##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D. C. 20549
 FORM 10-Q/A
 (Amendment No. 1 to Form 10-Q filed November 7, 2005)
 (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, 2005 or
 o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the Transition period from  to
 Commission File Number 0-13305
 PARALLEL PETROLEUM CORPORATION
 (Exact name of registrant as specified in its charter
 DELAWARE
(State of other jurisdiction
of incorporation or organization)
    
    75-1971716
(I.R.S. Employer Identification
Number)1004 N. Big Spring, Suite 400
Midland, Texas
(Address of principal executive offices)
    
    79701
(Zip Code)
 (432) 684-3727
(Registrants telephone number, including area code)
 Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
  þ o
  o þ o
 o þ




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##### Table of Contents



Accounting for Derivative Instruments and
Hedging Activities ITEM 1. Notes to Consolidated Financial Statements ITEM 2. MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ITEM 4. CONTROLS AND
PROCEDURES.
  (i)




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##### 



Page No.PART I.  FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTSReference is made to the succeeding pages for the following consolidated financial statements:-
    
    Consolidated Balance Sheets as of September 30, 2005 (unaudited) and December 31, 2004
    
    
    1-
    
    Unaudited Consolidated Statements of Income for the three months and Nine months ended September 30, 2005 and 2004
    
    
    2-
    
    Unaudited Consolidated Statements of Cash Flows for the nine months Ended September 30, 2005 and 2004
    
    
    3-
    
    Unaudited Consolidated Statements of Comprehensive Income (Loss) for the three months and nine months ended September 30, 2005 and 2004
    
    
    4-
    
    Notes to Consolidated Financial Statements
    
    
    5ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
    
    
    18ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    34ITEM 4. CONTROLS AND PROCEDURES
    
    
    37PART II.  OTHER INFORMATIONITEM 1. LEGAL PROCEEDINGS
    
    
    37ITEM 6. EXHIBITS
    
    
    38SignaturesCertification of Principal Executive Officer Pursuant to Section 302Certification of Principal Financial Officer Pursuant to Section 302Certification of Principal Executive Officer Pursuant to Section 906Certification of Principal Financial Officer Pursuant to Section 906
  (ii)




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##### Table of Contents



PARALLEL
PETROLEUM CORPORATION
 
 Consolidated Balance Sheets  (dollars in thousands)
 September 30,
    
    
    December 31,2005
    
    
    2004(unaudited)(restated)
    
    
    (restated)AssetsCurrent assets:Cash and cash equivalents
    
    $
    6,135
    
    
    $
    4,781Accounts receivable:Oil and gas
    
    
    14,215
    
    
    
    6,642Other, net of allowance for
doubtful account of $9
    
    
    740
    
    
    
    389Affiliates
    
    
    10
    
    
    
    714,965
    
    
    
    7,038Other current assets
    
    
    434
    
    
    
    179Deferred tax asset
    
    
    6,456
    
    
    
    2,531Total current assets
    
    
    27,990
    
    
    
    14,529Property and equipment, at cost:Oil and gas properties, full cost method (including $18,470 and $9,526 not
subject to depletion)
    
    
    264,178
    
    
    
    229,245Other
    
    
    2,483
    
    
    
    2,062266,661
    
    
    
    231,307Less accumulated depreciation,
depletion and amortization
    
    
    (86,941
    )
    
    
    (78,782
    )Net property and equipment
    
    
    179,720
    
    
    
    152,525Restricted cash
    
    
    149
    
    
    
    2,287Equity investment in Westfork Pipeline
    
    
    2,209
    
    
    
    595Other assets, net of accumulated
amortization of $792 and $581
    
    
    575
    
    
    
    735$
    210,643
    
    
    $
    170,671Liabilities and Stockholders EquityCurrent liabilities:Accounts payable and accrued
liabilities
    
    $
    9,556
    
    
    $
    5,568Asset retirement obligations
    
    
    133
    
    
    
    150Derivative obligations
    
    
    18,808
    
    
    
    7,965Total current liabilities
    
    
    28,497
    
    
    
    13,683Revolving credit facility
    
    
    68,000
    
    
    
    79,000Asset retirement obligations
    
    
    2,154
    
    
    
    1,982Derivative obligations
    
    
    31,608
    
    
    
    9,525Deferred tax liability
    
    
    4,233
    
    
    
    6,487Total long-term liabilities
    
    
    105,995
    
    
    
    96,994Commitments and contingencies (Note 10)Stockholders equity:Series A preferred stock  par value $0.10 per share, authorized 50,000 shares
    
    
    
    
    
    
    Preferred stock  6% convertible preferred stock  par value of $0.10 per share
(liquidation preference of $10 per share), authorized 10,000,000 shares,
issued and outstanding 950,000, converted to common stock June, 2005
    
    
    
    
    
    
    95Common stock  par value $0.01 per share,
authorized
60,000,000 shares,
issued and outstanding 34,140,211
and 25,439,292
    
    
    341
    
    
    
    254Additional paid-in capital
    
    
    76,747
    
    
    
    48,328Retained earnings
    
    
    8,527
    
    
    
    18,759Accumulated other comprehensive loss
    
    
    (9,464
    )
    
    
    (7,442
    )Total stockholders equity
    
    
    76,151
    
    
    
    59,994$
    210,643
    
    
    $
    170,671
  (1)




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##### Table of Contents



PARALLEL
PETROLEUM CORPORATION
 
 Consolidated Statements of Operations  (unaudited)
(in thousands, except per share data)
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(restated)
    
    
    (restated)
    
    
    (restated)
    
    
    (restated)Oil and natural gas revenues:Oil and natural gas sales
    
    $
    25,501
    
    
    $
    10,208
    
    
    $
    53,474
    
    
    $
    29,066Loss on hedging and derivatives
    
    
    (3,664
    )
    
    
    (2,463
    )
    
    
    (8,960
    )
    
    
    (5,403
    )Total revenues
    
    
    21,837
    
    
    
    7,745
    
    
    
    44,514
    
    
    
    23,663Costs and expenses:Lease operating expense
    
    
    2,663
    
    
    
    1,894
    
    
    
    7,399
    
    
    
    5,437Production taxes
    
    
    1,334
    
    
    
    458
    
    
    
    2,615
    
    
    
    1,407General and administrative
    
    
    1,735
    
    
    
    1,438
    
    
    
    4,771
    
    
    
    3,881Depreciation, depletion and amortization
    
    
    3,104
    
    
    
    1,984
    
    
    
    8,159
    
    
    
    6,030Total costs and expenses
    
    
    8,836
    
    
    
    5,774
    
    
    
    22,944
    
    
    
    16,755Operating income
    
    
    13,001
    
    
    
    1,971
    
    
    
    21,570
    
    
    
    6,908Other income (expense), net:Change in fair market value of derivatives
    
    
    (9,388
    )
    
    
    (4,417
    )
    
    
    (33,086
    )
    
    
    (4,417
    )Gain (loss) on ineffective portion of hedges
    
    
    404
    
    
    
    57
    
    
    
    (456
    )
    
    
    64Interest and other income
    
    
    83
    
    
    
    10
    
    
    
    124
    
    
    
    168Interest expense
    
    
    (1,060
    )
    
    
    (509
    )
    
    
    (3,101
    )
    
    
    (1,464
    )Other expense
    
    
    (75
    )
    
    
    (25
    )
    
    
    (77
    )
    
    
    (110
    )Equity in income (loss) of Westfork Pipeline
    
    
    22
    
    
    
    0
    
    
    
    (72
    )
    
    
    Total other expense, net
    
    
    (10,014
    )
    
    
    (4,884
    )
    
    
    (36,668
    )
    
    
    (5,759
    )Income (loss) before income taxes
    
    
    2,987
    
    
    
    (2,913
    )
    
    
    (15,098
    )
    
    
    1,149Income tax benefit (expense), deferred
    
    
    (998
    )
    
    
    1,045
    
    
    
    5,137
    
    
    
    (432
    )Net income (loss)
    
    
    1,989
    
    
    
    (1,868
    )
    
    
    (9,961
    )
    
    
    717Cumulative preferred stock dividend
    
    
    
    
    
    
    (142
    )
    
    
    (271
    )
    
    
    (429
    )Net income (loss) available to common stockholders
    
    $
    1,989
    
    
    $
    (2,010
    )
    
    $
    (10,232
    )
    
    $
    288Net income (loss) per common share:Basic
    
    $
    0.06
    
    
    $
    (0.08
    )
    
    $
    (0.32
    )
    
    $
    0.01Diluted
    
    $
    0.06
    
    
    $
    (0.08
    )
    
    $
    (0.32
    )
    
    $
    0.01Weighted average common share outstanding:Basic
    
    
    34,033
    
    
    
    25,382
    
    
    
    31,585
    
    
    
    25,284Diluted
    
    
    34,951
    
    
    
    25,382
    
    
    
    31,585
    
    
    
    25,284
  (2)




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PARALLEL
PETROLEUM CORPORATION
 
 Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2005 and 2004  (unaudited)
(dollars in thousands)
 2005
    
    
    2004(restated)
    
    
    (restated)Cash flows from operating activities:Net income (loss)
    
    $
    (9,961
    )
    
    $
    717Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation, depletion and amortization
    
    
    8,159
    
    
    
    6,030Accretion of asset retirement obligation
    
    
    82
    
    
    
    73Deferred income tax (benefit) expense
    
    
    (5,137
    )
    
    
    432Change in fair value of derivative instruments
    
    
    33,086
    
    
    
    4,417(Gain) loss on ineffective portion of hedges
    
    
    456
    
    
    
    (64
    )Common stock issued in lieu of cash for directors fees
    
    
    99
    
    
    
    99Stock option expense
    
    
    119
    
    
    
    127Equity in loss of Westfork Pipeline Company, LP
    
    
    72
    
    
    
    Changes in assets and liabilities:Other assets, net
    
    
    186
    
    
    
    (120
    )Restricted cash
    
    
    (149
    )
    
    
    Increase in accounts receivable
    
    
    (7,927
    )
    
    
    (1,190
    )Increase (decrease) in other current assets
    
    
    61
    
    
    
    (10
    )Increase in accounts payable and accrued liabilities
    
    
    3,988
    
    
    
    1,563Net cash provided by operating activities
    
    
    23,134
    
    
    
