner
    
    Beneficial Ownership (1)
    
    Class(2)Thomas R. Cambridge
    
    
    1,026,545
    (3)
    
    
    2.71
    %2201 Civic Circle, Suite 216
Amarillo, Texas 79109Larry C. Oldham
    
    
    897,090
    (4)
    
    
    2.39
    %1004 N. Big Spring, Suite 400
Midland, Texas 79701Martin B. Oring
    
    
    225,314
    (5)
    
    
    *10817 Grande Blvd.
West Palm Beach, Florida 33417Ray M. Poage
    
    
    89,363
    (6)
    
    
    *4711 Meandering Way
Colleyville, Texas 76034Jeffrey G. Shrader
    
    
    144,295
    (7)

    
    
    *801 S. Filmore, Suite 600
Amarillo, Texas 79105Eric A. Bayley
    
    
    203,490
    (8)
    
    
    *1004 N. Big Spring, Suite 400
Midland, Texas 79701John S. Rutherford
    
    
    166,300
    (9)
    
    
    *1004 N. Big Spring, Suite 400
Midland, Texas 79701Donald E. Tiffin
    
    
    63,265
    (10)
    
    
    *1004 N. Big Spring, Suite 400
Midland, Texas 79701Steven D. Foster
    
    
    46,000
    (11)
    
    
    *1004 N. Big Spring, Suite 400
Midland, Texas 79701All Executive Officers and Directors
    
    
    2,861,662
    (12)
    
    
    7.49
    %as a Group (9 persons)
 
 *
    
    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 (79)




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##### Table of Contents



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 of February
15, 2007 upon exercise of outstanding stock options are deemed to
be outstanding.(3)
    
    Includes 726,545 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. At February 15, 2007, a total of 726,545 shares of
common stock were pledged as collateral to secure repayment of
loans.(4)
    
    Includes 400,000 shares of common stock held
indirectly through Oldham Properties, Ltd., a limited partnership,
and as to which Mr. Oldham disclaims beneficial ownership. Also
included are 53,500 shares of common stock underlying presently
exercisable stock options held by Mr. Oldham. At February 15,
2007, a total of 366,500 shares of common stock were pledged as
collateral to secure repayment of loans.(5)
    
    Of the total number of shares shown, 24,000
shares are held directly by Mr. Orings wife; 82,019 shares are
held by Wealth Preservation, LLC, a limited liability company
owned and controlled by Mr. Oring and his wife; and 110,000 shares
may be acquired by Mr. Oring upon exercise of stock options held
by Mr. Oring.(6)
    
    Includes 20,068 shares of common stock held
indirectly by Mr. Poage through his Individual Retirement Account.
Also included are 60,000 shares that may be acquired upon exercise
of presently exercisable stock options.(7)
    
    Includes 10,000 shares of common stock that
may be acquired upon exercise of a presently exercisable stock
option. At February 15, 2007, a total of 125,000 shares of common
stock were pledged as collateral to secure repayment of loans.(8)
    
    Includes 100,000 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
an Individual Retirement Account and Parallels 408(k) Plan. At
February 15, 2007, a total of 65,000 shares of common stock were
pledged as collateral to secure repayment of loans. The total
number of shares shown excludes a warrant to purchase 200 shares
of common stock.(9)
    
    Includes 50,000 shares of common stock
underlying a presently exercisable stock option. Also included
are 7,550 shares held indirectly by Mr. Rutherford through his
408(k) Plan. At February 15, 2007, a total of 108,750 shares of
common stock were pledged as collateral to secure repayment of
loans.(10)
    
    Of the total number of shares shown, 9,350
shares are held indirectly through Mr. Tiffins individual
retirement account. At February 15, 2007, a total of 50,000 shares
of common stock were pledged as collateral to secure repayment of
loans.(11)
    
    Includes 400 shares of common stock held by
Mr. Fosters wife and 9,000 shares held in his 408(k) Plan. At
February 15, 2007, a total of 25,000 shares of common stock were
pledged as collateral to secure repayment of loans.(12)
    
    Includes 683,500 shares of common stock
underlying stock options that are presently exercisable. The
unexercisable portion of stock options held by our officers and
directors do not become exercisable within the next sixty days. Equity Compensation Plans
  (80)




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(c)Number of securities(b)
    
    remaining available for(a)
    
    Weighted-average
    
    future issuance underNumber of securities to be
    
    exercise
    
    equity compensationissued upon exercise of
    
    price of outstanding
    
    plans (excludingoutstanding options,
    
    options, warrants and
    
    securities reflected inPlan category
    
    warrants and rights
    
    rights
    
    column (a))Equity compensation plans approved by security holders
    
    
    998,500
    (1)
    
    $
    5.48
    
    
    
    96,320
    (2)Equity compensation plans not approved by security holders
    
    
    300,000
    (3)
    
    $
    4.64
    
    
    

    Total
    
    
    1,298,500
    
    
    $
    5.29
    
    
    
    96,320
 
 (1)
    
    Includes the following plans: 1992 Stock Option Plan; 1997 Nonemployee Directors Stock
Option Plan; 1998 Stock Option Plan; and 2001 Non-employee Directors Stock Option Plan.(2)
    
    Includes 78,820 shares available for future grant under the 2004 Non-Employee Director Stock
Grant Plan and 17,500 shares available for future stock option grants under the 1997
Non-Employee Directors Stock Option Plan.(3)
    
    These shares include an aggregate of 200,000 shares of common stock underlying stock options
granted on June 20, 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 77. The total number of shares
shown also includes 100,000 shares of common stock underlying a stock purchase warrant we
issued to an investment banking firm in December 2003. These warrants were issued under a
financial advisory services agreement with the investment banking firm, and not under employee
or director compensation plans. The warrants are exercisable, in whole or in part, at an
exercise price equal to $3.98 per share 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. 
 ITEM 13.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 Certain Transactions
   (81)




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(82)




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##### Table of Contents




    
    a director or officer of Parallel or a nominee to become a director;
    
    an owner of more than 5% of our outstanding common stock;
    
    certain family members of any of the above persons; and
    
    any entity in which any of the above persons is employed or is a partner or
principal or in which such person has a 5% or greater ownership interest.
 Approval Procedures
  
    
    the related partys relationship to Parallel and interest in the transaction;
    
    the material terms of the proposed transaction;
    
    the benefits to Parallel of the proposed transaction;
    
    the availability of other sources of comparable properties or services; and
    
    whether the proposed transaction is on terms comparable to terms available
to an unrelated third party or to employees generally.
  Ratification Procedures
  (83)




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##### Table of Contents



ITEM 14.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
   Types of Fees
    
    2006
    
    
    2005($ in thousands)Audit fees
    
    $
    469
    (1)
    
    $
    378
    (2)Audit-related fees
    
    
    52
    
    
    
    5Tax fees
    
    
    
    
    
    
    All other fees
    
    
    
    
    
    
    Total
    
    $
    521
    
    
    $
    383
 
 (1)
    
    Such amount includes $160,000
for professional services rendered in
connection with the audit of our internal
control over financial reporting under Section
404 of the Sarbanes-Oxley Act of 2002. This
amount includes associated expenses in the
amount of approximately $31,000.(2)
    
    Such amount includes $160,000 for
professional services rendered in connection with
the audit of our internal control over financial
reporting under Section 404 of the Sarbanes-Oxley
Act of 2002. This amount includes associated
expenses in the amount of approximately $20,000.    (84)




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##### Table of Contents



PART IV
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
      (b)
    
    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 Registrant3.3
    
    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 1 of Form 8-A of the
Registrant filed with the Securities and Exchange Commission on
October 10, 2000)4.4
    
    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)4.5
    
    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)
 (85)




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##### Table of Contents



No.
    
    Description of Exhibit4.6
    
    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)*4.7
    
    Purchase Warrant Agreement, dated as of October 1, 1980, between the Registrant and American
Stock Transfer, Inc.*4.8
    
    First Amendment to Warrant
Agreement, dated as of February 22, 2007, among the Registrant,
Computershare Shareholder Services, Inc. and Computershare Trust
Company, N.A.
 Executive Compensation Plans and Arrangements (Exhibit No.s 10.1 through 10.7):
 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)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 10.3 of the
Registrants Form 10-Q of the Registrant for the fiscal quarter ended June 30, 2005)*10.4
    
    1998 Stock Option Plan10.5
    
    2001 Non-Employee Directors Stock Option Plan (Incorporated by reference to Exhibit 10.7 of
the Registrants Form 10-Q Report for the fiscal quarter ended March 31, 2004)10.6
    
    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)*10.7
    
    Incentive and Retention Plan10.8
    
    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)10.9
    
    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)10.10
    
    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)10.11
    
    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)10.12
    
    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)10.13
    
    First Amendment to Second Amended and Restated Credit Agreement, dated as of December 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 December 30, 2004 and
filed with the Securities and Exchange Commission on December 30, 2004)
 (86)




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##### Table of Contents



No.
    
    Description of Exhibit10.14
    
    Second Amendment to Second Amended and Restated Credit Agreement, dated as of April 1, 2005,
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 April 4, 2005 and filed with the
Securities and Exchange Commission on April 8, 2005)
 10.15
    
    Third Amendment to Second Amended and Restated Credit Agreement (Incorporated by reference
to Exhibit 10.1 of the Registrants Form 8-K Report dated October 4, 2005 and filed with the
Securities and Exchange Commission on October 20, 2005)10.16
    
    Purchase and Sale Agreement, dated as of October 14, 1005, among Parallel, L.P., Lynx
Production Company, Inc., Elton Resources, Inc., Cascade Energy Corporation, Chelsea Energy,
Inc., William P. Sutter, Trustee, William P. Sutter Trust, J. Leroy Bell, E. L. Brahaney,
Brent Beck, Cavic Interests, LLC and Stanley Talbott (Incorporated by reference to Exhibit
10.2 of the Registrants Form 8-K Report dated October 14, 2005 and filed with the Securities
and Exchange Commission on October 20, 2005)10.17
    
    Ancillary Agreement to Purchase and Sale Agreement, dated October 14, 2005, between
Parallel, L.P. and Lynx Production Company, Inc. (Incorporated by reference to Exhibit 10.3 of
the Registrants Form 8-K Report dated October 14, 2005 and filed with the Securities and
Exchange Commission on October 20, 2005)10.18
    
    Guarantee of Parallel, L.P., dated October 13, 2004 (Incorporated by reference to Exhibit
10.4 of the Registrants Form 8-K Report dated October 14, 2005 and filed with the Securities
and Exchange Commission on October 20, 2005)10.19
    
    ISDA Master Agreement, dated as of October 13, 2005, between Parallel, L.P. and Citibank,
N.A. (Incorporated by reference to Exhibit 10.5 of the Registrants Form 8-K Report dated
October 14, 2005 and filed with the Securities and Exchange Commission on October 20, 2005)10.20
    
