##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D. C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2009 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Transition period from  to
 Commission File Number 000-13305
 PARALLEL PETROLEUM CORPORATION
  Delaware
    
    75-1971716(State of other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer Identification No.)1004 N. Big Spring, Suite 400,Midland, Texas
    
    79701(Address of Principal Executive Offices)
    
    (Zip Code)
 (Registrants telephone number, including area code)
 (Former name, former address and former fiscal year, if changed since last report)
  þ o
  o o
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller Reporting Company o
 o þ
 
 o o




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##### 



Page No.PART I.  FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTSReference is made to the succeeding pages for the following financial statements:- Unaudited Balance Sheets at September 30, 2009 and December 31, 2008
    
    
    1- Unaudited Statements of Operations for the three months and nine months
ended September 30, 2009 and 2008
    
    
    3- Unaudited Statements of Stockholders Equity as of December 31, 2008
and for the nine months ended September 30, 2009
    
    
    4- Unaudited Statements of Cash Flows for the nine months ended September 30, 2009 and 2008
    
    
    5- Notes to Financial Statements
    
    
    7ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
    
    
    32ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    56ITEM 4. CONTROLS AND PROCEDURES
    
    
    61PART II  OTHER INFORMATIONITEM 1. LEGAL PROCEEDINGS
    
    
    61ITEM 1A. RISK FACTORS
    
    
    64ITEM 6. EXHIBITS
    
    
    70SIGNATURESEX-10.29EX-31.1EX-31.2EX-32.1EX-32.2EX-99.2




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##### Table of Contents



PART 1  FINANCIAL INFORMATION
 
 ITEM 1.
    
    FINANCIAL STATEMENTS
 PARALLEL PETROLEUM CORPORATION
 
 Balance Sheets
 (unaudited)
 ($ in thousands)
 Assets
 September 30,
    
    
    December 31,2009
    
    
    2008Current assets:Cash and cash equivalents
    
    $
    36,921
    
    
    $
    36,303Short-term investments
    
    
    
    
    
    
    5,002Accounts receivable:Oil and natural gas sales
    
    
    9,459
    
    
    
    13,399Joint interest owners and other, net of allowance for doubtful accounts of $50
    
    
    1,586
    
    
    
    2,805Affiliates and joint ventures
    
    
    4
    
    
    
    1211,049
    
    
    
    16,216Other current assets
    
    
    484
    
    
    
    430Derivatives
    
    
    5,059
    
    
    
    22,665Deferred tax asset
    
    
    938
    
    
    
    Total current assets
    
    
    54,451
    
    
    
    80,616Property and equipment, at cost:Oil and natural gas properties, full cost method (including $139,063 and $137,202 not
subject to depletion)
    
    
    893,101
    
    
    
    878,722Other
    
    
    3,350
    
    
    
    3,172896,451
    
    
    
    881,894Less accumulated depreciation, depletion and amortization
    
    
    (538,309
    )
    
    
    (490,566
    )Net property and equipment
    
    
    358,142
    
    
    
    391,328Restricted cash
    
    
    83
    
    
    
    81Investment in pipeline venture
    
    
    355
    
    
    
    337Other assets, net of accumulated amortization of $1,919 and $1,443
    
    
    3,148
    
    
    
    3,566Deferred tax asset
    
    
    69,907
    
    
    
    60,567Derivatives
    
    
    8,833
    
    
    
    14,081$
    494,919
    
    
    $
    550,576
  (1)




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##### Table of Contents



PARALLEL PETROLEUM CORPORATION

Balance Sheets (continued)  (unaudited)
($ in thousands)
 Liabilities and Stockholders Equity
 September 30,
    
    
    December 31,2009
    
    
    2008Current liabilities:Accounts payable trade
    
    $
    1,430
    
    
    $
    13,522Accrued liabilities
    
    
    15,592
    
    
    
    21,780Accrued interest on senior notes
    
    
    2,563
    
    
    
    6,407Asset retirement obligations
    
    
    912
    
    
    
    158Derivative obligations
    
    
    6,666
    
    
    
    3,004Put premium obligations
    
    
    1,098
    
    
    
    628Deferred tax liability
    
    
    
    
    
    
    6,597Total current liabilities
    
    
    28,261
    
    
    
    52,096Long-term liabilities:Revolving credit facility
    
    
    225,000
    
    
    
    225,000Senior notes (principal amount $150,000)
    
    
    146,309
    
    
    
    145,890Asset retirement obligations
    
    
    9,673
    
    
    
    11,221Derivative obligations
    
    
    4,771
    
    
    
    5,136Put premium obligations
    
    
    2,856
    
    
    
    3,655Termination obligation
    
    
    535
    
    
    
    532Total long-term liabilities
    
    
    389,144
    
    
    
    391,434Commitments and contingenciesStockholders equity:Series A preferred stock  par value $0.10 per share, authorized 50,000 shares
    
    
    
    
    
    
    Common stock  par value $0.01 per share, authorized 60,000,000 shares,
issued and outstanding 41,646,445 for 2009 and 41,597,161 for 2008
    
    
    416
    
    
    
    415Additional paid-in capital
    
    
    201,657
    
    
    
    200,132Retained deficit
    
    
    (124,559
    )
    
    
    (93,501
    )Total stockholders  equity
    
    
    77,514
    
    
    
    107,046$
    494,919
    
    
    $
    550,576
  (2)




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##### Table of Contents



PARALLEL PETROLEUM CORPORATION
 
 Statements of Operations
 (unaudited)
 (in thousands, except per share data)
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Oil and natural gas revenues:Oil and natural gas sales
    
    $
    21,192
    
    
    $
    56,201
    
    
    $
    59,282
    
    
    $
    156,217Costs and expenses:Lease operating expense
    
    
    5,040
    
    
    
    7,539
    
    
    
    18,667
    
    
    
    21,772Production taxes
    
    
    495
    
    
    
    2,836
    
    
    
    1,829
    
    
    
    8,121General and administrative
    
    
    4,452
    
    
    
    3,125
    
    
    
    11,166
    
    
    
    8,958Depreciation, depletion and amortization
    
    
    5,155
    
    
    
    11,551
    
    
    
    17,334
    
    
    
    31,386Impairment of oil and natural gas properties
    
    
    
    
    
    
    
    
    
    
    30,426
    
    
    
    Total costs and expenses
    
    
    15,142
    
    
    
    25,051
    
    
    
    79,422
    
    
    
    70,237Operating income (loss)
    
    
    6,050
    
    
    
    31,150
    
    
    
    (20,140
    )
    
    
    85,980Other income (expense), net:Gain (loss) on derivatives not classified as hedges
    
    
    (1,335
    )
    
    
    65,661
    
    
    
    (8,856
    )
    
    
    (27,834
    )Interest and other income
    
    
    42
    
    
    
    20
    
    
    
    141
    
    
    
    85Interest expense, net of capitalized interest
    
    
    (6,384
    )
    
    
    (6,139
    )
    
    
    (19,074
    )
    
    
    (17,025
    )Cost of debt retirement
    
    
    
    
    
    
    (102
    )
    
    
    
    
    
    
    (102
    )Other expense
    
    
    
    
    
    
    (11
    )
    
    
    (5
    )
    
    
    (12
    )Equity in gain (loss) of pipelines and
gathering system ventures
    
    
    
    
    
    
    (2
    )
    
    
    1
    
    
    
    380Total other income (expense), net
    
    
    (7,677
    )
    
    
    59,427
    
    
    
    (27,793
    )
    
    
    (44,508
    )Income (loss) before income taxes
    
    
    (1,627
    )
    
    
    90,577
    
    
    
    (47,933
    )
    
    
    41,472Income tax benefit (expense)
    
    
    570
    
    
    
    (31,900
    )
    
    
    16,875
    
    
    
    (14,740
    )Net income (loss)
    
    $
    (1,057
    )
    
    $
    58,677
    
    
    $
    (31,058
    )
    
    $
    26,732Net income (loss) per common share:Basic
    
    $
    (0.03
    )
    
    $
    1.41
    
    
    $
    (0.75
    )
    
    $
    0.65Diluted
    
    $
    (0.03
    )
    
    $
    1.41
    
    
    $
    (0.75
    )
    
    $
    0.64Weighted average common shares outstanding:Basic
    
    
    41,646
    
    
    
    41,566
    
    
    
    41,614
    
    
    
    41,429Diluted
    
    
    41,646
    
    
    
    41,733
    
    
    
    41,614
    
    
    
    41,803
  (3)




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PARALLEL PETROLEUM CORPORATION
 
 Statements of Stockholders Equity
 As of December 31, 2008 and for the nine months ended September 30, 2009
 (unaudited)
 (in thousands)
 Common stock
    
    
    Additional
    
    
    
    
    
    
    TotalNumber of
    
    
    
    
    
    
    paid-in
    
    
    Retained
    
    
    stockholdersshares
    
    
    Amount
    
    
    capital
    
    
    deficit
    
    
    equityBalance, December 31, 2008
    
    
    41,597
    
    
    $
    415
    
    
    $
    200,132
    
    
    $
    (93,501
    )
    
    $
    107,046Common stock issued to directors
    
    
    49
    
    
    
    1
    
    
    
    96
    
    
    
    
    
    
    
    97Restricted stock expense
    
    
    
    
    
    
    
    
    
    
    56
    
    
    
    
    
    
    
    56Stock option expense
    
    
    
    
    
    
    
    
    
    
    1,373
    
    
    
    
    
    
    
    1,373Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (31,058
    )
    
    
    (31,058
    )Balance, September 30, 2009
    
    
    41,646
    
    
    $
    416
    
    
    $
    201,657
    
    
    $
    (124,559
    )
    
    $
    77,514
  (4)




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##### Table of Contents



PARALLEL PETROLEUM CORPORATION
 
 Statements of Cash Flows
 Nine Months Ended September 30, 2009 and 2008
 (unaudited)
 ($ in thousands)
 2009
    
    
    2008Cash flows from operating activities:Net income (loss)
    
    $
    ( 31,058
    )
    
    $
    26,732Adjustments to reconcile net (loss) income to net cash
provided by operating activities:Depreciation, depletion and amortization
    
    
    17,334
    
    
    
    31,386Gain on sale of automobiles
    
    
    (5
    )
    
    
    Impairment of oil and natural gas properties
    
    
    30,426
    
    
    
    Accretion of asset retirement obligation
    
    
    609
    
    
    
    275Accretion of senior notes discount
    
    
    419
    
    
    
    375Deferred income tax expense (benefit)
    
    
    (16,875
    )
    
    
    14,740Loss on derivatives not classified as hedges
    
    
    8,856
    
    
    