    12,074Cash flows from investing activities:Additions to oil and gas properties
    
    
    (37,888
    )
    
    
    (41,944
    )Use of restricted cash for acquisition of oil and gas properties
    
    
    2,287
    
    
    
    Proceeds from disposition of oil and gas properties
    
    
    3,028
    
    
    
    1,693Additions to other property and equipment
    
    
    (421
    )
    
    
    (591
    )Settlements on derivatives
    
    
    (3,424
    )
    
    
    Purchase of derivative instruments
    
    
    (598
    )
    
    
    Investment in Westfork Pipeline Company LP
    
    
    (1,686
    )
    
    
    Net cash used in investing activities
    
    
    (38,702
    )
    
    
    (40,842
    )Cash flows from financing activities:Net borrowings (payments) on revolving credit facility
    
    
    (11,000
    )
    
    
    15,250Deferred financing costs
    
    
    
    
    
    
    (377
    )Proceeds (net) from common stock issued
    
    
    27,743
    
    
    
    Proceeds from exercise of stock options
    
    
    450
    
    
    
    523Deferred stock offering costs
    
    
    
    
    
    
    (7
    )Payment of preferred stock dividend
    
    
    (271
    )
    
    
    (287
    )Net cash provided by financing activities
    
    
    16,922
    
    
    
    15,102Net increase (decrease) in cash and cash equivalents
    
    
    1,354
    
    
    
    (13,666
    )Cash and cash equivalents at beginning of period
    
    
    4,781
    
    
    
    17,378Cash and cash equivalents at end of period
    
    $
    6,135
    
    
    $
    3,712Non-cash financing and investing activities:Oil and gas properties asset retirement obligations, net
    
    $
    73
    
    
    $
    232Conversion of preferred stock
    
    $
    95
    
    
    $
    Accrued preferred stock dividend
    
    $
    
    
    
    $
    142Other transactions:Interest paid
    
    $
    3,319
    
    
    $
    1,465
  (3)




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##### Table of Contents



PARALLEL
PETROLEUM CORPORATION
 
 Consolidated Statements of Comprehensive Income (Loss)  (unaudited)
(dollars in thousands)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(restated)
    
    
    (restated)
    
    
    (restated)
    
    
    (restated)Net income (loss)
    
    $
    1,989
    
    
    $
    (1,868
    )
    
    $
    (9,961
    )
    
    $
    717Other comprehensive loss:Unrealized losses on derivatives
    
    
    (3,702
    )
    
    
    (7,517
    )
    
    
    (12,175
    )
    
    
    (15,642
    )Reclassification adjustments for losses
on derivatives included in net income (loss)
    
    
    3,694
    
    
    
    2,545
    
    
    
    9,112
    
    
    
    5,716Change in fair value of derivatives
    
    
    (8
    )
    
    
    (4,972
    )
    
    
    (3,063
    )
    
    
    (9,926
    )Income tax benefit
    
    
    3
    
    
    
    1,690
    
    
    
    1,041
    
    
    
    3,375Total other comprehensive loss
    
    
    (5
    )
    
    
    (3,282
    )
    
    
    (2,022
    )
    
    
    (6,551
    )Total comprehensive income (loss)
    
    $
    1,984
    
    
    $
    (5,150
    )
    
    $
    (11,983
    )
    
    $
    (5,834
    )
  (4)




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##### Table of Contents



PARALLEL PETROLEUM CORPORATION
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1.
    
    DESCRIPTION OF BUSINESS  NATURE OF OPERATIONS AND BASIS OF PRESENTATION
      NOTE 2. STOCKHOLDERS EQUITY
 Options
 Accounting for Stock-Based Compensation  Transition and Disclosure,
  (5)




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(dollars in thousands, except per share data)(restated)
    
    
    (restated)
    
    
    (restated)
    
    
    (restated)Net income, as reported
    
    $
    1,989
    
    
    $
    (1,868
    )
    
    $
    (9,961
    )
    
    $
    717Add:Expense recorded in 2005 and 2004
    
    
    49
    
    
    
    43
    
    
    
    119
    
    
    
    127Deduct:Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of tax effects
    
    
    (35
    )
    
    
    (48
    )
    
    
    (106
    )
    
    
    (143
    )Pro forma net income
    
    $
    2,003
    
    
    $
    (1,873
    )
    
    $
    (9,948
    )
    
    $
    701Earnings per share:Basic  as reported
    
    $
    0.06
    
    
    $
    (0.08
    )
    
    $
    (0.32
    )
    
    $
    0.01Basic  pro forma
    
    $
    0.06
    
    
    $
    (0.07
    )
    
    $
    (0.32
    )
    
    $
    0.03Diluted  as reported
    
    $
    0.06
    
    
    $
    (0.08
    )
    
    $
    (0.32
    )
    
    $
    0.01Diluted  pro forma
    
    $
    0.06
    
    
    $
    (0.07
    )
    
    $
    (0.32
    )
    
    $
    0.03
 Sale of Equity Securities
  Preferred Stock
  NOTE 3. REVOLVING CREDIT FACILITY
  (6)




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##### Table of Contents




    
    at the end of each quarter, a current ratio (as defined in the credit agreement) of at least 1.1 to 1.0;
    
    for each period (as calculated in the Credit Agreement) ending on December 31, March
31, June 30 and September 30, a funded debt ratio (as defined in the Credit Agreement)
of not more than 3.70, 3.60 and 3.50, respectively, for December 31, 2005, 2006 and
2007; and
    
    at all times, adjusted consolidated net worth (as defined in the Credit Agreement)
of at least (a) $50.0 million, plus (b) seventy-five percent (75%) of the net proceeds
from any equity securities issued by Parallel, plus (c) fifty percent (50%) of
consolidated net income for each fiscal quarter, if positive, and zero percent (0%) if
negative.
    (7)




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##### Table of Contents




    
    interpretation and processing seismic survey data;
    
    lease acquisitions and drilling activities;
    
    acquisitions of producing properties or companies owning producing properties; and,
    
    general corporate purposes.
  NOTE 4. ACQUISITIONS
    Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,Pro Forma
    
    
    
    
    
    Pro Forma2005
    
    2004
    
    2005
    
    2004(in thousands, except per share data)(restated)
    
    
    
    
    
    (restated)Oil and gas revenue, net of hedge losses
    
    $
    21,837
    
    
    $
    9,753
    
    
    $
    44,514
    
    
    $
    29,851Operating income
    
    $
    13,001
    
    
    $
    3,012
    
    
    $
    21,570
    
    
    $
    9,363Net income (loss) available to common stockholders
    
    $
    1,989
    
    
    $
    1,311
    
    
    $
    (10,232
    )
    
    $
    3,960Net income (loss) per common share:Basic
    
    $
    0.06
    
    
    $
    0.05
    
    
    $
    (0.32
    )
    
    $
    0.16Diluted
    
    $
    0.06
    
    
    $
    0.05
    
    
    $
    (0.32
    )
    
    $
    0.15
 NOTE 5. FULL COST CEILING TEST
    (8)




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##### Table of Contents



NOTE 6. DERIVATIVE INSTRUMENTS
 General
      Interest Rate Sensitivity
   (9)




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##### Table of Contents



Notional
    
    
    
    
    
    
    FairPeriod of Time
    
    Amount
    
    
    Fixed Interest Rates
    
    
    Market Value($ in millions)
    
    
    
    
    
    
    ($ in thousands)October 1, 2005 thru December 31, 2005(1)
    
    $
    20
    
    
    
    4.05%
    
    
    $
    (2
    )October 1, 2005 thru December 31, 2005
    
    $
    30
    
    
    
        2.89%
    
    
    $
    83January 1, 2006 thru December 31, 2006(1)
    
    $
    10
    
    
    
        4.05%
    
    
    $
    40January 1, 2006 thru December 31, 2006
    
    $
    40
    
    
    
    3.76%
    
    
    $
    273January 1, 2007 thru December 31, 2007
    
    $
    50
    
    
    
    4.30%
    
    
    $
    73January 1, 2008 thru December 30, 2008
    
    $
    50
    
    
    
    4.74%
    
    
    $
    (124
    )Total Fair M arket Value
    
    
    
    
    
    
    
    
    
    $
    343
 
 (1)
    
    Designated as cash flow hedge. Commodity Price Sensitivity
  Put Options.
 Collars.
  HoustonNy Mex
    
    
    
    
    
    
    Ship ChannelBarrels
    
    
    Oil Prices
    
    
    M M Btu of
    
    
    Gas Prices
    
    
    Fair M arketPeriod of Time
    
    of Oil
    
    
    Floor
    
    
    Cap
    
    
    Natural Gas
    
    
    Floor
    
    
    Cap
    
    
    Value($ in thousands)October 1, 2005 thru October 31, 2005
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    62,000
    
    
    $
    5.00
    
    
    $
    7.26
    
    
    $
    (226
    )October 1, 2005 thru December 31, 2005
    
    
    18,400
    
    
    $
    36.00
    
    
    $
    49.60
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    (307
    )January 1, 2006 thru December 31, 2006
    
    
    180,300
    
    
    $
    44.11
    
    
    $
    71.78
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    (1,691
    )April 1, 2006 thru October 31, 2006
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    214,000
    
    
    $
    6.00
    
    
    $
    12.40
    
    
    
    (176
    )January 1, 2007 thru December 31, 2007
    
    
    109,500
    
    
    $
    50.00
    
    
    $
    86.50
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (135
    )April 1, 2007 thru October 31, 2007
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    214,000
    
    
    $
    6.00
    
    
    $
    11.05
    
    
    
    (151
    )Total Fair M arket Value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (2,686
    )
 Commodity Swaps.
 (10)




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##### Table of Contents



Barrels of
    
    
    Nymex Oil
    
    
    Fair M arketPeriod of Time
    
    Oil
    
    
    Swap Price
    
    
    Value($ in thousands)October 1, 2005 thru December 31, 2005(1)
    
    
    92,000
    
    
    $
    23.30
    
    
    $
    (3,946
    )October 1, 2005 thru December 31, 2005
    
    
    192,500
    
    
    $
    39.96
    
    
    $
    (1,695
    )January 1, 2006 thru December 20, 2006(1)
    
    
    265,500
    
    
    $
    23.04
    
    
    
    (11,376
    )January 1, 2006 thru December 20, 2006
    
    
    182,500
    
    
    $
    36.36
    
    
    
