Southern Star Energy 10K 2009 Annual report

Southern Star Energy (SSER) Inactive 10-K2009 FY Annual report

Content analysis

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 2009
OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 000-52106

SOUTHERN STAR ENERGY INC.

(Exact Name of Registrant as Specified in its Charter)

Nevada		20-2514234
(State of other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

110 Cypress Station Drive, Suite 152
Houston, Texas		77090
(Address of Principal Executive Offices)		(Zip Code)

(832) 375-0330

(Registrant’s Telephone Number, including Area Code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, $0.001 par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o

Nox

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o Nox

Indicate by checkmark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “Accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

Large Accelerated Filer o

Accelerated Filer o

Non-Accelerated Filer o

Smaller Reporting Company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $19,600,000

The number of shares of the Registrant’s Common Stock outstanding as of August 17, 2009 was 45,347,280.

TABLE OF CONTENTS

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS	1

PART I

ITEM 1. DESCRIPTION OF BUSINESS	3
ITEM 1A. RISK FACTORS	8
ITEM 1B. UNRESOLVED STAFF COMMENTS	19
ITEM 2. PROPERTIES	19
ITEM 3. LEGAL PROCEEDINGS	25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	25

PART II

ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	25
ITEM 6. SELECTED FINANCIAL DATA	27
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	27
ITEM 8. FINANCIAL STATEMENTS	39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	66
ITEM 9A(T) CONTROLS AND PROCEDURES	66
ITEM 9B. OTHER INFORMATION	66

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	67
ITEM 11. EXECUTIVE COMPENSATION	70
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	77
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	79
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES	79

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	81

SIGNATURES	84

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This annual report on Form 10-K and the exhibits attached hereto contain certain statements that constitute “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements concern our anticipated results and developments in our operations in future periods, planned exploration and development of our properties, plans related to our business and matters that may occur in the future. These statements relate to analyses and other information that are based on forecasts of future results, estimates of amounts not yet determinable and assumptions of management. We use words like “expects,” “believes,” “intends,” “anticipates,” “plans,” “targets,” “projects” or “estimates” in this annual report. When used, these words and other, similar words and phrases or statements that an event, action or result “will,” “may,” “could,” or “should” occur, be taken or be achieved, identify “forward-looking” statements. Such forward-looking statements are subject to certain risks and uncertainties, both known and unknown, and assumptions, including, without limitation, risks related to:

•

our requirement for significant additional capital;

•

the fact that we historically incurred losses and expect to incur additional losses in the future;

•

our limited operating history in oil and natural gas production;

•

delays in development or production curtailment affecting our material properties;

•

our potential inability to successfully drill wells that can produce oil or natural gas in commercially viable quantities;

•

the greater risks we face as an exploration company;

•

fluctuations in the actual quantities and present value of our proved reserves;

•

the imprecise nature of estimating proved natural gas and oil reserves, future downward revisions of proved reserves and increased drilling expenditures without additions to proved reserves;

•

the declining of our reserves and production;

•

our inability to insure against all risks related to our operations;

•

market conditions or operational impediments;

•

our reliance on independent experts and technical or operational service providers;

•

our use of 3-D seismic data;

•

the fact that our interests are held in the form of leases;

•

the fact that our properties may not produce oil or natural gas as projected;

•

our lack of asset and geographic diversification;

•

potential conflicts of interest of our officers and directors;

•

our dependence on a number of key personnel;

•

our potential inability to recruit qualified managerial and field personnel;

•

the fact that our debt instruments are secured by substantially all of our assets and impose certain restrictions;

•

the potential that our internal control over financial reporting may be found to be deficient;

•

competition in the oil and natural gas industry;

•

price volatility of oil and gas commodities;

•

oil and natural gas transportation facilities;

•

environmental regulation of exploration and drilling operations;

•

decline in oil and natural gas prices;

•

seasonal demand for our products;

•

the complex laws and regulations that govern the oil and natural gas industry;

•

the unavailability or high cost of rigs, equipment, supplies, personnel and services; and

•

our common stock.

The preceding bullets outline some of the risks and uncertainties that may affect our forward-looking statements. For a full description of risks and uncertainties, see the sections elsewhere in this Form 10-K entitled “Risk Factors”, “Description of the Business” and “Management’s Discussion and Analysis”. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, believed, estimated or expected.

Our management has included projections and estimates in this annual report, which are based primarily on management’s experience in the industry, assessments of our results of operations, discussions and negotiations with third parties and a review of information filed by our competitors with the Securities and Exchange Commission or otherwise publicly available. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. We disclaim any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events, except as required by law.

We qualify all the forward-looking statements contained in this annual report by the foregoing cautionary note.

PART I

ITEM 1.

DESCRIPTION OF BUSINESS.

As used in this annual report, and unless otherwise indicated, the terms “we”, “us” and “our” refer to Southern Star Energy Inc. and our wholly-owned subsidiary, Southern Star Operating, Inc., a private Louisiana corporation (“Southern Star Operating”).

Business Development

We are an exploration stage company engaged in the acquisition, exploration and exploitation of prospective oil and gas properties. We currently hold a 40% working interest in 4,700 acres in the area within Bossier Parish, Louisiana, commonly referred to as the Sentell Field. Initial drilling in the field has resulted in Proved Reserves of 2.2 BCfe (billions of cubic-feet equivalent) and net production of approximately 500 MCFED (thousands of cubic-feet equivalent per day).

We were incorporated in the State of Nevada on February 7, 2005 under the name “Surge Enterprises, Inc.” and commenced operations on April 13, 2005 commensurate with the incorporation of our wholly-owned subsidiary, Surge Marketing Corp. (“Surge Marketing”). Surge Marketing was incorporated in British Columbia, Canada, on April 13, 2005, at which time it commenced development of a software product called LinkSurge.

In 2006, as management of our company investigated opportunities and challenges in our software business, management realized that the business did not present the best opportunity for our company to realize value for our shareholders. Our company identified the oil and gas business as a viable business opportunity. As a result of the prospects of the oil and gas industry and the inability of our company to generate substantial revenues from the software business, our board of directors decided to transition the business to the oil and gas sector. The difficulties with our software business largely resulted from our inability to obtain sufficient market share as a result of intense competition in the software industry from search engine technology companies and from competitors offering consulting services related thereto.

We incorporated Southern Star Operating on October 27, 2006, in anticipation of developing our oil and gas business. In addition, we incorporated Southern Star Energy Inc., a private Nevada corporation and wholly-owned subsidiary of our company on October 30, 2006, for the sole purpose of effecting a name change through a merger with our Nevada subsidiary. On November 13, 2006, we merged our Nevada subsidiary with and into our company, with our company continuing on as the surviving corporation under the name Southern Star Energy Inc.

On November 6, 2006, the Company entered into a restructuring agreement (the “Restructuring Agreement”) with Southern Star Operating, Big Sky Management Ltd. (“Big Sky”), Eric Boehnke (“Boehnke”), Troy Mutter (“Mutter”) and Frank Hollmann (“Hollmann”). Boehnke is the former President of the Company, and Mutter and Hollmann are former officers. Pursuant to the terms of the Restructuring Agreement (as amended), Big Sky, a private British Columbia company wholly-owned by Boehnke, agreed to assign to the Company Big Sky’s rights under a prospect acquisition agreement to purchase a 20% working interest in Sentell Field. Prior to entering into the Restructuring Agreement, Big Sky had not made any payments or acquired any property pursuant to the prospect acquisition agreement. In conjunction with the Restructuring Agreement, the Company transferred its wholly-owned subsidiary, Surge Marketing, to Mutter and Hollmann in consideration for the transfer of 9,000,000 split-adjusted shares of common stock of the Company to Boehnke, and the return and cancellation of an aggregate of 54,937,500 split-adjusted shares of common stock of the Company held by Mutter and Hollman. On April 5, 2007, the shares were returned to treasury and cancelled.

On November 1, 2006, our board of directors approved a seven point five (7.5) for one (1) forward stock split of our authorized, issued and outstanding common stock. The forward stock split was effected with the Nevada Secretary of State on November 13, 2006. As a result, our authorized capital increased from 75,000,000 to 562,500,000 shares of common stock with a par value of $0.001. The name change and forward stock split became effective with NASD’s Over-the-Counter Bulletin Board at the opening of the market on November 13, 2006, under the new stock symbol “SSEG”.

In November 2006, our wholly-owned subsidiary, Southern Star Operating, entered into a purchase and sale agreement with Dynamic Resources Corporation, Tyner Texas Operating Company, Tyner Texas Resources LP and Ramshorn Investments, Inc. Pursuant to the purchase and sale agreement, Southern Star Operating acquired an additional 20% contractual interest in the Sentell Field prospect area in Bossier Parish, Louisiana from Tyner Texas

Resources and Tyner Texas Operating in consideration for the payment of $291,000. In addition, Southern Star Operating was appointed as operator of the prospect following the resignation of Tyner Texas Operating Company.

Southern Star Energy holds a 40% working interest in the Sentell Field as a result of the acquisition of the 20% interest under the purchase and sale agreement and the 20% interest under the restructuring agreement, as amended.

On March 22, 2007, we effected a forward stock split of our authorized, issued and outstanding common stock with the Secretary of State of Nevada, whereby each one (1) share of our common stock prior to the stock split was equal to one and one-half (1.5) shares of common stock after the effective date of the stock split. As a result, our authorized capital increased from 562,500,000 shares of common stock with a par value of $0.001 to 843,750,000 shares of common stock with a par value of $0.001. The forward stock split became effective with NASD’s Over-the-Counter Bulletin Board at the opening of the market on April 4, 2007 under the new stock symbol “SSEY”.

On April 5, 2007, we disposed of our interest in our former wholly-owned subsidiary Surge Marketing, effective November 2, 2006, in accordance with the terms of a restructuring agreement dated November 6, 2006, as amended. As of that date, we ceased all operations associated with our former software business.

Business of Issuer

We are an exploration stage company engaged in the acquisition, exploration and exploitation of prospective oil and gas properties. We currently hold interests in 4,700 acres north of Shreveport in Bossier Parish Louisiana, commonly referred to as the Sentell Field. Initial drilling in the field has resulted in proved reserves of 2.2 BCfe (billions of cubic-feet equivalent) and net production of approximately 500 MCFED (thousand cubic-feet equivalent per day). Southern Star Energy currently holds a 40% working interest in the Sentell Field. Southern Star Operating, is the operator of the field by virtue of a contract operating agreement. We are undertaking exploration activities and are in the early stages of developing the properties pursuant to the leasehold rights we have acquired within the Sentell Field. As partial owner of the working interest in and to the leasehold rights, we, together with the other interest holders, have the exclusive right to explore and exploit any oil and gas and mineral resources contained in the Sentell Field.

Through the contractual arrangements governing the acquisition of leasehold interests in Sentell Field, Meagher Oil and Gas, an independent leasing agent, acquired, then reassigned the 100% working interest in the leasehold positions covering the Sentell Field to the following non-affiliated parties: Dynamic Resources Corp. holds a 20% working interest; Southern Star Energy holds a 40% working interest; and Ramshorn Investments, Inc. holds the remaining 40% working interest. The leases in the field are subject to a royalty interest of approximately 24%. As a result, the holders of the working interests are entitled to receive approximately 76% of any gross production revenues from the field, less all exploration and development costs, and the holders of the royalty interest are entitled to the remaining 24%. The royalty interests are held by various individual lessors and other entities. The royalty interest holders are not responsible for any exploration, development or operating costs.

Beginning in November 2007, the Company added the necessary staffing to directly control field operations.

To date, our company has drilled seven wells targeting the Cotton Valley formation, six of which are now producing and one of which is awaiting completion. We have also drilled three wells targeting the Haynesville formation, all of which are awaiting completion. See the section entitled “Properties” below for more information on our oil and gas interests and wells.

We have also laid a 15,000 foot gathering system and central processing and metering facility to service the five producing wells.

Business Strategy

Our business strategy to date has been largely focused on evaluating and exploiting our existing leasehold position and positioning the company for continuing growth. To that end, we have executed a pilot project in the Cotton Valley formation, drilled three wells to the Haynesville Shale interval, established the necessary operational and marketing infrastructure to place the field on production, and prepared the project to initiate full scale development.

The Company is also positioned to engage in a business development effort to identify and secure additional acreage in the East Texas Basin in Northeast Texas and Northwest Louisiana with similar characteristics as our current project as well as other attractive opportunities in the Louisiana and Texas Gulf Coast region.

Market and Customers

The Company markets its products directly in the field through short-term, 30 day “evergreen” contracts tied to the prevailing spot market for the area.

The primary product, natural gas, is sold through a “piggy-back” arrangement utilizing V.E. Faulconer, Inc.’s interconnect to Centerpoint Energy’s mainline distribution facilities located within the Sentell Field. The contract with Faulconer is a direct passthrough of revenues from Centerpoint less a $0.25 per mcf operating expense fee. Faulconer’s contract with Centerpoint is an index based pricing mechanism less 1.5% for fuel and shrinkage. The pricing mechanism is the CEGT North Louisiana Monthly Index as published in industry publications. Both the agreement with Faulconer and with Centerpoint are cancellable on 30 days notice. Natural gas revenue represents approximately 80% of field revenues.

Condensate production is also marketed directly in the field through truck loadout facilities at each wellhead location. The Company has an arrangement with Texon, L.P. on a 30 day “evergreen” basis to purchase crude oil and condensate at an industry established “posted” price less a transportation and handling deduction (currently $1.65 per barrel). The price posting is established on a monthly basis. The agreement with Texon is cancellable on 30 days notice. Crude and condensate revenue represents approximately 15% of the field revenues.

The Company also produces a small amount of natural gas liquids as part of the natural gas cleaning and stripping operations required by Centerpoint for gas quality control. Natural Gas Liquids are stored on location and sold on a spot basis as required. Martin Gas Sales purchases the product mix at prevailing posted prices less a transportation and handling fee (currently approximately $0.20 per gallon). The agreement with Martin is cancellable on 30 days notice. Natural gas liquid products revenue represents approximately 5% of the field revenues.

Competition

The oil and gas industry is intensely competitive. We compete with numerous individuals and companies, including many major oil and gas companies, which have substantially greater technical, financial and operational resources and staff. Accordingly, there is a high degree of competition for desirable oil and gas leases, suitable properties for drilling operations and necessary drilling equipment, as well as for access to funds. There are other competitors that have operations in our focus areas and the presence of these competitors could adversely affect our ability to acquire additional leases.

Government Regulations

The exploration and development of oil and gas properties is subject to various United States federal, state and local governmental regulations. Our company may, from time to time, be required to obtain licenses and permits from, or to pay certain bonds to, various governmental authorities in regards to the exploration of our property interests.

Regulations affecting production

All of the states in which we operate or may operate generally require permits for drilling operations, require drilling bonds and reports concerning operations and impose other requirements relating to the exploration and production of oil and gas. Such states also have statutes or regulations addressing conservation matters, including provisions for the unitization or pooling of oil and gas properties, the establishment of maximum rates of production from oil and gas wells, the spacing, plugging and abandonment of such wells, restrictions on venting or flaring natural gas and requirements regarding the ratability of production.

These laws and regulations may limit the amount of oil and natural gas we can produce from our wells and may limit the number of wells or the locations at which we can drill. Moreover, many states impose a production or severance tax with respect to the production and sale of oil and natural gas within their jurisdiction. States do not generally regulate wellhead prices or engage in other, similar direct economic regulation of production, but there can be no assurance they will not do so in the future.

In the event we conduct operations on federal, state or Indian oil and natural gas leases, our operations may be required to comply with additional regulatory restrictions, including various nondiscrimination statutes, royalty and related valuation requirements, and on-site security regulations and other appropriate permits issued by the Bureau of Land Management (“BLM”) or other relevant federal or state agencies.

Regulations affecting sales

The sales prices of oil, natural gas and natural gas liquids are not presently regulated, but rather are set by the market. We cannot predict, however, whether new legislation to regulate the price of energy commodities might be proposed, what proposals, if any, might actually be enacted by Congress or the various state legislatures, and what effect, if any, the proposals might have on the operations of the underlying properties.

Under the Energy Policy Act of 2005, the Federal Energy Regulatory Commission (“FERC”) possesses regulatory oversight over natural gas markets, including the purchase, sale and transportation of natural gas by “any entity.” The Commodity Futures Trading Commission (“CFTC”) also holds authority to monitor certain segments of the physical and futures energy commodities market pursuant to the Commodity Exchange Act. With regard to our physical purchases and sales of natural gas, natural gas liquids and crude oil, our gathering of these energy commodities, and any related hedging activities that we undertake, we are required to observe these anti-market manipulation laws and related regulations enforced by FERC and/or the CFTC. These agencies hold substantial enforcement authority, including the ability to assess civil penalties of up to $1 million per day per violation, to order disgorgement of profits and to recommend criminal penalties. Should we violate the anti-market manipulation laws and regulations, we could also be subject to related third-party damage claims by, among others, sellers, royalty owners and taxing authorities.

The price we receive from the sale of oil and natural gas liquids is affected by the cost of transporting those products to market. The FERC regulates interstate natural gas transportation rates and service conditions, which affect the marketing of gas we produce, as well as the revenues we receive for sales of such production. The price and terms of access to pipeline transportation are subject to extensive federal and state regulation. The FERC is continually proposing and implementing new rules and regulations affecting interstate transportation. These initiatives also may affect the intrastate transportation of natural gas under certain circumstances. The stated purpose of many of these regulatory changes is to promote competition among the various sectors of the natural gas industry. We do not believe that we will be affected by any such FERC action in a manner materially different than other natural gas producers in our areas of operation.

Interstate transportation rates for oil, natural gas liquids and other products is also regulated by the FERC. The FERC has established an indexing system for such transportation, which allows such pipelines to take an annual inflation-based rate increase. We are not able to predict with any certainty what effect, if any, these regulations will have on us, but, other factors being equal, the regulations may, over time, tend to increase transportation costs which may have the effect of reducing wellhead prices for oil and natural gas liquids.

Environmental Matters

Our operations pertaining to oil and gas exploration, production and related activities are subject to numerous and constantly changing federal, state and local laws governing the discharge of materials into the environment or otherwise relating to environmental protection. These laws and regulations may require the acquisition of certain permits prior to or in connection with our operations, restrict or prohibit the types, quantities and concentration of substances that we can release into the environment, restrict or prohibit activities that could impact wetlands, endangered or threatened species or other protected areas or natural resources, require some degree of remedial action to mitigate pollution from former operations, such as pit cleanups and plugging abandoned wells, and impose substantial liabilities for pollution resulting from our operations. Such laws and regulations may substantially increase the cost of our operations and may prevent or delay the commencement or continuation of a given project and thus generally could have a material adverse effect upon our capital expenditures, earnings, or competitive position. Violation of these laws and regulations could result in significant fines or penalties.

Some of our operations are located in environmentally sensitive environments. We believe that we are in substantial compliance with current applicable environmental laws and regulations, and the cost of compliance with such laws and regulations has not been material in 2009 and is not expected to be material in the future. We do not believe that we will be required to incur any material capital expenditures to comply with existing environmental requirements.

Nevertheless, changes in existing environmental laws and regulations or in the interpretations thereof could have a significant impact on our operations, as well as the oil and gas industry in general. For instance, any changes in environmental laws and regulations that result in more stringent and costly waste handling, storage, transport, disposal or clean-up requirements could have a material adverse impact on our operations.

Hazardous Substances

The Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”), also known as the “Superfund” law, imposes liability, without regard to fault or the legality of the original conduct, on certain classes of persons that are considered to have contributed to the release of a “hazardous substance” into the environment. These persons include the owner or operator of the disposal site or the site where the release occurred and companies that disposed or arranged for the disposal of the hazardous substances at the site where the release occurred. Under CERCLA, such persons may be subject to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment and for damages to natural resources, and it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment.

We are able to control directly the operation of only those wells with respect to which we act as operator. Notwithstanding our lack of direct control over wells operated by others, the failure of an operator other than us to comply with applicable environmental regulations may, in certain circumstances, be attributed to us. We are not aware of any liabilities for which we may be held responsible that would materially and adversely affect us. At this time, we operate all of the wells that we own.

Waste Handling

The Resource Conservation and Recovery Act (“RCRA”), and analogous state laws, impose detailed requirements for the handling, storage, treatment and disposal of hazardous and solid wastes. RCRA specifically excludes drilling fluids, produced waters, and other wastes associated with the exploration, development, or production of crude oil, natural gas or geothermal energy from regulation as hazardous wastes. However, these wastes may be regulated by the U.S. Environmental Protection Agency (“EPA”) or state agencies as solid wastes. Moreover, many ordinary industrial wastes, such as paint wastes, waste solvents, laboratory wastes and waste compressor oils, are regulated as hazardous wastes. Although the costs of managing hazardous waste may be significant, we do not believe that our costs in this regard are materially more burdensome than those for similarly situated companies.

Air Emissions

The Federal Clean Air Act and comparable state laws and regulations impose restrictions on emissions of air pollutants from various industrial sources, including compressor stations and natural gas processing facilities, and also impose various monitoring and reporting requirements. Such laws and regulations may require that we obtain pre-approval for the construction or modification of certain projects or facilities expected to produce air emissions or result in the increase of existing air emissions, obtain and strictly comply with air permits containing various emissions and operational limits, or utilize specific emission control technologies to limit emissions. Our failure to comply with these requirements could subject us to monetary penalties, injunctions, conditions or restrictions on operations, and potentially criminal enforcement actions. Capital expenditures for air pollution equipment may be required in connection with maintaining or obtaining operating permits and approvals relating to air emissions at facilities owned or operated by us. We do not believe that our operations will be materially adversely affected by any such requirements.

Water Discharges

The Federal Water Pollution Control Act (“Clean Water Act”) and analogous state laws impose restrictions and strict controls with respect to the discharge of pollutants, including spills and leaks of oil and other substances, into waters of the United States. The discharge of pollutants into regulated waters is prohibited, except in accordance with the terms of a permit issued by EPA or an analogous state agency. Federal and state regulatory agencies can impose administrative, civil and criminal penalties for non-compliance with discharge permits or other requirements of the Clean Water Act and analogous state laws and regulations. In addition, the United States Oil Pollution Act of 1990 (“OPA”) and similar legislation enacted in Texas, Louisiana and other coastal states impose oil spill prevention and control requirements and significantly expand liability for damages resulting from oil spills. OPA imposes strict and, with limited exceptions, joint and several liabilities upon each responsible party for oil spill response and removal costs and a variety of public and private damages.

Global Warming and Climate Change

In response to recent studies suggesting that emissions of carbon dioxide and certain other gases may be contributing to warming of the Earth’s atmosphere, the current session of the U.S. Congress is considering adoption of climate change-related legislation that would restrict emissions of “greenhouse gases.” One bill approved by the Senate Committee on Environment and Public Works would require a 70% reduction in emissions of greenhouse gases from sources within the United States between 2012 and 2050. In addition, at least 20 states have already taken legal measures to reduce emissions of greenhouse gases, primarily through the planned development of greenhouse gas emission inventories and/or regional greenhouse gas cap and trade programs. In California, for example, the California Global Warming Solutions Act of 2006 requires the California Air Resources Board to adopt regulations by 2012 that will achieve an overall reduction in greenhouse gas emissions from all sources in California of 25% by 2020. Also, as a result of the U.S. Supreme Court’s decision on April 2, 2007 in Massachusetts, et al. v. EPA, the EPA may be required to regulate carbon dioxide and other greenhouse gas emissions from mobile sources (e.g., cars and trucks) even if Congress does not adopt new legislation specifically addressing emissions of greenhouse gases.

Depending on the legislation or regulatory program that may be adopted to address emissions of greenhouse gases, we could be required to reduce greenhouse gas emissions resulting from our operations or we could be required to purchase and surrender allowances for greenhouse gas emissions associated with our operations or the oil and gas we produce. Although we would not be impacted to a greater degree than other similarly situated producers of oil and gas, a stringent greenhouse gas control program could have an adverse effect on our cost of doing business and could reduce demand for the oil and gas we produce.

Employees

Currently we employ William David Gibbs as our President, CEO and Director, Christopher H. Taylor as our Chief Financial Officer, Douglas M. Harwell as our Operations Manager, and Rae Lynn Wertz as our Manager of Administration. We have no other employees and conduct most of our business through agreements with consultants and third parties. Mr. Gibbs, Mr. Taylor, Mr. Harwell, and Ms. Wertz have employment agreements with us. The terms of Mr. Gibbs’, Mr. Taylor’s and Mr. Harwell’s agreements are discussed in the section titled “Executive Compensation”.

ITEM 1A.

RISK FACTORS

Much of the information included in this annual report includes or is based upon estimates, projections or other forward-looking statements. Such forward looking statements include any projections or estimates made by us and our management in connection with our business operations. While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested herein.

Such estimates, projections or other forward-looking statements involve various risks and uncertainties as outlined below. We caution the reader that important factors in some cases have affected and, in the future, could materially affect actual results and cause actual results to differ materially from the results expressed in any such estimates, projections or other forward-looking statements. Prospective investors should consider carefully the risk factors set out below.

Risks Relating to the Company

We may not be able to continue as a going concern.

As of May 31, 2009, we had a working capital deficiency of approximately $12,105,000 and had incurred losses of $18,883,000 since inception. We incurred a net loss of $12,921,000 for the year ended May 31, 2009 as compared to a net loss of $3,778,000 for the year ended May 31, 2009. We anticipate that losses will continue in the fiscal year ending May 31, 2010 due to lower oil and gas prices. We had current cash on hand as at May 31, 2009 of approximately $1,301,000. As of May 31, 2009, we had current assets of $2,824,000 and current liabilities of $14,929,000. The current liabilities consisted of accounts payable and accrued liabilities, net revenue payable to working interest partners and royalty interest owners, exploration advances and amounts due to related parties.

As we anticipate that our estimated operating expenditures for the coming fiscal year will be $3,763,000, we do not have sufficient working capital to enable us to complete our drilling program of exploration wells or to finance our normal operations for the next fiscal year. Accordingly, we plan on undertaking additional financing activities throughout the course of the fiscal year. We estimate that approximately $700,000 will be derived from operations in Sentell Field. However, the decrease in oil and natural gas prices has adversely affected our revenues and may continue to do so, which may increase our reliance on debt and equity financing.

Additionally, we estimate that we will be required to raise approximately $3,100,000 through the issuance of equity securities or through additional debt financing. Additional draw-downs on the credit facility will depend upon the success of our future financings and the availability of credit under the credit facility. We are seeking to increase our borrowing base under the credit facility. There can be no assurance that we will be successful in raising the required capital or that actual cash requirements will not exceed our estimates.