    27,834Amortization of deferred financing cost
    
    
    476
    
    
    
    509Cost of debt retirement
    
    
    
    
    
    
    102Accretion of interest on put obligations
    
    
    155
    
    
    
    45Common stock issued to directors
    
    
    97
    
    
    
    253Restricted stock expense
    
    
    56
    
    
    
    82Stock option expense
    
    
    1,373
    
    
    
    772Equity in gain of pipelines and gathering system ventures
    
    
    (1
    )
    
    
    (380
    )Changes in assets and liabilities:Other assets, net
    
    
    632
    
    
    
    (1,409
    )Restricted cash
    
    
    (2
    )
    
    
    (2
    )Accounts receivable
    
    
    5,167
    
    
    
    (4,001
    )Other current assets
    
    
    (54
    )
    
    
    92Accounts payable and accrued liabilities
    
    
    (14,124
    )
    
    
    9,320Net cash provided by operating activities
    
    
    3,481
    
    
    
    106,725Cash flows from investing activities:Additions to oil and natural gas properties
    
    
    (23,779
    )
    
    
    (170,681
    )Additions to other property and equipment
    
    
    (190
    )
    
    
    (577
    )Settlements on derivative instruments
    
    
    13,783
    
    
    
    (36,306
    )Short-term investments
    
    
    (5,002
    )
    
    
    Maturity of short-term investments
    
    
    10,004
    
    
    
    Net investment in pipelines and gathering system ventures
    
    
    (17
    )
    
    
    (21
    )Net cash used in investing activities
    
    
    (5,201
    )
    
    
    (207,585
    )Cash flows from financing activities:Borrowings from bank line of credit
    
    
    
    
    
    
    102,500Deferred financing cost
    
    
    (690
    )
    
    
    (270
    )Proceeds from exercise of stock options
    
    
    
    
    
    
    1,531Settlements on derivative instruments with financing elements
    
    
    3,028
    
    
    
    Net cash provided by financing activities
    
    
    2,338
    
    
    
    103,761Net increase in cash and cash equivalents
    
    
    618
    
    
    
    2,901Cash and cash equivalents at beginning of period
    
    
    36,303
    
    
    
    7,816Cash and cash equivalents at end of period
    
    $
    36,921
    
    
    $
    10,717
  (5)




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##### Table of Contents



PARALLEL PETROLEUM CORPORATION

Statements of Cash Flows (continued)
Nine Months Ended September 30, 2009 and 2008  (unaudited)
($ in thousands)
 2009
    
    
    2008Non-cash financing and investing activities:Deferred purchase of derivative puts
    
    $
    
    
    
    $
    3,325Oil and natural gas properties asset retirement obligations
    
    $
    (1,403
    )
    
    $
    626Additions to oil and natural gas properties accrued
    
    $
    (8,000
    )
    
    $
    1,700Termination obligation capitalized to oil and natural gas properties
    
    $
    (3
    )
    
    $
    Property transfer:Transfer to oil and natural gas properties
    
    $
    
    
    
    $
    8,707Transfer from equity investment
    
    $
    
    
    
    $
    (8,707
    )Other transactions:Interest paid
    
    $
    23,426
    
    
    $
    19,385Taxes paid
    
    $
    75
    
    
    $
    
  (6)




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##### Table of Contents



NOTES TO FINANCIAL STATEMENTS
 NOTE 1. DESCRIPTION OF BUSINESS  NATURE OF OPERATIONS AND BASIS OF PRESENTATION
   
    
    Permian Basin of west Texas and New Mexico; and
    
    Fort Worth Basin of north Texas.
  Subsequent Events
  (7)




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##### Table of Contents



NOTE 2. STOCKHOLDERS EQUITY
 Share-Based Payment
 Subsequent Events Description of Business  Nature of Operations and Basis of Presentation.
 Options
    2009
    
    2008
    
    2005
    
    2001Expected volatility
    
    
    63.94
    %
    
    
    46.50
    %
    
    
    54.20
    %
    
    
    57.95
    %Expected dividends
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00Expected term (in years)
    
    
    6.25
    
    
    
    6.25
    
    
    
    6.5
    
    
    
    7.5Risk-free rate
    
    
    3.19
    %
    
    
    3.81%-3.86
    %
    
    
    4.20
    %
    
    
    5.05
    %
 (8)




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##### Table of Contents



WeightedAverageNumber of Shares of
    
    
    Weighted
    
    
    RemainingCommon Stock
    
    
    Average Exercise
    
    
    Contractual
    
    
    AggregateUnderlying Options
    
    
    Price
    
    
    Term
    
    
    Intrinsic Value(in thousands)
    
    
    
    
    
    
    (years)
    
    
    ($ in thousands)Outstanding December 31, 2008
    
    
    739
    
    
    $
    14.41Granted
    
    
    464
    
    
    $
    2.00Exercised
    
    
    
    
    
    $
    Surrendered
    
    
    
    
    
    $
    Outstanding September 30, 2009
    
    
    1,203
    
    
    $
    9.62
    
    
    
    8.76
    
    
    $
    576Exercisable at September 30, 2009
    
    
    428
    
    
    $
    10.77
    
    
    
    6.96
    
    
    $
    33
 ($ in thousands)Grant date fair value of options issued and unvested, September 30, 2009
    
    $
    3,666Grant date fair value of options issued and outstanding, September 30, 2009
    
    $
    6,190
 Restricted Stock
   Stock Awards
  Stock Rights Agreement Amendment
  NOTE 3. CREDIT ARRANGEMENTS
  (9)




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##### Table of Contents



Revolving Credit Facility
         (10)




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##### Table of Contents



- Description of Business  Nature of Operations and Basis of Presentation - Subsequent Events
    Subsequent Events.
 Senior Notes
 1 4
 (11)




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##### Table of Contents



Subsequent
Events Waiver of Certain Provisions in Revolving Credit Agreement Intent and ability to Refinance on a Long Term Basis Classification of Short Term Obligations Expected to be Refinanced (as amended) Recognized Subsequent Events Subsequent Events) Subsequent Events
   Interest Incurred
  (12)




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##### Table of Contents



NOTE 4. OIL AND NATURAL GAS PROPERTIES
  
    
    all wells drilled from November 1, 2008 through December 31, 2009, and all
wells drilled during each succeeding calendar year through 2016 will be treated as a
separate project or payout period, creating eight separate projects or payout periods;
    
    at the time Chesapeake commences the drilling of a well during one of the
payout periods, we will assign to Chesapeake 100% of our leasehold interest within the
subject unit or lease, reserving and retaining a 50% reversionary interest that will
vest after Chesapeake recovers 150% of its costs for a particular payout period. Until
150% payout has been reached, Chesapeake will fund 100% of our costs for drilling,
completing and operating wells during the payout period;
    
    on each project, Chesapeake is entitled to receive all revenues from our
reversionary interest until Chesapeake receives revenues totaling 150% of the drilling,
completion and operating costs Chesapeake incurs in funding our reversionary interest;
    
    upon reaching the 150% payout level for a given project, 50% of the
interest assigned to Chesapeake will revert back to us;
    
    after 150% project payout, we will pay all costs and receive all revenues
attributable to our 50% reversionary interest in each project;
    
    for wells drilled after January 1, 2017, we will pay all costs and receive
all revenues attributable to our 50% reversionary interest; and
    
    we retained all of our interest in wells commenced prior to November 1,
2008, except for 3 wells commenced in late October 2008. We also retained all of our
interest in approximately 90 gross (22.4 net) producing wells and 31 gross (9.49 net)
wells in progress.
     (13)




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##### Table of Contents



September 30,
    
    
    December 31,2009
    
    
    2008($ in thousands)Proved properties
    
    $
    754,038
    
    
    $
    741,520Unproved properties, not subject to depletion
    
    
    139,063
    
    
    
    137,202893,101
    
    
    
    878,722Accumulated depletion (1)
    
    
    (535,663
    )
    
    
    (488,168
    )$
    357,438
    
    
    $
    390,554
 
 (1)
    
    Includes $30.4 million and $300.5 million impairment of oil and natural gas
properties for the periods ending September 30, 2009 and December 31, 2008,
respectively. NOTE 5. OTHER ASSETS
  September 30,
    
    
    December 31,2009
    
    
    2008($ in thousands)Revolving credit facility deferred financing costs, net
    
    $
    1,712
    
    
    $
    1,306Senior notes deferred financing costs, net
    
    
    1,239
    
    
    
    1,432Other
    
    
    197
    
    
    
    828$
    3,148
    
    
    $
    3,566
 NOTE 6. ACCRUED LIABILITIES
  September 30,
    
    
    December 31,2009
    
    
    2008($ in thousands)Revenue payable to joint interest and royalty owners
    
    $
    6,070
    
    
    $
    8,004Accrued capital expenditures
    
    
    950
    
    
    
    9,275Accrued lease operating expense
    
    
    1,440
    
    
    
    2,223Accrued ad valorem taxes
    
    
    3,073
    
    
    
    150Professional services
    
    
    1,750
    
    
    
    277Other
    
    
    2,309
    
    
    
    1,851$
    15,592
    
    
    $
    21,780
 (14)




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##### Table of Contents



NOTE 7. ASSET RETIREMENT OBLIGATIONS
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008($ in thousands)
    
    
    ($ in thousands)Beginning asset retirement obligation
    
    $
    10,004
    
    
    $
    5,606
    
    
    $
    11,379
    
    
    $
    4,937Additions related to new properties
    
    
    12
    
    
    
    211
    
    
    
    133
    
    
    
    917Revisions in estimated cash flows
    
    
    411
    
    
    
    (58
    )
    
    
    (1,304
    )
    
    
    (267
    )Deletions related to property disposals
    
    
    (26
    )
    
    
    (9
    )
    
    
    (232
    )
    
    
    (24
    )Accretion expense
    
    
    184
    
    
    
    88
    
    
    
    609
    
    
    
    275Ending asset retirement obligation
    
    $
    10,585
    
    
    $
    5,838
    
    
    $
    10,585
    
    
    $
    5,838
 Fair Value Measurements)
  NOTE 8. DERIVATIVE INSTRUMENTS
 General
   (15)




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##### Table of Contents



Subsequent Events
 Adoption of FASB ASC 815-10-65
 Disclosures about Derivative Instruments and Hedging Activities  an amendment of FASB Statement
No. 13) Accounting for Derivative Instruments and Hedging Activities (as amended)
  
 As ofSeptember 30, 2009
    
    
    December 31, 2008($ in thousands)Derivative AssetGas collars
    
    $
    2,162
    
    
    $
    6,611Oil collars
    
    
    1,774
    
    
    
