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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
 
 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 0-9498 MISSION RESOURCES CORPORATION   Delaware
(State or other jurisdiction of
incorporation or organization)
    
    76-0437769
(IRS Employer Identification Number)
 1331 Lamar, Suite 1455, Houston, Texas
(Address of principal executive offices)
    
    77010-3039
(ZIP Code)
 (713) 495-3000
Registrants telephone number, including area code Not Applicable
(Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
þ   No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act.) Yes
þ   No o As of May 4, 2005,
41,651,088 shares of common stock of Mission Resources
Corporation were outstanding.




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MISSION RESOURCES CORPORATION INDEX Page #PART I. FINANCIAL INFORMATION
    
    
    1ITEM 1. Financial Statements
    
    
    1Consolidated Balance Sheets:March 31, 2005 (Unaudited) and December 31, 2004
    
    
    1Consolidated Statements of Operations (Unaudited):Three months ended March 31, 2005 and 2004
    
    
    3Consolidated Statements of Cash Flows (Unaudited):Three months ended March 31, 2005 and 2004
    
    
    4Notes to Consolidated Financial Statements (Unaudited)
    
    
    6ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    29ITEM 4. Controls and Procedures
    
    
    31PART II. OTHER INFORMATION
    
    
    32ITEM 1. Legal Proceedings
    
    
    32ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    32ITEM 3. Defaults upon Senior Securities
    
    
    32ITEM 4. Submission of Matters to a Vote of Security Holders
    
    
    32ITEM 5. Other Information
    
    
    32ITEM 6. Exhibits
    
    
    33Certification of CEO Pursuant to Rule 13(a)-14aCertification of CFO Pursuant to Rule 13(a)-14aCertification of CEO Pursuant to Section 1350Certification of CFO Pursuant to Section 1350
  i




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MISSION RESOURCES CORPORATION 
 PART I. FINANCIAL INFORMATION 
 ITEM 1.Financial Statements MISSION RESOURCES CORPORATION 
 CONSOLIDATED BALANCE SHEETS (Amounts in thousands) ASSETS March 31,
    
    
    December 31,2005
    
    
    2004(Unaudited)CURRENT ASSETS:Cash and cash equivalents
    
    $
    9,171
    
    
    $
    5,975Accounts receivable
    
    
    10,255
    
    
    
    4,953Accrued revenues
    
    
    14,051
    
    
    
    12,175Current deferred income taxes
    
    
    7,482
    
    
    
    3,644Prepaid expenses and other
    
    
    1,610
    
    
    
    2,039Total current assets
    
    
    42,569
    
    
    
    28,786PROPERTY AND EQUIPMENT, at cost:Oil and gas properties (full cost), including
unproved properties of $16,423 and $8,858
excluded from amortization as of March 31, 2005 and
December 31, 2004, respectively
    
    
    922,891
    
    
    
    891,147Asset retirement cost
    
    
    18,149
    
    
    
    18,034Accumulated depreciation, depletion and amortization
    
    
    (581,469
    )
    
    
    (571,254
    )Net property, plant and equipment
    
    
    359,571
    
    
    
    337,927Leasehold, furniture and equipment
    
    
    6,063
    
    
    
    5,610Accumulated depreciation
    
    
    (3,038
    )
    
    
    (2,831
    )Net leasehold, furniture and equipment
    
    
    3,025
    
    
    
    2,779OTHER ASSETS
    
    
    8,042
    
    
    
    8,411$
    413,207
    
    
    $
    377,903
 See accompanying notes to condensed consolidated financial statements 1




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MISSION RESOURCES CORPORATION CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share information) LIABILITIES AND STOCKHOLDERS EQUITY March 31,
    
    
    December 31,2005
    
    
    2004(Unaudited)CURRENT LIABILITIES:Accounts payable
    
    $
    12,656
    
    
    $
    9,470Accrued liabilities
    
    
    19,663
    
    
    
    10,950Interest payable
    
    
    6,607
    
    
    
    3,381Commodity derivative liabilities
    
    
    21,855
    
    
    
    10,477Asset retirement obligation
    
    
    2,877
    
    
    
    2,512Advance drilling costs
    
    
    9,854
    
    
    
    2,257Total current liabilities
    
    
    73,512
    
    
    
    39,047LONG-TERM DEBT:Term loan facility
    
    
    25,000
    
    
    
    25,000Revolving credit facility
    
    
    18,000
    
    
    
    15,000Senior 9 7/8% notes due 2011
    
    
    130,000
    
    
    
    130,000Total long-term debt
    
    
    173,000
    
    
    
    170,000LONG-TERM LIABILITIES:Commodity derivative liabilities, excluding current portion
    
    
    6,047
    
    
    
    1,482Deferred income taxes, excluding current portion
    
    
    19,981
    
    
    
    20,003Asset retirement obligation, excluding current portion
    
    
    35,187
    
    
    
    35,366Total long-term liabilities
    
    
    61,215
    
    
    
    56,851STOCKHOLDERS EQUITY:Preferred stock, $0.01 par value, 5,000,000 shares authorized,
none issued or outstanding at March 31, 2005 and
December 31, 2004
    
    
    
    
    
    
    Common stock, $0.01 par value, 60,000,000 shares authorized,
41,535,088 and 41,416,671 shares issued at March 31, 2005
and December 31, 2004, respectively
    
    
    419
    
    
    
    418Additional paid-in capital
    
    
    209,311
    
    
    
    208,740Retained deficit
    
    
    (84,447
    )
    
    
    (87,283
    )Treasury stock, at cost, 389,000 shares at March 31, 2005
and December 31, 2004
    
    
    (1,937
    )
    
    
    (1,937
    )Other comprehensive income (loss), net of taxes
    
    
    (17,866
    )
    
    
    (7,933
    )Total stockholders equity
    
    
    105,480
    
    
    
    112,005$
    413,207
    
    
    $
    377,903
 See accompanying notes to condensed consolidated financial statements 2




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MISSION RESOURCES CORPORATION 
 CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited) (Amounts in thousands, except per share information) Three Months Ended March 31,2005
    
    
    2004REVENUES:Oil and gas revenues
    
    $
    34,361
    
    
    $
    28,796Gain on extinguishment of debt
    
    
    
    
    
    
    1,425Interest and other income (expense)
    
    
    (767
    )
    
    
    (810
    )33,594
    
    
    
    29,411COST AND EXPENSES:Lease operating expenses
    
    
    8,125
    
    
    
    7,106Transportation costs (credits)
    
    
    (43
    )
    
    
    25Taxes other than income
    
    
    2,500
    
    
    
    1,694Asset retirement obligation accretion expense
    
    
    420
    
    
    
    271Depreciation, depletion and amortization
    
    
    10,419
    
    
    
    10,664General and administrative expenses
    
    
    3,399
    
    
    
    2,823Interest expense
    
    
    4,272
    
    
    
    6,26229,092
    
    
    
    28,845Income before income taxes
    
    
    4,502
    
    
    
    566Provision for income taxes
    
    
    1,666
    
    
    
    206Net income
    
    $
    2,836
    
    
    $
    360Net income per share
    
    $
    0.07
    
    
    $
    0.01Net income per share-diluted
    
    $
    0.06
    
    
    $
    0.01Weighted average common shares outstanding
    
    
    41,485
    
    
    
    31,611Weighted average common shares outstanding-diluted
    
    
    43,666
    
    
    
    33,122
 See accompanying notes to condensed consolidated financial statements 3




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MISSION RESOURCES CORPORATION 
 CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 (Amounts in thousands, except per share information) Three Months Ended March 31,2005
    
    
    2004Cash flows from operating activities:Net income
    
    $
    2,836
    
    
    $
    360Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation, depletion and amortization
    
    
    10,782
    
    
    
    11,277Loss on commodity hedges
    
    
    660
    
    
    
    423Gain on extinguishment of debt
    
    
    
    
    
    
    (1,425
    )Asset retirement obligation accretion expense
    
    
    420
    
    
    
    271Deferred income taxes
    
    
    1,593
    
    
    
    111Other
    
    
    25
    
    
    
    379Change in assets and liabilities:Accounts receivable and accrued revenue
    
    
    (7,212
    )
    
    
    (1,062
    )Accounts payable and accrued liabilities
    
    
    22,723
    
    
    
    8,063Other
    
    
    95
    
    
    
    296Net cash flows provided by operating activities
    
    
    31,922
    
    
    
    18,693Cash flows from investing activities:Acquisition of oil and gas properties
    
    
    340
    
    
    
    (27,090
    )Additions to oil and gas properties
    
    
    (32,084
    )
    
    
    (10,717
    )Additions to leasehold, furniture and equipment
    
    
    (453
    )
    
    
    (104
    )Proceeds on sale of oil and gas properties, net
    
    
    4
    
    
    
    2,119Net cash flows used in investing activities
    
    
    (32,193
    )
    
    
    (35,792
    )Cash flows from financing activities:Proceeds from borrowings
    
    
    22,000
    
    
    
    Net proceeds from issuance of common stock
    
    
    468
    
    
    
    Repayment of borrowings
    
    
    (19,000
    )
    
    
    Cash held for reinvestment
    
    
    
    
    
    
    24,877Financing costs
    
    
    (1
    )
    
    
    (436
    )Net cash flows provided by financing activities
    
    
    3,467
    
    
    
    24,441Net increase in cash and cash equivalents
    
    
    3,196
    
    
    
    7,342Cash and cash equivalents at beginning of period
    
    
    5,975
    
    
    
    2,234Cash and cash equivalents at end of period
    
    $
    9,171
    
    
    $
    9,576
 See accompanying notes to condensed consolidated financial statements 4




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MISSION RESOURCES CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)(Unaudited) (Amounts in thousands) Three Months Ended March 31,2005
    
    
    2004Supplemental disclosures of cash flow information:Cash paid during the period for:Interest
    
    $
    495
    
    
    $
    1,770Income taxes paid
    
    $
    11
    
    
    $
    84
 See accompanying notes to condensed consolidated financial statements 5




