Daybreak Oil and Gas, Inc. | |
| 601 West Main Ave Suite 1017 Spokane, WA 99201 |
| Office: (509) 232-7674 Fax: (509) 455-8483 |
April 10, 2014
Via Edgar
United States Securities and Exchange Commission
Division of Corporation Finance
100 F Street, N.E.
Washington, D.C. 20549-7010
Attention:
Karl Hiller
Branch Chief
Re:
Daybreak Oil and Gas, Inc.
Form 10-K for the Fiscal Year Ended February 28, 2013
Filed May 28, 2013
Response Letter dated March 6, 2014
File No. 000-50107
Dear Mr. Hiller:
We are responding to comments received from the staff (the “Staff”) of the Securities and Exchange Commission (the “Commission”) by letter dated March 28, 2014 (the “Comment Letter”), which was received by Daybreak Oil and Gas, Inc. (“Daybreak”, the “Company”, “we”, “us” or “our”) regarding the filings listed above. Each comment is included below and is numbered to correspond to the numbered paragraph in the Comment Letter. The Company’s responses immediately follow each comment.
Form 10-K for the Fiscal Year ended February 28, 2013
Reserves, Page 19
1.
We note your response to prior comment three. So that we may better understand the changes to PUD volumes and future development costs, please address the following:
·
Quantify the amount of future development costs associated with the 69,340 bbls increase to proved undeveloped reserves.
·
Quantify any change in reserves with respect to the farm-in agreement that requires a third party to incur $156,275 of your development costs.
Mr. Hiller
Securities and Exchange Commission
April 10, 2014
Page 2
·
Quantify the amount of development costs associated with the PUD locations that were scheduled to be drilled in the same month as the effective date of the related reserve report and address the apparent inconsistent treatment of PUD volumes and related development costs.
·
Tell us if the aforementioned two PUD locations were drilled and if applicable, specify when the drilling occurred.
·
Quantify the changes to development costs and reserve quantities that relate to a decrease in your working and corresponding net revenue interest of approximately 10%.
·
Quantify the decrease to your development costs with respect to the change in the completion methodology used relative to that in prior years.
Response:
·
The amount of future development costs associated with the addition of three PUD locations representing 63,120 bbls of the increase in the reserve report effective February 28, 2013 was $99,380 per well for a total of $298,140. In the comments and responses between Daybreak and the SEC Staff a transposition in the amount of proved undeveloped reserves has occurred. The February 28, 2013 proved undeveloped reserves were 206,980 bbls not 206,890 bbls as previously referenced. The change between PUD balances of 137,550 bbls at February 28, 2012 and 206,980 bbls at February 28, 2013 was 69,430 bbls. After accounting for the addition of the three new PUD locations of 63,120 bbls, the remaining increase in reserves of 6,310 bbls came from PUDs that were shown on the reserve reports for both years and represented a decrease of $685,010 in development costs in comparison to the reserve report effective February 28, 2012.
·
The change in reserves on the reserve report effective February 28, 2013 in comparison to the reserve report effective February 28, 2012 with respect to the farm-in agreement that requires a third party to incur $156,275 of our development costs was a decline of 710 bbls from the reserve report effective February 28, 2012 balance of 4,860 bbls to 4,150 bbls on the reserve report effective February 28, 2013. This 710 bbls decline was due to (i) the assignment of working interest and corresponding decrease in net revenues (486 bbls) and (ii) to changes in reservoir performance (224 bbls).
·
The amount of development costs associated with the two PUD locations that were scheduled to be drilled in the same month as the effective date of the related reserve report was $296,880 on the reserve report effective February 28, 2012 and would have been $198,760 on the reserve report effective February 28, 2013 if the economic evaluation software had been “forced” to recognize an associated development cost. The decline in development costs of $98,120 between the two years was due to (i) the assignment of working interest and corresponding decrease in net revenues ($22,084) and (ii) a change in the drilling and completion methodology ($76,036). To avoid a possibility of misunderstanding in the future, we will ensure that in future reserve report filings the economic evaluation software is “forced” to recognize the associated development cost of any well that is scheduled to be drilled in the same month as the effective date of the reserve report.
Mr. Hiller
Securities and Exchange Commission
April 10, 2014
Page 3
·
The two aforementioned PUD locations that did not have a development cost reflected in the reserve report effective February 28, 2013 were actually drilled. Location work and the setting of conductor pipe on both PUDs occurred prior to March 1, 2013. The drilling of one of the PUDs was delayed until April 2013 due to delays in the arrival of the drilling rig itself. The second PUD was drilled in May 2013 again due to the delay in the arrival of the drilling rig and also due to a change in the drilling order of wells in a multiple well drilling program.
·
We have quantified the changes to development costs and reserve quantities resulting from our assignment of a working and corresponding net revenue interest of approximately 10% to a third party during the year ended February 28, 2013 by grossing up the proved undeveloped reserves and development cost from the reserve report effective February 28, 2013 by a 10% factor. The PUD reserve volume on the February 28, 2013 reserve report was 206,980 bbls with a grossed up reserve base of 229,978 bbls. The development cost of the proved undeveloped reserves on the February 28, 2013 reserve report was $1,044,380 with a grossed up development cost of $1,160,478. Therefore, the changes to development costs and reserve quantities that relate to a decrease in our working and corresponding net revenues interest of 10% are a decrease in reserve quantities of 22,998 bbls and a decrease in development costs of $116,042.
