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| NFEI.OB > SEC Filings for NFEI.OB > Form 10-Q on 14-Jan-2009 | All Recent SEC Filings |
14-Jan-2009
Quarterly Report
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:
• 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;
• Our ability to successfully implement our plan of operations;
• 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;
• Environmental and other regulations, as the same presently exist and may hereafter be amended;
• Our ability to identify, finance and integrate other acquisitions;
• Volatility of our stock price; and
• 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, consists of 1,600 net 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 Company had completed testing the Federal 12-1 well and the Focus Ranch Unit acreage under the farm-out agreement is in the process of being assigned to the Company but has not yet been completed and the Company is uncertain the specific date that it will be assigned to the Company. 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 Weitzel prospect (formerly called Amber Waves prospect) located in Denver Julesburg Basin prospect consists of 12,400 net acres of which we own 100%.
The following discussion and analysis covers the consolidated financial condition of the Company at November 30, 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 nine months ended November 30, 2008 to the same period from the previous fiscal 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 November 30, 2008 compared to the three months ended November 30, 2007
For the three months ended November 30, 2008 we reported a net loss attributable to common shareholders of $1,361,819 or $0.10 per share, on revenue of $336,302. This compares to a net loss attributable to common shareholders of $1,768,528, or $0.19 per share, on revenue of $144,974 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.
Revenues for the three months ended November 30, 2008 were $336,302 compared with $144,974 for the three months ended November 30, 2007, an increase of $191,328 or 131.97%. Oil and gas revenues during the three months ended November 30, 2008 were $306,152 compared with $112,619 during the three months ended November 30, 2007, an increase of $193,533 or 171.85%. The reason for the change is threefold and is a function of production, the sales price of the gas and recording revenues for production held in suspense. Production to our interest decreased approximately 907 MCF (2.230%) compared to the same three-month period ended November 30, 2007. The decrease in production is considered normal in the ordinary course of business. Average gas sales prices increased by $0.10 per MCF or 4.17% from $2.40 to $2.50 during the three months ended November 30, 2008 as compared to the three months ended November 30, 2007. The combination of the price/volume change amounted to an increase in revenue of $2,019. Revenues also increased by $214,135 from production held in suspense and recognized in the three months ended November 30, 2008. SDG revenues from the gathering pipeline were $30,150 for the three months ended September 30, 2008 compared with $32,355 for the three months ended September 30, 2007, a decrease of $2,205 or 6.82%. The decrease relates principally to the decreased gathering fees associated with the decreased production.
Increase
2008 2007 (Decrease)
-------- -------- ------------
Geologic consulting $ 18,750 $ 15,000 $ 3,750
Seismic consulting 51,218 5,514 45,704
Seismic lines 6,390 1,350 5,040
Misc other costs 4,651 1,484 3,167
Delay rentals 1,325 1,852 (527 )
-------- -------- ------------
$ 82,334 $ 25,200 $ 57,134
-------- -------- ------------
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The increase in geologic and seismic consulting is a result of increased exploration activity and reprocessing seismic lines at the Slater Dome Field and the Focus Ranch Unit compared with the prior period together with increased consulting activity associated with packaging and presenting the Weitzel prospect for sale. The increase in miscellaneous other costs is for maps and supplies associated with the packaging and sales effort. The decrease in delay rentals is considered normal in the ordinary course of business.