    (5,437
    )January 1, 2007 thru December 31, 2007
    
    
    474,500
    
    
    $
    34.36
    
    
    
    (13,753
    )January 1, 2008 thru December 31, 2008
    
    
    439,200
    
    
    $
    33.37
    
    
    
    (12,035
    )Total fair market value
    
    
    
    
    
    
    
    
    
    $
    (48,242
    )
 
 (1)
    
    Designated as cash flow hedge. (11)




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##### Table of Contents



NOTE 7. NET INCOME PER COMMON SHARE
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(dollars in thousands, except per share data)(restated)
    
    
    (restated)
    
    
    (restated)
    
    
    (restated)Basic EPS Computation:Numerator-Income (loss)
    
    $
    1,989
    
    
    $
    (1,868
    )
    
    $
    (9,961
    )
    
    $
    717Preferred stock dividend
    
    
    
    
    
    
    (142
    )
    
    
    (271
    )
    
    
    (429
    )Income (loss) available to common stockholders
    
    $
    1,989
    
    
    $
    (2,010
    )
    
    $
    (10,232
    )
    
    $
    288Denominator-Weighted average common shares outstanding
    
    
    34,033
    
    
    
    25,382
    
    
    
    31,585
    
    
    
    25,284Basic EPS:Income (loss) per share
    
    $
    0.06
    
    
    $
    (0.08
    )
    
    $
    (0.32
    )
    
    $
    0.01Diluted EPS Computation:Numerator-Income (loss)
    
    $
    1,989
    
    
    $
    (1,868
    )
    
    $
    (9,961
    )
    
    $
    717Preferred stock dividend
    
    
    
    
    
    
    (142
    )
    
    
    (271
    )
    
    
    (429
    )Income (loss) available to common stockholders
    
    $
    1,989
    
    
    $
    (2,010
    )
    
    $
    (10,232
    )
    
    $
    288Denominator -Weighted average common shares outstanding
    
    
    34,033
    
    
    
    25,382
    
    
    
    31,585
    
    
    
    25,284Employee stock options
    
    
    774
    
    
    
    
    
    
    
    
    
    
    
    Warrants
    
    
    144
    
    
    
    
    
    
    
    
    
    
    
    Preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average common shares for diluted
earnings per share assuming conversion
    
    
    34,951
    
    
    
    25,382
    
    
    
    31,585
    
    
    
    25,284Diluted EPS:Income (loss) per share
    
    $
    0.06
    
    
    $
    (0.08
    )
    
    $
    (0.32
    )
    
    $
    0.01
 (12)




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##### Table of Contents



NOTE 8. ASSET RETIREMENT OBLIGATIONS
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(in thousands)Beginning asset retirement obligation
    
    $
    2,251
    
    
    $
    1,943
    
    
    $
    2,132
    
    
    $
    1,701Additions related to new properties
    
    
    25
    
    
    
    204
    
    
    
    155
    
    
    
    435Deletions related to property disposals
    
    
    (17
    )
    
    
    (160
    )
    
    
    (82
    )
    
    
    (202
    )Accretion expense
    
    
    28
    
    
    
    20
    
    
    
    82
    
    
    
    73Ending asset retirement obligation
    
    $
    2,287
    
    
    $
    2,007
    
    
    $
    2,287
    
    
    $
    2,007
 NOTE 9. RECENTLY ANNOUNCED ACCOUNTING PRONOUNCEMENTS
 Statement of
Financial Accounting Standards No. 123 (revised 2004) Share-Based Payment
 NOTE 10. COMMITMENTS AND CONTINGENCIES
   NOTE 11. SUBSEQUENT EVENTS
  (13)




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##### Table of Contents



NOTE 12. RESTATEMENT
   Effects of the Restatement
  As of September 30, 2005
    
    As of December 31, 2004As previously
    
    
    
    
    
    As previouslyreported
    
    As restated
    
    reported
    
    As restated(in thousands)(unaudited)Condensed Consolidated Balance Sheet data:Other current assets
    
    $
    437
    
    
    $
    434
    
    
    $
    179
    
    
    $
    179Total current assets
    
    
    27,993
    
    
    
    27,990
    
    
    
    14,529
    
    
    
    14,529Other assets, net of accumulated
amortization of $792 and $581
    
    
    828
    
    
    
    575
    
    
    
    735
    
    
    
    735Total assets
    
    
    210,899
    
    
    
    210,643
    
    
    
    170,671
    
    
    
    170,671Derivative obligation  current
    
    
    18,811
    
    
    
    18,808
    
    
    
    7,965
    
    
    
    7,965Total current liabilities
    
    
    28,500
    
    
    
    28,497
    
    
    
    13,683
    
    
    
    13,683Derivative obligation  long term
    
    
    31,861
    
    
    
    31,608
    
    
    
    9,525
    
    
    
    9,525Total long-term liabilities
    
    
    106,248
    
    
    
    105,995
    
    
    
    96,994
    
    
    
    96,994Retained earnings
    
    
    31,292
    
    
    
    8,527
    
    
    
    22,073
    
    
    
    18,759Accumulated other comprehensive loss
    
    
    (32,229
    )
    
    
    (9,464
    )
    
    
    (10,756
    )
    
    
    (7,442
    )Total liabilities and stockholders equity
    
    
    210,899
    
    
    
    210,643
    
    
    
    170,671
    
    
    
    170,671
 (14)




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##### Table of Contents



Three Months EndedSeptember 30, 2005
    
    
    September 30, 2004As previously
    
    
    
    
    
    
    As previouslyreported
    
    
    As restated
    
    
    reported
    
    
    As restated(in thousands)(unaudited)Consolidated Statement of Operations data:Loss on hedging and derivatives
    
    $
    (5,565
    )
    
    $
    (3,664
    )
    
    $
    (2,463
    )
    
    $
    (2,463
    )Total revenues
    
    
    19,936
    
    
    
    21,837
    
    
    
    7,745
    
    
    
    7,745Operating income
    
    
    11,039
    
    
    
    13,001
    
    
    
    1,971
    
    
    
    1,971Change in fair market value of derivatives
    
    
    
    
    
    
    (9,388
    )
    
    
    
    
    
    
    (4,417
    )Gain (loss) on ineffective portion of hedges
    
    
    2,864
    
    
    
    404
    
    
    
    57
    
    
    
    57Interest expense
    
    
    (950
    )
    
    
    (1,060
    )
    
    
    (509
    )
    
    
    (509
    )Total other income (expense), net
    
    
    1,944
    
    
    
    (10,014
    )
    
    
    (467
    )
    
    
    (4,884
    )Net income (loss) before income taxes
    
    
    12,983
    
    
    
    2,987
    
    
    
    1,504
    
    
    
    (2,913
    )Income tax benefit (expense), deferred
    
    
    (4,396
    )
    
    
    (998
    )
    
    
    (457
    )
    
    
    1,045Net income (loss)
    
    
    8,587
    
    
    
    1,989
    
    
    
    1,047
    
    
    
    (1,868
    )Net income (loss) available to common stockholders
    
    
    8,587
    
    
    
    1,989
    
    
    
    905
    
    
    
    (2,010
    )Net income (loss) per common share:Basic
    
    $
    0.25
    
    
    $
    0.06
    
    
    $
    0.04
    
    
    $
    (0.08
    )Diluted
    
    $
    0.25
    
    
    $
    0.06
    
    
    $
    0.04
    
    
    $
    (0.08
    )
 Nine Months EndedSeptember 30, 2005
    
    
    September 30, 2004As previously
    
    
    
    
    
    
    As previouslyreported
    
    
    As restated
    
    
    reported
    
    
    As restated(in thousands)(unaudited)Consolidated Statement of Operations data:Loss on hedging and derivatives
    
    $
    (12,422
    )
    
    $
    (8,960
    )
    
    $
    (5,403
    )
    
    $
    (5,403
    )Total revenues
    
    
    41,052
    
    
    
    44,514
    
    
    
    23,663
    
    
    
    23,663Operating income
    
    
    17,929
    
    
    
    21,570
    
    
    
    6,908
    
    
    
    6,908Change in fair market value of derivatives
    
    
    
    
    
    
    (33,086
    )
    
    
    
    
    
    
    (4,417
    )Gain (loss) on ineffective portion of hedges
    
    
    (647
    )
    
    
    (456
    )
    
    
    64
    
    
    
    64Interest expense
    
    
    (2,884
    )
    
    
    (3,101
    )
    
    
    (1,464
    )
    
    
    (1,464
    )Total other income (expense), net
    
    
    (3,556
    )
    
    
    (36,668
    )
    
    
    (1,342
    )
    
    
    (5,759
    )Net income (loss) before income taxes
    
    
    14,373
    
    
    
    (15,098
    )
    
    
    5,566
    
    
    
    1,149Income tax benefit (expense), deferred
    
    
    (4,883
    )
    
    
    5,137
    
    
    
    (1,934
    )
    
    
    (432
    )Net income (loss)
    
    
    9,490
    
    
    
    (9,961
    )
    
    
    3,632
    
    
    
    717Net income (loss) available to common stockholders
    
    
    9,219
    
    
    
    (10,232
    )
    
    
    3,203
    
    
    
    288Net income (loss) per common share:Basic
    
    $
    0.29
    
    
    $
    (0.32
    )
    
    $
    0.13
    
    
    $
    0.01Diluted
    
    $
    0.29
    
    
    $
    (0.32
    )
    
    $
    0.13
    
    
    $
    0.01
 (15)




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##### Table of Contents



Nine Months EndedSeptember 30, 2005
    
    September 30, 2004As previously
    
    
    
    
    
    As previouslyreported
    
    As restated
    
    reported
    
    As restated(in thousands)(unaudited)Condensed Consolidated Statement of Cash Flows data:Net income (loss)
    
    $
    9,490
    
    
    $
    (9,961
    )
    
    $
    3,632
    
    
    $
    717Deferred income tax expense (benefit)
    
    
    4,883
    
    
    
    (5,137
    )
    
    
    1,934
    
    
    
    432Change in fair value of derivative instruments
    
    
    
    
    
    
    33,086
    
    
    
    
    
    
    
    4,417Gaine (loss) on ineffective portion of hedges
    
    
    647
    
    
    
    456
    
    
    
    (64
    )
    
