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| COCBF.OB > SEC Filings for COCBF.OB > Form 10-Q on 13-Nov-2008 | All Recent SEC Filings |
13-Nov-2008
Quarterly Report
Forward Looking Statements
Statements included in Management's Discussion and Analysis of Financial Condition and Results of Operations, which are not historical in nature are intended to be forward looking statements. The Company cautions readers that forward looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated in the forward looking statements. Among the risks and uncertainties are: the uncertainty of securing additional financing through the sale of shares of Coastal Petroleum and/or Coastal Caribbean; changes in the income tax laws relating to tax loss carry forwards; the failure of the Company's test wells to locate oil or gas reserves or the failure to locate oil or gas reserves which are economically feasible to recover; reductions in world wide oil or gas prices; adverse weather conditions; or mechanical failures of equipment used to explore the Company's leases.
Critical Accounting Policies
The Company follows the full cost method of accounting for its oil and gas properties. All costs associated with property acquisition, exploration and development activities whether successful or unsuccessful are capitalized
The capitalized costs are subject to a ceiling test which basically limits such costs to the aggregate of the estimated present value discounted at a 10% rate of future net revenues from proved reserves, based on current economic and operating conditions, plus the lower of cost or fair market value of unproved properties.
The Company assesses whether its unproved properties are impaired on a periodic basis. This assessment is based upon work completed on the properties to date, the expiration date of its leases and technical data from the properties and adjacent areas. Using this assessment, Management has determined that the Company's leases are not impaired.
Liquidity and Capital Resources
Liquidity
The Company has no available cash, excluding certificate of deposits pledged for drilling permits, at September 30, 2008, compared to $30,000 at December 31, 2007. Our current liabilities exceed our current assets by $680,000 at September 30, 2008. We have suspended payments to our directors, general legal counsel, and employee since the second quarter of 2007 and have accrued $665,000 in expenses as of September 30, 2008. We received $195,000 from the sale of unproved lease rights and redeemed a $50,000 certificate of deposit released from restrictions as a drilling bond during the nine months ended September 30, 2008, which we used primarily to pay our annual lease payments and other operating expenses.
ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
During 2008, we received $180,000 and $40,000 respectively under farm-out agreements for lease and drilling rights on our Montana and North Dakota leases. During 2007, we received approximately $309,000 under various agreements for lease and drilling rights and the options to acquire additional rights. Also during 2007, we received $255,000 that was used to drill one of the wells on our leases.
During 2008, we have paid lease rentals of $201,000. We have additional lease payments of approximately $22,000 due in November 2008. We may need to sell additional lease rights to obtain the cash to make these payments, although there is no guarantee we will be able to sell additional lease rights. Western Standard has paid for estimated gas well completion costs of $65,000 and funds are in place for the completion and testing operations.
We received $7,500 in March 2008 from the exercise of outstanding stock options from Robert J. Angerer, Sr., our vice president and a director of the Company.
As of September 30, 2008, we had no revenues, had recurring losses prior to 2005 and since 2005, and had an accumulated deficit during the development stage. Our current cash position is not adequate to fund existing operations or exploration and development of its oil and gas properties. We currently have in place an agreement with a party covering part of our leases under which the party will drill a test well and have the option to purchase a 50% working interest in the leases covered by the agreement. If the party exercised the option, we would receive approximately $1,000,000, although there is no assurance drilling will be successful or the option will be exercised. The Company also has an agreement with another party, under which the party has the option to purchase a 50% working interest in the Company's remaining Valley County leases by paying $1,000,000 in drilling costs on the Company's behalf, although there is no assurance drilling will be successful or the option will be exercised. These situations raise substantial doubt about our ability to continue as a going concern.
In Montana, we have obtained the rights to explore for oil and gas in one area which will be our primary area of focus. This primary area is a large assembly of leases covering approximately 124,882 net acres in Valley County, located in northeastern Montana close to known production from a Lodgepole reef. This area of Montana has a number of other producing formations in addition to the Lodgepole, including the Eagle sands. Currently we have two agreements with two different entities covering separate areas of the leases and exploration has begun on those leases. During 2006, we drilled two wells on lands outside these leases and they did not find economic quantities of oil or gas and were abandoned. We also hold leases in southwestern North Dakota and have an agreement covering four Lodgepole prospects on those leases.
ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
The first of the two agreements we entered into was a farm-out agreement with Western Standard Energy Corp. ("Western Standard") in August 2007. Under the agreement, Western Standard paid us $40,000 at execution and then paid an additional $384,000. From the $384,000, $255,000 was paid to cover the costs of drilling the first well to test a shallow natural gas prospect in Valley County, Montana and $129,000 was paid to cover associated lease rentals. Western Standard will have a 100% working interest in the first well until payout when it will be reduced to 80% and we will receive the other 20% working interest. Upon receiving the funds to cover lease rentals, we repaid in full our loan of $126,000. Under the loan agreement, the individual that loaned us the money continues to hold a 5% overriding royalty on the same approximately 42,000 (37,000 after some leases have expired) acres that are covered in the Western Standard farm-out agreement.
The first well under this agreement was drilled during October 2007, to test a shallow natural gas prospect near the middle of the Company's Valley County Leases. The well, known as the Federal 1-19 Well, had three objectives: to confirm the 34,000 acre Starbuck East Prospect by finding that the Eagle formation was high to surrounding wells off the Prospect; to confirm that there were good natural gas shows in the Starbuck East Prospect; and to find commercial gas in either the Eagle formation or the Judith River formation. The first two objectives were met. Due to drilling damage, the third objective has not yet been met.
During October 2007, the Federal 1-19 well reached a total depth of 1,126 feet and confirmed the structural high that we believed to be there. The well also had gas shows in two zones. Casing was run into the hole and operations to complete and test the well were scheduled to begin at the end of November, but were delayed by equipment repairs. The well is located on Federal land and the Bureau of Land Management would not allow the completion and testing operations or any further drilling to begin between December 1st and July 1st, so operations were suspended until July. In December, we entered a Memorandum of Understanding with Western Standard which led to a farm-out agreement on our North Dakota Leases discussed below, but also allowed us to use $29,000 of the funds from Western Standard originally sent to cover completion to now cover lease rental and other costs associated with the delay in well completion. Western Standard paid the estimated well completion costs of $65,000 and operations to complete and test the well were performed in two stages during the third quarter and proceeded to the third stage subsequent to the end of the third quarter. In October 2008, the Company received approximately $29,000 from Western Standard to pay for the third stage of operations which included stimulation of the well, a common procedure in completing oil and gas wells.
The Company was unable to determine by this well whether the target formations contain economic quantities of gas. Drilling damage in the well prevented the testing of either of the prospective formations at this location. Completion efforts found that the Eagle formation was damaged by the initial drilling and the formation was not able to be tested from this well. Further drilling into the Eagle formation during completion did not yield gas like the gas show seen from the upper part of the formation that was damaged. The Judith River formation, a secondary target, was damaged by drilling fluids lost into the formation while drilling through it to get to the Eagle formation, the primary target. Future wells to test this structure will incorporate the information obtained from these wells to prevent that damage from occurring again in other locations on the structure.
ITEM 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
It is not unusual that the first well confirming a structure does not become a
producing well. The test well did produce valuable information about the two gas
bearing formations and their potential for economically feasible commercial gas
production. Problems encountered in drilling the test well can now be avoided
when future wells are drilled on the Starbuck East Prospect. With the first two
objectives met, we will now focus on achieving the third objective, specifically
finding commercial gas in either the Eagle or Judith River formations.
Western Standard now has 30 days from the completion to exercise its option to purchase a 50% interest in approximately 42,000 (37,000 after some leases have expired) acres near the well location (referred to as "Valley County Shallow Gas Assembly"). The cost to exercise the option would be $1,000,000, payable in $200,000 installments based on certain milestones related to drilling step-out wells. We have received permits to drill two step-out wells and are currently in the permitting process for two more.
We entered the second agreement with Cobra Oil and Gas, in May of 2008. Under the agreement, Cobra has paid Coastal $180,000 for the option to acquire a half interest in approximately 87,000 acres of Coastal's Valley County Leases. The agreement allowed us to pay our Lease rentals that were due June 1, 2008 and brings in a new party to explore on the Leases. Cobra will have two years to exercise the option by spending $1,000,000 on our behalf, drilling wells on the leases under the agreement. Those leases include approximately 62,000 acres of leases that were formally under an agreement with F-Cross Resources that expired earlier this year and more than 20,000 acres of other leases Coastal held in Valley County.