Lease operating expenses for the three months ended November 30, 2008 were $351,320 compared with $311,876 in the three months ended November 30, 2007, an increase of $39,444 or 12.64%. The changes are summarized as follows:
Increase
2008 2007 (Decrease)
--------- --------- ------------
Lease Operating Expenses $ 275,422 $ 227,470 $ 47,952
Rework expenses 41,763 72,682 (30,919 )
Gas sales costs 6,000 6,000 -
Production taxes 28,135 5,724 22,411
--------- --------- ------------
$ 351,320 $ 311,876 $ 39,444
--------- --------- ------------
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General and administrative expenses for the three months ended November 30, 2008 were $401,481 compared with $488,589 in the three months ended November 30, 2007, a decrease of $87,108 or 17.83%. The following table summarizes the major components of the fluctuations:
Increase
2008 2007 (Decrease)
--------- --------- -----------
Employee compensation $ 191,600 $ 136,412 $ 55,188
Financial public relations 44,560 208,257 (163,697 )
Professional fees 59,060 61,095 (2,035 )
Insurance 8,654 10,768 (2,114 )
Payroll taxes and employee benefits 34,867 28,313 6,554
Travel 9,608 8,183 1,425
Office, utilities, etc. 11,839 17,473 (5,634 )
Rent 11,000 5,333 5,667
Repairs and maintenance 14,010 3,517 10,493
Miscellaneous other costs 16,283 7,297 8,986
Management fees SDG - 1,941 (1,941 )
--------- --------- -----------
$ 401,481 $ 488,589 $ (87,108 )
--------- --------- -----------
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Employee compensation increased $55,188 in the quarter ended November 30, 2008 compared with the quarter ended November 30, 2007 because, officer compensation increased $32,249, and field and office employee compensation increased $22,939 because the Company added additional employees in 2008 not present in 2007. The decrease in financial public relations in the amount of $163,697 in the three months ended November 30, 2008 compared with the three months ended November 30, 2007 arises from decreased fees paid to consultants for financial public relations and shareholder relations, advertising and presentation fees. Professional fees decreased by $2,035 in the three months ended November 30, 2008, compared with the three months ended in 2007 and is considered normal in the ordinary course of business. Insurance decreased by $2,114 in the three months ended November 30, 2008 compared to the three months ended in 2007 and is principally a function of rate changes. The increase in payroll taxes and employee benefits in the amount of $6,554 directly relates to the increase in compensation expenses .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. Travel expenses increased by $1,425; such fluctuation is considered normal in the ordinary course of business. Office expense decreased by $5,634, and is considered normal in the ordinary course of business. Repairs and maintenance increased $10,493, of which $6,770 was incurred by SDG for summer weed control along the gathering line and the balance of $3,723 was incurred by the Company for normal recurring activities. Miscellaneous other expenses increased $8,986 and such decrease is considered normal in the ordinary course of business. Management fees incurred by SDG decreased by $1,941 because the Company took over as the general partner on December 31, 2007 and accordingly, the fees are eliminated in the consolidation.
Depreciation, depletion and amortization for the three months ended November 30, 2008 was $226,464 compared with $216,938 during the three months ended November 30, 2007, an increase of $9,526 or 4.39%. The components of the increase are summarized in the following table:
Increase
2008 2007 (Decrease)
--------- --------- ------------
Producing oil & gas properties $ 159,500 $ 153,800 $ 5,700
Slater Dome Gathering LLLP 32,623 32,623 -
Other depreciable assets 34,341 30,515 3,826
--------- --------- ------------
$ 226,464 $ 216,938 $ 9,526
--------- --------- ------------
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The increase in depletion on producing properties is attributable to the increased basis in the assets at the Slater Dome Field. Other depreciation increased $3,826 for the three months ended November 30, 2008 as compared with the three months ended November 30, 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 November 30, 2008 was $12,490 compared with $78,548 in the three months ended November 30, 2007, a decrease of $66,058 or 84.10%. The decrease is a result of smaller interest bearing cash balances held in 2008 and lower interest rates on such balances as compared with 2007.
Interest expense for the three months ended November 30, 2008 was $19,854 compared with $18,550 in the three months ended November 30, 2007, an increase of $1,304 or 7.03%. The components of the change are summarized as follows:
--------------------------------------------------------------------------------
Increase
2008 2007 (Decrease)
-------- -------- ------------
Notes payable, affiliates $ 3,728 $ - $ 3,728
Notes payable 16,126 16,624 (498 )
Convertible debenture, affiliate - 1,926 (1,926 )
-------- -------- ------------
$ 19,854 $ 18,550 $ 1,304
-------- -------- ------------
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Notes payable, affiliates increased $3,728 in the three months ended November 30, 2008 compared with $0 in the quarter ended November 30, 2007 because the note to NRGG was issued in December 2007 and accordingly, not present in the three months ended November 30, 2007. Notes payable interest decreased by $498 because of reductions in principal. The convertible debenture to affiliates interest decreased because the Company paid the convertible debenture in full in December 2007.
Debt issuance costs for the three months ended November 30, 2008 was $0 as compared with $4,748 for the three months ended November 30, 2007, a decrease of $4,748. 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 November 30, 2008 was $7,479 as compared to $14,820 for the three months ended November 30, 2007 resulting in a decrease of $7,341 or 49.53%. This fluctuation principally relates to the acquisition of the general partner's interest in December 2007 and accordingly, the minority interest decreased.