The accompanying financial statements have been prepared on a going concern basis, which implies the Company will continue to realize its assets and discharge its liabilities in the normal course of business. The Company is unlikely to pay dividends or generate significant earnings in the immediate or foreseeable future. The continuation of the Company as a going concern and the ability of the Company to emerge from the exploration stage are dependent upon its successful efforts to raise additional equity financing to continue operations and generate sustainable significant revenue. There is no guarantee that the Company will be able to raise adequate equity financings or generate profitable operations.

We are currently not in compliance with our debt instrument and our debt instruments are secured by substantially all of our assets and impose restrictions on us that may affect our ability to successfully operate our business.

Our senior credit facility is secured by a lien on substantially all of our assets, including our oil and gas lease interests and contains customary restrictions, including covenants limiting our ability to incur additional debt, grant liens, make investments, consolidate, merge or acquire other businesses, sell assets, pay dividends and other distributions and enter into transactions with affiliates. As of May 31, 2009, we were not in compliance with certain of the financial covenants of our senior credit facility. These restrictions may make it difficult for us to successfully execute our business strategy or to compete in our industry with companies not similarly restricted. If we are not successful in or unable to repay when due or otherwise have a default under the facility, since substantially all our assets are pledged as security, we may be unable to continue our business and as a result may be required to scale back or cease operations for our business, the result of which would be that our stockholders would lose some or all of their investment.

Several of our vendors have filed claims for unpaid invoices related to goods and services provided to the Company in Louisiana.

On June 9, 2009, one of our vendors, Coastal Chemical Co., LLC filed suit in the 113^th Judicial District of Harris County, Texas related to approximately $104,000 in claimed unpaid invoices. In addition, since May 31, 2009, several vendors have filed liens against the Company related to claims for unpaid invoices for goods and services provided to the Company in Bossier Parish, Louisiana. Total claims related to these liens are approximately $2,542,000. If we are unable to satisfy our unpaid invoices or otherwise settle these claims, we will not be able to remove the liens on the Company which would adversely affect our results of operations and could lead to the seizure of Company property.

We will require significant additional capital, which may not be available to us on favorable terms, or at all.

As at May 31, 2009, we had a working capital deficit of $12,105,000. The working capital deficit resulted from drilling expenditures for four wells and a workover program on three other wells during the fiscal year ended May 31, 2009. Our plan of operations for the fiscal year ending May 31, 2010 contemplates operating expenditures of $3,763,000 for the development of existing properties and the costs and expenses associated therewith. We expect that our current cash balances and cash flow from operations will be sufficient only to provide a limited amount of working capital, and the anticipated revenues generated from our properties will not alone be sufficient to fund our operations or planned growth. As a result, we will need to seek alternative sources of capital, by either entering into joint ventures with other exploration and production companies or by undertaking financing activities. We expect that we will need to raise additional funds of approximately $3,100,000 in the future in order to fund our plan of operation for the fiscal year ending May 31, 2010, which may not be available in amounts or on terms acceptable to us, if at all.

If we borrow additional funds, we will likely be obligated to make periodic interest or other debt service payments and may be subject to additional restrictive covenants. The ability to borrow additional funds is dependent on a number of variables, including our proved reserves, and assumptions regarding the price at which oil and natural gas can be sold. Should we elect to raise additional capital through the issuance and sale of equity securities, the sales may be at prices below the market price of our stock, and our shareholders may suffer significant dilution. Our failure to obtain financing on a timely basis or on favorable terms could result in the loss or substantial dilution of our interests in our properties as disclosed in this Form 10-K. In addition, the failure of any of us or our partners to obtain any required financing could adversely affect our ability to complete the exploration or development of our projects on a timely basis. This could result in the curtailment of operations relating to exploration and development of our prospects, which in turn could lead to a possible loss of properties and a decline in our natural gas and oil reserves.

We have historically incurred losses and expect to incur additional losses in the future. It is difficult for us to forecast when we will achieve profitability, if ever.

We have historically incurred losses from operations during our time in the oil and natural gas business. As of May 31, 2009, we had a cumulative deficit of $18,833,000. While we have developed some of our Sentell Field property, most of our acreage is in the exploration stage and, to date, we have established a limited volume of proved reserves on our property. To become profitable, we would need to be successful in our acquisition, exploration, development and production activities, all of which are subject to many risks beyond our control. We cannot assure you that we will successfully implement our business plan or that we will achieve commercial profitability in the future. Even if we become profitable, we cannot assure you that our profitability will be sustainable or increase on a periodic basis. In addition, should we be unable to continue as a going concern, realization of assets and settlement of liabilities in other than the normal course of business may be at amounts significantly different from those in the financial statements included in this Form 10-K. Finally, due to our limited history in the oil and natural gas business, we have limited historical financial and operating information available to help you evaluate our performance or an investment in our common stock.

We have a very limited history of operations in oil and natural gas exploration and production and accordingly may not be successful in carrying out our business objectives.

We were incorporated in the State of Nevada on February 7, 2005 as Surge Enterprises, Inc., a British Columbia based software company. In November 2006, we completed a restructuring and shifted our core business and strategic focus to the exploration and development of oil and natural gas reserves in the United States.

We have raised limited financing and have incurred operating losses since our inception. We have no track record of successful oil and gas exploration and development activities that would allow an investor to assess the likelihood of us, or guarantee that we will be successful, as an oil and natural gas exploration and production company. We may fail to achieve or maintain successful operations, even in favorable market conditions. There is a substantial risk that we will not be successful in our exploration activities, or if initially successful, in thereafter generating any operating revenues or otherwise achieving sustained and recurring operating cash flows.

To address the risks and uncertainties associated with our limited history, we must (i) successfully execute our business strategy; (ii) continue to develop our oil exploration and production assets; respond to competitive developments; and (iv) attract, integrate, retain and motivate qualified personnel. We may be unable to accomplish one or more of these objectives, which could cause our business to suffer. In addition, accomplishing one or more of these objectives might be very expensive, which could harm our financial results. As a result, there can be no assurance that we will be successful in our oil and natural gas activities. Our future performance will depend upon our management and our ability to locate and negotiate additional oil and natural gas opportunities in which we are solely involved or participate in as a project partner. There can be no assurance that we will be successful in our efforts. Our inability to locate additional opportunities, successfully execute our business strategy, hire additional management and other personnel, or respond to competitive developments, could have a material adverse effect on our results of operations.

Delays in development or production curtailment affecting our material properties may adversely affect our financial position and results of operations.

The size of our operations and our capital expenditure budget limits the number of wells that we can develop in any given year. Complications in the development of any single material well may result in a material adverse affect on our financial condition and results of operations. In addition, a relatively small number of wells contribute a substantial portion of our production. If we were to experience operational problems resulting in the curtailment of production in any of these wells, our total production levels would be adversely affected, which would have a material adverse affect on our financial condition and results of operations.

We may not be able to successfully drill wells that can produce oil or natural gas in commercially viable quantities.

We cannot assure you that we will be able to successfully drill wells that can produce commercial quantities of oil and natural gas in the future. The total cost of drilling, completing and operating a well is uncertain before drilling commences. Overruns in budgeted expenditures is a common risk that can make a particular project uneconomical. The use of seismic data and other technologies and the study of producing fields in the same area will not enable us to know conclusively prior to drilling whether oil or natural gas will be present or, if present, whether oil or natural gas will be present in commercial quantities. Our use of seismic data is subject to interpretation and may not accurately identify the presence of natural gas and oil. Further, many factors may curtail, delay or cancel drilling, including the following:

	•	our limited history of drilling wells;
	•	delays and restrictions imposed by or resulting from compliance with regulatory requirements;
	•	pressure or irregularities in geological formations;
	•	shortages of or delays in obtaining equipment and qualified personnel;
	•	equipment failures or accidents;
	•	adverse weather conditions;
	•	reductions in oil and natural gas prices;
	•	land title problems; and
	•	limitations in the market for oil and natural gas.

Any of these risks can cause substantial losses, including personal injury or loss of life, damage to or destruction of property, natural resources and equipment, pollution, environmental contamination or loss of wells and other regulatory penalties. The occurrence of any of these events could negatively affect our ability to successfully drill wells that can produce oil or natural gas in commercially viable quantities.

While our management team has considerable industry experience, we have limited experience as a company as an operator of wells. If we fail to successfully manage our drilling and exploration programs or fail to successfully operate our wells, we may not obtain sufficient revenues to earn a profit. From 2006 through May 31, 2009, we participated in drilling a total of 11 gross wells, of which 6 were completed as producing, 4 are awaiting completion and 1 was identified as a dry hole. If we drill a disproportionate number of additional wells that we identify as dry holes in the Sentell Field or future prospects, we may materially harm our business.

Our focus on exploration activities exposes us to greater risks than are generally encountered in later-stage oil and natural gas property development businesses.

Much of our current activity involves drilling exploratory wells on parts of our property with limited or no proved oil and natural gas reserves. While all drilling, whether developmental or exploratory, involves risks, exploratory drilling involves greater risks of dry holes or failure to find commercial quantities of oil and natural gas. The economic success of any project will depend on numerous factors, including:

	•	our ability to drill, complete and operate wells;
	•	our ability to estimate the volumes of recoverable reserves relating to individual projects;
	•	rates of future production;
	•	future commodity prices; and
	•	investment and operating costs and possible environmental liabilities.

All of these factors may impact whether a project will generate cash flows sufficient to provide a suitable return on investment. If we experience a series of failed drilling projects, our business, results of operations and financial condition could be materially adversely affected.

The actual quantities and present value of our proved reserves may be lower than we have estimated.

This Form 10-K contains estimates of our proved oil and natural gas reserves and the estimated future net revenues from these reserves. The May 31, 2009 reserve estimate was prepared by H.J. Gruy and Associates, Inc. The process of estimating oil and natural gas reserves is complex and requires significant decisions and assumptions in the evaluation of available geological, geophysical, engineering and economic data for each reservoir. Accordingly,

these estimates are inherently imprecise. Actual future production, oil and natural gas prices, revenues, taxes, development and operating expenses, and quantities of recoverable oil and natural gas reserves most likely will vary from these estimates and vary over time. Such variations may be significant and could materially affect the estimated quantities and present value of our proved reserves. In addition, we may adjust estimates of proved reserves to reflect production history, results of exploration and development drilling, results of secondary and tertiary recovery applications, prevailing oil and natural gas prices and other factors, many of which are beyond our control.

You should not assume that the present value of future net revenues referred to in this Form 10-K is the current market value of our estimated oil and natural gas reserves. In accordance with SEC requirements, the estimated discounted future net cash flows from proved reserves are generally based on prices and costs as of the date of the estimate. Actual future prices and costs may be materially higher or lower than the prices and costs as of the date of the estimate. Any change in consumption by oil or natural gas purchasers or in governmental regulations or taxation will also affect actual future net cash flows. The timing of both the production and the expenses from the development and production of our oil and natural gas properties will affect the timing of actual future net cash flows from proved reserves and their present value. In addition, the 10% discount factor, which is required by the SEC to be used in calculating discounted future net cash flows for reporting purposes, is not necessarily the most appropriate discount factor nor does it reflect discount factors used in the market place for the purchase and sale of oil and natural gas.

The imprecise nature of estimating proved natural gas and oil reserves, future downward revisions of proved reserves and increased drilling expenditures without current additions to proved reserves may lead to write downs in the carrying value of our natural gas and oil properties.

Due to the imprecise nature of estimating natural gas and oil reserves as well as the potential volatility in natural gas and oil prices and their effect on the carrying value of our natural gas and oil properties, write downs in the future may be required as a result of factors that may negatively affect the present value of proved natural gas and oil reserves. These factors can include volatile natural gas and oil prices, downward revisions in estimated proved natural gas and oil reserve quantities, limited classification of proved reserves associated with successful wells and unsuccessful drilling activities.

Our reserves and production will decline and unless we replace our oil and natural gas reserves, our business, financial condition and results of operations will be adversely affected.

Producing oil and natural gas reserves ultimately results in declining production that will vary depending on reservoir characteristics and other factors. Thus, our future oil and natural gas production and resulting cash flow and earnings are directly dependent upon our success in developing our current reserves and finding additional recoverable reserves. We may not be able to develop, find or acquire additional reserves to replace our current and future production at acceptable costs.

We have not insured and cannot fully insure against all risks related to our operations, which could result in substantial claims for which we are underinsured or uninsured.

We have not insured and cannot fully insure against all risks and have not attempted to insure fully against risks where coverage is prohibitively expensive. We do not carry business interruption insurance coverage. Our exploration, drilling and other activities are subject to risks such as:

	•	fires and explosions;
	•	environmental hazards, such as uncontrollable flows of natural gas, oil, brine, well fluids, toxic gas or other pollution into the environment, including groundwater and shoreline contamination;
	•	abnormally pressured formations;
	•	mechanical failures of drilling equipment;
	•	personal injuries and death, including insufficient worker compensation coverage for third-party contractors who provide drilling services; and
	•	natural disasters, such as adverse weather conditions.

Losses and liabilities arising from uninsured and underinsured events, which could arise from even one catastrophic accident, could materially and adversely affect our business, results of operations and financial condition.

Market conditions or operational impediments may hinder our access to oil and natural gas markets or delay our production.

Market conditions or the unavailability of satisfactory oil and natural gas transportation arrangements may hinder access to oil and natural gas markets or delay production, if any, at our wells. The availability of a ready market for our future oil and natural gas production will depend on a number of factors, including the demand for and supply of oil and natural gas and the proximity of reserves to pipelines and terminal facilities. Any significant change in our arrangements with third-parties who provide transport services for our oil and natural gas or other market factors affecting the overall infrastructure facilities servicing our properties would adversely affect our ability to deliver the oil and natural gas we produce to markets in an efficient manner.

We rely on independent experts and technical or operational service providers over whom we may have limited control.

We use independent contractors to provide us with technical assistance and services. We rely upon the owners and operators of rigs and drilling equipment, and upon providers of field services, to drill and develop our field to production. In addition, we rely upon the services of other third parties to explore or analyze the Sentell Field and potential future prospects to determine a method in which the Sentell Field and future prospects may be developed in a cost-effective manner. Our limited control over the activities and business practices of these providers, any inability on our part to maintain satisfactory commercial relationships with them or their failure to provide quality services could materially and adversely affect our business, results of operations and financial condition.

Our interests are held in the form of leases that we may be unable to retain and the title to our properties may be defective.

Our property is held under leases and working interests in leases. Generally, the leases we are a party to are for a fixed term, but contain a provision that allows us to extend the term of the lease so long as we are producing oil or natural gas in quantities to meet the required payments under the lease. If we or the holder of a lease fails to meet the specific requirements of the lease regarding delay rental payments, continuous production or development, or similar terms, portions of the lease may terminate or expire. There can be no assurance that any of the obligations required to maintain each lease will be met. The termination or expiration of our leases or the working interests relating to leases may reduce our opportunity to exploit a given prospect for oil and natural gas production and thus have a material adverse effect on our business, results of operation and financial condition.

It is our practice in acquiring oil and natural gas leases or interests in oil and natural gas leases not to undergo the expense of retaining lawyers to fully examine the title to the interest to be placed under lease or already placed under lease. Rather, we rely upon the judgment of oil and natural gas lease brokers or landmen who actually do the field work in examining records in the appropriate governmental office before attempting to place under lease a specific interest. We believe that this practice is widely followed in the oil and natural gas industry.

Prior to drilling a well for oil and natural gas, it is the normal practice in the oil and natural gas industry for the person or company acting as the operator of the well to hire a lawyer to examine the title to the unit within which the proposed oil and natural gas well is to be drilled. Frequently, as a result of such examination, curative work must be done to correct deficiencies in the marketability of the title. The work entails expense and might include obtaining an affidavit of heirship or causing an estate to be administered. The examination made by the title lawyers may reveal that the oil and natural gas lease or leases are worthless, having been purchased in error from a person who is not the owner of the mineral interest desired. In such instances, the amount paid for such oil and natural gas lease or leases may be lost.

Properties that we acquire may not produce oil or natural gas as projected, and we may be unable to determine reserve potential, identify liabilities associated with the properties or obtain protection from sellers against them, which could cause us to incur losses.

One of our growth strategies is to pursue selective exploration of potential oil and natural gas reserves in the Sentell Field. We performed a review of this field that we believe is consistent with industry practices. However, these reviews are inherently incomplete. Generally, it is not feasible to review in-depth every individual property. Even a detailed review of records and properties may not necessarily reveal existing or potential problems, nor will it permit a buyer to become sufficiently familiar with the property to assess fully its deficiencies and potential. We may not perform an inspection on every well, and environmental problems, such as groundwater contamination, are not necessarily observable even when an inspection is undertaken. Even when problems are identified, we may not be able to obtain effective contractual protection against all or part of those problems, and we may assume environmental and other risks and liabilities in connection with the acquired properties.

Because of our lack of asset and geographic diversification, adverse developments in our operating area would adversely affect our results of operations.

All of our assets are currently located in the East Texas Basin. As a result, our business is disproportionately exposed to adverse developments affecting this region. These potential adverse developments could result from, among other things, changes in governmental regulation, capacity constraints with respect to the pipelines connected to our wells, curtailment of production and natural disasters or adverse weather conditions in or affecting this region. Due to our lack of diversification in asset type and location, an adverse development in our business or this operating area would have a significantly greater impact on our financial condition and results of operations than if we maintained more diverse assets and operating areas.

Our officers and directors may become subject to conflicts of interest.

Some of our directors and officers may also become directors, officers, contractors, shareholders or employees of other companies engaged in oil and natural gas exploration and development. To the extent that such other companies may participate in ventures in which we may participate, our directors may have a conflict of interest in negotiating and concluding terms respecting the extent of such participation. In the event that such a conflict of interest arises at a meeting of our directors, a director who has such a conflict will declare his interest and abstain from voting for or against the approval of such participation or such terms. In appropriate cases, we will establish a special committee of independent directors to review a matter in which several directors, or management, may have a conflict. From time to time, several companies may participate in the acquisition, exploration and development of oil and natural gas properties thereby allowing for their participation in larger programs, permitting involvement in a greater number of programs and reducing financial exposure in respect of any one program. A particular company may assign all or a portion of its interest in a particular program to another of these companies due to the financial position of the company making the assignment.

We depend on a number of key personnel who would be difficult to replace.

We are dependent upon the expertise of our management team, including our executive officers, William David Gibbs (President and CEO), Christopher H. Taylor (Chief Financial Officer) and Douglas M. Harwell (Operations Manager). The loss of the services of our executive officers, or any other member of our management team, through incapacity or otherwise, would be costly to us and would require us to seek and retain other qualified personnel. We may not be able to retain our executive officers and may not be able to enforce all of the provisions in their employment agreements. Failure to find suitable replacement for any member of our management team could negatively impact our ability to execute our strategy.

If we are unable to successfully recruit qualified managerial and field personnel having experience in oil and gas exploration, we may not be able to continue our operations.

Currently, our only employees are members of our management team. In order to successfully implement and manage our business plan, we will be dependent upon, among other things, successfully recruiting qualified managerial and field personnel having experience in the oil and gas exploration business. Competition for qualified individuals is intense. There can be no assurance that we will be able to find, attract and retain existing employees or that we will be able to find, attract and retain qualified personnel on acceptable terms.

We have made and will continue to make substantial financial and man-power investments in order to assess and maintain our internal control over financial reporting and our internal control over financial reporting may be found to be deficient.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we have furnished a report by management on our internal control over financial reporting in this annual report on Form 10- K. Such report contains, among other matters, an assessment of the effectiveness of our internal control over financial reporting, including a statement as to whether or not our internal control over financial reporting is effective.

For our annual report on Form 10-K for the fiscal year ended May 31, 2010, such report must also contain a statement that our auditors have issued an attestation report on the effectiveness of such internal controls.

While we have evaluated our internal control over financial reporting and have concluded that our internal control over financial reporting is effective, our auditors have not conducted the evaluation necessary to provide an attestation report on the effectiveness of our internal control over financial reporting. During the auditor’s evaluation and testing process, they may identify one or more material weaknesses in our internal control over financial reporting, and they will be unable to attest that such internal control is effective. If our auditor’s are unable to attest that our internal control over financial reporting is effective as of May 31, 2010, we could lose investor confidence in the accuracy and completeness of our financial reports, which would have a material adverse effect on our stock price.

Failure to comply with the new rules may make it more difficult for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage and/or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, on committees of our board of directors, or as executive officers.

We have incurred and will continue to incur significant increased costs in implementing and adhering to these requirements. In particular, the rules governing the standards that must be met for management to assess its internal control over financial reporting under Section 404 are complex, and require significant documentation, testing and possible remediation. Our process of reviewing, documenting and testing our internal control over financial reporting may cause a significant strain on our management, information systems and resources. We have invested in and may continue to invest in additional accounting and software systems. We have hired and continue to retain additional personnel and to use outside legal, accounting and advisory services. In addition, we have incurred additional fees from our auditors as they perform the additional services necessary for them to provide their attestation. If we are unable to favorably assess and continue to maintain the effectiveness of our internal control over financial reporting when we are required to, or if our independent auditors are unable to provide an unqualified attestation report, we may be required to change our internal control over financial reporting to remediate deficiencies. In addition, investors may lose confidence in the reliability of our financial statements causing our stock price to decline.

Risks Relating to Our Industry

The oil and natural gas industry is subject to significant competition, which may increase costs or otherwise adversely affect our ability to compete.

Oil and natural gas exploration is intensely competitive and involves a high degree of risk. In our efforts to acquire and develop oil and natural gas producing properties, we compete with other companies that have greater resources. Many of these companies not only explore for and produce oil and natural gas, but also conduct refining and petroleum marketing operations on a worldwide basis. Our ability to compete for oil and natural gas producing properties will be affected by the amount of funds available to us, information available to us and any standards established by us for the minimum projected return on investment. Our products will also face competition from alternative fuel sources and technologies.

Oil and natural gas are commodities subject to price volatility based on many factors outside the control of producers, and low prices may make properties uneconomic for future production.

Oil and natural gas are commodities, and, therefore, their prices are subject to wide fluctuations in response to relatively minor changes in supply and demand. Historically, the markets for oil and natural gas have been volatile. These markets will likely continue to be volatile in the future. The prices a producer may expect and its level of production depend on numerous factors beyond its control, such as:

	•	changes in global supply and demand for oil and natural gas;
	•	economic conditions in the United States and Canada;
	•	the actions of the Organization of Petroleum Exporting Countries, or OPEC;
	•	government regulation;
	•	the price and quantity of imports of foreign oil and natural gas;
	•	political conditions, including embargoes, in oil and natural gas-producing regions;
	•	the level of global oil and natural gas inventories;
	•	weather conditions;
	•	technological advances affecting energy consumption; and
	•	the price and availability of alternative fuels.

Lower oil and natural gas prices may not only decrease revenues on a per unit basis, but also may reduce the amount of oil and natural gas that can be economically produced. Lower prices will also negatively affect the value of proved reserves.

Oil and natural gas production depend on oil and natural gas transportation facilities, most of which are owned by others.

The marketability of our oil and natural gas production depends in large part on the availability, proximity and capacity of pipeline systems owned by third parties. The unavailability of or lack of available capacity on these systems and facilities could result in the shut-in of producing wells or the delay or discontinuance of drilling plans for properties. Although we have some contractual control over the transportation of our product, material changes in these business relationships

could materially affect our operations. Federal and state regulation of oil and natural gas production and transportation, tax and energy policies, changes in supply and demand, pipeline pressures, damage to or destruction of pipelines, maintenance and repair and general economic conditions could adversely affect our ability to produce, gather and transport oil and natural gas.

Exploration and drilling operations are subject to significant environmental regulation, which may increase costs or limit our ability to develop our properties.

We may encounter hazards incident to the exploration and development of oil and natural gas properties such as accidental spills or leakage of petroleum liquids and other unforeseen conditions. We may be subject to liability for pollution and other damages due to hazards that we cannot insure against due to prohibitive premium costs or for other reasons. Governmental regulations relating to environmental matters could also increase the cost of doing business or require alteration or cessation of operations in some areas.

Existing and possible future environmental legislation, regulations and actions could give rise to additional expense, capital expenditures, restrictions and delays in our activities, the extent of which we cannot predict. Regulatory requirements and environmental standards are subject to constant evaluation and may be significantly increased, which could materially and adversely affect our business or our ability to develop our property on an economically feasible basis. Before development and production can commence on our property, we must obtain regulatory and environmental approvals. We cannot assure you that we will obtain such approvals on a timely basis or at all. The cost of compliance with changes in governmental regulations has the potential to reduce the profitability of our operations and preclude entirely the economic development of a specific property.

A substantial or extended decline in oil and natural gas prices could reduce our future revenue and earnings.

As with most other companies involved in resource exploration and development, we may be adversely affected by future increases in the costs of conducting exploration, development and resource extraction that may not be fully offset by increases in the price received on sale of oil or natural gas.

Our revenues and growth, and the carrying value of our oil and natural gas property are substantially dependent on prevailing prices of oil and natural gas. Our ability to obtain additional capital on attractive terms is also substantially dependent upon oil and natural gas prices. Prices for oil and natural gas are subject to large fluctuations in response to relatively minor changes in the supply of and demand for oil and natural gas, market uncertainty and a variety of additional factors beyond our control. These factors include changes in global supply and demand for oil and natural gas, economic conditions in the United States and Canada, the actions of OPEC, governmental regulation, the price and quantity of imports in foreign oil and natural gas-producing regions, political conditions, including embargoes in oil and natural gas-producing regions, the level of global oil and natural gas inventories, weather conditions, technological advances affecting energy consumption and the price and availability of alternate fuel sources. Any substantial and extended decline in the price of oil and natural gas would have an adverse effect on our business, financial condition and results of operations.

Local, national and international economic conditions are beyond our control and may have a substantial adverse effect on our efforts. We cannot guard against the effects of these potential adverse conditions.

Our operations and demand for our products are affected by seasonal factors, which may lead to fluctuations in our operating results.

Our operating results are likely to vary due to seasonal factors. Demand for oil and natural gas products will generally increase during the winter because they are often used as heating fuels. The amount of such increased demand will depend to some extent upon the severity of winter. Because of the seasonality of our business and continuous fluctuations in the prices of our products, our operating results are likely to fluctuate from period to period.

Conducting operations in the oil and natural gas industry subjects us to complex laws and regulations that can have a material adverse effect on the cost, manner and feasibility of doing business.

Companies that explore for and develop, produce and sell oil and natural gas in the United States are subject to extensive federal, state and local laws and regulations, including complex tax and environmental laws and the corresponding regulations, and are required to obtain various permits and approvals from federal, state and local agencies. If these permits are not issued or unfavorable restrictions or conditions are imposed on our drilling activities, we may not be able to conduct our operations as planned. We may be required to make large expenditures to comply with governmental regulations. Matters subject to regulation include:

	•	water discharge and disposal permits for drilling operations;
	•	drilling bonds;
	•	drilling permits;
	•	reports concerning operations;
	•	air quality, noise levels and related permits;
	•	spacing of wells;
	•	rights-of-way and easements;
	•	unitization and pooling of properties;
	•	gathering, transportation and marketing of oil and natural gas;
	•	taxation; and
	•	waste transport and disposal permits and requirements.