    Third Amended and Restated Credit Agreement, dated as of December 23, 2005, among Parallel
Petroleum Corporation, Parallel, L.P., Parallel, L.L.C. and Citibank Texas, N.A., BNP Paribas,
CitiBank F.S.B., Western National Bank, Compass Bank, Comerica Bank, Bank of Scotland and
Fortis Capital Corp. (Incorporated by reference to Exhibit No. 10.1 of the Registrants Form
8-K Report, dated December 23, 2005, as filed with the Securities and Exchange Commission on
December 30, 2005)10.21
    
    Second Lien Term Loan Agreement, dated November 15, 2005, among Parallel Petroleum
Corporation, Parallel, L.P., BNP Paribas and Citibank Texas, N.A. (Incorporated by reference
to Exhibit No. 10.4 of the Registrants Form 8-K Report, dated November 15, 2005, as filed
with the Securities and Exchange Commission on November 21, 2005)10.22
    
    Intercreditor and Subordination Agreement, dated November 15, 2005, among Citibank Texas,
N.A., BNP Paribas, Parallel Petroleum Corporation, Parallel, L.P. and Parallel, L.L.C.
(Incorporated by reference to Exhibit No. 10.5 of the Registrants Form 8-K Report, dated
November 15, 2005, as filed with the Securities and Exchange Commission on November 21, 2005)*10.23
    
    Guaranty, dated as of December 23, 2005, made by Parallel,
L.L.C. to and in favor of Citibank Texas, N.A.*10.24
    
    Third Amended and Restated Pledge Agreement, dated as of
December 23, 2005, between Parallel, L.L.C. and Citibank Texas, N.A.*10.25
    
    Second Lien Guarantee and Collateral Agreement, dated as of
November 15, 2005, made by Parallel Petroleum Corporation and
Parallel, L.P. to and in favor of BNP Paribas14
    
    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 BDO Seidman, LLP*23.2
    
    Consent of Cawley Gillespie & Associates Inc. Independent Petroleum Engineers
 (87)




---



##### Table of Contents



No.
    
    Description of Exhibit*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. (88)




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##### Table of Contents



PARALLEL PETROLEUM CORPORATION
 Index to the Consolidated Financial Statements
 PageReport of Independent Registered Public Accounting Firm
    
    
    F-2Financial Statements:Consolidated Balance Sheets at December 31, 2006 and 2005
    
    
    F-3Consolidated Statements of Operations for the years ended December 2006, 2005,
and 2004
    
    
    F-4Consolidated Statements of Stockholders Equity for the years ended December 31,
2006, 2005 and 2004
    
    
    F-5Consolidated Statements of Cash Flows for the years ended December 31, 2006,
2005 and 2004
    
    
    F-6Consolidated Statements of Comprehensive Income (Loss) for the years ended
December 31, 2006, 2005, and 2004
    
    
    F-7Notes to Consolidated Financial Statements
    
    
    F-8
  F-1




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
     
  F-2




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##### Table of Contents



PARALLEL PETROLEUM CORPORATION
 
 Consolidated Balance
 Sheets December 31, 2006 and 2005
 (dollars in thousands)
 2006
    
    
    2005AssetsCurrent assets:Cash and cash equivalents
    
    $
    5,910
    
    
    $
    6,418Accounts receivable:Oil and
natural gas sales
    
    
    18,605
    
    
    
    13,183Joint
interest owners and other, net of allowance for doubtful account of $80 and $9
    
    
    10,539
    
    
    
    877Affiliates
    
    
    8
    
    
    
    1229,152
    
    
    
    14,072Other current assets
    
    
    2,863
    
    
    
    2,364Deferred tax asset
    
    
    4,340
    
    
    
    5,241Total current assets
    
    
    42,265
    
    
    
    28,095Property and equipment, at cost:Oil and natural gas properties, full cost method (including $50,375 and $22,328 not
subject to depletion)
    
    
    501,405
    
    
    
    303,819Other
    
    
    2,614
    
    
    
    2,404504,019
    
    
    
    306,223Less accumulated depreciation, depletion and amortization
    
    
    (115,513
    )
    
    
    (90,826
    )Net property and equipment
    
    
    388,506
    
    
    
    215,397Restricted cash
    
    
    325
    
    
    
    2,640Investment in pipelines and gathering system ventures
    
    
    6,454
    
    
    
    3,326Other assets, net of accumulated amortization of $760 and $901
    
    
    5,268
    
    
    
    3,550$
    442,818
    
    
    $
    253,008Liabilities and Stockholders EquityCurrent liabilities:Accounts payable and accrued liabilities
    
    $
    36,171
    
    
    $
    10,841Asset retirement obligations
    
    
    701
    
    
    
    214Derivative obligations
    
    
    14,109
    
    
    
    16,607Total current liabilities
    
    
    50,981
    
    
    
    27,662Revolving credit facility
    
    
    115,000
    
    
    
    50,000Term loan
    
    
    50,000
    
    
    
    50,000Asset retirement obligations
    
    
    4,362
    
    
    
    2,281Derivative obligations
    
    
    14,386
    
    
    
    25,527Deferred tax liability
    
    
    24,307
    
    
    
    8,036Total long-term liabilities
    
    
    208,055
    
    
    
    135,844Commitments and contingencies (Note 15)Stockholders equity:Series A preferred stock  par value $0.10 per share, authorized 50,000 shares
    
    
    
    
    
    
    Preferred stock  6% convertible preferred stock  par value of $0.10 per share,
(liquidation preference of $10 per share) authorized, 10,000,000 shares
    
    
    
    
    
    
    Common stock  par value $0.01 per share, authorized 60,000,000 shares,
issued and outstanding 37,547,010 and 34,748,916
    
    
    375
    
    
    
    347Additional paid-in capital
    
    
    140,353
    
    
    
    78,699Retained earnings
    
    
    43,054
    
    
    
    16,899Accumulated other comprehensive loss
    
    
    
    
    
    
    (6,443
    )Total stockholders equity
    
    
    183,782
    
    
    
    89,502$
    442,818
    
    
    $
    253,008
  F-3




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##### Table of Contents



PARALLEL PETROLEUM CORPORATION
 
 Consolidated Statements of Operations
 Years ended December 31, 2006, 2005, 2004
 (dollars in thousands, except per share data)
 2006
    
    
    2005
    
    
    2004Oil and natural gas revenues:Oil and natural gas sales
    
    $
    97,025
    
    
    $
    66,150
    
    
    $
    35,837Cost and expenses:Lease operating expense
    
    
    16,819
    
    
    
    9,947
    
    
    
    7,373Production taxes
    
    
    5,577
    
    
    
    4,102
    
    
    
    2,108General and administrative
    
    
    9,523
    
    
    
    6,712
    
    
    
    5,378Depreciation, depletion and amortization
    
    
    24,687
    
    
    
    12,044
    
    
    
    8,712Total costs and expenses
    
    
    56,606
    
    
    
    32,805
    
    
    
    23,571Operating income
    
    
    40,419
    
    
    
    33,345
    
    
    
    12,266Other income (expense), net:Gain (loss) on derivatives not classified as hedges
    
    
    2,802
    
    
    
    (31,669
    )
    
    
    (5,726
    )Gain (loss) on ineffective portion of hedges
    
    
    626
    
    
    
    (137
    )
    
    
    (240
    )Interest and other income
    
    
    158
    
    
    
    167
    
    
    
    189Interest expense
    
    
    (12,360
    )
    
    
    (4,780
    )
    
    
    (2,732
    )Other expense
    
    
    (189
    )
    
    
    (102
    )
    
    
    (324
    )Equity in income (loss) of pipelines and gathering system ventures
    
    
    8,593
    
    
    
    (89
    )
    
    
    Total other income (expense), net
    
    
    (370
    )
    
    
    (36,610
    )
    
    
    (8,833
    )Income (loss) before income taxes
    
    
    40,049
    
    
    
    (3,265
    )
    
    
    3,433Income tax benefit (expense)
    
    
    (13,894
    )
    
    
    1,676
    
    
    
    (1,162
    )Net income (loss)
    
    
    26,155
    
    
    
    (1,589
    )
    
    
    2,271Cumulative preferred stock dividend
    
    
    
    
    
    
    (271
    )
    
    
    (572
    )Net income (loss) available to common stockholders
    
    $
    26,155
    
    
    $
    (1,860
    )
    
    $
    1,699Net income (loss) per common share:Basic
    
    $
    0.73
    
    
    $
    (0.06
    )
    
    $
    0.07Diluted
    
    $
    0.71
    
    
    $
    (0.06
    )
    
    $
    0.07
  F-4




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##### Table of Contents



Consolidated Statements of Stockholders Equity
 Years ended December 31, 2006, 2005 and 2004
 (amounts in thousands)
 AccumulatedPreferred stock
    
    
    Common stock
    
    
    Additional
    
    
    
    
    
    
    Other
    
    
    TotalNumber of
    
    
    
    
    
    
    Number of
    
    
    
    
    
    
    paid-in
    
    
    Retained
    
    
    Comprehensive
    
    
    stockholdersshares
    
    
    Amount
    
    
    shares
    
    
    Amount
    
    
    capital
    
    
    earnings
    
    
    Loss
    
    
    equityBalance,January 1, 2004
    
    
    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
    
    
    
    
    
    
    
    
    
    
    
    169Changes in fair value of cash flow hedges, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,721
    )
    
    
    (3,721
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,271
    
    
    
    
    
    
    
    2,271Dividends on preferred stock ($0.60 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (572
    )
    
    
    
    
    
    
    (572
    )Balance,December 31, 2004
    
    
    950
    
    
    $
    95
    
    
    
    25,439
    
    
    $
    254
    
    
    $
    48,328
    
    
    $
    18,759
    
    
    $
    (7,442
    )
    
    $
    59,994Common stock issued, net of transaction costs
    
    
    
    
    
    
    
    
    
    
    5,750
    
    
    
    58
    
    
    
    27,686
    
    
    
    
    
    
    
    
    
    
    
    27,744Common stock issued for services
    
    
    
    
    
    
    
    
    
    
    12
    
    
    
    
    
    
    
    99
    
    
    
    
    
    
    
    
    
    
    
    99Preferred stock converted
    
    
    (950
    )
    
    
    (95
    )
    
    
    2,714
    
    
    
    27
    
    
    
    68
    
    
    
    
    
    
    
    
    
    
    
    Cashless exercise of warrants
    
    
    
    
    
    
    
    
    
    
    120
    
    
    
    1
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    Options exercised, including income tax benefit of $44
    
    
    
    
    
    
    
    
    
    
    714
    
    
    
    7
    
    
    
    2,241
    
    
    
    
    
    
    
    
    
    
    
    2,248Stock option expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    278
    