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MISSION RESOURCES CORPORATION Notes to Condensed Consolidated Financial Statements
  1.
    Summary of Significant Accounting Policies The accompanying unaudited consolidated financial statements have been prepared in accordance
with instructions to Form 10-Q and, therefore, do not include all disclosures required by
accounting principles generally accepted in the United States of America. However, in the opinion
of management, these statements include all adjustments, which are of a normal recurring nature,
necessary to present fairly the financial position of Mission Resources Corporation (the Company
or Mission) at March 31, 2005, and the results of operations and changes in cash flows for the
periods ended March 31, 2005 and 2004. Interim period results are not necessarily indicative of
results of operations or cash flows for a full year. These financial statements should be read in
conjunction with the consolidated financial statements and notes to the consolidated financial
statements in the Companys Annual Report on Form 10-K/A for the year ended December 31, 2004.  Principles of Consolidation The consolidated financial statements include the accounts of Mission Resources Corporation
and its wholly owned subsidiaries. Mission owns a 26.6% interest in the White Shoal Pipeline
Corporation that is accounted for using the equity method. Missions net investment of
approximately $245,000 at March 31, 2005 is included in the other assets line of the Consolidated
Balance Sheet. Mission has not received any distributions from White Shoals Pipeline Corporation
for the three months ended March 31, 2005.  Oil and Gas Property Accounting The Company uses the full cost method of accounting for its investment in oil and gas
properties. Under this method of accounting, all costs of acquisition, exploration and development
of oil and gas reserves (including such costs as leasehold acquisition costs, geological
expenditures, dry hole costs, tangible and intangible development costs and direct internal costs)
are capitalized as the cost of oil and gas properties when incurred. To the extent that capitalized
costs of oil and gas properties, net of accumulated depreciation, depletion and amortization,
exceed the discounted future net revenues of proved oil and gas reserves net of deferred taxes,
such excess capitalized costs would be charged to operations. No such charges to operations were
required during the three month periods ending March 31, 2005 or 2004.  Royalties Payable The accrued liabilities line of the Consolidated Balance Sheet includes approximately $3.2
million of royalties that are awaiting completion of title opinions. Upon receipt of the title
opinions and executed division orders, Mission will be required to make payment. This liability may
increase in size as the well produces or decrease as title opinions are completed and royalties
paid. Typically, royalties are paid within one to two months after the production is sold. Receivables Joint interest receivables are recorded at the invoiced amount and typically do not bear
interest. The Company reviews collectibility of such receivables quarterly. Balances over ninety
days past due and exceeding $30,000 are reviewed individually for collectibility. Account balances
are charged against earnings when the Company determines the potential for recovery is remote.
During the three months ended March 31, 2005, approximately $33,000 in receivables were charged
against earnings. The income charges are included in the interest and other income (expense) line
of the Consolidated Statement of Operations. The Company does not have any off-balance sheet credit
exposure related to its customers. 6




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MISSION RESOURCES CORPORATION
Notes to Condensed Consolidated Financial Statements Comprehensive Income (Loss) Comprehensive income includes all changes in a companys equity except those resulting from
investments by owners and distributions to owners. The Companys total comprehensive income for the
three months ended March 31, 2005 and 2004 was as follows (in thousands): Three Months EndedMarch 31,2005
    
    
    2004Net income
    
    $
    2,836
    
    
    $
    360Hedge accounting for derivative instruments, net of tax
    
    
    (9,933
    )
    
    
    (1,367
    )Comprehensive income (loss)
    
    $
    (7,097
    )
    
    $
    (1,007
    )
 The accumulated balance of other comprehensive loss related to hedge accounting is as follows
(in thousands): Balance at December 31, 2004
    
    $
    (7,933
    )Net loss on cash flow hedges
    
    
    3,855Reclassification adjustments
    
    
    (19,137
    )Tax effect on hedging activity
    
    
    5,349Balance at March 31, 2005
    
    $
    (17,866
    )
 Stock-Based Employee Compensation Plans At March 31, 2005, the Company has two active stock-based employee compensation plans: the
1996 Stock Incentive Plan and the 2004 Stock Incentive Plan. The 2004 Plan was approved by the
Board of Directors on March 4, 2004 and by the Companys stockholders at the May 19, 2004 annual
stockholders meeting. One inactive plan, the 1994 Stock Incentive Plan, still has options
outstanding that have not expired or been exercised; however, no new options can be granted under
the plan. The Company accounts for the plans under the recognition and measurement principles of the Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. No stock-based employee compensation cost is reflected in net income for options
granted under those plans when the exercise price of the option is equal to the market value of the
underlying common stock on the date of the grant. Net income would be affected; however, if the
exercise price of the option differed from the market price. Statement of Financial Accounting Standards (SFAS) No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, amends SFAS No. 123 to provide alternative methods of
transition for an entity that voluntarily changes the fair value based method of accounting for
stock-based employee compensation and to require prominent disclosure about the effects on reported
net income of an entitys accounting policy decisions with respect to stock-based employee
compensation. SFAS No. 148 amends APB Opinion No. 28, Interim Financial Reporting, to require
disclosure about those effects in interim financial information. Had compensation cost for the
Companys stock option compensation plans been determined based on the fair value at the grant
dates for awards under these plans consistent with the method of SFAS No. 123, the Companys pro
forma net income (loss) and pro forma net income (loss) per share of common stock would have been
as follows: 7




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MISSION RESOURCES CORPORATION
Notes to Condensed Consolidated Financial Statements Three Months EndedMarch 31, 2005
    
    
    March 31, 2004Net income (in thousands) *As reported
    
    $
    2,836
    
    
    $
    360Pro forma
    
    $
    2,252
    
    
    $
    360Earnings per shareAs reported
    
    $
    0.07
    
    
    $
    0.01Pro forma
    
    $
    0.05
    
    
    $
    0.01Diluted earnings per shareAs reported
    
    $
    0.06
    
    
    $
    0.01Pro forma
    
    $
    0.05
    
    
    $
    0.01
   *
    
    The stock-based employee compensation cost, net of the related tax effects, that
would have been included in the
determination of net income if the fair value method had been applied to all awards is
$584,000 for the three month period ended March 31, 2005. Recently Adopted Pronouncements Staff Accounting Bulletin (SAB) No. 106, regarding the application of FASB Statement No.
143, Accounting for Asset Retirement Obligations, by oil and gas producing companies following the
full cost accounting method was issued in September 2004. SAB 106 provided an interpretation of how
a company, after adopting Statement 143, should compute the full cost ceiling to avoid
double-counting the expected future cash outflows associated with asset retirement costs. The
provisions of this interpretation have been applied by the Company and did not have a significant
financial impact. SFAS No. 123R, Share-Based Paymentswas issued in December 2004. SFAS No. 123R requires public
companies to measure the cost of employee services in exchange for an award of equity instruments
based on a grant-date fair value of the award (with limited exceptions), and that cost must
generally be recognized over the vesting period. SFAS No. 123R amends the original SFAS No. 123 and
No. 95 that had allowed companies to choose between expensing stock options or showing pro forma
disclosure only. SFAS No. 123R becomes effective as of the beginning of the first annual reporting
period that begins after June 15, 2005; therefore, the Company expects to adopt the standard
January 1, 2006. The impact of SFAS No. 123R is dependent upon grants issued after the effective
date and therefore, cannot be estimated at this time. Financial Accounting Standards Board (FASB) Interpretation No. 47, Accounting for
Conditional Asset Retirement Obligationswas issued in March 2005. FASB Interpretation No. 47
clarifies that a conditional obligation meet the definition of an asset retirement obligation in
Statement No. 143 and therefore should be recognized if their fair value is reasonably estimable.
The interpretation provides additional guidance to evaluate whether fair value is reasonably
estimable. If it is not, Statement No. 143 requires that certain disclosures be made about the
unrecognized asset-retirement obligation. Companies must adopt FASB Interpretation No. 47 no later
than the end of the fiscal year ending after December 15, 2005. Mission is currently assessing
whether it has any conditional asset retirement obligation that would require disclosure. SAB No. 107, Share-Based Paymentswas issued in April 2005, confirming the latitude in SFAS
No. 123Rs provisions on selecting models for valuing share options and clarifying other positions
on accounting and disclosures for share-based payment arrangements. The Bulletin permits
registrants to choose from different models to estimate the fair value of share options, provides
guidance on developing assumptions used in the model and addresses the interaction between FASB No.
123R and Accounting Series Release (ASR) No. 268 and other SEC literature. 8




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MISSION RESOURCES CORPORATION
Notes to Condensed Consolidated Financial Statements Asset Retirement Obligations In July 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations, which
provided accounting requirements for retirement obligations associated with tangible long-lived
assets. SFAS No. 143 requires that the Company record a liability for the fair value of its asset
retirement obligation, in the period in which the liability is incurred if a reasonable estimate of
fair value can be made. The amount of the asset retirement obligation is added to the carrying
amount of the asset and this additional carrying amount is depreciated over the life of the asset.
The liability is accreted at the end of each period with the charge shown on the asset retirement
obligation accretion expense line of the Consolidated Statement of Operations. If the obligation is
settled for other than the carrying amount of the liability, the Company will recognize a gain or
loss on settlement. The following table shows changes in the asset retirement obligation that have occurred in the
first quarter of 2005 (amounts in thousands): Quarter EndedAsset Retirement Obligation
    
    March 31, 2005December 31, 2004 balance
    
    $
    37,878Liabilities incurred
    
    
    114Liabilities settled
    
    
    (348
    )Liabilities sold
    
    
    Accretion expense
    
    
    420Ending balance
    
    
    38,064Less: current portion
    
    
    2,877Long-term portion
    
    $
    35,187
 Reclassifications Certain reclassifications of prior period statements have been made to conform with current
reporting practices. Use of estimates In order to prepare the financial statements in conformity with accounting principles
generally accepted in the United States, management of the Company has made a number of estimates
and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent
assets and liabilities, and reserve information. Actual results could differ from those estimates.  2.
    Stockholders Equity On February 25, 2004, the Company acquired $15 million of its 10 7/8% senior subordinated
notes due 2007 from Stellar Funding, Ltd. in exchange for 6.25 million shares of the Companys
common stock. On March 15, 2004, the Company acquired an additional $15 million of its 10 7/8%
senior subordinated notes due 2007 from Harbert Distressed Investment Master Fund, Ltd. in exchange
for 6.0 million shares of the Companys common stock. On April 8, 2004, Mission issued 312,000 shares of its common stock in lieu of cash to its
financial advisors as a fee for services rendered during the debt refinancing discussed below in
Note 3. The $1.2 million fair value of this consideration was recorded as deferred financing costs
in the other assets line of the Consolidated Balance Sheet. 9




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MISSION RESOURCES CORPORATION
Notes to Condensed Consolidated Financial Statements The following represents a reconciliation of the numerator and denominator of the basic
earnings per share computation to the numerator and denominator of the diluted earnings per share
computation for the three months ended March 31, 2005 and 2004, respectively. Additionally,
potentially dilutive options that are not in the money are excluded from the computation of diluted
earnings per share. For the three months ended March 31, 2005 and 2004, the potentially dilutive
options excluded represented 586,75 and 1.1 million shares, respectively. SFAS No. 128 reconciliation (amounts in thousands except per share amounts): For the Three Months Ended
    
    
    For the Three Months EndedMarch 31, 2005
    
    
    March 31, 2004Income
    
    
    Shares
    
    
    Per Share
    
    
    Income
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    Amount
    
    
    (Numerator)
    
    
    (Denominator)
    
    
    AmountIncome per common
share:Income available to
common stockholders
    
    $
    2,836
    
    
    