    
    (64
    )Other assets, net
    
    
    (93
    )
    
    
    186
    
    
    
    (497
    )
    
    
    (120
    )(Increase) decrease in other current assets
    
    
    (258
    )
    
    
    61
    
    
    
    (10
    )
    
    
    (10
    )Net cash provided by operating activities
    
    
    19,112
    
    
    
    23,134
    
    
    
    11,697
    
    
    
    12,074Settlements on derivatives
    
    
    
    
    
    
    (3,424
    )
    
    
    
    
    
    
    Purchase of derivative instruments
    
    
    
    
    
    
    (598
    )
    
    
    
    
    
    
    Net cash used in investing activities
    
    
    (34,680
    )
    
    
    (38,702
    )
    
    
    (40,842
    )
    
    
    (40,842
    )
 (16)




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##### Table of Contents



Three Months EndedSeptember 30, 2005
    
    
    September 30, 2004As previously
    
    
    
    
    
    
    As previouslyreported
    
    
    As restated
    
    
    reported
    
    
    As restated(in thousands)(unaudited)Net income (loss)
    
    $
    8,587
    
    
    $
    1,989
    
    
    $
    1,047
    
    
    $
    (1,868
    )Other comprehensive loss:Unrealized losses on derivatives
    
    
    (15,553
    )
    
    
    (3,702
    )
    
    
    (11,934
    )
    
    
    (7,517
    )Reclassification adjustments for losses
on derivatives included in net income (loss)
    
    
    5,548
    
    
    
    3,694
    
    
    
    2,545
    
    
    
    2,545Change in fair value of derivatives
    
    
    (10,005
    )
    
    
    (8
    )
    
    
    (9,389
    )
    
    
    (4,972
    )Income tax benefit
    
    
    3,402
    
    
    
    3
    
    
    
    3,192
    
    
    
    1,690Total other comprehensive loss
    
    
    (6,603
    )
    
    
    (5
    )
    
    
    (6,197
    )
    
    
    (3,282
    )Total comprehensive income (loss)
    
    $
    1,984
    
    
    $
    1,984
    
    
    $
    (5,150
    )
    
    $
    (5,150
    )
 Nine Months EndedSeptember 30, 2005
    
    
    September 30, 2004As previously
    
    
    
    
    
    
    As previouslyreported
    
    
    As restated
    
    
    reported
    
    
    As restated(in thousands)(unaudited)Net income (loss)
    
    $
    9,490
    
    
    $
    (9,961
    )
    
    $
    3,632
    
    
    $
    717Other comprehensive loss:Unrealized losses on derivatives
    
    
    (45,071
    )
    
    
    (12,175
    )
    
    
    (20,059
    )
    
    
    (15,642
    )Reclassification adjustments for losses
on derivatives included in net income (loss)
    
    
    12,536
    
    
    
    9,112
    
    
    
    5,716
    
    
    
    5,716Change in fair value of derivatives
    
    
    (32,535
    )
    
    
    (3,063
    )
    
    
    (14,343
    )
    
    
    (9,926
    )Income tax benefit
    
    
    11,062
    
    
    
    1,041
    
    
    
    4,877
    
    
    
    3,375Total other comprehensive loss
    
    
    (21,473
    )
    
    
    (2,022
    )
    
    
    (9,466
    )
    
    
    (6,551
    )Total comprehensive loss
    
    $
    (11,983
    )
    
    $
    (11,983
    )
    
    $
    (5,834
    )
    
    $
    (5,834
    )
 (17)




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##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
  OVERVIEW
 Strategy
   
    
    focuses on projects having less geological risk;
    
    emphasizes exploitation and enhancement activities;
    
    focuses on acquiring producing properties; and
    
    expands the scope of operations by diversifying our exploratory and
development efforts, both in and outside of our current areas of operation.
   
    
    the prices we receive for the oil and natural gas we produce;
    
    the results of reprocessing and reinterpreting our 3-D seismic data;
    
    the results of our drilling activities;
    
    the costs of obtaining high quality field services;
    
    our ability to find and consummate acquisition opportunities; and
    
    our ability to negotiate and enter into work to earn arrangements, joint venture or
other similar agreements on terms acceptable to us.
  (18)




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##### Table of Contents



Operating Performance
  
    
    seasonal demand;
    
    weather;
    
    hurricane conditions in the Gulf of Mexico;
    
    availability of pipeline transportation to end users;
    
    proximity of our wells to major transportation pipeline infrastructures; and
    
    to a lesser extent, world oil prices.
  
    
    production expenses;
    
    overhead requirements; and
    
    costs of capital.
  
    
    cash flow from operations;
    
    sales of our equity securities;
    
    bank borrowings; and
    
    industry joint ventures.
   (19)




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##### Table of Contents



Results of Operations
  
    
    reserve base;
    
    sources of production;
    
    product mix (gas versus oil volumes);
    
    the prices we receive for our oil and gas production;
 (20)




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##### Table of Contents



Three Months Ended
    
    
    Nine Months Ended9/30/2005
    
    
    9/30/2004
    
    
    9/30/2005
    
    
    9/30/2004(in thousands, except per unit data)(restated)
    
    
    (restated)
    
    
    (restated)
    
    
    (restated)Production Volumes:Oil (Bbls)
    
    
    247
    
    
    
    168
    
    
    
    672
    
    
    
    495Natural gas (Mcf)
    
    
    1,109
    
    
    
    619
    
    
    
    2,411
    
    
    
    1,995BOE(1)
    
    
    432
    
    
    
    272
    
    
    
    1,074
    
    
    
    828BOE per day
    
    
    4.7
    
    
    
    3.0
    
    
    
    3.9
    
    
    
    3.0Sales Prices:Oil (per Bbl)(2)
    
    $
    58.95
    
    
    $
    41.30
    
    
    $
    50.86
    
    
    $
    36.69Natural gas (per Mcf)(2)
    
    $
    9.88
    
    
    $
    5.24
    
    
    $
    8.01
    
    
    $
    5.45BOE price (2)
    
    $
    59.09
    
    
    $
    37.56
    
    
    $
    49.81
    
    
    $
    35.10BOE price(3)
    
    $
    50.60
    
    
    $
    28.49
    
    
    $
    41.46
    
    
    $
    28.58Operating RevenuesOil
    
    $
    14,550
    
    
    $
    6,966
    
    
    $
    34,168
    
    
    $
    18,184Oil hedge
    
    
    (3,664
    )
    
    
    (2,159
    )
    
    
    (8,759
    )
    
    
    (4,805
    )Natural gas
    
    
    10,951
    
    
    
    3,242
    
    
    
    19,306
    
    
    
    10,882Natural gas hedge
    
    
    
    
    
    
    (304
    )
    
    
    (201
    )
    
    
    (598
    )$
    21,837
    
    
    $
    7,745
    
    
    $
    44,514
    
    
    $
    23,663Operating Expenses:Lease operating expense
    
    $
    2,663
    
    
    $
    1,894
    
    
    $
    7,399
    
    
    $
    5,437Production taxes
    
    
    1,334
    
    
    
    458
    
    
    
    2,615
    
    
    
    1,407General and administrative:General and administrative
    
    
    1,113
    
    
    
    839
    
    
    
    2,941
    
    
    
    2,379Public reporting
    
    
    622
    
    
    
    599
    
    
    
    1,830
    
    
    
    1,502Depreciation, depletion and amortization
    
    
    3,104
    
    
    
    1,984
    
    
    
    8,159
    
    
    
    6,030$
    8,836
    
    
    $
    5,774
    
    
    $
    22,944
    
    
    $
    16,755Operating income
    
    $
    13,001
    
    
    $
    1,971
    
    
    $
    21,570
    
    
    $
    6,908
 
 (1)
    
    A BOE means one barrel of oil equivalent using the ratio of six Mcf of gas to one barrel oil.(2)
    
    Excludes hedge transactions.(3)
    
    Includes hedge transactions. (21)




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##### Table of Contents



RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (AS RESTATED):
  Oil and Gas Revenues:
 Revenues(1)
    
    
    Production2005
    
    
    2004
    
    
    2005
    
    
    2004(restated)
    
    
    (restated)Oil (Bbls)
    
    
    50
    %
    
    
    62
    %
    
    
    57
    %
    
    
    62
    %Natural gas (Mcf)
    
    
    50
    %
    
    
    38
    %
    
    
    43
    %
    
    
    38
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 
 (1)
    
    Includes hedge transactions  Three Months Ended September 30,
    
    
    Increase
    
    
    % Increase2005
    
    
    2004
    
    
    (Decrease)
    
    
    (Decrease)(in thousands except per unit data)(restated)
    
    
    (restated)Production Volumes:Oil (Bbls)
    
    
    247
    
    
    
    168
    
    
    
    79
    
    
    
    47
    %Natural gas (Mcf)
    
    
    1,109
    
    
    
    619
    
    
    
    490
    
    
    
    79
    %BOE
    
    
    432
    
    
    
    272
    
    
    
    160
    
    
    
    59
    %BOE/Day
    
    
    4.7
    
    
    
    3.0
    
    
    
    1.7
    
    
    
    57
    %Sales Price:Oil (per Bbl)(1)
    
    $
    58.95
    
    
    $
    41.30
    
    
    $
    17.65
    
    
    
    43
    %Natural gas (per Mcf)(1)
    
    $
    9.88
    
    
    $
    5.24
    
    
    $
    4.64
    
    
    
    89
    %BOE price(1)
    
    $
    59.09
    
    
    $
    37.56
    
    
    $
    21.53
    
    
    
    57
    %BOE price(2)
    
    $
    50.60
    
    
    $
    28.49
    
    
    $
    22.11
    
    
    
    78
    %Operating Revenues:Oil
    
    $
    14,550
    
    
    $
    6,966
    
    
    $
    7,584
    
    
    
    109
    %Oil hedges
    
    
    (3,664
    )
    
    
    (2,159
    )
    
    
    1,505
    
    
    
    70
    %Natural gas
    
    
    10,951
    
    
    
    3,242
    
    
    
    7,709
    
    
    
    238
    %Natural gas hedges
    
    
    
    
    
    
    (304
    )
    
    
    (304
    )
    
    
    Total
    
    $
    21,837
    
    
    $
    7,745
    
    
    $
    14,092
    
    
    
    182
    %
 
 (1)
    
