Statements contained herein that are not based on historical fact, including without limitation statements containing the words "believes," "may," "will," "could," "should," "estimate," "continue," "anticipates," "plans," "intends," "expects," "target," and words of similar import, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, events or developments to be materially different from any future results, events or developments expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions, both nationally and in the regions in which we operate; technology changes; competition; changes in business strategy or development plans; the ability to attract and retain qualified personnel; liability and other claims asserted against us; and other factors referenced in our filings with the Securities and Exchange Commission. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Any forward-looking statement speaks only as of the date that we made the statement, and we disclaim any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future results, events or developments. The following discussion should be read in conjunction with the attached consolidated financial statements and notes thereto and with our audited financial statements and notes thereto for the fiscal year ended March 31, 2001.
Nation Energy Inc. (the "Company") is an exploration stage company. We were formed under the laws of the state of Florida on April 19, 1988 under the name Excalibur Contracting, Inc. and from that date until September 1998 we conducted no business and existed as a shell corporation. After the restatement of our Articles of Incorporation on September 16, 1998, our main focus has been the procurement of mineral leasehold interests, primarily for oil and gas exploitation rights. We reincorporated as a Delaware corporation on February 2, 2000 and changed our name to Nation Energy, Inc. on February 15, 2000. Pursuant to the change in our focus, we commenced corporate strategic development whereby we have been exploring potential oil and gas projects. Though we reviewed potential participation in several oil and gas projects in the Rocky Mountain region we entered into only one agreement as of this date for the exploration of oil and gas properties in that region. This agreement was the Joint Operating Agreement with Saurus Resources, Inc. dated December 1, 1999 which was attached as an exhibit to our Form 10-KSB/A filed with the Securities and Exchange Commission on March 31, 2000 and was described in detail in that filing.
We held interests in 28 oil and gas leases located in the Greater Trona Area prospect, located in and around Sweetwater County, Wyoming. These leases cover approximately 22,000 acres. Under the Joint Operating Agreement, Saurus Resources was the operator of oil and gas exploration on the property covered by these leases and has certain rights and duties as the operator. Our only material activities until recently had been related to our participation in exploration conducted under the Joint Operating Agreement with Saurus Resources. Under the Joint Operating Agreement, 24 test wells have been drilled and completed. We advanced a total of approximately $2,167,000 under our agreement with Saurus Resources. Operational difficulties in developing the test wells were largely responsible for greater than anticipated operating costs. These difficulties included mineral precipitation in the well bore, which inhibited production. The wells drilled were perforated and hydraulically fractured; these geophysical traits would have made extraction of gas much more complicated and expensive than anticipated. Poor weather and lack of available crews have also contributed to operational difficulties and greater expenses. Despite the significantly greater exploration expenditures, there were no strong indications that the test wells or other potential wells within the interests held by us would produce sufficient gas to enable us to recover the exploration costs expended to date, let alone be profitable.
Because of the poor operating results from the exploration conducted under the Joint Operating Agreement, we began to explore other alternatives to this arrangement. On February 28, 2001 we entered into a Purchase and Sale Agreement with VRD, Inc., an affiliate of Saurus Resources, under which we agreed to sell to VRD, Inc. all of our interest in our oil and gas leases in the Greater Trona Area, all right, title and interest in and to all of the personal property, fixtures and improvements appurtenant to the such leases, and all of our rights under the Joint Operating Agreement with Saurus Resources. The rights that were to be sold included the right to participate in the drilling, completion, tie-in and production of wells within the contract area. In consideration for the sale, were to receive from VRD, Inc. $2,165,780 in cash and we were to retain certain royalty interests.
We attempted to obtain the approval of our shareholders of the transactions contemplated in the Purchase and Sale Agreement with VRD, Inc.. The details of this transaction and the reasons for the sale were described in detail in Our Consent Solicitation Statement on Schedule 14A, which was filed on April 26, 2001 and subsequently amended by a filing made June 28, 2001. We obtained clearance from the SEC to distribute the Schedule 14A to our shareholders on September 26, 2001. However, by the time of the SEC clearance, the Purchase and Sale Agreement had expired in accordance with its terms and VRD, Inc. was unwilling to proceed with the transaction.
We entered into a Quitclaim, Release and Assumption Agreement, dated December 6, 2001, with VRD, Inc. and Saurus Resources, pursuant to which we disposed of any and all interests that we held in the oil and gas leases located in the Greater Trona Area of Sweetwater County, Wyoming. We felt that this was in the best interests of the Company given our potential liability under the oil and gas leases and the fact that it was unlikely that the properties in question had any realizable value. The Company wrote off the remaining value of the properties.