Failure to comply with these laws may result in the suspension or termination of operations and subject us to liabilities under administrative, civil and criminal penalties. Compliance costs can be significant. Moreover, these laws could change in ways that substantially increase the costs of doing business. Any such liabilities, penalties, suspensions, terminations or regulatory changes could materially and adversely affect our business, financial condition and results of operations.

The unavailability or high cost of drilling rigs, equipment, supplies, personnel and oilfield services could adversely affect our cost of operations or our ability to execute our plans on a timely basis.

Due to domestic drilling activity increases, a general shortage of drilling rigs, equipment, supplies and personnel has developed. As a result, the costs and delivery times of rigs, equipment, supplies or personnel are substantially greater than in previous years. From time to time, these costs have sharply increased and could do so again. The demand for and wage rates of qualified drilling rig crews generally rise in response to the increasing number of active rigs in service and could increase sharply in the event of a shortage. Shortages of drilling rigs, equipment, supplies or personnel could delay or adversely affect our development operations, which could have a material adverse effect on our business, financial condition and results of operations.

Risks Relating to Our Common Stock

Our common stock has a limited trading history and has experienced price volatility.

Our common stock trades on the OTC Bulletin Board. The volume of trading in our common stock varies greatly and may often be light, resulting in what is known as a “thinly-traded” stock. Until a larger secondary market for our common stock develops, the price of our common stock may fluctuate substantially. The price of our common stock may also be impacted by any of the following, some of which may have little or no relation to our company or industry:

	•	the breadth of our stockholder base and extent to which securities professionals follow our common stock;
	•	investor perception of our Company and the oil and natural gas industry, including industry trends;
	•	domestic and international economic and capital market conditions, including fluctuations in commodity prices;
	•	responses to quarter-to-quarter variations in our results of operations;
	•	announcements of significant acquisitions, strategic alliances, joint ventures or capital commitments by us or our competitors;
	•	additions or departures of key personnel;
	•	sales or purchases of our common stock by large stockholders or our insiders;
	•	accounting pronouncements or changes in accounting rules that affect our financial reporting; and
	•	changes in legal and regulatory compliance unrelated to our performance.

In addition, the stock market in general and the market for natural gas and oil exploration companies in particular have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating results or asset values of those companies. These broad market and industry factors may seriously impact the market price and trading volume of our common shares regardless of our actual operating performance.

We have not paid cash dividends on our common stock and do not anticipate paying any dividends on our common stock in the foreseeable future.

We do not anticipate paying cash dividends on our common stock in the foreseeable future. Payment of future cash dividends, if any, will be at the discretion of our board of directors and will depend on our financial condition, results of operations, contractual restrictions, capital requirements, business prospects and other factors that our board of directors considers relevant. Accordingly, investors may only see a return on their investment if the value of our securities appreciates.

A decline in the price of our common stock could affect our ability to raise further working capital and adversely impact our operations.

A prolonged decline in the price of our common stock could result in a reduction in the liquidity of our common stock and a reduction in our ability to raise capital. Because our operations have been primarily financed through the sale of equity securities, a decline in the price of our common stock could be especially detrimental to our liquidity and our continued operations. Any reduction in our ability to raise equity capital in the future would force us to reallocate funds from other planned uses and would have a significant negative effect on our business plans and operations, including our ability to explore and develop new properties and continue our exploration and development of our current property interests. If our stock price declines, we may not be able to raise additional capital or generate funds from operations sufficient to meet our obligations.

Our stock is a penny stock. Trading of our stock may be restricted by the Securities and Exchange Commission’s penny stock regulations which may limit a stockholder’s ability to buy and sell our stock.

Our stock is a penny stock. The Securities and Exchange Commission has adopted Rule 15g-9 which generally defines “penny stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors”. The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the Securities and Exchange Commission which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our common stock.

The Financial Industry Regulatory Authority, or FINRA, has adopted sales practice requirements which may also limit a stockholder’s ability to buy and sell our stock.

In addition to the “penny stock” rules described above, FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.

We may be required to issue Common Shares upon the net cashless exercise of Warrants which may cause dilution to our Common Shares.

As of August 17, 2009, the Company has outstanding warrants exercisable for approximately 3,897,419 common shares that contain cashless exercise provisions. A net cashless exercise provision provides that, if the fair market value of one common share is greater than the exercise price of the warrant, in lieu of exercising the warrant for cash, the holder may elect to receive common shares equal to the value of the warrant by surrendering the warrant.

Upon cashless exercise of a warrant, the holder would receive common shares equal to (a) the fair market value of one common share less the exercise price of the warrant; (b) multiplied by the number of common shares purchasable under the warrant; and (c) divided by the fair market value of one common share. If these warrants are exercised on a cashless exercise basis, we would be required to issue common shares without receipt of any cash consideration. Each of the outstanding warrants have an exercise price of $1.00. Based on the hypothetical fair-market value of $2.00 per common share, all of these warrants would be in-the-money and we would be required to issue 1,948,709.5 common shares if all of such in-the-money warrants were exercised on a cashless exercise basis, as set out above. It is unlikely that we will receive any cash proceeds from the exercise of warrants that are exercisable on a cashless exercise basis and that are in-the-money.

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not Applicable.

ITEM 2.

PROPERTIES.

Corporate Headquarters, Houston, Texas

Our corporate headquarters are located at 110 Cypress Station Drive, Suite 152, Houston, Texas 77090. We lease this property. On February 4, 2008, the Company entered into a lease agreement commencing May 1, 2008 for these office premises for a 3-year term expiring May 1, 2011. Annual rent under the new lease is payable at $35,000 for the first year, $35,000 for the second year and $36,000 for the final year. The Company must also pay its share of building operating costs and taxes. Our current premises are adequate for our existing operations.

Real Estate Investments

We do not currently maintain any investments in real estate, real estate mortgages or securities of persons primarily engaged in real estate activities, nor do we expect to do so in the foreseeable future.

Sentell Field, Cotton Valley, Bossier Parish, Louisiana

Property Discussion and Present Activity

Southern Star Energy holds a 40% working interest in an area which comprises approximately 4,700 acres in Bossier Parish, Louisiana north of Shreveport, commonly referred to as the Sentell Field. Southern Star Energy holds its working interest the Sentell Field, which has been acquired as a leasehold interest from private landowners, as a result of two separate property acquisitions in late 2006.

In November 2006, our wholly-owned subsidiary, Southern Star Operating, entered into a Purchase and Sale Agreement, dated November 2, 2006, with Dynamic Resources Corporation, Tyner Texas Operating Company, Tyner Texas Resources LP and Ramshorn Investments, Inc. Pursuant to the Purchase and Sale Agreement, Southern Star Operating acquired an additional 20% contractual interest in the Sentell Field Area in Bossier Parish, Louisiana from Tyner Texas Resources and Tyner Texas Operating in consideration for the payment of $290,962.27. In addition, the Purchase and Sale Agreement appointed Southern Star Operating as operator of the Sentell Field following the resignation of Tyner Texas Operating Company.

Through the contractual arrangements governing the acquisition of leasehold interests in the Sentell Field, Meagher Oil and Gas, an independent leasing agent, acquired, then reassigned the 100% working interest in the leasehold

positions covering the field to the following non-affiliated parties: Dynamic Resources Corp. holds a 20% working interest; Southern Star Energy holds a 40% working interest; and Ramshorn Investments, Inc. holds the remaining 40% working interest. The leases in the Sentell Field are subject to a royalty interest of approximately 24%. As a result, the holders of the working interests are entitled to receive approximately 76% of any gross production revenues from the field, less all exploration and development costs, and the holders of the royalty interest are entitled to the remaining 24%. The royalties are held by various individual lessors and other entities. The royalty interest holders are not responsible for any exploration, development or operating costs.

The Sentell Field is located 5 miles north of Shreveport / Bossier City, Louisiana. The field is well positioned within the highly prolific East Texas Basin. The field was originally developed in the 1950’s with 10 wells spaced at one well per section (approximately 640 acres). The initial wells produced from only one relatively thin member of the Upper Cotton Valley Group (the Bodcaw sand) located approximately 200 feet above our current development target. These wells were mostly depleted by the early 1970’s, having experienced unusually high production volumes averaging over 4.5 BCF per completion.

Based on analysis of the old field data as well as extensive regional data, the Company targeted the deeper Davis sands section of the Cotton Valley Group as potentially productive. Wells drilled in the Cotton Valley Trend typically exhibit the following characteristics:

	•	Predominately natural gas;
	•	High probability of success; and
	•	Significant development potential and repeatability.

By the close of fiscal 2008, our company had drilled six wells, including five successful Cotton Valley formation test wells, all of which are producing. We have also laid a 15,000 foot gathering system and central processing and metering facility to service the five producers.

Based on the satisfactory results of our deep Cotton Valley wells, the Company embarked on our 2009 program to continue to drill additional wells to define the core productive outlines of the Cotton Valley formation within our acreage. An additional critical objective of this program is to assess the presence and potential of the Haynesville Shale within our acreage position.

In late August 2008, the first of the new wells, the Cash Pointe Plantation 30-1 reached a total depth of 9,500 feet and successfully logged the Cotton Valley . Production casing has been run to total depth and the well is currently awaiting extension of the field gathering system prior to completion.

Following the successful drilling of the Cash Pointe well, the rig moved to our second location, the Atkins-Lincoln 17-2 well. This well was designed to assess both Cotton Valley as well as Haynesville potential. In October 2008, the Company announced that the Atkins-Lincoln 17-2 had reached a depth of 9,500 feet and encountered 68 feet of net effective gas pay in the Cotton Valley Formation. Subsequently, casing was set at 9,500 feet and we continued to drill to a total depth of 11,300 feet where we successfully logged the targeted Haynesville interval. The well encountered a gross productive interval of 327 feet of gas-filled porosity, indicating a thickening of the Haynesville productive interval under our leasehold.

After the successful discovery in the Haynesville Shale at the Atkins-Lincoln 17-2 location, we moved the rig approximately 1.5 miles south-southwest to the A.S. Burt 20-1 location. The Burt well was also designed as a combination Cotton Valley and Haynesville delineation well. At intermediate pipe depth, the results of the A.S. Burt 20-1 location were consistent with the Company’s earlier Cotton Valley locations. In November 2008, we reached total depth of 11,220 feet where once again we successfully logged the targeted Haynesville interval. The well encountered a gross productive interval of 249 feet of gas-filled porosity, further confirming the presence of a thick productive interval in the Haynesville Shale under our leasehold.

Each of the Company’s eight Cotton Valley wells has similar log characteristics, and six of these wells are currently flowing into sales lines. A seventh well is awaiting a pipeline connection. Both the A.S. Burt 20-1 and the Atkins-Lincoln 17-2 will be completed in the Haynesville Shale, pending thorough analysis and completion design.

In December 2008, we spud the Moore 20-1 well, the fourth well in our 2008 development program. The well successfully logged the Cotton Valley interval and came on production in late February 2009.

Based on the petrophysical results over the Haynesville Shale intervals in the Atkins-Lincoln 17-2 and the A.S. Burt 20-1 wells, the company revised its near term strategy to focus on exploiting these discoveries and follow up with a third location to further define the Haynesville potential. This caused and will cause our near-term attention to be re-directed to the Haynesville completions as well as increasing our pipeline capacity in the field. This program will have the additional benefit of continuing to secure our leasehold position while allowing us to defer Cotton Valley development plans until oil and natural gas prices improve.

On February 19, 2009, the Company spud its third Haynesville delineation well, the Boyce Pate 16-1. This well successfully encountered its Cotton Valley target, logging 66 feet of net gas pay in the Davis Sand intervals before the Company drilled ahead to further evaluate the well’s Haynesville potential. The Boyce Pate 16-1 well reached total depth of 11,200 feet on March 21, 2009. Wireline logging and mud log shows indicate the Boyce Pate 16-1 well encountered 177 feet of net porous Haynesville Shale over a gross interval of 395 feet.

Looking to the future, we have amassed an extensive, proprietary petrophysical data and engineering analyses in the East Texas Basin. These will be key elements in executing our growth strategy including property acquisitions, development drilling, and exploration drilling throughout the region.

Reserves

H.J. Gruy and Associates, Inc., an oil and natural gas consulting firm, estimated our reserves as of May 31, 2009 and 2008. All of our reserves are located within the continental United States as part of the Sentell Field. The reserve estimates are developed using geological and engineering data and interests and burdens information developed by the Company. Reserve estimates are inherently imprecise and remain subject to revisions based on production history, results of additional exploration and development drilling, results of secondary and tertiary recovery applications, prevailing oil and natural gas prices, and other factors. You should read the notes following the table below and the notes to our Financial Statements, located elsewhere in this Form 10-K, in conjunction with the following reserve estimates:

	Estimated Net Reserves			Estimated Future Net Cash Flow
Louisiana – Sentell Field	Oil & Condensate (Mbbls)	NGL (MGal)	Natural Gas (MMcf)	Not Discounted (M$)	Discounted at 10% Per Year (M$)
Proved Developed
Proved Producing	4.3	143.0	395.5	1,087.3	707.7
Proved Nonproducing	−	−	347.1	816.5	710.6
Proved Undeveloped	13.0	451.6	1,278.2	1,427.0	218.0

Total Proved	17.3	594.6	2,020.9	3,330.7	1,636.3

The discounted future net cash flows summarized in the above tables are computed using a discount rate of 10% per annum. Proved reserves are estimated in accordance with the Petroleum Resources Management System published by the Society of Petroleum Engineers.

Future net cash flow as presented herein is defined as the future cash inflow attributable to the evaluated interest less, if applicable, future operating costs, ad valorem taxes, and future capital expenditures. Future cash inflow is defined as gross cash inflow less, if applicable, royalties and severance taxes. Estimates of capital costs are included as required for workovers, new development wells, and production equipment. Future cash inflow and future net cash flow exclude consideration of state or federal income tax.

Estimates of future net cash flow and discounted future net cash flow should not be interpreted to represent the fair market value for the estimated reserves. The proved reserve volumes and estimated future net cash flows have not been adjusted for uncertainty.

Reserves Reports to Other Agencies

No reserve estimates were filed with a Federal authority or agency other than with the SEC on Form 10-K.

Production, Average Sales Prices, and Production Costs

As of May 31, 2009, our oil and gas production comes from six wells in the Sentell Field. Sales volumes, prices received, and production costs are summarized in the following table:

			Fiscal Year ended May 31,
Louisiana – Sentell Field			2009		2008		2007
Sales Volume:
	Gas (Mcf – thousands of cubic feet)		167,377		53,069		NIL
	Oil and natural gas liquids (Bbls – barrels)		3,526		1,059		NIL
Average Sales Price:
	Gas ($/Mcf – dollars per thousand cubic feet)	$	6.52	$	9.01	$	NIL
	Oil ($/Bbls – dollars per barrel)	$	75.60	$	108.25	$	NIL
Average Production costs:
	Production costs ($/Mcfe)	$	2.58	$	4.98	$	NIL
	Production and property taxes ($/Mcfe)	$	0.35	$	1.56	$	NIL
	Gas Gathering, Transportation and Marketing ($/Mcfe)	$	0.26	$	0.22	$	NIL

Our production costs are higher than industry norms on an mcfe basis due primarily to our operations being in the early stages and high saltwater disposal costs. We expect our expenses on an mcfe basis to continue to decrease in the future as production volumes increase.

Productive Wells and Acreage

As part of our corporate strategy, we seek to operate our wells where possible and to maintain a high level of participation in our wells by investing our own capital in drilling operations. The following table summarizes our productive wells as of May 31, 2009, all of which are located in the Sentell Field. Productive wells are wells that are producing or capable of producing, including shut-in wells.

		Operated		Non-operated
		Gross	Net	Gross		Net
Louisiana – Sentell Field
	Gas wells	6	2.4	NIL	NIL
	Oil Wells	NIL	NIL	NIL	NIL
Total		6	2.4	NIL	NIL

Along with Ramshorn and Dynamic, we have acquired approximately 4,700 gross acres in the Sentell Field and our 40% working interest equates to 1,882 net acres. The following table details our gross and net acres of developed and undeveloped oil and natural gas leases as of May 31, 2009.

		Developed Acreage⁽¹⁾		Total Acreage
		Gross⁽²⁾	Net⁽³⁾	Gross	Net
Louisiana
	Sentell Field	3,051	1,220	4,704	1,882
Acreage Totals		3,051	1,220	4,704	1,882

_________________

(1)

Developed acreage is the number of acres that are allocated or assignable to producing wells or wells capable of production.

	(2)	A gross acre is an acre in which a working interest is owned.
	(3)	A net acre is deemed to exist when the sum of fractional ownership working interest in gross acres equals one. The number of net acres is the sum of the fractional working interests owned in gross acres expressed as whole numbers and fractions thereof.

The following table sets forth the gross and net acres of undeveloped land and gross and net acres of undeveloped land subject to leases that will expire during the next three years and have no options for renewal:

				Undeveloped Acreage⁽¹⁾
				Gross⁽²⁾	Net⁽³⁾
Louisiana
	Sentell Field			1,653	661
Acreage Totals				1,653	661
		(1)	Undeveloped acreage is lease acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and natural gas regardless of whether such acreage includes proved reserves.
		(2)	A gross acre is an acre in which a working interest is owned.
		(3)	A net acre is deemed to exist when the sum of fractional ownership working interest in gross acres equals one. The number of net acres is the sum of the fractional working interests owned in gross acres expressed as whole numbers and fractions thereof.

Louisiana – Sentell Field		Expiring Acreage
Year Ending		Gross	Net
May 31, 2010		688	275
May 31, 2011		965	386
	Total	1,653	661

All of our leases grant us the exclusive right to explore for and develop oil, natural gas and other hydrocarbons and minerals that may be produced from wells drilled on the leased property without any material depth restrictions. Successful production from any horizon will preserve nearly all of our leases as to all potential pay intervals.

Drilling Activity

The following table sets forth the number and type of wells that we drilled during the years ended May 31, 2009, 2008 and 2007.

Louisiana – Sentell Field

Year Ended May 31, 2009

Year Ended May 31, 2008

Year Ended May 31, 2007

Gross⁽¹⁾

Net⁽²⁾

Gross

Net

Gross

Net

Development wells, completed as:

Oil wells

NIL

Gas wells

NIL

Non-Productive⁽³⁾

NIL

Exploratory wells, completed as:

Oil wells

NIL

Gas wells

1.2

0.8

Non-Productive⁽³⁾

1⁽⁴⁾

0.4

NIL

Total

0.8

NIL

____________

Capital Expenditures

The following tables set forth our capital expenditures for the year ended May 31, 2009 and our planned capital expenditures for our principal properties for the fiscal year ending May 31, 2010. Net capital expenditures include both cash expenditures and accrued expenditures and are net of proceeds from divestitures.

Project Location		Year Ended May 31, 2009 Net Capital Expenditures ($000)		Year Ended May 31, 2010 Estimated Net Capital Expenditures ($000)
Louisiana
	Sentell Field	$	7,828	$	1,700
Total All Areas		$	7,828	$	1,700

Please see Note 4 to the Company’s Consolidated Financial Statements for the year ended May 31, 2009, for a breakdown of the Company’s oil and gas acquisition, exploration, development and expenditure activities.

Present Activities

Currently, in addition to the six wells that are currently producing from the Cotton Valley formation, we have three Haynesville wells and one Cotton Valley well that are awaiting completion.

Delivery Commitments

The Company is not obligated to provide a fixed and determinable quantity of oil or gas in the future under existing contracts or agreements.

Competition

The oil and gas industry is intensely competitive, particularly with respect to the acquisition of prospective oil and natural gas properties and oil and natural gas reserves. Our ability to effectively compete is dependent on our geological, geophysical and engineering expertise, and our financial resources. We must compete against a substantial number of major and independent oil and natural gas companies that have larger technical staffs and greater financial and operational resources than we do. Many of these companies not only engage in the acquisition, exploration, development and production of oil and natural gas reserves, but also have refining operations, market refined products and generate electricity. We also compete with other oil and natural gas companies to secure drilling rigs and other equipment necessary for drilling and completion of wells. Consequently, drilling equipment may be in short supply from time to time. Currently, access to additional drilling equipment in certain regions is difficult.

Commodity Price Environment

Generally, the demand for and the price of natural gas increase during the colder winter months and decrease during the warmer summer months. Pipelines, utilities, local distribution companies and industrial users utilize natural gas storage facilities and purchase some of their anticipated winter requirements during the summer, which can lessen seasonal demand fluctuations. Crude oil and the demand for heating oil are also impacted by seasonal factors, with generally higher prices in the winter. Seasonal anomalies, such as mild winters, sometimes lessen these fluctuations.

Our results of operations and financial condition are significantly affected by oil and natural gas commodity prices, which can fluctuate dramatically. Commodity prices are beyond our control and are difficult to predict. We do not currently hedge any of our production.

The prices received for domestic production of oil and natural gas have increased significantly during the past several years, and are continuing to increase in response to global political issues and domestic shortages, which has resulted in increased demand for the equipment and services that we need to drill, complete and operate wells. As a result of this increased demand for oil field services, shortages have developed, and we have seen an escalation in drilling rig rates, field service costs, material prices and all costs associated with drilling, completing and operating wells. If oil and natural gas prices remain high relative to historical levels, we anticipate that the recent trends toward increasing costs and equipment shortages will continue.

ITEM 3.

LEGAL PROCEEDINGS.

Except for the above, we are not involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our interest.

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

There were no matters submitted to a vote of our security holders either through solicitation of proxies or otherwise in the fourth quarter of the fiscal year ended May 31, 2009.

PART II

ITEM 5.

MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES.

Market Information

Our common stock is quoted on the Over The Counter Bulletin Board (“OTCBB”), which is sponsored by the Financial Industry Regulatory Authority (“FINRA”). The OTCBB is a network of security dealers who buy and sell stock. The dealers are connected by a computer network, which provides information on current “bids” and “asks” as well as volume information. The OTCBB is not considered a “national exchange”. On April 4, 2007, our symbol changed to “SSEY” from “SSEG”.

The high and low bid quotations of our common stock on the OTC Bulletin Board as reported by the FINRA were as follows:

FINRA OTC Bulletin Board⁽¹⁾
Quarter Ended	High	Low
May 31, 2009	$0.45	$0.21
February 28, 2009	$0.62	$0.25
November 30, 2008	$0.90	$0.35
August 31, 2008	$1.20	$0.71
May 31, 2008	$1.20	$0.50
February 28, 2008	$1.44	$0.62
November 30, 2007	$1.95	$0.70
August 31, 2007	$0.95	$0.70

(1)

Over-the-counter market quotations reflect inter-dealer prices without retail mark-up, mark-down or commission, and may not represent actual transactions.

Holders

Our common shares are issued in registered form. Pacific Stock Transfer Company, 500 E. Warm Springs Road, Suite 240, Las Vegas, Nevada 89119 (Telephone: 702.361.3033; Facsimile: 702.433.1979) is the registrar and transfer agent for our common shares. On August 17, 2009, the shareholders’ list of our common shares showed 18 registered shareholders and 45,347,280 shares outstanding.

Dividend Policy

We have not paid any cash dividends on our common stock and we have no intention of paying any dividends on our shares of common stock in the near future. Our current policy is to retain earnings, if any, for use in our operations and in the development of our business. Our future dividend policy will be determined from time to time by our board of directors.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table discloses the number of securities authorized for issuance pursuant to the Company’s equity compensation plans, including the Company’s 2007 Stock Option Plan, as of May 31, 2009:

	(a) number of securities to be issued upon exercise of outstanding options, warrants, and rights	(b) weighted average exercise price of outstanding options, warrants and rights	(c) number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders	NIL	$NIL	NIL
Equity compensation plans not approved by security holders	4,350,000⁽¹⁾	$0.80	650,000 ⁽¹⁾
TOTAL	4,350,000	$0.80	650,000

(1)

On October 31, 2007, the Company approved the 2007 Stock Option Plan (the “Plan”) to issue up to 3,000,000 shares to eligible employees, officers, directors and consultants. On June 4, 2008, the Company amended the Plan to increase the number of shares issuable to 5,000,000. See Note 9 to the financial statements in Part II, Item 8. of this Form 10-K for a further description of the 2007 Stock Option Plan and options granted thereunder.

Recent Sales of Unregistered Securities

During the period covered by this annual report, the Company did not sell any securities that were not registered under the Securities Act of 1933, as amended, that were not previously included in a Quarterly Report on Form 10-QSB or on a Current Report on Form 8-K filed by us.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

During the period covered by this annual report, neither us nor any of our affiliates repurchased common shares of the Company registered under section 12 of the Exchange Act of 1934, as amended.

ITEM 6.

SELECTED FINANCIAL DATA.

Not applicable.

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes appearing elsewhere in this annual report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including, but not limited to, those set forth under the section entitled “Risk Factors” above and elsewhere in this annual report. See section “Cautionary Note Regarding Forward-Looking Statements”.

The discussion and analysis of the financial condition and results of operations are based upon the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of any contingent liabilities at the financial statement date and reported amounts of revenue and expenses during the reporting period. On an on-going basis the Company reviews its estimates and assumptions. The estimates were based on historical experience and other assumptions that the Company believes to be reasonable under the circumstances. Actual results are likely to differ from those estimates under different assumptions or conditions, but the Company does not believe such differences will materially affect our financial position or results of operations. Critical accounting policies, the policies the Company believes are most important to the presentation of its financial statements and require the most difficult, subjective and complex judgments, are outlined below in the sub-section “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies,” and have not changed significantly.

Overview

We are an exploration stage company engaged in the acquisition, exploration and exploitation of prospective oil and gas properties. We currently hold a 40% working interest in approximately 4,700 acres in an area north of Shreveport in Bossier Parish, Louisiana, commonly referred to as the Sentell Field. Initial drilling in the field has resulted in proved reserves of approximately 2.2 Bcfe (billions of cubic-feet equivalent) and net production of 500 MCFED (thousand cubic-feet equivalent per day). Southern Star Operating, our wholly owned subsidiary, is the operator of the field by virtue of a contract operating agreement. We are undertaking exploration activities and are in the early stages of developing the properties pursuant to the leasehold rights we have acquired within the Sentell Field. As partial owner of the working interest in and to the leasehold rights, we, together with the other interest holders, have the exclusive right to explore and exploit any oil and gas and mineral resources contained in the Sentell Field.