    13,480Oil puts
    
    
    9,956
    
    
    
    16,655Derviative ObligationInterest rate swaps
    
    
    (6,883
    )
    
    
    (8,051
    )Gas swaps
    
    
    (300
    )
    
    
    Gas collars
    
    
    (2,970
    )
    
    
    Oil collars
    
    
    (1,284
    )
    
    
    (89
    )Net derivative asset
    
    $
    2,455
    
    
    $
    28,606
 (16)




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##### Table of Contents



(1)
 For the three months ended
    
    
    For the nine months endedSeptember 30, 2009
    
    
    September 30, 2008
    
    
    September 30, 2009
    
    
    September 30, 2008($ in thousands)
    
    
    ($ in thousands)Interest rate swaps
    
    $
    (1,192
    )
    
    $
    (802
    )
    
    $
    (1,215
    )
    
    $
    (1,497
    )Gas collars
    
    
    (1,478
    )
    
    
    15,666
    
    
    
    2,004
    
    
    
    1,954Gas swaps
    
    
    (138
    )
    
    
    
    
    
    
    399
    
    
    
    Oil swaps
    
    
    
    
    
    
    6,847
    
    
    
    
    
    
    
    (8,039
    )Oil collars
    
    
    796
    
    
    
    40,983
    
    
    
    (6,856
    )
    
    
    (22,794
    )Oil puts
    
    
    677
    
    
    
    2,967
    
    
    
    (3,188
    )
    
    
    2,542Total gain (loss) on derivatives
    
    $
    (1,335
    )
    
    $
    65,661
    
    
    $
    (8,856
    )
    
    $
    (27,834
    )
 
 (1)
    
    All changes in the mark-to-market valuation of our derivatives are recorded on the Statement
of Operations under the line item Loss on derivatives not classified as hedges. Adoption of FASB ASC 820-10
 Fair
Value Measurements)
 Level 1:
    
    Unadjusted quoted prices in active markets that are accessible at the
measurement date for identical, unrestricted assets or liabilities. We
consider active markets as those in which transactions for the assets or
liabilities occur in sufficient frequency and volume to provide pricing
information on an ongoing basis.Level 2:
    
    Quoted prices in markets that are not active, or inputs which are
observable, either directly or indirectly, for substantially the full term
of the asset or liability. This category includes those derivative
instruments that are valued using observable market data. Substantially all
of these inputs are observable in the marketplace throughout the full term
of the derivative instrument, can be derived from observable data, or
supported by observable levels at which transactions are executed in the
marketplace. Instruments in this category include non-exchange traded
derivatives such as over-the-counter commodity price swaps and interest rate
swaps.Level 3:
    
    Measured based on prices or valuation models that require inputs
that are both significant to the fair value measurement and less observable
from objective sources (i.e., supported by little or no market activity). Our
valuation models are primarily industry-standard models that consider various
inputs including: (a) quoted forward prices for commodities,
 (17)




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##### Table of Contents



(b) time value,
(c) volatility factors and (d) current market and contractual  prices for the underlying instruments, as well as other relevant economic measures. Level 3
instruments primarily include derivative instruments, such as commodity price
collars and puts. These instruments are considered Level 3 because we do not
have sufficient corroborating market evidence for volatility to support
classifying these assets and liabilities as Level 2.
   Quoted Prices inActive Marketsfor Identical
    
    
    Other Observable
    
    
    Unobservable
    
    
    Fair Value atAssets (Level 1)
    
    
    Inputs (Level 2)
    
    
    Inputs (Level 3)
    
    
    September 30, 2009Interest swaps
    
    $
    
    
    
    $
    (6,883
    )
    
    $
    
    
    
    $
    (6,883
    )Gas swaps
    
    $
    
    
    
    $
    (300
    )
    
    $
    
    
    
    $
    (300
    )Oil puts
    
    $
    
    
    
    $
    
    
    
    $
    9,956
    
    
    $
    9,956Oil & gas collars
    
    $
    
    
    
    $
    
    
    
    $
    (318
    )
    
    $
    (318
    )$
    
    
    
    $
    (7,183
    )
    
    $
    9,638
    
    
    $
    2,455
   Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2009
    
    
    September 30, 2009Derivative
    
    
    Derivative
    
    
    Derivative
    
    
    DerivativeCollars
    
    
    Puts
    
    
    Collars
    
    
    PutsBeginning balance
    
    $
    3,916
    
    
    $
    10,153
    
    
    $
    20,002
    
    
    $
    16,656Total losses
    
    
    (682
    )
    
    
    678
    
    
    
    (4,852
    )
    
    
    (3,189
    )Settlements(1)
    
    
    (3,552
    )
    
    
    (875
    )
    
    
    (15,468
    )
    
    
    (3,511
    )Purchases
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Transfers in and/or out of level 3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at end of period
    
    $
    (318
    )
    
    $
    9,956
    
    
    $
    (318
    )
    
    $
    9,956Change in unrealized losses included in earnings relating
to derivatives still held as of September 30, 2009(2)
    
    $
    (4,234
    )
    
    $
    (197
    )
    
    $
    (20,320
    )
    
    $
    (6,700
    )
 
 (1)
    
    Put premiums were netted from the
settlement receipts of approximately
$163,000 for the three months ended
September 30, 2009 and approximately $483,000 for the nine months ended September 30, 2009.(2)
    
    Losses (realized and unrealized) are
included in earnings and are reported
in Loss on derivatives not classified
as
hedges in the Statement of Operations. (18)




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Interest Rate Sensitivity
   Notional
    
    
    Weighted Average
    
    
    EstimatedPeriod of Time
    
    Amounts
    
    
    Fixed Interest Rates
    
    
    Fair Market Value($ in millions)
    
    
    
    
    
    
    ($ in thousands)October 1, 2009 through December 31, 2009
    
    $
    100
    
    
    
    4.22
    %
    
    $
    (994
    )January 1, 2010 through October 31, 2010
    
    $
    100
    
    
    
    4.71
    %
    
    
    (3,230
    )November 1, 2010 through December 31, 2010
    
    $
    50
    
    
    
    4.26
    %
    
    
    (284
    )January 1, 2011 through December 31, 2011
    
    $
    100
    
    
    
    4.67
    %
    
    
    (2,375
    )Total Fair Market Value
    
    
    
    
    
    
    
    
    
    $
    (6,883
    )
 Commodity Price Sensitivity
  Put Options.
 (19)




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##### Table of Contents



Weighted
    
    
    EstimatedBarrels of
    
    
    Average
    
    
    Fair MarketPeriod of Time
    
    Oil
    
    
    Floor
    
    
    Value($ in thousands)October 1, 2009 through December 31, 2009
    
    
    27,600
    
    
    $
    100.00
    
    
    $
    802January 1, 2010 through December 31, 2010
    
    
    280,100
    
    
    $
    84.36
    
    
    
    5,008January 1, 2011 through December 31, 2011
    
    
    146,000
    
    
    $
    100.00
    
    
    
    4,146Total Fair Market Value
    
    
    
    
    
    
    
    
    
    $
    9,956
 Collars.
    (20)




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##### Table of Contents



Weighted Average
    
    EstimatedBarrels of
    
    NYMEX Oil Prices
    
    Fair MarketPeriod of Time
    
    Oil
    
    Floor
    
    Ceiling
    
    Value($ in thousands)October 1, 2009 through December 31, 2009
    
    
    193,200
    
    
    $
    65.71
    
    
    $
    82.93
    
    
    $
    276January 1, 2010 through October 31, 2010
    
    
    486,400
    
    
    $
    63.44
    
    
    $
    78.26
    
    
    
    (1,219
    )January 1, 2011 through December 31, 2011
    
    
    255,500
    
    
    $
    70.00
    
    
    $
    94.25
    
    
    
    579January 1, 2012 through December 31, 2012
    
    
    366,000
    
    
    $
    70.00
    
    
    $
    101.50
    
    
    
    854Weighted AverageMMBtu of
    
    
    WAHA Gas PricesNatural Gas
    
    
    Floor
    
    
    CeilingOctober 1, 2009 through December 31, 2009
    
    
    1,288,000
    
    
    $
    5.82
    
    
    $
    7.85
    
    
    
    1,869January 1, 2010 through December 31, 2010
    
    
    4,380,000
    
    
    $
    4.74
    
    
    $
    5.86
    
    
    
    (2,422
    )January 1, 2011 through December 31, 2011
    
    
    511,000
    
    
    $
    6.00
    
    
    $
    6.55
    
    
    
    (120
    )January 1, 2012 through December 31, 2012
    
    
    439,200
    
    
    $
    6.00
    
    
    $
    7.00
    
    
    
    (71
    )January 1, 2013 through December 31, 2013
    
    
    401,500
    
    
    $
    6.00
    
    
    $
    7.10
    
    
    
    (64
    )Total Fair Market Value
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (318
    )
 Commodity Swaps.
   EstimatedMMBtu of
    
    
    WAHA
    
    
    Fair MarketPeriod of Time
    
    Natural Gas
    
    
    Swap Price
    
    
    Value($ in thousands)January 1, 2011 through December 31, 2011
    
    
    803,000
    
    
    $
    6.30
    
    
    $
    (151
    )January 1, 2012 through December 31, 2012
    
    
    658,800
    
    
    $
    6.47
    
    
    
    (84
    )January 1, 2013 through December 31, 2013
    
    
    584,000
    
    
    $
    6.52
    
    
    
    (65
    )$
    (300
    )
 NOTE 9. NET LOSS PER COMMON SHARE
  (21)




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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(in thousands, except per share data)Basic EPS Computation:Numerator-Net income (loss)
    
    $
    (1,057
    )
    
    $
    58,677
    
    
    $
    (31,058
    )
    
    $
    26,732Denominator-Weighted average common shares outstanding
    
    
    41,646
    
    
    
    41,566
    
    
    
    41,614
    
    
    
    41,429Basic EPS:Net income (loss) per share
    
    $
    (0.03
    )
    
    $
    1.41
    
    
    $
    (0.75
    )
    
    $
    0.65Diluted EPS Computation:Numerator-Net income (loss)
    
    $
    (1,057
    )
    
    $
    58,677
    
    
    $
    (31,058
    )
    
    $
    26,732Denominator-Weighted average common shares outstanding
    
    
    41,646
    
    
    
    41,566
    
    
    
    41,614
    
    
    
    41,429Employee stock options
    
    
    
    
    
    
    167
    
    
    
    
    
    
    
    300Warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    74Weighted average common shares for
diluted earnings per share assuming
conversion
    
    
    41,646
    
    
    
