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CAK > SEC Filings for CAK > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for CAMAC ENERGY INC.

Form 10-Q for CAMAC ENERGY INC.


9-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our Business

CAMAC Energy Inc. is engaged in the exploration, development, and production of oil and gas outside the United States, directly and through joint ventures and other ventures in which it may participate. Currently the Company has interests in OML 120/121 oil and gas leases in deep water offshore Nigeria and has recently acquired exploratory acreage in Kenya and The Gambia.

The Company was originally incorporated in Delaware on December 12, 1979 as Gemini Marketing Associates Inc., subsequently changed its name to Pacific East Advisors, Inc., and on May 7, 2007 consummated a reverse merger involving predecessor company IMPCO and ADS (the "Mergers"), in connection with which the Company changed its name to Pacific Asia Petroleum, Inc. The Company's name was changed to CAMAC Energy Inc. upon the acquisition of certain interests in oil and gas properties located offshore Nigeria in April 2010. The Company's corporate headquarters is located in Houston, Texas.

In August 2012, the Company divested its wholly-owned Hong Kong subsidiary Pacific Asia Petroleum Limited (PAPL) for cash consideration of $2.5 million and 9.6 million fully paid ordinary shares, net of selling expenses, of Leyshon Resources Limited ("Leyshon"), a natural resources mining company based in Beijing, China. The Leyshon shares had a fair market value of $1.9 million.

PAPL held the Company's interest in the Zijinshan production sharing contract (the "Zijinshan PSC") relating to the Zijinshan Block in the Shanxi Province of China. Since 2008, the Company engaged in exploration activities on this Block in search of coalbed methane and other gas. The Company made a strategic decision to monetize this asset and withdraw from activity in China in order to focus its efforts and capital resources on its core Africa activities.

As a result of the above transaction, the Company is reporting Asia operations for all presented periods in discontinued operations and, as such, the financial statement information provided in this report for continuing operations for the periods ended September 30, 2012 and 2011 are presented in one reportable segment.

Africa Developments

Nigeria

For the three months ended September 30, 2012 and 2011, the Oyo Field had gross crude oil production from two producing wells averaging 2,641 and 3,514 barrels per day, respectively, of which the Company's net shares including Cost Oil were 388 and 833 barrels per day, respectively. For the nine months ended September 30, 2012 and 2011, the Oyo Field had gross crude oil production from two producing wells averaging 2,791 and 3,878 barrels per day, respectively, of which the Company's net shares including Cost Oil were 438 and 1,025 barrels per day, respectively. There were three liftings totaling approximately 765,000 barrels of crude oil during the nine months ended September 30, 2012 at an average price of $113.23 per barrel. At September 30, 2012, the Company had a remaining workover liability related to the Oyo well #5 workover of approximately $15.6 million which was charged to expense in prior periods. This amount will be eligible for recovery as future Cost Oil revenue after payment occurs, and the rate of recovery will be affected by future production levels and other field expenditures.

In June 2012, Nigerian Agip Exploration Limited ("NAE") completed the previously announced sale of its 40% working interest in OML 120/121 to Allied Energy Plc., an affiliate of the Company. Allied has informed the Company that it plans to drill a new well in the Oyo Field commencing in the first quarter 2013. The new well, Oyo #7, will be designed to both increase the current production levels and test the prospective resource potential of the deeper Miocene reservoir in the field.

In October 2012, the Company announced that Allied has engaged Axxis Petroconsultants Limited ("Axxis"), as project manager for the drilling of Oyo #7 well. Axxis is an experienced management and engineering services firm that has successfully managed both offshore and onshore drillings rigs and projects in West Africa. Axxis will work with both the Company and Allied personnel to finalize the ongoing rig negotiations, procure long lead items and manage the drilling program from mobilization to completion. Additionally in October 2012, the Company announced that Allied has also engaged various experienced vendors to provide certain equipment and services related to the drilling of the Oyo #7 well.

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Kenya

In May 2012, the Company, through an indirect wholly owned subsidiary, entered into four production sharing contracts ("Kenya PSCs") with the Government of the Republic of Kenya, covering previously awarded exploration Blocks L1B and L16, and new offshore exploration Blocks L27 and L28. For all Blocks, the Company will be the operator, with the Government having the right to participate up to 20%, either directly or through an appointee, in any area subsequent to declaration of a commercial discovery. The Company is responsible for all exploration expenditures.

The Kenya PSCs for Blocks L1B and L16 each provide for an initial exploration period of two years with specified minimum work obligations during that period. Prior to the end of the initial exploration period, the Company will conduct for each Block a regional geological study and acquire, process and interpret 3D seismic data. The Company has the right to apply for up to two additional two-year exploration periods with specified additional minimum work obligations, including the drilling of one exploratory well on each Block in each such additional period.

The Kenya PSCs for Blocks L27 and L28 each provide for an initial exploration period of three years with specified minimum work obligations during that period. Prior to the end of the initial exploration period, the Company will conduct for each Block a regional geological study and acquire, process and interpret 3D seismic data. The Company has the right to apply for up to two additional two-year exploration periods with specified additional minimum work obligations, including the drilling of one exploratory well on each Block, in each such additional period.