Through the contractual arrangements governing the acquisition of leasehold interests in Sentell Field, Meagher Oil and Gas, an independent leasing agent, acquired, then reassigned the 100% working interest in the leasehold positions covering the Sentell Field to the following non-affiliated parties: Dynamic Resources Corp. holds a 20% working interest; Southern Star Energy holds a 40% working interest; and Ramshorn Investments, Inc. holds the remaining 40% working interest. The leases in the field are subject to a royalty interest of approximately 24%. As a result, the holders of the working interests are entitled to receive approximately 76% of any gross production revenues from the field and the holders of the royalty interest are entitled to the remaining 24%. The royalty interests are held by various individual lessors and other entities. The royalty interest holders are not responsible for any exploration, development or operating costs.

Fiscal Year 2010 Plan of Operations

We are an exploration stage oil and gas company. We estimate our operating expenditures for the fiscal year ending May 31, 2010, to be as follows:

Estimated Operating Expenditures For the 2010 Fiscal Year
Operating Expenditures	($000)
Capital Expenditures	$1,700
General and Administrative Expenditures	1,800
Debt Service	263
Total	$3,763

We do not currently have sufficient capital to fund our estimated expenditures for the remainder of the fiscal year and intend to fund the expenditures through debt and/or equity financing and operating revenue. There can be no assurance that such financing will be available on acceptable terms, if at all. See, “Liquidity and Capital Resources,” below.

Capital Expenditures

Each of the Company’s eight Cotton Valley wells has similar log characteristics, and six of these wells are currently flowing into sales lines. The sixth well is awaiting a pipeline connection. Both the A.S. Burt 20-1 and the Atkins-Lincoln 17-2 will be completed in the Haynesville Shale, pending thorough analysis and completion design.

In December 2008, we spud the Moore 20-1 well, the fourth well in our 2008 development program. The well successfully logged the Cotton Valley interval and came on production in late February 2009.

After these delineation wells are completed and tested, we intend to continue developing the Sentell Field at a pace appropriate to conditions and capital constraints. Our 4,700-acre Sentell Field has the potential for about 50 Cotton Valley and 50 Haynesville wells positioned on 160-acre spacing. Numerous vertical and horizontal wells have been drilled, logged and put into production from the Haynesville formation within a 30-mile radius of our acreage in the Sentell Field. However, until we determine the extent of the productive limits of the project, we will not know the full extent of development costs to bring the acreage to production. We intend to complete step-out drilling to extend the productive limits of acreage. We estimate that our capital expenditures for the fiscal year ending May 31, 2010 will be approximately $1,700,000, consisting of concluding drilling operations on certain Haynesville wells, commencement of drilling an additional Haynesville well, additional stimulation work on certain Cotton Valley wells, infrastructure improvements, and leasehold acquisitions. See, “Capital Expenditures,” below.

General and Administrative Expenses

We expect to incur general and administrative costs in the amount of approximately $1,800,000 during fiscal year 2010. General and administrative costs primarily include compensation arrangements with our employees and consultants, which are described in more detail below. Further, general and administrative costs including on-going legal, accounting and audit expenses to comply with our reporting responsibilities as a public company under the Exchange Act, insurance, rent, software, office supplies and office equipment.

Our company is operated by William David Gibbs as Chief Executive Officer, President, Secretary and Treasurer, Bruce Ganer as Vice President of Exploration and Development, Christopher H. Taylor, as Chief Financial Officer, and Douglas Harwell as Operations Manager. Mr. Gibbs, Mr. Taylor and Mr. Harwell are employees of the Company and Mr. Ganer provides his services through a management company pursuant to a written agreement, the terms of which are described below. To reduce costs, we intend to continue to outsource our professional and personnel requirements when practical by retaining consultants on an as-needed basis. Although we enter into consulting agreements periodically, we have entered into several long term employment and consulting agreements, the terms of which are described below.

On February 15, 2007, the Company entered into a services agreement with Rylar & Associates, Inc., a consultant who provides consulting services in partial consideration for 375,000 shares of Common Stock. The Company is to issue 187,500 shares upon the generation of revenues from the Company’s Sentell Field property in excess of all costs reasonably incurred in relation to the drilling of the wells. The Company is also obligated to issue 187,500 shares to be held in escrow for a period of one year upon the Sentell Field generating more than 15 billion cubic feet equivalent of natural gas or having reserves greater than $75,000,000 calculated on a 10% discounted cash flow basis. As of May 31, 2009, no shares have been issued under this services agreement.

On February 27, 2007 the Company entered into a services agreement with Sierra Pine Resources (a company wholly-owned by Bruce Ganer, our Vice President of Exploration and Development), a consultant who provides consulting services in consideration for $140 per hour of services and 375,000 shares of the Company’s common stock. The Company is to issue 187,500 shares upon the generation of revenues from the Sentell Field in excess of

all costs reasonably incurred in relation to the drilling of the well. The Company is also obligated to issue 187,500 shares to be held in escrow for a period of one year upon the Sentell Field generating more than 15 billion cubic feet equivalent of natural gas or having reserves greater than $75,000,000 calculated on a 10% discounted cash flow basis. As of May 31, 2009, no shares have been issued under this services agreement.

On May 3, 2007, the Company entered into a marketing agreement with RedChip Companies Inc. (“RedChip”) for an initial term of 12 months in consideration of $7,500 per month, and commencing August 1, 2007, an equivalent value of $5,000 per month payable in shares of the Company’s common stock, the value of which was to be determined based upon the closing price of the shares as reported by StockWatch Inc. on the first business day of each quarterly period. The shares were to be issued by the Company to RedChip on a quarterly basis no later than ten days after the first day of each subsequent quarter. On December 11, 2007, the Company issued 18,750 for $15,000 of consulting services shares pursuant to the consulting agreement and at May 31, 2008, $35,000 was included in common stock subscribed. During the nine months ended February 28, 2009, the Company issued 46,335 shares of common stock with a fair value of $36,000 pursuant to the agreement and subsequently terminated this agreement.

On June 18, 2007, the Company entered into a services agreement with Imperial Capital Ltd. (“Imperial”), a financial advisor, to provide services related to assisting the Company in financing activities. Upon entering into the $2,000,000 Credit Agreement with Macquaire Bank Limited (“Macquarie”) in May 2008, the Company paid $60,000 of financing fees and was obligated to issue a warrant exercisable to purchase 100,000 shares of common stock at $1.00 per share. Additionally, in connection with the Amended Credit Agreement with Macquarie, the Company paid to Imperial $90,000 in cash, agreed to pay Imperial in cash the amount of 3% of the gross proceeds of each funding in excess of the initial $5 million borrowing base which the Company receives under the Macquarie credit agreement until Imperial has received $750,000 ($150,000 of which has been paid), and issued to Imperial a warrant to purchase 1,250,000 shares of common stock of the Company. On August 8, 2008, the Company terminated this agreement.

In November 2007, the Company entered into a consulting agreement with William David Gibbs to serve as the CEO and president of the Company and provide consulting services in consideration for $200 per hour of services to a maximum of $1,500 per day and $30,000 per month and options exercisable to purchase 1,500,000 shares of the Company’s common stock at $1.20 per share for 5 years (one-third of the options vest on each of the first three anniversaries of November 27, 2007). On February 26, 2008, the Company reduced the exercise price of the options to $0.70 per share, resulting in an increase to stock-based compensation expense. On May 1, 2008, Mr. Gibbs ceased to be a consultant and entered into an employment agreement with the Company to serve as the Company’s president and CEO. Mr. Gibbs will be retained as CEO and president in consideration for, among other things, a base salary of $240,000 per year and incentive bonuses as set forth in the employment agreement. On June 4, 2008, we entered into a stock option agreement with Mr. Gibbs granting him the right to purchase up to an aggregate of 1,000,000 shares of our common stock at an exercise price of $1.00 per share exercisable for a period of five years pursuant to our Stock Option Plan (one-third of the options vest on each of the first three anniversaries of June 4, 2008). On January 5, 2009, the Company awarded to Mr. Gibbs a bonus payment of $60,000, less any applicable statutory deductions, in order to recognize Mr. Gibbs’ contribution to the Company as its president and the progress made by the Company in 2008.

On November 22, 2007, we entered into a consulting agreement with Larry Keller, whereby Larry Keller agreed to provide consulting services to our company for a consulting fee of $175 per hour and the grant of a stock option to purchase up to 500,000 shares of our common stock at a price of $1.09 per share, exercisable until November 22, 2009(half of the options vested on November 22, 2007 and half vested on November 22, 2008). On May 30, 2008, we paid a cash bonus of approximately $25,000 per well upon the successful completion of our company’s following three wells: Atkins-Lincoln 18-1; Atkins et al. 8-1; and Atkins-Lincoln 18-2.

On January 1, 2008, we entered into a consulting agreement with Big Sky Management Ltd., whereby Big Sky Management agreed to provide management services to our company. Big Sky Management has agreed to provide the services through its employee and our director Eric Boehnke in consideration for the payment, by our Company, of $10,000 per month.

On May 20, 2008, the Company entered into a consulting agreement with Enercom, Inc., an investor communications consulting firm that will provide investor communications services on behalf of the Company in consideration for a minimum of $3,000 per month. This agreement was cancelled effective June 30, 2009.

Effective June 16, 2008, we entered into an agreement with Douglas M. Harwell, whereby we agreed to employ Mr. Harwell as our operations manager. Mr. Harwell will be retained as our operations manager in consideration for, among other things: (i) a base salary of $160,000 per year; (ii) incentive bonuses as set forth in the employment agreement; and (iii) the grant of a stock option to purchase up to 250,000 shares of our common stock at a price of $1.00 per share, exercisable until June 16, 2013 (one-third of the options will vest on each of the first three anniversaries of June 16, 2008).

Effective October 27, 2008, we entered into an agreement with Deborah Null, whereby we agreed to employ Ms. Null as our land manager. Ms. Null was retained as our land manager in consideration for, among other things: (i) a base salary of $130,000 per year; (ii) incentive bonuses as set forth in the employment agreement; and (iii) the grant of stock options exercisable to purchase up to 100,000 shares of our common stock at a price of $0.60 per share, exercisable until October 27, 2013. Effective December 18, 2008, Ms. Null resigned her position as land manager of the Company. Ms. Null’s resignation had the effect of terminating her employment agreement and stock option agreement and rendering her stock options void and of no effect. At the time of Ms. Null’s resignation, none of the stock options had vested.

Debt Service

We expect to incur $263,000 in interest expenses for the fiscal year ending May 31, 2010. These interest expenses are related to debt outstanding under our credit facility with Macquarie Bank Limited and assume the interest rate remains 5.25%, our current interest rate. Should we be determined to be in default under our credit facility, our interest rate could increase to 9.25%. We do not anticipate paying any principal on the credit facility until the maturity date of July 11, 2011. We expect interest expense to increase if we obtain additional debt financing in the future.

Results of Operations

The Company has been in the exploration stage since completion of its restructuring in November 2006 and has not yet realized any significant revenues from its planned operations. The Company is unlikely to generate significant earnings in the immediate or foreseeable future. The continuation of the Company as a going concern and the ability of the Company to emerge from the exploration stage are dependent upon its successful efforts to raise additional equity financing to continue operations and generate sustainable significant revenue. There is no guarantee that the Company will be able to raise adequate equity or debt financings or generate profitable operations.

Year ended May 31, 2009 compared to year ended May 31, 2008

Net Loss. We reported a net loss of $13,147,000 for the year ended May 31, 2009 compared to a net loss of $3,778,000 for the year ended May 31, 2008. The increase in net loss is due primarily to full cost ceiling impairments in the amount of $8,395,000 described more fully below as well as increases in production costs.

Revenues. We reported revenues from the production of oil and natural gas of $1,401,000 for the year ended May 31, 2009, compared to $626,000 in revenues for the year ended May 31, 2008. The increase in revenues is attributable to a full year’s production from the successful drilling and completion of five wells in the Sentell Field in 2008 and the successful drilling and completion of one well in the year ended May 31, 2009.

Depletion, depreciation and amortization. Depletion, depreciation and amortization for the year period ended May 31, 2009 was $8,920,000. Included in this amount are impairments of oil and gas properties totaling $8,221,000 as a result of the ceiling test impairments as of May 31, 2009 ($823,000) February 28, 2009 ($5,196,000) and August 31, 2008 ($2,202,000). In determining the future cash flows used in performing the full cost ceiling test, the Company used the following prices, held constant, at May 31, 2009, February 28, 2009, and August 31, 2008:

	Natural Gas Price per Mcf	Oil Price per Barrel
May 31, 2009	$3.37	$54.31
February 28, 2009	$3.39	$51.05
August 31, 2008	$8.82	$115.96

The prices used in the February 28, 2009 ceiling test represented spot prices in April 2009. Had the Company utilized the spot prices on February 28, 2009, the impairment recorded at February 28, 2009, would have been $6,452,000. Prices used in the ceiling test at May 31, 2008 were $10.67 per mcf of natural gas and $124.79 per barrel of oil. There was depletion, depreciation and amortization recorded in the amount of $112,000 during the year ended May 31, 2008.

General and administrative. For the year ended May 31, 2009, we recorded general and administrative expenses of $3,414,000 compared to $2,219,000 for the year ended May 31, 2008. The increases were primarily attributable to increased business activity related to development of our properties; hiring a chief financial officer, operations manager and land manager during the year ended May 31, 2009; stock-based compensation; implementing improvements to our corporate governance and public company reporting and exploring business development opportunities. We anticipate that our general and administrative expenses will continue at or above these levels as we anticipate that our business activities may increase in future periods.

Production costs. We recorded production costs of $712,000 for the year ended May 31, 2009 compared to $296,000 in production costs for the year ended May 31, 2008. The increase in production costs is attributable to production resulting from the successful drilling and completion of six wells in the Sentell Field. Production costs may increase in future periods as a result of our current drilling program, under which we project we will drill additional wells, assuming adequate financing is available on acceptable terms, if at all.

Accretion of discount on debt. In the year ended May 31, 2009, we recorded accretion of discount on debt of $425,250, which represents the remainder of the discount recorded in connection with the $2,000,000 credit agreement entered into in May 2008 with Macquarie Bank Limited. In the year ended May 31, 2008, we recorded accretion of discount on convertible debentures of $1,142,000; the convertible debentures have since been converted into shares of the Company.

Financing costs. We also recognized financing costs of $838,000 in the year ended May 31, 2009, which represents a portion of the financing costs related to the $25,000,000 Credit Agreement entered into in July 2008. The Credit Agreement is discussed further under ‘Liquidity and Capital Resources’ below. In connection with the Credit Agreement, we recorded deferred financing costs of $2,831,000 which will be amortized to financing costs using a method approximating the interest method over the three-year term of the Credit Agreement. We recorded financing costs of $544,000 for the year ended May 31, 2008. We anticipate we will raise additional capital during the fiscal year ending May 31, 2010, which could in an increase in financing costs. There can be no assurance that additional financing will be available on acceptable terms, if at all.

Interest expense. For the year ended May 31, 2009, we recognized $239,000 in interest expense related to debt outstanding under our agreements with Macquarie Bank Limited. For the year ended May 31, 2008, we recorded interest expense of $91,000. Interest expense may increase during the fiscal year ending May 31, 2010, if we obtain additional debt financing. There can be no assurance that our borrowing base with Macquarie will be increased (see “Liquidity and Capital Resources,” below), or that additional debt financing will be available on acceptable terms, if at all.

Liquidity and Capital Resources

As of May 31, 2009, we had a working capital deficiency of approximately $12,105,000 and had incurred losses of $18,883,000 since inception. As of May 31, 2009, we had current assets of $2,824,000 and current liabilities of $14,929,000. The current liabilities consisted of accounts payable and accrued liabilities, net revenue payable to working interest partners and royalty interest owners, exploration advances and amounts due to related parties.

To date, we have had negative cash flows from operations and we have been dependent on sales of our equity securities and debt financing to meet our cash requirements. Declining gas prices are anticipated to have an adverse effect on revenue and cash flow. We expect this situation to continue for the foreseeable future. We anticipate that we will have negative cash flows during the next twelve month period.

From September through November 2007, several debt holders converted certain convertible debentures which eliminated our interest payable on such securities. On September 18, 2007, we issued a 10% $1,300,000 convertible debenture to Gobbet Management Inc. The debenture, which was due September 18, 2009, was converted into shares of common stock of our company at a conversion price of $0.50 per share. On November 16, 2007, Gobbet Management converted the principal amount of $1,300,000 plus $21,306 in interest into 2,642,611 shares of common stock of our company. We issued the 2,624,611 shares of common stock on December 21, 2007 and the remaining 18,000 shares of common stock on April 14, 2008. On November 16, 2007, Sovereign Services Limited converted the principal amount of $800,000 plus interest of $77,778 pursuant to a 10% convertible debenture due December 1, 2008, into 2,633,333 shares of common stock of our company. We issued the 2,633,333 shares of common stock on December 21, 2007. On November 16, 2007, Sovereign Services converted the principal amount of $600,000 plus interest of $63,333 pursuant to a 10% convertible debenture due November 1, 2008, into 265,333 shares of common stock of our company. We issued the 265,333 shares of common stock on December 21, 2007.

Credit Facility

On July 11, 2008, the Company entered into a senior secured revolving credit agreement with Macquarie Bank Limited and certain lenders to receive advances up to $25,000,000 with an initial borrowing base of $5,000,000. This Amended and Restated Senior First Lien Secured Credit Agreement (dated July 11, 2008) (“Credit Agreement”) amended and restated the $2,000,000 Senior First Lien Secured Credit Agreement between the Company and Macquarie Bank Limited, dated May 16, 2008, in its entirety.

On July 16, 2008, we closed the first draw down under the Credit Agreement with Macquarie Bank Limited (individually and as Administrative Agent) (“Administrative Agent”) and the various participating lenders (the “Lenders”). The Credit Agreement matures on July 11, 2011.

Borrowings under the Credit Agreement may be used exclusively for the development of the properties listed in the Credit Agreement, general corporate purposes (as approved by the Administrative Agent), and the payment of the Administrative Agent’s costs associated with the loan. Upon closing, we drew an advance of $2.5 million, leaving $2.5 million available under the initial borrowing base. Prior to the advance, we had a working capital deficit of approximately $2,218,117, incurred primarily due to drilling expenses on two wells and a workover program on three other wells during the fiscal year ended May 31, 2008. We used the initial advance of $2.5 million to pay off the working capital deficit accumulated from that program. In the period from August 2008 to January 2009, we drew down an additional $2.5 million against the initial borrowing base to fund our 40% working interest share of the estimated costs of drilling and completing new Sentell Field wells. At February 28, 2009, we had no availability remaining under the initial borrowing base of the credit facility. The borrowing base will be redetermined no less than every six months, based upon the Administrative Agent’s review of the most recent reserve report (prepared by our engineers and setting forth our projected recoverable reserves of our company). Reserve reports are due to the Administrative Agent on or before each January 15 and July 15 until the maturity date. Within 30 days following receipt of the reserve report, the Administrative Agent will, in its sole discretion, make a determination of the borrowing base, which will be effective until the next redetermination date. The Administrative Agent will determine the borrowing base in accordance with its customary lending practices based on the maximum revolving loan amount supportable by our properties.

Under the terms of the Credit Agreement, advances comprising the revolving loan accrue interest at the applicable contract rate on the outstanding borrowed and unpaid principal amount of the loan. The contract rate is a per annum rate equal to the lesser of prime rate plus 2% or the highest lawful rate. The prime rate means the greater of (i) the prime rate of interest specified by the Wall Street Journal and (ii) the Federal Funds Rate plus 0.50% per annum. The contract rate was 5.25% at May 31, 2009.

Pursuant to the terms of the Credit Agreement, all proceeds from the sale of oil and gas from our properties, if any, will be remitted to the Administrative Agent via payment into a project account. The Administrative Agent will then create a sub-account on its internal books and credit to that account all funds deposited as payments into the project account. We have authorized the Administrative Agent to debit the sub-account for the payment of all obligations under the Credit Agreement when due.

As collateral security for all of our obligations to the Administrative Agent and each of the Lenders under the Credit Agreement and other related documents, we granted to the Administrative Agent (for the benefit of the Lenders) a first priority mortgage lien in all of our real and personal property subject to certain permitted encumbrances.

The Credit Agreement contains various positive covenants, including interest coverage ratio, current ratio and adjusted present value ratio covenants (as defined in the Credit Agreement), and certain negative covenants which prevent us from carrying out certain actions, including incurring specified debt or guaranties, suffering any change of control, merging into or consolidating with any other entity, declaring or paying any cash dividends or distributions. At May 31, 2009, the Company was not in compliance with its interest coverage ratio, current ratio and adjusted present value ratio covenants. We have notified Macquarie of these deficiencies and Macquarie has continued to fulfill our funding requests knowing we are out of compliance. The Company has initiated and continues to pursue efforts to remedy the noncompliance. While we expect such efforts to be successful, there can be no assurance that we will be able to remedy the noncompliance.

On May 29, 2009, the Company and Macquarie executed a waiver letter amending the Credit Agreement (“Waiver Letter”). Under the terms of the Waiver Letter, until June 30, 2009, the Lender agreed to waive the Company’s compliance with certain sections of the Credit Agreement, which pertain to interest coverage ratio, current ratio, and adjusted PV ratio.

In consideration of this waiver, the Company agreed to pay the Macquarie one hundred percent (100%) of the Net Operating Cash Flow (as defined in the Credit Agreement), to be applied against the entire outstanding balance of the loan until such time as the outstanding balance of the loan is paid off. The Company also agreed to obtain the written consent of the Macquarie prior to incurring or agreeing to incur any cost or expense for capital expenditures of any kind. Finally, the Company released Macquarie from any action or failure to act in connection with the Credit Agreement or related documents occurring any time prior to May 29, 2009. The Waiver Letter expired June 30, 2009. The Company remains out of compliance with its interest coverage ratio, current ratio and adjusted present value ratio covenants.

Available Capital

We incurred a net loss of $13,147,000 for the year ended May 31, 2009 as compared to a net loss of $3,778,000 for the year ended May 31, 2009. We anticipate that losses will continue in the fiscal year ending May 31, 2010 due to lower oil and gas prices. We had current cash on hand as at May 31, 2009 of approximately $1,301,000.

As we anticipate that our estimated operating expenditures for the coming fiscal year will be $3,763,000, we do not have sufficient working capital to enable us to complete our drilling program of exploration wells or to finance our normal operations for the next fiscal year. Accordingly, we plan on undertaking additional financing activities throughout the course of the fiscal year. We estimate that approximately $700,000 will be derived from operations in the Sentell Field. However, the decrease in oil and natural gas prices has adversely affected our revenues and may continue to do so, which may increase our reliance on debt and equity financing.

Additionally, we estimate that we will be required to raise at least approximately $3,100,000 through the issuance of equity securities or through additional debt financing. Additional draw-downs on the credit facility will depend upon the success of our future financings and the availability of credit under the credit facility. We are seeking to increase our borrowing base under the credit facility. There can be no assurance that we will be successful in raising the required capital or that actual cash requirements will not exceed our estimates.

Given that we have not achieved profitable operations to date, our cash requirements are subject to numerous contingencies and risk factors beyond our control, including operational and development risks, competition from well-funded competitors, and our ability to manage growth. We can offer no assurance that our company will generate cash flow sufficient to achieve profitable operations or that our expenses will not exceed our projections. If our expenses exceed estimates, we will require additional monies during the next fiscal year to execute our business plan.

There are no assurances that we will be able to obtain funds required for our continued operation. There can be no assurance that additional financing will be available to us when needed or, if available, that it can be obtained on commercially reasonable terms. Unprecedented disruptions in the current credit and financial markets have had a significant material adverse impact on a number of financial institutions and have limited access to capital and credit for many companies. These disruptions could, among other things, make it more difficult for the Company to obtain, or increase its cost of obtaining, capital and financing for its operations.

If we are not able to obtain additional financing on a timely basis, we will not be able to meet our other obligations as they become due and we will be forced to scale down or perhaps even cease the operation of our business.

There is substantial doubt about our ability to continue as a going concern as the continuation of our business is dependent upon obtaining further long-term financing, successful exploration and development of our oil and gas properties and, finally, achieving a profitable level of operations. The issuance of additional equity securities by us could result in a significant dilution in the equity interests of our current stockholders. Obtaining additional commercial loans, assuming those loans would be available, or drawing on our revolving credit agreement with Macquarie Bank Limited, will increase our liabilities and future cash commitments.

Future Financings

The recent unprecedented events in global financial markets have had a profound impact on the global economy. Many industries, including the oil and natural gas industry, are impacted by these market conditions. Some of the key impacts of the current financial market turmoil include contraction in credit markets resulting in a widening of credit risk, devaluations and high volatility in global equity, commodity, natural resources and foreign exchange markets, and a lack of market liquidity. A continued or worsened slowdown in the financial markets or other economic conditions, including but not limited to, consumer spending, employment rates, business conditions, inflation, fuel and energy costs, consumer debt levels, lack of available credit, the state of the financial markets, interest rates, and tax rates may adversely affect the Company’s growth and profitability.

Specifically:

•

The global credit/liquidity crisis could impact the cost and availability of financing and our overall liquidity;

•

Volatility of petroleum prices, which could adversely affect sales and revenues in the oil and natural gas sector; and

•

The devaluation and volatility of global stock markets could impact the valuation of, and market in, our equity securities.

These factors could have a material adverse effect on the Company’s financial condition and results of operations.

We anticipate that additional funding, when required, will be in the form of equity financing from the sale of our common stock or through debt financing. However, we cannot provide investors with any assurance that we will be able to raise sufficient funding from the sale of our common stock or through debt financing on commercially reasonable terms to fund operations. We do not currently have any arrangements in place for any future equity financing. For debt financing, the Company has a credit agreement with Macquarie Bank Limited that currently has a borrowing base of $5,000,000, none of which is available as of May 31, 2009, and a maximum limit of $25,000,000, as disclosed above under “Liquidity and Capital Resources”.

Capital Expenditures

We control our capital expenditures as the operator of the Sentell Field, which allows us to monitor and pace capital expenditures. Based on the success of our initial Haynesville delineation wells tempered by the global decline in product prices and restricted capital availability, we have curtailed our 2010 capital program. For the fiscal year ending May 31, 2010, our current plans include:

1.	Drilling and completion activities at an estimated cost of $1,500,000; and
2.	Field infrastructure and leasehold acquisition for an estimated net cost of $200,000.

Off-Balance Sheet Arrangements

Our company has no outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap transactions or foreign currency contracts. Our company does not engage in trading activities involving non-exchange traded contracts.

Critical Accounting Policies

The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying disclosures of our company. Although these estimates are based on management’s knowledge of current events and actions that our company may undertake in the future, actual results may differ from such estimates.