    41,485
    
    
    $
    0.07
    
    
    $
    360
    
    
    
    31,611
    
    
    $
    0.01Effect of dilutive
securities:Options
    
    
    
    
    
    
    2,181
    
    
    
    
    
    
    
    
    
    
    
    1,511Income per common
share-diluted:Income available to
common stockholders
and assumed
conversions
    
    $
    2,836
    
    
    
    43,666
    
    
    $
    0.06
    
    
    $
    360
    
    
    
    33,122
    
    
    $
    0.01
 As of March 31, 2005 and 2004, Mission held in treasury 389,323 shares of its common stock
that had been acquired at an aggregate price of $1.9 million. These treasury shares are reported at
cost as a reduction to Stockholders Equity on the Consolidated Balance Sheet.  3.
    Long Term Debt Refinancing On April 8, 2004, Mission issued new senior notes, announced the redemption of its 10 7/8%
senior subordinated notes due 2007 (the 10 7/8% Notes), and replaced both its revolving credit
facility and its term loan. Those transactions and the details of the resulting debt are discussed
below. 9 7/8% Notes On April 8, 2004, Mission issued $130.0 million of its 9 7/8% senior notes due 2011 (the 9
7/8% Notes) which are guaranteed on an unsubordinated, unsecured basis by all of its current
subsidiaries. Interest on the notes is payable semi-annually, on each April 1 and October 1,
commencing on October 1, 2004. A portion of the net proceeds from the offering of the 9 7/8 % Notes was set aside to redeem,
on May 10, 2004, the $87.4 million aggregate principal amount of the 10 7/8 % Notes that remained
outstanding. On April 8, 2004, the remainder of the net proceeds from the offering of the 9 7/8%
Notes, together with $21.5 million that was advanced under the new senior secured revolving credit
facility (as described below) and $25.0 million that was borrowed under the new second lien term
loan (as described below), was used to completely discharge all of the Companys outstanding
indebtedness under its prior revolving credit facility and term loan. 10




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MISSION RESOURCES CORPORATION
Notes to Condensed Consolidated Financial Statements At any time on or after April 9, 2005 and prior to April 9, 2008, the Company may redeem up to
35% of the aggregate original principal amount of the 9 7/8% Notes, using the net proceeds of
equity offerings, at a redemption price equal to 109.875% of the principal amount of the 9 7/8%
Notes, plus accrued and unpaid interest. On or after April 9, 2008, the Company may redeem all or a
portion of the 9 7/8% Notes at the redemption prices (expressed as percentages of principal amount) set forth
below plus accrued and unpaid interest, if redeemed during the twelve-month period beginning on
April 9th of the years indicated below: Year
    
    Percentage2008
    
    
    104.93750
    %2009
    
    
    102.46875
    %2010
    
    
    100.00000
    %
 If the Company experiences specific kinds of change of control, it may be required to purchase
all or part of the 9 7/8% Notes at a price equal to 101% of the principal amount together with
accrued and unpaid interest. The 9 7/8% Notes contain covenants that, subject to certain exceptions and qualifications,
limit the Companys ability and the ability of certain of its subsidiaries to:  
    incur additional indebtedness or issue certain types of preferred stock or
redeemable stock;
    transfer or sell assets;
    enter into sale and leaseback transactions;
    pay dividends or make other distributions on stock, redeem stock or redeem
subordinated debt;
    enter into transactions with affiliates;
    create liens on its assets;
    guarantee other indebtedness;
    enter into agreements that restrict dividends from subsidiaries;
    make investments;
    sell capital stock of subsidiaries; and
    merge or consolidate. Moodys and Standard & Poors currently publish debt ratings for the 9 7/8% Notes. Their
ratings consider a number of items including the Companys debt levels, planned asset sales,
near-term and long-term production growth opportunities, capital allocation challenges and
commodity price levels. Moodys rating on the 9 7/8% Notes is Caa2 and Standard & Poors rating
is CCC. A decline in credit ratings will not create a default or other unfavorable change in the
9 7/8% Notes. On April 4, 2005, Moodys placed Missions ratings under review with a direction uncertain
following the announcement that Petrohawk Energy Corporation (Petrohawk) was acquiring Mission.
The review will enable Moodys to complete an assessment of Petrohawk and the effect that the
combination will have upon holders of the 9 7/8% Notes. On April 5, 2005, also in response to the
Petrohawk announcement, Standard & Poors placed Mission on CreditWatch with negative implications
to reflect the potential for Missions current rating to be affirmed or lowered, or that a negative
outlook could be assigned. 11




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##### Table of Contents



MISSION RESOURCES CORPORATION
Notes to Condensed Consolidated Financial Statements Senior Secured Revolving Credit Facility On April 8, 2004, the Company entered into a new senior secured revolving credit facility led
by Wells Fargo Bank, N.A. The facility, which matures on April 8, 2007, is secured by a first
priority mortgage and security interest in at least 85% of the Companys oil and gas properties,
all of the ownership interests of all of the Companys subsidiaries, and the Companys equipment,
accounts receivable, inventory, contract rights, general intangibles and other assets. The facility
is also guaranteed by all of the Companys subsidiaries. Availability under the facility, which includes a $3 million subfacility for standby letters
of credit, is subject to a borrowing base that is determined at the sole discretion of the facility
lenders. The initial borrowing base of the facility was $50 million, of which $30 million was
available for general corporate purposes and $20 million was available for the acquisition of oil
and gas properties approved by the lenders. The borrowing base is redetermined on each April 1 and
October 1. Mission and the lenders each have the option to request one unscheduled interim
redetermination between scheduled redetermination dates. On March 24, 2005, the borrowing base was
set at $50 million to be used for general corporate purposes. On April 8, 2004, the Company was advanced $21.5 million under the facility, which amount,
together with a portion of the net proceeds from the offering of the 9 7/8% Notes and $25 million
that was borrowed under the new second lien term loan (as described below), was used to completely
discharge all of the Companys outstanding indebtedness under its prior revolving credit facility
and term loan. At March 31, 2005, $18.0 million in borrowings were outstanding and $31.9 million
was available for borrowing. Advances under the facility bear interest, at the Companys option, at either (i) a margin
(which varies from 25.0 basis points to 125.0 basis points based upon utilization of the borrowing
base) over the base rate, which is the higher of (a) Wells Fargos prime rate in effect on that
day, and (b) the federal funds rate in effect on that day as announced by the Federal Reserve Bank
of New York, plus 0.5%; or (ii) a margin (which varies from 175.0 basis points to 275.0 basis
points based upon utilization of the borrowing base) over LIBOR. The Company is allowed to prepay
any base rate or LIBOR loan without penalty, provided that each prepayment is at least $500,000 and
multiples of $100,000 in excess thereof, plus accrued and unpaid interest. Standby letters of credit may be issued under the $3 million letter of credit subfacility.
Mission is required to pay, to the issuer of the letter of credit, with respect to each issued
letter of credit, (i) a per annum letter of credit fee equal to the LIBOR margin then in effect
multiplied by the face amount of such letter of credit plus (ii) an issuing fee of the greater of
$500 or 12.5 basis points. The facility requires the Company to hedge forward, on a rolling 12-month basis, 50% of proved
producing volumes projected to be produced over the following 12 months. The Company is also
required to hedge forward, on a rolling 12-month basis, 25% of proved producing volumes projected
to be produced over the succeeding 12-month period. Any time that Mission has borrowings under the
facility in excess of 70% of the borrowing base available for general corporate purposes, the agent
under the facility may require Mission to hedge a percentage of projected production volumes on
terms acceptable to the agent. 12




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##### Table of Contents



MISSION RESOURCES CORPORATION
Notes to Condensed Consolidated Financial Statements The facility also contains the following restrictions on hedging arrangements and interest
rate agreements: (i) the hedge provider must be a lender under the facility or an unsecured
counterparty acceptable to the agent under the facility; and (ii) total notional volume must not be
more than 75% of scheduled proved producing net production quantities in any period or, with
respect to interest rate agreements, notional principal amount must not exceed 75% of outstanding
loans, including future reductions in the borrowing base. The facility contains the following covenants which are considered important to the Companys
operations. At March 31, 2005, Mission was in compliance with each of the following covenants:  
    The Company is required to maintain a current ratio of consolidated current
assets (as defined in the facility) to consolidated current liabilities (as defined
in the facility) of not less than 1.0 to 1.0;
    The Company is required to maintain (on a rolling four quarter basis) an
interest coverage ratio (as defined in the facility) of no less than (i) 2.75 for
March 31, 2005 through June 30, 2005, and (ii) 3.0 for September 30, 2005 and
thereafter;
    The Company is required to maintain (on a rolling four quarter basis) a leverage
ratio (as defined in the facility) of no more than 3.5 for December 31, 2004 and
thereafter; and
    The Company is required to maintain a tangible net worth (as defined in the
facility) of not less than 85% of tangible net worth at March 31, 2004, plus 50% of
positive net income after tax distributions, plus 100% of equity offerings after
March 31, 2004, excluding any asset impairment charges. The facility also includes restrictions with respect to changes in the nature of the Companys
business; sale of all or a substantial or material part of its assets; mergers, acquisitions,
reorganizations and recapitalizations; liens; guarantees; debt; leases; dividends and other
distributions; investments; debt prepayments; sale-leasebacks; capital expenditures; lease
expenditures; and transactions with affiliates. Second Lien Term Loan On April 8, 2004, Mission entered into a second lien term loan with a syndicate of lenders
arranged by Guggenheim Corporate Funding, LLC. The loan, which matures on April 8, 2008, is secured
by a second priority security interest in the assets securing the senior secured revolving credit
facility. The facility is also guaranteed by all of Missions subsidiaries. On April 8, 2004, the
Company borrowed the $25.0 million under the loan, which amount, together with a portion of the net
proceeds from the offering of the 9 7/8% Notes and $21.5 million borrowed under the senior secured
revolving credit facility (as described above), was used to completely discharge all of the
outstanding indebtedness under the prior revolving credit facility and term loan. The loan accrues interest in each monthly interest period at the rate of the 30-day LIBOR plus
525 basis points per annum, payable monthly in cash. The Company may prepay the loan at any time
after the date six months and one day after April 8, 2004, in whole or in part, in multiples of $1
million at the prices (expressed as percentages of principal amount) set forth below, plus accrued
and unpaid interest, if prepaid during each successive 12-month period beginning on April
9th of each year indicated below: 13




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MISSION RESOURCES CORPORATION
Notes to Condensed Consolidated Financial Statements Year
    
    Premium2005
    
    
    101
    %2006 to maturity
    
    
    100
    %
 provided, however, that no prepayment shall be made prior to the date six months and one day after
April 8, 2004. No such prepayment was made prior to such date as required. The loan contains covenants that are no more restrictive than those contained in the senior
secured revolving credit facility. Redeemed 10 7/8% Notes In April 1997, the Company issued $100 million of 10 7/8% Notes due 2007. On May 29, 2001, the
Company issued an additional $125 million of 10 7/8% Notes with identical terms to the notes issued
in April 1997 at a premium of $1.9 million. The premium, shown separately on the Consolidated
Balance Sheet, was amortized as a reduction of interest expense over the life of the 10 7/8% Notes
so that the effective interest rate on the additional 10 7/8% Notes was 10.5%. Interest on the 10
7/8% Notes was payable semi-annually on April 1 and October 1. On March 28, 2003, the Company acquired, in a private transaction with various funds
affiliated with Farallon Capital Management, LLC, approximately $97.6 million in principal amount
of the 10 7/8% Notes for approximately $71.7 million, plus accrued interest. Including costs of the
transaction and the removal of $2.2 million of previously deferred financing costs related to the
acquired 10 7/8% Notes, the Company recognized a $22.4 million gain on the extinguishment of the 10
7/8% Notes. In December 2003, February 2004 and March 2004, the Company, in three private transactions,
acquired $40.0 million aggregate principal amount of the 10 7/8% Notes in exchange for an aggregate
of 16.75 million shares of its common stock as summarized below: Net Gain onPrincipal
    
    Common
    
    Extinguishment ofDate
    
    Note Holder
    
    Value
    
    Shares
    
    10 7/8% NotesDecember 2003
    
    FTVIPT  Franklin
Income Securities
Fund and Franklin
Custodian Funds 
Income Series
    
    $10 million
    
    4.50 million
    
    $1.1 millionFebruary 2004
    
    Stellar Fundings, Ltd.
    