    
    
    
    
    
    
    
    
    
    
    278Changes in fair value of cash flow hedges, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    999
    
    
    
    999Net income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,589
    )
    
    
    
    
    
    
    (1,589
    )Dividends on preferred stock ($0.60 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (271
    )
    
    
    
    
    
    
    (271
    )Balance,December 31, 2005
    
    
    
    
    
    $
    
    
    
    
    34,749
    
    
    $
    347
    
    
    $
    78,699
    
    
    $
    16,899
    
    
    $
    (6,443
    )
    
    $
    89,502Common stock issued, net of transaction costs
    
    
    
    
    
    
    
    
    
    
    2,500
    
    
    
    25
    
    
    
    60,242
    
    
    
    
    
    
    
    
    
    
    
    60,267Common stock issued for services
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    118
    
    
    
    
    
    
    
    
    
    
    
    118Cashless exercise of warrants
    
    
    
    
    
    
    
    
    
    
    117
    
    
    
    1
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    Options exercised, including income tax benefit of $180
    
    
    
    
    
    
    
    
    
    
    176
    
    
    
    2
    
    
    
    764
    
    
    
    
    
    
    
    
    
    
    
    766Stock option expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    531
    
    
    
    
    
    
    
    
    
    
    
    531Changes in fair value of cash flow hedges, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,443
    
    
    
    6,443Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,155
    
    
    
    
    
    
    
    26,155Balance,December 31, 2006
    
    
    
    
    
    $
    
    
    
    
    37,547
    
    
    $
    375
    
    
    $
    140,353
    
    
    $
    43,054
    
    
    $
    
    
    
    $
    183,782
  F-5




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##### Table of Contents



PARALLEL PETROLEUM CORPORATION
 
 Consolidated Statements of Cash Flows
 Years ended December 31, 2006, 2005 and 2004
 (dollars in thousands)
 2006
    
    
    2005
    
    
    2004Cash flows from operating activities:Net income (loss)
    
    $
    26,155
    
    
    $
    (1,589
    )
    
    $
    2,271Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation, depletion and amortization
    
    
    24,687
    
    
    
    12,044
    
    
    
    8,712Accretion of asset retirement obligation
    
    
    248
    
    
    
    112
    
    
    
    92Deferred income tax
    
    
    13,894
    
    
    
    (1,676
    )
    
    
    1,162(Gain) loss on derivatives not classified as hedges
    
    
    (2,802
    )
    
    
    31,669
    
    
    
    5,726(Gain) loss on ineffective portion of hedges
    
    
    (626
    )
    
    
    137
    
    
    
    240Common stock issued for directors fees
    
    
    118
    
    
    
    99
    
    
    
    99Stock option expense
    
    
    531
    
    
    
    278
    
    
    
    169Equity
(income) loss in pipelines and gathering system ventures
    
    
    (8,593
    )
    
    
    
    
    
    
    Return on
investment in pipelines and gathering system ventures
    
    
    9,000
    
    
    
    89
    
    
    
    Bad debt expense
    
    
    71
    
    
    
    
    
    
    
    Changes in assets and liabilities:Other assets, net
    
    
    1,567
    
    
    
    (823
    )
    
    
    163Restricted cash
    
    
    (50
    )
    
    
    (274
    )
    
    
    Increase in accounts receivable
    
    
    (15,151
    )
    
    
    (7,034
    )
    
    
    (2,112
    )(Increase) decrease in other current assets
    
    
    (153
    )
    
    
    (1,187
    )
    
    
    31Increase in accounts payable and accrued liabilities
    
    
    25,330
    
    
    
    5,273
    
    
    
    1,603Federal tax deposit
    
    
    (40
    )
    
    
    
    
    
    
    Net cash provided by operating activities
    
    
    74,186
    
    
    
    37,118
    
    
    
    18,156Cash flows from investing activities:Additions to oil and natural gas properties
    
    
    (195,396
    )
    
    
    (77,351
    )
    
    
    (67,911
    )Restricted cash
    
    
    2,366
    
    
    
    (79
    )
    
    
    (2,287
    )Proceeds from disposition of oil and natural gas properties
    
    
    130
    
    
    
    3,028
    
    
    
    1,625Additions to other property and equipment
    
    
    (210
    )
    
    
    (342
    )
    
    
    (647
    )Settlements of derivative instruments
    
    
    (3,902
    )
    
    
    (5,022
    )
    
    
    Purchase of derivative instruments
    
    
    
    
    
    
    (2,363
    )
    
    
    Investment in pipelines and gathering system ventures
    
    
    (11,260
    )
    
    
    (2,820
    )
    
    
    (298
    )Return of
investment in pipelines and gathering system ventures
    
    
    7,724
    
    
    
    
    
    
    
    Net cash used in investing activities
    
    
    (200,548
    )
    
    
    (84,949
    )
    
    
    (69,518
    )Cash flows from financing activities:Borrowings from bank line of credit
    
    
    117,000
    
    
    
    45,714
    
    
    
    53,325Payments on bank line of credit
    
    
    (52,000
    )
    
    
    (74,714
    )
    
    
    (14,075
    )Deferred financing costs
    
    
    (179
    )
    
    
    (1,253
    )
    
    
    (429
    )Borrowings from term loan
    
    
    
    
    
    
    50,000
    
    
    
    Proceeds from exercise of stock options
    
    
    766
    
    
    
    2,248
    
    
    
    523Proceeds (net) from common stock issued
    
    
    60,267
    
    
    
    27,744
    
    
    
    Payment of preferred stock dividend
    
    
    
    
    
    
    (271
    )
    
    
    (572
    )Deferred stock offering costs
    
    
    
    
    
    
    
    
    
    
    (7
    )Net cash provided by financing activities
    
    
    125,854
    
    
    
    49,468
    
    
    
    38,765Net increase (decrease) in cash and cash equivalents
    
    
    (508
    )
    
    
    1,637
    
    
    
    (12,597
    )Cash and cash equivalents at beginning of year
    
    
    6,418
    
    
    
    4,781
    
    
    
    17,378Cash and cash equivalents at end of year
    
    $
    5,910
    
    
    $
    6,418
    
    
    $
    4,781Non-cash financing and investing activities:Oil and natural gas properties asset retirement obligation
    
    $
    2,320
    
    
    $
    251
    
    
    $
    338Other transactions:Interest paid
    
    $
    12,540
    
    
    $
    5,422
    
    
    $
    1,708
  F-6




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##### Table of Contents



PARALLEL PETROLEUM CORPORATION
 
 Consolidated Statements of Comprehensive Income (Loss)
 Years ended December 31, 2006, 2005 and 2004
 (dollars in thousands)
 2006
    
    
    2005
    
    
    2004Net income (loss)
    
    $
    26,155
    
    
    $
    (1,589
    )
    
    $
    2,271Other comprehensive income (loss):Unrealized losses on derivatives
    
    
    (1,648
    )
    
    
    (10,980
    )
    
    
    (14,357
    )Reclassification adjustment for losses
on derivatives included in net income (loss)
    
    
    11,409
    
    
    
    12,494
    
    
    
    8,719Change in fair value of derivatives
    
    
    9,761
    
    
    
    1,514
    
    
    
    (5,638
    )Income tax benefit (expense), deferred
    
    
    (3,318
    )
    
    
    (515
    )
    
    
    1,917Total other comprehensive income (loss)
    
    
    6,443
    
    
    
    999
    
    
    
    (3,721
    )Total comprehensive income (loss)
    
    $
    32,598
    
    
    $
    (590
    )
    
    $
    (1,450
    )
 F-7




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##### Table of Contents



(1)
    
    Organization, Business and Summary of Significant Accounting Policies
 (a)
    
    Basis of ConsolidationThe accompanying financial statements present the consolidated accounts 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 natural 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 OperationsThe 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 currently carried out primarily in Texas
and New Mexico. The Companys activities are focused in the Permian Basin of west Texas and
New Mexico, the Fort Worth Basin of north 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 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 natural gas produced from the wells.(d)
    
    Property and EquipmentOil and natural gas properties:The Company uses the full cost method of accounting for its oil and natural gas producing
activities. Accordingly, all costs associated with acquisition, exploration, and
development of oil and natural gas reserves, including directly related overhead costs, are
capitalized.Management and service fees received under 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 natural 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 natural gas reserves with oil and natural 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 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. Once the assessment of unproved properties
is complete and when major development projects are evaluated, the costs previously
excluded from amortization are transferred to the full cost pool and amortization begins.If the net investment in oil and natural 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
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##### Table of Contents



proved reserves (see Note 16) 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 natural gas reserves, in
which case the gain or loss is recognized in income.Other Property and Equipment: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 natural 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
under the equity method and, accordingly, net income includes the Companys proportionate
share of their income or loss. In addition, the Company has an investment in a joint
venture which is accounted for by the equity method because the Company does not have
effective control or voting interest although the Company owns approximately 76 1/2% of the
joint venture economic interest.(g)
    
    Stock-Based CompensationParallel accounts for its stock based compensation using the prospective method under
Statement of Financial Accounting Standards No. 123(SFAS 123). Under this method, the
fair values of all options granted since 2003 have been reflected as compensation expense
over the periods in which the services are rendered.Parallel adopted SFAS 123(R) effective January 1, 2006, and is applying the modified
prospective method, whereby compensation cost associated with the unvested portion of
awards granted during the period of June 2001 to December 2002 will be recognized over the
remaining vesting period. No options that were granted prior to June 2001 remain unvested
at January 1, 2006. Under this method, prior periods are not revised for comparative
purposes.(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.
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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 undiscovered 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 options, 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:
 2006
    
    
    2005
    
    
    2004($ in thousands, except per share data)Basic EPS Computation:Numerator-Net income (loss)
    
    $
    26,155
    
    
    $
    (1,589
    )
    
    $
    2,271Preferred stock dividend
    
    
    
    
    
    
    (271
    )
    
    
    (572
    )Net income (loss) available to common stockholders
    
    
    26,155
    
    
    
    (1,860
    )
    
    
    1,699Denominator-Weighted average common shares outstanding
    
    
    35,888
    
    
    
    32,253
    
    
    
    25,323Basic earnings (loss) per share
    
    $
    0.73
    
    
    $
    (0.06
    )
    
    $
    0.07Diluted EPS Computation:Numerator-Net income (loss)
    
    $
    26,155
    
    
    $
    (1,589
    )
    
    $
    2,271Preferred stock dividend
    
    
    
    
    
    
    (271
    )
    
    
    (572
    )Net income (loss) available to common stockholders
    
    $
    26,155
    
    
    $
    (1,860
    )
    
    $
    1,699Denominator -Weighted average common shares outstanding
    
    
    35,888
    
    
    
    32,253
    
    
    
    25,323Employee stock options
    
    
    599
    
    
    