In addition to the minimum work obligations, each of the Kenya PSC's require annual surface rental payments, training fund payments and contributions to local community development projects. All of the Kenya PSCs also include customary provisions including but not limited to governing law, confidentiality, force majeure, arbitration, and abandonment and decommissioning costs.

Gambia

In May 2012, the Company, through an indirect wholly owned subsidiary, signed two Petroleum Exploration, Development & Production Licenses with The Republic of The Gambia (the "Licenses"), for previously awarded exploration blocks A2 and A5 ("the Blocks"). For both Blocks, the Company will be the operator, with the Gambia National Petroleum Company (GNPC) having the right to elect to participate up to a 15% interest, following approval of a development and production plan. The Company is responsible for all expenditures prior to such approval even if the GNPC elects to participate.

The Licenses for both Blocks provide for an initial exploration period of four years with specified work obligations during that period. Prior to the end of the initial exploration period, the Company will conduct for each Block a regional geological study, acquire, process and interpret 3D seismic data, drill one exploration well to the total depth of 5,000 meters below mean sea level and evaluate drilling results, with the first two work obligations due prior to the end of the second year. The Company has the right to apply for up to two additional two-year exploration periods with specified additional minimum work obligations, including the drilling of one exploration well in each additional period for each Block.

In addition to the minimum work obligations, the Licenses require annual rental payments and training and resource fees. Each of the Licenses also include customary provisions including but not limited to governing law, confidentiality, force majeure, arbitration, and abandonment and decommissioning costs.

Results of Operations - Continuing Operations

The following discussion pertains to the Company's results of operations, financial condition, liquidity and capital resources and should be read together with our unaudited consolidated financial statements and notes to unaudited consolidated financial statements as well as our Annual Report on Form 10-K for the year ended December 31, 2011.

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Three months ended September 30, 2012, compared to the three months ended September 30, 2011:

Revenues. Our revenues for the three months ended September 30, 2012, were $7,945,000 as compared to $9,648,000 for the three months ended September 30, 2011. During the three months ended September 30, 2012 and 2011, the average gross production from the Oyo Field was 2,641 and 3,514 barrels per day, respectively, and the Company's share of average daily net production was 388 and 833 barrels per day, respectively. The revenue per barrel on crude oil sold during the three months ended September 30, 2012 and 2011, was $106.83 and $116.91, respectively.

Lease operating expenses and production costs. Lease operating expenses consist of personnel costs and contractor charges directly associated with the production of oil. Our lease operating expenses in the three months ended September 30, 2012 were $76,000 as compared to $700,000 for the three months ended September 30, 2011. The $624,000 decrease was primarily due to workover costs of $535,000 related to well #5 in the Oyo Field in the prior period and higher other costs of $89,000.

Exploratory expenses. Exploratory expense consists of salaries and personnel costs related to exploration activities, drilling costs for unsuccessful wells, costs for acquisition of seismic data and lease related costs (surface fees, training and community) charged to expense. Our exploratory expenses in the three months ended September 30, 2012 were $1,012,000 as compared to $384,000 for the three months ended September 30, 2011. The $628,000 increase was due to higher lease related costs related to our recent Kenya and The Gambia lease acquisitions of $419,000 in the current period and higher other costs of $209,000.

Depreciation, depletion and amortization expenses. Depreciation, depletion and amortization expenses consist of depletion of oil reserves and depreciation of leasehold improvements, furniture and fixtures and computer equipment. Our depreciation, depletion and amortization expenses in the three months ended September 30, 2012 were $5,384,000 as compared to $3,220,000 for the three months ended September 30, 2011. The $2,164,000 increase was primarily due to the increased depletion rate in the current period.

General and administrative expenses. General and administrative expenses consist primarily of salaries and related personnel costs of executive management, finance, accounting, legal and human resources, consulting projects and insurance. Our general and administrative expenses in the three months ended September 30, 2012, were $3,417,000 as compared to $3,038,000 for the three months ended September 30, 2011. The $379,000 increase was due to higher salaries and benefits expense of $199,000, and higher other costs of $180,000.

Nine months ended September 30, 2012, compared to the nine months ended September 30, 2011:

Revenues. Our revenues for the nine months ended September 30, 2012 were $13,617,000 as compared to $29,665,000 for the nine months ended September 30, 2011. The $16,048,000 decrease was due to lower volumes sold in 2012, primarily related to timing of liftings and lower production volumes. During the nine months ended September 30, 2012 and 2011, the average gross production from the Oyo Field was 2,791 and 3,878 barrels per day, respectively, and the Company's share of average daily net production was 438 and 1,025 barrels per day, respectively. The revenue per barrel on crude oil sold during the nine months ended September 30, 2012 and 2011 was $113.23 and $114.33, respectively.