    $15 million
    
    6.25 million
    
    $0.5 millionMarch 2004
    
    Harbert Distressed
Investment Master
Fund, Ltd.
    
    $15 million
    
    6.00 million
    
    $0.9 million
 On May 10, 2004, the remaining $87.4 million of 10 7/8% Notes were redeemed at a premium of
approximately $1.6 million. This premium is included in the $4.1 million ($2.6 million, net of tax)
net loss on extinguishment of debt reported in the three month period ended June 30, 2004. 14




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MISSION RESOURCES CORPORATION
Notes to Condensed Consolidated Financial Statements Former Credit Facilities The Company was party to a $150.0 million credit facility with a syndicate of lenders. The
credit facility was a revolving facility, expiring May 16, 2004, which allowed Mission to borrow,
repay and re-borrow under the facility from time to time. The total amount which might be borrowed
under the facility was limited by a borrowing base that was periodically set by the lenders based
on Missions oil and gas reserves and other factors deemed relevant by the lenders. The facility
was re-paid in full and cancelled on March 28, 2003. On March 28, 2003, simultaneously with the acquisition of $97.6 million in principal amount of
the 10 7/8% Notes, the Company amended and restated its existing credit facility with new lenders,
led by Farallon Energy Lending, LLC. Deferred financing costs of $947,000 relating to the
previously existing facility were charged to earnings as a reduction in the gain on extinguishment
of debt. Under the amended and restated facility, the Company borrowed $80.0 million, the proceeds
of which were used to acquire approximately $97.6 million face amount of 10 7/8% Notes, to pay
accrued interest on the 10 7/8% Notes purchased, and to pay closing costs. The amended and restated
facility was cancelled in April 2004 and was replaced by the Senior Secured Revolving Credit
Facility discussed above.  4.
    Derivative Instruments and Hedging Activities The Company produces and sells crude oil, natural gas and natural gas liquids. As a result,
its operating results can be significantly affected by fluctuations in commodity prices caused by
changing market forces. The Company periodically seeks to reduce its exposure to price volatility
by hedging a portion of its production through swaps, options and other commodity derivative
instruments. A combination of options, structured as a costless collar, is the Companys preferred
hedge instrument because there are no up-front costs and protection is given against low prices.
Such hedges assure that Mission receives NYMEX prices no lower than the floor price and no higher
than the ceiling price for hedged production. Hedging activities decreased revenues by $3.9 million
and $2.8 million for the three month periods ended March 31, 2005 and 2004, respectively. The Companys 12-month average realized price, excluding hedges, for natural gas was $0.19 per
MCF less than the NYMEX MMBTU price. The Companys 12-month average realized price, excluding
hedges, for oil was $1.98 per BBL less than the NYMEX BBL price. Realized prices differ from NYMEX
as a result of factors such as the location of the property, the heating content of natural gas and
the quality of oil. The gas differential stated above excludes the impact of the Mist field gas
production that is sold at an annually fixed price. The Company has elected to designate all hedges by applying the interpretations from the
FASBs Derivative Implementation Group issue G-20 (DIG G-20). By using the DIG G-20 approach,
because the Companys collars meet specific criteria, the time value component is included in the
hedge relationship and is recorded to other comprehensive income (OCI) rather than to income,
which reduces earnings variability. Should ineffectiveness occur for reasons other than time, that ineffectiveness is recognized
currently and is reported in the interest and other income line of the Consolidated Statement of
Operations. The Company has acquired a license for software specifically designed to make the
complex calculations required by SFAS No. 133, as amended, including calculating ineffectiveness.
The Company recognized a net loss related to the ineffectiveness of its cash flow hedges in the
three months ended March 31, 2004 and 2005 of approximately $423,000 and $660,000, respectively.
As the existing hedges settle over the next two years, gains or losses in OCI will be reclassified
to earnings. Using March 31, 2005 strip prices, the amount expected to be reclassified over the
next twelve months will be a $13.9 million loss, net of taxes. 15




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##### Table of Contents



MISSION RESOURCES CORPORATION
Notes to Condensed Consolidated Financial Statements The following tables detail the cash flow commodity hedges that were in place at March 31,
2005: Oil Hedges NYMEX
   
    
    
    NYMEXBBLS
    
    
    
    
    
    
    
    
    
    
    
    
    
    Price Floor
    
    
    
    Price CeilingPeriod
    
    
    Per Day
    
    
    
    Total BBLS
    
    
    
    Type
    
    
    
    Avg.
    
    
    
    Avg.Second Qtr. 2005
    
    
    
    2,500
    
    
    
    
    227,500
    
    
    
    Collar
    
    
    $
    32.54
    
    
    
    $
    36.47Third Qtr. 2005
    
    
    
    2,500
    
    
    
    
    230,000
    
    
    
    Collar
    
    
    $
    32.06
    
    
    
    $
    35.71Fourth Qtr. 2005
    
    
    
    2,500
    
    
    
    
    230,000
    
    
    
    Collar
    
    
    $
    31.53
    
    
    
    $
    35.18First Qtr. 2006
    
    
    
    1,750
    
    
    
    
    157,500
    
    
    
    Collar
    
    
    $
    34.49
    
    
    
    $
    48.20Second Qtr. 2006
    
    
    
    1,750
    
    
    
    
    159,250
    
    
    
    Collar
    
    
    $
    34.16
    
    
    
    $
    46.86Third Qtr. 2006
    
    
    
    1,750
    
    
    
    
    161,000
    
    
    
    Collar
    
    
    $
    33.58
    
    
    
    $
    46.07Fourth Qtr. 2006
    
    
    
    1,750
    
    
    
    
    161,000
    
    
    
    Collar
    
    
    $
    33.33
    
    
    
    $
    45.08
 Gas Hedges NYMEX
    
    
    
    NYMEXMMBTU
    
    
    
    
    
    
    
    
    
    
    
    
    
    Price Floor
    
    
    
    Price CeilingPeriod
    
    
    Per Day
    
    
    
    Total MMBTU
    
    
    
    Type
    
    
    
    Avg.
    
    
    
    Avg.Second Qtr. 2005
    
    
    
    14,000
    
    
    
    
    1,274,000
    
    
    
    Collar
    
    
    $
    5.02
    
    
    
    $
    6.82Third Qtr. 2005
    
    
    
    14,000
    
    
    
    
    1,288,000
    
    
    
    Collar
    
    
    $
    5.02
    
    
    
    $
    6.86Fourth Qtr. 2005
    
    
    
    14,000
    
    
    
    
    1,288,000
    
    
    
    Collar
    
    
    $
    5.06
    
    
    
    $
    7.47First Qtr. 2006
    
    
    
    7,500
    
    
    
    
    675,000
    
    
    
    Collar
    
    
    $
    5.84
    
    
    
    $
    9.57Second Qtr. 2006
    
    
    
    5,500
    
    
    
    
    500,500
    
    
    
    Collar
    
    
    $
    5.50
    
    
    
    $
    7.43Third Qtr. 2006
    
    
    
    5,500
    
    
    
    
    506,000
    
    
    
    Collar
    
    
    $
    5.50
    
    
    
    $
    7.40Fourth Qtr. 2006
    
    
    
    5,500
    
    
    
    
    506,000
    
    
    
    Collar
    
    
    $
    5.73
    
    
    
    $
    8.23
  5.
    Income Taxes The provision for federal and state income taxes for the three months ended March 31, 2005 was
based upon a 37% effective tax rate. In assessing the realizability of the deferred tax assets,
management considers whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon
the recognition of future taxable income during the periods in which those temporary differences
are available. Based upon projections for future state taxable income, management believes it is
more likely than not that the Company will not realize a portion of its deferred tax asset related
to state tax net operating loss (NOL) carryforwards. In addition, management believes it is more
likely than not that the Company will not realize its deferred tax asset related to the impairment
of the interest in Carpatsky. Accordingly, a valuation allowance of approximately $3.9 million has
been recorded at March 31, 2005. On December 17, 2003, the Company issued 4.5 million shares of common stock in exchange for
the surrender of $10 million of the 10 7/8% Notes. As a result of this transaction, management
believes that the Company has experienced an ownership change as defined in Section 382 of the
Internal Revenue Code, which could result in the imposition of significant limitations on the
future use of the Companys existing NOL and tax credit carryforwards in the future. As of March
31, 2005, management believes that the limitations imposed by section 382 will not result in the
Company being unable to fully utilize its NOL and tax credit carryforwards to offset future taxable
income and related tax liabilities. 16