F-Cross Resources, LLC ("F-Cross") will continue to hold its interest in the section in which it drilled a well under the September 2007 agreement which has otherwise expired. Under that agreement we received $50,000 from F-Cross at the execution of a farm-out agreement covering approximately 64,000 acres (now 62,000 after some leases expired) on the northwest part of our Valley County Leases. Under the agreement, F-Cross had the option to drill a Lodgepole test well within six months and after that well had the further option to acquire an interest in surrounding acreage. F-Cross is to pay for the cost of drilling the initial well and will receive a 100% working interest in the well until payout and an 80% working interest after payout. F-Cross exercised its option and drilled the first Lodgepole test well during November, 2007. The well is awaiting completion and testing of several zones which have potential for both oil and gas. Unlike the shallow gas well on Federal land, this well is located on State land and provided that there is no State objection, we expect that F-Cross will resume operations to complete and test the well once the weather and state regulators permit it, however those operation have not yet been resumed. F-Cross did not meet the requirements in the agreement and in late March the option to acquire an interest in additional acreage expired, leaving F-Cross with the interest in the section in which it drilled the well.
ITEM 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
The two wells we were involved with drilling during 2006 and that were abandoned
during 2007 were drilled in Montana, but in areas outside of and as far as 130
miles from our Valley County Leases and were farm-in wells on leases held by
others. Both of those wells reached the targeted Lodgepole reefs, but no gas or
oil was present in economic quantities. We will not pursue any further drilling
in these areas. The second of these wells was drilled with partners and there
are approximately $115,000 in unpaid expenses related to this well that are
collectively the responsibility of the various partners. This amount is not
reflected as a liability in the accompanying financial statements.
In North Dakota, we control the working interest on approximately 8,510 net acres in Slope, Billings, and Stark Counties, on which a number of drillable prospects have been mapped to date. The depth of wells here is greater than in Montana (approximately 9,500 feet versus approximately 5,000 feet), and so the cost of drilling is higher. A typical North Dakota wildcat well costs about $1.5 million to drill. We intend to bring in others to share the risk and investment in wells we drill in North Dakota until we are in a stronger financial position.
Through our efforts to bring in others to explore our North Dakota leases, in December of 2007 we entered a new farm-out agreement with Western Standard. Under the agreement, we assigned leases over four of our high-graded Lodgepole Reef prospects to Western Standard in return for $80,000. We received $40,000 in November 2007, $25,000 in February 2008 and $15,000 in April 2008. We will also retain a back-in working interest of 20% in the leases after payout. The leases cover all rights below the Tyler formation, including the Lodgepole formation, with an 80% net revenue interest. We acquired these and other leases in the area in 2005 from Oil For America for $50,000 and we have invested some additional funds to geochemically test and high-grade these and other prospects on the leases. Oil For America has agreed to waive the drilling obligation on these four prospects. We will still retain additional Lodgepole reef prospects on our North Dakota leases not covered by this farm-out agreement.
As briefly described above, in the Memorandum of Understanding which gave rise to the new farm-out agreement, Western Standard also agreed that we could use the more than $29,000 originally forwarded to be used for completion of the first shallow gas well to cover the costs associated with the delay in operations, including annual rentals. This amount combined with the $80,000 paid for the four reef prospects helped cover our operations during the first half of 2008.
Results of Operations
Nine months ended September 30, 2008 vs. September 30, 2007
We did not conduct drilling activities for the nine months ended September 30, 2008 or 2007, due to weather and/or landowner access restrictions on our leases from January 1st to July 1st. We performed some completion work in two stages during the 3rd quarter and expect to finish the remainder of the operations, including completion work, stimulation and testing of the well, during the 4th quarter of 2008. Substantially all the drilling activity on our leases for 2007 was financed under farm-out agreements with other entities, and we expect that to continue in 2008.
ITEM 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Therefore, our expenses are primarily administrative and our 2008 expenses
remained consistent with 2007 amounts. During 2007, we incurred $51,000 to
prepare our 2006 wells for abandonment.
Our interest income decreased in 2008 from 2007 due to lower cash balances.
Three months ended September 30, 2008 vs. September 30, 2007
We conducted initial completion activities in the third quarter of 2008, but did not conduct any drilling activities in 2007. We expect to finish completion and testing operations during the 4th quarter of 2008. Substantially all the drilling activity on our leases for 2007 was financed under farm-out agreements with other entities, and we expect that to continue in 2008. Therefore, our expenses are primarily administrative and our 2008 expenses remained consistent with 2007 amounts. During 2007, we sold certain piping and other well supplies for $17,000, which reduced the cost of preparing the 2006 wells for abandonment.
Our interest income decreased in 2008 from 2007 due to lower cash balances.
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