General
We are an independent energy company focused on the development, exploration,
exploitation, acquisition, and production of natural gas and crude oil
properties with principal holdings in the U.S. Permian Basin and additional
holdings in the U.S. Gulf Coast region and in the South American country of
Colombia.
Our mission is to deliver outstanding net asset value per share growth to our
investors via attractive oil and gas investments. Our strategy is to focus on
early identification of, and opportunistic entrance into, existing and emerging
resource plays. We do not operate wells but typically seek to partner with
larger operators in development of resources or retain interests, with or
without contribution on our part, in prospects identified, packaged and promoted
to larger operators. By entering these plays earlier, identifying stranded
blocks and partnering with, or promoting to, larger operators, we believe we can
capture larger resource potential at lower cost and minimize our exposure to
drilling risks and costs and ongoing operating costs.
We, along with our partners, actively manage our resources through opportunistic
acquisitions and divestitures where reserves can be identified, developed,
monetized and financial resources redeployed with the objective of growing
reserves, production and shareholder value.
Generally, we generate nearly all our revenues and cash flows from the sale of
produced natural gas and crude oil, whether through royalty interests, working
interests or other arrangements. We may also realize gains and additional cash
flows from the periodic divestiture of assets.
Recent Developments
Lease Activity
Permian Basin. In 2018, we acquired a 12.5% working interest, subject to a
proportionate 10% back-in after payout, in an approximately 650-acre lease block
in Yoakum County, Texas. The acreage lay in the Midland Basin region of the
larger Permian Basin.
In 2019, we acquired, for $587,100, a 20% working interest in an approximately
5,871-acre lease block in the Northern Shelf of the Permian Basin in Texas. We
are required to pay 26.667% of costs on the initial well on the block through
the point at which the well is drilled, completed, equipped and ready for
operation, production or disposal. Pursuant to the agreement to acquire such
interest, we also secured the right to participate, at cost and for a period of
five years, in a 20,367-acre area of mutual interest, including the acquired
lease block.
In 2019, we experienced a lease expiration with respect to undeveloped acreage
in Reeves County, Texas, reducing our acreage holdings by 320 gross (50 net)
acres.
Colombia. In 2019, we acquired a 2% interest in Hupecol Meta, LLC ("Hupecol
Meta") (the "Hupecol Meta Acquisition"). Pursuant to the terms of the Hupecol
Meta Acquisition, we paid total consideration of approximately $197,000.
Hupecol Meta holds a working interest in the 639,405 gross acre CPO-11 block in
the Llanos Basin in Colombia, comprised of the 69,128 acre Venus Exploration
Area and 570,277 acres, which was 50% farmed out by Hupecol Meta. Through our
membership interest in Hupecol Meta, we hold a 2% interest in the Venus
Exploration Area and a 1.0% interest in the remainder of the block.
Louisiana Acreage Lease/Royalty Interest. We hold a 23.437% mineral interest in
2,485 gross acres in East Baton Rouge Parish, Louisiana. Out of that acreage, in
2018, we leased to an operator/lessee 743.94 acres. Under the terms of that
lease, we received a lease bonus totaling $113,335 and a royalty of 22.5% gross,
entitling us to a 5.27% net interest in all production from the acreage free of
operating costs, other than production and ad valorem taxes.
The operator/lessee has indicated that it plans to drill an initial well to test
the Lower Tuscaloosa Formation below 19,000 feet.
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Drilling Activity and Well Operations
During 2019, we drilled the Frost #1H well in Yoakum County, Texas, reaching
total depth of approximately 10,000 feet, including an approximately 4,800-foot
horizontal leg. The well was fractured, production facilities constructed and
the well came on production on June 5, 2019 at which time oil production
commenced while the well commenced unloading of frac fluid.
During 2019, Hupecol Meta LLC drilled the 7,550-foot Daisy-1 vertical well on
the CPO-11 block in Colombia. The drilling operation resulted in a dry hole.
During 2019, our capital investment expenditures for drilling, completion and
related operations totaled $692,319, principally relating to acreage in Hockley
County, Texas.
In Louisiana, the Crown Paper well, in which we hold a royalty interest, was
subject to local flooding which resulted in no royalty revenues being realized
during the quarter ended June 30, 2019. The well came back on line in mid-August
and royalties resumed in September 2019.