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##### Table of Contents



MISSION RESOURCES CORPORATION
Notes to Condensed Consolidated Financial Statements  6.
    Guarantees In 1993 and 1996, the Company entered into agreements with surety companies and with Torch
Energy Advisors Incorporated (Torch) and Nuevo Energy Company (Nuevo) whereby the surety
companies agreed to issue such bonds to the Company, Torch and/or Nuevo. However, Torch, Nuevo and
the Company agreed to be jointly and severally liable to the surety company for any liabilities
arising under any bonds issued to the Company, Torch and/or Nuevo. Torch currently has no bonds
outstanding pursuant to these agreements and Nuevo has issued approximately $34.3 million of bonds.
The Company has notified the sureties that it will not be responsible for any new bonds issued to
Torch or Nuevo. However, the sureties are permitted under these agreements to seek reimbursement
from the Company, as well and from Torch and Nuevo, if the surety makes any payments under the
bonds issued to Torch and Nuevo. On May 17, 2004, Plains Exploration and Production Company
announced it had completed the acquisition of Nuevo Energy Company effective May 14, 2004. The Companys subsidiaries, Mission E&P Limited Partnership, Mission Holdings LLC and Black
Hawk Oil Company are guarantors under the Senior Secured Revolving Credit Facility, the Second Lien
Term Loan and the indenture for the 9 7/8% Notes.  7.
    Supplemental Guarantor Information Mission E&P Limited Partnership, Mission Holdings LLC and Black Hawk Oil Company, all
subsidiaries of Mission Resources Corporation (collectively, the Guarantor Subsidiaries) are
guarantors under the Senior Secured Revolving Credit Facility, the Second Lien Term Loan and the
indenture for the 9 7/8% Notes. The Company does not believe that
separate quarterly financial statements and
other disclosures concerning the Guarantor Subsidiaries would provide any additional information
that would be material to investors in making an investment decision.  8.
    Subsequent Events On April 4, 2005, Petrohawk Energy Corporation (Petrohawk) and Mission announced that they
had entered into a definitive agreement whereby Petrohawk would acquire Mission for a combination
of Petrohawk stock, cash and the assumption of debt. The total consideration will consist of approximately 60 percent Petrohawk common stock and 40
percent cash totaling approximately 19.2 million Petrohawk common shares and $135 million cash. The
acquisition is subject to the approval of the stockholders of Mission and Petrohawk. The board of
directors of both companies have unanimously approved the transaction, which is subject to
customary conditions, including regulatory approvals. The acquisition is expected to be completed
during the third quarter of 2005. On April 15, 2005, as a result of the above mentioned acquisition, we terminated our
exploration and production system conversion project. As a result, all development costs related to the project as
well as additional contract termination costs, approximately $1.8 million in total, will be
expensed prior to the merger. 17




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##### Table of Contents



MISSION RESOURCES CORPORATION 
 ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations Mission is an independent oil and gas exploration and production company. We drill for,
acquire, develop and produce natural gas and crude oil. Our property portfolio is comprised of
long-lived, low-risk assets, like those in the Permian Basin, and multi-reservoir,
high-productivity assets found along the Gulf Coast and in the Gulf of Mexico. Our operational
focus remains on efficient, well managed upstream natural gas and crude oil exploration and
production. As a result of our successful first quarter drilling program, we have added a new core area,
South Texas. Mission participated in the drilling of the Weise #1 well in July 2004, which began
producing in January 2005 at an initial gross rate of 14.5 million cubic feet of gas per day. Since
January 1, 2005, Mission has participated in the drilling of the Dehnert #1, the Buckner Foundation
#1 and the Weise #2 wells in the Lions Wilcox field in Goliad County, Texas. The Simmons #1 and the
Wright Materials #3 are currently drilling. Mission holds a 35% working interest in the Weise #1,
the Dehnert #1, the Simmons #1 and the Buckner Foundation #1, a 31.5% working interest in the Weise
#2, and a 28% working interest in the Wright Materials #3. Another drilling success is the Iles #1
in Jefferson County, Texas. Results of Operations The following table sets forth certain information for Mission for the periods presented: Three Months Ended March 31,
    
    
    Change2005
    
    
    2004
    
    
    Amount
    
    
    PercentProduction:Oil and condensate (MBBLs)
    
    
    425
    
    
    
    401
    
    
    
    24
    
    
    
    6.0
    %Natural gas (MMCF)
    
    
    3,102
    
    
    
    3,216
    
    
    
    (114
    )
    
    
    (3.5
    %)MMCFE
    
    
    5,652
    
    
    
    5,622
    
    
    
    30
    
    
    
    0.5
    %Average sales price including the effect
of hedges:Oil and condensate (per BBL)
    
    $
    38.07
    
    
    $
    27.54
    
    
    $
    10.53
    
    
    
    38.2
    %Natural gas (per MCF)
    
    $
    5.86
    
    
    $
    5.52
    
    
    $
    0.34
    
    
    
    6.2
    %Average sales price excluding the
effect of hedges:Oil and condensate (per BBL)
    
    $
    47.14
    
    
    $
    34.25
    
    
    $
    12.89
    
    
    
    37.6
    %Natural gas (per MCF)
    
    $
    5.86
    
    
    $
    5.55
    
    
    $
    0.31
    
    
    
    5.6
    %Average cost per unit of production
(per MCFE):Lease operating expense
    
    $
    1.44
    
    
    $
    1.26
    
    
    $
    0.18
    
    
    
    14.3
    %General and administrative expense
    
    $
    0.60
    
    
    $
    0.50
    
    
    $
    0.10
    
    
    
    20.0
    %Depreciation, depletion
and amortization
    
    $
    1.81
    
    
    $
    1.86
    
    
    $
    (0.05
    )
    
    
    (2.7
    %)
 18




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##### Table of Contents



MISSION RESOURCES CORPORATION Three Months Ended March 31, 2005 and 2004 Net Income Net income for the three months ended March 31, 2005 was $2.8 million or $0.06 per share. Net
income for the three months ended March 31, 2004 was $360,000 or $0.01 per share. Higher oil
volumes, partially offset by lower gas volumes, along with substantially higher commodity prices
were the primary reasons for the increase in net income. Lower interest expense offset somewhat by
higher lease operating expenses also contributed to this increase. Oil and Gas Revenues Oil revenues for the three months ended March 31, 2005 were $16.2 million, as compared to
$11.0 million for the respective period in 2004. The increase in oil revenue is mainly the result
of a 38.2% increase in oil prices. Realized oil prices averaged $38.07 per barrel in the three
month period ended March 31, 2005, as compared to $27.54 per barrel in the three month period ended
March 31, 2004. Oil production increased 6.0% from 401,000 barrels in the three month period ended
March 31, 2004 to 425,000 barrels for the same period of 2005. Missions successes with its
drilling program in the first quarter of 2005, along with the purchase of an additional working
interest in the Chocolate Bayou, Southwest Lake Boeuf, Backridge and West Lake Verret fields in the
fourth quarter of 2004, accounted for most of the production increase. Gas revenues increased from $17.8 million reported for the three month period ended March 31,
2004 to $18.2 million for the three months ended March 31, 2005. This increase was driven by a 6.2%
increase in realized gas prices. Realized gas prices averaged $5.86 per MCF in the three month
period ended March 31, 2005 as compared to $5.52 per MCF in the comparable period of 2004. The realized prices discussed above include the impact of oil and gas hedges. Decreases of
$2.8 million and $3.9 million related to hedging activity were reflected in oil and gas revenues
for the three months ended March 31, 2004 and March 31, 2005, respectively. Extinguishment of debt In February and March of 2004, $30.0 million in principal amount of the 10 7/8 Notes were
retired at a net gain of $1.4 million ($905,000 net of taxes) on extinguishment of debt. Interest and Other Income (Expense) Interest and other income (expense) was a net expense of $767,000 and $810,000 for the three
months ended March 31, 2005 and 2004, respectively. In the first quarter of 2005, a $660,000 loss
on hedge ineffectiveness was the most significant item as compared to a loss on hedge
ineffectiveness of $423,000 in the first quarter of 2004. Also, in the first quarter of 2004, bad
debt expense totaled $395,000 as compared to $33,000 in the first quarter of 2005. Lease Operating Expenses Lease operating expenses increased from $7.1 million in the three months ended March 31, 2004
to $8.1 million for the same period of 2005, or from $1.26 per MCFE to $1.44 per MCFE on a per unit
basis. This increase was primarily the result of a large number of workovers being performed in the
West Lake Verret and other fields. Some of the work performed was a direct result of the current
pricing environment and would not have been economical to perform in the past. Also, there has been
an increase 19




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MISSION RESOURCES CORPORATION in the cost of basic oil field services. We expect the trends in increased operating expenses
and basic oil field services to continue into 2005. Taxes Other Than Income The table below details the components of taxes other than income and their respective changes
between the periods (dollars in thousands). Three Months EndedMarch 31,
    
    
    Change2005
    
    
    2004
    
    
    Amount
    
    
    PercentProduction taxes
    
    $
    2,151
    
    
    $
    1,145
    
    
    $
    1,006
    
    
    
    88
    %Property taxes
    
    
    188
    
    
    
    442
    
    
    
    (254
    )
    
    
    (57
    %)Other taxes
    
    
    161
    
    
    
    107
    
    
    
    54
    
    
    
    50
    %Taxes other than income
    
    $
    2,500
    
    
    $
    1,694
    
    
    $
    806
 Taxes other than income increased from $1.7 million in the three months ended March 31, 2004
to $2.5 million for the same period of 2005. In general, production taxes increase as revenue and
production increases. In 2005, the increase in production taxes was disproportionately larger than
our revenue increases primarily as a result of the 22% increase in Louisianas tax rate on natural
gas. Somewhat offsetting this increase was a 57% reduction in our property taxes. Towards the end
of 2004, through negotiated reductions in property values on both our operated and non-operated
properties, we significantly reduced our property tax liability. Transportation costs Transportation costs were a net benefit of approximately $43,000 for the three months ended
March 31, 2005, compared to a small expense for the same period in 2004. The transportation cost
reduction in the first quarter of 2005 was primarily the result of transportation adjustments on
High Island Block 552 and the actualization of 2004 accruals on the LacBlanc field, which we sold
in late 2004. Depreciation, Depletion and Amortization Depreciation, depletion and amortization (DD&A) was $10.4 million for the three months ended
March 31, 2005 and $10.7 million for the three months ended March 31, 2004. DD&A per MCFE has
decreased from $1.86 per MCFE in the first quarter of 2004 to $1.81 per MCFE in the first quarter
of 2005. The decrease in DD&A on a per MCFE basis reflects the impact of increases in reserves as a
result of extensions and discoveries in existing fields. General and Administrative Expenses General and administrative expenses (G&A) were $3.4 million in the three month period ended
March 31, 2005, and were $2.8 million in the three month period ended March 31, 2004. This increase
is primarily the result of higher salaries and benefit costs due to increased headcount and higher
accounting costs as a result of Sarbanes-Oxley compliance work. This was somewhat offset by higher
overhead reimbursements on operated properties as a result of the increased drilling activity. Interest Expense Interest expense decreased 32% to $4.3 million for the three months ended March 31, 2005 from
$6.3 million in the same period in 2004. The following table details the components of interest and
their respective changes between the periods (dollars in thousands). 20




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MISSION RESOURCES CORPORATION Three Months EndedMarch 31,
    
    
    Change2005
    
    
    2004
    
    
    Amount
    
    
    PercentInterest on 10 7/8% Notes, net of amortized premium
    
    $
    
    
    
    $
    2,889
    
    
    $
    (2,889
    )
    
