General development of business
We were organized pursuant to the laws of the State of Nevada in 2004. Since that time we have been involved in various natural resource ventures, and since March 2008 we have been exclusively engaged in the search for one or more oil and gas leases in which we could acquire a working interest for the purpose of developing such leases and the marketing of crude oil and natural gas derived there from. During 2008 we issued 500,000 shares of our common stock for gross proceeds of $1,500,000 and utilized these proceeds to acquire oil and gas leases consisting of a 25% working interest (18.75% net revenue interest) in leases covering 440 acres located in Howard County, Texas, known as the Anderson Prospect (“Prospect”). We acquired our interest in the Prospect from Big Star Oil & Gas, LLC (“Big Star”), who is the independent operator of the Prospect. We drilled an initial well, known as the Eastland #1 (the “Well”) to a total depth of approximately 7,800 feet to the Pennsylvania Reef formation. This zone was determined to be non-commercial and we subsequently completed the Well in a shallower formation, the Lower Spraberry, at approximately 6,400 feet in November 2009. Through November 2009, our total costs to acquire the Prospect and drill and complete the Well were $296,042. Production from the Well decreased rapidly and in January 2011 we elected not to participate with the operator in a recompletion of the Well. As a result of this election, we will not share in the production from the Well until those participating in the recompletion have recovered their drilling costs. We evaluated our investment in the Well at December 31, 2010 and have determined that the Well is not commercial and have therefore impaired the Prospect for its total cost.
On September 28, 2011, we entered into a Letter of Intent (“LOI”) with Stanford Energy, Inc. (“Stanford Energy”) and two of its shareholders to acquire all of the outstanding common stock of Stanford Energy. The LOI expired on January 15, 2012 and on February 6, 2012; we entered into a second non-binding LOI with Stanford Energy and two of its shareholders to acquire all of the outstanding stock of Stanford Energy in exchange for a total of 3,440,000 shares of our common stock. Closing is anticipated to be held on March 30, 2012. Stanford Energy holds interests in oil and gas properties located in Andrews County, Texas. Each party will be responsible for and bear its respective expenses and fees incurred by it in connection with the LOI and the transactions contemplated thereby. Notwithstanding the foregoing, we have paid to Stanford, and Stanford acknowledges receipt of, a non-refundable transaction fee in the amount of $250,000. In addition, we have loaned a total of $1,000,000 to Stanford for which we have received a promissory note bearing interest at 5% per annum and have agreed to loan up to an additional $250,000 to Stanford, as disclosed in our report on Form 8-K filed with the Commission on February 1, 2012. On February 11, 2012, we loaned $50,000 to Stanford under the second promissory note.
We intend to proceed with the preparation of a definitive acquisition agreement the specific terms of which remain subject to further negotiation between the parties. Closing of the definitive agreement will be subject to completion of customary due diligence by the parties and verification of the valuation of the interest of Stanford Energy in the properties. We have agreed for a period of 120 days not to take any action to encourage, solicit, initiate or otherwise facilitate the submission by a third party, or negotiate or enter into any other contract or agreement with any other entity, the purpose of which would be to sell, directly or indirectly, our assets or stock, including by way of merger, business combination or otherwise, in a manner inconsistent with the provisions of the LOI.
The shares to be issued to the shareholders of Stanford Energy will not be and have not been registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.
If our efforts to complete the transaction contemplated by the LOI are not successful, we intend to pursue the acquisition of other oil and gas properties. We have also sought the assistance of outside consultants and others in this search and have entered into preliminary discussions with such individuals; however, no definitive agreements or arrangements have been reached. The cost to retain one or more consultants or a firm specializing in the purchase/sale of oil and gas properties will have an impact on our financial position depending on the arrangement we are able to negotiate. We are not able to estimate the amount of these costs or the terms of any arrangements that we may be entering into.
The types of costs that we may incur include travel relating to meeting with individuals instrumental in our acquisition of one or more oil and gas properties, obtaining petroleum engineer reports relative to the oil and gas properties that we are investigating, legal fees associated with such acquisition (including title reports and negotiation fees) and accounting fees relative to obtaining historical information regarding the production of oil and gas on such properties. Even though we may incur such cost, there is no assurance that we will ultimately be able to consummate a transaction resulting in our acquisition of an oil and/or gas property.
