Note 2 - Long-Term Debt |
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Effective October 28, 2003, Castleguard negotiated with a commercial bank an increase in its borrowing base to $322,333, which will reduce at $21,667 a month. Principal payments will be required only when the amount outstanding equals the borrowing base. Maturity is approximately 15 months. Interest is payable monthly at the Wall Street Journal's prime rate plus 3/4 of one percent. The note is collateralized by the Company's interest in oil and gas properties. Debt covenants restrict other debt, pledge of assets, payments of dividends, mergers and changes in ownership. |
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Note 3- Sale of Mings Chapel Interests |
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The Company completed the sale for cash to an unrelated purchaser of its interest in the Mings Chapel, Texas producing wells and related assets in March 2003. No gain or loss resulted from the sale with the net credit reducing the Company's net investment in oil and gas properties. The Company reduced its bank debt with $50,000 of the proceeds. |
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Note 4- Change in Well Ownership Interests |
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Through action of the Louisiana Conservation Commission, as modified by a court decision of the District Court of Caddo Parish, Louisiana, dated December 17, 2002, Castleguard's working interest in the Hudson Reservoir A Sand of the Youngblood 21-1D well in the Minden Field, Webster Parish, Louisiana field has been reduced retroactively to the date of first production. The Hudson Reservoir A Sand produced in the Youngblood 21-1D Well from December, 1999 through September, 2001, at which time the Hudson A Sand was abandoned and the well was recompleted in other zones. Castleguard's interest in all other producing sands in the Youngblood 21-1 Well will increase as a result of the Orders. Since the entry of the District Court's Order, the parties have negotiated the methodology of implementing that decision, which negotiations have resulted in a June 30, 2003 tentative agreement which was executed on behalf of Castleguard on July 12, 200 3. |
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The reduction in Castleguard's working interest will require Castleguard to pay to other working interest owners a portion of the revenue received by Castleguard attributable to production from the Hudson A Sand and will require other working interest owners to pay to Castleguard an amount for their additional share of the well costs. Although the methodology has been resolved, the calculation of the amounts owed by the parties to each other has not been finalized and agreed upon. The operator of the well, O'Brien Energy Company, is currently determining the amounts to be paid and received among the various working interest owners to give effect to the decision and agreement. |
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Based on preliminary data forwarded by the operator, Castleguard's management estimates that it will sustain a charge to pre-tax earnings of from $150,000 to $175,000 and will receive an amount approximating $75,000 for well costs, thus cash to be ultimately paid by Castleguard should approximate $75,000 to $100,000. At the time final financial information becomes determinable, Castleguard expects to record the charge less a related tax benefit in the fourth quarter 2003 operating results. |
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS |
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This Quarterly Report on Form 10-QSB includes "forward-looking" statements within the meaning of Section 27a of the Securities Act of 1933, as amended (the "Securities Act"), and section 21e of the Securities Exchange Act of 1934, as amended (the "exchange act"). Specifically, all statements other than statements of historical facts included in this report regarding Castleguard Energy Inc.'s financial position, business strategy and plans and objectives of management of the Company for future operations are forward- looking statements. These forward-looking statements are based on the beliefs of the Company's management as well as assumptions made by and information currently available to the Company's management. When used in this report, the words "anticipate," "believe," "estimate," "expect" and "intend" and words or phrases of similar import, as they relate to the Company or Company management, are intended to identify forward-looking statements. Such st atements reflect the current view of the Company with respect to future events and are subject to certain risks, uncertainties and assumptions related to certain factors including, without limitation, price levels for oil and natural gas, concentration of oil and natural gas reserves and production, drilling risks, uncertainty of oil and gas reserves, risks associated with the development of additional revenues and with the acquisition of oil and gas properties and other energy assets, operating hazards and uninsured risks, general economic conditions, governmental regulation, changes in industry practices, marketing risks, one time events and other factors described herein ("cautionary statements"). Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Based upon changing conditions, should any one or more of these risks or uncertainties materialize, or should any under lying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended. The Company does not intend to update these forward- looking statements. All subsequent written and oral forward- looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the applicable cautionary statements. Reference is made to disclosure regarding "Forward-Looking Statements and Cautionary Statements" included in the Company's Annual Report on Form 10-KSB for the year ended December 31, 2002, which is incorporated herein by reference. |
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The Company is an independent oil and gas exploration company whose strategic focus is the application of advanced seismic imaging and computer-aided exploration technologies in the systematic search for commercial hydrocarbon reserves, primarily in the states of Texas and Louisiana. The Company attempts to leverage its technical experience and expertise with seismic technology to identify exploration and exploitation projects with significant potential economic return. The company intends to participate in selected exploration projects as a non-operating, working interest owner, sharing both risk and rewards with its partners. The Company has and will continue to pursue exploration opportunities in regions where the Company believes significant opportunity for discovery of oil and gas exists. By reducing drilling risk through seismic technology, the Company seeks to improve the expected return on investment in its oil and gas expl oration projects. The Company attempts to limit capital requirements by forming industry alliances and exchanges a portion of its interest for cash and/or a carried interest in its exploration projects. |