    
    (100
    %)Interest on 9 7/8% Notes
    
    
    3,209
    
    
    
    
    
    
    
    3,209
    
    
    
    100
    %Amortization of financing costs
    
    
    363
    
    
    
    685
    
    
    
    (322
    )
    
    
    (47
    %)Interest on credit facility/term loan
    
    
    698
    
    
    
    2,574
    
    
    
    (1,876
    )
    
    
    (73
    %)Other
    
    
    2
    
    
    
    114
    
    
    
    (112
    )
    
    
    (98
    %)Reported interest expense
    
    $
    4,272
    
    
    $
    6,262
    
    
    $
    (1,990
    )
 In early 2004, interest expense on the term loan was based on an $80 million principal balance
at 12.0% interest. On April 8, 2004, as part of the debt refinancing, the principal balance on the
term loan was repaid and replaced with a senior secured revolving credit facility and a second lien
term loan. As of March 31, 2005, the combined balance on the credit facility and term loan was $43
million with rates between 5.5% and 8.0%. This decrease in principal balance and interest rates
resulted in a significant reduction in interest paid in the three month period ending March 31,
2005, as compared to the same period in 2004. Also, the 10 7/8% Notes, with a principal balance of
approximately $87.4 million as of March 31, 2004, were replaced with 9 7/8% Notes with a principal
balance of $130.0 million as of March 31, 2005. Income Taxes The provision for federal and state income taxes for the three months ended March, 31, 2005
was based upon a 37% effective tax rate. A $3.9 million valuation allowance on deferred taxes is
recorded at March 31, 2005. In assessing the realizability of the deferred tax assets, management
considers whether it is more likely than not that some portion or all of the deferred tax assets
will be realized. The ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those temporary differences become deductible.
Based upon projections for future state taxable income, management believes it is more likely than
not that the Company will not realize its entire deferred tax asset related to state income taxes. Financial Condition Financing Our outstanding indebtedness totaled $173 million at March 31, 2005. The nature of our
indebtedness as of March 31, 2005 and 2004 is summarized on the table below (amounts in thousands). March 31,2005
    
    
    20049 7/8% Notes
    
    $
    130,000
    
    
    $
    Second lien term loan facility
    
    
    25,000
    
    
    
    Senior secured revolving credit facility (1)
    
    
    18,000
    
    
    
    Term loan facility
    
    
    
    
    
    
    80,00010 7/8% Notes
    
    
    
    
    
    
    87,426Unamortized premium on 10 7/8% Notes
    
    
    
    
    
    
    734Total debt
    
    $
    173,000
    
    
    $
    168,160
   (1)
    
    $31.9 million was available at March 31, 2005 for additional borrowing under this facility. 21




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MISSION RESOURCES CORPORATION Liquidity and Capital Resources Missions principal sources of capital for the last three years have been cash flow from
operations, debt sources such as the issuance of bonds or credit facility borrowings, issuance of
common stock, and the sale of oil and gas properties. Our primary uses of capital have been the
funding of exploration and development projects, property acquisitions and the refinancing of long
term debt. At March 31, 2005, we had negative working capital of $30.9 million compared to a negative
working capital of $10.3 million at December 31, 2004. This decrease in working capital can
primarily be attributed to commodity prices in excess of our hedge price ceilings and our expanded
exploration and development activities. An $11.4 million increase in our current commodity derivative liabilities, offset by a $3.8
million increase in the current deferred tax asset related to those derivatives, account for
approximately $7.6 million of the working capital decrease. The derivative liabilities as of March
31, 2005 represent the amount by which actual commodity prices exceed the price caps on our hedges.
Should commodity prices decrease, the liability will decline and the premium over the hedge prices

that we will realize on unhedged production will also reduce. Since hedges are settled out of the
receipts from the sale of production, we anticipate having adequate cash inflows to settle any
hedge payments when they come due while maintaining revenues near the hedge price. Expanded exploration and development programs during the first quarter of 2005, particularly
on operated properties, account for approximately $11.0 million of the working capital decrease.
The $8.7 million increase in accrued liabilities represents Missions net share of recently
incurred costs for which invoices for payment have not yet been received. For the projects where
Mission has requested advanced payments from working interest partners, we have an obligation to
incur costs to complete the project, referred to as advance drilling costs. Advance drilling costs
increased $7.6 million from December 31, 2004 to March 31, 2005. Partially offsetting the liability
increases, is a $5.3 million increase in accounts receivable. This receivable increase reflects the
portion of incurred costs that have been passed on to other working interest owners in a joint
interest billing. The $3.2 million increase in interest payable accounts for the remaining significant portion
of our working capital decrease. This is a normal fluctuation due to the fact that our bond
interest is paid semi-annually on April 1st and October 1st; therefore, our
payable balances at the end of first and third quarter are usually approximately double the
balances of the immediately preceding quarter. Cash Flows Net cash flow provided by operating activities was $31.9 million and $18.7 million for the
three month periods ending March 31, 2005 and 2004, respectively. The period-to-period increase in
cash flow was primarily caused by significantly higher oil and gas revenues, reductions in cash
interest expense and the increase in advanced capital costs from working interest partners to help
fund the aggressive drilling program in the first quarter of 2005. Net cash used in investing activities for the three month periods ending March 31, 2005 and
2004 was $32.2 million and $35.8 million, respectively. We made no property acquisitions in the
three month period ended March 31, 2005, compared to approximately $27.1 million for the same
period of 2004. We invested $32.1 million in exploration and development of oil and gas properties
for the three month period ended March 31, 2005 compared to $10.7 million of the same period of
2004. Proceeds from property sales were $2.1 million for the three month period ending March 31,
2004. There were no property sales in the first quarter of 2005. 22




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##### Table of Contents



MISSION RESOURCES CORPORATION Net cash provided by financing activities was $3.5 million and $24.4 million in the three
month periods ending March 31, 2005 and 2004, respectively. The largest difference is $24.9 million
of cash that had been held for reinvestment and subsequently used to acquire the Jalmat field in
January 2004. Our capital budget for 2005 is $71.0 million using estimated prices of $35.00 per BBL and
$5.50 per MMBTU. Approximately 54% of the total is planned for development projects, while 28% is
planned for exploration. The remaining 18% is planned for seismic data, land and land-related
assets and corporate assets. An additional $6.0 million has been authorized to cover carryover
spending from 2004 related to rig deployment delays. As of March 31, 2005, $32.2 million has been
spent on capital projects. Carryover spending from fourth quarter 2004 projects along with a
frontloaded 2005 capital budget is the reason for the accelerated spending to date. Based upon the
level of funding needed for development projects, the level of exploratory spending could be
modified to stay within the budget. This capital budget represents the largest planned use of our
available operating cash flow. We believe that cash flows from operating activities combined with
our ability to control the timing of substantially all of our future exploration and development
requirements will provide us with the flexibility and liquidity to meet our planned capital
requirements for 2005. Our intent is to apply less than our discretionary cash flow to capital
projects in 2005. The budget may be modified throughout the year based on our projections of cash
flow; however, due to the timing of our capital programs, we may spend more than our cash flow in
individual quarters. Pursuant to the terms of the agreement with Petrohawk discussed below under
Subsequent Events, Petrohawks approval is necessary to increase the capital spending above $77.0
million. Contractual Obligations and Commercial Commitments Mission is required to make future payments under contractual obligations. Mission has also
made various commitments in the future should certain events occur or conditions exist. Missions
contractual obligations and commercial commitments from January 1, 2005 forward are described in
the Form 10-K/A for the year ended December 31, 2004 and have not changed significantly as of March
31, 2005. Subsequent Events On April 4, 2005, Petrohawk and Mission announced that they had entered into a definitive
agreement whereby Petrohawk would acquire Mission for a combination of Petrohawk stock, cash and
the assumption of debt. The total consideration will consist of approximately 60 percent Petrohawk common stock and 40
percent cash totaling approximately 19.2 million Petrohawk common shares and $135 million cash. The
acquisition is subject to the approval of the stockholders of Mission and Petrohawk. The board of
directors of both companies have unanimously approved the transaction, which is subject to
customary conditions, including regulatory approvals. The acquisition is expected to be completed
during the third quarter of 2005. On April 15, 2005, as a result of the above mentioned acquisition, we terminated our
exploration and production system conversion project. As a result, all development costs related to the project as
well as additional contract termination costs, approximately $1.8 million in total, will be
expensed prior to the merger. 23




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##### Table of Contents



MISSION RESOURCES CORPORATION Critical Accounting Policies In response to SEC Release No. 33-8040, Cautionary Advice Regarding Disclosure About Critical
Accounting Policies, we identified those policies of particular importance to the portrayal of our
financial position and results of operations and those policies that require our management to
apply significant judgment. We believe these critical accounting policies affect the more
significant judgments and estimates used in the preparation of our consolidated financial
statements. Full Cost Method of Accounting for Oil and Gas Assets We use the full cost method of accounting for investments in oil and gas properties. Under the
full cost method of accounting, all costs related to the acquisition, exploration and development
of oil and gas reserves are capitalized as incurred into a full cost pool. Under the full cost
method, a portion of employee-related costs may be capitalized in the full cost pool if they are
directly identified with acquisition, exploration and development activities. Generally, salaries
and benefits are allocated based upon time spent on projects. We deplete the capitalized costs in the full cost pool, plus estimated future expenditures to
develop reserves, on a prospective basis using the units of production method based upon the ratio
of current production to total proved reserves. Depreciation, depletion and amortization is a
significant component of our net income. Proportionally, it represented 30% and 37% of our total
oil and gas revenues for the three month period ended March 31, 2005 and 2004, respectively. Any
reduction in proved reserves without a corresponding reduction in capitalized costs will increase
the depletion rate. If, during 2005, our reserves decrease by 10%, our depletion per MCFE would
increase approximately $0.20 or 11%; however, a 10% increase in reserves would have a 9% impact,
decreasing depletion per MCFE by approximately $0.17. Both the volume of proved reserves and the estimated future expenditures used for the
depletion calculation are obtained from the reserves estimates prepared by independent reserve
engineers. These reserve estimates rely upon both the engineers quantitative and subjective
analysis of various data, such as engineering data, production trends and forecasts, estimated
future spending and the timing of spending. Finally, estimated production costs and commodity
prices are added to the assessment in order to determine whether the estimated reserves have any
value. Reserves that cannot be produced and sold at a profit are not included in the estimated
total proved reserves; therefore the quantity of reserves can increase or decrease as oil and gas
prices change. See Risk Factors: Risks Related to Our Business, Industry and Strategy in our
Annual Report on Form 10-K/A filed for the fiscal year ended December 31, 2004 for general cautions
concerning the reliability of reserve and future net revenue estimates by reserve engineers. The full cost method requires a quarterly calculation of a limitation on capitalized costs,
often referred to as a full cost ceiling calculation. The ceiling is the discounted present value
of our estimated total proved reserves adjusted for taxes, using a 10% discount rate. To the extent
that our capitalized costs (net of depreciation, depletion, amortization, and deferred taxes)
exceed the ceiling, the excess must be written off to expense. Once incurred, this impairment of
oil and gas properties is not reversible at a later date even if oil and gas prices increase. No
such impairment was required in the three month periods ended March 31, 2005 and 2004. While the difficulty in estimating proved reserves could cause the likelihood of a ceiling
impairment to be difficult to predict, the impact of changes in oil and gas prices is most
significant. In general, the ceiling is lower when prices are lower. Oil and gas prices at the end
of the period are applied to the estimated reserves, then costs are deducted to arrive at future
net revenues, which are then discounted at 10% to arrive at the discounted present value of proved
reserves. Additionally, we adjust the estimated future revenues for the impact of our existing cash
flow commodity hedges. The ceiling 24