On November 15, 2011, we commenced a non-public offering of up to 1,250,000 common shares at $4.00 per share. We closed the offering on December 23, 2011, with net proceeds, after incidental costs of the offering, of $4,665,169 and issued a total of 1,167,504 shares of common stock to the investors. On December 23, 2011, we commenced a second non-public offering of up to 1,250,000 common shares at $4.00 per share. The second offering was closed on January 30, 2012, with net proceeds, after incidental costs of the offering, of $4,280,555 and issued 1,071,180 shares of common stock to the investors. The shares issued in these offerings were not and will not be registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.
In addition to the foregoing, we continue to pursue the acquisition of oil and gas leases in our own right.
On March 1, 2012, we entered into a letter agreement with Patriot Royalty & Land, LLC to purchase a 100% working interest, with a corresponding 75% net revenue interest in leases contain approximately 161.4 acres located in Andrews County, Texas. The purchase price for the lease is $700 per acre for a total of $112,980. To the extent seller is not able to provide satisfactory title to all 161.4 acres, it will provide satisfactory title to a minimum of 137.19 acres at $700 per acre, thus reducing the purchase price to $96,033. Closing is scheduled for April 10, 2012, and is subject to completion satisfactory due diligence by the Company. In the event any of the leases expire and are extended by the Company prior to January 31, 2016, we have agreed to assign the seller a 1.5% overriding royalty in the renewed or extended lease.
Also, we have placed $82,800 in escrow for the purchase from Fisher Royalties of a working interest in approximately 280 acres located in Andrews County, Texas. Closing of the transaction is subject to completion of satisfactory due diligence by the Company.
We are also making an application in the State of Taxes that will allow us to become an operator of oil and gas operations within that state. At February 15, 2012, we had approximately $8.5 million in cash with which to maintain ongoing operations and to engage in further oil and gas activities. In addition, we hold an unsecured note receivable bearing interest at 5% per annum due on January 30, 2013, from Stanford Energy in the amount of $1.05 million.
To the extent possible, we are partial to the acquisition of producing properties and/or developed undrilled properties rather than exploratory properties. We do not intend to limit our evaluation to any one state. We presently have no intention to evaluate off-shore properties or properties located outside of the United States of America.
Major Customers
At the present time, the Company has no major customer.
Financial Information About Industry Segments
All of our business operations have been conducted in the United States of America. We are not engaged nor do we plan to be engaged in any business activities other than the oil and gas business. We do not anticipate engaging in the transportation of oil and gas products through pipelines or otherwise, and we do not anticipate engaging in the storing or refining of oil and gas products.
Foreign Operations and Subsidiaries
We do not have any foreign operations. We have no subsidiary corporations or other entities with which we or our officers and directors are affiliated, other than disclosed herein.
Government Regulation
The acquisition of land leases and the production of oil and natural gas are extensively regulated at federal, state and local levels. Such regulations include the issuance of drilling permits, spacing of wells, methods used to drill wells, allowable rates of production, the unitization or pooling of properties and the plugging and abandonment of wells. Examples of federal agencies with regulatory authority are: the Bureau of Land Management, the Minerals Management Service, the Environmental Protection Agency (“EPA”), the Occupational and Safety and Health Administration and the Federal Energy Regulatory Commission. These agencies are given authority pursuant to the Federal Land Policy and Management Act, the Endangered Species Act, the National Environmental Policy Act, the Federal Water Pollution Control Act of 1972, the Safe drinking Water Act of 1974, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Resource Conservation and Recovery Act, the Oil Pollution Act of 1990, the Clean Air Act, the Occupational Safety and Health Act and the Final Mandatory Reporting of Greenhouse Gases Rule.
We have relied on the operator to report to the appropriate governmental authorities with respect to the various rules and regulation. We have not conducted an independent review of their compliance procedures. We are presently not engaged in the transportation of oil and natural gas which are regulated by several federal and state agencies.
Environmental Matters
Our oil and natural gas operations will subject us to stringent federal, state and local laws governing the discharge of materials into the environment or otherwise relating to environmental protection. Numerous governmental departments, such as the EPA, issue regulations to implement and enforce such laws, the compliance with which is often difficult and costly and violations of which carry substantial civil and criminal penalties and sanctions for failure to comply. Regulations also require some form of remedial action to prevent pollution from former operations such as plugging abandoned wells, and imposing substantial liabilities for pollution resulting from operations. In addition, these laws, rules and regulations may restrict the rate of production. The regulatory burden on the oil and natural gas industry increases our cost of doing business and financial results of our oil and gas operations. Changes in environmental laws and regulations occur frequently, and changes that result in more stringent and costly waste handling, disposal or clean-up requirements could adversely affect our operations and financial position.
