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| NFEI.OB > SEC Filings for NFEI.OB > Form 10-Q on 14-Oct-2008 | All Recent SEC Filings |
14-Oct-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 35,480 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 7,801 net acres of which we own 100%.
Our plan of operation is to further develop the Slater Dome Field by drilling additional up to two wells in the fall 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 August 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 and six months ended August 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 August 31, 2008 compared to the three months ended August 31, 2007
For the three months ended August 31, 2008 we reported a net loss attributable to common shareholders of $2,003,010 or $0.16 per share, on revenue of $330,883. This compares to a net loss attributable to common shareholders of $1,707,285, or $0.23 per share, on revenue of $192,992 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 August 31, 2008 were $330,883 compared with $192,992 for the three months ended August 31, 2007, an increase of $137,891 or 71.45%. Oil and gas revenues during the three months ended August 31, 2008 were $290,034 compared with $175,859 during the three months ended August 31, 2007, an increase of $114,175 or 64.92%. 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 30,065 MCF (55.50%) compared to the same three-month period ended August 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 $5.07 per MCF or 169.57% from $2.99 to $8.06 during the three months ended August 31, 2008 as compared to the three months ended August 31, 2007. SDG revenues from the gathering pipeline were $40,849 for the three months ended June 30, 2008 compared with $17,133 for the quarter ended June 30, 2007, an increase of $23,716 or 138.42%. The increase relates principally to the increased gathering fees associated with the increased production.
Exploration costs for the three months ended August 31, 2008 were $46,899 compared with $49,307 in the three months ended August 31, 2007, a decrease of $2,408 or 4.88%. 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 $ 16,250 $ 15,000 $ 1,250
Seismic consulting 5,125 24,038 (18,913)
Seismic lines -- 6,911 (6,911)
Misc other costs 12,619 946 11,673
Delay rentals 12,905 2,412 10,493
-------- -------- --------
$ 46,899 $ 49,307 $ (2,408)
======== ======== ========
|
The decrease in seismic consulting is a result of decreased exploration activity and reprocessing seismic lines at the Slater Dome Field and the Focus Ranch Unit compared with the prior period. 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 the increase in delay rentals is considered normal in the ordinary course of business.
Lease operating expenses for the three months ended August 31, 2008 were $305,711 compared with $436,299 in the three months ended August 31, 2007, a decrease of $130,588 or 29.93%. The changes are summarized as follows:
Increase
2008 2007 (Decrease)
-------- --------- ----------
Lease operating expenses $ 278,947 $ 424,887 $(145,940)
Gas sales costs 6,000 2,000 4,000
Production taxes 20,764 9,412 11,352
--------- --------- ---------
$ 305,711 $ 436,299 $(130,588)
========= ========= =========
|
Lease operating expenses decreased $145,940 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 in 2008. Gas sales costs increased because we contracted with an entity to market our gas in July 2007 and accordingly, only one month of costs were present in the quarter ended August 31, 2007. The production tax fluctuation is considered normal in the ordinary course of business and directly relate to the increase in production.
General and administrative expenses for the three months ended August 31, 2008 were $578,026 compared with $390,444 in the three months ended August 31, 2007, a increase of $187,582 or 48.04%. The following table summarizes the major components of the fluctuations:
Increase
2008 2007 (Decrease)
--------- --------- ---------
Employee compensation $ 233,463 $ 112,525 $ 120,938
Restricted stock awards 101,000 -- 101,000
Financial public relations 38,709 143,914 (105,205)
Professional fees 95,250 55,723 39,527
Insurance 37,926 16,375 21,551
Payroll and other taxes 15,126 5,899 9,227
Travel 10,962 6,588 4,374
Office 12,957 9,711 3,246
Miscellaneous other 26,761 27,881 (1,120)
Repairs and maintenance 5,873 8,980 (3,107)
Management fees SDG -- 2,848 (2,848)
--------- --------- ---------
$ 578,026 $ 390,444 $ 187,582
========= ========= =========
|
Employee compensation increased $120,938 in the quarter ended August 31, 2008 compared with the quarter ended August 31, 2007 because 2008 bonuses in the amount of $38,000 were not present in 2007, officer compensation increased $25,166, and additional field and office employees compensation in the amount of $57,772 increased because the Company added additional employees in 2008. The Company awarded 100,000 shares of common stock to certain key employees; the trading value of the common stock on the grant date was $1.01 and there were no awards granted in the quarter ended August 31, 2007. The decrease in financial public relations in the amount of $105,205 was principally the result of decrease fees paid to consultants for financial public relations and shareholder relations in the amount of $109,958 which was offset by increases in advertising and presentation fees in the amount of $4,753. Professional fees increased by $39,527 in the three months ended August 31, 2008, compared with the quarter ended 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 increased by $21,551 in the three months ended August 31, 2008 compared to the quarter ended in 2007 and is principally a function of rate changes and the increase in the number of employees covered under the Company's health insurance plan; such fluctuations are considered normal in the ordinary course of business. The increase in payroll taxes in the amount of $9,227 directly relates to the increase in compensation expenses. Travel expenses increased by $4,374; such fluctuation is considered normal in the ordinary course of business. Office expense increased by $3,246, principally because of additional computer software maintenance fees and office supplies; both of which are considered normal in the ordinary course of business. Miscellaneous other expenses decreased $1,120 and such decrease is considered normal in the ordinary course of business. Repairs and maintenance decreased $3,107 principally as a result of nonrecurring repairs in 2007 by SDG. Management fees incurred by SDG decreased by $2,848 because the Company took over as the general partner on December 31, 2007 and accordingly, the fees are eliminated in the consolidation.