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MISSION RESOURCES CORPORATION calculation dictates that prices and costs in effect as of the last day of the period are
generally held constant indefinitely. Therefore, the future net revenues associated with the
estimated proved reserves are not based on Missions assessment of future prices or costs, but
rather are based on prices and costs in effect as of the end of the period. Because the ceiling calculation dictates that prices in effect as of the last day of the
period be held constant, the resulting value is rarely indicative of the true fair value of our
reserves. Oil and natural gas prices have historically been variable and, on any particular day at
the end of a period, can be either substantially higher or lower than our long-term price forecast,
which we feel is more indicative of our reserve value. You should not view full cost ceiling
impairments caused by fluctuating prices, as opposed to reductions in reserve volumes, as an
absolute indicator of a reduction in the ultimate value of our reserves. Oil and gas prices used in the ceiling calculation at March 31, 2005 were $55.32 per barrel
and $7.17 per MMBTU. A significant reduction in these prices at a future measurement date could
trigger a full cost ceiling impairment. As an illustration, had oil and gas prices at March 31,
2005 been 10% lower, we would have been 47% closer to a ceiling impairment. Derivative Instruments Accounting All of our commodity derivative instruments represent hedges of the price of future oil and
natural gas production. We estimate the fair values of our hedges at the end of each reporting
period. The estimated fair values of our commodity derivative instruments are recorded in the
Consolidated Balance Sheet as assets or liabilities as appropriate. For effective hedges, we record the change in the fair value of the hedge instruments to other
comprehensive income, a component of stockholders equity, until the hedged oil or natural gas
quantities are produced. Any ineffectiveness in our hedges, which could represent either gains or
losses, is reported when calculated at the end of each accounting period as part of the interest
and other income line of the Statement of Operations. Estimating the fair values of commodity hedge derivatives requires complex calculations,
including the use of discounted cash flow techniques and our subjective judgment in selecting an
appropriate discount rate. In addition, the calculation uses future NYMEX prices, which although
posted for trading purposes, are merely the market consensus of forecast price trends. The results
of our fair value calculation cannot be expected to represent exactly the fair value of our
commodity hedges. We currently use a software product from an outside vendor to calculate the fair
value of our hedges. This vendor provides the necessary NYMEX futures prices and the calculated
volatility in those prices daily. The software is programmed to apply a consistent discounted cash
flow technique, using these variables and a discount rate derived from prevailing interest rates.
This software is successfully used by several of our peers. Its methods are in compliance with the
requirements of SFAS No. 133, as amended, and have been reviewed by a national accounting firm. In
order to minimize the impact on managements estimates on our ineffectiveness calculation, we are
using this same software to calculate any ineffectiveness in our hedge relationships. This software
facilitates the complex calculations and uses current prices downloaded to the database, but the
results are nevertheless estimates. The most significant estimate used in the ineffectiveness
calculation is our estimate of future prices. We use the forward price curves posted for each of
our contract prices. 25




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##### Table of Contents



MISSION RESOURCES CORPORATION Revenue Recognition Mission records revenues from sales of crude oil and natural gas when delivery to the customer
has occurred and title has transferred. This occurs when production has been delivered to a
pipeline or a tanker lifting has occurred. We may share ownership with other producers in certain
properties. In this case, we use the sales method to account for sales of production. It is
customary in the industry for various working interest partners to sell more or less than their
entitled share of natural gas production, creating gas imbalances. Under the sales method, gas
sales are recorded when revenue checks are received or are receivable on the accrual basis.
Typically no provision is made on the balance sheet to account for potential amounts due to or from
Mission related to gas imbalances. If the gas reserves attributable to a property have depleted to
the point that there are insufficient reserves to satisfy existing imbalance positions, a liability
or a receivable, as appropriate, should be recorded equal to the net value of the imbalance. As of
March 31, 2005, the Company had recorded a net liability of approximately $817,000, representing
approximately 492,000 MCF at an average price of $1.66 per MCF, related to imbalances on properties
at or nearing depletion. The net liability accrued as of March 31, 2004, was $895,000 representing
382,000 MCF at an average price of $2.34 per MCF. We value gas imbalances using the price at which the imbalance originated, if required by the
gas balancing agreement, or we use the current price where there is no gas balancing agreement
available. Reserve changes on any fields that have imbalances could change this liability. We do
not anticipate the settlement of gas imbalances to adversely impact our financial condition in the
future. Settlements are typically negotiated, so the per MCF price for which imbalances are settled
could differ among wells and even among owners in one well. Exclusive of the liability recorded for
properties at or nearing depletion (see discussion above), the Companys remaining unrecorded
imbalance, valued at current prices, is a liability of approximately $494,000. Asset Retirement, Impairment or Disposal We adopted SFAS No. 143, Accounting for Asset Retirement Obligations effective January 1,
2003. SFAS No. 143 requires us to record a liability for the fair value of our estimated asset
retirement obligation, primarily comprised of our plugging and abandonment liabilities, in the
period in which it is incurred. After initial implementation, we reduce the liability as
abandonment costs are incurred. We will accrete the liability quarterly using the period and
effective interest rates determined at implementation. As new well are drilled or purchased, their
initial asset retirement cost and liability will be calculated and recorded. Should either the
estimated life or the estimated abandonment costs of a property change upon our quarterly review, a
new calculation is performed using the same methodology of taking the abandonment cost and
inflating it forward to its abandonment date and then discounting it back to the present using our
risk-adjusted rate. The risk-adjusted rate is re-evaluated annually so the liability could have
layers of valuation. We accrete the liability in these layers using the appropriate period and
interest rate. The carrying value of the asset retirement obligation is adjusted to the newly
calculated value, with a corresponding offsetting adjustment to the asset retirement cost;
therefore, abandonment costs will almost always approximate the estimate. We have developed a
process through which to track and monitor the obligations for each asset. When wells are sold, the related liability and asset costs are removed from the balance sheet.
Any difference between the two remains in the full cost pool. SFAS No. 143 does not specifically
address the proper accounting to be applied by a full cost method company when properties are sold.
A May 23, 2003 letter to the FASB and the SEC from a group of concerned companys made inquiries
and outlined possible alternatives, including our current treatment. Should a clarification be
issued, there is a chance that Missions treatment will be required to change and income would be
impacted. 26




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##### Table of Contents



MISSION RESOURCES CORPORATION As with previously discussed estimates, the estimation of our initial liability and its
subsequent remeasurements is dependent upon many variables. We attempt to limit the impact of
managements judgment on these variables by using the input of qualified third parties when
possible. We engaged an independent engineering firm to evaluate our properties annually and to
provide us with estimates of abandonment costs. We used the remaining estimated useful life from
the yearend reserve reports by Netherland, Sewell and Associates, Inc. in estimating when
abandonment could be expected for each property. The resulting estimate, after application of a
discount factor and some significant calculations, could differ from actual results, despite all
our efforts to make the most accurate estimation possible. Income Taxes Mission has accumulated substantial income tax deductions that have not yet been used to
reduce cash income taxes actually paid with the filing of our income tax returns. These accumulated
deductions are commonly referred to as net operating loss carryforwards or NOLs. Our NOLs are, subject to a number of restrictions, available to reduce cash taxes that may
become owed in future years. In accordance with the accounting for income taxes under SFAS No. 109,
we record a deferred tax asset and a reduction of our tax expense for our NOLs. If we estimate that
some or all of our NOLs are more likely than not going to expire or otherwise not be utilized to
reduce future tax, we record a valuation allowance to remove the benefit of those NOLs from our
financial statements. One of the restrictions on the future use of NOLs is contained in Section 382 of the Internal
Revenue Code. In general, Section 382 provides that the amount of existing NOLs that may be used to
offset future taxable income after the occurrence of an ownership change (as defined solely for
Section 382 purposes) is limited to an amount that is determined, in part, by the fair market value
of the enterprise at the time the ownership change occurred. The fair market value of the
enterprises individual assets and the timing in which the value of those assets are realized are
also factors that impact the amount of NOLs available under Section 382 (382 Limitation). As a result of our issuance of common stock in exchange for the retirement of a portion of our
10 7/8% senior subordinated notes in December 2003, we experienced an ownership change as defined
under Section 382. Consequently, we have included the estimated impact that a 382 Limitation may
have upon the future availability of our NOLs as part of our evaluation under SFAS 109. Consistent with previously described estimates, our estimation of the future benefit of
our NOLs is dependent upon many variables and is subject to change. Managements judgment on these
variables considers, in part, the input of qualified third parties when possible. To assist in the
determination of the impact (if any) that the 382 Limitations may have upon the Companys NOLs, we
have used information derived from a) the public equity markets b) data provided by an independent
reserve engineering firm and c) opinions from an independent appraisal firm. We have engaged an
international independent public accounting firm to assist us in applying the numerous and
complicated tax law requirements. However, despite our attempt to make the most accurate estimates
possible, the ultimate utilization of our NOLs is highly dependent upon our actual production and
the realization of taxable income in future periods. 27




