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CAK > SEC Filings for CAK > Form 10-Q on 13-Aug-2013All Recent SEC Filings

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Form 10-Q for CAMAC ENERGY INC.


13-Aug-2013

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. The Company's principal assets include certain rights to interests in OML 120 and 121, which include the currently producing Oyo Field and interests in six exploration blocks in Kenya and The Gambia.

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

As a result of the above transaction, the Company is reporting its China operations, including other inactive operations not involved in this sale, 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 June 30, 2013 and 2012 are presented in one reportable segment.

Nigeria

There was one lifting during the three months ended June 30, 2013 totaling approximately 220,000 barrels of crude oil, 18,800 barrels net to the Company's interests, at an average price of $103.12 per barrel. There was no lifting during the three months ended June 30, 2012. For the three months ended June 30, 2013 and 2012, the Oyo Field had gross crude oil production from two producing wells (wells #5 and #6) averaging 2,329 and 2,786 barrels per day, respectively, of which the Company's net share, including Cost Oil, were 199 and 461 barrels per day, respectively. For the six months ended June 30, 2013 and 2012, the Oyo Field had gross crude oil production from two producing wells (wells #5 and #6) averaging 2,339 and 2,867 barrels per day, respectively, of which the Company's net share, including Cost Oil, were 215 and 464 barrels per day, respectively.

At June 30, 2013, the Company had remaining liabilities related to the Oyo well #5 workover of approximately $15.2 million which have been 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, NAE completed the sale of its 40% working interest in OML 120 and 121 to Allied, an affiliate of the Company. Allied has informed the Company of its plans to drill a new well in the Oyo Field, commencing in the third quarter of 2013. The new well, Oyo #7, will be designed to both increase production levels from the Oyo field and the test prospective resource potential of the deeper Miocene reservoir on the block.

The Company entered into a technical services agreement with Allied effective September 1, 2012, whereby the Company agreed to provide services related to the Oyo Field in Nigeria. Pursuant to the terms of the Agreement, Allied agreed to pay the Company $150,000 per month. The amounts earned under the agreement are recorded as a reduction to lease operating expenses and production costs and general and administrative expenses.

Kenya

In May 2012, the Company, through an indirect wholly owned subsidiary, entered into four production sharing contracts 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 gravity and magnetic survey and acquire, process and interpret 2D seismic data. The gravity and magnetic survey on Block L1B was completed in April, 2013. The Company has the right to apply for up to two additional two-year exploration periods with specified additional minimum work obligations, including the acquisition of 3D seismic data and the drilling of one exploratory well on each Block during each such additional period.

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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 and geophysical study, purchase 2D seismic data 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, during each such additional period.

In addition to the minimum work obligations, each of the Kenya PSCs requires 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.

The 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, for previously awarded exploration blocks A2 and A5. For both Blocks, the Company will be the operator, with the 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 Gambia 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 during each additional period for each Block.

In addition to the minimum work obligations, The Gambia Licenses require annual rental payments and training and resource fees. Each of The Gambia Licenses also includes 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, 2012.

Three months ended June 30, 2013, compared to the three months ended June 30, 2012:

Revenues. Our revenues for the three months ended June 30, 2013 were $1,941,000 as compared to $0 for the three months ended June 30, 2012. During the three months ended June 30, 2013, the Company's share of cost oil and profit oil was $636,000 and $1,305,000, respectively. The average revenue per barrel on crude oil sold during the three months ended June 30, 2013 was $103.12.

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 for the three months ended June 30, 2013 decreased $110,000 as compared to the three months ended June 30, 2012. The decrease was primarily due to amounts earned in the current period under the technical services agreement with Allied of $300,000, partially offset by higher salaries and benefits of $126,000.

Exploratory expenses. Exploratory expenses consist 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 development expenditures) charged to expense. Our exploratory expenses for the three months ended June 30, 2013 increased $1,296,000 as compared to the three months ended June 30, 2012. The increase was primarily due to current period gravity and magnetic survey expenses in Kenya of $572,000, higher consulting expenses of $475,000 and higher lease related costs in Kenya and The Gambia of $187,000.

Depreciation, depletion and amortization.. 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 for the three months ended June 30, 2013 increased $1,143,000 as compared to the three months ended June 30, 2012. The increase was primarily due to the lifting in the current period, partially offset by a lower depletion rate in the current period. There was no lifting in the prior period.