Amortization of the non-qualified common stock options issued in November 2006 was $515,550 for both the three months ended August 31, 2008 and 2007, because the warrants vest quarterly through August 31, 2008. The increase of $402,700 in the quarter ended August 31, 2008 compared to 2007 is attributable to the quarterly vesting of the options issued July 23, 2008.
Depreciation, depletion and amortization for the three months ended August 31, 2008 was $245,600 compared with $205,465 during the three months ended August 31, 2007, an increase of $40,135 or 19.53%. The components of the increase are summarized in the following table:
Increase
2008 2007 (Decrease)
-------- -------- --------
Producing oil and gas properties 178,800 144,400 34,400
Slater Dome Gathering, LLLP 32,623 32,623 --
Other depreciable assets 34,177 28,442 5,735
-------- -------- --------
245,600 206,465 $ 40,135
======== ======== ========
|
The increase in depletion on producing properties is attributable to the increased production from the Slater Dome Field. Other depreciation increased $5,735 for the three months ended August 31, 2008 as compared with the three months ended August 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 August 31, 2008 was $28,400 compared with $105,514 in the three months ended August 31, 2007, a decrease of $77,114 or 73.08%. The decrease is a result of smaller interest bearing cash balances held in 2008 as compared with 2007.
Interest expense for the three months ended August 31, 2008 was $21,722 compared with $25,634 in the three months ended August 31, 2007, a decrease of $3,912 or 15.26%. The components of the change are summarized as follows:
Increase
2008 2007 (Decrease)
-------- -------- --------
Notes payable, affiliates $ 5,246 $ -- $ 5,246
Notes payable 16,476 14,459 2,017
Convertible debenture, affiliate -- 1,927 (1,927)
Convertible dentures -- 9,248 (9,248)
-------- -------- --------
$ 21,722 $ 25,634 $ (3,912)
======== ======== ========
|
Notes payable, affiliates increased $5,246 in the three months ended August 31, 2008 compared with $0 in the quarter ended August 31, 2007 because the note to NRGG was issued in December 2007 and accordingly, not present in the quarter ended in 2007. Notes payable interest increased by $2,017 because an obligation for the field facility was incurred in June 2007 and accordingly, two months of interest expense were incurred in the quarter ended August 31, 2007. The convertible debenture to affiliates interest decreased because the Company paid the remaining balance of the convertible debenture in full in December 2007. The convertible debentures interest decreased because the debentures were converted to common stock or paid on July 23, 2007.
Debt issuance costs for the three months ended August 31, 2008 was $0 as compared with $130,508 for the three months ended August 31, 2007, a decrease of $130,508. 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 August 31, 2008 was $13,270 as compared to $13,656 for the three months ended August 31, 2007 resulting in a decrease of $386 or 2.83%. This fluctuation principally relates to the acquisition of the general partner's interest in December 2007.
During the three months ended August 31, 2008, the Company charged dividends on the Series B and C Convertible Preferred Stock in the amount of $69,233 and $132,549 respectively, together with distributions to the SDG minority interests in the amount of $31,033 to the loss attributable to common shares compared with $238,928 during the three months ended August 31, 2007, a decrease of $6,113 or 2.56%. The changes in the dividends on the Series B and C Preferred Stock arise from changes in computational balances. The increase in distributions to the SDG minority interests in the amount of $31,033 is because SDG made a larger distribution to minority interest owners during the three months ended June 30, 2008 as compared with the same period in 2007.
Increase
2008 2007 (Decrease)
--------- --------- ---------
Dividends, Series B $ 69,233 $ 85,180 $ (15,947)
Dividends, Series C 132,549 140,048 (7,499)
Distributions, SDG 31,033 13,700 17,333
--------- --------- ---------
$ 232,815 $ 238,928 $ (6,113)
========= ========= =========
|
As a result of the above, we generated a net loss attributable to common shareholders of $2,003,010 or $0.16 per share during the three months ended August 31, 2008 as compared to a net loss attributable to common shareholders of $1,707,285 or $0.23 per share during the three months ended August 31, 2007.
Results of Operation: six months ended August 31, 2008 compared to the six months ended August 31, 2007.