    41,733
    
    
    
    41,614
    
    
    
    41,803Diluted EPS:Net income (loss ) per share
    
    $
    (0.03
    )
    
    $
    1.41
    
    
    $
    (0.75
    )
    
    $
    0.64
  NOTE 10. FAIR VALUE OF FINANCIAL INSTRUMENTS
    1 4
 Derivative Instruments.
 NOTE 11. RECENTLY ANNOUNCED ACCOUNTING PRONOUNCEMENTS
  (22)




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##### Table of Contents



Business Combinations).
 Effective Date of FASB Statement No. 157
 Disclosures about Derivative Instruments and Hedging Activities, an
amendment of FASB Statement No. 133) Accounting for Derivative Instruments and Hedging
Activities)
 Modernization of Oil and Gas Reporting. a b c
   (23)




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##### Table of Contents



Accounting for Assets Acquired and Liabilities Assumed in a
Business Combination That Arise from Contingencies Business Combinations
 , Subsequent Events)
 The FASB Accounting Standards Codification TM and the Hierarchy of Generally
Accepted Accounting Principles a replacement of FASB Statement
No. 162) FASB
Accounting Standards Codification
  (24)




---



##### Table of Contents



NOTE 12. COMMITMENTS AND CONTINGENCIES
  Royalty Claims
 th
 Internal Revenue Service
  (25)




---



##### Table of Contents



Class Action Complaints
       (26)




---



##### Table of Contents



Other
    NOTE 13. SUBSEQUENT EVENTS
  Amendment to Merger Agreement
 Description of Business  Nature of Operations and Basis of
Presentation
 (27)




---



##### Table of Contents



Tender Offer
  10 1 /4% Senior Notes Due 2014 Change of Control Offer
 1 4
  Credit Arrangements Waiver of Certain Provisions
in Revolving Credit Agreement
   (28)




---



##### Table of Contents



Acceleration of Vesting for Stock Based Compensation
 Options and Restricted Stock
    (29)




---



##### Table of Contents



Non-Officer Employee Severance Plan
  Consent to Extend Hedge Transactions and Counterparty Ratings Criteria
  Waiver of Certain Provisions in Revolving Credit Agreement
 10 1 /4% Senior Notes Due 2014
Change of Control Offer
 Board Representation
  (30)




---



##### Table of Contents



Transaction Fees
  Collars
     Commodity Swaps
   Amended Revolving Credit Agreement
  (31)




---



##### Table of Contents



101/4% Senior Notes Due 2014
Change of Control Offer
 
 ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
  OVERVIEW
 General
 Description of Business  Nature of Operations and Basis of
Presentation Subsequent Events
 Strategy
 2009 Priorities.
 
    
    maximize liquidity and financial flexibility;
    
    generate operating cash flow in excess of our capital investment budget (CAPEX);
 
    
    invest $29.1 million in CAPEX spending; and
    
    focus on operated properties.
 Oil and Natural Gas Properties
 (32)




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##### Table of Contents



Conduct Exploitation Activities on Our Existing Assets.
 Use of Horizontal Drilling and Fracture Stimulation Activities in Gas Resource Plays.
 Use of Advanced Technologies and Production Techniques.
 Acquire Long-Lived Properties with Enhancement Opportunities.
 Conduct Exploratory Activities.
  (33)




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##### Table of Contents




    
    the prices we receive for the oil and natural gas we produce;
    
    sources and availability of funds to conduct operations and complete
acquisitions;
    
    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
ventures or other similar arrangements 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
 
    
    to a lesser extent, world oil prices.
  
    
    production expenses;
    
    overhead requirements;
    
    costs of capital; and
    
    effects of derivative contracts.
  (34)




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##### Table of Contents




    
    cash flow from operations;
    
    sales of our equity and debt securities;
    
    bank borrowings; and
    
    industry joint ventures.
    Oil and
Natural Gas Properties
  (35)




---



##### Table of Contents



Results of Operations
  
    
    reserve base;
    
    sources of production;
    
    product mix (gas versus oil volumes); and
    
    the prices we receive for our oil and natural gas production.
   Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(in thousands, except per unit data)Production Volumes:Oil (Bbls)
    
    
    237
    
    
    
    274
    
    
    
    737
    
    
    
    758Natural gas (Mcf)
    
    
    2,036
    
    
    
    2,886
    
    
    
    6,761
    
    
    
    8,338BOE(1)
    
    
    576
    
    
    
    755
    
    
    
    1,864
    
    
    
    2,148BOE per day
    
    
    6.3
    
    
    
    8.2
    
    
    
    6.8
    
    
    
    7.8Sales
Prices:Oil (per Bbl)
    
    $
    64.49
    
    
    $
    115.19
    
    
    $
    51.81
    
    
    $
    109.52Natural gas (per Mcf)
    
    $
    2.90
    
    
    $
    8.54
    
    
    $
    3.12
    
    
    $
    8.78BOE price
    
    $
    36.76
    
    
    $
    74.45
    
    
    $
    31.80
    
    
    $
    72.73Operating Revenues:Oil
    
    $
    15,299
    
    
    $
    31,552
    
    
    $
    38,204
    
    
    $
    83,043Natural gas
    
    
    5,893
    
    
    
    24,649
    
    
    
    21,078
    
    
    
    73,174$
    21,192
    
    
    $
    56,201
    
    
    $
    59,282
    
    
    $
    156,217Operating Expenses:Lease operating expense
    
    $
    5,040
    
    
    $
    7,539
    
    
    $
    18,667
    
    
    $
    21,772Production taxes
    
    
    495
    
    
    
    2,836
    
    
    
    1,829
    
    
    
    8,121General and administrative
    
    
    4,452
    
    
    
    3,125
    
    
    
    11,166
    
    
    
    8,958Depreciation, depletion and amortization
    
    
    5,155
    
    
    
    11,551
    
    
    
    17,334
    
    
    
    31,386Impairment of oil and natural gas properties
    
    
    
    
    
    
    
    
    
    $
    30,426
    
    
    
    $
    15,142
    
    
    $
    25,051
    
    
    
    79,422
    
    
    $
    70,237Operating income (loss)
    
    $
    6,050
    
    
    $
    31,150
    
    
    $
    (20,140
    )
    
    $
    85,980
 
 (1)
    
    A BOE means one barrel of oil equivalent using the ratio of six Mcf of gas to one barrel
of oil. (36)




---



##### Table of Contents



RESULTS OF OPERATIONS
 For the Three Months Ended September 30, 2009 and 2008:
  Oil and Gas Revenues
 Revenues
    
    
    ProductionFor the Three Months Ended September 30,
    
    
    For the Three Months Ended September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Oil (Bbls)
    
    
    72
    %
    
    
    56
    %
    
    
    41
    %
    
    
    36
    %Natural gas (Mcf)
    
    
    28
    %
    
    
    44
    %
    
    
    59
    %
    
    
    64
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
  Three Months Ended September 30,
    
    
    
    
    
    
    Percentage2009
    
    
    2008
    
    
    Change
    
    
    Change(in thousands except per unit data)Production Volumes:Oil (Bbls)
    
    
    237
    
    
    
    274
    
    
    
    (37
    )
    
    
    (14
    )%Natural gas (Mcf)
    
    
    2,036
    
    
    
    2,886
    
    
    
    (850
    )
    
    
    (29
    )%BOE (1)
    
    
    576
    
    
    
    755
    
    
    
    (179
    )
    
    
    (24
    )%BOE/Day
    
    
    6.3
    
    
    
    8.2
    
    
    
    (1.9
    )
    
    
    (23
    )%Sales
Price:Oil (per Bbl)
    
    $
    64.49
    
    
    $
    115.19
    
    
    $
    (50.70
    )
    
    
    (44
    )%Natural gas (per Mcf)
    
    $
    2.90
    
    
    $
    8.54
    
    
    $
    (5.64
    )
    
    
    (66
    )%BOE price
    
    $
    36.76
    
    
    $
    74.45
    
    
    $
    (37.69
    )
    
    
    (51
    )%Operating Revenues:Oil
    
    $
    15,299
    
    
    $
    31,552
    
    
    $
    (16,253
    )
    
    
    (52
    )%Natural gas
    
    
    5,893
    
    
    
    24,649
    
    
    
    (18,756
    )
    
    
    (76
    )%Total
    
    $
    21,192
    
    
    $
    56,201
    
    
    $
    (35,009
    )
    
    
    (62
    )%
 
 (1)
    
    A BOE means one barrel of oil equivalent using the ratio of six Mcf of gas to one
barrel of oil. Oil revenues
  Natural gas revenues
  (37)




---



##### Table of Contents



Cost and Expenses
 Three months ended September 30,
    
    
    
    
    
    
    Percentage2009
    
    
    2008
    
    
    Change
    
    
    Change($ in thousands)Lease operating expense
    
    $
    5,040
    
    
    $
    7,539
    
    
    $
    ( 2,499
    )
    
    
    (33
    )%Production taxes
    
    
    495
    
    
    
    2,836
    
    
    
    (2,341
    )
    
    
    (83
    )%General and administrative
    
    
    4,452
    
    
    
    3,125
    
    
    
    1,327
    
    
    
    42
    %Depreciation, depletion and amortization
    
    
    5,155
    
    
    
    11,551
    
    
    
    (6,396
    )
    
    
    (55
    )%Total
    
    $
    15,142
    
    
    $
    25,051
    
    
    $
    ( 9,909
    )
    
    
    (40
    )%
 Lease operating expense
  Production taxes
  General and administrative
  Depreciation, depletion and amortization
  (38)




---



##### Table of Contents



Other income (expense)
 Three months ended September 30,
    
    
    
    
    
    
    Percentage2009
    
    
    2008
    
    
    Change
    
    
    Change($ in thousands)Gain (loss) on derivatives not classified as hedges
    
    $
    (1,335
    )
    
    $
    65,661
    
    
    $
    (66,996
    )
    
    
    (102
    )%Interest and other income
    
    
    42
    
    
    
    20
    
    
    
    22
    
    
    
    110
    %Interest expense, net of capitalized interest
    
    
    (6,384
    )
    
    
    (6,139
    )
    
    
    (245
    )
    
    
    (4
    )%Cost of debt retirement
    
    
    
    
    
    
    (102
    )
    
    
    102
    
    
    
    100
    %Other expense
    
    
    
    
    
    
    (11
    )
    
    
    11
    
    
    
    100
    %Equity in loss of pipeline venture and
gathering system ventures
    
    
    
    
    
    
    (2
    )
    
    
    2
    
    
    
    100
    %Total
    
    $
    (7,677
    )
    