    Excludes hedge transactions.(2)
    
    Includes hedge transactions.  (22)




---



##### Table of Contents



Cost and Expenses:
 Three months ended September 30,
    
    
    Increase
    
    
    % Increase2005
    
    
    2004
    
    
    (Decrease)
    
    
    (Decrease)(dollars in thousands)(restated)
    
    
    (restated)Lease operating expense
    
    $
    2,663
    
    
    $
    1,894
    
    
    $
    769
    
    
    
    41
    %Production taxes
    
    
    1,334
    
    
    
    458
    
    
    
    876
    
    
    
    191
    %General and administrative:General and administrative
    
    
    1,113
    
    
    
    839
    
    
    
    274
    
    
    
    33
    %Public reporting
    
    
    622
    
    
    
    599
    
    
    
    23
    
    
    
    4
    %Total general and administrative
    
    
    1,735
    
    
    
    1,438
    
    
    
    297
    
    
    
    21
    %Depreciation, depletion and amortization
    
    
    3,104
    
    
    
    1,984
    
    
    
    1,120
    
    
    
    56
    %Total
    
    $
    8,836
    
    
    $
    5,774
    
    
    $
    3,062
    
    
    
    53
    %
    (23)




---



##### Table of Contents



Other income (expense)
 Three months ended September 30,
    
    
    Increase
    
    
    % Increase2005
    
    
    2004
    
    
    (Decrease)
    
    
    (Decrease)(dollars in thousands)(restated)
    
    
    (restated)Change in fair market value of derivatives
    
    $
    (9,388
    )
    
    $
    (4,417
    )
    
    
    4,971
    
    
    
    113
    %Gain on ineffective portion of hedges
    
    
    404
    
    
    
    57
    
    
    
    461
    
    
    
    809
    %Interest and other income
    
    
    83
    
    
    
    10
    
    
    
    73
    
    
    
    730
    %Interest expense, net
    
    
    (1,060
    )
    
    
    (509
    )
    
    
    551
    
    
    
    108
    %Other expense
    
    
    (75
    )
    
    
    (25
    )
    
    
    50
    
    
    
    200
    %Equity loss in Westfork Pipeline Company LP
    
    
    22
    
    
    
    
    
    
    
    22
    
    
    
    Total
    
    $
    (10,014
    )
    
    $
    (4,884
    )
    
    
    5,130
    
    
    
    105
    %
    RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (AS RESTATED):
  Oil and Gas Revenues:
 Revenues(1)
    
    
    Production2005
    
    
    2004
    
    
    2005
    
    
    2004(restated)
    
    
    (restated)Oil (Bbls)
    
    
    57
    %
    
    
    57
    %
    
    
    63
    %
    
    
    60
    %Natural gas (Mcf)
    
    
    43
    %
    
    
    43
    %
    
    
    37
    %
    
    
    40
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 
 (1)
    
    Includes hedge transactions (24)




---



##### Table of Contents



Nine Months Ended September 30,
    
    
    Increase
    
    
    % Increase2005
    
    
    2004
    
    
    (Decrease)
    
    
    (Decrease)(in thousands except per unit data)(restated)
    
    
    (restated)Production Volumes:Oil (Bbls)
    
    
    672
    
    
    
    495
    
    
    
    177
    
    
    
    36
    %Natural gas (Mcf)
    
    
    2,411
    
    
    
    1,995
    
    
    
    416
    
    
    
    21
    %BOE
    
    
    1,074
    
    
    
    828
    
    
    
    246
    
    
    
    30
    %BOE/Day
    
    
    3.9
    
    
    
    3.0
    
    
    
    0.9
    
    
    
    30
    %Sales Price:Oil (per Bbl)(1)
    
    $
    50.86
    
    
    $
    36.69
    
    
    $
    14.17
    
    
    
    39
    %Natural gas (per Mcf)(1)
    
    $
    8.01
    
    
    $
    5.45
    
    
    $
    2.56
    
    
    
    47
    %BOE price(1)
    
    $
    49.81
    
    
    $
    35.10
    
    
    $
    14.71
    
    
    
    42
    %BOE price(2)
    
    $
    41.46
    
    
    $
    28.58
    
    
    $
    12.88
    
    
    
    45
    %Operating Revenues:Oil
    
    $
    34,168
    
    
    $
    18,184
    
    
    $
    15,984
    
    
    
    88
    %Oil hedges
    
    
    (8,759
    )
    
    
    (4,805
    )
    
    
    3,954
    
    
    
    82
    %Natural gas
    
    
    19,306
    
    
    
    10,882
    
    
    
    8,424
    
    
    
    77
    %Natural gas hedges
    
    
    (201
    )
    
    
    (598
    )
    
    
    (397
    )
    
    
    (66
    )%Total
    
    $
    44,514
    
    
    $
    23,663
    
    
    $
    20,851
    
    
    
    88
    %
 
 (1)
    
    Excludes hedge transactions.(2)
    
    Includes hedge transactions.    (25)




---



##### Table of Contents



Cost and Expenses:
 Nine months ended September 30,
    
    
    Increase
    
    
    % Increase2005
    
    
    2004
    
    
    (Decrease)
    
    
    (Decrease)(dollars in thousands)(restated)
    
    
    (restated)Lease operating expense
    
    $
    7,399
    
    
    $
    5,437
    
    
    $
    1,962
    
    
    
    36
    %Production taxes
    
    
    2,615
    
    
    
    1,407
    
    
    
    1,208
    
    
    
    86
    %General and administrative:General and administrative
    
    
    2,941
    
    
    
    2,379
    
    
    
    562
    
    
    
    24
    %Public reporting
    
    
    1,830
    
    
    
    1,502
    
    
    
    328
    
    
    
    22
    %Total general and administrative
    
    
    4,771
    
    
    
    3,881
    
    
    
    890
    
    
    
    23
    %Depreciation, depletion and amortization
    
    
    8,159
    
    
    
    6,030
    
    
    
    2,129
    
    
    
    35
    %Total
    
    $
    22,944
    
    
    $
    16,755
    
    
    $
    6,189
    
    
    
    37
    %
     (26)




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##### Table of Contents



Other income (expense):
 Nine months ended September 30,
    
    
    Increase
    
    
    % Increase2005
    
    
    2004
    
    
    (Decrease)
    
    
    (Decrease)(dollars in thousands)(restated)
    
    
    (restated)Change in fair market value of derivatives
    
    $
    (33,086
    )
    
    $
    (4,417
    )
    
    $
    28,669
    
    
    
    649
    %Gain (loss) on ineffective portion of hedges
    
    
    (456
    )
    
    $
    64
    
    
    
    (520
    )
    
    
    (813
    )%Interest and other income
    
    
    124
    
    
    
    168
    
    
    
    (44
    )
    
    
    (26
    )%Interest expense, net
    
    
    (3,101
    )
    
    
    (1,464
    )
    
    
    1,637
    
    
    
    112
    %Other expense
    
    
    (77
    )
    
    
    (110
    )
    
    
    (33
    )
    
    
    (30
    )%Equity loss in Westfork Pipeline Company LP
    
    
    (72
    )
    
    
    
    
    
    
    (72
    )
    
    
    Total
    
    $
    (36,668
    )
    
    $
    (5,759
    )
    
    $
    30,909
    
    
    
    537
    %
    LIQUIDITY AND CAPITAL RESOURCES
    (27)




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##### Table of Contents



Bank Borrowings
        (28)




---



##### Table of Contents




    
    at the end of each quarter, a current ratio (as defined in the credit agreement) of at least 1.1 to 1.0;
    
    for each period (as calculated in the Credit Agreement) ending on December 31, March
31, June 30 and September 30, a funded debt ratio (as defined in the Credit Agreement)
of not more than 3.70, 3.60 and 3.50, respectively, for December 31, 2005, 2006 and
2007; and
    
    at all times, adjusted consolidated net worth (as defined in the Credit Agreement)
of at least (a) $50.0 million, plus (b) seventy-five percent (75%) of the net proceeds
from any equity securities issued by Parallel, plus (c) fifty percent (50%) of
consolidated net income for each fiscal quarter, if positive, and zero percent (0%) if
negative.
    
    
    interpretation and processing of 3-D seismic survey data;
    
    lease acquisitions and drilling activities;
    
    acquisitions of producing properties or companies owning producing properties; and,
    
    general corporate purposes.
  Sale of Equity Securities
  Preferred Stock
  (29)




---



##### Table of Contents



Commodity Price Risk Management Transactions
      Contractual Obligations, Commitments and Off-Balance Sheet Arrangements
  (30)




---



##### Table of Contents



Obligation Due in PeriodThree monthsendingDecember 31,
    
    
    Year ended December 31,AfterContractual Cash Obligations
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    5 years
    
    
    Total(in thousands)Revolving Credit Facility (secured)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    68,000
    
    
    $
    
    
    
    $
    
    
    
    $
    68,000Office Lease (Dinero Plaza)
    
    
    39
    
    
    
    105
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    144Andrews and Snyder Field Offices (1)
    
    
    6
    
    
    
    23
    
    
    
    23
    
    
    
    14
    
    
    
    14
    
    
    
    
    
    
    
    80Asset retirement obligations(2)
    
    
    106
    
    
    
    39
    
    
    
    223
    
    
    
    19
    
    
    
    151
    
    
    
    1,749
    
    
    
    2,287Derivative Obligations
    
    
    6,174
    
    
    
    18,378
    
    
    
    13,828
    
    
    
    12,036
    
    
    
    
    
    
    
    
    
    
    
    50,416Drilling contract
    
    
    292
    
    
    
    964
    
    
    
    613
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,869Total
    
    $
    6,617
    
    
    $
    19,509
    
    
    $
    14,687
    
    
    $
    80,069
    
    
    $
    165
    
    
    $
    1,749
    
    
    $
    122,796
 
 (1)
    
    The Snyder field office lease remains in effect until the termination of our trade
agreement with a third party working interest owner in the Diamond M project. The Andrews
field office lease expires in December 2007. The lease cost for these two office facilities
are billed to nonaffiliated third party working interest owners under our joint operating
agreements with these third parties.(2)
    
    Assets retirement obligations of oil and natural gas assets, excluding salvage value and
accretion. Outlook
  
    
    internally generated cash from operations;
    
    proceeds from bank borrowings; and
    
    proceeds from sales of equity securities.
  
