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| NFEI.OB > SEC Filings for NFEI.OB > Form 10-Q on 11-Jul-2008 | All Recent SEC Filings |
11-Jul-2008
Quarterly Report
Forward Looking Information
Information contained in the following discussion of results of operations and financial condition and in certain of the notes to the financial statements included in this document contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which can be identified by the use of words such as "may," "will," "expect," "anticipate," "estimate," or "continue," or variations thereon or comparable terminology. In addition, all statements other than statements of historical facts that address activities, events, or developments the Company expects, believes, or anticipates will or may occur in the future, and other such matters, are forward-looking statements. The following discussion should be read in conjunction with the Company's unaudited financial statements and related notes included elsewhere herein.
The Company's future operating results may be affected by various trends and factors, which are beyond the Company's control. The important factors that could prevent us from achieving our stated goals and objectives include, but are not limited to, those set forth in our Annual Report on Form 10-KSB for the fiscal year ended February 29, 2008 and the following:
o The general state of the economy;
o Our ability to find third parties to implement our plan of operations
in drilling additional wells at the Slater Dome Field (as defined
below) and prove reserves at the Focus Ranch Unit;
o Our ability to successfully implement our plan of operations;
o Our ability to raise additional capital, as it may be affected by
current conditions in the stock market and competition in the oil and
gas industry for risk capital;
o Environmental and other regulations, as the same presently exist and
may hereafter be amended;
o Our ability to identify, finance and integrate other acquisitions;
o Volatility of our stock price; and
o Actions of overseas producers of oil and natural gas over which we
have no control.
We undertake no responsibility or obligation to update publicly these forward-looking statements, but may do so in the future in written or oral statements. Investors should take note of any future statements made by or on our behalf.
The Company cautions the reader that a number of important factors discussed herein, and in other reports filed with the Securities and Exchange Commission, including its 10-KSB for the year ended February 29, 2008, could affect the Company's actual results and cause actual results to differ materially from those discussed in forward-looking statements. This information should be read in conjunction with our Annual Report on Form 10-KSB for the year ended February 29, 2008.
Overview
We are a natural resource exploration and production company engaged in the exploration, acquisition and development of oil and gas properties in the United States. We currently own an interest in five oil and gas prospects, three of which are undeveloped. The Company owns a 66.66667% working interest in the Slater Dome Field and is the operator of this field. The Slater Dome Field consists of 33,303 net acres, held by mineral leases, and is located along the Colorado-Wyoming border in Moffat County, Colorado, and Carbon County, Wyoming. The Slater Dome Field targets coal-bed methane gas located at relatively shallow depths by industry drilling standards. The Flattops Prospect consists of 3,276 net acres, of which we own 100% of the working interest. The North Slater Dome Field, consisting of 600 gross acres, of which we own a 100% working interest. The Focus Ranch Unit consists of approximately 36,891 gross acres, 30,500 net acres adjacent to and southeast of the Slater Dome Field in northwest Colorado and one gas well, the Focus Ranch Federal 12-1 well ("Focus Ranch Unit") and is subject to a farmout agreement. The agreement provides that the Company shall become the operator of and acquire the Farmor's interest in the Focus Ranch Unit. The Farmor will retain a 1% working interest in the Unit and the Company will acquire the balance of Farmor's interest ranging between a 74% and a 99% working interest on a lease by lease basis. As of the date of this Form 10-Q, the Focus Ranch Unit had not been assigned to the Company. The Bureau of Land Management has placed the Focus Ranch Unit in suspense pending the results of the testing of the Federal 12-1 well which is expected to be completed by fall 2008. We also own a 15% working interest in 15,049 gross acres in Routt County Colorado called Gibraltar Peaks Prospect. The acreage includes all rights from the surface of the earth to the base of the Mesa Verde Formation. The Gibraltar Peaks Prospect is included in the Focus Ranch Unit. The Amber Waves prospect located in Denver Julesburg Basin prospect consists of 6,885 net acres of which we own 100%.