Our operator in Colombia is continuing discussions with federal and local
officials in order to secure compensation for the value of, and our investment
in, three concessions. Pending resolution of such discussions, no drilling
activities are presently contemplated on those concessions.
Financing Activities
During 2019, we undertook the following financing activities to support our
acquisitions of additional acreage positions and to support drilling operations:
2019 At-the-Market Offering. In May 2019, we entered into an At-the-Market
Issuance Sales Agreement (the "Sales Agreement") with WestPark Capital pursuant
to which we may sell, at our option, up to an aggregate of $5.2 million in
shares of common stock through WestPark Capital, as sales agent. Sales of shares
under the Sales Agreement (the "2019 ATM Offering") will be made, in accordance
with one or more placement notices delivered to WestPark Capital, which notices
set parameters under which shares may be sold. The 2019 ATM Offering was made
pursuant to a shelf registration statement by methods deemed to be "at the
market," as defined in Rule 415 promulgated under the Securities Act of 1933. We
will pay WestPark a commission in cash equal to 3% of the gross proceeds from
the sale of shares in the 2019 ATM Offering. Additionally, we reimbursed
WestPark Capital for $18,000 of expenses incurred in connection with the 2019
ATM Offering. During 2019, we sold an aggregate of 3,472,506 shares in the 2019
ATM Offering and received proceeds, net of commissions, of $606,960.
Subsequent to December 31, 2019, through the date hereof, we sold an aggregate
of 21,059,499 shares in the 2019 ATM Offering and received proceeds, net of
commissions and expenses, of $4,376,549.
Bridge Loan Financing. In September 2019, we issued promissory notes (the
"Bridge Loan Notes") with a total principal amount of $621,052, an original
issue discount of 5%, warrants (the "Bridge Loan Warrants") to purchase
1,180,000 shares of common stock, and a term of 120 days. Net proceeds received
for the Bridge Loan Notes and Warrants totaled $590,000.
The Bridge Loan Notes were unsecured obligations bearing interest at 12.0% per
annum and payable interest only on the last day of each calendar month with any
unpaid principal and accrued interest being payable in full on January 16, 2020.
The Bridge Loan Notes were subject to mandatory prepayment from and to the
extent of (i) 100% of net proceeds we receive from any sales, for cash, of
equity or debt securities (other than Bridge Loan Notes), (ii) 100% of net
proceeds we receive from the sale of assets (other than sales in the ordinary
course of business); and (iii) 75% of net proceeds we receive from the sale of
oil and gas produced from our Hockley County, Texas properties. Additionally, we
had the option to prepay the Bridge Loan Notes, at our sole election, without
penalty. The holders of the Bridge Loan Notes waived mandatory prepayment at the
end of each month during 2019.
The Bridge Loan Notes were recorded net of debt discount that consists of (i)
$31,052 of original issue discount on the Bridge Loan Notes and (ii) the
relative fair value of the Bridge Loan Warrants of $144,948. The debt discount
is amortized over the life of the Bridge Loan Notes as additional interest
expense.
During 2019, interest expense paid in cash totaled $21,439, and interest expense
attributable to amortization of debt discount totaled $152,533. As of December
31, 2019, we owed $621,052 under the Bridge Loan Notes and $0 of accrued
interest. The Bridge Loan Notes were repaid in full in January 2020.
The holders of the Bridge Loan Notes were our Chief Executive Officer and a 10%
shareholder.
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OID Promissory Note. In October 2019, we issued a promissory note (the "OID
Note") with a principal amount of $100,000 and an original issue discount of
10%. Net proceeds received for the OID Note totaled $90,000.
The OID Note was an unsecured obligation bearing interest at 0% per annum and
payable from any and all of our cash receipts with any unpaid principal and
accrued interest being payable in full on October 31, 2019. The OID Note was
repaid in full as of October 31, 2019.
The holder of the OID Note was a 10% shareholder of the Company.
Recovery of Escrow Account
In 2010, we, and our operator in Colombia, Hupecol, sold our interests in two
entities in Colombia. Pursuant to the terms of those sales, a portion of the
sales price was escrowed to secure certain representations of the selling
parties. Our share of amounts escrowed was recorded as escrow receivables.