We are not the operator of the Well; however, the laws and regulations require that the operator be in compliance with environmental rules and regulations. We are not aware of any non-compliance with environmental rules and regulations as a result of the operator’s activities. We have expended such capital as the operator believed necessary for compliance with environmental matters.
Fluctuations in Profitability in the Oil and Natural Gas Industry
We will likely face commodity pricing and supply risks; however, we do not intend to minimize those risks through hedging activities. The oil and natural gas industry is highly cyclical and historically has experienced severe downturns characterized by oversupply and weak demand. Many factors affect our industry, including general economic conditions, cartel pricing or production controls from organizations such as the Organization of Petroleum Exporting Countries (OPEC), international incidents (politics, wars, etc.) consumer preferences, personal discretionary spending levels, interest rates and the availability of credit and capital to pursue new production opportunities.
The oil and natural gas industry has experienced both fluctuations in the price of oil and in the price of gas. These events are largely due to the occurrence of worldwide man made as well and natural events. Not all of these events are directly related to the oil and gas industry. Nevertheless, their occurrence has affected an increase in the price of oil and as a consequence, an increase in the cost to acquire oil properties. A resultant effect has been an increase in the period required to potentially obtain a return on invested capital. As these events have unfolded, we have not been able to reap any benefits from the increased oil prices and in general these factors have worked against us in attempting to acquire oil and/or gas properties at what we considered to be reasonably priced.
Drilling and Completion Risks
As evidenced by the Well that we completed in 2009, there are substantial risks associated with the drilling of oil and gas wells, particularly when such wells are exploratory wells. The cost of acquiring a leasehold interest in developed properties is substantially greater than properties without existing wells where offset wells could be drilled. Our present operations have been exploratory in nature; however, in the future we intend to pursue the acquisition of an interest in developmental oil and gas leases or developed undrilled leases. We will evaluate the risks associated with each property we investigate on a property by property basis.
Seasonality of Our Products
Even though adverse weather conditions may have an effect on the operations of our present business, in general the production of oil and gas and our search for additional oil and gas properties will continue throughout the year.
Competition
As we evaluate other oil and gas properties we will be in completion with other business entities that are seeking to acquire similar properties. These other entities will likely have greater financial resources with which to acquire an interest in such properties. We have no advantage over any other business entities for any reason. Therefore, we will likely be at a disadvantage in acquiring properties having existing oil and gas production because of the acquisition costs and our limited financial resources.
Corporate Offices and Employees
We maintain our sole office at 18 ½ East State St., Suite 202, Redlands, California, where we lease approximately 600 gross square feet of space on a month-to-month net lease at $1,100 per month. Our president, Mr. Steve Owens, utilizes this office for our business operations on a part-time basis. We have no employees or staff. Our board of directors provides services to our company on an as needed basis and utilizes their own resources for such purposes. We may change these arrangements in the future.
Other Information
We do not maintain an Internet address and we do not maintain an Internet website. All information provided to the public with respect to our company is filed with the Securities and Exchange Commission and can be located on the Internet at www.sec.gov/edgar.
ITEM 1A. RISK FACTORS
The Company has a lack of operating history.
Even though we have been engaged in the oil and gas business for several years, we have not been able to successfully develop our oil and gas leasehold interests. As a non-operator, we are to some degree dependent on the operator’s willingness to initiate a drilling program that we believe will meet our objectives. We are in the process of applying to the Rail Road Commission in the State of Texas to become an operator. Until the application is approved, we will be dependent on others to operate any leasehold interest that we currently hold or that we may acquire in the future.
Management’s lack of knowledge regarding new technology in oil and gas operations.
The Company and its current management have not been engaged in oil and gas field operations for several years. Current technology has changed many of the aspects of drilling oil and gas wells and their operations. As an operator, the importance of being knowledgeable about these new aspects is increased because the operator is responsible for initiating and maintaining all aspects of seeking out appropriate drilling locations, the drilling of the well and its subsequent operations. Thus, the Company will seek to employ or otherwise retain individuals competent in these aspects of our business. There is no assurance that we will be able to find individuals who we believe will serve to enhance our business.
The Company lacks profitable operations.
The Well drilled on the Prospect only yielded several months of production. Otherwise we have not been engaged in actual field operations. The cash required to operate the Company and to seek out additional oil and gas properties has been supplied through the sale of the Company’s common stock. Our common stock is not actively traded and consequently, our ability to continue to have available cash to both fund our operations and to seek additional oil and gas properties may be curtailed if we do not have profitable oil and gas operations in the future.