During the three months ended November 30, 2008, the Company charged dividends on the Series B and C Convertible Preferred Stock in the amount of $218,979 and $247,972 respectively, together with distributions to the SDG minority interests in the amount of $23,275 to the loss attributable to common shares compared with $247,972 during the three months ended November 30, 2007, a decrease of $28,993 or 11.69%. The changes in the dividends on the Series B and C Preferred Stock arise from changes in computational balances. The decrease in distributions to the SDG minority interests in the amount of $9,835 is because SDG made a smaller distribution to minority interest owners during the three months ended June 30, 2008 as compared with the same period in 2007 and the minority interest decreased.
Increase
2008 2007 (Decrease)
--------- --------- ------------
Dividends, Series B $ 58,005 $ 76,609 $ (18,604 )
Dividends, Series C 137,699 138,253 (554 )
Distributions, SDG 23,275 33,110 (9,835 )
--------- --------- ------------
$ 218,979 $ 247,972 $ (28,993 )
--------- --------- ------------
|
As a result of the above, we generated a net loss attributable to common shareholders of $1,361,819 or $0.10 per share during the three months ended November 30, 2008 as compared to a net loss attributable to common shareholders of $1,768,528 or $0.19 per share during the three months ended November 30, 2007.
For the nine months ended November 30, 2008 we reported a net loss attributable to common shareholders of $4,754,935 or $0.39 per share, on revenue of $1,165,032. This compares to a net loss attributable to common shareholders of $5,472,718, or $0.71 per share, on revenue of $435,358, 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 nine months ended November 30, 2008 were $1,165,032 compared with $435,358 for the nine months ended November 30, 2007, an increase of $729,674 or 167.60%. Oil and gas revenues were $1,056,964 for the period ended November 30, 2008 compared with $341,074, an increase of $715,890 or 209.89%. 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 nine months ended November 30, 2008 was 150,634 MCF compared to 80,588 in the comparable period in 2007, an increase of 70,073 MCF (86.98%). The second element of the change is price; average gas sales prices increased by $3.04 per MCF or 95.5% from $3.18 to $6.25 in this period as compared to the nine months ended November 30, 2007. SDG revenues from the gathering pipeline were $108,068 for the nine months ended September 30, 2008 compared with $94,284 for its nine months ended September 30, 2007, an increase of $13,784 or 14.62%. The increase relates the increase in gas transported during the nine months ended June 30, 2008 as compared with the same period in the nine months ended June 30, 2007.
Exploration costs for the nine months ended November 30, 2008 were $179,044 compared with $141,795 in the nine months ended November 30, 2007, an increase of $37,249 or 26.26%. The increase in geologic and seismic consulting is a result of increased exploration activity at the Slater Dome Field and the Focus Ranch Unit compared with the prior period together with increased consulting activity associated with packaging and presenting the Weitzel prospect for sale. The decrease in seismic lines arises because we purchased fewer seismic lines in the nine months ended November 30, 2008. The increase in miscellaneous other costs is for maps and supplies associated with the packaging and sales effort. The increase in delay rentals is considered normal in the ordinary course of business. The following summarizes the components of the fluctuations:
Increase
2008 2007 (Decrease)
--------- --------- ------------
Geologic consulting $ 50,000 $ 45,000 $ 5,000
Seismic consulting 86,081 45,122 40,959
Seismic lines 6,390 35,587 (29,197 )
Misc other costs 20,753 3,349 17,404
Delay rentals 15,820 12,737 3,083
--------- --------- ------------
$ 179,044 $ 141,795 $ 37,249
--------- --------- ------------
|
Increase
2008 2007 (Decrease)
--------- ----------- -----------
Lease Operating Expenses $ 796,333 $ 683,827 $ 112,506
Rework expenses 55,941 423,416 (367,475 )
Gas sales costs 18,000 8,000 10,000
Production taxes 77,942 18,248 59,694
--------- ----------- -----------
$ 948,215 $ 1,133,491 $ (185,276 )
--------- ----------- -----------
|
Gas sales costs increased because there were 9 months of costs in the period ended November 30, 2008 compared with 4 months in the comparable period in 2007. Production taxes increased as a result of increased revenues.
The costs of gas gathering amounted to $1,139 during the nine months ended September 30, 2008 as compared to $4,739 for the nine months ended September 30, 2007, a decrease of $3,600 or 75.96%. The decrease is considered normal in the ordinary course of business.
General and administrative expenses for the nine months ended November 30, 2008 were $1,504,473 compared with $1,516,117 in the nine months ended November 30, 2007, a decrease of $11,644 or 0.77%. The following table summarizes the major components of the fluctuations.
Increase
2008 2007 (Decrease)
----------- ----------- -----------
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