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RESULTS OF OPERATIONS |
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Three Month Periods Ended September 30, 2003 vs. 2002 |
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Third quarter 2003 (this year) net income declined 69% to $16,815 ($.00 per share) from $53,732 ($.00 per share) in the third quarter of 2002 (last year) as the result of a 72% decline in natural gas production and a 58% decline in oil production. The total effect of production declines was partially offset by a 78% improvement in average prices for natural gas during the quarter. The combination of lower production and higher prices resulted in a 51% decline in revenues this year compared to last year and drove a 69% decline in net income for the quarter. |
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Production volumes continued to be adversely affected by wells in the Minden Louisiana field where workovers were not able to restore production levels of last year. A new well is drilling in the field with favorable prospects but production, if any, will not commence until late in the fourth quarter or early next year. Castleguard farmed out 60% of its interest in the well to another party retaining rights to participate in 20% of the farmout after payout. |
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Natural gas sales volumes were 14,151 mcf this year versus 50,754 last year; oil production was 900 barrels this year versus 2,130 barrels last year. Average natural gas prices rose to $5.23 per mcf from $2.93 last year and average oil prices rose to $28.84 per barrel versus $26.42 per barrel last year. |
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Lease operating expenses and depreciation, depletion and amortization declined in line with production volumes. General and administrative expense was in line with this years' second quarter and slightly higher than last year. Interest expense declined from last year attributable to lower debt levels and lower interest rates. |
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Nine Month Periods Ended September 30, 2003 vs. 2002 |
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Nine months net income 2003 (this year) of $103,965 was 7% improved over last years of $97,526 principally as a result of higher earnings in the first half of the year. The higher earnings were the result of higher natural gas prices than in 2002 and higher production of barrels of oil. Revenues for the nine months were down 27% from last year as the result of a 71% decline in natural gas production partially offset by a 126% increase in natural gas average prices and a 21% increase in average oil prices. |
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Gas volumes this year were 53,096 mcf for nine months compared to 180,855 mcf last year. Oil volumes this year were 3,095 barrels compared to 3,322 barrels last year. Average natural gas prices rose to $5.96 per mcf from $2.64 per mcf last year; average oil prices were $29.73 per barrel compared to $24.54 per barrel last year. |
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Expenses declined in 2003 compared to 2002, following the decline in production this year which combined with lower interest expense from lower borrowings and interest rates more than offset the revenue decline resulting in slightly higher net income. |
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LIQUIDITY AND CAPITAL RESOURCES |
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Cash flow from operations for the nine months of 2003 plus proceeds from property sales, but excluding changes in working capital, was adequate to fund operations and required debt reductions during the period. Bank debt was reduced $245,000 during the nine months leaving $150,666 outstanding at September 30, 2003, which is only 11% of Castleguard's capitalization. |
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During October 2003, Castleguard revised its borrowing arrangement with a commercial bank to increase its borrowing base to $322,333 which provided $193,333 in new borrowing capacity. Their terms provide for a reduction in the borrowing base of $21,667 per month with principal payments required only when the amount outstanding equals the borrowing base. Castleguard expects to fund its share of well costs for a new well drilling in the Minden field from a portion of the availability. Opportunities may exceed funds available which could cause management to review other potential sources of capital. |
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Change in Well Ownership Interest |
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Through action of the Louisiana Conservation Commission, as modified by a court decision of the District Court of Caddo Parish, Louisiana, dated December 17, 2002, Castleguard's working interest in the Hudson Reservoir A Sand of the Youngblood 21-1D well in the Minden Field, Webster Parish, Louisiana field has been reduced retroactively to the date of first production. The Hudson Reservoir A Sand produced in the Youngblood 21-1D Well from December, 1999 through September, 2001, at which time the Hudson A Sand was abandoned and the well was recompleted in other zones. Castleguard's interest in all other producing sands in the Youngblood 21-1 Well will increase as a result of the Orders. Since the entry of the District Court's Order, the parties have negotiated the methodology of implementing that decision, which negotiations have resulted in a June 30, 2003 tentative agreement which was executed on behalf of Castleguard on July 12, 2003. |
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The reduction in Castleguard's working interest will require Castleguard to pay to other working interest owners a portion of the revenue received by Castleguard attributable to production from the Hudson A Sand and will require other working interest owners to pay to Castleguard an amount for their additional share of the well costs. Although the methodology has been resolved, the calculation of the amounts owed by the parties to each other has not been finalized and agreed upon. The operator of the well, O'Brien Energy Company, is currently determining the amounts to be paid and received among the various working interest owners to give effect to the decision and agreement. |
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Based on preliminary data forwarded by the operator, Castleguard's management estimates that it will sustain a charge to pre-tax earnings of from $150,000 to $175,000 and will receive an amount approximating $75,000 for well costs, thus cash to be ultimately paid by Castleguard should approximate $75,000 to $100,000. At the time final financial information becomes determinable, Castleguard expects to record the charge less a related tax benefit in the fourth quarter 2003 operating results. |
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Item 3. CONTROLS AND PROCEDURES |
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