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CAK > SEC Filings for CAK > Form 10-Q/A on 18-Jul-2014All Recent SEC Filings

Show all filings for CAMAC ENERGY INC.

Form 10-Q/A for CAMAC ENERGY INC.


18-Jul-2014

Quarterly Report


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

Our Business

CAMAC Energy Inc. is an independent exploration and production company engaged in the acquisition and development of energy resources in Africa. The Company's exploration, development and production activities are currently focused in Sub-Saharan Africa. Our strategy is to acquire and develop high-potential exploration and production assets in Africa and to explore and develop those assets through strategic partnerships with national oil companies, indigenous local partners and other independent oil companies. Our shares are traded on the NYSE MKT under the symbol "CAK" and, as of February 24, 2014, on the Johannesburg Stock Exchange ("JSE") under the symbol "CME".

The Company's asset portfolio consists of nine licenses in four countries covering an area of approximately 43,000 square kilometers (approximately 10 million acres). The Company has producing properties and conducts exploration activities in Nigeria, as well as exploration licenses with significant hydrocarbon potential onshore and offshore Kenya, offshore The Gambia and offshore Ghana.

The Company's operating subsidiaries are CAMAC Energy Limited, CAMAC Petroleum Limited, CAMAC Energy International Limited, CAMAC Energy Ghana Limited, CAMAC Energy Kenya Limited, CAMAC Energy Gambia A5 Limited and CAMAC Energy Gambia A2 Limited and the Company's related parties include CAMAC Energy Holdings Limited, CAMAC International Nigeria Limited, CAMAC International Limited and Allied Energy Plc. ("Allied"). The terms "we," "us," "our," "Company," and "our Company" refer to CAMAC and its subsidiaries and affiliates.

In February 2014, the Company completed the acquisition of the remaining economic interests that it did not already own in the Production Sharing Contract ("PSC") covering Oil Mining Leases 120 and 121 ("OMLs 120 and 121") offshore Nigeria, which include the currently producing Oyo Field (the "Allied Assets"), from Allied (the "Allied Transaction"). Pursuant to the terms of the Transfer Agreement, the Company, as partial consideration for the Allied Assets, paid $85.0 million in cash to Allied, issued 497,454,857 shares of the Company's common stock to Allied and delivered a $50.0 million Convertible Subordinated Note (the "Convertible Subordinated Note") to Allied under which $25.0 million was deemed to be advanced.

To fund the cash portion of the Allied Transaction and a portion of the anticipated capital expenditures for development of the Oyo Field, the Company also entered into a Share Purchase Agreement (the "Share Purchase Agreement") with the Public Investment Corporation (SOC) Limited, a state-owned company registered and duly incorporated in the Republic of South Africa ("PIC"), for an aggregate cash investment of $270.0 million through a private placement of 376,884,422 shares of common stock (the "Private Placement"). The Share Purchase Agreement provides that the Private Placement will be completed in two installments. The first installment of $135.0 million (the "First Closing") in exchange for 188,442,211 shares of the Company's common stock was completed at the closing of the Allied Transaction. The second installment (the "Second Closing") of $135.0 million in exchange for 188,442,211 shares of the Company's common stock was completed in May 2014.

Following the Second Closing with the PIC, the Company was required to pay to Allied the additional $85.0 million in cash, and the additional $25.0 million was deemed to be advanced to Allied under the Convertible Subordinated Note.

In connection with preparing recasted historical financial information for the Company to account for the Allied Transaction as a combination of businesses under common control and subsequent to filing its original Form 10-Q for the period ended March 31, 2014 (as filed on May 9, 2014, the "Original Form 10-Q"), the Company identified certain errors in the financial information contained in the Original Form 10-Q. As a result, previously reported financial information has been restated to reflect the correction of these errors. For a further discussion of the impact of this restatement, see "Note 3 - Restatement" in the Notes to the Unaudited Consolidated Financial Statements in this Form 10-Q/A.

Nigeria

The Company currently owns 100% of the economic interests under the PSC and related assets, contracts and rights pertaining to OMLs 120 and 121 including the producing Oyo Field, which is located in deep-water offshore Nigeria.