Our plan of operation is to further develop the Slater Dome Field by drilling additional wells in the summer of 2008; such wells are anticipated to be adjacent or near our existing wells in the southeast section of this property. We also plan to test the Niobrara and Frontier formations in the Focus Ranch Federal 12-1 well in the Unit. We intend to sell a portion of our Amber Waves Prospect located in Northeast Colorado and we will attempt to obtain a promoted or carried working interest as well as a prospect fee. We also plan to evaluate opportunities to acquire other interests in oil and gas properties.
The following discussion and analysis covers the consolidated financial condition of the Company at May 31, 2008, changes in our financial condition since February 29, 2008, the end of the previous fiscal year, and a comparison of the results of operation for the three months ended May 31, 2008 to the same period from the previous year. This information should be read in conjunction with our Annual Report on Form 10-KSB for the year ended February 29, 2008.
Results of Operation: Three months ended May 31, 2008 compared to the three months ended May 31, 2007
For the three months ended May 31, 2008 we reported a net loss attributable to common shareholders of $1,389,615 or $0.13 per share, on revenue of $497,847. This compares to a net loss attributable to common shareholders of $2,096,808, or $0.34 per share, on revenue of $97,392, for the comparable period of the previous fiscal year. We expect to incur losses until such time as we complete the dewatering process of our wells, stabilize production of the coal-bed methane gas.
Revenues for the three months ended May 31, 2008 were $497,847 compared with $97,392 for the three months ended May 31, 2007, an increase of $400,455 or 411.18%. Oil and gas revenues during the three months ended May 31, 2008 were $460,778 compared with $52,596 during the three months ended May 31, 2007, an increase of $408,182 or 776.07%. The reason for the change is twofold and is a function of production and the sales price of the gas. Production to our interest increased approximately 42,584 MCF (69.54%) compared to the same three-month period ending May 31, 2007. The increase in production is principally attributable to increased compression capacity, and the addition of four additional wells drilled in the summer of 2007. Average gas sales prices increased by $3.94 per MCF or 95% from $4.15 to $8.09 during the three months ended May 31, 2008 as compared to the three months ended May 31, 2007. SDG revenues from the gathering pipeline were $37,069 for the three months ended March 31, 2008 compared with $44,796 for the quarter ended March 31, 2007, a decrease of $7,727 or 17.25%. The decrease relates principally to the fact that the Company increased its ownership in SDG which owns the gas gathering pipeline and accordingly, gathering fees received from third parties decreased.
Exploration costs for the three months ended May 31, 2008 were $49,811 compared with $67,288 in the three months ended May 31, 2007, a decrease of $17,477 or 25.97%. The reason for the decrease is the result of decreases in seismic consulting, seismic lines, miscellaneous costs and delay rentals offset by an increase in geological consulting.
Increase
2008 2007 (Decrease)
-------- -------- --------
Geologic consulting $ 15,000 $ 15,000 $ --
Seismic consulting 29,739 15,571 $ 14,168
Seismic lines -- 27,326 $(27,326)
Misc other costs 3,483 919 $ 2,564
Delay rentals 1,589 8,472 $ (6,883)
-------- -------- --------
$ 49,811 $ 67,288 $(17,477)
======== ======== ========
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The increase in seismic consulting is a result of exploration activity and reprocessing seismic lines at the Slater Dome Field and the Focus Ranch Unit. The decrease in seismic lines is directly related to the culmination of our analysis of potential prospects in the Denver Julesburg Basin in prior periods. Decreases in miscellaneous other costs and delay rentals are considered normal in the ordinary course of business.
Lease operating expenses for the three months ended May 31, 2008 were $291,184 compared with $385,316 in the three months ended May 31, 2007, a decrease of $94,132 or 24.43%. The changes are summarized as follows:
Increase
2008 2007 (Decrease)
-------- -------- --------
Lease operating expenses $ 256,142 $ 382,206 $(126,064)
Gas sales costs 6,000 -- 6,000
Production taxes 29,042 3,110 25,932
--------- --------- ---------
$ 291,184 $ 385,316 $ (94,132)
========= ========= =========
|
Lease operating expenses decreased $126,064 when compared with the previous period ending in 2007 because expenditures required in 2007 associated with rehabilitation of the property after taking over operations in the winter of 2007 were not present. Gas sales costs increased because we contracted with an entity to market our gas in July 2007 and such costs were not present in the quarter ended May 31, 2007. The production tax fluctuation is considered normal in the ordinary course of business and directly relate to the increase in production.