    $
    59,427
    
    
    $
    (67,104
    )
    
    
    (113
    )%
 Gain (loss) on derivatives not classified as hedges
 Derivative Instruments
 Interest expense
  Income taxes, deferred
  Basic and diluted net income (loss)
  (39)




---



##### Table of Contents



RESULTS OF OPERATIONS
 For the Nine Months Ended September 30, 2009 and 2008:
  Oil and Gas Revenues
 Revenues
    
    
    ProductionFor the Nine Months Ended
    
    
    For the Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Oil (Bbls)
    
    
    64
    %
    
    
    53
    %
    
    
    40
    %
    
    
    35
    %Natural gas (Mcf)
    
    
    36
    %
    
    
    47
    %
    
    
    60
    %
    
    
    65
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
  Nine Months Ended September 30,
    
    
    
    
    
    
    Percentage2009
    
    
    2008
    
    
    Change
    
    
    Change(in thousands except per unit data)Production Volumes:Oil (Bbls)
    
    
    737
    
    
    
    758
    
    
    
    (21
    )
    
    
    (3
    )%Natural gas (Mcf)
    
    
    6,761
    
    
    
    8,338
    
    
    
    (1,577
    )
    
    
    (19
    )%BOE (1)
    
    
    1,864
    
    
    
    2,148
    
    
    
    (284
    )
    
    
    (13
    )%BOE/Day
    
    
    6.8
    
    
    
    7.8
    
    
    
    (1.0
    )
    
    
    (13
    )%Sales
Price:Oil (per Bbl)
    
    $
    51.81
    
    
    $
    109.52
    
    
    $
    (57.71
    )
    
    
    (53
    )%Natural gas (per Mcf)
    
    $
    3.12
    
    
    $
    8.78
    
    
    $
    (5.66
    )
    
    
    (64
    )%BOE price
    
    $
    31.80
    
    
    $
    72.73
    
    
    $
    (40.93
    )
    
    
    (56
    )%Operating Revenues:Oil
    
    $
    38,204
    
    
    $
    83,043
    
    
    $
    (44,839
    )
    
    
    (54
    )%Natural gas
    
    
    21,078
    
    
    
    73,174
    
    
    
    (52,096
    )
    
    
    (71
    )%Total
    
    $
    59,282
    
    
    $
    156,217
    
    
    $
    (96,935
    )
    
    
    (62
    )%
 
 (1)
    
    A BOE means one barrel of oil equivalent using the ratio of six Mcf of gas to one barrel of
oil. Oil revenues
  (40)




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##### Table of Contents



Natural gas revenues
  Cost and Expenses
 Nine months ended September 30,
    
    
    
    
    
    

    Percentage2009
    
    
    2008
    
    
    Change
    
    
    Change($ in thousands)Lease operating expense
    
    $
    18,667
    
    
    $
    21,772
    
    
    $
    (3,105
    )
    
    
    (14
    )%Production taxes
    
    
    1,829
    
    
    
    8,121
    
    
    
    (6,292
    )
    
    
    (77
    )%General and administrative
    
    
    11,166
    
    
    
    8,958
    
    
    
    2,208
    
    
    
    25
    %Depreciation, depletion and amortization
    
    
    17,334
    
    
    
    31,386
    
    
    
    (14,052
    )
    
    
    (45
    )%Impairment of oil and natural gas properties
    
    
    30,426
    
    
    
    
    
    
    
    30,426
    
    
    
    N/ATotal
    
    $
    79,422
    
    
    $
    70,237
    
    
    $
    9,185
    
    
    
    13
    %
 Lease operating expense
  Production taxes
  General and administrative
  Depreciation, depletion and amortization
  (41)




---



##### Table of Contents



Impairment of oil and natural gas properties
  Other income (expense)
 Nine months ended September 30,
    
    
    
    
    
    


    Percentage2009
    
    
    2008
    
    
    Change
    
    
    Change($ in thousands)Loss on derivatives not classified as hedges
    
    $
    (8,856
    )
    
    $
    (27,834
    )
    
    $
    18,978
    
    
    
    68
    %Interest and other income
    
    
    141
    
    
    
    85
    
    
    
    56
    
    
    
    66
    %Interest expense, net of capitalized interest
    
    
    (19,074
    )
    
    
    (17,025
    )
    
    
    (2,049
    )
    
    
    (12
    )%Cost of debt retirement
    
    
    
    
    
    
    (102
    )
    
    
    102
    
    
    
    100
    %Other expense
    
    
    (5
    )
    
    
    (12
    )
    
    
    7
    
    
    
    58
    %Equity in gain of pipeline venture and gathering system ventures
    
    
    1
    
    
    
    380
    
    
    
    (379
    )
    
    
    (100
    )%Total
    
    $
    (27,793
    )
    
    $
    (44,508
    )
    
    $
    16,715
    
    
    
    38
    %
 Loss on derivatives not classified as hedges
 Derivative Instruments
 Interest expense
  (42)




---



##### Table of Contents



Equity in gain of pipelines and gathering system ventures
  Income taxes, deferred
  Basic and diluted net income (loss)
  LIQUIDITY AND CAPITAL RESOURCES
 Subsequent
Events
   (43)




---



##### Table of Contents



Oil and Natural Gas Properties
  (44)




---



##### Table of Contents



Bank Borrowings  Revolving Credit Facility
   Credit Arrangements
      (45)




---



##### Table of Contents



10 1 /4% Senior Notes Due 2014 Change of Control Offer Subsequent Events
 Description of Business Nature of Operations and Basis of Presentation, Credit Arrangements Subsequent Events
   Senior Notes and Change of Control Offer
 1 4
 (46)




---



##### Table of Contents



Description Business  Nature of Operations and Basis of Presentation, Credit Arrangements and Subsequent Events
   Debt Ratings
  (47)




---



##### Table of Contents



Interest Incurred
  Commodity Price Risk Management Transactions and Effects of Derivative Instruments
 Subsequent Events
   Disclosures about Derivative Instruments and Hedging Activities  an amendment of FASB Statement
No. 133 Accounting for Derivative Instruments and Hedging Activities (as amended)
 Fair
Value Measurements)
  (48)




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##### Table of Contents



Derivative Instruments
  Contractual Obligations, Commitments and Off-Balance Sheet Arrangements
   Trends and Outlook
   (49)




---



##### Table of Contents



Oil and
Natural Gas Properties
  ,
 
    
    internally generated cash from operations;
    
    proceeds from bank borrowings;
    
    proceeds from sales of equity and debt securities; and
    
    proceeds from sales of non-core assets.
  
    
    our proved reserves;
    
    the volumes of oil and natural gas we produce from existing wells;
    
    the prices at which we sell oil and natural gas;
    
    our ability to acquire, locate and produce new reserves;
    
    events occurring within the global capital markets; and
 (50)




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##### Table of Contents




    
    results from re-determinations of the borrowing base.
  
    
    increased bank borrowings;
    
    additional sales of our debt or equity securities;
    
    sales of non-core properties;
    
    other forms of financing; or
    
    a combination of the above.
  Oil and Natural Gas Price Trends
    Production Trends
  Oil and Natural Gas Properties
  (51)




---



##### Table of Contents



Lease Operating Expense Trends
  Interest Expense Trends
  Income Taxes
 Accounting
for Income Taxes),
 Recent Accounting Pronouncements
 Business Combinations
 Effective Date of FASB Statement No. 157
 (52)




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##### Table of Contents



Disclosures about Derivative Instruments and Hedging Activities, an
amendment of FASB Statement No. 133). Accounting for Derivative Instruments and Hedging
Activities)
 Modernization of Oil and Gas Reporting. a b c
   Accounting for Assets Acquired and Liabilities Assumed in a
Business Combination That Arise from Contingencies Business Combinations
 (53)




---



##### Table of Contents



, Subsequent Events)
 The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted
Accounting Principlesa replacement of FASB Statement No. 162 FASB
Accounting Standards Codification
  Critical Accounting Policies
  FORWARD-LOOKING STATEMENTS
 Cautionary Statement Regarding Forward-Looking Statements
  
    
    our future financial and operating performance and results;
 (54)




---



##### Table of Contents




    
    our drilling plans and ability to secure drilling rigs to effectuate our plans;
    
    production volumes;
    
    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;
    
    our plans and forecasts; and
    
    any other statements that are not historical facts.
   
    
    difficult and adverse conditions in the global and domestic capital and credit
markets;
    
    continued volatility and further deterioration of the capital and credit markets;
    
    uncertainty about the effectiveness of the U.S. governments plan to purchase large
amounts of illiquid, mortgage-backed and other securities from financial institutions;
    
    the impairment of financial institutions;
    
    exposure to financial and capital market risk;
    
    changes in general economic conditions, including the performance of financial
markets and interest rates, which may affect our ability to raise capital and generate
operating cash flow;
    
    unanticipated changes in industry trends;
    
    fluctuations in prices of oil and natural gas;
    
    dependence on key personnel;
    
    reliance on technological development and technology development programs;
    
    demand for oil and natural gas;
 (55)




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##### Table of Contents




    
    losses due to 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 and liability for environmental matters;
    
    receipt of amounts owed to us by purchasers of our production and counterparties to
our derivative contracts;
    
    hedging decisions, including whether or not to hedge;
    
    terrorist attacks or war;
    
    actions of third party co-owners of interests in properties in which we also own an
interest; and
    
    fluctuations in interest rates and availability of capital.
    