From September 2013 to November 2013, the first phase of drilling operations was conducted on the Oyo-7 well in OML 120. Based on logging while drilling ("LWD") data, the well encountered gross oil pay of 133 feet (net oil pay of 115 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. As a secondary objective, the Oyo-7 well confirmed the presence of hydrocarbons in the deeper Miocene formation. This marked the first time a well had been successfully drilled into the Miocene formation of OML 120. Hydrocarbons were encountered in three intervals totaling approximately 65 feet, as interpreted from the LWD data. Currently, the Oyo-7 well has been temporarily plugged and suspended but is expected to be re-entered and completed in the Pliocene reservoir as an oil producer in late 2014.

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In January 2014, a long-term drilling contract was signed for the drillship Energy Searcher. The rig is expected to be delivered to the Oyo Field in OML 120 by May 2014 to commence the planned Oyo Field development campaign. The agreement covers an initial term of one year, with an option to extend the contract for an additional one year. The minimum commitment pursuant to the initial term of the agreement is approximately $86.0 million.

In order to optimize drilling, completion, and production activities, current plans are to spud the Oyo-8 well by mid-2014, with well-hookup and first production expected in late 2014. The drilling rig will then move to complete and hook-up the Oyo-7 well, with first production expected in late 2014.

In addition to the development wells offshore Nigeria, the Company has identified ten exploration prospects and twelve leads, and is in the process of maturing three prospects, each containing substantial prospective resources. The Company currently plans to drill at least one of these prospects in 2015.

In February 2014, a long-term contract was signed for the floating, production, storage, and offloading system ("FPSO") Armada Perdana, the vessel that is currently connected to the Company's producing wells Oyo-5 and Oyo-6 in OML 120. The contract provides for an initial term of seven years beginning January 1, 2014, with an automatic extension for an additional term of two years unless terminated by the Company with prior notice. The FPSO can process up to 40,000 barrels of liquid per day, with a storage capacity of approximately one million barrels. The annual minimum commitment per the terms of the agreement is approximately $35.0 million in the first year and approximately $48.0 million thereafter.

Kenya

In May 2012, the Company, through a wholly owned subsidiary, entered into four production sharing contracts with the Government of the Republic of Kenya (the "Kenya PSCs"), covering onshore 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 blocks L1B and L16 was completed in April 2013. The Company plans to apply for an additional two-year exploration period, so in December 2013, the Company initiated an Environmental and Social Impact Assessment ("ESIA") study in blocks L1B and L16. The ESIA study was successfully completed in March 2014, and the reports were submitted for approval to the Kenya National Environment Management Authority in order to obtain the license to carry out an additional 2D seismic survey in the two blocks. 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 for both onshore blocks.

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. The Company participated in a multi-client combined gravity / magnetic and 2D seismic survey covering blocks L27 and L28. The survey was successfully completed in March 2014, and data processing is underway. Also, in March 2014 the Company started the regional geophysical study for these two blocks.

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.

The Gambia

In May 2012, the Company, through a wholly owned subsidiary, signed two Petroleum Exploration, Development & Production Licenses with The Republic of The Gambia, for offshore exploration blocks A2 and A5. For both blocks, the Company is the operator, with the Gambian National Petroleum Company ("GNPCo") 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 GNPCo elects to participate.

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The Gambia Licenses for both blocks provide for an initial exploration period of four 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, acquire, process and interpret seismic data, drill one exploration well and evaluate drilling results, with the first two work obligations (regional geological study and 3D seismic data acquisition and processing) 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 surface rental payments, training and community fees.

Recent Developments

In April 2014, the Company signed a Petroleum Agreement relating to the Expanded Shallow Water Tano block in Ghana. The Company has been named technical operator and will hold a 30% interest in the block. The block contains three discovered fields, and the work program requires the partners to determine, within nine months, the economic viability of developing the discovered fields.

The Company continues to pursue new energy ventures outside the U.S., directly and through joint ventures and other partnerships in which it may participate.

Results of 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 the notes thereto contained in this report and our audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2013.

Three months ended March 31, 2014, compared to the three months ended March 31, 2013:

Revenues

Revenue is recognized when a lifting (sale) occurs. Crude oil revenues for the three months ended March 31, 2014 were $19.9 million, as compared to $22.0 million for the three months ended March 31, 2013. For the three months ended March 31, 2014, the Company sold approximately 182,000 net barrels of oil at an average price of $109.11/Bbl. In the three months ended, March 31, 2013, the Company sold approximately 203,000 net barrels of oil at an average price of $108.35/Bbl.