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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 for the three months ended June 30, 2013 increased $541,000 as compared to the three months ended June 30, 2012. The increase was due to higher salaries and benefits of $289,000, higher consulting and legal expenses of $274,000, and higher share-based compensation expense of $146,000, partially offset by amounts earned in the current period under the technical services agreement with Allied of $143,000 and lower other costs of $25,000.

Six months ended June 30, 2013, compared to the six months ended June 30, 2012:

Revenues. Our revenues for the six months ended June 30, 2013 decreased $1,279,000 as compared to the six months ended June 30, 2012. The decrease was primarily due to lower Cost Oil (cost recovery of workover costs incurred on well #5 in the Oyo Field) of $1,966,000 and lower sales prices, offset by higher Profit Oil sales of $687,000 in the current period. The average revenue per barrel on crude oil sold during the six months ended June 30, 2013 and 2012, was $105.98 and $123.73, 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 for the six months ended June 30, 2013 decreased $352,000 as compared to the six months ended June 30, 2012. The decrease was primarily due to amounts earned in the current period under the technical services agreement with Allied of $600,000, partially offset by higher salaries and benefits of $289,000.

Exploratory expenses. Exploratory expenses consist 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 development expenditures) charged to expense. Our exploratory expenses for the six months ended June 30, 2013 increased $1,941,000 as compared to the six months ended June 30, 2012. The increase was primarily due to current period gravity and magnetic survey expenses in Kenya of $842,000, higher consulting expenses of $609,000 and higher lease related costs in Kenya and The Gambia of $538,000.

Depreciation, depletion and amortization.. 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 for the six months ended June 30, 2013 decreased $801,000 as compared to the six months ended June 30, 2012. The decrease was primarily due to the lower sales volumes and a lower 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 for the six months ended June 30, 2013 increased $1,757,000 as compared to the six months ended June 30, 2012. The increase was primarily due to higher consulting and legal expenses of $898,000, higher share-based compensation expense of $852,000 and higher rent expense of $192,000, partially offset by amounts earned in the current period under the technical services agreement with Allied of $300,000.

Liquidity and Capital Resources

As of June 30, 2013, the Company had a net working capital (current assets minus current liabilities) deficit of $12,215,000, including cash and cash equivalents of $1,985,000.

During the six months ended June 30, 2013, net cash used in operating activities was $1,332,000 as compared to $9,039,000 for the six months ended June 30, 2012. The net reduction in cash used in operating activities of $7,707,000 was primarily due to the timing of receivable collections and payments.

During the six months ended June 30, 2013, capital expenditures were $489,000 as compared to $3,206,000 in the six months ended June 30, 2012. The decrease in capital expenditures of $2,717,000 was partially due to The Gambia and Kenya lease bonus payments of $3,240,000 in the prior period.

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During the six months ended June 30, 2013, no cash was used in financing activities. During the same period in 2012, net cash provided by financing activities of $2,037,000 primarily consisted of proceeds received from the Promissory Note of $5,000,000, partially offset by payments made to the Promissory Note of $2,966,000.

In June 2011, CPL, a wholly owned subsidiary of the Company, executed a Promissory Note in favor of Allied. Under the initial terms of the Promissory Note, Allied agreed to make loans to CPL from time to time for purposes of making payments relating to the workover of Oyo well #5 in an aggregate sum of up to $25.0 million. Interest accrues on the outstanding principal under the Promissory Note at a rate of 30 day LIBOR plus 2% per annum. In August 2013, CPL and Allied agreed to amend the Promissory Note to, among other things, allow for borrowings up to an aggregate of $10.0 million for general corporate purposes other than making payments relating to the workover of Oyo well #5. Pursuant to the initial terms of the Promissory Note, the outstanding principal amount of all loans was to mature on June 6, 2013. In August 2012, the Promissory Note was amended to extend the maturity date to October 15, 2013, and in March 2013 the Promissory Note was again amended to extend the maturity date to July 15, 2014. The Company has guaranteed all of CPL's obligations under the Promissory Note. As of June 30, 2013, $0.9 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 and fulfill substantial commitments related to the Kenya PSCs and The Gambia Licenses 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 June 30, 2013, substantially all of our capital had been raised through private placements and registered direct offerings of equity instruments.

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.

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