    
    our proved reserves;
    
    the volumes of oil and natural gas we produce from existing wells;
    
    the prices at which we sell oil and gas; and
    
    our ability to acquire, locate and produce new reserves.
  
    
    increased bank borrowings;
    
    sales of Parallels securities;
    
    sales of non-core properties; or
    
    other forms of financing.
 (31)




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##### Table of Contents



Inflation
  Critical Accounting Policies
   RESTATEMENT
 Accounting for Derivative Instruments and Hedging Activities ITEM 1. Notes to Consolidated
Financial Statements ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ITEM 4. CONTROLS AND PROCEDURES.
 (32)




---



##### Table of Contents



TRENDS AND PRICES
    FORWARD-LOOKING STATEMENTS
 Cautionary Statement Regarding Forward-Looking Statements
  
    
    our future financial and operating performance and results;
    
    our business strategy;
    
    changes in prices and demand for oil and natural gas;
    
    sources of funds necessary to conduct operations and complete acquisitions;
    
    development costs;
    
    number and location of planned wells;
    
    our future commodity price risk management activities; and
    
    our plans and forecasts.
   
    
    fluctuations in prices of oil and natural gas;
    
    demand for oil and natural gas;
    
    losses due to potential or future litigation;
    
    future capital requirements and availability of financing;
    
    geological concentration of our reserves;
 (33)




---



##### Table of Contents




    
    risks associated with drilling and operating wells;
    
    competition;
    
    general economic conditions;
    
    governmental regulations;
    
    receipt of amounts owed to us by purchasers of our production and counterparties to
our hedging contracts;
    
    hedging decisions, including whether or not to hedge;
    
    events similar to 911;
    
    actions of third party co-owners of interests in properties in which we also own an interest; and
    
    fluctuations in interest rates and availability of capital.
   
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Interest Rate Sensitivity as of September 30, 2005
  2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    Total($ in thousands)Variable rate debt:Revolving facility (secured)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    68,000
    
    
    $
    
    
    
    $
    68,000Weighted average interest
rate
    
    
    6.42
    %
    
    
    6.42
    %
    
    
    6.42
    %
    
    
    6.42
    %
    
    
    
  (34)




---



##### Table of Contents



Notional
    
    
    
    
    
    
    FairPeriod of Time
    
    Amounts
    
    
    Fixed Interest Rates
    
    
    Market Value($ in millions)
    
    
    
    
    
    
    ($ in thousands)October 1, 2005 thru December 31, 2005(1)
    
    $
    20
    
    
    
    4.05
    %
    
    $
    (2
    )October 1, 2005 thru December 31, 2005
    
    $
    30
    
    
    
    2.89
    %
    
    $
    83January 1, 2006 thru December 31, 2006(1)
    
    $
    10
    
    
    
    4.05
    %
    
    $
    40January 1, 2006 thru December 31, 2006
    
    $
    40
    
    
    
    3.76
    %
    
    $
    273January 1, 2007 thru December 31, 2007
    
    $
    50
    
    
    
    4.30
    %
    
    $
    73January 1, 2008 thru December 30, 2008
    
    $
    50
    
    
    
    4.74
    %
    
    $
    (124
    )Total Fair Market Value
    
    
    
    
    
    
    
    
    
    $
    343
 
 (1)
    
    Designated as cash flow hedge. Commodity Price Sensitivity as of September 30, 2005
    (35)




---



##### Table of Contents



Collars.
  HoustonNyMex
    
    
    
    
    
    
    Ship ChannelBarrels
    
    
    Oil Prices
    
    
    M M Btu of
    
    
    Gas Prices
    
    
    Fair MarketPeriod of Time
    
    of Oil
    
    
    Floor
    
    
    Cap
    
    
    Natural Gas
    
    
    Floor
    
    
    Cap
    
    
    Value($ in thousands)October 1, 2005 thru October 31, 2005
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    62,000
    
    
    $
    5.00
    
    
    $
    7.26
    
    
    $
    (226
    )October 1, 2005 thru December 31, 2005
    
    
    18,400
    
    
    $
    36.00
    
    
    $
    49.60
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    (307
    )January 1, 2006 thru December 31, 2006
    
    
    180,300
    
    
    $
    44.11
    
    
    $
    71.78
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    (1,691
    )April 1, 2006 thru October 31, 2006
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    214,000
    
    
    $
    6.00
    
    
    $
    12.40
    
    
    
    (176
    )January 1, 2007 thru December 31, 2007
    
    
    109,500
    
    
    $
    50.00
    
    
    $
    86.50
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (135
    )April 1, 2007 thru October 31, 2007
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    214,000
    
    
    $
    6.00
    
    
    $
    11.05
    
    
    
    (151
    )Total Fair Market Value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (2,686
    )
 Commodity Swaps.
  Barrels of
    
    
    Nymex Oil
    
    
    Fair MarketPeriod of Time
    
    Oil
    
    
    Swap Price
    
    
    Value($ in thousands)October 1, 2005 thru December 31, 2005(1)
    
    
    92,000
    
    
    $
    23.30
    
    
    $
    (3,946
    )October 1, 2005 thru December 31, 2005
    
    
    192,500
    
    
    $
    39.96
    
    
    $
    (1,695
    )January 1, 2006 thru December 20, 2006(1)
    
    
    265,500
    
    
    $
    23.04
    
    
    
    (11,376
    )January 1, 2006 thru December 20, 2006
    
    
    182,500
    
    
    $
    36.36
    
    
    
    (5,437
    )January 1, 2007 thru December 31, 2007
    
    
    474,500
    
    
    $
    34.36
    
    
    
    (13,753
    )January 1, 2008 thru December 31, 2008
    
    
    439,200
    
    
    $
    33.37
    
    
    
    (12,035
    )Total fair market value
    
    
    
    
    
    
    
    
    
    $
    (48,242
    )
 
 (1)
    
    Designated as cash flow hedge. (36)




---



##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
  Accounting for Derivative Instruments and Hedging Activities
   
 PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  (37)




---



##### Table of Contents



ITEM 6. EXHIBITS
 (a)
    
    Exhibits
  No.
    
    Description of Exhibit3.1
    
    Certificate of Incorporation of Registrant (Incorporated by reference
to Exhibit 3.1 to Form 10-Q of the Registrant for the fiscal quarter
ended June 30, 2004)3.2
    
    Bylaws of Registrant (Incorporated by reference to Exhibit 3 of the
Registrants Form 8-K, dated October 9, 2000, as filed with the Securities and
Exchange Commission on October 10, 2000)3.3
    
    Certificate of Formation of Parallel, L.L.C. (Incorporated by reference to
Exhibit No. 3.3 of the Registrants Registration Statement on Form S-3, No.
333-119725 filed on October 13, 2004)3.4
    
    Limited Liability Company Agreement of Parallel, L.L.C. (Incorporated by
reference to Exhibit No. 3.4 of the Registrants Statement on Form S-3, No.
333-119725 filed on October 13, 2004)3.5
    
    Certificate of Limited Partnership of Parallel, L.P. (Incorporated by reference
to Exhibit No. 3.5 of the Registrants Registration Statement on Form S-3, No.
333-119725 filed on October 13, 2004)3.6
    
    Agreement of Limited Partnership of Parallel, L.P. (Incorporated by reference
to Exhibit No. 3.6 of the Registrants Registration Statement on Form S-3, No.
333-119725 filed on October 13, 2004)4.1
    
    Certificate of Designations, Preferences and Rights of Serial Preferred Stock -
6% Convertible Preferred Stock (Incorporated by reference to Exhibit 4.1 of
Form 10-Q of the Registrant for the fiscal quarter ended June 30, 2004)4.2
    
    Certificate of Designation, Preferences and Rights of Series A Preferred Stock
(Incorporated by reference to Exhibit 4.2 of Form 10-K of the Registrant for
the fiscal year ended December 31, 2000)4.3
    
    Rights Agreement, dated as of October 5, 2000, between the Registrant and
Computershare Trust Company, Inc., as Rights Agent (Incorporated by reference
to Exhibit 4.3 of Form 10-K of the Registrant for the fiscal year ended
December 31, 2000)4.4
    
    Form of Indenture relating to senior debt securities of the Registrant
(Incorporated by reference to Exhibit No. 4.4 of the Registrants Statement on
Form S-3, No. 333-119725 filed on October 13, 2004)4.5
    
    Form of Indenture relating to subordinated debt securities of the Registrant
(Incorporated by reference to Exhibit No. 4.5 of the Registrants Registration
Statement on Form S-3, No. 333-119725 filed on October 13, 2004)4.6
    
    Form of common stock certificate of the Registrant (Incorporated by reference
to Exhibit No. 4.6 of the Registrants Registration Statement on Form S-3, No.
333-119725 filed on October 13, 2004)4.7
    
    Warrant Purchase Agreement, dated November 20, 2001, between the Registrant and
Stonington Corporation (Incorporated by reference to Exhibit 4.7 of Form 10-K
of the Registrant for the fiscal year ended December 31, 2004)
 (38)




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##### Table of Contents



No.
    