In 2016, we recorded an allowance in the amount of $262,016 relating to the
undisbursed balance of escrow receivables.
In 2018, we received payments totaling $86,553, net, representing recoveries of
escrowed funds relating to the previously written-off escrow receivables. As a
result of the receipt of such funds, we recorded non-recurring other income in
the amount of $86,553 in 2018.
COVID-19
In early 2020, global health care systems and economies began to experience
strain from the spread of the COVID-19 Coronavirus. As the virus spread, global
economic activity began to slow and future economic activity was forecast to
slow with a resulting forecast of a decline in oil and gas demand. In response,
OPEC initiated discussions with Russia to lower production to support energy
prices. By mid-March 2020, with OPEC and Russia unable to agree on cuts, crude
oil prices declined to less than $25 per barrel. Such decline in prices will
adversely affect our revenues and profitability in 2020 and, if price declines
persist, will adversely affect the economics of our existing wells and planned
future wells, possibly resulting in impairment charges to existing properties
and delaying or abandoning planned drilling operations as uneconomical.
In response to the COVID-19 pandemic, our staff has begun working remotely and
many of our key vendors, service suppliers and partners have similarly begun to
work remotely. As a result of such remote work arrangements, we anticipate that
certain operational, reporting, accounting and other processes will slow which
may result in longer time to execute critical business functions, higher
operating costs and uncertainties regarding the quality of services and
supplies, any of which could substantially adversely affect our operating
results for as long as the current pandemic persists and potentially for some
time after the pandemic subsides.
Critical Accounting Policies
The following describes the critical accounting policies used in reporting our
financial condition and results of operations. In some cases, accounting
standards allow more than one alternative accounting method for reporting. Such
is the case with accounting for oil and gas activities described below. In those
cases, our reported results of operations would be different should we employ an
alternative accounting method.
Full Cost Method of Accounting for Oil and Gas Activities. We follow the full
cost method of accounting for oil and gas property acquisition, exploration and
development activities. Under this method, all productive and nonproductive
costs incurred in connection with the exploration for and development of oil and
gas reserves are capitalized. Capitalized costs include lease acquisition,
geological and geophysical work, delay rentals, costs of drilling, completing
and equipping successful and unsuccessful oil and gas wells and related internal
costs that can be directly identified with acquisition, exploration and
development activities, but does not include any cost related to production,
general corporate overhead or similar activities. Gain or loss on the sale or
other disposition of oil and gas properties is not recognized unless significant
amounts of oil and gas reserves are involved. No corporate overhead has been
capitalized as of December 31, 2019. The capitalized costs of oil and gas
properties, plus estimated future development costs relating to proved reserves,
are amortized on a units-of-production method over the estimated productive life
of the reserves. Unevaluated oil and gas properties are excluded from this
calculation. The capitalized oil and gas property costs, less accumulated
amortization, are limited to an amount (the ceiling limitation) equal to the sum
of: (a) the present value of estimated future net revenues from the projected
production of proved oil and gas reserves, calculated using the average oil and
natural gas sales price received by the Company as of the first trading day of
each month over the preceding twelve months (such prices are held constant
throughout the life of the properties) and a discount factor of 10%; (b) the
cost of unproved and unevaluated properties excluded from the costs being
amortized; (c) the lower of cost or estimated fair value of unproved properties
included in the costs being amortized; and (d) related income tax effects. Costs
in excess of this ceiling are charged to proved properties impairment expense.
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Revenue recognition. On January 1, 2018, we adopted the new revenue guidance
using the modified retrospective method for contracts that were not complete at
December 31, 2017. ASU 2014-09, "Revenue from Contracts with Customers (Topic
606)", supersedes the revenue recognition requirements and industry-specific
guidance under Revenue Recognition (Topic 605). Topic 606 requires an entity to
recognize revenue when it transfers promised goods or services to customers in
an amount that reflects the consideration the entity expects to be entitled to
in exchange for those goods or services. We adopted Topic 606 on January 1,
2018, using the modified retrospective method applied to contracts that were not
completed as of January 1, 2018. Under the modified retrospective method, prior
period financial positions and results are not adjusted. The cumulative effect
adjustment recognized in the opening balances included no significant changes as
a result of this adoption. While our 2018 net earnings were not materially
impacted by revenue recognition timing changes, Topic 606 requires certain
changes to the presentation of revenues and related expenses beginning January
1, 2018.