The Company’s financial position could change.
As of December 31, 2011 we had total liabilities of $5,645 and $4,423,913 in cash. We have subsequently increased our cash position through the sale of our common stock and currently have a cash position of approximately $8.3 million and a receivable from Stanford of approximately $1.1 million. The acquisition of Stanford, pursuant to the LOI previously discussed, will allow us to commence drilling oil and gas wells immediately. Based on discussions with management of Stanford and assuming the Stanford transaction closes, the cost of drilling a well on the properties currently held by Stanford, which properties generally have a working interest of 100% and a net revenue interest of 75%, would be approximately $600,000. Thus, our cash position would be depleted substantially with each well drilled and no assurance can be given that we would be successful in drilling a commercially productive well. Thus, the possibility exists that our cash position would be significantly reduced without a corresponding increase in cash flow from a producing well.
The Company’s business or proposed business is subject to delay.
The definitive agreement that the Company and Stanford will enter into pursuant to the LOI will contain numerous provisions that may require a substantial amount of time to obtain. The transaction described in the LOI is intended to be effective as of January 1, 2012; however, until the transaction closes, we will not benefit from any oil and gas production generated by Stanford. Any delay in the closing of the transaction contemplated by the LOI will negatively impact our cash flow.
There is a lack of a market for the Company’s common equity securities.
We have been dependent on the sale of our common stock to fund our operations; nevertheless, there is a lack of marketability for our common equity securities. Our ability to continue to obtain capital through the sale of our common stock is questionable if purchasers of our common stock are not able to sell the stock they have purchased into the marketplace. The ability of management to find securities firms or broker/dealers into making a market in our common stock cannot be assured. Consequently, our future ability to obtain capital through the non-public offering of our common stock is questionable.
The Company’s oil and gas business operates in highly competitive environments, which affect, among other things, its results of operations and its ability to acquire additional oil and gas producing properties.
The Company’s oil and gas production is dependent on acquiring oil and gas properties that have substantial reserves. We believe that the acquisition of Stanford as described in the LOI will go a long way in accomplishing this goal. Nevertheless, until this transaction closes, of which there is no assurance that it will, the Company will be dependent on current management to seek out and acquire producing oil and gas properties, an interest in such properties and/or leasehold interests that hold the potential for drilling wells that result in production.
The Company has many competitors (including national oil companies), some of which are larger and better funded, and that may be willing to accept greater risks or have special competencies. Competition for reserves may make it more difficult to find attractive investment opportunities or require delay of expected reserve replacement efforts. Cash conservation considerations during periods of low product prices may delay production growth and reserve replacement efforts. These are challenges that the Company faces if the transaction contemplated by the LOI does not close and the Company is required to seek profitable operations from other sources.
Governmental actions may affect the Company’s ability to obtain profitable operations.
Inasmuch as governmental agencies and many political interests are involved in the oil and gas business, we may face additional risks as we seek to acquire oil and gas leasehold interests, such as:
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new or amended laws and regulations, including those related to taxes, royalty rates, permitted production rates, import, export and use of equipment and environmental protection, all of which may increase costs or reduce the demand for the Company's products;
reduction of production limits of any kind;
refusal or delay in the extension or grant of, exploration, production or development contracts; and
we intend to acquire operation oil and gas properties that are considered a business acquisition for SEC accounting purposes and we may not be able to obtain the necessary historical information in order to consummate the transaction.
The Company faces risks associated with its mergers, acquisitions and divestitures.
The Company’s merger and acquisition activities as described in the LOI carry risks that may not be fully realized at the present time. Even though no such risks are anticipated, there is no assurance that the closing of the transaction contemplated with Stanford will be accomplished in a timely manner or ever. Significant accounting requirements including disclosures of past activities are entailed in the oil and gas accounting requirements imposed on Stanford prior to the closing of the transaction. These pose a substantial risk to the Company when intending to close its transaction with Stanford. a non-public entity, because private entities in general are not required to maintain this detailed information. Consequently a significant burden is placed on Stanford to obtain that information.
The Company’s oil and gas reserves are based on professional judgments and may be subject to revision.
The Company currently has no oil and gas reserves. If and when the Stanford acquisition is completed, the calculations of oil and gas reserves will become an obligation of the Company. Therefore, in the future we will need to depend on estimates concerning reservoir characteristics and recoverability, as well as oil and gas prices, capital costs and operating costs. If the Company were required to make unanticipated significant negative reserve revisions, its results of operations and stock price could be adversely affected.