The costs of gas gathering decreased by $185 from $833 to $648 or 22.19% during the three months ended March 31, 2008 as compared to the same quarter in 2007. The increase is considered normal in the ordinary course of business.
General and administrative expenses for the three months ended May 31, 2008 were $524,966 compared with $637,084 in the three months ended May 31, 2007, a decrease of $112,118 or 17.6%. The following table summarizes the major components of the fluctuations:
Increase
2008 2007 (Decrease)
--------- --------- ---------
Employee compensation $ 141,503 $ 292,724 $(151,221)
Financial public relations 141,371 155,287 (13,916)
Professional fees 78,275 56,137 22,138
Insurance 34,611 37,461 (2,850)
Reserve engineering costs 28,754 25,783 2,971
Payroll and other taxes 11,964 20,945 (8,981)
Travel 5,782 13,104 (7,322)
Rent 11,300 8,900 2,400
Office 38,186 2,499 35,687
Miscellaneous other 14,624 11,137 3,487
Repairs and maintenance 2,911 6,240 (3,329)
Landman fees and expenses 13,461 5,097 8,364
Management fees SDG 2,224 1,770 454
--------- --------- ---------
$ 524,966 $ 637,084 $(112,118)
========= ========= =========
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Employee compensation decreased $151,221 in the quarter ended May 31, 2008 compared with the quarter ended May 31, 2007 because 2007 bonuses in the amount of $160,000 were not present in 2008 offset by additional field and office employees compensation in the amount of $8,779 in 2008. The decrease in financial public relations in the amount of $13,916 was principally the result of decrease fees paid to consultants for financial public relations and shareholder relations in the amount of $39,256 which was offset by increases in travel, advertising and presentation fees in the amount of $25,340. Professional fees increased by $22,138 in the three months ended May 31, 2008, compared to the quarter ending in 2007 and was as a result of increased legal and accounting which is considered normal in the ordinary course of business and is a result of increased corporate activity. Insurance decreased by $2,850 in the three months ended May 31, 2008 compared to the quarter ending in 2007 and is principally a function of rate changes and is considered normal in the ordinary course of business. The decrease in payroll taxes and employee benefits in the amount of $8,981 directly relates to the decrease in compensation expenses. Travel expenses decreased by $7,322 because travel has been coordinated with financial public relations. Rent increased by $2,400 because the field office rent increased $3,300 offset by a decrease of $900 in rent paid by SDG. Office increased by $35,687, principally because of additional computer software maintenance fees of $18,148, and office supplies increased $18,418, both of which are considered normal in the ordinary course of business. Miscellaneous other expenses increased $3,487 and such increase is considered normal in the ordinary course of business. Repairs and maintenance decreased $3,329 principally as a result of nonrecurring repairs in 2007 by SDG. Landman fees and expenses increased $8,364 as a result of title work in the Amber Waves Prospect in 2008. Management fees incurred by SDG increased by $454; such increase is considered normal in the ordinary course of business.
Amortization of the non-qualified common stock options issued in November 2006 was $515,550 for both the three months ended May 31, 2008 and 2007, because the warrants vest quarterly through August 31, 2008.
Depreciation, depletion and amortization for the three months ended May 31, 2008 was $265,177 compared with $117,973 during the three months ended May 31, 2007, an increase of $147,204 or 124.78%. The components of the increase are summarized in the following table:
Increase
2008 2007 (Decrease)
-------- -------- --------
Producing oil and gas properties $199,100 $ 72,500 $126,600
Slater Dome Gathering, LLLP 32,623 32,623 --
Other depreciable assets 33,454 12,850 20,604
-------- -------- --------
$265,177 $117,973 $147,204
======== ======== ========
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The increase in depletion on producing properties is attributable to the increased production from the Slater Dome Field, Other depreciation increased $20,604 for the three months ended May 31, 2008 as compared with the three months ended May 31, 2007 because of depreciation associated with additional non oil and gas property and equipment the Company placed into service.