Going Concern

The Company has been in the exploration stage since completion of its restructuring in November, 2006 and has not yet realized any significant revenues from its planned operations. Previously, it was in the development stage, pursuant to Statements of Financial Accounting Standards (“SFAS”) No. 7 “Accounting and Reporting by Development Stage Enterprises”, and had not generated or sustained significant revenues. The accompanying financial statements have been prepared on a going concern basis, which implies the Company will continue to realize its assets and discharge its liabilities in the normal course of business. The Company is unlikely to pay dividends or generate significant earnings in the immediate or foreseeable future. The continuation of the Company as a going concern and the ability of the Company to emerge from the exploration stage are dependent upon its successful efforts to raise additional equity financing to continue operations and generate sustainable significant revenue. There is no guarantee that the Company will be able to raise adequate equity financings or generate profitable operations. As at May 31, 2009, the Company has a working capital deficit of $12,105,000 and has incurred losses of $18,833,000 since inception. The accompanying financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern.

Oil and Gas Properties

The Company utilizes the full-cost method of accounting for petroleum and natural gas properties. Under this method, the Company capitalizes all costs associated with acquisition, exploration and development of oil and natural gas reserves, including leasehold acquisition costs, geological and geophysical expenditures, lease rentals on undeveloped properties and costs of drilling of productive and non-productive wells into the full cost pool on a country by country basis. When the Company obtains proven oil and gas reserves, capitalized costs, including estimated future costs to develop the reserves proved and estimated abandonment costs, net of salvage, will be depleted on the units-of-production method using estimates of proved reserves. The costs of unproved properties are not amortized until it is determined whether or not proved reserves can be assigned to the properties. Until such determination is made the Company assesses annually whether impairment has occurred, and includes in the amortization base drilling exploratory dry holes associated with unproved properties.

The Company applies a ceiling test to the capitalized cost in the full cost pool. The ceiling test limits such cost to the estimated present value, using a ten percent discount rate, of the future net revenue from proved reserves, based on current economic and operating conditions. Specifically, the Company computes the ceiling test so that capitalized cost, less accumulated depletion and related deferred income tax, do not exceed an amount (the ceiling) equal to the sum of: (A) The present value of estimated future net revenue computed by applying current prices of oil and gas reserves (with consideration of price changes only to the extent provided by contractual arrangements) to estimated future production of proved oil and gas reserves as of the date of the latest balance sheet presented, less estimated future expenditures (based on current cost) to be incurred in developing and producing the proved reserves computed using a discount factor of ten percent and assuming continuation of existing economic conditions; plus (B) the cost of property not being amortized; plus (C) the lower of cost or estimated fair value of unproven properties included in the costs being amortized; less (D) income tax effects related to differences between the book and tax basis of the property.

such as historical experience and other data such as primary lease terms of the property, average holding periods of unproved property, and geographic and geologic data. The Company adds the amount of impairment assessed to the cost to be amortized subject to the ceiling test.

Recent Accounting Pronouncements

Effective June 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS No. 157), which established a framework for measuring fair value in generally accepted accounting principles, clarified the definition of fair value within that framework, and expanded disclosures about the use of fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. However, in February 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position No. FA5 157-2, Effective Date of FASB Statement No. 157 (FSP No. 157-2), which deferred the effective date of SFAS No. 157 for one year for non-financial assets and liabilities, except for certain items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).

SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS No. 157 provides a framework for measuring fair value, establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date and requires consideration of the Company’s creditworthiness when valuing certain liabilities.

The three-level fair value hierarchy for disclosure of fair value measurements defined by SFAS No. 157 is as follows:

Level 1	—	Quoted prices for identical instruments in active markets at the measurement date.

Level 2	—	Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets at the measurement date and for the anticipated term of the instrument.

Level 3	—	Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

The adoption of SFAS No. 157 did not have a material effect on the Company’s financial statements.

In March 2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment to FASB Statement No. 133”. SFAS No. 161 is intended to improve financial standards for derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. Entities are required to provide enhanced disclosures about: (a) how and why an entity uses derivative instruments; (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations; and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years beginning after November 15, 2008, with early adoption encouraged. The Company is currently evaluating the impact of SFAS No. 161 on its consolidated financial statements, and the adoption of this statement is not expected to have a material effect on the Company’s consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141R, “Business Combinations”. This statement replaces SFAS 141 and defines the acquirer in a business combination as the entity that obtains control of one or more businesses in a business combination and establishes the acquisition date as the date that the acquirer achieves control. SFAS 141R requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date. SFAS 141R also requires the acquirer to recognize contingent consideration at the acquisition date, measured at its fair value at that date. This statement is effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2008 and earlier adoption is prohibited. The adoption of this statement is not expected to have a material effect on the Company’s consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements Liabilities –an Amendment of ARB No. 51”. This statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This statement is effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2008 and earlier adoption is prohibited. The adoption of this statement is not expected to have a material effect on the Company’s consolidated financial statements.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles”. SFAS No. 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles for nongovernmental entities. SFAS No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board Auditing amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles”.

In May 2008, the FASB issued FSP 14-1 “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) “. FSP 14-1 requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. FSP 14-1 is effective for fiscal years beginning after December 15, 2008, on a retroactive basis. The adoption of this statement is not expected to have a material effect on the Company’s consolidated financial statements.

On December 31, 2008, the SEC published the final rules and interpretations updating its oil and gas reporting requirements. Many of the revisions are updates to definitions in the existing oil and gas rules to make them consistent with the petroleum resource management system, which is a widely accepted standard for the management of petroleum resources that was developed by several industry organizations. Key revisions include changes to the pricing used to estimate reserves utilizing a 12-month average price rather than a single day spot price which eliminates the ability to utilize subsequent prices to the end of a reporting period when the full cost ceiling was exceeded and subsequent pricing exceeds pricing at the end of a reporting period, the ability to include nontraditional resources in reserves, the use of new technology for determining reserves, and permitting disclosure of probable and possible reserves. The SEC will require companies to comply with the amended disclosure requirements for registration statements filed after January 1, 2010, and for annual reports on Form 10-K for fiscal years ending on or after December 15, 2009. Early adoption is not permitted. The Company is currently assessing the impact that the adoption will have on the Company’s disclosures, operating results, financial position and cash flows.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events. ” The objective of SFAS No. 165 is to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, this Statement sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. SFAS No. 165 is effective for interim or annual financial periods ending after June 15, 2009. The adoption of this statement is not expected to have a material effect on the Company’s consolidated financial statements.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC did not, or are not believed by management to, have a material impact on the Company’s present or future consolidated financial statements.

ITEM 8.

FINANCIAL STATEMENTS.

Our consolidated audited financial statements are stated in United States dollars and are prepared in accordance with United States generally accepted accounting principles.

The following consolidated audited financial statements are filed as part of this annual report:

Independent Auditor’s Report, dated August 31, 2009 of Weaver and Tidwell, L.L.P.

Independent Auditor’s Report, dated August 15, 2008 of Dale Matheson Carr-Hilton Labonte LLP

Audited Consolidated Balance Sheets as at May 31, 2009 and May 31, 2008

Audited Consolidated Statements of Operations for the years ended May 31, 2009 and 2008 and the cumulative period from February 7, 2005 (Date of Inception) to May 31, 2009

Audited Consolidated Statements of Cash Flows for the years ended May 31, 2009 and 2008 and the cumulative period from February 7, 2005 (Date of Inception) to May 31, 2009

Audited Consolidated Statement of Stockholders’ Equity (Deficit) for the period from February 7, 2005 (Date of Inception) to May 31, 2009

Notes to the Consolidated Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Southern Star Energy, Inc.

(An Exploration Stage Company)

We have audited the accompanying consolidated balance sheet of Southern Star Energy, Inc. and Subsidiary (An Exploration Stage Company) as of May 31, 2009, and the related consolidated statements of operations, stockholders’ deficit and cash flows for the year then ended and for the cumulative period from inception (February 7, 2005) to May 31, 2009. The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Southern Star Energy, Inc. and Subsidiary (An Exploration Stage Company) at May 31, 2009, and the related consolidated results of operations and cash flows for the year then ended and for the cumulative period from inception (February 7, 2005) to May 31, 2009, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has incurred losses since inception, has not attained profitable operations and is dependent upon obtaining adequate financing to fulfill its exploration activities. These factors raise substantial doubt that the Company will be able to continue as a going concern. Management’s plans in regard to these matters are also discussed in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Weaver and Tidwell, L.L.P.

WEAVER AND TIDWELL, L.L.P.

Houston, Texas

August 31, 2009

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors of Southern Star Energy Inc.

(An exploration stage company)

We have audited the accompanying consolidated balance sheets of Southern Star Energy Inc. (an exploration stage Company) as of May 31, 2008 and the consolidated statements of operations, stockholders’ equity and cash flows for the year then ended and for the period from February 7, 2005 (date of inception) to May 31, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal controls over financial reporting. Our audit included consideration of internal controls over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal controls over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company at May 31, 2008 and the results of its operations and its cash flows for the year then ended and for the period from February 7, 2005 (date of inception) to May 31, 2008 in accordance with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has incurred losses in developing its business and further losses are anticipated. The Company requires additional funds to meet its obligations and the costs of its operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in this regard are described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ DMCL

DALE MATHESON CARR-HILTON LABONTE LLP

Chartered Accountants

Vancouver, Canada

August 15, 2008

Southern Star Energy Inc.

(An Exploration Stage Company)

Consolidated Balance Sheets

(in thousands)

	May 31, 2009 $	May 31, 2008 $
ASSETS
Current Assets
Cash	1,301	1,436
Accounts Receivable (Note 4)	1,000	−
Accrued Revenue	352	336
Prepaids	171	38
Total Current Assets	2,824	1,810

Deferred Financing Costs, net	1,993	–
Property and Equipment (Note 3)	15	20
Surety Bond (Note 4)	11	10
Oil and Gas Properties (full cost method) (Note 4)
Proved	10,653	6,597
Unproved	3,771	–
Gross Oil and Gas Properties	14,424	6,597
Less - Accumulated Depreciation, Depletion and Amortization	(9,018)	(109)
Net Oil and Gas Properties	5,406	6,488

Total Assets	10,249	8,328

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

Current Liabilities
Accounts Payable and Accrued Liabilities	5,985	1,556
Net Revenue Payable to Working Interest Partners (Note 4)	847	599
Exploration Advances (Note 4)	2,925	266
Bank Debt (Note 6)	5,000	–
Loan Payable, less unamortized discount of $425,250 (Note 6)	−	1,575
Other Current Liabilities	116	−
Due to Related Party (Note 8)	56	32
Total Current Liabilities	14,929	4,028
Asset Retirement Obligations (Note 5)	98	54
Total Liabilities	15,027	4,082

Contingency and Commitments (Notes 1,6 and 12)

Stockholders’ Equity (Deficit)

Common Stock (Note 10) Authorized: 843,750 shares, par value $0.001 Issued: 45,347 shares (May 31, 2008– 44,801 shares)	45	45
Additional Paid-In Capital	14,010	9,852
Common Stock Subscribed (Note 10(b))	−	35
Deficit Accumulated During the Exploration Stage	(18,833)	(5,686)
Total Stockholders’ Equity (Deficit)	(4,778)	4,246

Total Liabilities and Stockholders’ Equity (Deficit)	10,249	8,328

The accompanying notes are an integral part of these consolidated financial statements.

Southern Star Energy Inc.

(An Exploration Stage Company)

Consolidated Statements of Operations

(in thousands, except per share amounts)

	Accumulated From February 7, 2005 (Date of Inception) to May 31,	Year Ended May 31,	Year Ended May 31,
	2009	2009	2008
	$	$	$

Revenue	2,027	1,401	626

Operating Expenses

Depletion, depreciation and accretion (Notes 3, 4 and 5)	9,033	8,920	112
General and administrative (Note 9)	5,997	3,414	2,219
Lease operating expenses	849	646	203
Production taxes	159	66	93

Total Operating Expenses	16,038	13,046	2,627

Loss Before the Following Items	(14,011)	(11,645)	(2,001)

Other Expenses

Accretion of discount on debt (Notes 6 and 7)	(1,646)	(425)	(1,142)
Financing costs (Note 11)	(2,750)	(838)	(544)
Interest on loans (Note 6)	(405)	(239)	(91)

Total Other Expenses	(4,801)	(1,502)	(1,777)

Loss Before Discontinued Operations	(18,812)	(13,147)	(3,778)

Discontinued operations (Note 14)	(21)	–	–

Net Loss	(18,833)	(13,147)	(3,778)

Net Loss Per Share

Continuing Operations – Basic and Diluted		(0.29)	(0.10)
Discontinued Operations – Basic and Diluted		–	–
		(0.29)	(0.10)

Weighted Average Number of Shares Outstanding – Basic and Diluted		45,093	36,016

The accompanying notes are an integral part of these consolidated financial statements.

Southern Star Energy Inc.

(An Exploration Stage Company)

Consolidated Statements of Cash Flows

(in thousands)

	Accumulated From February 7, 2005 (Date of Inception) to May 31,2009 $	Year Ended May 31, 2009 $	Year Ended May 31, 2008 $
Operating Activities

Net loss	(18,833)	(13,147)	(3,779)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Accretion of convertible debt discount	1,646	425	1,142
Common stock subscribed	35	−	35
Depreciation, depletion and accretion	9,033	8,920	112
Intrinsic value of convertible units and fair value warrants issued as finance fees	1,775	−	406
Interest accrued on convertible debt	−	−	(71)
Shares issued for consulting services	16	1	15
Stock-based compensation	2,129	1,248	881
Amortization of deferred financing costs	838	838

Changes in operating assets and liabilities

Accounts receivable	(343)	(17)	(312)
Prepaids	184	(17)	208
Accounts payable and accrued liabilities	1,114	147	782
Customer deposit	–	–	–
Deferred revenue	19	–	–
Due to related parties	30	23	32
Exploration advances	2,327	2,061	184

Net Cash Provided by ( Used in) Continuing Operations	(25)	482	(365)
Discontinued operations	(38)	–	–

Net Cash Provided by (Used in) Operating Activities	(63)	482	(365)

Investing Activities
Acquisition of property and equipment	(30)	(3)	(20)
Surety bond	(10)	–	–
Oil and gas property expenditures	(9,060)	(3,658)	(2,797)

Net Cash Used in Investing Activities	(9,100)	(3,661)	(2,817)

Financing Activities
Deferred debt issuance costs	(161)	(161)	–
Proceeds from issuance of common stock	493	205	–
Proceeds from common stock subscribed	1,850	–	–
Proceeds from loan payable	5,000	3,000	2,000
Proceeds from convertible units	580	−	580
Advances from related parties	6	–	–
Proceeds from issuance of convertible debentures	2,700	−	1,300

Net Cash Provided by Financing Activities	10,468	3,044	3,880

Effect of exchange rate on cash	(4)	–	–

Change in Cash	1,301	(135)	698

Cash – Beginning	–	1,436	738

Cash – Ending	1,301	1,301	1,436

Supplemental Disclosures:
Oil and gas property expenditures recorded in prepaids	−	−	7
Oil and gas property expenditures recorded in accounts payable and accrued liabilities	5,898	5,898	1,453

Cash paid for:
Interest	243	239	4
Income taxes	–	–	–

The accompanying notes are an integral part of these consolidated financial statements.

Southern Star Energy Inc.

(An Exploration Stage Company)

Consolidated Statement of Stockholders’ Equity

Period from February 7, 2005 (Date of Inception) to May 31, 2009

	Common Shares Number Amount		Additional Paid-in Capital (Discount)	Convertible Units	Common Stock Subscribed		Other Comprehensive Income (Loss)	Accumulated Deficit	Total Stockholders’ Equity (Deficit)
		$	$	$	$	$		$	$
Balance – February 7, 2005 (date of inception) – Stock issued for cash	563	1	(1)	–	–	–		–	−
Stock issued for cash	84,431	84	(48)	–	–	–		–	37
Net loss for the period	–	–	–	–	–	–		(12)	(12)
				–
Balance – May 31, 2005	84,994	85	(49)	–	–	−		(12)	24

Foreign currency translation adjustment	–	–	–	–	–	(4)		–	(4)
Net loss for the year	–	–	–	–	–	–		(46)	(46)

Balance – May 31, 2006	84,994	85	(49)	–	–	(4)		(58)	(26)
Stock issued for cash	750	1	249	–	–	–		–	250
Intrinsic value of beneficial conversion feature (Note 7)	–	–	640	–	–	–		–	640
Fair value of warrants issued for financing fees (Note 11(a))	–	–	1,369	1,850	–	–		–	3,219
Stock returned and cancelled (Note 10) – April 5, 2007	(54,938)	(55)	55	–	–	–		–	–
Foreign currency translation adjustment	–	–	–	–	–	4		–	4
Net loss for the year	–	–	–	–	–	–		(1,850)	(1,850)

Balance – May 31, 2007	30,806	31	2,264	1,850	–	–		(1,908)	2,237
Intrinsic value of beneficial conversion feature (Note 7)	–	–	520	–	–	–		–	520
Fair value of warrants issued for financing fees (Note 11)	–	–	406	580	–	–		–	986
Stock issued upon conversion of convertible debentures and interest (Note 7)	7,266	7	2,855	–	–	–		–	2,862
Conversion of convertible units (Note 11)	6,710	7	2,423	(2,430)	–	–		–	–
Shares issued for consulting services (Note 10)	19	−	15	–	–	–		–	15
Shares issuable for consulting services (Note 10)	–	–	–	–	35	–		–	35
Fair value of warrants issued for financing fees (Note 6)	–	–	486	–	–	–		–	486
Stock-based compensation (Note 9)	–	–	881	–	–	–		–	881
Net loss for the year	–	–	–	–	–	–		(3,778)	(3,778)

Balance – May 31, 2008	44,801	45	9,852	–	35	–		(5,686)	4,246
Shares issued for Consulting Services	46	−	36	−	(35)	−		−	1
Fair Value of warrants issued for financing activities (Note 6)	−	−	1,729	−	−	−		−	1,729
Fair Value of warrants issued for financing activities (Note 6)	−	−	941	−	−	−		−	941
Stock-based Compensation	−		1,248	−	−	−		−	1,248
Shares issued to director	500	−	205	−	−	−		−	205
Net loss for period	−	−	−	−	−	−		(13,147)	(13,147)
Balance – May 31, 2009	45,347	45	14,010	−	−	−		(18,833)	(4,778)

On November 13, 2006, the Company effected a 7.5:1 forward stock split of the authorized, issued and outstanding common stock. On March 22, 2007, the Company effected a 1.5:1 forward stock split of the authorized, issued and outstanding common stock. All share amounts have been retroactively adjusted for all periods presented.

The accompanying notes are an integral part of these consolidated financial statements.

Southern Star Energy Inc.

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

1.	Nature of Operations and Continuance of Business

Southern Star Energy Inc. was incorporated in the State of Nevada on February 7, 2005 under the name Surge Enterprises, Inc. Pursuant to a Restructuring Agreement dated November 6, 2006, the Company disposed of its interest in the Company’s wholly-owned subsidiary, Surge Marketing Corp. (“Surge Marketing”) (Note 13). On November 13, 2006 the Company changed its name to Southern Star Energy Inc.

On November 2, 2006, the Company commenced the business of the acquisition, exploration and development of oil and gas resources with the acquisition of an initial 20% interest in certain oil and gas leases located in Louisiana. The Company previously focused its business efforts on software sales and website development.

The Company has been in the exploration stage since completion of its restructuring in November, 2006 and has not yet realized significant revenues from its planned operations. Previously, it was in the development stage, pursuant to Statements of Financial Accounting Standards (“SFAS”) No. 7 “Accounting and Reporting by Development Stage Enterprises”, and had not generated or sustained significant revenues. These financial statements have been prepared on a going concern basis, which implies the Company will continue to realize its assets and discharge its liabilities in the normal course of business. The Company is unlikely to pay dividends or generate significant earnings in the immediate or foreseeable future. The continuation of the Company as a going concern and the ability of the Company to emerge from the exploration stage are dependent upon its successful efforts to raise additional equity or debt financing to continue operations and generate sustainable significant revenue. There is no guarantee the Company will be able to raise adequate equity financing or generate profitable operations. As of May 31, 2009, the Company has a working capital deficit of $12,105,000 and has incurred losses of $18,833,000 since inception. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. These financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. Management of the Company has undertaken steps as part of a plan with the goal of sustaining Company operations for the next fiscal year and beyond. These steps include: (a) continuing efforts to raise additional capital and/or other forms of financing; and (b) controlling overhead and expenses. There can be no assurance that any of these efforts will be successful.

2.	Summary of Significant Accounting Policies

Basis of Presentation

These consolidated financial statements and related notes are presented in accordance with accounting principles generally accepted in the United States (“US GAAP”), and are expressed in U.S. dollars. These consolidated financial statements include the accounts of the Company, its wholly-owned subsidiary, Southern Star Operating, Inc. (“Southern Star Operating”), incorporated in the State of Louisiana, USA and the total operating expenses include all of the activities incurred by Surge Marketing up to November 2, 2006 (Note 14). All intercompany balances and transactions have been eliminated. The Company’s fiscal year-end is May 31. Certain reclassifications have been made to prior period amounts to conform to current period presentation.

Use of Estimates

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company regularly evaluates estimates and assumptions related to useful life and recoverability of long-lived assets, stock-based compensation, accounts receivable and deferred income tax asset valuations. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between

Southern Star Energy Inc.

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

the estimates and the actual results, future results of operations will be affected. The most significant estimates with regard to these consolidated financial statements relate to carrying values of oil and gas properties, stock-based compensation, convertible notes, the provision for income taxes and provision for asset retirement obligation.

Concentrations of Credit Risk

The Company operates all of its oil and natural gas properties. As the operator of a property, the Company makes full payments for costs associated with the property and seeks reimbursement from the other working interest owners in the property for their share of those costs. The Company’s joint interest partners consist primarily of independent oil and natural gas producers. If the oil and natural gas exploration and production industry in general were adversely affected, the ability of the Company’s joint interest partners to reimburse the Company could be adversely affected.

The purchasers of the Company’s oil and natural gas production consist primarily of independent marketers, major oil and natural gas companies and gas pipeline companies. The Company has not experienced any significant losses from uncollectible accounts. In 2009 and 2008, the Company had two individual purchasers each accounting for in excess of 10% of our total sales, collectively representing 95% of its total sales. The Company does not believe the loss of any one of its purchasers would materially affect the Company’s ability to sell the oil and natural gas it produces. The Company believes other purchasers are available in the Company’s areas of operations.

The Company regularly maintains its cash in bank deposit accounts, which, at times, may exceed federally insured limits. The Company has not experienced any losses with respect to the related risks to cash and cash equivalents and does not believe its exposure to such risk is more than nominal.

Foreign Currency Transactions

The Company accounts for foreign currency transactions in accordance with Financial Accounting Standards Board (“FASB”) No. 52, “Foreign Currency Translation”. Previously, the Company’s functional currency was the Canadian dollar. Effective upon completion of the Restructuring Agreement, the Company changed its functional currency to the United States dollar. Monetary assets and liabilities denominated in foreign currencies are translated into United States dollars at rates of exchange in effect at the balance sheet date. Non-monetary assets, liabilities and items recorded in income arising from transactions denominated in foreign currencies are translated at rates of exchange in effect at the date of the transaction. Foreign currency transactions are primarily undertaken in Canadian dollars. The Company has not, to the date of these financials statements, entered into derivative instruments to offset the impact of foreign currency fluctuations.

Accounts Receivable

Trade accounts receivable are recorded at the invoiced amount and do not bear any interest. The Company regularly reviews collectability and establishes or adjusts an allowance for uncollectible amounts as necessary using the specific identification method. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

Oil and Gas Properties

The Company utilizes the full-cost method of accounting for petroleum and natural gas properties. Under this method, the Company capitalizes all costs associated with acquisition, exploration and development of oil and natural gas reserves, including leasehold acquisition costs, geological and geophysical expenditures, lease rentals on undeveloped properties and costs of drilling of productive and non-productive wells into the full cost pool on a country by country basis. When the Company obtains proven oil and gas reserves, capitalized costs, including estimated future costs to develop the reserves proved and estimated abandonment costs, net of salvage, will be depleted on the units-of-production method using estimates of proved reserves. The costs of unproved properties are not amortized until it is determined whether or not proved reserves can be assigned to the properties. Until such determination is made the Company assesses annually whether impairment has occurred, and includes in the amortization base costs of drilling exploratory dry holes associated with unproved properties.

Southern Star Energy Inc.

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

For unproven properties, the Company excludes from capitalized costs subject to depletion, all costs directly associated with the acquisition and evaluation of the unproved property until it is determined whether or not proved reserves can be assigned to the property. Until such a determination is made, the Company assesses the property at least annually to ascertain whether impairment has occurred. In assessing impairment the Company considers factors such as historical experience and other data such as primary lease terms of the property, average holding periods of unproved property, and geographic and geologic data. The Company adds the amount of impairment assessed to the cost to be amortized subject to the ceiling test.

Revenue Recognition

Oil and natural gas revenues are recorded using the sales method whereby the Company recognizes oil and natural gas revenue based on the amount of oil and gas sold to purchasers when title passes, the amount is determinable and collection is reasonably assured. Actual sales of gas are based on sales, net of the associated volume charges for processing fees and for costs associated with delivery, transportation, marketing, and royalties in accordance with industry standards. Operating costs and taxes are recognized in the same period for which revenue is earned.

Asset Retirement Obligations

The Company recognizes a liability for future retirement obligations associated with the Company’s oil and gas properties in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 143 “Accounting for Asset Retirement Obligations”. The estimated fair value of the asset retirement obligation is based on the current cost escalated at an inflation rate and discounted at a credit adjusted risk-free rate. This liability is capitalized as part of the cost of the related asset and amortized over its useful life. The liability accretes until the Company settles the obligation.

Property and Equipment

Property and equipment consists of furniture, equipment, and leasehold improvements and is recorded at cost, less accumulated depreciation. Furniture, equipment and leasehold improvements are being depreciated over three years using the straight-line method.

Income Taxes

Income taxes are provided based upon the liability method of accounting in accordance with SFAS No. 109, “Accounting for Income Taxes”. Pursuant to SFAS No. 109 the Company is required to compute deferred income tax assets for net operating losses carried forward. The potential benefits of net operating losses have not been recognized in these financial statements because the Company cannot be assured it is more likely than not it will utilize the net operating losses carried forward in future years.

Southern Star Energy Inc.

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), on June 1, 2007. Previously, the Company had accounted for tax contingencies in accordance with SFAS No.5, “Accounting for Contingencies”. As required by FIN 48, which clarifies SFAS No. 109, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting this standard, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. At the adoption date, the Company applied FIN 48 to all tax positions for which the statute of limitations remained open. The adoption of FIN 48 did not have a material impact on the financial statements during the years ended May 31, 2009 and 2008.