    
    
    
    
    289Warrants
    
    
    269
    
    
    
    
    
    
    
    76Weighted average common shares for diluted
earnings per share assuming conversion
    
    
    36,756
    
    
    
    32,253
    
    
    
    25,688Diluted earnings (loss) per share
    
    $
    0.71
    
    
    $
    (0.06
    )
    
    $
    0.07
 For the year ended December 31, 2005, the effects of all potentially dilutive
securities (including options, warrants and the if converted effects of convertible
preferred stock) were excluded from the computation of diluted earnings per share because
the Company had a net loss and, therefore, the effect would have been antidilutive.
Approximately 664,000 options and warrants were excluded from the computation of diluted
earnings per share in 2004, because the Companys inclusion would have resulted in
antidilution. Likewise, convertible preferred shares were not treated as if converted for
the year ended December 31, 2004, because the effects would have been antidilutive.(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 natural gas reserve estimates, and the related future net
cash flows derived from those reserves,
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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 as of December 31, 2006, includes $50,000 placed in a certificate of
deposit for a Letter of Credit with the State of New Mexico and approximately $275,000
placed in a certificate of deposit for a drilling bond. As of December 31, 2005,
restricted cash included cash held in escrow for the Harris San Andres purchase (see Note
3) aggregating approximately $2.3 million and monies placed in a certificate of deposit for
a drilling bond of approximately $275,000.(m)
    
    ReclassificationsCertain reclassifications have been made to prior years amounts to conform with current
year 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 SFAS No. 133, Accounting for Derivative
Instruments and for Hedging Activities, and related interpretations and amendments. Under
this Statement, 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.(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 natural gas sold to
purchasers. For the period ended December 31, 2006, 2005 and 2004, the Company did not have
any oil or natural 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.
 2006
    
    
    2005
    
    
    2004($ in thousands)Oil revenue
    
    $
    68,076
    
    
    $
    47,800
    
    
    $
    28,455Effects of oil hedges
    
    
    (11,512
    )
    
    
    (12,139
    )
    
    
    (7,458
    )Natural gas revenue
    
    
    40,461
    
    
    
    30,690
    
    
    
    15,735Effects of natural gas hedges
    
    
    
    
    
    
    (201
    )
    
    
    (895
    )$
    97,025
    
    
    $
    66,150
    
    
    $
    35,837
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##### Table of Contents



(p)
    
    Recent Accounting Pronouncements
   (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.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 6.(3)
    
    Oil and Natural Gas PropertiesThe following table reflects capitalized costs related to the oil and natural gas properties
as of December 31:
 2006
    
    
    2005($ in thousands)Proved properties
    
    $
    451,030
    
    
    $
    281,491Unproved properties, not subject to depletion
    
    
    50,375
    
    
    
    22,328501,405
    
    
    
    303,819Accumulated depletion
    
    
    (113,467
    )
    
    
    (89,202
    )$
    387,938
    
    
    $
    214,617
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##### Table of Contents



PrepaidLeasehold
    
    
    Geological and
    
    
    DrillingYear Incurred
    
    Costs
    
    
    Geophysical
    
    
    Costs
    
    
    Total($ in thousands)2006
    
    $
    26,880
    
    
    $
    2,943
    
    
    $
    5,200
    
    
    $
    35,0232005
    
    
    8,414
    
    
    
    688
    
    
    
    
    
    
    
    9,1022004
    
    
    4,398
    
    
    
    700
    
    
    
    
    
    
    
    5,0982003 and prior
    
    
    817
    
    
    
    335
    
    
    
    
    
    
    
    1,152$
    40,509
    
    
    $
    4,666
    
    
    $
    5,200
    
    
    $
    50,375
     2006
    
    
    2005
    
    
    2004($ in thousands)Proved property acquisition costs
    
    $
    27,370
    
    
    $
    23,763
    
    
    $
    39,763Unproved property acquisitions costs
    
    
    30,058
    
    
    
    11,743
    
    
    
    7,400Exploration costs
    
    
    71,003
    
    
    
    15,455
    
    
    
    6,794Development costs
    
    
    66,965
    
    
    
    26,390
    
    
    
    13,954$
    195,396
    
    
    $
    77,351
    
    
    $
    67,911
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Twelve Months EndedDecember 31,Pro Forma
    
    Pro Forma2006
    
    2005($ in thousands)Oil and gas revenue
    
    $
    97,580
    
    
    $
    74,270Operating income
    
    $
    40,738
    
    
    $
    38,800Net income available
to common stockholders
    
    $
    26,291
    
    
    $
    (732
    )Net income per common share:Basic
    
    $
    0.73
    
    
    $
    (0.02
    )Diluted
    
    $
    0.72
    
    
    $
    (0.02
    )
 (4)
    
    Other AssetsBelow are the components of other assets as of December 31, 2006 and 2005:
 December 31,2006
    
    
    2005($ in thousands)Bank fees, net of accumulated amortization
    
    $
    1,361
    
    
    $
    1,675Prepaid drilling
    
    
    54
    
    
    
    1,125
    (1)Fair value of derivative contracts
    
    
    3,845
    
    
    
    738Other
    
    
    8
    
    
    
    12$
    5,268
    
    
    $
    3,550
 
 (1)
    
    This represents the long-term portion of prepaid drilling costs to be
transferred to property, plant and equipment as work is performed. (5)
    
    Asset Retirement ObligationOn January 1, 2003, the Company adopted SFAS 143, Accounting for Asset Retirement Obligations.
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 natural gas properties.
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##### Table of Contents



2006
    
    
    2005
    
    
    2004($ in thousands)Beginning asset retirement obligation
    
    $
    2,495
    
    
    $
    2,132
    
    
    $
    1,701Additions related to new properties
    
    
    406
    
    
    
    370
    
    
    
    939Revisions in estimated cash flows
    
    
    1,979
    
    
    
    (3
    )
    
    
    (53
    )Deletions related to property disposals
    
    
    (65
    )
    
    
    (116
    )
    
    
    (547
    )Accretion expense
    
    
    248
    
    
    
    112
    
    
    
    92Ending asset retirement obligation
    
    $
    5,063
    
    
    $
    2,495
    
    
    $
    2,132
 Accretion expense is recognized as a component of lease operating expense.(6)
    
    Derivative InstrumentsThe Company enters into derivative contracts to provide a measure of stability in the cash
flows associated with the Companys oil and natural gas production 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 natural gas prices and to limit variability in its cash interest
payments. In addition, the Companys revolving credit facility and second lien term loan
facility require the Company to maintain derivative financial instruments which limit the
Companys exposure to fluctuating commodity prices covering at least 50% of the Companys
estimated monthly production of oil and natural gas extending 24 months into the future.The Company designated all of its interest rate swaps, commodity collars and commodity swaps
entered into in 2002 and 2003 as cash flow hedges (hedges). The effective portion of the
unrealized gain or loss on cash flow hedges is recorded in other comprehensive income (loss)
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 natural gas revenues when
the production is sold and interest expense as the interest accrues. Ineffective portions of
hedges (changes in fair value resulting from changes in realized prices that do not match the
changes in the hedge or reference price) are recognized in other expense as they occur.As of December 31, 2005, the Company had recorded unrealized losses of $9.8 million,
respectively, related to its derivative instruments designated as hedges, which represented
the estimated aggregate fair values of the Companys open hedge contracts as of that date. The
unrealized losses, net of taxes, are presented in stockholders equity in the Consolidated
Balance Sheets as accumulated other comprehensive loss. All derivative instruments previously
designated as cash flow hedges had been settled as of December 31, 2006.Derivative contracts not designated as hedges are marked to market at each period end and
the increases or decreases in fair values recorded to earnings. No derivative instruments
entered into subsequent to June 30, 2004 have been designated as cash flow hedges.The Company is exposed to credit risk in the event of nonperformance by the
counterparties to these contracts, BNP Paribas and Citibank, N.A. However, the Company
periodically assesses their credit worthiness to mitigate this credit risk.Interest Rate SensitivityUnder the Companys revolving credit facility, the Company may elect an interest rate based
upon the agent banks base lending rate or the LIBOR rate, plus a margin ranging from 2.00% to
2.50% 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 5.00%.
Under the Companys term loan facility second lien term loan facility, the Company may elect
an interest rate based upon an alternate base rate, or the LIBOR rate, plus a margin of 4.50%.
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##### Table of Contents



Interest Rate Swaps.
    EstimatedNotional
    
    
    Weighted Average
    
    
    Fair Market ValuePeriod of Time
    
    Amounts
    
    
    Fixed Interest Rates
    
    
    at December 31, 2006($ in millions)
    
    
    
    
    
    
    ($ in thousands)January 1, 2007 thru December 31, 2007
    
    $
    100
    
    
    
    4.62
    %
    
    $
    611January 1, 2008 thru December 31, 2008
    
    $
    100
    
    
    
    4.86
    %
    
    
    12January 1, 2009 thru December 31, 2009
    
    $
    50
    
    
    
    5.06
    %
    
    
    (86
    )January 1, 2010 thru October 31, 2010
    
    $
    50
    
    
    
    5.15
    %
    
    
    (71
    )Total Fair Market Value
    
    
    
    
    
    
    
    
    
    $
    466
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##### Table of Contents



Commodity Price Sensitivity
 Collars.
  HoustonNyMex
    
    
    
    
    
    
    Ship Channel
    
    
    WAHA
    
    
    FairBarrels
    
    
    Oil Prices
    
    
    MMBtu of
    
    
    Gas Prices
    
    
    Gas Prices
    
    
    MarketPeriod of Time
    
    of Oil
    
    
    Floor
    
    
    Cap
    
    
    Natural Gas
    
    
    Floor
    
    
    Cap
    
    
    Floor
    
    
    Cap
    
    
    Value($ inthousands)January 1, 2007 thru
December 31, 2007
    
    
    292,000
    
    
    $
    55.63
    
    
    $
    84.88
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    357April 1, 2007 thru
October 31, 2007
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    214,000
    
    
    $
    6.00
    
    
    $
    11.05
    
    
    $
    
    
    
    $
    
    
    
    
    85April 1, 2007 thru
October 31, 2007
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    642,000
    
    
    $
    
    
    
    $
    
    
    
    $
    6.25
    
    
    $
    8.90
    
    
    
    291January 1, 2008 thru
December 31, 2008
    
    
    237,900
    
    
    $
    60.38
    
    
    $
    81.08
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    411January 1, 2009 thru
December 31, 2009
    
    
    620,500
    
    
    $
    63.53
    
    
    $
    80.21
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    1,733January 1, 2010 thru
October 31, 2010
    
    
    486,400
    
    
    $
    63.44
    
    
    $
    78.26
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    1,285Total Fair Market Value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    4,162
 Commodity Swaps.
  Barrels of
    
    
    Nymex Oil
    
    
    Fair MarketPeriod of Time
    
    Oil
    
    
    Swap Price
    
    
    Value($ in thousands)January 1, 2007 thru December 31, 2007
    
    
    474,500
    
    
    $
    34.36
    
    
    $
    (14,109
    )January 1, 2008 thru December 31, 2008
    
    
    439,200
    
    
    $
    33.37
    
    
    
    (13,826
    )Total fair market value
    
    
    
    
    
    
    
    
    
    $
    (27,935
    )
 (7)
    
    Equity Investment and Property AcquisitionsThe Company had three separate partnership investments to construct pipeline systems which
gather natural gas primarily on its leaseholds in the Barnett Shale area  West Fork Pipeline
Company I, L.P., West Fork Pipeline Company II, L.P. and West Fork Pipeline Company V, L.P.
These investments were recorded as an equity investment in the accompanying consolidated
balance sheet. In the fourth Quarter 2006, essentially all of the assets contained in West  Fork Pipeline I and West Fork Pipeline V were sold. The Company received distributions of
$16.6 million and $683,000, respectively, as a result of  these asset sales. The company has invested
$328,000 in the West Fork Pipeline II through 2006. West Fork Pipeline II is currently
acquiring the necessary easements and permits to begin transmission of natural gas.
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West Fork Pipeline Company I, L.P.
    