During the three months ended March 31, 2014, the average net daily production from the Oyo Field was approximately 1,700 BOPD, as compared to approximately 2,000 BOPD for the three months ended March 31, 2013.

Operating Costs and Expenses

Production costs for the three months ended March 31, 2014 were $22.9 million, as compared to $22.1 million for the three months ended March 31, 2013.

During the three months ended March 31, 2014, the Company incurred $2.3 million of exploration expenses, including $2.0 million spent in Kenya, and $0.3 million spent in The Gambia. During the three months ended March 31, 2013, the Company incurred $1.2 million of exploration expenses, including $0.5 million spent at the corporate level for exploration activities, $0.5 million in Kenya, and $0.2 million in The Gambia.

Depreciation, depletion and amortization ("DD&A") expenses for the three months ended March 31, 2014 were $5.0 million, as compared to $5.5 million for the three months ended March 31, 2013. In the three months ended March 31, 2014, DD&A expenses decreased as compared to the three months ended March 31, 2013 primarily due to both lower depletion rates and lower sales volumes. The average depletion rate for the three months ended March 31, 2014 was $24.06/Bbl, as compared to $27.37/Bbl for the three months ended March 31, 2013.

General and administrative expenses for the three months ended March 31, 2014 were $4.4 million, as compared to $3.7 million for the three months ended March 31, 2013. The increase in general and administrative expenses for the three months ended March 31, 2014, as compared to the three months ended March 31, 2013, was primarily due to legal costs incurred in conjunction with the Allied Transaction and the Private Placement. In addition, the Company incurred non-cash stock-based compensation expenses of $0.5 million and $0.3 million for the three months ended March 31, 2014 and 2013, respectively.

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Other Income (Expense)

Other expense for the three months ended March 31, 2014 was $0.2 million, primarily for interest accrued on the related party note payable. Other expense was approximately $4,000 for the three months ended March 31, 2013.

Income Taxes

Income taxes were nil for the three months ended March 31, 2014 and 2013.

Headline Earnings

In February 2014, the Company's common stock became listed on the JSE. The Company is required to publish all documents filed with the SEC with the JSE. The JSE requires that we calculate Headline Earnings Per Share ("HEPS") which, per the SEC, is considered a non-GAAP measurement.

As defined in the Circular 3/2009 of The South African Institute of Chartered Accountants, headline earnings is an additional earnings number that excludes certain separately identifiable remeasurements, net of related tax, and related non-controlling interest.

The number of shares used to calculate basic and diluted HEPS is the same as basic and diluted EPS. In the three months ended March 31, 2014 and 2013, there were no separate identifiable remeasurements required and headline earnings was the same as net loss per share as disclosed on the unaudited consolidated statements of operations. Therefore, HEPS for the three months ended March 31, 2014 and 2013, were $(0.02) and $(0.03), respectively.

Liquidity and Capital Resources

As of March 31, 2014, the Company had current asset and current liability balances of $55.6 million and $151.4 million, respectively, resulting in a net working capital deficit of $95.8 million. Included in the current liability balance of $151.4 million, was approximately $118.0 million owed to Allied, a related party.

During the three months ended March 31, 2014, net cash used in operating activities was $3.8 million as compared to $2.7 million for the three months ended March 31, 2013. The net increase in cash used in operating activities of $1.1 million was primarily due to $4.4 million higher net loss, partially offset by $3.6 million positive variance in changes in operating assets and liabilities.

During the three months ended March 31, 2014, net cash used in investing activities was $87.1 million, including $85.0 million paid to Allied as partial consideration for the Allied Assets, and $2.1 million spent for additions to property, plant and equipment. During the three months ended March 31, 2013, net cash used in investing activities were $0.4 million primarily for additions to property, plant and equipment.

During the three months ended March 31, 2014, net cash provided by financing activities was $126.9 million as compared to $1.6 million for the three months ended March 31, 2013. The net increase in cash provided by financing activities was primarily due to the $135.0 million investment from the PIC, $0.4 million for the issuance of stock pursuant to employee stock option exercises and $0.7 million additional borrowings under the Promissory Note, partially offset by a $9.2 million adjustment to the net assets of Allied in connection with the Allied Transaction.