Financial Instruments

The fair values of financial instruments, which include cash, accounts receivable, surety bond, accounts payable, exploration advances, loan payable and due to related party approximate their carrying values due to the relatively short maturity of these instruments.

Comprehensive Loss

SFAS No. 130, “Reporting Comprehensive Income”, establishes standards for the reporting and display of comprehensive loss and its components in the financial statements. As at May 31, 2009 and 2008, the Company has no items that represent comprehensive loss.

Stock-Based Compensation

The Company records stock-based compensation in accordance with SFAS No. 123R “Share Based Payments”, using the fair value method. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. Equity instruments issued to employees and the cost of the services received as consideration are measured and recognized based on the fair value of the equity instruments issued.

Discontinued Operations

Certain amounts have been reclassified to present the Company’s disposal of its interest in its wholly-owned subsidiary, Surge Marketing, as discontinued operations. Unless otherwise indicated, information presented in the notes to the financial statements relates only to the Company’s continuing operations. Information relating to discontinued operations is included in Note 14 and in some instances, where appropriate, is included as a separate disclosure within the individual footnote.

Basic and Diluted Loss Per Share

The Company computes net loss per share in accordance with SFAS No. 128, “Earnings per Share” which requires presentation of both basic and diluted earnings per share (EPS) on the face of the statement of operations. Basic EPS is computed by dividing net income (loss) available to common shareholders (numerator) by the weighted average number of common shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period including stock options, using the treasury stock method, and convertible preferred stock, using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential common shares if their effect is anti-dilutive.

Recent Accounting Pronouncements

Effective June 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements (SFAS No. 157), which established a framework for measuring fair value in generally accepted accounting principles, clarified the definition of fair value within that framework, and expanded disclosures about the use of fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. However, in February 2008, the Financial

Southern Star Energy Inc.

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

Accounting Standards Board (FASB) issued FASB Staff Position No. FA5 157-2, Effective Date of FASB Statement No. 157 (FSP No. 157-2), which deferred the effective date of SFAS No. 157 for one year for non-financial assets and liabilities, except for certain items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).

The three-level fair value hierarchy for disclosure of fair value measurements defined by SFAS No. 157 is as follows:


Level 1	—	Quoted prices for identical instruments in active markets at the measurement date.

Level 2	—	Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets at the measurement date and for the anticipated term of the instrument.

Level 3	—	Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

The adoption of SFAS No. 157 did not have a material effect on the Company’s financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment to FASB Statement No. 133”. SFAS No. 161 is intended to improve financial standards for derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. Entities are required to provide enhanced disclosures about: (a) how and why an entity uses derivative instruments; (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations; and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years beginning after November 15, 2008, with early adoption encouraged. The Company is currently evaluating the impact of SFAS No. 161 on its consolidated financial statements, and the adoption of this statement is not expected to have a material effect on the Company’s consolidated financial statements.

Southern Star Energy Inc.

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements Liabilities –an Amendment of ARB No. 51”. This statement amends ARB 51 to establish accounting and reporting standards for the Noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This statement is effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2008 and earlier adoption is prohibited. The adoption of this statement is not expected to have a material effect on the Company’s consolidated financial statements.

3.	Equipment

	Cost $	Accumulated Depreciation $	May 31, 2009 Net Book Value $	May 31, 2008 Net Book Value $
	(in 000’)
Leasehold improvements	12	4	8	12
Furniture and equipment	10	3	7	8

	22	7	15	20

Southern Star Energy Inc.

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

4.	Oil and Gas Properties

Pursuant to the terms of the Restructuring Agreement dated November 6, 2006 (the “Restructuring Agreement”) (Note 13), Big Sky Management (“Big Sky”), a company owned by the former President of the Company, agreed to assign to the Company Big Sky’s rights under a prospect acquisition agreement to purchase a 20% working interest in certain oil and gas leases located in Louisiana, known as Sentell Field (formerly called the D Duck Prospect). Pursuant to the prospect acquisition agreement with Dynamic Resources Corporation (“Dynamic”), dated October 10, 2006, Big Sky was obligated to pay Dynamic $97,634 for the 20% working interest. Big Sky also was obligated to pay 100% of Dynamic’s remaining share, being 20%, of the drilling and completion costs on the initial two wells drilled on the property up to a maximum of $400,000 per well. Prior to entering into the Restructuring Agreement, Big Sky had not made any payments for Sentell Field. Subsequent to the date of the Restructuring Agreement, the Company paid $97,634 to Dynamic for its 20% interest and $144,116 was paid to Dynamic by Ramshorn Investments, Inc. (“Ramshorn”) for its 40% interest. The Company’s working interest is subject to an approximate 24% royalty interest. As a result, the Company is entitled to receive a proportionate share of approximately76% of its interest in any production from Sentell Field, less all exploration and development costs, and the holder of the royalty interest is entitled to the remaining 24% of any production. The holder of the royalty interest is not responsible for any exploration or development costs.

On November 2, 2006, the Company acquired another 20% working interest in the property for $290,062, resulting in a combined working interest of 40%, and became the Operator of Sentell Field. An additional 40% working interest is held by Ramshorn who has agreed to pay 40% of the drilling costs on Sentell Field.

All of the Company’s proven and unproven oil and gas properties are located in the United States. The following table summarizes information regarding the Company’s oil and gas acquisition, exploration and development activities:

		May 31, 2009 $	May 31, 2008 $
	(in 000’s)
Proved Properties
Acquisition costs		785	693
Development costs		3,413	60
Exploration costs		6,455	5,844
Less:
Accumulated depletion, depreciation and amortization		(9,018)	(109)
		1,635	6,488

Unproven Properties
Acquisition costs		64	–
Exploration costs		3,707	–
Net Carrying Value		5,406	6,488

Included in accumulated depletion, depreciation and amortization are impairments of oil and gas properties totaling $8,221,000 as a result of the ceiling test impairments as of May 31, 2009 ($823,000) February 28, 2009 ($5,196,000) and August 31, 2008 ($2,202,000). In determining the future cash flows used in performing the full cost ceiling test, the Company used the following prices, held constant, at May 31, 2009, February 28, 2009, and August 31, 2008:

	Natural Gas Price per Mcf	Oil Price per Barrel
May 31, 2009	$3.37	$54.31
February 28, 2009	$3.39	$51.05
August 31, 2008	$8.82	$115.96

Unproved properties represent the costs of wells drilled which have not yet been completed and to which proved reserves have not been assigned. Accordingly, these costs have been excluded in determining depletion, depreciation and amortization expense.

During the drilling of the Boyce Pate 16-1 well, the Company incurred additional costs of approximately $1,700,000 resulting from a vendor using inappropriate cement while setting a plug after the drilling of the well. The vendor has agreed to reimburse us for the additional costs, of which our share totals approximately $686,000. To date, $1,000,000 has been received from the vendor and, accordingly, oil and gas property balances as May 31, 2009, have been reduced by approximately $400,000 for our share of amounts received. Additional amounts received from the vendor will be accounted for a reduction of oil and gas properties.

Southern Star Energy Inc.

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

5.	Asset Retirement Obligation

The Company’s asset retirement obligations (“AROs”) in regards to Sentell Field relates to site restoration.

A reconciliation between the opening and closing AROs balance is provided below:

	May 31, 2009 $	May 31, 2008 $
	(in 000’s)
Beginning asset retirement obligations	54	–
Liabilities incurred	37	57
Liabilities settled	−	(6)
Accretion	7	3

Total asset retirement obligations	98	54

In accordance with SFAS No. 143 “Accounting for Asset Retirement Obligations,” the Company measured the ARO’s at fair value and properly capitalized this to the oil and gas property accounts. The ARO’s will accrete to $171,000 over a period of seven years at which it is expected to be settled. A discount rate of 10% and an inflation rate of 2.5% were used to calculate the present value of the ARO’s. The corresponding accretion at May 31, 2009, of $7,000 has been included in depletion, depreciation and amortization. Actual retirement costs will be recorded against the ARO’s when incurred. Any difference between the recorded ARO’s and the actual retirement costs incurred will be recorded as a gain or loss in the period of settlement.

6.	Bank Debt

On May 16, 2008, the Company and Macquarie Bank Limited (“Macquarie”) entered into a credit agreement (the “Macquarie Credit Agreement”) to receive advances up to $2,000,000 with a maturity date of September 13, 2008, which the Company received in full on May 20, 2008. The advances accrued interest at the lesser of the prime rate plus 2% and the highest lawful rate with interest payable on the last day of each month. Pursuant to the terms of the agreement, all proceeds from the sale of oil and gas by the Company were to be remitted Macquarie while amounts are outstanding under the agreement. In connection with the Macquarie Credit Agreement, the Company issued the lender a warrant to purchase 750,000 shares of common stock at $1.00 per share until May 16, 2013. The Company recorded the fair value of the warrant of $486,000 as additional paid-in capital and recorded an equivalent discount, which will be expensed over the term of the agreement.

On July 11, 2008, the Company and Macquarie entered into a credit agreement (the “Amended Macquarie Credit Agreement”) to receive advances up to $25,000,000 with an initial borrowing base of $5,000,000. The Amended Macquarie Credit Agreement amends and restates the previous credit agreement described above in its entirety. On July 16, 2008, the Company received an advance of approximately $2,500,000 and received advances for the remaining $2,500,000 throughout the nine months ended February 28, 2009. The advances accrue interest at the lesser of the prime rate plus 2% and the highest lawful rate. Interest payments must be made on the last day of each month and all interest and advances must be repaid by July 11, 2011, the maturity date. Pursuant to the terms of the Amended Macquarie Credit Agreement, all proceeds from the sale of oil and gas by the Company will be remitted to Macquarie while amounts are outstanding under the agreement.

The Amended Macquarie Credit Agreement is secured by a lien on substantially all of the Company's assets, including the Company's oil and gas properties and contains various positive covenants, including interest coverage ratio, current ratio and adjusted present value ratio covenants (as defined in the agreement), and certain negative covenants which prevent us from carrying out certain actions, including incurring specified debt or guaranties, suffering any change of control, merging into or consolidating with any other entity and declaring or paying any cash dividends or distributions. As of May 31, 2009, we were not in compliance with certain of these financial covenants.

Southern Star Energy Inc.

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

In consideration of this waiver, the Company agreed to pay Macquarie one hundred percent (100%) of the Net Operating Cash Flow (as defined in the Credit Agreement), to be applied against the entire outstanding balance of the loan until such time as the outstanding balance of the loan is paid off. The Company also agreed to obtain the written consent of Macquarie prior to incurring or agreeing to incur any cost or expense for capital expenditures of any kind. Finally, the Company released Macquarie from any action or failure to act in connection with the Credit Agreement or related documents occurring any time prior to May 29, 2009. The Waiver Letter expired June 30, 2009. The Company remains out of compliance with its interest coverage ratio, current ratio and adjusted present value ratio covenants.

In connection with the Amended Macquarie Credit Agreement, the Company issued the lender a warrant to purchase 750,000 shares of common stock at $1.00 per share until July 11, 2013 in exchange for the warrant to purchase 750,000 shares of common stock at $1.00 issued in connection with the Macquarie Credit Agreement. Also in connection with the credit agreement, the Company issued the lender a warrant to purchase 1,897,419 shares of common stock at $1.00 per share until July 11, 2013.

Pursuant to a financial services agreement and in connection with the Macquarie Credit Agreement, the Company paid Imperial Capital, LLC (“Imperial”) $60,000 of financing fees, $50,000 in additional expenses and was obligated to issue a warrant exercisable to purchase 100,000 shares of common stock at $1.00 per share. Additionally, in connection with the Amended Macquarie Credit Agreement, the Company paid Imperial a cash fee of $90,000 and issued a warrant to purchase 1,250,000 shares of the Company’s common stock at $1.00 per share until July 11, 2013. Furthermore, the Company will owe Imperial the amount of 3% of the gross proceeds of each funding in excess of the initial $5,000,000 borrowing base the Company receives under the Amended Macquarie Credit Agreement until Imperial has received the total fee of $750,000, of which $150,000 has been paid.

The issuance-date fair value of the warrants issued to Macquarie ($1,728,852) and Imperial ($940,908) have been recorded as deferred financing costs with a related adjustment to additional paid-in capital. Additionally, the Company incurred an additional $161,337 in legal and other direct costs in connection with the Amended Macquarie Credit Agreement that have been recorded as deferred financing costs. Such deferred financing costs are being amortized to financing costs over the three-year term of the agreement using a method that approximates the interest method.

7.	Convertible Debentures

On November 1, 2006, the Company issued a 10% convertible debenture with a principal amount of $600,000 which was due and payable on November 1, 2008. The principal and accrued interest on the debenture could be converted into shares of the Company’s common stock at $0.33 per share, at the option of the holder. An equity portion representing the beneficial conversion feature was not recorded, as there was no intrinsic value at the date of commitment. On November 16, 2007, the Company received notice that the outstanding principal and accrued interest of $663,333 was to be converted into 1,989,999 shares of common stock. On December 21, 2007, 265,333 shares were issued and the remaining 1,724,666 shares were issued on January 15, 2008.

On December 1, 2006, the Company issued a 10% convertible debenture with a principal amount of $800,000 which was due and payable on December 1, 2008. The principal and accrued interest on the debenture could be converted into shares of the Company’s common stock at $0.33 per share, at the option of the holder.

Southern Star Energy Inc.

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

In accordance with Emerging Issues Task Force (“EITF”) 98-5 “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios”, the Company recognized the value of the embedded beneficial conversion feature of $640,000 as additional paid-in capital and an equivalent discount which would have been expensed over the term of the convertible debenture. The Company would have recorded interest expense over the term of the convertible debenture of $640,000 resulting from the difference between the stated value and carrying value at the date of issuance.

On November 16, 2007, the Company received notice that the outstanding principal and accrued interest of $877,778 was to be converted into 2,633,333 shares of common stock. Upon notice of conversion the Company recognized the unaccreted discount of $507,868 as interest expense. The shares were issued on December 21, 2007.

On September 18, 2007, the Company issued a 10% convertible debenture with a principal amount of $1,300,000 which was due and payable on September 18, 2009. The principal and accrued interest on the debenture could be converted into shares of the Company’s common stock at $0.50 per share, at the option of the holder.

In accordance with EITF 98-5, the Company recognized the value of the embedded beneficial conversion feature of $520,000 as additional paid-in capital and an equivalent discount which would have been expensed over the term of the convertible debenture. The Company would have recorded interest expense over the term of the convertible debenture of $520,000 resulting from the difference between the stated value and carrying value at the date of issuance.

On November 16, 2007, the Company received notice that the outstanding principal and accrued interest of $1,321,306 was to be converted into 2,642,611 shares of common stock. Upon notice of conversion the Company recognized the unaccreted discount of $520,000 as interest expense. On December 21, 2007, the Company issued 2,624,611 of the shares issuable on the conversion of debentures. On April 10, 2008 the Company issued the 18,000 shares for $9,000 of accrued interest.

8.	Related Party Transactions

In the year ended May 31, 2008, the Company granted to a company wholly owned by a director of the Company, 750,000 stock options to purchase shares of the Company’s common stock at $1.09 per share for a period of 4 years pursuant to a consulting agreement (Note 12(g)). On February 26, 2008, the Company reduced the exercise price of the options to $0.70 per share. In the year ended May 31, 2009, the Company also paid $354,000 (May 31, 2008 – $156,000) in consulting fees pursuant to a consulting agreement. At May 31, 2009, the Company owed $42,000 to this company pursuant to the consulting agreement. This amount is unsecured, is non-interest bearing and is due on demand.

In the year ended May 31, 2008, the Company granted, to the President of the Company, 1,500,000 stock options to purchase shares of the Company’s common stock at $1.20 per share for a period of 5 years pursuant to a consulting agreement (Note 12(i)). On February 26, 2008, the Company reduced the exercise price of the options to $0.70 per share. The Company also paid $189,000 in consulting fees pursuant to a consulting agreement in the year ended May 31, 2008.

The Company incurred $120,000 (May 31, 2008– $50,000) to Big Sky, a company owned by a director and the former CEO of the Company pursuant to a consulting agreement (Note 12(a)). At May 31, 2009, the Company owed $4,000 (May 31, 2008 - $300) to Big Sky for expenses incurred on behalf of the Company. This amount is unsecured, is non-interest bearing and is due on demand.

In the year ended May 31, 2008, the Company paid $22,000 in consulting fees to the former CFO of the Company.

At May 31, 2009, the Company owed $10,000 (May 31, 2008 - $Nil) to a director of the company for consulting services rendered to the company during the year ended May 31, 2009. This amount is unsecured, is non-interest bearing and is due on demand.

These transactions are in the normal course of business and are recorded at the exchange amount, which is the consideration agreed to by the related parties.

Southern Star Energy Inc.

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

9.	Stock Options and Warrants

Stock Options

On October 31, 2007, the Company approved the 2007 Stock Option Plan (the “Plan”) to issue up to 3,000,000 shares to eligible employees, officers, directors and consultants. Pursuant to the Plan, the Company has granted stock options to certain directors and consultants. On June 4, 2008, the Company amended the Plan to increase the number of shares issuable to 5,000,000. Pursuant to the Plan, the Company has granted stock options to certain directors and consultants.

On February 26, 2008, the Company modified the terms of certain options outstanding, reducing the exercise price to $0.70 per share. The modification resulted in a $138,000 increase in the fair value of the options, of which $31,000 was recognized immediately as stock-based compensation expense and the remaining $107,000 being recognized over the remaining vesting period of the options. The weighted average grant date fair value of the modified stock options was $0.52.

The weighted average grant date fair value of stock options granted during the year ended May 31, 2009 was $0.68 per share (May 31, 2008 - $1.04 per share). No stock options were exercised during the years ended May 31, 2009 and 2008. During the year ended May 31, 2009, the Company recorded stock-based compensation of $1,248,000 (May 31, 2008- $880,571) as general and administrative expense.

A summary of the Company’s stock option activity is as follows:

	Number of Options	Weighted Average Exercise Price $	Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value $
Outstanding, May 31, 2008	2,750,000	0.70
Granted	1,700,000	0.94
Forfeited	(100,000)	0.60
Outstanding, May 31, 2009	4,350,000	0.80	3.36	−
Exercisable, May 31, 2009	1,250,000	0.70	2.29	−

The fair value of each option grant was estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions:

	Year Ended May 31, 2009	Year Ended May 31, 2008

Expected dividend yield	0%	0%
Expected volatility	112%	111%
Expected life (in years)	3.50	3.93
Risk-free interest rate	3.19%	2.65%

As at May 31, 2009, there was $1,878,000 (May 31, 2008 - $1,954,000) of total unrecognized compensation costs related to nonvested share-based compensation arrangements granted under the Plan which are expected to be recognized over a weighted-average period of 1.70 years. The total fair value of shares vested during the year ended May 31, 2009 was $1,248,000.

A summary of the status of the Company’s nonvested shares as of May 31, 2009, and changes during the year ended May 31, 2009, is presented below:

Southern Star Energy Inc.

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

	Number of Shares	Weighted-Average Grant-Date Fair Value $
Nonvested at May 31, 2008	2,500,000	0.53
Granted	1,700,000	0.68
Vested	(1,000,000)	0.51
Forfeited	(100,000)	0.44
Nonvested at May 31, 2009	3,100,000	0.62

Warrants

On May 16, 2008, the Company issued a warrant to purchase 750,000 shares of common stock at $1.00 per share until May 16, 2013 (Note 6). On July 11, 2008, in connection with entering into the Amended Macquarie Credit Agreement as discussed in Note 6, the Company issued an additional warrant to purchase 1,897,419 shares of common stock at $1.00 per share until July 11, 2013. Additionally, pursuant to a financial services agreement and the Amended Macquarie Credit Agreement, the Company issued a warrant to purchase 1,250,000 shares of the Company’s common stock until July 11, 2013.

A summary of the Company’s warrants is as follows:

	Number of Warrants	Weighted Average Exercise Price $	Weighted Average Remaining Contractual Term
Outstanding, May 31, 2009	1	1.00
Granted	2	1.00
Outstanding, May 31, 2009	3	1.00	4.12

10.

Common Stock

On November 13, 2006, the Company completed a 7.5:1 forward stock split on the basis of 7.5 new shares of common stock in exchange for every one old share of common stock outstanding. On March 22, 2007, the Company effected a 1.5:1 forward stock split of the authorized, issued and outstanding common stock. All per share amounts have been retroactively restated to reflect the forward stock splits .

On April 10, 2008, the Company issued 18,000 shares of common stock for $9,000 of accrued interest (Note 7(c)).

On December 11, 2007, the Company issued 18,750 shares of common stock for $15,000 of consulting services described in Note 12(d). At May 31, 2008, $35,000 of consulting expense was included in common stock subscribed.

On December 21, 2007, January 15, 2008 and April 10, 2008, the Company issued 5,523,277, 1,724,666 and 18,000 shares of common stock, respectively, upon the conversion of $2,862,416 of principal and accrued interest relating to the convertible debentures described in Note 7.

On February 6, 2008, the Company issued 6,710,001 shares of common stock upon the conversion of the $2,430,000 of convertible units described in Note 11.

On February 12, 2007, the Company entered into a subscription agreement for the issuance of 37 units at $50,000 per unit for proceeds of $1,850,000. Each unit entitled the subscriber to receive 1% of the net proceeds from production attributable to the Company’s interest in certain wells located on Sentell Field (Note 4). Each unit was convertible into shares of the Company’s common stock at a rate of 1.5 shares for every $0.50 of investment. During the year ended May 31, 2007, pursuant to EITF 98-5 and EITF 00-27 “Application of Issue No. 98-5 to Certain Convertible Instruments” the Company recorded $1,369,000 intrinsic value of the beneficial conversion feature upon issuance (Note 11).

Southern Star Energy Inc.

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

On February 13, 2007, the Company received stock subscriptions for 750,000 shares of common stock at $0.33 per share for proceeds of $250,000. The shares were issued on March 30, 2007.

On April 5, 2007, 54,937,500 shares of common stock were returned to treasury and cancelled as a part of the Restructuring Agreement described in Note 13.

	i)	During the year ended May 31, 2009, the Company issued 46,335 shares of common stock with a fair value of $36,000 pursuant to a marketing agreement, which was subsequently terminated.
	j)	On January 21, 2009, the Company issued 500,000 shares of common stock to a director of the Company for proceeds of $205,000.

11.

Convertible Units

On February 12, 2007, the Company entered into a subscription agreement for the issuance of 37 units at $50,000 per unit for proceeds of $1,850,000. Each unit entitles the subscriber to receive 1% of the net proceeds from production attributable to the Company’s interest in certain wells located on Sentell Field (Note 4). Each unit is convertible into shares of the Company’s common stock at a rate of 1.5 shares for every $0.50 of investment. During the year ended May 31, 2007, pursuant to EITF 98-5 and EITF 00-27, the Company recorded the $1,369,000 intrinsic value of the beneficial conversion feature upon issuance. On February 6, 2008, the Company issued 5,550,001 shares of common stock upon the conversion of all 37 units.

On July 11, 2007, the Company entered into a subscription agreement for the issuance of 11.6 units at $50,000 per unit for proceeds of $580,000. Each unit entitles the subscriber to receive 1.98% of the net proceeds from production attributable to the Company’s interest in certain wells located on Sentell Field (Note 4). Each unit is convertible into shares of the Company’s common stock at a rate of 1 share for every $0.50 of investment. During the year ended May 31, 2008, pursuant to EITF 98-5 and EITF 00-27, the Company recorded the $406,000 intrinsic value of the beneficial conversion feature upon issuance. On February 6, 2008, the Company issued 1,160,000 shares of common stock upon the conversion of all 11.6 units.

12.

Commitments

On January 1, 2008, the Company entered into a consulting agreement with the former CEO of the Company to provide consulting services in exchange for $10,000 per month for an indefinite period.

On February 4, 2008, the Company entered into a lease agreement commencing May 1, 2008 for office premises for a 3 year term expiring May 1, 2011. Annual rent under the new lease is payable at $35,000 for the first year, $35,000 for the second year and $36,000 for the final year. The Company must also pay its share of building operating costs and taxes. Future minimum lease payments over the next three fiscal years are as follows:

		Future Minimum Lease Payments $ (in 000’s)
2010		35
2011		33
Total		68

Southern Star Energy Inc.

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

On May 20, 2008, the Company entered into a consulting agreement with an investor communications consulting firm that will provide investor communications services on behalf of the Company in consideration of a minimum of $3,000 per month for an initial period of one year. This agreement was terminated subsequent to May 31, 2009.

On May 3, 2007, the Company entered into a marketing agreement with RedChip Companies Inc. (“RedChip”) for an initial term of 12 months in consideration of $7,500 per month, and commencing August 1, 2007, an equivalent value of $5,000 per month payable in shares of the Company’s common stock, the value of which will be determined based upon the closing price of the shares as reported by StockWatch Inc. on the first business day of each quarterly period. The shares were to be issued by the Company to RedChip on a quarterly basis no later than ten days after the first day of each subsequent quarter. On December 11, 2007, the Company issued 18,750 for $15,000 of consulting services shares pursuant to the consulting agreement and at May 31, 2008, $35,000 was included in common stock subscribed. During the year ended May 31, 2009, the Company issued 46,335 shares pursuant to this agreement before terminating the agreement.

On February 27, 2007, the Company entered into a services agreement with a consultant who will provide consulting services in consideration for $140 per hour of services and 375,000 shares of the Company’s common stock. The Company is to issue 187,500 shares upon the generation of revenues from Sentell Field in excess of all costs reasonably incurred in relation to the drilling of the well. The Company is also obligated to issue 187,500 shares to be held in escrow for a period of one year upon Sentell Field generating more than 15 billion cubic feet equivalent of natural gas or having reserves greater than $75,000,000 calculated on a 10% discounted cash flow basis. As at May 31, 2009, no shares have been issued under this services agreement.

On February 15, 2007, the Company entered into a services agreement with a consultant who will provide consulting services in consideration for $75 per hour of services and 375,000 shares of the Company’s common stock. The Company is to issue 187,500 shares upon the generation of revenues from Sentell Field in excess of all costs reasonably incurred in relation to the drilling of the well. The Company is also obligated to issue 187,500 shares to be held in escrow for a period of one year upon Sentell Field generating more than 15 billion cubic feet equivalent of natural gas or having reserves greater than $75,000,000 calculated on a 10% discounted cash flow basis. As at May 31, 2009, no shares have been issued under this services agreement.