    
    37.3000
    %West Fork Pipeline Company II, L.P.
    
    
    35.8750
    %West Fork Pipeline Company V, L.P.
    
    
    23.2585
    %Hagerman Gas Gathering System
    
    
    76.5000
    %
   December 31,2006
    
    
    2005($ in thousands)West Fork Pipeline Company I, L.P.
    
    $
    
    
    
    $
    3,120West Fork Pipeline Company II, L.P.
    
    
    280
    
    
    
    21West Fork Pipeline Company V, L.P.
    
    
    
    
    
    
    185Hagerman Gas Gathering System
    
    
    6,174
    
    
    
    $
    6,454
    
    
    $
    3,326
  Year Ended December 31,2006
    
    
    2005
    
    
    2004($ in thousands)West Fork Pipeline Company I, L.P.(1)
    
    $
    9,286
    
    
    $
    (83
    )
    
    $
    West Fork Pipeline Company II, L.P.
    
    
    (50
    )
    
    
    (5
    )
    
    
    West Fork Pipeline Company V, L.P.(2)
    
    
    (147
    )
    
    
    (1
    )
    
    
    Hagerman Gas Gathering System
    
    
    (496
    )
    
    
    
    
    
    
    $
    8,593
    
    
    $
    (89
    )
    
    $
    
 
 (1)
    
    Included in our earnings from West Fork Pipeline Company
I, L.P. is our proportionate gain in the sale of the partnership
assets of approximately $9.1 million.(2)
    
    Included in our earnings from West Fork Pipeline
Company V, L.P. is our proportionate loss in the sale of the
partnership assets of approximately $90,000. F-18




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##### Table of Contents



December 31,2006
    
    2005($ in thousands)Balance SheetCurrent assets
    
    $
    1,408
    
    
    $
    1,493Non-current assets
    
    
    8,361
    
    
    
    10,567Current liabilities
    
    
    1,338
    
    
    
    674Owners equity
    
    
    8,431
    
    
    
    11,386
 Year Ended December 31,2006
    
    
    2005
    
    
    2004($ in thousands)Income StatementRevenues
    
    $
    2,402
    
    
    $
    627
    
    
    $
    1Costs and expenses
    
    
    (2,597
    )
    
    
    (699
    )
    
    
    (150
    )Gain/loss on sale of assets
    
    
    23,780
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    23,585
    
    
    $
    (72
    )
    
    $
    (149
    )
 (8)
    
    Credit FacilitiesThe Company has two separate credit facilities. The Companys Third Amended and Restated
Credit Agreement (or the Revolving Credit Agreement), dated as of December 23, 2005, with a
group of bank lenders provides a revolving line of credit having a borrowing base limitation
of $167.0 million at December 31, 2006. The total amount that the Company can borrow and have
outstanding at any one time is limited to the lesser of $350.0 million or the borrowing base
established by the lenders. At December 31, 2006, the principal amount outstanding under the
Companys revolving credit facility was $115.0 million, and $445,000 was reserved for the
Companys letters of credit. The second credit facility (or the Second Lien Agreement) is a
five year term loan facility provided to the Company under a Second Lien Term Loan Agreement,
dated November 15, 2005, with a group of banks and other lenders. At December 31, 2006, the
Companys term loan under the second lien agreement was fully funded in the principal amount
of $50.0 million.The credit facilities have varying interest rates and consist of the following banks base
rate and LIBOR tranches at December 31:
 2006
    
    
    2005($ in thousands)Revolving Facility note payable to banks,Agent banks base lending rate of 8.25%
    
    $
    2,000
    
    
    $
    Libor Tranche at 7.61% and 6.40%
    
    
    113,000
    
    
    
    50,000Term Loan (Second Lien) payable to banks,Libor Tranche at 9.875% and 9.0%
    
    
    50,000
    
    
    
    50,000Total notes payable to banks
    
    $
    165,000
    
    
    $
    100,000
 F-19




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##### Table of Contents



Revolving Credit Facility
           Second Lien Term Loan Facility
 1 2
 F-20




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##### Table of Contents



The LIBO rate is generally equal to the sum of (a) a designated rate appearing in the Dow
Jones Market Service for the applicable interest periods offered in one, two, three or six
month periods and (b) an applicable margin rate per annum equal to 4.50%.The Second Lien Agreement contains various restrictive covenants, including (i) maintenance of
a maximum ratio of debt to earnings before interest, income taxes, depreciation, depletion and
amortization, (ii) maintenance of a minimum ratio of oil and natural gas reserve value to
debt, (iii) prohibition of payment of dividends, and (iv) restrictions on incurrence of
additional debt. The Companys producing oil and natural gas properties are also pledged to
secure payment of its indebtedness under this facility, but the liens granted to the lender
under the Second Lien Agreement are second and junior to the rights of the first lienholders
under the Revolving Credit Agreement.At December 31, 2006, the Companys LIBO interest rate was 9.875% on $50.0 million.In the case of alternate base rate loans, interest is payable the last day of each March,
June, September and December. In the case of LIBO loans, interest is payable the last day of
the tranche period not to exceed a three month period.As of December 31, 2006 we were in compliance with all of the covenants in our Second Lien
Agreement.All outstanding principal under the second lien agreement is due and payable on November 15,
2010. The maturity date may be accelerated by the lenders upon the occurrence of an event of
default under the second lien agreement.Prepayments in whole or in part if made prior to the first anniversary date will bear a
premium of 1% of the amount prepaid; there is no premium after the first anniversary date.(9)
    
    Income TaxesThe Companys income tax provision consists of the following:
 Years ended December 31,2006
    
    
    2005
    
    
    2004($ in thousands)Deferred income tax (benefit) expense
    
    $
    13,894
    
    
    $
    (1,676
    )
    
    $
    1,162Deferred income tax (benefit) expense related to
loss/gain on derivatives in other comprehensive loss
    
    
    3,318
    
    
    
    515
    
    
    
    (1,917
    )Total income tax provision (benefit)
    
    $
    17,212
    
    
    $
    (1,161
    )
    
    $
    (755
    )
 Income tax expense differs from the amount computed at the federal statutory rate as
follows:
 Years ended December 31,2006
    
    
    2005
    
    
    2004($ in thousands)Income tax (benefit) expense at statutory rate
    
    $
    13,617
    
    
    $
    (1,110
    )
    
    $
    1,167Statutory depletion
    
    
    37
    
    
    
    (443
    )
    
    
    (29
    )State tax, net of federal benefit
    
    
    101
    
    
    
    16
    
    
    
    6Nondeductible expenses and other
    
    
    139
    
    
    
    (139
    )
    
    
    18Income tax expense
    
    $
    13,894
    
    
    $
    (1,676
    )
    
    $
    1,162
 F-21




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##### Table of Contents



The tax effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liability at December 31 are as follows:
 2006
    
    
    2005($ in thousands)Current:Deferred tax assets:Fair market value losses on derivatives expected
to be settled within one year
    
    $
    4,340
    
    
    $
    5,241Noncurrent:Deferred tax assets:Net operating loss carryforwards, state and federal
    
    $
    16,942
    
    
    $
    3,734Statutory depletion carryforwards
    
    
    2,424
    
    
    
    2,462Alternative minimum tax credit carryforward
    
    
    157
    
    
    
    154Fair market value losses on derivatives not expected
to be settled within one year
    
    
    4,102
    
    
    
    9,331Asset retirement obligations
    
    
    233
    
    
    
    149Other
    
    
    26
    
    
    
    64Total noncurrent deferred tax assets
    
    
    23,884
    
    
    
    15,894Deferred tax liabilities:Property and equipment, principally due to differences in
basis, expensing of intangible drilling costs for tax
purposes and depletion
    
    
    (48,191
    )
    
    
    (23,930
    )Total deferred tax liabilities
    
    
    (48,191
    )
    
    
    (23,930
    )Net noncurrent deferred income tax liability
    
    $
    (24,307
    )
    
    $
    (8,036
    )
 As of December 31, 2006, the Company had net operating loss carry forwards for regular tax and
alternative minimum taxable income (AMT) purposes available to reduce future taxable income.
These carry forwards expire as follows:
 Net operating
    
    
    AMTloss
    
    
    operating loss($ in thousands)2019
    
    $
    2,507
    
    
    $
    2,9182021
    
    
    4,576
    
    
    
    4,4982022
    
    
    44
    
    
    
    442023
    
    
    8
    
    
    
    3322024
    
    
    3,718
    
    
    
    3,8062026
    
    
    38,977
    
    
    
    37,943$
    49,830
    
    
    $
    49,541
 As of December 31, 2006, the Company had approximately $157,000 of AMT credit carryover
that has no expiration date.
 F-22




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##### Table of Contents



(10)
    
    Equity TransactionsPreferred StockOn June 6, 2005, outstanding shares of the Companys 6% Convertible Preferred Stock, $0.10 par
value per share were converted to common stock. Under terms of the Preferred Stock Agreement,
all of the holders of the Convertible Preferred Stock elected to convert their shares into
shares of the Companys common stock based on the original contractual conversion rate of
$10.00 divided by $3.50. The holders of the Preferred Stock received approximately 2.8571
shares of common stock of the Company for each share of Preferred Stock.Sale of Equity SecuritiesOn February 9, 2005, the Company sold 5,750,000 shares of its common stock, $.01 par value per
share, pursuant to a public offering at a price of $5.27 per share. Gross cash proceeds were
$30.3 million, and net proceeds were approximately $27.7 million. The common shares were
issued under Parallels $100.0 million Universal Shelf Registration Statement on Form S-3
which became effective in November 2004. The proceeds were used to reduce the amount
outstanding under the revolving credit facility.On August 16, 2006, the Company sold 2,500,000 shares of its common stock, $.01 par value per
share, pursuant to a public offering at a price of $25.25 per share. Gross cash proceeds were
$63.1 million, and net proceeds were approximately $60.3 million. The proceeds were used
for general corporate purposes, including debt repayment and the acceleration of Parallels
drilling and completion operations in certain core areas such as the Barnett Shale natural
gas, New Mexico Wolfcamp natural gas and Permian Basin west Texas oil properties.(11)
    