Our revenue is comprised principally of revenue from exploration and production
activities. Our oil is sold primarily to marketers, gatherers, and refiners.
Natural gas is sold primarily to interstate and intrastate natural-gas
pipelines, direct end-users, industrial users, local distribution companies, and
natural-gas marketers. NGLs are sold primarily to direct end-users, refiners,
and marketers. Payment is generally received from the customer in the month
following delivery.
Contracts with customers have varying terms, including spot sales or
month-to-month contracts, contracts with a finite term, and life-of-field
contracts where all production from a well or group of wells is sold to one or
more customers. We recognize sales revenues for oil, natural gas, and NGLs based
on the amount of each product sold to a customer when control transfers to the
customer. Generally, control transfers at the time of delivery to the customer
at a pipeline interconnect, the tailgate of a processing facility, or as a
tanker lifting is completed. Revenue is measured based on the contract price,
which may be index-based or fixed, and may include adjustments for market
differentials and downstream costs incurred by the customer, including
gathering, transportation, and fuel costs.
Revenues are recognized for the sale of our net share of production volumes.
Unevaluated Oil and Gas Properties. Unevaluated oil and gas properties consist
principally of our cost of acquiring and evaluating undeveloped leases, net of
an allowance for impairment and transfers to depletable oil and gas properties.
When leases are developed, expire or are abandoned, the related costs are
transferred from unevaluated oil and gas properties to oil and gas properties
subject to amortization. Additionally, we review the carrying costs of
unevaluated oil and gas properties for the purpose of determining probable
future lease expirations and abandonments, and prospective discounted future
economic benefit attributable to the leases.
Unevaluated oil and gas properties not subject to amortization include the
following at December 31, 2019 and 2018:
At At
December 31, 2019 December 31, 2018
Acquisition costs $ 279,177 $ 141,318
Evaluation costs 2,199,279 2,315,181
Total $ 2,478,456 $ 2,456,499
The carrying value of unevaluated oil and gas prospects includes $2,343,126 and
$2,321,170 expended for properties in South America at December 31, 2019 and
2018, respectively. We are maintaining our interest in these properties.
Stock-Based Compensation. We use the Black-Scholes option-pricing model, which
requires the input of highly subjective assumptions. These assumptions include
estimating the volatility of our common stock price over the expected life of
the options, dividend yield, an appropriate risk-free interest rate and the
number of options that will ultimately not complete their vesting requirements.
Changes in the subjective assumptions can materially affect the estimated fair
value of stock-based compensation and consequently, the related amount
recognized on the Statements of Operations.
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Results of Operations
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
Oil and Gas Revenues. Total oil and gas revenues decreased 56% to $997,992 in
2019 from $2,243,325 in 2018. The decrease in revenues was attributable to a
combination of lower production, lower average prices realized from oil and gas
sales and decreased royalties from our Crown Paper well.
The following table sets forth the gross and net producing wells, net oil and
gas production volumes and average hydrocarbon sales prices for 2019 and 2018:
2019 2018
Gross producing wells 4 5
Net producing wells 0.49 0.52
Net oil production (Bbls) 13,674 23,842
Net gas production (Mcf) 116,629 253,053
Oil-Average sales price per barrel $ 55.73 $ 57.43
Gas-Average sales price per mcf $ 2.02 $ 3.27The decrease in gross/net producing wells resulted from cessation of operation
of two uneconomical wells in Louisiana during 2019, partially offset by the
commencement of operations of a well in Yoakum County, Texas. The decrease in
production was principally attributable to natural decline in production from
our Reeves County, Texas wells, partially offset by production from our Yoakum
County well commencing in 2019.
The change in average sales prices realized reflects fluctuations in global
commodity prices together with bottlenecks in transportation/delivery
capabilities in the Permian Basin which adversely affected commodity pricing.
Royalties from our Crown Paper well decreased to $28,558 in 2019 from $68,006 in
2018. The decrease in royalty income was attributable to local flooding that
resulted in the shut-in of the well for approximately four months during
mid-2019.