    Description of Exhibit4.8
    
    Warrant Purchase Agreement, dated December 23, 2003, between the Registrant and
Stonington Corporation (Incorporated by reference to Exhibit 4.8 of Form 10-K
of the Registrant for the fiscal year ended December 31, 2004)
Executive Compensation Plans and Arrangements
(Exhibit No.s 10.1 through 10.8):10.1
    
    1992 Stock Option Plan (Incorporated by reference to Exhibit 10.1 of Form 10-K
of the Registrant for the fiscal year ended December 31, 2004)10.2
    
    Merrill Lynch, Pierce, Fenner & Smith Incorporated Prototype
Simplified Employee Pension Plan (Incorporated by reference to
Exhibit 10.6 of the Registrants Form 10-K for the fiscal year ended
December 31, 1995)10.3
    
    Non-Employee Directors Stock Option Plan (Incorporated by reference
to Exhibit 10.3 of Form 10-Q of the Registrant for the fiscal
quarter ended June 30, 2005)10.4
    
    1998 Stock Option Plan (Incorporated by reference to Exhibit 10.7 of
Form 10-K of the Registrant for the fiscal year ended December 31,
1998)10.5
    
    Form of Incentive Award Agreements, dated December 12, 2001, between
the Registrant and Thomas R. Cambridge, Larry C. Oldham, Eric A.
Bayley and John S. Rutherford granting 2,394 Unit Equivalent Rights
to Mr. Cambridge; 9,564 Unit Equivalent Rights to Mr. Oldham; 2,869
Unit Equivalent Rights to Mr. Bayley; and 7,173 Unit Equivalent
Rights to Mr. Rutherford (Incorporated by reference to Exhibit 10.8
of Form 10-K of the Registrant for the fiscal year ended December
31, 2001)10.6
    
    2001 Non-Employee Directors Stock Option Plan (Incorporated by
reference to Exhibit 10.7 of the Registrants Form 10-Q Report for
the first fiscal quarter ended March 31, 2004)10.7
    
    2004 Non-Employee Director Stock Grant Plan (Incorporated by
reference to Exhibit 10.1 of the Registrants Form 8-K Report dated
September 22, 2004)10.8
    
    Incentive and Retention Plan (Incorporated by reference to Exhibit
10.1 of the Registrants Form 8-K Report dated September 23, 2004
and filed with the Securities and Exchange Commission on September
29, 2004)10.9
    
    Certificate of Formation of First Permian, L.L.C. (Incorporated by
reference to Exhibit 10.1 of the Registrants Form 8-K Report dated
June 30, 1999)10.10
    
    Limited Liability Company Agreement of First Permian, L.L.C.
(Incorporated by reference to Exhibit 10.2 of the Registrants Form
8-K Report dated June 30, 1999)10.11
    
    Amended and Restated Limited Liability Company Agreement of First
Permian, L.L.C. dated as of May 31, 2000 (Incorporated by reference
to Exhibit 10.16 of Form 10-K of the Registrant for the fiscal year
ended December 31, 2000)10.12
    
    Credit Agreement, dated June 30, 1999, by and among First Permian,
L.L.C., Parallel Petroleum Corporation, Baytech, Inc., and Bank One,
Texas, N.A. (Incorporated by reference to Exhibit 10.6 of the
Registrants Form 8-K Report dated June 30, 1999)
 (39)




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##### Table of Contents



No.
    
    Description of Exhibit10.13
    
    Limited Guaranty, dated June 30, 1999, by and among First Permian,
L.L.C., Parallel Petroleum Corporation and Bank One, Texas, N.A.
(Incorporated by reference to Exhibit 10.7 of the Registrants Form
8-K Report dated June 30, 1999)10.14
    
    Second Restated Credit Agreement, dated October 25, 2000, among
First Permian, L.L.C., Bank One, Texas, N.A., and Bank One Capital
Markets, Inc. (Incorporated by reference to Exhibit 10.22 of Form
10-K of the Registrant for the fiscal year ended December 31, 2000)10.15
    
    Loan Agreement, dated as of January 25, 2002, between the Registrant
and First American Bank, SSB (Incorporated by reference to Exhibit
10.25 of Form 10-K of the Registrant for the fiscal year ended
December 31, 2001)10.16
    
    Purchase and Sale Agreement, dated as of November 27, 2002, among
JMC Exploration, Inc., Arkoma Star L.L.C., Parallel, L.P. and
Texland Petroleum, Inc. (Incorporated by reference to Exhibit 10.1
of Form 8-K of the Registrant, dated December 20, 2002)10.17
    
    First Amended and Restated Credit Agreement, dated December 20,
2002, by and among Parallel Petroleum Corporation, Parallel, L.P.,
Parallel, L.L.C., First American Bank, SSB, Western National Bank
and BNP Paribas (Incorporated by reference to Exhibit 10.2 of Form
8-K of the Registrant, dated December 20, 2002)10.18
    
    Guaranty dated December 20, 2002, between Parallel, L.L.C. and First
American Bank, SSB, as Agent (Incorporated by reference to Exhibit
10.3 of Form 8-K of the Registrant, dated December 20, 2002)10.19
    
    First Amendment to First Amended and Restated Credit Agreement,
dated as of September 12, 2003, by and among Parallel Petroleum
Corporation, Parallel, L.P., Parallel, L.L.C., First American Bank,
SSB, Western National Bank, and BNP Paribas (Incorporated by
reference to Exhibit 10.29 of Form 10-Q of the Registrant for the
quarter ended September 30, 2003)10.20
    
    Second Amended and Restated Credit Agreement, dated September 27,
2004, by and among Parallel Petroleum Corporation, Parallel, L.P.,
Parallel, L.L.C., First American Bank, SSB, BNP Paribas, Citibank,
F.S.B. and Western National Bank (Incorporated by reference to
Exhibit 10.1 of the Registrants Form 8-K Report dated September 27,
2004 and filed with the Securities and Exchange Commission on
October 1, 2004)10.21
    
    Agreement of Limited Partnership of West Fork Pipeline Company LP
(Incorporated by reference to Exhibit 10.21 of Form 10-K of the
Registrant for the fiscal year ended December 31, 2004)10.22
    
    First Amendment to Second Amended and Restated Credit Agreement,
dated as of December 27, 2004, by and among Parallel Petroleum
Corporation, Parallel, L.P., Parallel, L.L.C., First American Bank,
SSB, BNP Paribas, Citibank, F.S.B. and Western National Bank
(Incorporated by reference to Exhibit 10.1 of the Registrants Form
8-K Report dated December 30, 2004 and filed with the Securities and
Exchange Commission on December 30, 2004)10.23
    
    Second Amendment to Second Amended and Restated Credit Agreement,
dated as of April 1, 2005, by and among Parallel Petroleum
Corporation, Parallel, L.P., Parallel, L.L.C., First American Bank,
SSB, BNP Paribas, Citibank, F.S.B. and Western National Bank
(Incorporated by reference to Exhibit 10.1 of the Registrants Form
8-K Report dated April 4, 2005 and filed with the Securities and
Exchange Commission on April 8, 2005)
 (40)




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##### Table of Contents



No.
    
    Description of Exhibit10.24
    
    Third Amendment to Second Amended and Restated Credit Agreement
(Incorporated by referenced to Exhibit 10.1 of the Registrants Form
8-K Report dated October 14, 2005 and filed with the Securities and
Exchange Commission on October 20, 2005)10.25
    
    Purchase and Sale Agreement, dated as of October 14, 1005, among
Parallel, L.P., Lynx Production Company, Inc., Elton Resources,
Inc., Cascade Energy Corporation, Chelsea Energy, Inc., William P.
Sutter, Trustee, William P. Sutter Trust, J. Leroy Bell, E. L.
Brahaney, Brent Beck, Cavic Interests, LLC and Stanley Talbott
(Incorporated by reference to Exhibit 10.2 of the Registrants Form
8-K Report dated October 14, 2005 and filed with the Securities and
Exchange Commission on October 20, 2005)10.26
    
    Ancillary Agreement to Purchase and Sale Agreement, dated October
14, 2005, between Parallel, L.P. and Lynx Production Company, Inc.
(Incorporated by reference to Exhibit 10.3 of the Registrants Form
8-K Report dated October 14, 2005 and filed with the Securities and
Exchange Commission on October 20, 2005)10.27
    
    Guarantee of Parallel, L.P., dated October 13, 2004 (Incorporated by
reference to Exhibit 10.4 of the Registrants Form 8-K Report dated
October 14, 2005 and filed with the Securities and Exchange
Commission on October 20, 2005)10.28
    
    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)14
    
    Code of Ethics (Incorporated by reference to Exhibit No. 14 of the
Registrants Form 10-K Report for the fiscal year ended December 31,
2003 and filed with the Securities and Exchange Commission on March
22, 2004)21
    
    Subsidiaries (Incorporated by reference to Exhibit No. 21 of the
Registrants Form 10-K Report for the fiscal year ended December 31,
2003 and filed with the Securities and Exchange Commission on March
22, 2004)*31.1
    
    Certification of Principal Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the Sarbanes 
Oxley Act of 2002*31.2
    
    Certification of Principal Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the Sarbanes 
Oxley Act of 2002*32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes -
Oxley Act of 2002.*32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes -
Oxley Act of 2002.
 
 *
    
    Filed herewith. (41)




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##### Table of Contents



SIGNATURES
  PARALLEL PETROLEUM CORPORATIONDate:
May 9, 2006
    
    BY: /s/ Larry C. OldhamLarry C. OldhamPresident and Chief Executive OfficerDate: May 9, 2006
    
    BY: /s/ Steven D. FosterSteven D. Foster,Chief Financial Officer




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##### Table of Contents



INDEX TO EXHIBITS
 No.
    
    Description of Exhibit3.1
    
    Certificate of Incorporation of Registrant (Incorporated by reference
to Exhibit 3.1 to Form 10-Q of the Registrant for the fiscal quarter
ended June 30, 2004)3.2
    
    Bylaws of Registrant (Incorporated by reference to Exhibit 3 of the
Registrants Form 8-K, dated October 9, 2000, as filed with the Securities and
Exchange Commission on October 10, 2000)3.3
    
    Certificate of Formation of Parallel, L.L.C. (Incorporated by reference to
Exhibit No. 3.3 of the Registrants Registration Statement on Form S-3, No.
333-119725 filed on October 13, 2004)3.4
    
    Limited Liability Company Agreement of Parallel, L.L.C. (Incorporated by
reference to Exhibit No. 3.4 of the Registrants Statement on Form S-3, No.
333-119725 filed on October 13, 2004)3.5
    
    Certificate of Limited Partnership of Parallel, L.P. (Incorporated by reference
to Exhibit No. 3.5 of the Registrants Registration Statement on Form S-3, No.
333-119725 filed on October 13, 2004)3.6
    
    Agreement of Limited Partnership of Parallel, L.P. (Incorporated by reference
to Exhibit No. 3.6 of the Registrants Registration Statement on Form S-3, No.
333-119725 filed on October 13, 2004)4.1
    
    Certificate of Designations, Preferences and Rights of Serial Preferred Stock -
6% Convertible Preferred Stock (Incorporated by reference to Exhibit 4.1 of
Form 10-Q of the Registrant for the fiscal quarter ended June 30, 2004)4.2
    
    Certificate of Designation, Preferences and Rights of Series A Preferred Stock
(Incorporated by reference to Exhibit 4.2 of Form 10-K of the Registrant for
the fiscal year ended December 31, 2000)4.3
    
    Rights Agreement, dated as of October 5, 2000, between the Registrant and
Computershare Trust Company, Inc., as Rights Agent (Incorporated by reference
to Exhibit 4.3 of Form 10-K of the Registrant for the fiscal year ended
December 31, 2000)4.4
    
    Form of Indenture relating to senior debt securities of the Registrant
(Incorporated by reference to Exhibit No. 4.4 of the Registrants Statement on
Form S-3, No. 333-119725 filed on October 13, 2004)4.5
    
    Form of Indenture relating to subordinated debt securities of the Registrant
(Incorporated by reference to Exhibit No. 4.5 of the Registrants Registration
Statement on Form S-3, No. 333-119725 filed on October 13, 2004)4.6
    
    Form of common stock certificate of the Registrant (Incorporated by reference
to Exhibit No. 4.6 of the Registrants Registration Statement on Form S-3, No.
333-119725 filed on October 13, 2004)4.7
    
    Warrant Purchase Agreement, dated November 20, 2001, between the Registrant and
Stonington Corporation (Incorporated by reference to Exhibit 4.7 of Form 10-K
of the Registrant for the fiscal year ended December 31, 2004)




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##### Table of Contents



No.
    