Lease operating expenses and production costs. Our lease operating expenses in the nine months ended September 30, 2012 were $255,000 as compared to $27,594,000 for the nine months ended September 30, 2011. The $27,339,000 decrease was primarily due to lower workover costs of $25,747,000 related to well #5 in the Oyo Field and lower technical services cost of $1,653,000, partially offset by higher other costs of $61,000. The technical services agreement related to the Oyo Field operations was terminated as of March 31, 2011.

Exploratory expenses. Our exploratory expenses in the nine months ended September 30, 2012 were $2,167,000 as compared to $464,000 for the nine months ended September 30, 2011. The $1,703,000 increase was primarily due to higher salaries and benefits expense of $630,000, higher lease related costs of $689,000 related to our recent Kenya and The Gambia lease acquisitions and higher other costs of $384,000.

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Depreciation, depletion and amortization expenses. Our depreciation, depletion and amortization expenses in the nine months ended September 30, 2012 were $8,739,000 as compared to $10,183,000 for the nine months ended September 30, 2011. The $1,444,000 decrease was primarily due to lower sales volumes in 2012, primarily related to timing of liftings and lower production volumes, partially offset by an increased depletion rate in the current period.

General and administrative expenses. Our general and administrative expenses in the nine months ended September 30, 2012, were $8,773,000 as compared to $9,806,000 for the nine months ended September 30, 2011. The $1,033,000 decrease was due to lower salaries and benefits expense of $1,045,000, primarily due to officer resignations in the prior period, and lower stock-based compensation of $1,408,000, partially offset by higher administrative costs of $589,000, higher consulting and legal expenses of $525,000 and higher other costs of $306,000.

Liquidity and Capital Resources

As of September 30, 2012, the Company had cash and cash equivalents of $5,661,000, accounts receivable of $6,043,000, accounts payable of $15,142,000 and accrued expenses of $4,107,000.

During the nine months ended September 30, 2012, net cash used in operating activities was $5,321,000 as compared to $3,433,000 for the nine months ended September 30, 2011. The net increase in cash used in operating activities of $1,888,000 was primarily due to the timing of working capital items, offset by a decrease in net loss before non-cash expenses (primarily dry hole costs, depreciation, depletion and amortization and stock-based compensation) and before gain on divestiture, net.

During the nine months ended September 30, 2012, net cash used in investing activities was $1,060,000 as compared to $6,733,000 in the nine months ended September 30, 2011. The decrease in cash used in investing activities of $5,673,000 was partially due to the $5,000,000 payment related to the OML 120/121 Transaction in the prior period, offset by the current period Gambia and Kenya lease bonus payments of $3,240,000, less net cash proceeds of $2,364,000 from the divestiture of China.

During the nine months ended September 30, 2012, net cash used in financing activities was $1,578,000 as compared to net cash provided by financing activities of $177,000 in the nine months ended September 30, 2011. The increase of net cash used in financing activities of $1,755,000, was primarily due to the excess of payments greater than proceeds from the Promissory Note during the current period.

On June 6, 2011, CAMAC Petroleum Limited ("CPL"), a wholly owned subsidiary of the Company, executed a Promissory Note (the "Promissory Note") in favor of Allied (the "Lender"). Under the terms of the Promissory Note, the Lender agreed to make loans to CPL, from time to time and pursuant to requests by CPL, in an aggregate sum of up to $25.0 million. Interest accrues on outstanding principal under the Promissory Note at a rate of 30 day LIBOR plus 2% per annum. CPL may prepay and re-borrow all or a portion of such amount from time to time. Pursuant to the initial terms of the Promissory Note, the unpaid aggregate outstanding principal amount of all loans, were to mature on June 6, 2013. During August 2012, the Promissory Note was amended, to extend the maturity date to October 15, 2013. The Company has irrevocably, unconditionally and absolutely guaranteed all of CPL's obligations under the Promissory Note. As of September 30, 2012, $4.4 million was outstanding.

Based upon current cash flow projections, management believes that the Company will have sufficient capital resources to meet projected cash flow requirements for the next twelve months from the date of filing this report, assuming no additional participation in Oyo Field operating and development costs through such date.

Our ability to execute our business plan will also depend on whether we are able to raise additional funds through equity, debt financing or strategic alliances. Such additional funds may not become available on acceptable terms, if at all, and any additional funding obtained may not be sufficient to meet our needs in the long-term. Through September 30, 2012, substantially all of our capital had been raised through private placements and registered direct offerings of equity instruments.

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Off-Balance Sheet Arrangements

We have no off balance sheet arrangements, other than normal operating leases and employee contracts, that have or are likely to have a current or future material effect on our financial condition, changes in financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.

Tabular Disclosure of Contractual Obligations

Please see our Annual Report on Form 10-K for the year ended December 31, 2011, Part II, Item 7 for a table summarizing the Company's significant contractual obligations as of December 31, 2011. No material changes to such information have occurred during the nine months ended September 30, 2012, other than the obligations related to the Kenya PSCs and the Gambia Licenses during the initial exploration periods.

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