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MISSION RESOURCES CORPORATION Forward-Looking Statements This quarterly report on Form 10-Q includes forward-looking statements within the meanings
of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of
the Securities Exchange Act of 1934, as amended (Exchange Act). All statements other than
statements of historical fact are forward-looking statements. Forward-looking statements are
subject to certain risks, trends and uncertainties that could cause actual results to differ
materially from those projected. Among those risks, trends and uncertainties are our estimate of
the sufficiency of existing capital sources, our highly leveraged capital structure, our ability to
raise additional capital to fund cash requirements for future operations, the uncertainties
involved in estimating quantities of proved oil and natural gas reserves, in prospect development
and property acquisitions and in projecting future rates of production, the timing of development
expenditures and drilling of wells, and the operating hazards attendant to the oil and gas
business. Although we believe that in making such forward-looking statements our expectations are
based upon reasonable assumptions, such statements may be influenced by factors that could cause
actual outcomes and results to be materially different from those projected. We cannot assure you
that the assumptions upon which these statements are based will prove to have been correct. When used in this Form 10-Q, the words expect, anticipate, intend, plan, believe,
seek, estimate and similar expressions are intended to identify forward-looking statements,
although not all forward-looking statements contain these identifying words. Because these
forward-looking statements involve risks and uncertainties, actual results could differ materially
from those expressed or implied by these forward-looking statements for a number of important
reasons, including those discussed under Managements Discussions and Analysis of Financial
Condition and Results of Operations, and elsewhere in this Form 10-Q. You should read these statements carefully because they discuss our expectations about our
future performance, contain projections of our future operating results or our future financial
condition, or state other forward-looking information. Before you invest in our common stock, you
should be aware that the occurrence of any of the events describe in Managements Discussions and
Analysis of Financial Condition and Results of Operations, and elsewhere in this Form 10-Q could
substantially harm our business, results of operations and financial condition and that upon the
occurrence of any of these events, the trading price of our common stock could decline, and you
could lose all or part of your investment. We cannot guarantee any future results, levels of activity, performance of achievements.
Except as required by law, we undertake no obligation to update any of the forward-looking
statements in this Form 10-Q after the date of this Form 10-Q. As used in this quarterly report, the words we, our, us, Mission and the Company
refer to Mission Resources Corporation, its predecessors and subsidiaries, except as otherwise
specified. Terms specific to the oil and gas industry may be used in this Form 10-Q. 28




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MISSION RESOURCES CORPORATION 
 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk Mission is exposed to market risk, including adverse changes in commodity prices and interest
rate. Commodity Price Risk Mission produces and sells crude oil, natural gas and natural gas liquids. As a result, our
operating results can be significantly affected by fluctuations in commodity prices caused by
changing market forces. We periodically seek to reduce our exposure to price volatility by hedging
a portion of production through swaps, options and other commodity derivative instruments. A
combination of options, structured as a collar, is our preferred hedge instrument because there are
no up-front costs and protection is given against low prices. These collars assure that the NYMEX
prices we receive on the hedged production will be no lower than the floor price and no higher than
the ceiling price. Our 12-month average realized price, excluding hedges, for natural gas per MCF was $0.19 per
MCF less than the NYMEX MMBTU price. Our 12-month average realized price, excluding hedges, for oil
was $1.98 per BBL less than NYMEX. Realized prices differ from NYMEX as a result of factors such as
the location of the property, the heating content of natural gas and the quality of oil. The gas
differential stated above excludes the impact of the Mist field gas production that is sold at an
annually fixed price. By removing the price volatility from hedged volumes of oil and natural gas production, we
have mitigated, but not eliminated, the potential negative effect of declining prices on our
operating cash flow. The potential for increased operating cash flow due to increasing prices has
also been reduced. If all our commodity hedges were to settle at March 31, 2005 prices, our cash
flows would decrease by $22.2 million; however the actual settlement of our hedges will increase or
decrease cash flows over the period of the hedges at varying prices. As
of May 4, 2005, Mission had the following hedges in place: Oil Hedges NYMEX
    
    
    
    NYMEXBBLS
    
    
    
    
    
    
    
    
    
    
    
    
    
    Price Floor
    
    
    
    Price CeilingPeriod
    
    
    Per Day
    
    
    
    Total BBLS
    
    
    
    Type
    
    
    
    Avg.
    
    
    
    Avg.Second Qtr. 2005
    
    
    
    2,500
    
    
    
    
    227,500
    
    
    
    Collar
    
    
    $
    32.54
    
    
    
    $
    36.47Third Qtr. 2005
    
    
    
    2,500
    
    
    
    
    230,000
    
    
    
    Collar
    
    
    $
    32.06
    
    
    
    $
    35.71Fourth Qtr. 2005
    
    
    
    2,500
    
    
    
    
    230,000
    
    
    
    Collar
    
    
    $
    31.53
    
    
    
    $
    35.18First Qtr. 2006
    
    
    
    1,750
    
    
    
    
    157,500
    
    
    
    Collar
    
    
    $
    34.49
    
    
    
    $
    48.20Second Qtr. 2006
    
    
    
    1,750
    
    
    
    
    159,250
    
    
    
    Collar
    
    
    $
    34.16
    
    
    
    $
    46.86Third Qtr. 2006
    
    
    
    1,750
    
    
    
    
    161,000
    
    
    
    Collar
    
    
    $
    33.58
    
    
    
    $
    46.07Fourth Qtr. 2006
    
    
    
    1,750
    
    
    
    
    161,000
    
    
    
    Collar
    
    
    $
    33.33
    
    
    
    $
    45.08
 29




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MISSION RESOURCES CORPORATION Gas Hedges NYMEX
    
    
    
    NYMEXMMBTU
    
    
    
    
    
    
    
    
    
    
    
    
    
    Price Floor
    
    
    
    Price CeilingPeriod
    
    
    Per Day
    
    
    
    Total MMBTU
    
    
    
    Type
    
    
    
    Avg.
    
    
    
    Avg.Second Qtr. 2005
    
    
    
    14,000
    
    
    
    
    1,274,000
    
    
    
    Collar
    
    
    $
    5.02
    
    
    
    $
    6.82Third Qtr. 2005
    
    
    
    14,000
    
    
    
    
    1,288,000
    
    
    
    Collar
    
    
    $
    5.02
    
    
    
    $
    6.86Fourth Qtr. 2005
    
    
    
    14,000
    
    
    
    
    1,288,000
    
    
    
    Collar
    
    
    $
    5.06
    
    
    
    $
    7.47First Qtr. 2006
    
    
    
    7,500
    
    
    
    
    675,000
    
    
    
    Collar
    
    
    $
    5.84
    
    
    
    $
    9.57Second Qtr. 2006
    
    
    
    5,500
    
    
    
    
    500,500
    
    
    
    Collar
    
    
    $
    5.50
    
    
    
    $
    7.43Third Qtr. 2006
    
    
    
    5,500
    
    
    
    
    506,000
    
    
    
    Collar
    
    
    $
    5.50
    
    
    
    $
    7.40Fourth Qtr. 2006
    
    
    
    5,500
    
    
    
    
    506,000
    
    
    
    Collar
    
    
    $
    5.73
    
    
    
    $
    8.23
 These commodity derivative agreements expose Mission to counter party credit risk to the
extent the counter party is unable to meet its monthly settlement commitment to Mission. Mission
believes it selects creditworthy counter parties to its hedge transactions. Each of Missions
counter parties have long term senior unsecured debt ratings of at least A/A2 by Standard & Poors
or Moodys. Interest Rate Risk Our senior secured revolving credit facility and term loan have floating interest rates and as
such expose us to interest rate risk. If interest rates were to increase 10% over their current
levels, and at our current level of borrowing, our annualized interest expense would increase
$308,000 or 1.9%. We have considered, but have not yet entered into, derivative transactions
designed to mitigate interest rate risk. 30




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MISSION RESOURCES CORPORATION 
 ITEM 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures As of the end of the period covered by this report, Missions management, including its
principal executive officer (CEO) and principal financial officer (CFO), carried out an
evaluation of the effectiveness of Missions disclosure controls and procedures pursuant to Rule
13a-15 of the Securities and Exchange Act of 1934. Based on those evaluations, the CEO and CFO
concluded:  i.
    that Missions disclosure controls and procedures are designed to ensure that (a)
information required to be disclosed by Mission in the reports it files or submits under
the Securities and Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SECs rules and forms, and that (b) such
information is accumulated and communicated to Missions management, including the CEO and
CFO, as appropriate to allow timely decisions regarding required disclosure; andii.
    that Missions disclosure controls and procedures are effective. Changes in the Internal Controls There have been no changes in Missions internal controls over financial reporting during the
period covered by this report that have materially affected, or that are reasonably likely to
materially affect, Missions internal control over financial reporting. 31




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MISSION RESOURCES CORPORATION 
 PART II. OTHER INFORMATION 
 ITEM 1. Legal Proceedings The Company is involved in litigation relating to claims arising out of its operations in the
normal course of business, including workmens compensation claims, tort claims and contractual
disputes. Some of the existing known claims against the Company are covered by insurance subject
to the limits of such policies and the payment of deductible amounts by the Company. Management
believes that the ultimate disposition of all uninsured or unindemnified matters resulting from
existing litigation will not have a material adverse effect on the Companys business or financial
position. 
 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds None. 
 ITEM 3. Defaults Upon Senior Securities None. 
 ITEM 4. Submission of Matters to a Vote of Security Holders None. 
 ITEM 5. Other Information On April 4, 2005, Petrohawk and Mission announced that they had entered into a definitive
agreement whereby Petrohawk would acquire Mission for a combination of Petrohawk stock, cash and
the assumption of debt. The total consideration will consist of approximately 60 percent Petrohawk common stock and 40
percent cash totaling approximately 19.2 million Petrohawk common shares and $135 million cash. The
acquisition is subject to the approval of the stockholders of Mission and Petrohawk. The board of
directors of both companies have unanimously approved the transaction, which is subject to
customary conditions, including regulatory approvals. The acquisition is expected to be completed
during the third quarter of 2005. 32




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MISSION RESOURCES CORPORATION 
 ITEM 6. Exhibits 10.1
    
    Second Amendment to Credit Agreement, effective as of
March 18, 2005, among Mission Resources Corporation, each of the lenders
party thereto, and Wells Fargo Bank, National Association, as
administrative agent for the lenders (incorporated by reference to Exhibit
10.1 to the Companys Current Report on Form 8-K filed on March 29, 2005).10.2
    
    Employment Agreement dated as of March 14, 2005,
between Mission Resources Corporation and William R. Picquet (incorporated
by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K
filed on March 16, 2005).10.3
    
    Non-statutory Stock Option Grant Agreement dated as of
March 14, 2005, between Mission Resources Corporation and William R.
Picquet (incorporated by reference to Exhibit 10.2 to the Companys Current
Report on Form 8-K filed on March 16, 2005).31.1*
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) / Rule
15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.31.2*
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) / Rule15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.32.1*
    
    Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of
Chief Executive Officer of the Company.32.2*
    
    Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of
Chief Financial Officer of the Company.
   *
    
    Filed herewith. 33




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MISSION RESOURCES CORPORATION Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized. MISSION RESOURCES CORPORATION
                     (Registrant)Date: May 10, 2005
    By:
    /s/ Robert L. CavnarRobert L. CavnarChairman and Chief Executive Officer Date: May 10, 2005
    By:
    /s/ Richard W. PiacentiRichard W. PiacentiExecutive Vice President and Chief Financial Officer 34




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MISSION RESOURCES CORPORATION 
 Exhibit Index 31.1*
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) / Rule
15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.31.2*
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) / Rule15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.32.1*
    
    Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of
Chief Executive Officer of the Company.32.2*
    
    Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of
Chief Financial Officer of the Company.
   *
    
    Filed herewith. 35