For the six months ended August 31, 2008 we reported a net loss attributable to common shareholders of $3,392,625 or $0.29 per share, on revenue of $828,730. This compares to a net loss attributable to common shareholders of $3,704,190, or $0.55 per share, on revenue of $290,384, 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 and stabilize production of the coal-bed methane gas from the Slater Dome Field.
Revenues for the six months ended August 31, 2008 were $828,730 compared with $290,384 for the six months ended August 31, 2007, an increase of $538,346 or 185.39%. Oil and gas revenues were $750,812 this quarter compared with $228,455, an increase of $522,357 or 228.65%. The reason for the change is twofold and is a function of production and the sales price of the gas. Production to our interest in the six months ended August 31, 2008 was 115,413 MCF compared to 39,849 in the comparable period in 2007, an increase of 75,563 MCF (65.47%). The second element of the change is price; average gas sales prices increased by $4.51 per MCF or 126.33% from $3.57 to $8.08 in this period as compare to the six months ended August 31, 2007. SDG revenues from the gathering pipeline were $77,918 for the six months ended June 30, 2008 compared with $61,929 for its six months ended June 30, 2007, an increase of $15,989 or 25.82%. The increase relates the increase in gas transported during the six months ended June 30, 2008 as compared with the same period in the six months ended June 30, 2007.
Exploration costs for the six months ended August 31, 2008 were $96,710 compared with $116,595 in the six months ended August 31, 2007, a decrease of $19,885 or 17.05%. The primary reason for the decrease is decreased seismic and geologic consulting and purchasing seismic lines during the six months ended August 31, 2008 offset by an increase in delay rentals and other costs compared with the same period in 2006 summarized as follows.
Increase
2008 2007 (Decrease)
--------- --------- ---------
Geologic consulting $ 31,250 $ 30,000 $ 1,250
Seismic consulting 34,863 39,608 (4,745)
Seismic lines -- 34,237 (34,237)
Misc other costs 16,102 1,865 14,237
Delay rentals 14,495 10,885 3,610
--------- --------- ---------
$ 96,710 $ 116,595 $ (19,885)
========= ========= =========
|
Lease operating expenses for the six months ended August 31, 2008 were $596,895 compared with $821,615 in the six months ended August 31, 2007, a decrease of $224,720 or 27.35%. The principal reason for the decrease is that in the six months ended August 31, 2007 expenditures associated with rehabilitation of the property after taking over operations in the winter of 2007 were not present in 2008. The changes are summarized as follows.
Increase
2008 2007 (Decrease)
--------- --------- ---------
Lease Operating Expenses $ 536,267 $ 807,192 $(270,925)
Gas sales costs 12,000 2,000 10,000
Production taxes 48,628 12,423 36,205
--------- --------- ---------
$ 596,895 $ 821,615 $(224,720)
========= ========= =========
|
Gas sales costs increased because there were 6 months of costs in the period ended August 31, 2008 compared with one month in the comparable period in 2007. Production taxes increased as a result of increased revenues.
The costs of gas gathering amounted to $648 during the six months ended June 30, 2008 as compared to $832 for the six months ended June 30, 2007, a decrease of $184 or 22.12%. The decrease is considered normal in the ordinary course of business.
General and administrative expenses for the six months ended August 31, 2008 were $1,102,992 compared with $1,027,528 in the six months ended August 31, 2007, an increase of $75,464 or 7.34%. The following table summarizes the major components of the fluctuations.
Increase
2008 2007 (Decrease)
---------- ---------- ----------
Employee compensation $ 374,965 $ 405,249 $ (30,284)
Restricted stock awards 101,000 -- 101,000
Financial public relations 180,079 299,201 (119,122)
Professional fees 215,740 142,739 73,001
Insurance 84,990 64,279 20,711
Payroll and other taxes 29,049 27,169 1,880
Travel 16,744 19,792 (3,048)
Office 69,341 23,509 45,832
Rent 22,300 20,167 2,133
Repairs and maintenance 8,784 21,605 (12,821)
Management fees SDG -- 3,818 (3,818)
---------- ---------- ----------
$1,102,992 $1,027,528 $ 75,464
========== ========== ==========
|
Employee compensation decreased $30,284 in the six months ended August 31, 2008 compared with the six months ended August 31, 2007 because salaries and bonuses to officers decreased $122,000, offset with increased additional staff compensation in the amount of $91,715 resulting from annual salary increases and additional personnel in the field. Restricted stock awards increased by $101,000 in the six months ended August 31, 2008 because there were no awards in the comparable period in 2007. The decrease in financial public relations in the amount of $119,122 principally as a result of a decrease in financial public relations fees in the amount of $149,215 offset by increases in other related costs of $30,093. Professional fees increased by $73,001 as a result of increased legal, accounting and engineering fees associated with the increasing corporate activity in the amount of $51,886 and increased fees associated with contract land personnel and other professionals in the amount of $21,115. Payroll taxes increased by $1,880 and is directly related to compensation changes. Travel decreased $3,048 in the six months ended August 31, 2008 . . .
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