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Interest Rate Sensitivity as of September 30, 2009
 Credit Arrangements
 (56)




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##### Table of Contents



2013 and2009
    
    2010
    
    2011
    
    2012
    
    after
    
    Total($ in thousands, except interest rates)Revolving Credit Facility (secured)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    225,000
    
    
    $
    225,000Interest rate
    
    
    4.75
    %
    
    
    4.75
    %
    
    
    4.75
    %
    
    
    4.75
    %
    
    
    4.75
    %Senior notes
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    150,000
    
    
    $
    150,000Interest rate
    
    
    10.25
    %
    
    
    10.25
    %
    
    
    10.25
    %
    
    
    10.25
    %
    
    
    10.25
    %
   Description of Business  Nature of Operations and Basis of Presentation, Credit Arrangements Subsequent Events
   Notional
    
    
    Weighted Average
    
    
    EstimatedPeriod of Time
    
    Amounts
    
    
    Fixed Interest Rates
    
    
    Fair Market Value($ in millions)
    
    
    
    
    
    
    ($ in thousands)October 1, 2009 through December 31, 2009
    
    $
    100
    
    
    
    4.22
    %
    
    $
    (994
    )January 1, 2010 through October 31, 2010
    
    $
    100
    
    
    
    4.71
    %
    
    
    (3,230
    )November 1, 2010 through December 31, 2010
    
    $
    50
    
    
    
    4.26
    %
    
    
    (284
    )January 1, 2011 through December 31, 2011
    
    $
    100
    
    
    
    4.67
    %
    
    
    (2,375
    )Total Fair Market Value
    
    
    
    
    
    
    
    
    
    $
    (6,883
    )
 (57)




---



##### Table of Contents



Commodity Price Sensitivity
 Consent to Extend Hedge Transactions
and Counterparty Ratings Criteria in Subsequent Events
  Derivative Instruments
   (58)




---



##### Table of Contents



Subsequent Events
 Put Options.
    Weighted
    
    
    EstimatedBarrels of
    
    
    Average
    
    
    Fair MarketPeriod of Time
    
    Oil
    
    
    Floor
    
    
    Value($ in thousands)October 1, 2009 through December 31, 2009
    
    
    27,600
    
    
    $
    100.00
    
    
    $
    802January 1, 2010 through December 31, 2010
    
    
    280,100
    
    
    $
    84.36
    
    
    
    5,008January 1, 2011 through December 31, 2011
    
    
    146,000
    
    
    $
    100.00
    
    
    
    4,146Total Fair Market Value
    
    
    
    
    
    
    
    
    
    $
    9,956
 Collars.
   (59)




---



##### Table of Contents



Weighted Average
    
    EstimatedBarrels of
    
    NYMEX Oil Prices
    
    Fair MarketPeriod of Time
    
    Oil
    
    Floor
    
    Ceiling
    
    Value($ in thousands)October 1, 2009 through December 31, 2009
    
    
    193,200
    
    
    $
    65.71
    
    
    $
    82.93
    
    
    $
    276January 1, 2010 through October 31, 2010
    
    
    486,400
    
    
    $
    63.44
    
    
    $
    78.26
    
    
    
    (1,219
    )January 1, 2011 through December 31, 2011
    
    
    255,500
    
    
    $
    70.00
    
    
    $
    94.25
    
    
    
    579January 1, 2012 through December 31, 2012
    
    
    366,000
    
    
    $
    70.00
    
    
    $
    101.50
    
    
    
    854Weighted AverageMMBtu of
    
    
    WAHA Gas PricesNatural Gas
    
    
    Floor
    
    
    CeilingOctober 1, 2009 through December 31, 2009
    
    
    1,288,000
    
    
    $
    5.82
    
    
    $
    7.85
    
    
    
    1,869January 1, 2010 through December 31, 2010
    
    
    4,380,000
    
    
    $
    4.74
    
    
    $
    5.86
    
    
    
    (2,422
    )January 1, 2011 through December 31, 2011
    
    
    511,000
    
    
    $
    6.00
    
    
    $
    6.55
    
    
    
    (120
    )January 1, 2012 through December 31, 2012
    
    
    439,200
    
    
    $
    6.00
    
    
    $
    7.00
    
    
    
    (71
    )January 1, 2013 through December 31, 2013
    
    
    401,500
    
    
    $
    6.00
    
    
    $
    7.10
    
    
    
    (64
    )Total Fair Market Value
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (318
    )
 Commodity Swaps.
  EstimatedMMBtu of
    
    
    WAHA
    
    
    Fair MarketPeriod of Time
    
    Natural Gas
    
    
    Swap Price
    
    
    Value($ in thousands)January 1, 2011 through December 31, 2011
    
    
    803,000
    
    
    $
    6.30
    
    
    $
    (151
    )January 1, 2012 through December 31, 2012
    
    
    658,800
    
    
    $
    6.47
    
    
    
    (84
    )January 1, 2013 through December 31, 2013
    
    
    584,000
    
    
    $
    6.52
    
    
    
    (65
    )$
    (300
    )
 (60)




---



##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
   
 PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  Royalty Claims
 th
 Internal Revenue Service
  (61)




---



##### Table of Contents



Class Action Complaints
     (62)




---



##### Table of Contents



Other
   (63)




---



##### Table of Contents



ITEM 1A. RISK FACTORS
  The adoption of climate change legislation by Congress could result in increased operating
costs and reduced demand for the oil and natural gas we produce.
   The adoption of derivatives legislation by Congress could have an adverse impact on our
ability to hedge risks associated with our business.
  (64)




---



##### Table of Contents



Federal and state legislation and regulatory initiatives relating to hydraulic fracturing
could result in increased costs and additional operating restrictions or delays.
  Certain federal income tax deductions currently available with respect to oil and gas drilling
and development may be eliminated as a result of future legislation.
   We must replace oil and natural gas reserves that we produce. Failure to replace reserves may
negatively affect our business.
  (65)




---



##### Table of Contents



Reserves at Year-EndYear
    
    Oil (Bbls)
    
    Gas (Mcf)
    
    BOE(in thousands)2000
    
    
    974
    
    
    
    15,686
    
    
    
    3,5882001
    
    
    916
    
    
    
    13,947
    
    
    
    3,2412002
    
    
    10,271
    
    
    
    15,633
    
    
    
    12,8772003
    
    
    12,084
    
    
    
    16,271
    
    
    
    14,7962004
    
    
    18,916
    
    
    
    16,825
    
    
    
    21,7202005
    
    
    21,192
    
    
    
    25,237
    
    
    
    25,3982006
    
    
    28,721
    
    
    
    58,896
    
    
    
    38,5372007
    
    
    28,434
    
    
    
    57,234
    
    
    
    37,9732008
    
    
    21,206
    
    
    
    71,833
    
    
    
    33,178
  
    
    additions from exploratory drilling;
    
    revisions of existing reserves due to factors such as changes in commodity
price, estimated future drilling costs in the case of proved undeveloped
reserves, changes in estimated future production costs, and revisions based on
changes in expectation of well performance;
    
    purchases of minerals in place; and
    
    sales of minerals in place.
  General economic conditions could adversely impact our results of operations.
  (66)




---



##### Table of Contents



Adverse capital and credit market conditions may significantly affect our ability to meet
liquidity needs, access to capital and cost of capital.
    (67)




---



##### Table of Contents



Difficult conditions in the global capital markets and the economy generally may materially
adversely affect our business and results of operations and we do not expect these conditions to
improve in the near future.
    There can be no assurance that actions of the U.S. Government, Federal Reserve and other
governmental and regulatory bodies for the purpose of stabilizing the financial markets will
achieve the intended effect.
  (68)




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##### Table of Contents



The impairment of financial institutions could adversely affect us.
  If the counterparties to the derivative instruments we use to hedge our business risks default
or fail to perform, we may be exposed to risks we had sought to mitigate, which could materially
adversely affect our financial condition and results of operations.
  The fluctuation and volatility of oil and natural gas prices may adversely affect our
business, the value of our mineral properties, our revenues and profitability.
  (69)




---



##### Table of Contents



Our oil and gas operations are subject to various Federal, state and local regulations that
materially affect our operations.
  
 ITEM 6. EXHIBITS
   No.
    
    Description of Exhibit2.1
    
    
    Agreement and Plan of Merger, dated as of September 15, 2009, among Parent, Merger
Subsidiary and the Registrant (Incorporated by reference to Exhibit 2.1 to the Current
Report on Form 8-K filed by the Registrant with the Securities and Exchange Commission on
September 15, 2009)2.2
    
    
    Amendment No. 1 to Agreement and Plan of Merger, dated as of October 13, 2009, by and
among Parent, Merger Subsidiary and the Registrant (Incorporated by reference to Exhibit
(a)(13) to Amendment No. 2 to the Solicitation/Recommendation Statement on Schedule 14D-9
filed by the Registrant on October 13, 2009)3.1
    
    
    Certificate of Incorporation of Registrant (Incorporated by reference to Exhibit 3.1 to
Form 10-Q of the Registrant for the fiscal quarter ended June 30, 2004)3.2
    
    
    Bylaws of Registrant (Incorporated by reference to Exhibit 10.1 of the Registrants
Current Report on Form 8-K filed on November 30, 2007)3.3
    
    
    Certificate of Formation of Parallel, L.L.C. (Incorporated by reference to Exhibit No.
3.3 of the Registrants Registration Statement on Form S-3, No. 333-119725 filed on October
13, 2004)
 (70)




---



##### Table of Contents



No.
    
    Description of Exhibit3.4
    
    
    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 Designations, 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
    
    
    First Amendment to Rights Agreement, dated as of September 14, 2009, between Parallel
Petroleum Corporation and Computershare Trust Company, N.A., as rights agent (Incorporated
by reference to Exhibit 4.1 of the Current Report on Form 8-K filed by Parallel Petroleum
Corporation with the Securities and Exchange Commission on September 15, 2009)4.5
    
    
    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)4.6
    
    
    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)4.7
    
    
    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)4.8
    
    
    Purchase Warrant Agreement, dated as of October 1, 1980, between the Registrant and
American Stock Transfer, Inc. (Incorporated by reference to Exhibit 4.7 of Form 10-K of the
Registrant for the fiscal year ended December 31, 2006)4.9
    
    
    First Amendment to Warrant Agreement, dated as of February 22, 2007, among the
Registrant, Computershare Shareholder Services, Inc. and Computershare Trust Company, N.A.
(Incorporated by reference to Exhibit 4.8 of Form 10-K of the Registrant for the fiscal
year ended December 31, 2006)4.10
    
    
    Form of Rule 144A 101/4% Senior Note due 2014 (Incorporated by reference to Exhibit 4.2 to
the Registrants Current Report on Form 8-K filed on August 1, 2007)
 (71)




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##### Table of Contents



No.
    