- 7 -
Plan of Operation
On November 21, 2001 we entered into a farm-in agreement with Olympia Energy Inc. (the "Farm-in") under which we will share the development costs and revenues for a natural gas project in the Smoky area near Grande Prairie, Alberta, Canada. Under the terms of the Farm-in we will fund 25% of the cost to drill and complete a 4,800 meter well in the Smoky area and will earn a 15% interest after payout in the Smoky project. Total drilling costs for the Smoky project are estimated to be CDN $11,000,000. Drilling on an initial well began on November 13th and is expected to take approximately 120 days.
Management is of the view that the Smoky project has a very good potential for substantial recoverable gas. The Smoky area has existing infrastructure facilities and pipelines and there is currently production within 5 miles of the Smoky project area.
Our primary objective over the 12 months ending December 31, 2002, will be to continue to participate in the Farm-in with Olympia Energy Inc.
We do not foresee hiring any additional employees in the next twelve months. We do not intend to purchase any significant equipment over the twelve months ending December 31, 2002. Any monies raised by the Company will first be expended pursuant to our obligations under the Farm-in agreement.
We have not had any operating revenues from the date of our formation in April 18, 1988 to the present. We currently do not have enough cash to meet our obligations during the next twelve months. Upon the closing of the previously announced private placement for gross proceeds of $1,000,000, management expects to have enough cash to meet it's obligations to fund 25% of the cost to drill and complete the project in the Smoky area.
Results of Operations
As a result of the Quitclaim, Release and Assumption Agreement entered into with VRD, Inc and Saurus Resources, we wrote down the entire interest in the oil and gas leases located in the Greater Trona Area of Sweetwater County, Wyoming. This write down to the assets resulted in an aggregate loss of $1,491,007 compared to a recorded loss of $796,794 for the nine month period ended December 31, 2000. Of the $1,491,007 loss for this period, $1,370,678 comprised the write down of the asset. Similarly $738,675 of the $796,794 reported for the previous year was a write down taken on the same oil and gas interest. The Company reports a net loss per common share, basic and diluted of $0.14 compared to a loss of $0.11 in the same period last year, primarily due to the write down of the assets.
As of February 7, 2002 the Smoky well was drilling ahead at 3,832 meters and had accumulated costs of $3,475,723. The well is within budget and expected time frames.
- 8 -
Liquidity and Capital Resources
Our material commitments for capital expenditures are limited to the Farm-in with Olympia Energy for the development of the Smoky project. At December 31, 2001, we advanced a total of $606,205 under the farm-in agreement with Olympia Energy toward the drilling and development costs on an initial well.
On December 4, 2001 we announced a private placement of 5,000,000 shares at $0.20 per share for gross proceeds of $1,000,000. The proceeds of the private placement will be used to fund our obligations under the Farm-in agreement for the Smoky project.
We have no operating history. We can only estimate the future needs for capital based on the current status of our operations, our current plans and current economic condition. Due to the uncertainties regarding our future activities, we are unable to predict precisely what amount will be used for any particular purpose, other than the funds which we will be required to expend under the Farm-in agreement.
Certain Relationships and Related Transactions
The Company receives administration and back office support under an oral administrative services agreement with Caravel Management Corp., under which the Company is charged $3,000 per month. Caravel Management Corp. is a management company that is wholly owned by John R Hislop, the Company's Chairman of the Board, Secretary and Vice President and Chief Financial Officer and a director. The administrative agreement is on a month to month basis.
Geological and Geophysical Techniques
The Company may, within the next twelve months or thereafter, employ detailed geological interpretation combined with advanced seismic exploration techniques to identify potential ventures. Geological interpretation is based upon data recovered from existing oil and gas wells in an area and other sources. Such information is either purchased from the company that drilled the wells or becomes public knowledge through state agencies after a period of years. Through analysis of rock types, fossils and the electrical and chemical characteristics of rocks from existing wells, the Company can construct a picture of rock layers in the area. Further, the Company will have access to the logs from the existing operating wells which will allow the Company to extrapolate a decline curve and make an estimation of the number of recoverable barrels of oil or cubic feet of gas existing beneath a particular lease. The Company has not purchased, leased, or entered into any agreements to purchase or lease any of the equipment necessary to conduct the geological or geophysical testing referred to herein and will only to do so should the Board of Directors find that the information otherwise available to the Company is insufficient to identify potentially profitable oil and gas properties.