The Company has a $25.0 million borrowing facility under a Promissory Note with Allied. As of March 31, 2014, $7.1 million was outstanding under the Promissory Note. The Promissory Note is set to mature and become due on July 15, 2014. In January 2014, Allied agreed to amend the Promissory Note and extend the maturity date to July 15, 2015 in the event the Company is not successful in obtaining external financing arrangements by June 30, 2014.

In February 2014, the Company completed the Allied Transaction and the First Closing of the Private Placement in accordance with the terms of the Transfer Agreement and the Share Purchase Agreement, respectively. The Company received $135.0 million pursuant to the Second Closing of the Private Placement in May 2014. Subsequently, the Company paid Allied the additional $85.0 million in cash, resulting in a net $50.0 million available to the Company.

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As partial consideration in connection with the February 2014 closing of the Allied Transaction, the Company issued the $50.0 million Convertible Subordinated Note in favor of Allied. The principal of the Convertible Subordinated Note was deemed advanced in two equal $25.0 million tranches at each of the First Closing and the Second Closing of the Private Placement. Interest on the Convertible Subordinated Note accrues at a rate per annum of one-month LIBOR plus 5%, payable quarterly in cash until the maturity of the Convertible Subordinated Note five years from the closing of the Allied Transaction. At the election of the holder, the Convertible Subordinated Note will be convertible into shares of the Company's common stock at an initial conversion price of $0.7164 per share, subject to customary anti-dilution adjustments. The Convertible Subordinated Note is subordinated to the Company's existing and future senior indebtedness and is subject to acceleration upon an Event of Default (as defined in the Convertible Subordinated Note). The Company may, at its option prepay the note, in whole or in part, at any time, without premium or penalty. The note is subject to mandatory prepayment upon (i) the Company's issuance of capital stock or incurrence of indebtedness, the proceeds of which the Company does not apply to repayment of senior indebtedness or
(ii) any capital markets debt issuance to the extent the net proceeds of such issuance exceed $250.0 million. Allied may assign all or any part of its rights and obligations under the Convertible Subordinated Note to any person upon written notice to the Company.

Although there are no assurances that the Company's plans will be realized, 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.

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.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

All statements, other than statements of historical fact, included in this report, including without limitation the statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations" are, or may be deemed to be, forward-looking statements. Such forward-looking statements involve assumptions, known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of the Company, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements contained in this report.

We may from time to time make written or oral forward-looking statements with respect to our long-term objectives or expectations which may be included in our filings with the SEC, reports to stockholders and information provided on our website.

The words or phrases "will likely," "are expected to," "is anticipated," "is predicted," "forecast," "estimate," "project," "plans to continue," "believes," or similar expressions identify "forward-looking statements." Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. We wish to caution you not to place undue reliance on any such forward-looking statements, which speak only as of the date made. We are calling to your attention important factors that could affect our financial performance and could cause actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.

The following list of important factors may not be all-inclusive, and we specifically decline to undertake an obligation to publicly revise any forward-looking statements that have been made to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Among the factors that could have an impact on our ability to achieve expected operating results and growth plan goals and/or affect the market price of our stock are:

Limited operating history, operating revenue or earnings history.

Ability to raise capital to fund our business plan, including developing the Oyo Field and other oil and gas licenses we may participate in, on terms and conditions acceptable to the Company.

Ability to develop oil and gas reserves.

Dependence on key personnel, technical services and contractor support.

Fluctuation in quarterly operating results.

Possible significant influence over corporate affairs by significant stockholders.

Ability to enter into definitive agreements to formalize foreign energy ventures and secure necessary exploitation rights.

Ability to successfully integrate and operate acquired or newly formed entities and multiple foreign energy ventures and subsidiaries.

Competition from large petroleum and other energy interests.

Changes in laws and regulations that affect our operations and the energy industry in general.

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Risks and uncertainties associated with exploration, development and production of oil and gas, and drilling and production risks.

Expropriation and other risks associated with foreign operations.

Risks associated with anticipated and ongoing third party pipeline construction and transportation of oil and gas.

The lack of availability of oil and gas field goods and services.

Environmental risks and changing economic conditions.

For a detailed description of these and other factors that could cause actual results to differ materially from those expressed in any forward-looking statement, please see "Risk Factors" in Item 1A of Part II of this report and in our Annual Report on Form 10-K for the year ended December 31, 2013.

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