On November 22, 2007, the Company entered into a consulting agreement with a company wholly owned by a director of the Company that will provide consulting services in consideration for $10,000 per month, options to purchase 750,000 shares of the Company’s common stock at $1.09 per share for 4 years and $60,000 upon the commercial production of each new well. The options granted had a grant-date fair value of approximately $611,000. One-third of the options granted will vest on each of the first three anniversaries of November 22, 2007. On February 26, 2008, the Company reduced the exercise price of the options to $0.70 per share which resulted in an increase to the fair value of the options in the amount of approximately $34,000. Approximately $3,000 of such increase was recognized immediately with the remaining $31,000 to be recognized ratably over the remaining vesting period. In addition, if during the term of this agreement, the Company identifies an oil and gas property interest or well for potential exploration by the Company and retains the consultant, the consultant will be granted an overriding royalty of: 2% for leases where the Company has acquired a working interest of greater than 80%, 1.75% for leases where the Company has acquired a working interest of greater than 78% but less than 80%, 1.5% for leases where the Company has acquired a working interest of greater than 75% but less than 78%, 1.0% for leases where the Company has acquired a working interest of less than 75%.

On November 22, 2007, the Company entered into a consulting agreement with a consultant who will provide consulting services in consideration for $175 per hour of services, options to purchase 500,000 shares of the Company’s common stock at $1.09 per share for 2 years and $25,000 upon the successful completion of three of the Company’s wells. The options granted had a grant-date fair value of approximately $315,000. One-half of the options granted vested immediately and the remaining half vests

Southern Star Energy Inc.

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

on the first anniversary of November 22, 2007. On February 26, 2008, the Company reduced the exercise price of the options to $0.70 per share which resulted in an increase to the fair value of the options in the amount of approximately $36,000. Approximately $21,000 of such increase was recognized immediately with the remaining $15,000 was recognized ratably over the remaining vesting period. During the year, the Company paid $75,000 to the consultant for the completion of certain wells on Sentell Field.

On November 22, 2007, the Company entered into a consulting agreement with the President of the Company who will provide consulting services in consideration for $200 per hour of services to a maximum of $1,500 per day and $30,000 per month and options to purchase 1,500,000 shares of the Company’s common stock at $1.20 per share for 5 years. The options granted had a grant-date fair value of approximately $1,442,000. One-third of the options granted will vest on each of the first three anniversaries of November 22, 2007. On February 26, 2008, the Company reduced the exercise price of the options to $0.70 per share which resulted in an increase to the fair value of the options in the amount of approximately $67,000. Approximately $6,000 of such increase was recognized immediately with the remaining $61,000 to be recognized ratably over the remaining vesting period. Additionally, if the President completes an equity financing in excess of $5,000,000 the President would cease to be a consultant and become an employee with a base salary of $240,000 per year and up to two bonus payments of $30,000 upon the successful completion of a new well outside the current Sentell Field or the acquisition of any property or financing of greater than $3,000,000. On May 1, 2008, the President of the Company ceased to be a consultant and became an employee of the Company.

On June 18, 2007, the Company entered into a services agreement with Imperial to provide services related to assisting the Company in future financing activities. Pursuant to a financial services agreement and in connection with the Macquarie Credit Agreement, the Company paid Imperial $60,000 of financing fees, $50,000 in additional expenses and was obligated to issue a warrant exercisable to purchase 100,000 shares of common stock at $1.00. Additionally, in connection with the Amended Macquarie Credit Agreement, the Company paid Imperial a cash fee of $90,000 and issued a warrant to purchase 1,250,000 shares of the Company’s common stock until July 11, 2013. Furthermore, the Company will owe Imperial the amount of 3% of the gross proceeds of each funding in excess of the initial $5,000,000 borrowing base the Company receive under the Amended Macquarie Credit Agreement until Imperial has received the total fee of $750,000, of which $150,000 has been paid.

13.

Restructuring Agreement

On November 6, 2006, the Company entered into a restructuring agreement (the “Restructuring Agreement”) with Southern Star Operating, Big Sky, Eric Boehnke (“Boehnke”), Troy Mutter (“Mutter”) and Frank Hollmann (“Hollmann”). Boehnke is the former President of the Company, and Mutter and Hollmann are former officers. Pursuant to the terms of the Restructuring Agreement, as amended, Big Sky, a private British Columbia company wholly-owned by Boehnke, agreed to assign to the Company its rights under a prospect acquisition agreement to purchase a 20% working interest in Sentell Field (Note 4). Prior to entering into the Restructuring Agreement, Big Sky had not made any payments or acquired any property pursuant to the prospect acquisition agreement. In conjunction with the Restructuring Agreement, the Company transferred its wholly-owned subsidiary, Surge Marketing, to Mutter and Hollmann in consideration for the transfer of 9,000,000 split-adjusted shares of common stock of the Company to Boehnke, and the return and cancellation of an aggregate of 54,937,500 split-adjusted shares of common stock of the Company held by Mutter and Hollman. On April 5, 2007, the shares were returned to treasury and cancelled.

14.

Discontinued Operations

Pursuant to the Restructuring Agreement discussed in Note 13, on April 5, 2007 the Company completed the transfer of all of its interests in its wholly-owned subsidiary, Surge Marketing, in exchange for the transfer of 9,000,000 split-adjusted shares of common stock of the Company to Boehnke, and the return and cancellation

Southern Star Energy Inc.

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

of an aggregate of 54,937,500 split-adjusted shares of common stock of the Company held by Mutter and Hollman. Effective November 2, 2006, the Company had discontinued all operations related to the former business of software sales and website development.

The results of discontinued operations are summarized as follows:

	Accumulated From February 7, 2005 (Date of Inception) to May 31,
	2008
	$
	(in 000’s)
Revenue
Consulting	90
Software	19
	109
Expenses	171
Net Operating Loss	(62)
Gain on disposal	41
Gain (Loss) From Discontinued Operations	(21)

The net operating gain (loss) represents all of the activity incurred by Surge Marketing up to November 2, 2006.

The Company realized a gain on the disposal of Surge Marketing, equal to the carrying value of the assets and liabilities disposed of as of November 2, 2006:

	(in $000’s)
Assets	61
Liabilities	(119)
Amounts Surge Enterprises, Inc, owed to Surge Marketing	52
Amounts owed to related parties	(40)
Investment in Surge Marketing	(1)
Comprehensive loss	6
Gain on Disposal	(41)

The results of operations and cash flows of Surge Marketing for the period from June 1, 2006 to November 2, 2006 have been reported on a discontinued operations basis.

15.

Income Taxes

The Company is subject to United States federal income taxes at an approximate rate of 35%. The reconciliation of the provision for income taxes at the United States federal statutory rate compared to the Company’s income tax provision as reported is as follows:

Southern Star Energy Inc.

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

The significant components of deferred income tax assets and liabilities at May 31, 2009 and 2008 are as follows:

		May 31, 2009		May 31, 2008
		(in 000’s)
Net loss before income taxes	$	(13,147)	$	(3,778)
Statutory income tax rate		35%		35%
Income tax recovery at statutory income tax rate		(4,602)		(1,322)
Depreciation, depletion and amortization		2,713		−
Intangible drilling costs		(1,713)		−
Accretion of discount on convertible debt		149		407
Financing costs		293		142
Stock-based compensation		437		308
Other		4		2
Change in valuation allowance		2,719		463
	$	–	$	–

	May 31, 2009 $	May 31, 2008 $

Net operating loss carryforward	4,494	630
Oil and gas property	(1,344)	(324)
Valuation allowance	(3,150)	(306)
Net deferred income tax asset	–	–

The Company has recognized a valuation allowance for the deferred income tax asset since the Company cannot be assured that it is more likely than not that such benefit will be utilized in future years. The valuation allowance is reviewed annually. When circumstances change and which cause a change in management’s judgment about the realizability of deferred income tax assets, the impact of the change on the valuation allowance is generally reflected in current income.

The Company has a net operating loss carryforward of approximately $12,839,000 available to offset taxable income in future years which expire as follows:

Expiring in:		(In $000’s)
2025		12
2026		45
2027		399
2028		4,615
2029		7,768
Total		12,839

Southern Star Energy Inc.

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

16.

Supplemental Oil and Gas Disclosures (Unaudited)

Costs Incurred In Oil and Gas Property Acquisition, Exploration, and Development Activities

		2009		2008
		(in 000’s)
Acquisitions
Proved	$	92	$	−
Unproved		64		224
Exploration		4,317		3,517
Development		3,354		60
Costs Incurred	$	7,828	$	3,801

Capitalized Costs

		2009			2008
		(in 000’s)
Proved Properties	$	10,653		$	6,597
Unproved Properties		3,771			--
		14,424			6,597
Accumulated DD&A		(9,018	)		(109)
	$	5,406		$	6,488

Oil and Gas Reserve Information

General

The Company’s estimated net proved oil and gas reserves and the present value of estimated cash flows from those reserves are summarized below. Proved reserves represent estimated quantities of natural gas, crude oil and condensate that geological and engineering data demonstrate, with reasonable certainty, to be recoverable in future years from known reservoirs under economic and operating conditions in effect when the estimates were made. Proved developed reserves are proved reserves expected to be recovered through wells and equipment in place and under operating methods used when the estimates were made.

The reserves were estimated by an independent petroleum engineer. The present value of estimated cash flows is estimated by management using market prices at the end of each of the periods presented in the financial statements. Those prices were held constant over the estimated life of the reserves. There are numerous uncertainties inherent in estimating quantities and values of proved oil and gas reserves and in projecting future rates of production and the timing of development expenditures, including factors involving reservoir engineering, pricing and both operating and regulatory constraints. All reserves estimates are to some degree speculative, and various classifications of reserves only constitute attempts to define the degree of speculation involved. Accordingly, oil and gas reserve information represents estimates only and should not be construed as being exact.

Southern Star Energy Inc.

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

Estimated Oil and Gas Reserve Quantities

The Company’s ownership interests in estimated quantities of proved oil and gas reserves and changes in net proved oil and gas reserves, all of which are located in the United States, are summarized below:

	Proved Reserves
	Oil and Natural Gas Liquids (barrels)	Natural Gas (Mcf)
Proved reserves, May 31, 2007	−	−
Extensions, discoveries and other additions	65,002	3,254,271
Production	(1,059)	(53,069)
Proved reserves, May 31, 2008	63,943	3,201,202
Revisions of previous estimates	(28,950)	(1,365,165)
Extensions and discoveries	−	352,250
Production	(3,526)	(167,377)
Proved reserves, May 31, 2009	31,467	2,020,910

Proved developed reserves, May 31, 2008	43,985	2,193,422
Proved developed reserves, May 31, 2009	7,744	742,670

Amortization per unit of production (mcf) is $0.74.

There were no revisions of previous estimates of reserves or purchases of minerals in-place during the year ended May 31, 2008.

Standardized Measure of Discounted Future Cash Flows

The standardized measure of discounted future net cash flows from proved reserves for the years presented in the financial statements are summarized below. There were no proved reserves at inception through August 31, 2007. The standardized measure of future cash flows as of May 31, 2009 is calculated using a price per barrel of oil of $61.72, a price per Mcf of natural gas of $3.37, and a price per Gal non-gas liquid of $0.89. These prices are equal to the price received by the Company at May 31, 2009. The resulting estimated future cash inflows are reduced by estimated future costs to produce the estimated proved reserves. These costs are based on year-end cost levels. Future income taxes are based on year-end statutory rates after consideration of permanent differences, to the excess of pre-tax cash inflows over the Company’s tax basis in the associated proved gas and oil properties. The future net cash flows are reduced to present value by applying a 10% discount rate. The standardized measure of discounted future cash flows is not intended to represent the replacement cost or fair market value of the Company’s oil and gas properties.

	May 31 ,2009	May 31 ,2008
	(in 000’s)
Future production revenues	$ 8,281	$ 41,482
Future production costs	(2,743)	(9,477)
Future development costs	(2,207)	(10,776)
Future income taxes	−	−
Future net cash flows	3,331	21,229
10% annual discount for estimating future net cash flows	(1,695)	(12,731)
Standardized measure of discounted future net cash flows	$ 1,636	$ 8,498

Southern Star Energy Inc.

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

Future development costs include the estimated costs of bringing non-producing proved reserves into production.

Principal changes in the standardized measure of discounted future net cash flows attributable to the Company’s proved reserves are as follows at May 31:

	2009 $	2008 $
	(in 000’s)
Standardized measure, beginning of year	8,498	−
Sales of oil and natural gas, net of production costs	(689)	(330)
Net changes in pricing and production costs	(11,310)	−
Change in estimated future development costs	3,640	−
Extensions and discoveries, net of future development costs	1	8,828
Previously estimated development costs incurred	570	−
Revisions of quantity estimates	(1,926)	−
Accretion of discount	850	−
Changes in timing of production and other	(2,002)	−
Standardized measures, end of year	1,636	8,498

17.

Subsequent Events

On June 9, 2009, one of our vendors, Coastal Chemical Co., LLC filed suit in the 113th Judicial District of Harris County, Texas related to approximately $104,000 in claimed unpaid invoices. In addition, since May 31, 2009, several vendors have filed liens against the Company related to claims for unpaid invoices for goods and services provided to the Company in Bossier Parish, Louisiana. Total claims related to these liens are approximately $3,050,000. The suit and liens are all based upon claims for non-payment for amounts which have been reflected in the Company’ accounts payable balances.

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

ITEM 9A(T).

CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures

At the end of the period covered by this report on Form 10-K or the year ended May 31, 2009, an evaluation was carried out under the supervision of and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operations of the Company’s disclosure controls and procedures (as defined in Rule 13a - 15(e) and Rule 15d - 15(e) under the Exchange Act). Based on that evaluation the CEO and the CFO have concluded that the Company’s disclosure controls and procedures were adequately designed and effective in ensuring that: (i) information required to be disclosed by the Company in reports that it files or submits to the Securities and Exchange Commission under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms and (ii) material information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow for accurate and timely decisions regarding required disclosure.

Management’s Report on Internal Control Over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of financial statements for external purposes in accordance with generally accepted accounting principles.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness in future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management conducted an evaluation of the design and operation of the Company’s internal control over financial reporting as of May 31, 2009 based on the criteria in a framework developed by the Company’s management pursuant to and in compliance with the principles and framework of the Committee of Sponsoring Organizations of the Treadway Commission. This evaluation included review of the documentation of controls, evaluation of the design effectiveness of controls, walkthroughs of the operating effectiveness of controls and a conclusion on this evaluation. Based on this evaluation, management has concluded that the Company’s internal control over financial reporting was effective as of May 31, 2009 and no material weaknesses were discovered.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rule 13(a)-15(f) or 15(d)-15(f)) that occurred during the quarter ended May 31, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B.

OTHER INFORMATION.

None.

PART III

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Directors and Executive Officers and Significant Employees

All directors of our company hold office until the next annual meeting of the stockholders or until their successors have been elected and qualified. The officers of our company are appointed by our board of directors and hold office until their death, resignation or removal from office. Our directors, executive officers and significant employees, their ages, positions held, and duration as such, are as follows:

Name	Position	Age	Date Elected/Appointed
William David Gibbs	President, CEO and Director	56	December 3, 2007
Eric Boehnke	Director	44	October 30, 2006
Bruce L. Ganer	Vice President of Exploration and Development, and Director	58	November 22, 2007
Michael O. Aldridge	Director	50	December 4, 2008
Christopher H. Taylor	Chief Financial Officer	38	September 22, 2008
Douglas M. Harwell	Operations Manager	32	June 16, 2008

William David Gibbs

Mr. Gibbs is an entrepreneurial senior executive in the independent upstream energy sector with over 33 years experience in both technical and executive leadership roles. He has a successful track record of creating, growing and monetizing a significant exploration and production company focused on the U.S. Gulf of Mexico, delivering outstanding shareholder returns.

From 2005 to November 2007, Mr. Gibbs was the President of Medco Energy US LLC (formerly Novus Louisiana) Lafayette, Louisiana where he rebuilt the company after a hostile takeover and failed divestiture effort. From 1992 to 2005, Mr. Gibbs held several senior management positions with TDC Energy, LLC from Vice President, Business Development in 1992 to President and Chief Executive Officer in 2000.

He received a Bachelor of Mechanical Engineering from the Georgia Institute of Technology in 1975 and an Offshore Operators’ Certification from the University of Southwestern Louisiana in 1979. He completed the Owner/President Management Program (Unit 1) at Harvard University in 2001.

Mr. Gibbs is the founder and president of Esperanza Ministries. Esperanza Ministries is a 501(c)(3) charity operating medical and educational services in Central America. Esperanza and its affiliates operate four schools, a regional medical center, and a large child care facility in southern Honduras. Over the past seven years, Esperanza has raised and deployed over $500,000 of funds and supplies as well as leading several large mission teams.

Eric Boehnke

From January 1997 until present, Mr. Boehnke has acted as president and a director of Big Sky Management Ltd., a private company principally involved with providing corporate finance and administrative management services to private and public companies. From May 2004 until present, Mr. Boehnke has acted as a director and officer of VanArbor Asset Management Ltd., a British Columbia based independent asset management company dedicated to

creating wealth using a disciplined, proprietary investment strategy with an emphasis on preserving capital while generating long-term returns. Mr. Boehnke has been involved with Van Arbor Asset Management since inception, playing an integral role in the development of the proprietary technology and the implementation of the company’s business plan. Mr. Boehnke has been an officer and director of various public companies, the most recent being Cano Petroleum Inc. (AMEX:CFW). Mr. Boehnke served as a board member of this company from May 2003 to June 2004. Cano Petroleum is an oil and gas company that is focused on secondary and enhanced oil recovery techniques to extract additional oil from mature onshore United States properties. Mr. Boehnke graduated from the University of Toronto in 1984 with a Bachelor of Science degree. Mr. Boehnke currently serves as a director and officer on Petra Petroleum Ltd, a British Columbia company which is a reporting issuer with the BCSC and as an officer and director of Woodbridge Energy Ltd, a capital pool company trading on the TSX V.

Bruce L. Ganer

Mr. Ganer has 37 years of experience providing engineering, petrophysics, planning, and managerial direction of exploration and production development projects with a successful track record in both United States and International projects.

Mr. Ganer started his career at Schlumberger working for seven years as a field engineer and manager of SE Division Computing Center. He then moved on to Home Petroleum where he worked as a Petrophysicist evaluating properties in Oklahoma, Texas, Louisiana and Mississippi. In 1982 he joined Union Texas Petroleum where we worked for nine years as a petrophysicist and reservoir engineer assigned to seven of the top ten onshore fields. He also served as their onshore strategic plan and budget coordinator. Mr. Ganer provided solutions on particularly problematic reservoirs and evaluated exploration wells in domestic U.S., Alaska, Pakistan, Spain, Africa, Indonesia and Columbia. In 1991, Mr. Ganer joined Pennzoil Exploration and Production Company as their Chief Petrophysicist and Reservoir Engineer. A year later he was assigned to Pennzoil International in charge of the technical staff which he grew to thirty professionals that included geologists, geophysicists, petrophysicists, production engineers and reservoir engineers. He served as the Technical Project Leader for a megastructure six billion barrel offshore oil development in Azerbaijan.

In 1997, Mr. Ganer formed Sierra Pine Resources which places exploration and development teams assisting clients to meet corporate goals. Recent activities focus on acquisition and development of north Louisiana fields, offshore Gulf of Mexico, redevelopment of one field in Turkey and five fields offshore Brazil. His company’s efforts over the last eight years have directly resulted in several significant value-added projects accounting for in excess of 290 Bcfe in proven reserve additions.

Mr. Ganer is recognized as an industry expert in the Cotton Valley trend and has performed evaluations resulting in the redevelopment of multiple Cotton Valley projects. In addition to multiple large client driven projects, Mr. Ganer and his team are responsible for the identification and project formulation of the Sentell Field Development project on behalf of the Company and its partners.

Mr. Ganer received a BS, Physics & Math from Central Michigan University, post graduate studies in Physics from Central Michigan University, post graduate studies in Geology and Geophysics from Centenary College and University of Houston and a Masters of Science in Petroleum Engineering from the University of Houston.

Mr. Ganer previously served as a director of Probe Resources Ltd. and resigned on May 12, 2008.

Michael O. Aldridge

Mr. Aldridge has more than 28 years of financial management experience with various companies. Mr. Aldridge was most recently the Executive Vice President of NYSE-listed PetroQuest Energy, where he also served as Chief Financial Officer, Treasurer and a member of the Board of Directors. From 1992 to 1999, he was a Vice President of NYSE-listed Ocean Energy. His previous experience also includes 11 years with Ernst & Young.

Mr. Aldridge earned a Bachelor of Science Degree in Accounting from Louisiana State University in 1980, and is a Certified Public Accountant.

Christopher H. Taylor

Mr. Taylor joined Southern Star after working for two years as an Assistant Treasurer with Noble Drilling Services Inc., a subsidiary of Noble Corporation (NYSE: NE), where he worked on various corporate finance matters. Prior to joining Noble, Mr. Taylor spent more than 12 years managing project teams for the audit practices of Grant

Thornton LLP and Arthur Andersen LLP, serving energy clients on multiple engagements and providing professional services for mergers and acquisitions, equity issues, and strategic financial planning.

Mr. Taylor is a CPA and graduated Magna Cum Laude from Oklahoma Christian University in 1993 with a Bachelor of Science Degree in Accounting.

Douglas M. Harwell

Mr. Harwell has over ten years operation experience as a mechanical engineer and has designed and implemented drill-well completions, conventional workovers, through-tubing workovers and well abandonments. Mr. Harwell also evaluated wells for buildup, determined impact on field economics and designed wellbore architecture, in addition to effectively working with facilities and construction engineers to determine surface requirements. He also developed procedures for installation, as well as performing surveillance to optimize pump performance. Mr. Harwell has the been Manager, Special Projects of Cannon Services, Ltd. from May 2005 to June 2008. Previously, from May 1998 to May 2005 he held various positions with ExxonMobil Production Company.

Mr. Harwell obtained a Bachelor of Science in Mechanical Engineering from the Louisiana Tech University in May 1998, summa cum laude.

To our knowledge, there is no arrangement or understanding between any of our officers and any other person pursuant to which the officer was selected to serve as an officer.

Family Relationships

None of our executive officers or key employees is related by blood, marriage or adoption to any other director or executive officer.

Involvement in Certain Legal Proceedings

Our directors, executive officers and control persons have not been involved in any of the following events during the past five years:

	1.	any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
	2.	any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offences);
	3.	being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or
	4.	being found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s officers, directors, and persons who beneficially own more than 10% of the Company’s common stock (“10% Stockholders”), to file reports of ownership and changes in ownership with the Securities and Exchange Commission (“SEC”). Such officers, directors and 10% Stockholders are also required by SEC rules to furnish us with copies of all Section 16(a) forms that they file.

Based solely on our review of the copies of such forms received by us, or written representations from certain reporting persons, we believe that during fiscal year ended May 31, 2009, all filing requirements applicable to its officers, directors and greater than 10% percent beneficial owners were complied with.

Code of Ethics

Effective September 1, 2006, our company’s board of directors adopted a Code of Business Conduct and Ethics that applies to, among other persons, our company’s president and secretary (being our principal executive officer, principal financial officer and principal accounting officer), as well as persons performing similar functions. As adopted, our Code of Business Conduct and Ethics sets forth written standards that are designed to deter wrongdoing and to promote:

	1.	honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
	2.	full, fair, accurate, timely, and understandable disclosure in reports and documents that we file with, or submit to, the Securities and Exchange Commission and in other public communications made by us;
	3.	compliance with applicable governmental laws, rules and regulations;
	4.	the prompt internal reporting of violations of the Code of Business Conduct and Ethics to an appropriate person or persons identified in the Code of Business Conduct and Ethics; and
	5.	accountability for adherence to the Code of Business Conduct and Ethics.

Our Code of Business Conduct and Ethics requires, among other things, that all of our company’s senior officers commit to timely, accurate and consistent disclosure of information; that they maintain confidential information; and that they act with honesty and integrity.

In addition, our Code of Business Conduct and Ethics emphasizes that all employees, and particularly senior officers, have a responsibility for maintaining financial integrity within our company, consistent with generally accepted accounting principles, and federal and state securities laws. Any senior officer who becomes aware of any incidents involving financial or accounting manipulation or other irregularities, whether by witnessing the incident or being told of it, must report it to our company. Any failure to report such inappropriate or irregular conduct of others is to be treated as a severe disciplinary matter. It is against our company policy to retaliate against any individual who reports in good faith the violation or potential violation of our company’s Code of Business Conduct and Ethics by another.

Our Code of Business Conduct and Ethics was filed with the Securities and Exchange Commission on September 13, 2006, as Exhibit 14.1 to our annual report and is also available on the Company’s website at http://www.ssenergyinc.com/s/CodeofEthics.asp.

Corporate Governance

As of August 17, 2009, we did not effect any material changes to the procedures by which our shareholders may recommend nominees to our board of directors. Our board of directors does not have a policy with regards to the consideration of any director candidates recommended by our shareholders. Our board of directors has determined that it is in the best position to evaluate our company’s requirements as well as the qualifications of each candidate when the board considers a nominee for a position on our board of directors. If shareholders wish to recommend candidates directly to our board, they may do so by sending communications to the President of our company at the address on the cover of this annual report.

Audit Committee

We do not have a standing audit committee in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended, at the present time. Our board of directors has determined that we do not have a board member that qualifies as an “audit committee financial expert” as defined in Item 407(d)(5) of Regulation S-K, nor do we have a board member that qualifies as “independent” as the term is defined by Nasdaq Marketplace Rule 4200(a)(15).

We believe that the members of our board of directors are capable of analyzing and evaluating our financial statements and understanding internal controls and procedures for financial reporting. The board of directors of our

company does not believe that it is necessary to have an audit committee because we believe that the functions of an audit committee can be adequately performed by the board of directors as it currently exists. In addition, we believe that retaining an independent director who would qualify as an “audit committee financial expert” would be overly costly and burdensome and is not warranted in our circumstances given the early stages of our development and the fact that we have not generated any significant revenues from operations to date.

ITEM 11.

EXECUTIVE COMPENSATION.