    Stock Compensation, Warrants and RightsThe Company awards both incentive stock options and nonqualified stock options to selected key
employees, officers, and directors. The options are awarded at an exercise price equal to the
closing price of the Companys common stock on the date of grant. These options vest over a
period of two to ten years with a ten-year exercise period. As of December 31, 2006, options
expire beginning in2007 and extending through 2015. Options to purchase a total of 17,500
shares of common stock remain available for grant.
 (a)
    
    Stock OptionsA summary of the Companys employee stock options as of December 31, 2006, 2005 and 2004,
and changes during the years ended on those dates is presented below:
 Year ended
    
    
    Year ended
    
    
    Year endedDecember 31, 2006
    
    
    December 31, 2005
    
    
    December 31, 2004Number of
    
    
    Weighted
    
    
    Number of
    
    
    Weighted
    
    
    Number of
    
    
    Weightedshares
    
    
    average price
    
    
    shares
    
    
    average price
    
    
    shares
    
    
    average price(in thousands)
    
    
    
    
    
    
    (in thousands)
    
    
    
    
    
    
    (in thousands)Stock options:Outstanding at beginning of year
    
    
    1,405
    
    
    $
    5.22
    
    
    
    1,919
    
    
    $
    3.71
    
    
    
    2,138
    
    
    $
    3.65Options granted
    
    
    
    
    
    
    
    
    
    
    200
    
    
    
    12.27
    
    
    
    
    
    
    
    Options exercised
    
    
    (176
    )
    
    
    4.35
    
    
    
    (714
    )
    
    
    3.15
    
    
    
    (174
    )
    
    
    3.00Options cancelled
    
    
    (30
    )
    
    
    3.09
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options expired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (45
    )
    
    
    4.29Outstanding at end of year
    
    
    1,199
    
    
    $
    5.40
    
    
    
    1,405
    
    
    $
    5.22
    
    
    
    1,919
    
    
    $
    3.71Exercisable at end of year
    
    
    1,001
    
    
    $
    4.32
    
    
    
    1,160
    
    
    $
    4.01
    
    
    
    1,776
    
    
    $
    3.50Weighted average fair value of
options granted during the year
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    8.71
    
    
    
    
    
    
    $
    
 F-23




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##### Table of Contents



The following table summarizes information about the Companys employee stock options
outstanding and exercisable at December 31, 2006:
 AverageRemaining
    
    Fair MarketLife
    
    Value(in thousands)Stock options outstanding as of December 31, 2006
    
    
    4.5
    
    

$
    14,587Currently exercisable as of December 31, 2006
    
    
    3.6
    
    
    $
    13,266
 Options outstanding
    
    
    Options exercisableRange of
    
    Number
    
    
    Weighted average
    
    
    Weighted
    
    
    Number
    
    
    Weightedexercise
    
    Outstanding at
    
    
    remaining
    
    
    average
    
    
    exercisable at
    
    
    averageprices
    
    December 31, 2006
    
    
    contractual life
    
    
    exercise price
    
    
    December 31, 2006
    
    
    exercise price(in thousands)
    
    
    
    
    
    
    
    
    
    
    (in thousands)$1.81 - $3.60
    
    
    401
    
    
    4 years
    
    $
    2.92
    
    
    
    401
    
    
    $
    2.92$4.09 - $5.50
    
    
    598
    
    
    4 years
    
    $
    4.76
    
    
    
    560
    
    
    $
    4.75$12.27
    
    
    200
    
    
    9 years
    
    $
    12.27
    
    
    
    40
    
    
    $
    12.271,199
    
    
    
    
    
    
    
    
    
    
    
    1,001
 For the twelve months ended December 31, 2006, 2005 and 2004, Parallel recognized
compensation expense of approximately $531,000, $278,000 and $169,000 with tax benefits of
approximately $181,000, $95,000 and $58,000, respectively, associated with its stock option
grants.The following table presents the future stock-based compensation expense expected to be
recognized over the vesting period:
 ($ in thousands)2007
    
    $
    3242008
    
    
    1942009 through 2010
    
    
    144Total
    
    $
    662
 Nonvested options were 197,500 at December 31, 2006. During the twelve months ended
December 31, 2006, 176,250 options were exercised; however, no options were granted,
expired or forfeited. During 2006 the Company settled 30,000 options for approximately
$511,000.The fair value of each option award is estimated on the date of grant. The fair value of
stock options granted prior to and remaining outstanding at January 1, 2006 and that had
option shares subject to future vesting at that date was determined using the Black-Scholes
option valuation method assumptions noted in the following table. Expected volatilities
are based on historical volatility of the common stock. The expected term of the options
granted used in the model represent the period of time that options granted are expected to
be outstanding.
 F-24




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##### Table of Contents



Year ended December 31,2005
    
    
    2001Expected volatility
    
    
    54.20
    %
    
    
    57.95
    %Expected dividends
    
    
    0.00
    %
    
    
    0.00
    %Expected term (in years)
    
    
    7
    
    
    
    8Risk free rate
    
    
    4.200
    %
    
    
    5.050
    %
 ($ in thousands)Intrinsic Value of Options Exercised Twelve Months Ending December 31, 2006
    
    $
    2,855Intrinsic Value of Options Exercised Twelve Months Ending December 31, 2005
    
    $
    9,169Intrinsic Value of Options Exercised Twelve Months Ending December 31, 2004
    
    $
    363Fair Market Value of Options Granted Twelve Months Ending December 31, 2006
    
    $
    Fair Market Value of Options Granted Twelve Months Ending December 31, 2005
    
    $
    1,423Fair Market Value of Options Granted Twelve Months Ending December 31, 2004
    
    $
    
 There were no stock options granted for the twelve months ended December 31, 2006. For the
twelve months ended December 31, 2005 there were 200,000 options granted with a fair market
value of $1.42 million.The following table illustrates the effect on net income and earnings per share if we had
applied the fair value recognition provisions of Statement No. 123 to employee options
awarded prior to 2003.
 Year Ended December 31,2005
    
    
    2004( $ in thousands, exceptper share data)Net income (loss)
    
    $
    (1,589
    )
    
    $
    2,271Add:Stock-based compensation expense for employees included in
reported net income (loss), net of related tax effects of $95 and
$57
    
    
    183
    
    
    
    112Less:Total stock-based employee compensation expense determined
under fair value method for all awards, net of related tax effects
    
    
    (610
    )
    
    
    (408
    )Pro forma net income (loss)
    
    $
    (2,016
    )
    
    $
    1,975Earnings (loss) per share:Basic  as reported
    
    $
    (0.06
    )
    
    $
    0.07Basic  pro forma
    
    $
    (0.07
    )
    
    $
    0.06Diluted  as reported
    
    $
    (0.06
    )
    
    $
    0.07Diluted  pro forma
    
    $
    (0.07
    )
    
    $
    0.05
 (b)
    
    Stock WarrantsThe Company has 300,030 warrants outstanding at December 31, 2006, 2005, and 2004, which
were issued as part of the Companys initial public offering in 1980. Each warrant allows
the holder to buy one share of common
 F-25




---



##### Table of Contents



stock for $6.00. The warrants are exercisable for a 30 day period commencing on the
date a registration statement covering exercise is declared effective. The warrants contain
antidilution provisions.The Company also had an additional 136,708 warrants outstanding at December 31, 2005 issued
as partial payment for services rendered for financial and investment advice in 2001. The
warrants had a term of five years from date of issuance and a vesting period of one year.
The warrants have an exercise price of $2.95 per share and contain a provision for cashless
exercise. The expense related to these warrants in the amount of $99,000 was recorded in
other expenses in 2001 based on the estimated fair value on the date of grant using the
Black-Scholes option pricing model. As of December 31, 2006 these warrants had been fully
exercised.The Company has 100,000 warrants outstanding at December 31, 2006, 2005 and 2004, which
were issued as partial payment for services rendered for financial and investment advice
for the Companys private placement offering in December, 2003. The warrants have a term of
five years from date of issuance and vesting period of one year. The warrants have an
exercise price of $3.98 per share and contain a provision for cashless exercise. The fair
value related to these warrants in the amount of $157,000 was recorded in other expenses in
2003 based on the estimated fair value on the date of grant using the Black-Scholes option
pricing model.(c)
    
    Stock RightsOn October 5, 2000, the board of directors declared a dividend of one Stock Right for each
outstanding share of the Companys common stock. If a person acquires 15% or more of the
Companys common stock or a tender offer or exchange offer is made for 15% or more of the
common stock, each Stock Right will entitle the holder to purchase from the Company one
one-thousandth of a share of 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 Stock Rights attach to all common stock certificates representing shares
then outstanding, and no separate Stock Rights certificates will be distributed. The Stock
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 Stock Rights separate is referred to as the
distribution date.Under certain circumstances the Stock 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
Stock 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 Stock Right.Under certain circumstances the Stock 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 Stock Right.The Stock 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
Stock Right.
 F-26




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##### Table of Contents



(d)
    
    Non-Employee Director Stock Grant PlanEffective July 1, 2004, the Company began paying an annual retainer fee to each
non-employee Director in the form of shares of the Companys common stock. Under the 2004
Non-Employee Director Stock Grant Plan, each non-employee Director is entitled to receive
an annual retainer fee in the form of shares of common stock having a value of $25,000. The
shares of stock are automatically granted on the first day of July in each year. The actual
number of shares received is determined by dividing $25,000 by the average daily closing
price of the common stock on the Nasdaq Stock Market for the ten consecutive trading days
commencing fifteen trading days before the first day of July of each year. On July 1, 2006,
and in accordance with the terms of the plan, the Company issued a total of 4,696 shares of
common stock to four non-employee Directors as follows: Jeffrey G. Shrader  1,174 shares;
Dewayne E. Chitwood  1,174 shares; Martin B. Oring  1,174 shares; and Ray M. Poage 
1,174 shares. On July 1, 2005, and in accordance with the terms of the plan, the Company
issued a total of 11,596 shares of common stock to four non-employee Directors as follows:
Jeffrey G. Shrader  2,899 shares; Dewayne E. Chitwood  2,899 shares; Martin B. Oring 
2,899 shares; and Ray M. Poage  2,899 shares. The Company has 78,820 remaining shares of
common stock available to issue to directors under this arrangement.
 (12)
    