Interest income for the three months ended May 31, 2008 was $21,547 compared with $133,474 in the three months ended May 31, 2007, a decrease of $111,927 or 83.86%. Such decrease is a result of smaller interest bearing cash balances held.
Interest expense for the three months ended May 31, 2008 was $21,338 compared with $18,306 in the three months ended May 31, 2007, an increase of $3,032 or 16.56%. The components of the change are summarized as follows:
Increase
2008 2007 (Decrease)
------- ------- --------
Convertible debenture $ -- $16,380 $(16,380)
Convertible debenture, affiliates -- 1,926 (1,926)
Notes payable, affiliates 5,039 -- 5,039
Notes payable 16,299 -- 16,299
------- ------- --------
$21,338 $18,306 $ 3,032
======= ======= ========
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The convertible debentures interest decreased because the debentures were converted to common stock or paid on July 23, 2007. The convertible debenture to affiliates interest decreased because the Company paid the remaining balance of the convertible debenture in full in December 2007. Notes payable, affiliates increased $5,309 in the three months ended May 31, 2008 compared with $0 in the quarter ended May 31, 2007 because the note to NRGG was issued in December 2007 and accordingly, not present in the quarter ending in 2007. Notes payable interest increased by $16,299 because an obligation for the field facility was incurred in June 2007 and accordingly, was not present in the quarter ended May 31, 2007.
Debt issuance costs for the three months ended May 31, 2008 was $0 as compared with $228,661 for the three months ended May 31, 2007, a decrease of $228,661. The change in debt issuance cost arises because the debentures matured on July 23, 2007 and the completion of the amortization period occurred in 2007.
The minority interest in the income of the consolidated subsidiary for the three months ended May 31, 2008 was $11,018 as compared to $11,517 for the three months ended May 31, 2007 resulting in a decrease of $499 or 4.33%. This fluctuation principally relates to the acquisition of the general partners interest in December 2007.
During the three months ended May 31, 2008, the Company charged dividends on the Series B and C Convertible Preferred Stock in the amount of $76,088 and $139,404 respectively, together with distributions to the SDG minority interests in the amount of $13,825 to the loss attributable to common shares compared with $345,146 during the three months ended May 31, 2007, a decrease of $115,829 or 33.56%. The changes in the dividends on the Series B and C Preferred Stock arises from changes in computational balances. The decrease in distributions to the SDG minority interests in the amount of $5,075 is because SDG made smaller distribution to minority interest owners during the three months ended March 31, 2008 as compared with the same period in 2007.
Increase
2008 2007 (Decrease)
--------- --------- ---------
Dividends Series B $ 76,088 $ 86,596 $ (10,508)
Dividends Series C 139,404 239,650 (100,246)
Distributions SDG 13,825 18,900 (5,075)
--------- --------- ---------
$ 229,317 $ 345,146 $(115,829)
========= ========= =========
|
As a result of the above, we generated a net loss attributable to common shareholders of $1,389,615 or $0.13 per share during the three months ended May 31, 2008 as compared to a net loss attributable to common shareholders of $2,096,808 or $0.34 per share during the three months ended May 31, 2007.
Liquidity and Capital Resources
We have not generated positive cash flows from operating activities and used $731,418 in operating activities during the three months ended May 31, 2008. The primary sources of capital have been from sales of gas and issuances of equity securities during the three months ended May 31, 2008. Our primary use of capital has been for the acquisition, development and exploration of oil and gas properties. Our working capital requirements are expected to increase in line with the growth of our business. We have no lines of credit or other bank or off balance sheet financing arrangements. We believe our capital requirements will continue to be met with cash from operations, additional issuance of equity or debt securities as well as traditional bank financing. Additional issuances of equity or convertible debt securities will result in dilution to our current Common Stockholders'.
