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CAK > SEC Filings for CAK > Form 10-Q on 14-Nov-2013All Recent SEC Filings

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Form 10-Q for CAMAC ENERGY INC.


14-Nov-2013

Quarterly Report


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

Our Business

CAMAC Energy, Inc. (NYSE MKT: CAK) is an independent exploration and production company engaged in the acquisition and development of energy resources in Africa. The Company's principal assets include interests in OMLs 120 and 121 in Nigeria, which include our current production in the Oyo Field, and additional exploration blocks in Kenya and The Gambia.

The Company's corporate headquarters is located in Houston, Texas and has offices in Nairobi, Kenya, Banjul, The Gambia and Lagos, Nigeria.

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 September 30, 2013 and 2012 are presented in one reportable segment.

Nigeria

There was one lifting during the three months ended September 30, 2013, totaling approximately 220,000 barrels of crude oil, 31,000 barrels net to the Company's interests, at an average price of $112.09 per barrel. During the same period last year, there were two liftings totaling approximately 475,000 barrels of crude oil, 109,000 barrels net to the Company's interests, at an average price of $108.00 per barrel. For the three months ended September 30, 2013 and 2012, the Oyo Field had gross crude oil production from two producing wells (wells #5 and #6) averaging 2,228 and 2,641 barrels per day, respectively, of which the Company's net share, including Cost Oil, were 314 and 388 barrels per day, respectively.

There were three liftings during the nine months ended September 30, 2013, totaling approximately 671,000 barrels of crude oil, 73,000 barrels net to the Company's interests, at an average price of $107.85 per barrel. During the same period last year, there were three liftings totaling approximately 765,000 barrels of crude oil, 120,000 barrels net to the Company's interests, at an average price of $113.23 per barrel. For the nine months ended September 30, 2013 and 2012, the Oyo Field had gross crude oil production from two producing wells (wells #5 and #6) averaging 2,302 and 2,791barrels per day, respectively, of which the Company's net share, including Cost Oil, were 250 and 438 barrels per day, respectively.

At September 30, 2013, the Company had remaining liabilities related to the Oyo well #5 workover of approximately $5.9 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. At that time, Allied informed the Company of its plans to drill a new well in the Oyo Field, commencing in the third quarter of 2013.

In early September 2013, the Sedneth 701 drilling rig arrived on location at OML 120 and drilling operations commenced shortly after on the new well, Oyo #7. The new well is designed to both increase production levels from the Oyo field and to test prospective resource potential of the deeper Miocene reservoir on the block.

In November 2013, preliminary data from the Oyo #7 well in OML 120, revealed results that exceeded the Company's internal pre-drill expectations. Based on logging while drilling ("LWD") data, the well encountered gross oil pay of 133 feet (net oil pay of 116 feet) and gross gas pay of 103 feet (net gas pay of 93 feet) in the gas cap from the currently producing Pliocene reservoir, with excellent reservoir quality. Additionally, based on LWD data, the well encountered approximately 65 feet of total hydrocarbon column in the Miocene reservoir.

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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 recovered 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 is 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 and L16 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.

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, acquire 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 is 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 September 30, 2013, compared to the three months ended September 30, 2012:

Revenues. Revenue is recognized when a lifting occurs. Our revenues for the three months ended September 30, 2013 decreased $4,465,000 as compared to the three months ended September 30, 2012. The decrease was primarily due to lower Cost Oil recovery (recovery of workover costs incurred on well #5 in the Oyo Field) of $2,972,000 and lower Profit Oil sales of $1,493,000 due to a reduction in sales volumes of 43,484 barrels, net of royalty, partially offset by higher sales prices. There were two liftings in the prior period compared to one lifting in the current period.

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Lease operating expenses and production costs. Lease operating expenses consist of personnel costs and other charges directly associated with the production of oil and technical service agreements. Our lease operating expenses for the three months ended September 30, 2013 decreased $169,000 as compared to the three months ended September 30, 2012. The decrease was primarily due to an increase in amounts recovered in the current period under the technical services agreement with Allied of $300,000, which offset lease operating expenses, partially offset by higher salaries and benefits of $138,000.

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 September 30, 2013 decreased $45,000 as compared to the three months ended September 30, 2012. The decrease was primarily due to lower seismic data purchases in the current period of $87,000.

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 September 30, 2013 decreased $3,492,000 as compared to the three months ended September 30, 2012. The decrease was primarily due to the timing of the liftings period over period, partially offset by a lower depletion rate in the current period. There were two liftings in the prior period compared to one lifting 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 three months ended September 30, 2013 decreased $23,000 as compared to the three months ended September 30, 2012. The decrease was primarily due to amounts recovered in the current period under the technical services agreement with Allied of $150,000, which offset general and administrative expenses, mostly offset by higher salaries and benefits of $122,000.