    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
two wells. In 2006, 2005 and 2004 the Company was billed approximately $23,000, $20,000 and
$15,000, respectively, for the Companys pro rata share of lease operating and drilling
expenses and received approximately $176,000, $161,000 and $165,000 in 2006, 2005, and 2004
respectively, in oil and natural gas revenues related to these wells. These two wells were
acquired in 1984.An entity, of which Mr. Cambridge is the President, owned interests in certain wells that are
administered by the Company. During 2006 the Company charged approximately $3,000 for lease
operating expenses and paid approximately $8,000 in oil and natural gas revenues related to
these wells.Dewayne E. Chitwood, a Director of the Company, also serves as director of an entity which
owned 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, owned a total of 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. On June 6, 2005 the 110,000 and the 55,000
shares of preferred stock were converted to 314,285 and 157,142 shares of common stock,
respectively.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 2005 and 2004 the Company
charged approximately $4,000 and $14,000, respectively, for lease operating expenses and paid
approximately $8,000, and $48,000, respectively, in oil and natural gas revenues related to
these wells. In 2005 the Company paid to the entity approximately $140,000 in payment of net
proceeds attributable to its pro rata share from the sale of the interests.In December, 2001, and prior to his employment with Parallel, Donald E. Tiffin, Parallels
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 2006, the Company
charged approximately $111,000 for capital expenditures and lease operating expenses and paid
approximately $100,000 in oil and natural gas revenues related to this project.(13)
    
    Statements of Cash FlowsIn 2006, $40,000 was paid for estimated alternative minimum tax. No Federal income taxes were
paid in 2005 and 2004.
 F-27




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##### Table of Contents



The Company made interest payments of approximately $12.5 million, $5.4 million, and
$1.7 million in 2006, 2005 and 2004, respectively.At December 31, 2006, 2005 and 2004, there were $8.5 million, $2.5 million and $741,000,
respectively, of property additions accrued in accounts payable.(14)
    
    Major CustomersThe following purchasers accounted for 10% or more of the Companys oil and natural gas sales
for the years ended December 31:
 2006

    
    2005

    
    2004Company A
    
    
    (1)
    

    
    
    14
    %
    
    
    22
    %Company B
    
    
    20
    %
    
    
    12
    %
    
    

    (1)Company C
    
    
    30
    %
    
    
    40
    %
    
    
    43
    %Company D
    
    
    12
    %
    
    

    (1)
    
    
    

        (1)Company E
    
    
    10
    %
    
    

    (1)
    
    
    

    (1)
 
 (1)
    
    Less than 10%. (15)
    
    Commitments and ContingenciesOn December 30, 2005, the Company was named as a defendant in a lawsuit filed in the 352nd
Judicial District Court of Tarrant County, Texas, Cause No. 352-215616-05, AFE Oil and Gas,
L.L.C. (aka AFE Oil and Gas, LLC) v. Premium Resources II, L.P., Premium Resources, Inc.,
Danay Covert, Nick Morris, William D. Middleton, Dale Resources, L.L.C., and Parallel
Petroleum, Inc.In this suit, the plaintiff alleges breach of fiduciary duty, fraud and conspiracy to
defraud, breach of contract, constructive trust, suit to remove cloud from title, declaratory
judgment, alter ego, tortious interference with contract and statutory fraud and seeks
recovery of an unspecified amount of actual damages, special damages, consequential damages,
exemplary damages, attorneys fees, pre-judgment and post-judgment interest and costs.
Generally, the plaintiff alleges that it owns a 5.5% overriding royalty interest in certain
oil and natural gas properties including the Square Top LP and the West Fork LP leases
located in Tarrant County, Texas. The plaintiff alleges that the defendants (other than Dale
Resources and Parallel) wrongfully and intentionally allowed these original oil and natural
gas leases to terminate; causing the termination of plaintiffs overriding royalty interest
in each lease. The plaintiff further alleges that the defendants (other than Dale Resources
and Parallel) failed to drill wells necessary to maintain the original leases in force and
that after the original leases were allowed to terminate, the defendants (other than Dale
Resources and Parallel) then acquired new oil and natural gas leases covering these same oil
and natural gas properties, which were subsequently assigned to Dale Resources. Thereafter,
Dale Resources allegedly assigned a portion of these new leases to Parallel.In addition to seeking unspecified monetary damages, the plaintiff also seeks to impose a
constructive trust for its benefit on the new oil and natural gas leases and seeks a judicial
declaration that either (1) the plaintiff is the owner of an overriding royalty interest in
the new leases or that (2) the original leases and plaintiffs interest in the original
leases are still in effect. The plaintiff also claims that the new leases constitute a cloud
on plaintiffs title and seeks to have that cloud removed. Based on Parallels present
understanding of this case, Parallel believes that it has substantial defenses to the
plaintiffs claims and intends to vigorously assert these defenses. However, if the plaintiff
is awarded an interest in the new leases, then Parallel could potentially become liable for
the payment to plaintiff of the portion of production proceeds attributable to plaintiffs
interest received by Parallel. On the other hand, if the plaintiff prevails on its claim that
the original leases are still in effect, Parallels interest in the new leases could become
subject to forfeiture. Based on the information known to date, Parallel has not established a
reserve for this matter.Prior to January 1, 2005, the Company had established a simplified employee pension plan
(SEP) covering all salaried employees of the Company. The employees could 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 had reached the age of 50 or older during the calendar
year could have elected to take advantage of a catch-up salary deferral contribution.
 F-28




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##### Table of Contents



Eligible participants could have increased their salary deferral by $3,000 for the year
2004. The Company made discretionary contributions to the SEP; however, total contributions
could not exceed $41,000 per employee. During 2004 the Company contributed an aggregate of
approximately $133,000 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.
During 2006 and 2005, the Company contributed an aggregate of approximately $240,000 and
$168,000, respectively, to the 401(k) Plan.The Company leases office space under a non-cancelable operating lease expiring in 2010.
Future annual payments under this operating lease are approximately $204,000, $210,000,
$216,000 and $36,000 for the years ending December 31, 2007 thru February 28, 2010,
respectively. Rental expense under the Companys current and former lease totaled
approximately $194,000, $162,000, and $127,000 for the years ended December 31, 2006, 2005 and
2004, 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 lease expires upon the cessation of production from the
Diamond M area wells. Future annual payments under these lease agreements total
approximately $23,000 for 2007 and $14,000 for 2008 thru 2011. Rental expense under these two
leases totaled approximately $23,000, $23,000 and $15,000 for the year ended December 31,
2006, 2005 and 2004, respectively.The Company has an Incentive and Retention Plan which provides for the payment to eligible
officers and employees a one time performance bonus and retention payment upon the occurrence
of a change of control as defined in the Plan. Because of the uncertainty of the occurrence of
a change of control or corporate transaction within the meaning of the plan, the amount of
these bonuses is undeterminable. Although the amount of the bonus is undeterminable at this
time, if the Plan was calculated using the December 31, 2006, stock price of $17.57 per share,
the Plan would have a balance of approximately $18.5 million.In January 2006, the Company adopted a Non-officer Employee Severance Plan for the purpose of
providing the Companys non-officer employees with an incentive to remain employed by with the
Company. This Plan provides for a one-time severance payment to the non-officer employees
equal to one year of their then current base salary upon the occurrence of a change of
control within the meaning of the Plan. Based on the aggregate non-officer base salaries in
effect as of December 31, 2006, the total severance amount payable under the plan would have
been approximately $3.3 million.(16)
    
    Supplemental Oil and Natural Gas Reserve Data (Unaudited)The Company has presented the reserve estimates utilizing an oil price of $54.67, $56.09 and
$40.59 per Bbl and a natural gas price of $5.00, $8.68 and $5.65 per Mcf as of December 31,
2006, 2005 and 2004, respectively. Information for oil is presented in barrels (Bbl) and for
natural 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 by independent petroleum engineering
consultants as of December 31, 2006, 2005 and 2004. 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 natural 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. Proved developed reserves are those reserves
expected to be recovered through existing wells, with existing equipment and operating
methods.
 F-29




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##### Table of Contents



Total proved
    
    
    Proved developedBBL
    
    
    MCF
    
    
    BBL
    
    
    MCF(in thousands)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
    )
    
    
    (468
    )
    
    
    (18
    )
    
    
    (468
    )Extensions and discoveries
    
    
    1,159
    
    
    
    4,662
    
    
    
    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
    
    
    
    13,158Purchase of reserves in place
    
    
    2,299
    
    
    
    456
    
    
    
    619
    
    
    
    122Sale of reserves in place
    
    
    (14
    )
    
    
    (205
    )
    
    
    (14
    )
    
    
    (205
    )Extensions and discoveries
    
    
    944
    
    
    
    13,106
    
    
    
    69
    
    
    
    8,502Revisions of previous estimates
    
    
    (30
    )
    
    
    (1,353
    )
    
    
    653
    
    
    
    (739
    )Production
    
    
    (923
    )
    
    
    (3,592
    )
    
    
    (923
    )
    
    
    (3,592
    )Reserves as of December 31, 2005
    
    
    21,192
    
    
    
    25,237
    
    
    
    13,614
    
    
    
    17,246Purchase of reserves in place
    
    
    3,270
    
    
    
    4,355
    
    
    
    915
    
    
    
    2,255Extensions and discoveries
    
    
    8,182
    
    
    
    38,159
    
    
    
    699
    
    
    
    13,948Revisions of previous estimates
    
    
    (2,786
    )
    
    
    (2,316
    )
    
    
    841
    
    
    
    1,831Production
    
    
    (1,137
    )
    
    
    (6,539
    )
    
    
    (1,137
    )
    
    
    (6,539
    )Reserves as of December 31, 2006
    
    
    28,721
    
    
    
    58,896
    
    
    
    14,932
    
    
    
    28,741
 Statement of Financial
Accounting Standards No. 69, Disclosures about Oil and Gas Producing Activities
  F-30




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##### Table of Contents



Standardized Measure of Discounted Future Net Cash Flows
Relating to Proved Oil and Gas Reserves  ($ in thousands)
 December 31,2006
    
    
    2005
    
    
    2004Future cash inflows
    
    $
    1,864,860
    
    
    $
    1,407,153
    
    
    $
    862,945Future costs:Production
    
    
    (606,138
    )
    
    
    (361,563
    )
    
    
    (260,312
    )Development
    
    
    (138,715
    )
    
    
    (36,335
    )
    
    
    (25,131
    )Future income taxes
    
    
    (292,954
    )
    
    
    (249,621
    )
    
    
    (137,765
    )Future net cash flows
    
    
    827,053
    
    
    
    759,634
    
    
    