·
The development cost of proved undeveloped reserves (“PUDs”) in the reserve report effective February 28, 2013 was $1,044,380. The development cost of PUDs in the reserve report effective February 28, 2012 was $1,431,250 resulting in a decline of development costs of $386,870 between the two reserve reports. The five components that comprise the net change in development costs of $386,870 between the two reserve report years are (i) the three new PUDs in the February 28, 2013 reserve report referenced in the first bullet point above; (ii) the farm-in agreement referenced in the second bullet point above; (iii) the economic evaluation software exclusion referenced in the third bullet point above; (iv) the decrease in the working interest and corresponding decrease in net revenues and development costs; and (v) the change in the drilling and completion methodology. These five components either add to an increase in, or contribute to a decrease in, the change of total development costs between the reserve reports effective February 28, 2012 and February 28, 2013. The component attributable to the farm-in agreement is a reduction of $156,275 of development costs. A further reduction of $296,880 is related to the economic evaluation software exclusion. These two reductions in development costs are offset by the addition of the three new PUDs for $298,140 and the adjusted change in the assignment of the decrease in working interest and corresponding net revenues of 10% for $305,214(1). When these four components are combined and compared to the year-to-year net change in development costs, the remaining result represents a decrease of approximately $537,069 in development costs attributable to the change in drilling and completion methodology.
(1) The methodology for calculating the adjusted change due to the assignment in working interest and corresponding net revenues of $305,214 is derived by comparing the “grossed up” development costs from the reserve report effective February 28, 2013 with the development costs of the reserve report effective February 28, 2012 after removing the two PUDs that were involved in the economic evaluation software exclusion and the three new PUDs that were added to the reserve report effective February 28, 2013. The removal of the five PUDs from the comparison prevents the double counting of their effect on the change in development costs.
Mr. Hiller
Securities and Exchange Commission
April 10, 2014
Page 4
Exhibit 99.1
2.
We have read your response to prior comment six in our letter dated February 20, 2014 and re-issue our comment in part as the reserve report does not include certain disclosures required by Item 1202(a)(8) of Regulation S-K. Please obtain and file a revised report that addresses the following information in order to satisfy your filing obligations.
·
The purpose for which the report was prepared (e.g., prepared for inclusion as an exhibit in a filing made with the U.S. Securities and Exchange Commission (SEC) Item 1202(a)(8)(i)).
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The date on which the report was completed (in addition to the effective date) (Item 1202(a)(8)(ii)).
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The proportion of the Company’s total proved reserves covered by the report (Item 1202(a)(8)(iii)).
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A statement that the assumptions, data, methods, and procedures used in the preparation of the report are appropriate for the purpose served by the report (Item 1202(a)(8)(iv)).
·
The average realized prices in addition to the initial benchmark prices by product type for the reserves included in the report as part of the primary economic assumptions (Item 1202(a)(8)(v))).
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A discussion of the possible effects of regulation on the ability of the registrant to recover the estimated reserves (Item 1202(a)(8)(v)).
·
A statement that the third party has used all methods and procedures as it considered necessary under the circumstances to prepare the report (Item1202(a)(8)(viii)).
Response:
We have discussed with our independent reserve engineers the Staff’s comments in regards to the reserve letter issued by our reserve engineers. They have agreed to reissue their reserve letter with verbiage that will include the specific disclosures of Item 1202(a)(8) of Regulation S-K as shown in the above listed bullet points.
We are filing the revised reserve letter from our reserve engineers as Exhibit 99.1 to this response letter dealing with your latest comments.
We will ensure that future reserve letter filings address the specific disclosures required by Item 1202(a)(8) of Regulation S-K.
Closing Comments
We agree with the purpose and scope of the staff reviewing our Form 10-K filings to aid public companies in ensuring that all the information investors require to make an informed investment decision is disclosed.
We again want to thank the Staff for taking time to join the teleconference call that was held on Tuesday, April 1, 2014 to clarify the questions we had in regards to the Staff’s comments.
Mr. Hiller
Securities and Exchange Commission
April 10, 2014
Page 5
We acknowledge that:
·
the Company is responsible for the adequacy and accuracy of the disclosure in the filing;
·
staff comments or changes to disclosure in response to staff comments do not foreclose the Commission from taking any action with respect to the filing; and
·
the Company may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States.
We are currently involved with preparing our Annual Report on Form 10-K for the fiscal year ended February 28, 2014, which we expect to timely file on or before May 29, 2014, and we will ensure that the above comments are incorporated as appropriate into this filing. Because we will soon file our next 10-K and because it is our view that the changes to our disclosures and additional disclosures to be made in response to the Staff’s comments are not material, we do not plan to also file an amendment to our Form 10-K filing for the year ended February 28, 2013 unless the Staff requests otherwise.
We believe the foregoing is responsive to your comments. If you should have any questions or further comments, please call me at (281) 996-4176.
Sincerely,
/s/ JAMES F. WESTMORELAND
James F. Westmoreland
President and Chief Executive Officer
Exhibit 99.1