    Description of Exhibit4.11
    
    
    Form of IAI 101/4% Senior Note due 2014 (Incorporated by reference to Exhibit 4.3 to the
Registrants Current Report on Form 8-K filed on August 1, 2007)4.12
    
    
    Form of Regulation S 101/4% Senior Note due 2014 (Incorporated by reference to Exhibit 4.4
to the Registrants Current Report on Form 8-K filed on August 1, 2007)4.13
    
    
    Indenture, dated as of July 31, 2007, among the Registrant as Issuer and Wells Fargo
Bank, National Association as Trustee (Incorporated by reference to Exhibit 4.1 to the
Registrants Current Report on Form 8-K filed on August 1, 2007)4.14
    
    
    Registration Rights Agreement, dated as of July 31, 2007, by and among the Registrant,
Jefferies & Company, Inc., Merrill Lynch, Pierce, Fenner and Smith Incorporated and BNP
Paribas Securities Corp. (Incorporated by reference to Exhibit 10.2 to the Registrants
Current Report on Form 8-K filed on August 1, 2007)4.15
    
    
    Purchase Agreement, dated as of July 26, 2007, by and among the Registrant, Jefferies &
Company, Inc., Merrill Lynch, Pierce, Fenner and Smith Incorporated and BNP Paribas
Securities Corp. (Incorporated by reference to Exhibit 4.2 to the Registrants Current
Report on Form 8-K filed on August 1, 2007)4.16
    
    
    Form of 101/4% Unrestricted Senior Note due 2014 (Incorporated by reference to Exhibit 4.13
of Form S-4 of the Registrant, Registration No. 333-148465)Executive Compensation Plans and Arrangements (Exhibit No.s 10.1 through 10.13):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
    
    
    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)10.3
    
    
    1998 Stock Option Plan (Incorporated by reference to Exhibit 10.2 of Form 8-K of the
Registrant dated December 23, 2008)10.4
    
    
    2001 Non-Employee Directors Stock Option Plan (Incorporated by reference to Exhibit 10.3
of the Registrants Form 8-K dated December 23, 2008)10.5
    
    
    2004 Non-Employee Director Stock Grant Plan (Incorporated by reference to Exhibit (e)(9)
to Schedule 14D-9 filed by Parallel Petroleum Corporation with the Securities and Exchange
Commission on September 24, 2009)10.6
    
    
    Incentive and Retention Plan (Incorporated by reference to Exhibit 10.7 of Form 10-K of
the Registrant for the fiscal year ended December 31, 2006)10.7
    
    
    2008 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.1 of the
Registrants Form 8-K Report dated March 27, 2008)10.8
    
    
    Form of Nonqualified Stock Option Agreement for nonqualified stock options granted under
the Registrants 2008 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.2 of
the Registrants Current Report on Form 8-K filed on June 18, 2008)10.9
    
    
    Form of Outside Director Stock Award Agreement for stock awards granted under the
Registrants 2008 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.3 of the
Registrants Current Report on Form 8-K filed on June 18, 2008)
 (72)




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No.
    
    Description of Exhibit10.10
    
    
    Form of Outside Director Restricted Stock Agreement for restricted stock grants under the
Registrants 2008 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.4 of the
Registrants Current Report on Form 8-K filed on June 18, 2008)10.11
    
    
    Non-Officer Employee Severance Plan (Incorporated by reference to Exhibit (e)(11) to
Schedule 14D-9 filed by Parallel Petroleum Corporation with the Securities and Exchange
Commission on September 24, 2009)10.12
    
    
    Form of Option Waiver, Cancellation and Release Agreement (Incorporated by reference to
Exhibit (e)(13) to Schedule 14D-9 filed by Parallel Petroleum Corporation with the Securities
and Exchange Commission on September 24, 2009)10.13
    
    
    Form of Option Waiver, Cash-Out and Release Agreement (Incorporated by reference to
Exhibit (e)(14) to Schedule 14D-9 filed by Parallel Petroleum Corporation with the Securities
and Exchange Commission on September 24, 2009)10.14
    
    
    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)10.15
    
    
    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)10.16
    
    
    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)10.17
    
    
    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)10.18
    
    
    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)10.19
    
    
    Guaranty, dated as of December 23, 2005, made by Parallel, L.L.C. to and in favor of
Citibank Texas, N.A. (Incorporated by reference to Exhibit 10.23 of Form 10-K of the
Registrant for the fiscal year ended December 31, 2006)10.20
    
    
    Third Amended and Restated Pledge Agreement, dated as of December 23, 2005, between
Parallel, L.L.C. and Citibank Texas, N.A. (Incorporated by reference to Exhibit 10.24 of Form
10-K of the Registrant for the fiscal year ended December 31, 2006)
 (73)




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##### Table of Contents



No.
    
    Description of Exhibit10.21
    
    
    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 Paribas (Incorporated
by reference to Exhibit 10.25 of Form 10-K of the Registrant for the fiscal year ended
December 31, 2006)10.22
    
    
    Third Amendment to Third Amended and Restated Credit Agreement, dated as of July 31, 2007,
among the Registrant, Citibank, N.A., BNP Paribas, Western National Bank, Compass Bank,
Comerica Bank, Bank of Scotland, and Fortis Capital Corp. (Incorporated by reference to
Exhibit 10.3 of the Registrants Current Report on Form 8-K filed on August 1, 2007)10.23
    
    
    Fourth Amendment to Third Amended and Restated Credit Agreement, dated as of November 30,
2007, among the Registrant, Citibank, N.A., BNP Paribas, Western National Bank, Compass Bank,
Comerica Bank, Bank of Scotland, and Fortis Capital Corp. (Incorporated by reference to
Exhibit 10.27 of Form S-4 of the Registrant, Registration No. 333-148465)10.24
    
    
    Hagerman Gas Gathering System Joint Venture Agreement, dated as of January 16, 2007, among
the Registrant, Feagan Gathering Company and Capstone Oil and Gas Company, L.P. (Incorporated
by reference to Exhibit 10.28 of Form 10-K of the Registrant for the fiscal year ended
December 31, 2007)10.25
    
    
    Fourth Amended and Restated Credit Agreement, dated as of May 16, 2008, among the
Registrant, Citibank, N.A., BNP Paribas, Western National Bank, Compass Bank, Comerica Bank,
Bank of Scotland plc, and Texas Capital Bank, N.A. (Incorporated by reference to Exhibit 10.1
of the Registrants Current Report on Form 8-K filed on May 22, 2008)10.26
    
    
    First Amendment to Fourth Amended and Restated Credit Agreement, dated as of October 31,
2008, by and among Parallel Petroleum Corporation, Citibank, N.A., BNP Paribas, Western
National Bank, Compass Bank, Bank of Scotland plc, Texas Capital Bank, N.A., Bank of America,
N.A. and West Texas National Bank (Incorporated by reference to Exhibit 10.34 of the
Registrants Form 10-Q Report for the third fiscal quarter ended September 30, 2008)10.27
    
    
    Second Amendment to Fourth Amended and Restated Credit Agreement, executed as of February
19, 2009, by and among Parallel Petroleum Corporation, Citibank, N.A., BNP Paribas, Western
National Bank, Compass Bank, Bank of Scotland plc, Texas Capital Bank, N.A., Bank of America,
N.A. and West Texas National Bank (Incorporated by reference to Exhibit 10.24 of Form 10-K of
the Registrant for the fiscal year ended December 31, 2008)10.28
    
    
    Third Amendment to Fourth Amended and Restated Credit Agreement, executed as of April 30,
2009, by and among Parallel Petroleum Corporation, Citibank, N.A., BNP Paribas, Western
National Bank, Compass Bank, Bank of Scotland plc, Texas Capital Bank, N.A., Bank of America,
N.A. and West Texas National Bank (Incorporated by reference to Exhibit 10.1 of the
Registrants Current Report on Form 8-K filed on May 4, 2009)*10.29
    
    
    Fourth Amendment to Fourth
Amended and Restated Credit Agreement, dated November 9, 2009, among the Registrant, Citibank, N.A.,
 BNP Paribas, Western National Bank, Compass Bank, Bank of Scotland
plc, Texas Capital Bank, N.A., Bank of America, N.A. and West Texas National Bank.
 (74)




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##### Table of Contents



No.
    
    Description of Exhibit14
    
    
    Code of Ethics (Incorporated by reference to Exhibit No. 14 of the Registrants Form
10-K Report for the fiscal year ended December 31, 2003 and filed with the Securities and
Exchange Commission on March 22, 2004)*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 2002.99.1
    
    
    Memorandum of Understanding, dated as of October 13, 2009 (Incorporated by reference to
exhibit (a)(16) to Amendment No. 2 to the Solicitation/Recommendation Statement on Schedule
14D-9 filed by the Registrant on October 13, 2009)*99.2
    
    
    Amended and Restated Waiver Escrow Agreement, dated as of November 9, 2009, by and among PLLL
Holdings, LLC, Parallel Petroleum Corporation and Citibank, N.A., as
escrow agent and as administrative agent for
each of the lenders that is a signatory to the certain Fourth Amended and Restated Credit
Agreement.
 
 *
    
    Filed herewith.**
    
    Furnished herewith. (75)




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##### Table of Contents



PARALLEL PETROLEUM CORPORATIONBy:
    /s/ Larry C. OldhamDate: November 9, 2009
    Larry C. OldhamPresident and Chief Executive OfficerDate: November 9, 2009
    By:
    /s/ Steven D. FosterSteven D. Foster,Chief Financial Officer




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##### Table of Contents



No.
    
    Description of Exhibit2.1
    
    
    Agreement and Plan of Merger, dated as of September 15, 2009, among Parent, Merger
Subsidiary and Parallel Petroleum Corporation (Incorporated by reference to Exhibit 2.1 to
the Current Report on Form 8-K filed by Parallel Petroleum Corporation with the Securities
and Exchange Commission on September 15, 2009)2.2
    
    
    Amendment No. 1 to Agreement and Plan of Merger, dated as of October 13, 2009, by and
among Parent, Merger Subsidiary and the Registrant (Incorporated by reference to Exhibit
(a)(13) to Amendment No. 2 to the Solicitation/Recommendation Statement on Schedule 14D-9
filed by the Registrant on October 13, 2009)3.1
    
    
    Certificate of Incorporation of Registrant (Incorporated by reference to Exhibit 3.1 to
Form 10-Q of the Registrant for the fiscal quarter ended June 30, 2004)3.2
    
    
    Bylaws of Registrant (Incorporated by reference to Exhibit 10.1 of the Registrants
Current Report on Form 8-K filed on November 30, 2007)3.3
    
    
    Certificate of Formation of Parallel, L.L.C. (Incorporated by reference to Exhibit No.
3.3 of the Registrants Registration Statement on Form S-3, No. 333-119725 filed on October
13, 2004)3.4
    
    
    Limited Liability Company Agreement of Parallel, L.L.C. (Incorporated by reference to
Exhibit No. 3.4 of the Registrants Statement on Form S-3, No. 333-119725 filed on October
13, 2004)3.5
    
    
    Certificate of Limited Partnership of Parallel, L.P. (Incorporated by reference to
Exhibit No. 3.5 of the Registrants Registration Statement on Form S-3, No. 333-119725
filed on October 13, 2004)3.6
    
    
    Agreement of Limited Partnership of Parallel, L.P. (Incorporated by reference to
Exhibit No. 3.6 of the Registrants Registration Statement on Form S-3, No. 333-119725
filed on October 13, 2004)4.1
    
    
    Certificate of Designations, Preferences and Rights of Serial Preferred Stock  6%
Convertible Preferred Stock (Incorporated by reference to Exhibit 4.1 of Form 10-Q of the
Registrant for the fiscal quarter ended June 30, 2004)4.2
    
    
    Certificate of Designations, 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
    
    
    First Amendment to Rights Agreement, dated as of September 14, 2009, between Parallel
Petroleum Corporation and Computershare Trust Company, N.A., as rights agent (Incorporated
by reference to Exhibit 4.1 of the Current Report on Form 8-K filed by Parallel Petroleum
Corporation with the Securities and Exchange Commission on September 15, 2009)




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##### Table of Contents



No.
    