    439,73710% annual discount for estimated timing of cash flows
    
    
    (490,565
    )
    
    
    (398,844
    )
    
    
    (233,328
    )Standardized measure of discounted future net cash flows
    
    $
    336,488
    
    
    $
    360,790
    
    
    $
    206,409
 Changes in Standardized Measure of
Discounted Future Net Cash Flows From Proved Reserves  ($ in thousands)
 December 31,2006
    
    
    2005
    
    
    2004Increase (decrease):Purchases of minerals in place
    
    $
    20,698
    
    
    $
    29,354
    
    
    $
    47,727Extensions
and discoveries and improved recovery, net of future production and development costs
    
    
    104,622
    
    
    
    87,790
    (1)
    
    
    41,755
    (1)Accretion of discount
    
    
    47,281
    
    
    
    26,625
    
    
    
    14,779Net change in sales prices net of production costs
    
    
    (78,387
    )
    
    
    135,242
    
    
    
    45,572Changes in estimated future development costs
    
    
    12,726
    
    
    
    (10,886
    )
    
    
    (8,641
    )Revisions of quantity estimates
    
    
    (44,561
    )
    
    
    (4,518
    )
    
    
    13,024Net change in income taxes
    
    
    (21,452
    )
    
    
    (52,181
    )
    
    
    (28,319
    )Sales, net of production costs
    
    
    (86,130
    )
    
    
    (47,974
    )
    
    
    (26,356
    )Changes of production rates (timing) and other
    
    
    20,901
    
    
    
    (9,071
    )(1)
    
    
    (9,398
    )(1)Net increase
    
    
    (24,302
    )
    
    
    154,381
    
    
    
    90,143Standardized measure of discounted future net cash flows:Beginning of year
    
    
    360,790
    
    
    
    206,409
    
    
    
    116,266End of year
    
    $
    336,488
    
    
    $
    360,790
    
    
    $
    206,409
 
 (1)
    
    During 2006, the Company revised its method of calculating Extensions and
discoveries and improved recovery, net of future production and development costs.
Consequently, related calculations in 2005 and 2004 have been adjusted to be consistent
with the 2006 calculation. F-31




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##### Table of Contents



(17) Selected Quarterly Financial Data (Unaudited)
 QuarterFirst
    
    
    Second
    
    
    Third
    
    Fourth(1)($ in thousands, except per share data)2006Oil and gas revenues
    
    $
    20,543
    
    
    $
    26,342
    
    
    $
    26,211
    
    
    $
    23,929Total costs and expenses
    
    
    11,102
    
    
    
    13,962
    
    
    
    16,686
    
    
    
    14,856Operating income
    
    
    9,441
    
    
    
    12,380
    
    
    
    9,525
    
    
    
    9,073Net income
    
    $
    1,611
    
    
    $
    2,464
    
    
    $
    10,996
    
    
    $
    11,084
    (1)Net income available to common stockholders
    
    $
    1,611
    
    
    $
    2,464
    
    
    $
    10,996
    
    
    $
    11,084
    (1)Net income per common share   basic
    
    $
    0.05
    
    
    $
    0.07
    
    
    $
    0.30
    
    
    $
    0.30
    (1)Net income per common share   diluted
    
    $
    0.05
    
    
    $
    0.07
    
    
    $
    0.30
    
    
    $
    0.29
    (1)2005Oil and gas revenues
    
    $
    10,414
    
    
    $
    12,263
    
    
    $
    21,837
    
    
    $
    21,636Total costs and expenses
    
    
    7,048
    
    
    
    7,060
    
    
    
    8,836
    
    
    
    9,861Operating income
    
    
    3,366
    
    
    
    5,203
    
    
    
    13,001
    
    
    
    11,775Net income (loss)
    
    $
    (10,704
    )
    
    $
    (1,246
    )
    
    $
    1,989
    
    
    $
    8,372Net income (loss) available to common stockholders
    
    $
    (10,847
    )
    
    $
    (1,374
    )
    
    $
    1,989
    
    
    $
    8,372Net income per share:Net income (loss) per common share  basic
    
    $
    (0.38
    )
    
    $
    (0.04
    )
    
    $
    0.06
    
    
    $
    0.24Net income (loss) per common share  diluted
    
    $
    (0.38
    )
    
    $
    (0.04
    )
    
    $
    0.06
    
    
    $
    0.24
 
 (1)
    
    2006 results include $9.0 million of equity in income of pipeline and gathering
systems representing the Companys share of net gain on sale of certain pipeline assets.
See Note 7. F-32




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##### Table of Contents



PARALLEL PETROLEUM CORPORATIONFebruary 28, 2007
    By:
    /s/ Larry C. OldhamLarry C. OldhamPresident and Chief Executive OfficerFebruary 28, 2007
    By:
    /s/ Steven D. FosterSteven D. FosterChief Financial Officer S-1




---



##### Table of Contents



/s/ Thomas R. Cambridge
    
    Chairman of the Board of Directors
    
    February 28, 2007Thomas R. Cambridge/s/ Larry C. Oldham
    
    President and Chief Executive Officer
    
    February 28, 2007Larry C. Oldham
    
    (Principal
Executive Officer)/s/ Steven D. Foster
    
    Chief Financial Officer
    
    February 28, 2007Steven D. Foster
    
    (Principal
Financial andAccounting Officer)/s/ Martin B. Oring
    
    Director
    
    February 28, 2007Martin B. Oring/s/ Ray M. Poage
    
    Director
    
    February 28, 2007Ray M. Poage/s/ Jeffrey G. Shrader
    
    Director
    
    February 28, 2007Jeffrey G. Shrader
 S-2




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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 Registrant3.3
    
    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 1 of Form 8-A of the
Registrant filed with the Securities and Exchange Commission on
October 10, 2000)4.4
    
    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)4.5
    
    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)4.6
    
    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)*4.7
    
    Purchase Warrant Agreement, dated as of October 1, 1980, between the Registrant and American
Stock Transfer, Inc.*4.8
    
    First Amendment to Warrant
Agreement, dated as of February 22, 2007, among the Registrant,
Computershare Shareholder Services, Inc. and Computershare Trust
Company, N.A.Executive Compensation Plans and Arrangements (Exhibit No.s 10.1 through 10.7):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)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 10.3 of the
Registrants Form 10-Q of the Registrant for the fiscal quarter ended June 30, 2005)*10.4
    
    1998 Stock Option Plan




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##### Table of Contents



No.
    
    Description of Exhibit10.5
    
    2001 Non-Employee Directors Stock Option Plan (Incorporated by reference to Exhibit 10.7 of
the Registrants Form 10-Q Report for the fiscal quarter ended March 31, 2004)10.6
    
    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)*10.7
    
    Incentive and Retention Plan10.8
    
    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)10.9
    
    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)10.10
    
    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)10.11
    
    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)10.12
    
    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)10.13
    
    First Amendment to Second Amended and Restated Credit Agreement, dated as of December 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 December 30, 2004 and
filed with the Securities and Exchange Commission on December 30, 2004)10.14
    
    Second Amendment to Second Amended and Restated Credit Agreement, dated as of April 1, 2005,
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 April 4, 2005 and filed with the
Securities and Exchange Commission on April 8, 2005)10.15
    
    Third Amendment to Second Amended and Restated Credit Agreement (Incorporated by reference
to Exhibit 10.1 of the Registrants Form 8-K Report dated October 4, 2005 and filed with the
Securities and Exchange Commission on October 20, 2005)10.16
    
    Purchase and Sale Agreement, dated as of October 14, 1005, among Parallel, L.P., Lynx
Production Company, Inc., Elton Resources, Inc., Cascade Energy Corporation, Chelsea Energy,
Inc., William P. Sutter, Trustee, William P. Sutter Trust, J. Leroy Bell, E. L. Brahaney,
Brent Beck, Cavic Interests, LLC and Stanley Talbott (Incorporated by reference to Exhibit
10.2 of the Registrants Form 8-K Report dated October 14, 2005 and filed with the Securities
and Exchange Commission on October 20, 2005)10.17
    
    Ancillary Agreement to Purchase and Sale Agreement, dated October 14, 2005, between
Parallel, L.P. and Lynx Production Company, Inc. (Incorporated by reference to Exhibit 10.3 of
the Registrants Form 8-K Report dated October 14, 2005 and filed with the Securities and
Exchange Commission on October 20, 2005)10.18
    
    Guarantee of Parallel, L.P., dated October 13, 2004 (Incorporated by reference to Exhibit
10.4 of the Registrants Form 8-K Report dated October 14, 2005 and filed with the Securities
and Exchange Commission on October 20, 2005)10.19
    
    ISDA Master Agreement, dated as of October 13, 2005, between Parallel, L.P. and Citibank,
N.A. (Incorporated by reference to Exhibit 10.5 of the Registrants Form 8-K Report dated
October 14, 2005 and filed with the Securities and Exchange Commission on October 20, 2005)




---



##### Table of Contents



No.
    
    Description of Exhibit10.20
    
    Third Amended and Restated Credit Agreement, dated as of December 23, 2005, among Parallel
Petroleum Corporation, Parallel, L.P., Parallel, L.L.C. and Citibank Texas, N.A., BNP Paribas,
CitiBank F.S.B., Western National Bank, Compass Bank, Comerica Bank, Bank of Scotland and
Fortis Capital Corp. (Incorporated by reference to Exhibit No. 10.1 of the Registrants Form
8-K Report, dated December 23, 2005, as filed with the Securities and Exchange Commission on
December 30, 2005)10.21
    
    Second Lien Term Loan Agreement, dated November 15, 2005, among Parallel Petroleum
Corporation, Parallel, L.P., BNP Paribas and Citibank Texas, N.A. (Incorporated by reference
to Exhibit No. 10.4 of the Registrants Form 8-K Report, dated November 15, 2005, as filed
with the Securities and Exchange Commission on November 21, 2005)10.22
    
    Intercreditor and Subordination Agreement, dated November 15, 2005, among Citibank Texas,
N.A., BNP Paribas, Parallel Petroleum Corporation, Parallel, L.P. and Parallel, L.L.C.
(Incorporated by reference to Exhibit No. 10.5 of the Registrants Form 8-K Report, dated
November 15, 2005, as filed with the Securities and Exchange Commission on November 21, 2005)*10.23
    
    Guaranty, dated as of
December 23, 2005, made by Parallel, L.L.C. to and in favor of
Citibank Texas, N.A.*10.24
    
    Third Amended and Restated Pledge
Agreement, dated as of December 23, 2005, between Parallel,
L.L.C. and Citibank Texas, N.A.*10.25
    
    Second Lien Guarantee and
Collateral Agreement, dated as of November 15, 2005, made by
Parallel Petroleum Corporation and Parallel, L.P. to and in favor of
BNP Paribas14
    
    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 BDO Seidman, LLP*23.2
    
    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