Oil, gas and natural gas liquids sales revenues for 2019 and 2018 by region were
as follows:
Colombia U.S. Total
2019
Oil sales $ - $ 762,039 $ 762,039
Gas sales $ - $ 79,889 $ 79,889
Natural gas liquids sales $ - $ 156,064 $ 156,064
2018
Oil sales $ - $ 1,416,946 $ 1,416,946
Gas sales $ - $ 663,389 $ 663,389
Natural gas liquids sales $ - $ 162,987 $ 162,987Lease Bonus Revenue. During 2018, lease bonus revenue totaled $113,335, compared
to $0 in 2019. Lease bonus revenue related to a non-recurring lease of a mineral
interest we own in Louisiana to a third party operator.
Lease Operating Expenses. Lease operating expenses decreased 14% to $789,708 in
2019 from $914,269 in 2018.
The decrease in lease operating expenses was attributable to reduced production,
partially offset by increased operating expenses associated with our Frost #1H
well in Yoakum County coming onto production.
All lease operating expenses during 2019 and 2018 were attributable to U.S.
operations.
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Depreciation and Depletion Expense. Depreciation and depletion expense increased
by 23% to $438,553 in 2019 from $357,822 in 2018. The increase in depreciation
and depletion during 2019 was due to an increase in capitalized costs subject to
amortization and commencement of production from the Frost #1H well, partially
offset by a natural decline in production volumes. Depreciation and depletion
expense is expected to increase as we drill and bring onto production planned
wells.
Impairment Expense. Impairment expense totaled $745,691 in 2019 compared to $0
in 2018. The impairment expense during 2019 was due to a decrease in the market
price of oil during 2019 as well as downward adjustments to the projected future
production from our wells per the 2019 reserve report due to a natural decline
in production and a lease expiration.
General and Administrative Expenses. General and administrative expense
decreased by 5% to $1,357,723 in 2019 from $1,422,560 in 2018. The change in
general and administrative expense was primarily attributable to a decrease in
salaries and wages resulting from the elimination of salary to our CEO
commencing with the appointment of our current CEO in mid-2018.
Other Income (Expense). Other income/expense, net, totaled $182,011 of expense
during 2019, compared to $86,655 of income during 2018. Other expense during
2019 consisted of $1,961 of interest income, offset by interest expense of
$183,972 relating to the Bridge Loan Notes and the OID Note. Other income during
2018 consisted of $102 of interest income and $86,553 of other income arising
from the recovery of escrowed funds previously written-off.
Financial Condition
Liquidity and Capital Resources. At December 31, 2019, we had a cash balance of
$97,915 and a deficit in working capital of $748,426, compared to a cash balance
of $755,702 and working capital of $895,366 at December 31, 2018.
Cash Flows. Operating activities used cash of $725,019 during 2019, compared to
$360,792 of cash provided by operating activities during 2018. The change in
cash flows from operating activities was primarily attributable to the
$2,264,358 increase in net loss in 2019, compared to 2018 which was primarily
attributable to the decline in oil and gas revenues.
Investing activities used cash of $889,328 during 2019, compared to $505,407 of
cash used during 2018. The increase in cash used in investing activities
reflects development and acquisition costs incurred during 2019 of $692,319 and
the acquisition of our interest in the Hupecol Meta LLC of $197,009, compared to
2018 acquisition of our Yoakum County acreage ($135,329) and investments in
drilling operations ($390,216). 2018 investing activities reflect a credit of
$131,864 attributable to cash advances previously reflected as development costs
on our Reeves County acreage.
Financing activities provided cash of $956,560 during 2019, compared to $508,255
of cash provided during 2018. During 2019, cash provided by financing activities
consisted of sales of common stock in our 2019 ATM Offering of $606,960, sales
of Bridge Loan Notes of $590,000 and sales of the OID Note of $90,000, partially
offset by distributions with respect to outstanding preferred stock of $230,400
and repayment of the OID Note of $100,000. During 2018, cash provided by
financing activities consisted of sales of common stock in our 2017 ATM Offering
($747,205) partially offset by distributions on outstanding preferred stock
($238,950).
Long-Term Liabilities. At December 31, 2019, we had long-term liabilities of
$263,596, compared to $82,719 at December 31, 2018. Long-term liabilities, as of
December 31, 2019, consisted of a reserve for plugging costs of $44,186 and a
lease liability of $219,410.