    Description of Exhibit4.5
    
    
    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)4.6
    
    
    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)4.7
    
    
    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)4.8
    
    
    Purchase Warrant Agreement, dated as of October 1, 1980, between the Registrant and
American Stock Transfer, Inc. (Incorporated by reference to Exhibit 4.7 of Form 10-K of the
Registrant for the fiscal year ended December 31, 2006)4.9
    
    
    First Amendment to Warrant Agreement, dated as of February 22, 2007, among the
Registrant, Computershare Shareholder Services, Inc. and Computershare Trust Company, N.A.
(Incorporated by reference to Exhibit 4.8 of Form 10-K of the Registrant for the fiscal
year ended December 31, 2006)4.10
    
    
    Form of Rule 144A 101/4% Senior Note due 2014 (Incorporated by reference to Exhibit 4.2 to
the Registrants Current Report on Form 8-K filed on August 1, 2007)4.11
    
    
    Form of IAI 101/4% Senior Note due 2014 (Incorporated by reference to Exhibit 4.3 to the
Registrants Current Report on Form 8-K filed on August 1, 2007)4.12
    
    
    Form of Regulation S 101/4% Senior Note due 2014 (Incorporated by reference to Exhibit 4.4
to the Registrants Current Report on Form 8-K filed on August 1, 2007)4.13
    
    
    Indenture, dated as of July 31, 2007, among the Registrant as Issuer and Wells Fargo
Bank, National Association as Trustee (Incorporated by reference to Exhibit 4.1 to the
Registrants Current Report on Form 8-K filed on August 1, 2007)4.14
    
    
    Registration Rights Agreement, dated as of July 31, 2007, by and among the Registrant,
Jefferies & Company, Inc., Merrill Lynch, Pierce, Fenner and Smith Incorporated and BNP
Paribas Securities Corp. (Incorporated by reference to Exhibit 10.2 to the Registrants
Current Report on Form 8-K filed on August 1, 2007)4.15
    
    
    Purchase Agreement, dated as of July 26, 2007, by and among the Registrant, Jefferies &
Company, Inc., Merrill Lynch, Pierce, Fenner and Smith Incorporated and BNP Paribas
Securities Corp. (Incorporated by reference to Exhibit 4.2 to the Registrants Current
Report on Form 8-K filed on August 1, 2007)4.16
    
    
    Form of 101/4% Unrestricted Senior Note due 2014 (Incorporated by reference to Exhibit 4.13
of Form S-4 of the Registrant, Registration No. 333-148465)Executive Compensation Plans and Arrangements (Exhibit No.s 10.1 through 10.11):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)




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##### Table of Contents



No.
    
    Description of Exhibit10.2
    
    
    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)10.3
    
    
    1998 Stock Option Plan (Incorporated by reference to Exhibit 10.2 of Form 8-K of the
Registrant dated December 23, 2008)10.4
    
    
    2001 Non-Employee Directors Stock Option Plan (Incorporated by reference to Exhibit 10.3
of the Registrants Form 8-K dated December 23, 2008)10.5
    
    
    2004 Non-Employee Director Stock Grant Plan (Incorporated by reference to Exhibit (e)(9)
to Schedule 14D-9 filed by Parallel Petroleum Corporation with the Securities and Exchange
Commission on September 24, 2009)10.6
    
    
    Incentive and Retention Plan (Incorporated by reference to Exhibit 10.7 of Form 10-K of
the Registrant for the fiscal year ended December 31, 2006)10.7
    
    
    2008 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.1 of the
Registrants Form 8-K Report dated March 27, 2008)10.8
    
    
    Form of Nonqualified Stock Option Agreement for nonqualified stock options granted under
the Registrants 2008 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.2 of
the Registrants Current Report on Form 8-K filed on June 18, 2008)10.9
    
    
    Form of Outside Director Stock Award Agreement for stock awards granted under the
Registrants 2008 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.3 of the
Registrants Current Report on Form 8-K filed on June 18, 2008)10.10
    
    
    Form of Outside Director Restricted Stock Agreement for restricted stock grants under the
Registrants 2008 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.4 of the
Registrants Current Report on Form 8-K filed on June 18, 2008)10.11
    
    
    Non-Officer Employee Severance Plan (Incorporated by reference to Exhibit (e)(11) to
Schedule 14D-9 filed by Parallel Petroleum Corporation with the Securities and Exchange
Commission on September 24, 2009)10.12
    
    
    Form of Option Waiver, Cancellation and Release Agreement (Incorporated by reference to
Exhibit (e)(13) to Schedule 14D-9 filed by Parallel Petroleum Corporation with the Securities
and Exchange Commission on September 24, 2009)10.13
    
    
    Form of Option Waiver, Cash-Out and Release Agreement (Incorporated by reference to
Exhibit (e)(14) to Schedule 14D-9 filed by Parallel Petroleum Corporation with the Securities
and Exchange Commission on September 24, 2009)10.14
    
    
    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)10.15
    
    
    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)




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##### Table of Contents



No.
    
    Description of Exhibit10.16
    
    
    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)10.17
    
    
    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)10.18
    
    
    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)10.19
    
    
    Guaranty, dated as of December 23, 2005, made by Parallel, L.L.C. to and in favor of
Citibank Texas, N.A. (Incorporated by reference to Exhibit 10.23 of Form 10-K of the
Registrant for the fiscal year ended December 31, 2006)10.20
    
    
    Third Amended and Restated Pledge Agreement, dated as of December 23, 2005, between
Parallel, L.L.C. and Citibank Texas, N.A. (Incorporated by reference to Exhibit 10.24 of Form
10-K of the Registrant for the fiscal year ended December 31, 2006)10.21
    
    
    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 Paribas (Incorporated
by reference to Exhibit 10.25 of Form 10-K of the Registrant for the fiscal year ended
December 31, 2006)10.22
    
    
    Third Amendment to Third Amended and Restated Credit Agreement, dated as of July 31, 2007,
among the Registrant, Citibank, N.A., BNP Paribas, Western National Bank, Compass Bank,
Comerica Bank, Bank of Scotland, and Fortis Capital Corp. (Incorporated by reference to
Exhibit 10.3 of the Registrants Current Report on Form 8-K filed on August 1, 2007)10.23
    
    
    Fourth Amendment to Third Amended and Restated Credit Agreement, dated as of November 30,
2007, among the Registrant, Citibank, N.A., BNP Paribas, Western National Bank,
Compass Bank, Comerica Bank, Bank of Scotland,
and Fortis Capital Corp. (Incorporated by
reference to Exhibit 10.27 of Form S-4 of the
Registrant, Registration No. 333-148465)10.24
    
    
    Hagerman Gas Gathering System Joint Venture Agreement, dated as of January 16, 2007, among
the Registrant, Feagan Gathering Company and Capstone Oil and Gas Company, L.P. (Incorporated
by reference to Exhibit 10.28 of Form 10-K of the Registrant for the fiscal year ended
December 31, 2007)10.25
    
    
    Fourth Amended and Restated Credit Agreement, dated as of May 16, 2008, among the
Registrant, Citibank, N.A., BNP Paribas, Western National Bank, Compass Bank, Comerica Bank,
Bank of Scotland plc, and Texas Capital Bank, N.A. (Incorporated by reference to Exhibit 10.1
of the Registrants Current Report on Form 8-K filed on May 22, 2008)




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##### Table of Contents



No.
    
    Description of Exhibit10.26
    
    
    First Amendment to Fourth Amended and Restated Credit Agreement, dated as of October 31,
2008, by and among Parallel Petroleum Corporation, Citibank, N.A., BNP Paribas, Western
National Bank, Compass Bank, Bank of Scotland plc, Texas Capital Bank, N.A., Bank of America,
N.A. and West Texas National Bank (Incorporated by reference to Exhibit 10.34 of the
Registrants Form 10-Q Report for the third fiscal quarter ended September 30, 2008)10.27
    
    
    Second Amendment to Fourth Amended and Restated Credit Agreement, executed as of February
19, 2009, by and among Parallel Petroleum Corporation, Citibank, N.A., BNP Paribas, Western
National Bank, Compass Bank, Bank of Scotland plc, Texas Capital Bank, N.A., Bank of America,
N.A. and West Texas National Bank (Incorporated by reference to Exhibit 10.24 of Form 10-K of
the Registrant for the fiscal year ended December 31, 2008)10.28
    
    
    Third Amendment to Fourth Amended and Restated Credit Agreement, executed as of April 30,
2009, by and among Parallel Petroleum Corporation, Citibank, N.A., BNP Paribas, Western
National Bank, Compass Bank, Bank of Scotland plc, Texas Capital Bank, N.A., Bank of America,
N.A. and West Texas National Bank (Incorporated by reference to Exhibit 10.1 of the
Registrants Current Report on Form 8-K filed on May 4, 2009)*10.29
    
    
    Fourth Amendment to Fourth Amended and Restated Credit Agreement, dated
November 9, 2009, among the Registrant, Citibank, N.A., BNP Paribas, Western
National Bank, Compass Bank, Bank of Scotland plc, Texas Capital Bank, N.A., Bank
of America, N.A. and West Texas National Bank.14
    
    
    Code of Ethics (Incorporated by reference to Exhibit No. 14 of the Registrants Form
10-K Report for the fiscal year ended December 31, 2003 and filed with the Securities and
Exchange Commission on March 22, 2004)*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 2002.99.1
    
    
    Memorandum of Understanding, dated as of October 13, 2009 (Incorporated by reference to
exhibit (a)(16) to Amendment No. 2 to the Solicitation/Recommendation Statement on Schedule
14D-9 filed by the Registrant on October 13, 2009)*99.2
    
    

Amended
and Restated Waiver Escrow Agreement, dated  as of November 9, 2009, by and among PLLL
Holdings, LLC, Parallel Petroleum Corporation and Citibank, N.A., as
 escrow
agent and as administrative agent for
each of the lenders that is a signatory to the certain Fourth Amended and Restated Credit
Agreement
 
 *
    
    Filed herewith.**
    
    Furnished herewith.