Our plan of operations for the next twelve months call for us to participate in the drilling of additional wells at Slater Dome Field, to develop the Flattops Prospect by drilling two wells in the summer/fall of 2009, testing the Niobrara formation at the Focus Ranch Unit and to provide capital for other lease acquisitions. We believe that the plan of operations for the next twelve months will require capital of approximately $10,000,000. To the extent that additional opportunities present themselves to the Company, the Company may require additional sources of capital to participate in these opportunities. We expect that working capital requirements will be funded through a combination of our existing funds, cash flow from operations and issuance of equity and debt securities. Further, the Company could receive proceeds from the exercise of outstanding warrants issued to the holders of the Company's Convertible Debenture and the associated placement agent warrants. The Convertible Debt Warrants are exercisable at a price of $1.33 and the placement agent warrants are exercisable at $1.08. The warrants issued to the holders of the Convertible Debentures and the placement agent warrants expire on July 22, 2008. If all of the warrants issued in connection with the convertible debt were exercised, it would result in proceeds to the Company of $2,789,121. There can be no assurance that any of the warrant holders will exercise these warrants. Management believes that current cash balances plus cash flow from operations will not be sufficient to fund our capital and liquidity needs for the next twelve months and the Company will be required to obtain additional capital to execute its drilling and development plans.
As of May 31, 2008, we had a cash balance of $4,252,828. We used $731,418 in cash for operating activities during the three months ended May 31, 2008 as compared to $1,819,693 during the three months ended May 31, 2007.
The following summarizes the Company's capital resources at May 31, 2008
compared with February 29, 2008:
May 31, February 29, Increase Increase
2008 2008 (Decrease) (Decrease)
----------------------------------------------------------------------------------------
Cash $ 4,252,828 $ 3,602,939 $ 649,889 18%
Current assets 5,639,720 4,881,911 757,809 16%
Total Assets 27,256,014 26,209,623 1,046,391 4%
Current liabilities 3,499,754 3,535,934 (36,180) -1%
Working capital 2,139,966 1,345,977 793,989 59%
Net cash (used) in operating (731,418) (3,048,539) 2,317,121 -76%
activities
Net cash used in investing (553,757) (5,653,729) 5,099,972 -90%
activities
Net cash provided by (used in) 1,935,064 (419,027) 2,354,091 -562%
financing activities
|
The principal components of the changes in cash are summarized as follows:
Proceeds from revenues $ 497,847
Proceeds from exercising warrants 1,712,469
Proceeds from exercising placement agent warrants 269,747
Operating costs billed to non-affiliates (662,123)
Purchase of property and equipment (587,059)
Deposits 33,300
Principal payments on notes payable (8,568)
Preferred stock dividends (1,544)
Distributions to SDG minority interests (13,823)
Operating expenses and other (590,356)
----------
$ 649,889
==========
|
The principal cause of the changes in current liabilities in the amount of $36,180 was payment of $491,033 for accounts payable offset by $213,948 increase in dividends payable and $243,068 increase on accrued expenses. The Company increased the current portion of the long-term debt by $4,817 as a normal course of the loan amortization. The remaining changes are considered normal in the ordinary course of business.
Increase
5/31/2008 2/29/2008 (Decrease)
---------- ---------- ----------
Accounts payable $ 318,274 $ 809,397 $ (491,123)
Convertible debenture, affiliates 806,250 806,250 --
Dividends payable 1,737,484 1,523,536 213,948
Accrued expenses 551,134 308,066 243,068
Accounts payable, affiliates 36,430 48,459 (12,029)
Accrued interest 11,345 6,206 5,139
Current portion of long term debt 38,837 34,020 4,817
---------- ---------- ----------
$3,499,754 $3,535,934 $ (36,180)
========== ========== ==========
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The increase in working capital of $793,989 or 59% is principally due to increased revenues and accounts receivable.
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