Employees
We currently have no employees other than our officers and directors. We expect to hire additional employees as needed. Management currently estimates that the Company will not hire any employees in the next twelve months.
- 9 -
RISK FACTORS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS. ACTUAL EVENTS OR RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS INCLUDING, WITHOUT LIMITATION, THE RISK FACTORS SET FORTH BELOW AND IN THE OTHER REPORTS OF THE COMPANY. AN INVESTMENT IN THE SECURITIES OF THE COMPANY INVOLVES A HIGH DEGREE OF RISK. THE RISKS DISCLOSED DO NOT PURPORT TO BE A COMPREHENSIVE SUMMARY OF ALL THE RISKS ASSOCIATED WITH AN INVESTMENT IN THE COMPANY. RATHER, THEY ARE ONLY CERTAIN PARTICULAR RISKS TO WHICH THE COMPANY IS SUBJECT THAT THE COMPANY WISHES TO ENCOURAGE PROSPECTIVE INVESTORS TO DISCUSS IN DETAIL WITH THEIR PROFESSIONAL ADVISORS. PROSPECTIVE INVESTORS, PRIOR TO MAKING AN INVESTMENT IN THE COMPANY, SHOULD CAREFULLY CONSIDER, AMONG OTHERS, THE FOLLOWING RISK FACTORS.
AN INVESTMENT IN OUR COMMON STOCK INVOLVES SUBSTANTIAL RISKS AND UNCERTAINTIES AND PEOPLE CONSIDERING SUCH AN INVESTMENT SHOULD NOT COMMIT MORE THAN THEY CAN AFFORD TO LOSE. PLEASE REFER TO OUR ANNUAL REPORT ON FORM 10- KSB AS FILED WITH THE SEC ON JUNE 28, 2001, AS AMENDED SEPTEMBER 26, 2001 FOR A LIST OF ADDITIONAL RISK FACTORS AND INVESTMENT CONSIDERATIONS.
FOR ALL OF THE AFORESAID REASONS AND OTHERS SET FORTH HEREIN, AS WELL AS OTHER FACTORS NOT SET FORTH HEREIN, THE PURCHASE OF THE SHARES OF THE COMPANY INVOLVES A HIGH DEGREE OF RISK. ANY PERSON CONSIDERING AN INVESTMENT IN THE SHARES OF THE COMPANY SHOULD BE AWARE OF THESE AND OTHER FACTORS SET FORTH IN THIS REPORT AND OUR OTHER SEC FILINGS. THE SHARES OF COMMON STOCK SHOULD BE PURCHASED ONLY BY PERSONS WHO CAN AFFORD TO ABSORB A TOTAL LOSS OF THEIR INVESTMENT IN THE COMPANY AND HAVE NO NEED FOR A RETURN ON THEIR INVESTMENT.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults upon Senior Securities
None.
- 10 -
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
The following exhibits are attached to this report and are incorporated herein by reference:
Exhibit No. | Exhibit Name |
3.1 | Certificate of Incorporation of Company, filed December 16, 1999* |
3.2 | Certificate of Amendment of Certificate of Incorporation of Company, filed February 15, 2000* |
3.3 | Bylaws of the Company* |
10.1 | Joint Operating Agreement with Saurus Resources, Inc. dated December 1, 1999* |
10.2 | 1999 Stock Option and Incentive Plan* |
10.3 | Purchase and Sale Agreement** |
10.4 | Quitclaim Release and Assumption Agreement with Saurus Resources, Inc. and VRD, Inc., dated December 6, 2001 |
10.5 | Farm-in Agreement with Olympia Energy Inc., dated November 21, 2001 |
* Incorporated by reference from the Company's Form 10-KSB filed with the Securities and Exchange Commission March 31, 2000.
** Incorporated by reference from the Company's Schedule 14A filed with the Securities and Exchange Commission April 26, 2001.
(b) Reports on Form 8-K
Two reports on Form 8-K were filed during the quarter for which this report is filed. On November 29 and December 5, 2001, we filed a Form 8-K Current Report announcing the Farm-in Agreement with Olympia Energy Inc. On December 5, 2001, we filed a Form 8-K Current Report announcing a private placement of 5,000,000 shares for gross proceeds of $1,000,000.
- 11 -
Signatures
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| NATION ENERGY, INC.
(Registrant)
|
Dated: February 14, 2002 | By: "John R. Hislop" John R. Hislop,
Chairman of the Board, Secretary and Vice President and Chief Financial Officer, Director |