Capital and Exploration Expenditures and Commitments. Our principal capital and
exploration expenditures relate to ongoing efforts to acquire, drill and
complete prospects, in particular our Permian Basin acreage and our newly
acquired Colombian acreage. Prior to the onset of the COVID-19 pandemic, we
commenced drilling operations on our Frost #2-H well in Yoakum County. Drilling
operations have been completed and fracturing operations are pending. During the
first quarter of 2020, we fully funded our commitment with respect to that well
in the amount of $518,542. Given the current economic environment and the
current COVID-19 pandemic, all planned additional drilling and development
operations during 2020 are on hold pending improved conditions. Accordingly,
unless and until industry conditions substantially improve, we do not presently
anticipate making any material capital expenditures during 2020, although we may
evaluate opportunistic acquisitions of additional acreage. The actual timing and
number of wells drilled during 2020 will be principally controlled by the
operators of our acreage, based on a number of factors, including but not
limited to availability of financing, performance of existing wells on the
subject acreage, energy prices and industry condition and outlook, costs of
drilling and completion services and equipment and other factors beyond our
control or that of our operators.
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During 2019, we invested $889,328 for the acquisition and development of oil and
gas properties and the acquisition of our interest in Hupecol Meta LLC,
consisting of (1) cost of acquisition of U.S. properties ($531,417),
attributable to acreage acquired in the Northern Shelf of the Permian Basin in
Texas, (2) cost of acquisition of Colombian properties ($197,009), attributable
to our acquisition of an interest in the CPO-11 block through our purchase of an
interest in Hupecol Meta, (3) drilling and development operations in the U.S.
($138,945), and (4) leasehold, drilling and development operations in Colombia
($21,957). Of the amount invested, we capitalized $21,957 to oil and gas
properties not subject to amortization and capitalized $670,362 to oil and gas
properties subject to amortization.
As our allocable share of well costs will vary depending on the timing and
number of wells drilled as well as our working interest in each such well and
the level of participation of other interest owners, we have not established a
drilling budget but will budget on a well-by-well basis as our operators propose
wells.
With our receipt, subsequent to December 31, 2019, of $4,376,549 from sales of
common stock under our 2019 ATM Offering, we believe that we have the ability to
fund operations and our cost for all planned wells expected to be drilled during
2020.
In the event that we pursue additional acreage acquisitions or expand our
drilling plans, we may be required to secure additional funding beyond our
resources on hand. While we may, among other efforts, seek additional funding
from "at-the-market" sales of common stock, and private sales of equity and debt
securities, we presently have no commitments to provide additional funding, and
there can be no assurance that we can secure the necessary capital to fund our
share of drilling, acquisition or other costs on acceptable terms or at all. If,
for any reason, we are unable to fund our share of drilling and completion costs
and fail to satisfy commitments relative to our interest in our acreage, we may
be subject to penalties or to the possible loss of some of our rights and
interests in prospects with respect to which we fail to satisfy funding
commitments and we may be required to curtail operations and forego
opportunities. Unless and until the depressing economic effects of the
coronavirus recede, we expect that new capital to fund projects will be
difficult, if not impossible, to secure.
Contractual Obligations. At December 31, 2019, our only material contractual
obligation requiring determinable future payments on our part was our lease
relating to our executive offices.
The following table details our contractual obligations as of December 31, 2019:
Payments due by period
Total < 1 year 1-3 years 3-5 years >5 years
Operating leases $ 376,355 $ 130,717 $ 245,638 $ - $ -
Total $ 376,355 $ 130,717 $ 245,638 $ - $ -
In addition to the contractual obligations requiring that we make fixed
payments, in conjunction with our efforts to secure oil and gas prospects,
financing and services, we have, from time to time, granted overriding royalty
interests ("ORRI") in various properties, and may grant ORRIs in the future,
pursuant to which we will be obligated to pay a portion of our interest in
revenues from various prospects to third parties. Our Permian Basin acreage is
subject to a ORRI's ranging from 1% to 2%, in aggregate, in favor of current and
former employees and officers. All present and future prospects in Colombia are
subject to a 1.5% ORRI in favor of each of a current employee and a former
director.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements or guarantees of third party
obligations at December 31, 2019.
Inflation
We believe that inflation has not had a significant impact on our operations
since inception.
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