    Description of Exhibit4.8
    
    Warrant Purchase Agreement, dated December 23, 2003, between the Registrant and
Stonington Corporation (Incorporated by reference to Exhibit 4.8 of Form 10-K
of the Registrant for the fiscal year ended December 31, 2004)
Executive Compensation
Plans and Arrangements (Exhibit No.s 10.1 through
10.8):10.1
    
    1992 Stock Option Plan (Incorporated by reference to Exhibit 10.1 of Form 10-K
of the Registrant for the fiscal year ended December 31, 2004)10.2
    
    Merrill Lynch, Pierce, Fenner & Smith Incorporated Prototype
Simplified Employee Pension Plan (Incorporated by reference to
Exhibit 10.6 of the Registrants Form 10-K for the fiscal year ended
December 31, 1995)10.3
    
    Non-Employee Directors Stock Option Plan (Incorporated by reference
to Exhibit 10.3 of Form 10-Q of the Registrant for the fiscal
quarter ended June 30, 2005)10.4
    
    1998 Stock Option Plan (Incorporated by reference to Exhibit 10.7 of
Form 10-K of the Registrant for the fiscal year ended December 31,
1998)10.5
    
    Form of Incentive Award Agreements, dated December 12, 2001, between
the Registrant and Thomas R. Cambridge, Larry C. Oldham, Eric A.
Bayley and John S. Rutherford granting 2,394 Unit Equivalent Rights
to Mr. Cambridge; 9,564 Unit Equivalent Rights to Mr. Oldham; 2,869
Unit Equivalent Rights to Mr. Bayley; and 7,173 Unit Equivalent
Rights to Mr. Rutherford (Incorporated by reference to Exhibit 10.8
of Form 10-K of the Registrant for the fiscal year ended December
31, 2001)10.6
    
    2001 Non-Employee Directors Stock Option Plan (Incorporated by
reference to Exhibit 10.7 of the Registrants Form 10-Q Report for
the first fiscal quarter ended March 31, 2004)10.7
    
    2004 Non-Employee Director Stock Grant Plan (Incorporated by
reference to Exhibit 10.1 of the Registrants Form 8-K Report dated
September 22, 2004)10.8
    
    Incentive and Retention Plan (Incorporated by reference to Exhibit
10.1 of the Registrants Form 8-K Report dated September 23, 2004
and filed with the Securities and Exchange Commission on September
29, 2004)10.9
    
    Certificate of Formation of First Permian, L.L.C. (Incorporated by
reference to Exhibit 10.1 of the Registrants Form 8-K Report dated
June 30, 1999)10.10
    
    Limited Liability Company Agreement of First Permian, L.L.C.
(Incorporated by reference to Exhibit 10.2 of the Registrants Form
8-K Report dated June 30, 1999)10.11
    
    Amended and Restated Limited Liability Company Agreement of First
Permian, L.L.C. dated as of May 31, 2000 (Incorporated by reference
to Exhibit 10.16 of Form 10-K of the Registrant for the fiscal year
ended December 31, 2000)10.12
    
    Credit Agreement, dated June 30, 1999, by and among First Permian,
L.L.C., Parallel Petroleum Corporation, Baytech, Inc., and Bank One,
Texas, N.A. (Incorporated by reference to Exhibit 10.6 of the
Registrants Form 8-K Report dated June 30, 1999)10.13
    
    Limited Guaranty, dated June 30, 1999, by and among First Permian,
L.L.C., Parallel Petroleum Corporation and Bank One, Texas, N.A.
(Incorporated by reference to Exhibit 10.7 of the Registrants Form
8-K Report dated June 30, 1999)




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##### Table of Contents



No.
    
    Description of Exhibit10.14
    
    Second Restated Credit Agreement, dated October 25, 2000, among
First Permian, L.L.C., Bank One, Texas, N.A., and Bank One Capital
Markets, Inc. (Incorporated by reference to Exhibit 10.22 of Form
10-K of the Registrant for the fiscal year ended December 31, 2000)10.15
    
    Loan Agreement, dated as of January 25, 2002, between the Registrant
and First American Bank, SSB (Incorporated by reference to Exhibit
10.25 of Form 10-K of the Registrant for the fiscal year ended
December 31, 2001)10.16
    
    Purchase and Sale Agreement, dated as of November 27, 2002, among
JMC Exploration, Inc., Arkoma Star L.L.C., Parallel, L.P. and
Texland Petroleum, Inc. (Incorporated by reference to Exhibit 10.1
of Form 8-K of the Registrant, dated December 20, 2002)10.17
    
    First Amended and Restated Credit Agreement, dated December 20,
2002, by and among Parallel Petroleum Corporation, Parallel, L.P.,
Parallel, L.L.C., First American Bank, SSB, Western National Bank
and BNP Paribas (Incorporated by reference to Exhibit 10.2 of Form
8-K of the Registrant, dated December 20, 2002)10.18
    
    Guaranty dated December 20, 2002, between Parallel, L.L.C. and First
American Bank, SSB, as Agent (Incorporated by reference to Exhibit
10.3 of Form 8-K of the Registrant, dated December 20, 2002)10.19
    
    First Amendment to First Amended and Restated Credit Agreement,
dated as of September 12, 2003, by and among Parallel Petroleum
Corporation, Parallel, L.P., Parallel, L.L.C., First American Bank,
SSB, Western National Bank, and BNP Paribas (Incorporated by
reference to Exhibit 10.29 of Form 10-Q of the Registrant for the
quarter ended September 30, 2003)10.20
    
    Second Amended and Restated Credit Agreement, dated September 27,
2004, by and among Parallel Petroleum Corporation, Parallel, L.P.,
Parallel, L.L.C., First American Bank, SSB, BNP Paribas, Citibank,
F.S.B. and Western National Bank (Incorporated by reference to
Exhibit 10.1 of the Registrants Form 8-K Report dated September 27,
2004 and filed with the Securities and Exchange Commission on
October 1, 2004)10.21
    
    Agreement of Limited Partnership of West Fork Pipeline Company LP
(Incorporated by reference to Exhibit 10.21 of Form 10-K of the
Registrant for the fiscal year ended December 31, 2004)10.22
    
    First Amendment to Second Amended and Restated Credit Agreement,
dated as of December 27, 2004, by and among Parallel Petroleum
Corporation, Parallel, L.P., Parallel, L.L.C., First American Bank,
SSB, BNP Paribas, Citibank, F.S.B. and Western National Bank
(Incorporated by reference to Exhibit 10.1 of the Registrants Form
8-K Report dated December 30, 2004 and filed with the Securities and
Exchange Commission on December 30, 2004)10.23
    
    Second Amendment to Second Amended and Restated Credit Agreement,
dated as of April 1, 2005, by and among Parallel Petroleum
Corporation, Parallel, L.P., Parallel, L.L.C., First American Bank,
SSB, BNP Paribas, Citibank, F.S.B. and Western National Bank
(Incorporated by reference to Exhibit 10.1 of the Registrants Form
8-K Report dated April 4, 2005 and filed with the Securities and
Exchange Commission on April 8, 2005)10.24
    
    Third Amendment to Second Amended and Restated Credit Agreement
(Incorporated by referenced to Exhibit 10.1 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 Exhibit10.25
    
    Purchase and Sale Agreement, dated as of October 14, 1005, among
Parallel, L.P., Lynx Production Company, Inc., Elton Resources,
Inc., Cascade Energy Corporation, Chelsea Energy, Inc., William P.
Sutter, Trustee, William P. Sutter Trust, J. Leroy Bell, E. L.
Brahaney, Brent Beck, Cavic Interests, LLC and Stanley Talbott
(Incorporated by reference to Exhibit 10.2 of the Registrants Form
8-K Report dated October 14, 2005 and filed with the Securities and
Exchange Commission on October 20, 2005)10.26
    
    Ancillary Agreement to Purchase and Sale Agreement, dated October
14, 2005, between Parallel, L.P. and Lynx Production Company, Inc.
(Incorporated by reference to Exhibit 10.3 of the Registrants Form
8-K Report dated October 14, 2005 and filed with the Securities and
Exchange Commission on October 20, 2005)10.27
    
    Guarantee of Parallel, L.P., dated October 13, 2004 (Incorporated by
reference to Exhibit 10.4 of the Registrants Form 8-K Report dated
October 14, 2005 and filed with the Securities and Exchange
Commission on October 20, 2005)10.28
    
    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)14
    
    Code of Ethics (Incorporated by reference to Exhibit No. 14 of the
Registrants Form 10-K Report for the fiscal year ended December 31,
2003 and filed with the Securities and Exchange Commission on March
22, 2004)21
    
    Subsidiaries (Incorporated by reference to Exhibit No. 21 of the
Registrants Form 10-K Report for the fiscal year ended December 31,
2003 and filed with the Securities and Exchange Commission on March
22, 2004)*31.1
    
    Certification of Principal Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the Sarbanes -
Oxley Act of 2002*31.2
    
    Certification of Principal Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the Sarbanes -
Oxley Act of 2002*32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes -
Oxley Act of 2002.*32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes -
Oxley Act of 2002.
 
 *
    
    Filed herewith