Nine months ended September 30, 2013, compared to the nine months ended September 30, 2012:

Revenues. Revenue is recognized when a lifting occurs. Our revenues for the nine months ended September 30, 2013 decreased $5,744,000 as compared to the nine months ended September 30, 2012. The decrease was primarily due to lower Cost Oil recovery (recovery of workover costs incurred on well #5 in the Oyo Field), of $4,938,000, lower Profit Oil sales of $806,000 due to a reduction in sales volumes of 48,000 barrels, net of royalty, and lower sales prices.

Lease operating expenses and production costs. Lease operating expenses consist of personnel costs and other charges directly associated with the production of oil and technical service agreements. Our lease operating expenses for the nine months ended September 30, 2013 decreased $521,000 as compared to the nine months ended September 30, 2012. The decrease was primarily due to an increase in amounts recovered in the current period under the technical services agreement with Allied of $900,000, which offset lease operating expenses, partially offset by higher salaries and benefits of $428,000.

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 nine months ended September 30, 2013 increased $1,897,000 as compared to the nine months ended September 30, 2012. The increase was primarily due to current period gravity and magnetic survey expenses in Kenya of $842,000, higher consulting expenses of $682,000 and higher lease related costs in Kenya and The Gambia of $387,000, offset by lower salaries and benefits of $33,000.

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 nine months ended September 30, 2013 decreased $4,293,000 as compared to the nine months ended September 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 nine months ended September 30, 2013 increased $1,735,000 as compared to the nine months ended September 30, 2012. The increase was primarily due to higher consulting and legal expenses of $1,056,000 and higher share-based compensation expense of $1,045,000, partially offset by amounts recovered in the current period under the technical services agreement with Allied of $450,000, which offset general and administrative expenses.

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Liquidity and Capital Resources

As of September 30, 2013, the Company had a net working capital (current assets minus current liabilities) deficit of $13,410,000, including cash and cash equivalents of $435,000.

During the nine months ended September 30, 2013, net cash used in operating activities was $4,281,000 as compared to $5,321,000 for the nine months ended September 30, 2012. The net decrease in cash used in operating activities of $1,040,000 was primarily due to the timing of receivable collections and payments.

During the nine months ended September 30, 2013, net cash used in investing activities was $590,000 as compared to $1,060,000 in the nine months ended September 30, 2012. The decreases in cash used in investing activities is primarily due to a decrease in capital expenditures of $2,836,000 (primarily due to The Gambia and Kenya lease bonus payments of $3,240,000 in the prior period), partially offset by the impact of net cash proceeds of $2,364,000 from the divestiture of China operations.

During the nine months ended September 30, 2013, net cash provided by financing activities was $1,500,000 as compared to net cash used in financing activities of $1,578,000. The net increase in cash provided by financing activities of $3,078,000 was primarily due to the net proceeds received from the Promissory Note.

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. As of September 30, 2013, borrowings for general corporate purposes totaled $1.5 million. 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. On September 10, 2013, the Company and Allied amended the Promissory Note and the Guaranty to add the Company as a borrower, to allow for borrowings of up to $10 million for general corporate purposes and to pledge the stock of the subsidiary of CEI that holds the exploration licenses in Gambia and Kenya as collateral pursuant to an equitable share mortgage arrangement. The Company has guaranteed all of CPL's obligations under the Promissory Note. As of September 30, 2013, $11.7 million was outstanding.

The Company's consolidated financial statements have been prepared assuming the Company will continue as a going concern. To date, the Company has incurred substantial losses from operations and during the three months ending September 30, 2013, the Company's outstanding Promissory Note of $11.7 millon became payable within the next 12 months. This significantly affected the working capital position, and as of September 30, 2013, current liabilities exceed current assets by $13.4 millon. The Company has minimal liquid assets and negative operating cash flows, and internal cash flow models do not forecast enough operating cash flows to fund operations and pay outstanding liabilities for the next 12 months. These factors raise substantial doubt about the Company's ability to continue as a going concern.

The Company is in active discussions concerning potential transactions that, if successfully concluded, would result in additional capital funding for the Company. If the Company is not successful in completing one or more of these potential transactions, amending the current terms of the Promissory Note or generating additional capital through the issuance of debt or equity, the Company may not be able to continue as a going concern.

There can be no assurance that any additional financing will be available on acceptable terms, if at all. To the extent the Company raises additional funds by issuing equity securities, the Company's stockholders may experience significant dilution. Any debt financing, if available, may involve restrictive covenants that impact the Company's ability to conduct business.

Although there are no assurances that the Company's plans will be realized, the Company believes that it will be able to continue operations in the future. Accordingly, no adjustments relating to the recoverability and classification of recorded asset amounts and the classification of liabilities has been made to the accompanying consolidated financial statements in anticipation of the Company not being able to continue as a going concern.

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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.

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