A summary of cash and other compensation paid to our Principal Executive Officer and other executives for the fiscal year ended May 31, 2009 is as follows:

Name and Principal Position (a)	Year (b)	Salary ($) (c)	Bonus ($) (d)	Stock Awards ($) (e)	Option Awards ($) (f)⁽¹⁾	Non-Equity Incentive Plan Compensation ($) (g)	Nonqualified Deferred Compensation Earnings ($) (h)	All Other Compensation ($) (i)⁽²⁾	Total ($) (j)
William David Gibbs, President, CEO and Director	May 31, 2009	240,000	60,000	NIL	745,717	NIL	NIL	NIL	1,045,717
	May 31, 2008	20,000	NIL	NIL	256,344	NIL	NIL	169,000	445,344
	May 31, 2007	NIL	NIL	NIL	NIL	NIL	NIL	NIL	NIL
Bruce L. Ganer, Vice President of Exploration and Development	May 31, 2009	NIL	NIL	NIL	217,024	NIL	NIL	342,722	559,746
	May 31, 2008	NIL	NIL	NIL	112,640	NIL	NIL	155,884	268,524
	May 31, 2007	NIL	NIL	NIL	NIL	NIL	NIL	NIL	NIL
Christopher H. Taylor, Chief Financial Officer	May 31, 2009	124,846	NIL	NIL	46,571	NIL	NIL	NIL	171,417
	May 31, 2008	NIL	NIL	NIL	NIL	NIL	NIL	NIL	NIL
	May 31, 2007	NIL	NIL	NIL	NIL	NIL	NIL	NIL	NIL
Douglas M. Harwell, Operations Manager	May 31, 2009	153,333	NIL	NIL	61,301	NIL	NIL	NIL	214,634
	May 31, 2008	NIL	NIL	NIL	NIL	NIL	NIL	NIL	NIL
	May 31, 2007	NIL	NIL	NIL	NIL	NIL	NIL	NIL	NIL
Eric Boehnke, former President and CEO	May 31, 2009	NIL	NIL	NIL	NIL	NIL	NIL	120,000	120,000
	May 31, 2008	NIL	NIL	NIL	NIL	NIL	NIL	50,000	50,000
	May 31, 2007	NIL	NIL	NIL	NIL	NIL	NIL	NIL	NIL
Hilda Kouvelis, former Chief Financial Officer	May 31, 2009	NIL	NIL	NIL	NIL	NIL	NIL	NIL	NIL
	May 31, 2008	NIL	NIL	NIL	NIL	NIL	NIL	21,756	21,756
	May 31, 2007	NIL	NIL	NIL	NIL	NIL	NIL	NIL	NIL

	(1)	Stock Options – Amounts represent the dollar amount recognized for financial statement reporting purposes with respect to the fiscal year in accordance with FAS 123R. (a) Mr. Gibbs has options to purchase 1,500,000 shares of the Company’s common stock at $0.70 per share for five years. One-third of these options vest on each of the first, second, and third anniversaries of their issuance on November 27, 2008. Mr. Gibbs also has options to purchase 1,000,000 shares of the Company’s common stock at an exercise price of $1.00 per share for five years. One-third of these options vest on each of the first, second, and third anniversaries of their issuance on June 4, 2008. (b) Mr. Ganer has options to purchase 750,000 shares of the Company’s common stock at $0.70 per share for four years. One-third of these options vested on November 22, 2007, the date of issuance, and one-third vest on each of the first and second anniversaries of the date of issuance. (c) Mr. Taylor has options to purchase 350,000 shares of the Company’s common stock at $0.82 per share for five years. One-third of the options vest on each of the first, second and third anniversaries of their issuance on September 22, 2008. Mr. Harwell has options to purchase 250,000 shares of the Company’s common stock at $1.00 per share for five years. One-third of the options vest on each of the first, second and third anniversaries of their issuance on June 16, 2008.
	(2)	Other Compensation – The amounts listed in column (i) describe the amounts paid to each officer or director pursuant to consulting agreements, more completely described in the section immediately following entitled “Narrative Disclosure to Summary Compensation Table”.

Narrative Disclosure to Summary Compensation Table

William David Gibbs

On November 22, 2007, the Company entered into a consulting agreement with William David Gibbs to serve as the CEO and President of the Company and provide consulting services in consideration for $200 per hour of services to a maximum of $1,500 per day and $30,000 per month, options to purchase 1,500,000 shares of the Company’s common stock at $1.20 per share for 5 years. On February 26, 2008, the Company reduced the exercise price of the options to $0.70 per share. If the Mr. Gibbs completed an equity financing in excess of $5,000,000 then he would cease to be a consultant and would become an employee with a base salary of $240,000 per year and up to two bonus payments of $30,000 upon the successful completion of a new well outside the current Sentell Field or the acquisition of any property or financing of greater than $3,000,000. On May 1, 2008, Mr. Gibbs ceased to be a consultant and became an employee of the Company.

The 1,500,000 stock options shall vest in accordance with the following schedule:

(i)

Five hundred thousand (500,000) stock options vested on November 27, 2008;

(ii)

Five hundred thousand (500,000) stock options vest on November 27, 2009; and

(iii)

Five hundred thousand (500,000) stock options vest on November 27, 2010.

On June 4, 2008, we entered into a stock option agreement with William David Gibbs granting him the right to purchase up to an aggregate of 1,000,000 shares of our common stock at an exercise price of $1.00 per share exercisable for a period of five years pursuant to our Stock Option Plan. The 1,000,000 stock options shall vest in accordance with the following schedule:

(i)

Three hundred thirty-three thousand three hundred and thirty-four (333,334) stock options vested on June 4, 2009;

(ii)

Three hundred thirty-three thousand three hundred and thirty-three (333,333) stock options shall vest on June 4, 2010; and

(iii)

Three hundred thirty-three thousand three hundred and thirty-three (333,333) stock options shall vest on June 4, 2011.

Mr. Gibbs will only be able to exercise the options if he is a director and/or officer at the time of exercise of any such options.

Bruce L. Ganer

On October 1, 2007, we appointed Bruce Ganer as our Vice President of Exploration and Development. Effective November 22, 2007, we entered into a consulting agreement between our company and Sierra Pine Resources International, Inc., a company wholly-owned by Bruce Ganer, whereby Sierra Pine agreed to provide consulting services to our company through Mr. Ganer in consideration for, among other things, the payment of $10,000 per month and the grant of a stock option to purchase up to 750,000 shares of our common stock at a price of $1.09 per share, exercisable until November 22, 2011. On February 26, 2008, the Company reduced the exercise price of the options to $0.70 per share. In addition, if during the term of this agreement, the Company identifies an oil and gas property interest or well for potential exploration by the Company and retains the consultant, the consultant will be granted an overriding royalty of: 2% for leases where the Company has acquired a working interest of greater than 80%, 1.75% for leases where the Company has acquired a working interest of greater than 78% but less than 80%, 1.5% for leases where the Company has acquired a working interest of greater than 75% but less than 78%, 1.0% for leases where the Company has acquired a working interest of less than 75%.

The 750,000 stock options shall vest in accordance with the following schedule:

(i)

Two hundred and fifty thousand (250,000) stock options vested on November 22, 2007;

(ii)

Two hundred and fifty thousand (250,000) stock options shall vest on November 22, 2008; and

(iii)

Two hundred and fifty thousand (250,000) stock options shall vest on November 22, 2009.

Sierra Pine International, Inc. will only be able to exercise the options if it is a consultant at the time of exercise of any such options.

Christopher H. Taylor

Effective September 22, 2008, we entered into an agreement with Christopher H. Taylor, whereby we agreed to employ Mr. Taylor as our chief financial officer. Mr. Taylor will be retained as our chief financial officer in consideration for, among other things: (i) a base salary of $180,000 per year; (ii) the following incentive bonuses: (a) during the first year of employment, a maximum of two bonus payments of $22,500 each upon the successful closing of a material acquisition or the completion of a new well on a prospect outside the Sentell Field project and (b) at the first anniversary of Mr. Taylor’s employment, a bonus of up to $45,000 to awarded solely at the discretion of the board; and (iii) the grant of a stock option to purchase up to 350,000 shares of our common stock at a price of $0.82 per share, exercisable until September 22, 2013. The 350,000 stock options shall vest in accordance with the following schedule:

(i)

One hundred sixteen thousand six hundred and sixty-seven (116,667) stock options shall vest on September 22, 2009;

(ii)

One hundred sixteen thousand six hundred and sixty-seven (116,667) stock options shall vest on September 22, 2010; and

(iii)

One hundred sixteen thousand six hundred and sixty-six (116,666) stock options shall vest on September 22, 2011.

Mr. Taylor will only be able to exercise the options if he is an employee at the time of exercise of any such options.

Douglas M. Harwell

Effective June 16, 2008, we entered into an agreement with Douglas M. Harwell, whereby we agreed to employ Mr. Harwell as our operations manager. Mr. Harwell will be retained as our operations manager in consideration for, among other things: (i) a base salary of $160,000 per year; (ii) the following incentive bonuses: (a) during the first year of employment, a maximum of two bonus payments of $20,000 each upon the successful closing of a material acquisition or the completion of a new well on a prospect outside the Sentell Field project and (b) at the first

anniversary of Mr. Harwell’s employment, a bonus of up to $40,000 to awarded solely at the discretion of the board; and (iii) the grant of a stock option to purchase up to 250,000 shares of our common stock at a price of $1.00 per share, exercisable until June 16, 2013. The 250,000 stock options shall vest in accordance with the following schedule:

(i)

Eighty three thousand three hundred and thirty-four (83,334) stock options shall vest on June 16, 2009;

(ii)

Eighty three thousand three hundred and thirty-three (83,333) stock options shall vest on June 16, 2010; and

(iii)

Eighty three thousand three hundred and thirty-three (83,333) stock options shall vest on June 16, 2011.

Mr. Harwell will only be able to exercise the options if he is an employee at the time of exercise of any such options.

Eric Boehnke

On January 1, 2008, we entered into a consulting agreement with Big Sky Management Ltd., whereby Big Sky Management agreed to provide management services to our company that are consistent with the services ordinarily provided by a Chief Executive Officer. Big Sky Management agreed to provide the services through its employee Eric Boehnke in consideration for the payment, by our company, of $10,000 per month, plus expenses.

On April 8, 2008, Eric Boehnke resigned as our chief executive officer and William David Gibbs was appointed as chief executive officer in place of Eric Boehnke. Eric Boehnke continues to act as a director of our company. This resignation does not impact the consulting agreement with Big Sky Management Ltd.

Hilda Kouvelis

On November 2, 2007, we entered into a letter agreement with VirtualCFO, Inc. doing business as VCFO, whereby we engaged the services of VCFO to provide oversight and guidance to our company’s finance and accounting team. Under the agreement, Hilda Kouvelis was assigned by VCFO to provide our company with management support and assist our company with operational and public reporting requirements, corporate oversight, guidance of finance and accounting matters and such other assistance as required by our company. We paid Hilda Kouvelis, our Chief Financial Officer, $175 per hour for all services provided.

Ms. Kouvelis resigned as CFO effective July 1, 2008.

Other Compensation Information

Our company does not maintain any long-term compensation plans, and did not maintain such plans at any time during our two most recently completed fiscal years ended May 31, 2009. As such, there were no long-term compensation plan awards or payouts to any of the named executive officers of our company during our two most recently completed fiscal years ended May 31, 2008 and 2009.

Our compensation program for our named executive officers is administered and reviewed by our board of directors. Historically, executive compensation consists of a combination of base salary and bonuses. Individual compensation levels are designed to reflect individual responsibilities, performance and experience, as well as the performance of our company. The determination of discretionary bonuses is based on various factors, including implementation of our business plan, acquisition of assets, development of corporate opportunities and completion of financing.

There are no arrangements or plans in which we provide pension, retirement or similar benefits for directors or executive officers. In addition to those options currently held under the Plan, our directors and executive officers may receive stock options at the discretion of our board of directors in the future. We do not have any material bonus or profit sharing plans pursuant to which cash or non-cash compensation is or may be paid to our directors or executive officers, except that stock options may be granted at the discretion of our board of directors pursuant to the Plan.

Outstanding Equity Awards

The following table sets forth certain information concerning our outstanding options for our named executive officers at August 17, 2009:

	Option Awards
Name (a)	# of Securities Underlying Unexercised Options; (#) Exercisable (b)	# of Securities Underlying Unexercised Options; # Unexercisable (c)	Equity Incentive Plan Awards; Number of Securities Underlying Unexercised Unearned Options (#) (d)	Option Exercise Price ($) (e)	Option Exp. Date (f)
William David Gibbs	500,000 333,334	1,000,000 ⁽¹⁾ 666,666	NIL	$0.70/share $1.00/share	11/22/2012 6/4/2013

Bruce L. Ganer	500,000	250,000 ⁽²⁾	NIL	$0.70/share	11/22/2011

Christopher H. Taylor	NIL	350,000⁽³⁾	NIL	$0.82/share	9/22/2013

Douglas M. Harwell	83,334⁽⁴⁾	166,666 ⁽⁴⁾	NIL	$1.00/share	7/6/2013

(1)

On November 22, 2007, the Company entered into a consulting agreement with William David Gibbs to serve as the CEO and President of the Company and provide consulting services in partial consideration for options to purchase 1,500,000 shares of the Company’s common stock at $1.20 per share for 5 years pursuant to our Stock Option Plan. On February 26, 2008, the Company reduced the exercise price of the options to $0.70 per share. The 1,500,000 stock options shall vest in accordance with the following schedule:

(i)

Five hundred thousand (500,000) stock options vested on November 27, 2008;

(ii)

Five hundred thousand (500,000) stock options vest on November 27, 2009; and

(iii)

Five hundred thousand (500,000) stock options vest on November 27, 2010.

(i)

Three hundred thirty-three thousand three hundred and thirty-four (333,334) stock options vested on June 4, 2009;

(ii)

Three hundred thirty-three thousand three hundred and thirty-three (333,333) stock options shall vest on June 4, 2010; and

(iii)

Three hundred thirty-three thousand three hundred and thirty-three (333,333) stock options shall vest on June 4, 2011.

Mr. Gibbs will only be able to exercise the options if he is a director and/or officer at the time of exercise of any such options.

(2)

(i)

Two hundred and fifty thousand (250,000) stock options vested on November 22, 2007;

(ii)

Two hundred and fifty thousand (250,000) stock options shall vest on November 22, 2008; and

(iii)

Two hundred and fifty thousand (250,000) stock options shall vest on November 22, 2009.

Sierra Pine International, Inc. will only be able to exercise the options if it is a consultant at the time of exercise of any such options.

(3)

Effective September 22, 2008, we entered into an agreement with Christopher H. Taylor, whereby we agreed to employ Mr. Taylor as our Chief Financial Officer. Mr. Taylor will be retained as our Chief Financial Officer in partial consideration for the grant of a stock option to purchase up to 350,000 shares of our common stock at a price of $0.82 per share, exercisable until September 22, 2013 under our Stock Option Plan. The 350,000 stock options shall vest in accordance with the following schedule:

(i)

One hundred sixteen thousand six hundred and sixty-seven (116,667) stock options shall vest on September 22, 2009;

(ii)

One hundred sixteen thousand six hundred and sixty-seven (116,667) stock options shall vest on September 22, 2010; and

(iii)

One hundred sixteen thousand six hundred and sixty-six (116,666) stock options shall vest on September 22, 2011.

Mr. Taylor will only be able to exercise the options if he is an employee at the time of exercise of any such options.

(4)

Effective June 16, 2008, we entered into an agreement with Douglas M. Harwell, whereby we agreed to employ Mr. Harwell as our operations manager. Mr. Harwell will be retained as our operations manager in partial consideration for the grant of a stock option to purchase up to 250,000 shares of our common stock at a price of $1.00 per share, exercisable until June 16, 2013 under our Stock Option Plan. The 250,000 stock options shall vest in accordance with the following schedule:

(i)

Eighty three thousand three hundred and thirty-four (83,334) stock options shall vest on June 16, 2009;

(ii)

Eighty three thousand three hundred and thirty-three (83,333) stock options shall vest on June 16, 2010; and

(iii)

Eighty three thousand three hundred and thirty-three (83,333) stock options shall vest on June 16, 2011.

Mr. Harwell will only be able to exercise the options if he is an employee at the time of exercise of any such options.

Retirement, Resignation or Termination Plans

We sponsor no plan, whether written or verbal, that would provide compensation or benefits of any type to an executive upon retirement, or any plan that would provide payment for retirement, resignation, or termination as a result of a change in control of our Company or as a result of a change in the responsibilities of an executive following a change in control of our Company.

Compensation of Directors

Except for Michael O. Aldridge, all directors of the Company are/were executive officers of the Company and their compensation is reported in the executive compensation table presented at the start of this section.

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The following table sets forth certain information regarding the beneficial ownership of shares of our common stock as of August 17, 2009 by:

•

Each person who is known by us to beneficially own more than 5% of our issued and outstanding shares of common stock;

•

Our named executive officers;

•

Our directors; and

•

All of our executive officers and directors as a group.

(1) Title of Class	(2) Name and Address of Beneficial Owner	(3) Amount and Nature of Beneficial Owner	(4) Percent of Class*
Directors and Named Executive Officers
Common Stock	William David Gibbs	930,430(1)	2.0%
Common Stock	Bruce Ganer	500,000(1)	1.1%
Common Stock	Christopher H. Taylor	NIL	NIL
Common Stock	Douglas M. Harwell	83,334(1)	0.2%
Common Stock	Eric Boehnke	7,500,000	16.5%
Common Stock	Michael O. Aldridge	205,000	0.5%
Directors and Named Executives as a Group		9,218,764(1)	20.3%
5% Shareholders
Common Stock	Macquarie Bank Limited 125 West 55th Street 22nd Floor New York, NY 10019	2,647,419(2)	5.6%
Common Stock	Venture Capital Asset Management AG Im Alteu Reiet 22 Schaan, Lichtenstein FL-9494	6,710,001	15.0%
Common Stock	Gobbet Management Inc. Postfach 837 Imaltein Riet 22 Sehaan, 9494	2,642,611	5.9%
Common Stock	Sovereign Services Ltd. 3E-B1, 25 Tai Hang Drive Jardine’s Lookout, Hong Kong	2,633,333	5.9%

* Percentages are calculated on a partially diluted basis based on 45,347,280 shares issued and outstanding on August 17, 2009 and shares acquirable by the holder within the next 60 days.

(1)

Includes the following common shares issuable upon the exercise of outstanding employee stock options which are exercisable within 60 days: Mr. Gibbs – 833,334, Mr. Ganer – 500,000, Mr. Harwell – 83,334, all directors and officers as a group – 1,416,668.

(2)

As part of the consideration for the Credit Agreement we entered into with Macquarie we issued two warrants. One warrant is to purchase up to 750,000 shares of our common stock at an exercise price of $1.00 per share (“Warrant 1A”). Warrant 1A is a reissuance of a warrant issued to Macquarie in consideration for a previous agreement; the terms of the original warrant were previously reported on our Current Report on Form 8-K filed as of May 16, 2008. Therefore, Warrant 1A represents the right to acquire 750,000 shares of our common stock in place of rights granted under the original warrant. The effective date of Warrant 1A is July 11, 2008 and Warrant 1A expires on July 11, 2013. The second warrant is to purchase up to 1,897,419 shares of our common stock at an exercise price of $1.00 per share (“Warrant 2”). The effective date of Warrant 2 is July 11, 2008 and it expires on July 11, 2013.

We have no knowledge of any other arrangements, including any pledge by any person of our securities, the operation of which may at a subsequent date result in a change in control of our company.

We are not, to the best of our knowledge, directly or indirectly owned or controlled by another corporation or foreign government.

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.

Except for the transactions described below, none of our directors, executive officers or more-than-five-percent shareholders, nor any associate, affiliate, or family member of the foregoing, have any interest, direct or indirect, in any transaction or in any proposed transactions, since the start of the fiscal year ending May 31, 2008, which has materially affected or will materially affect us.

	•	On June 4, 2008, we entered into a stock option agreement with William David Gibbs granting him the right to purchase up to an aggregate of 1,000,000 shares of our common stock at an exercise price of $1.00 per share exercisable for a period of five years pursuant to our Stock Option Plan.
	•	Effective June 16, 2008, we entered into an employment agreement with Douglas M. Harwell, whereby we agreed to employ Mr. Harwell as our operations manager. Mr. Harwell will be retained as our operations manager in consideration for, among other things: (i) a base salary of $160,000 per year; (ii) incentive bonuses as set forth in the employment agreement; and (ii) the grant of a stock option to purchase up to 250,000 shares of our common stock at a price of $1.00 per share, exercisable until June 16, 2013. There are no family relationships with Mr. Harwell and any of our other directors and officers.
	•	Effective September 22, 2008, we entered into an employment agreement with Christopher H. Taylor, whereby we agreed to employ Mr. Taylor as our chief financial officer. Mr. Taylor will be retained as our chief financial officer in consideration for, among other things: (i) a base salary of $180,000 per year; (ii) incentive bonuses as set forth in the employment agreement; and (ii) the grant of a stock option to purchase up to 350,000 shares of our common stock at a price of $0.82 per share, exercisable until September 22, 2013. There are no family relationships with Mr. Taylor and any of our other directors and officers.
	•	On January 20, 2009, the Company closed an unregistered private placement of its common stock, par value $0.001. The Company issued 500,000 shares of common stock at a price per share of $0.41 to Michael O. Aldridge, a director of the Company, for proceeds of $205,000.

Director Independence

We currently act with four directors: William David Gibbs, Bruce L. Ganer, Eric Boehnke and Michael O. Aldridge.

The Board of Directors has determined that Mr. Aldridge is an independent director as defined by Nasdaq Marketplace Rule 4200(a)(15).

We have determined that neither Mr. Gibbs, Mr. Ganer, nor Mr. Boehnke is an independent director as defined by Nasdaq Marketplace Rule 4200(a)(15) due to the fact that they are either current or former executive officers.

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES.

Audit Fees

The aggregate fees billed by the Company’s auditors for professional services rendered in connection with the audit of the Company’s annual consolidated financial statements for fiscal years 2009 and 2008 and reviews of the consolidated financial statements included in the Company’s Forms 10-K, 10-KSB, 10-Q and 10-QSB for fiscal years 2009 and 2008 were $80,000 and $50,000, respectively.

Audit-Related Fees

The aggregate fees billed by the Company’s auditors for any additional fees for assurance and related services that are reasonably related to the performance of the audit or review of the Company’s financial statements and are not reported under “Audit Fees” above for fiscal years 2009 and 2008 were $NIL and $13,500, respectively.

Tax Fees

The aggregate fees billed by the Company’s auditors for professional services for tax compliance, tax advice, and tax planning for fiscal 2009 and 2008 were $NIL and $5,000, respectively.

All Other Fees

The aggregate fees billed by the Company’s auditors for all other non-audit services rendered to the Company, such as attending meetings and other miscellaneous financial consulting, for fiscal 2008 and 2007 were $NIL and $NIL, respectively.

PART IV

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(3)

(i) Articles of Incorporation and (ii) Bylaws

3.1	Articles of Incorporation (incorporated by reference from our SB-2 filed on October 13, 2005)

3.2	Bylaws (incorporated by reference from our SB-2 filed on October 13, 2005)

3.3	Certificate of Correction (incorporated by reference from our SB-2 filed on October 13, 2005)

3.4	Articles of Merger filed with the Secretary of Sate of Nevada on November 7, 2006 and which is effective November 13, 2006 (incorporated by reference from our Current Report on Form 8-K filed on November 13, 2006)

3.5	Certificate of Change filed with the Secretary of State of Nevada on November 7, 2006 and which is effective November 13, 2006 (incorporated by reference from our Current Report on Form 8-K filed on November 13, 2006)

3.6	Certificate of Change filed with the Secretary of State of Nevada on April 2 2007 and which is effective April 2, 2007 (incorporated by reference from our Current Report on Form 8-K filed on April 4, 2007)

(4)

Instruments Defining the Rights of Securityholders including Indentures

4.1	Stock Option Plan (incorporated by reference from our Quarterly Report on Form 10-QSB filed on January 14, 2008)

(10)

Material Contracts

10.1	Subscription Agreement dated November 1, 2006 with Sovereign Services Limited (incorporated by reference from our Current Report on Form 8-K filed on November 9, 2006)

10.2	Convertible Debenture dated November 1, 2006 with Sovereign Services Limited (incorporated by reference from our Current Report on Form 8-K filed on November 9, 2006)

10.3	Assignment of Oil, Gas and Mineral Leases dated November 3, 2006 by Meagher Oil &Gas Properties, Inc. (incorporated by reference from our Current Report on Form 8-K filed on November 9, 2006)

10.4	Purchase and Sale Agreement dated November 2, 2006 with Dynamic Resources Corporation, Tyner Texas Operating Company, Tyner Texas Resources LP and Ramshorn Investments, Inc. (incorporated by reference from our Current Report on Form 8-K filed on January 3, 2007)

10.5	Restructuring Agreement dated November 6, 2006 with Southern Star Operating, Inc., Big Sky Management, Ltd., Eric Boehnke, Troy Mutter and Frank Hollmann (incorporated by reference from our Current Report on Form 8-K filed on November 9, 2006)

10.6	Amendment Agreement dated December 22, 2006 with Southern Star Operating, Inc., Big Sky Management, Ltd., Eric Boehnke, Troy Mutter and Frank Hollmann (incorporated by reference from our Current Report on Form 8-K filed on January 3, 2007)

10.7	Amended and Restated Subscription Agreement dated July 10, 2007 between our company and Venture Capital Asset Management Ag (incorporated by reference from our Current Report on Form 8-K filed on July 18, 2007)\
10.8	Private Placement Subscription dated September 18, 2007 (incorporated by reference from our Quarterly Report on Form 10-QSB filed on October 15, 2007)

10.9	Convertible Debenture dated September 18, 2007 (incorporated by reference from our Current Report on Form 8-K filed on November 21, 2007)

10.10

Letter Agreement dated November 7, 2007 with VirtualCFO, Inc. doing business as VCFO (incorporated by reference from our Current Report on Form 8-K filed on November 7, 2007)

10.11

Consulting Agreement dated November 22, 2007 with Larry Keller (incorporated by reference from our Current Report on Form 8-K filed on December 6, 2007)

10.12

Stock Option and Subscription Agreement dated November 22, 2007 with Larry Keller (incorporated by reference from our Current Report on Form 8-K filed on December 6, 2007)

10.13

Consulting Agreement dated November 22, 2007 with Sierra Pine International, Inc. (incorporated by reference from our Current Report on Form 8-K filed on December 10, 2007)

10.14

Stock Option and Subscription Agreement dated November 22, 2007 with Sierra Pine International, Inc. (incorporated by reference from our Current Report on Form 8-K filed on December 10, 2007)

10.15

Agreement dated November 9, 2007 with William David Gibbs (incorporated by reference from our Current Report on Form 8-K filed on December 3, 2007)

10.16

Stock Option and Subscription Agreement dated November 27, 2007 with William David Gibbs (incorporated by reference from our Current Report on Form 8-K filed on December 3, 2007)

10.17

Consulting Agreement dated January 1, 2008 with Big Sky Management Ltd. (incorporated by reference from our Current Report on Form 8-K filed on January 7, 2008)

10.18

Crude Oil Purchase Agreement dated December 31, 2007 with Texon LP (incorporated by reference from our Quarterly Report on Form 10-QSB filed on April 15, 2008)

10.19

Assignment of Oil, Gas and Mineral Leases dated April 28, 2008 by Meagher Oil &Gas Properties Inc. (incorporated by reference from our Annual Report on Form 10-KSB filed on August 29, 2008)

10.20

Assignment of Oil, Gas and Mineral Leases dated April 28, 2008 by Meagher Oil &Gas Properties Inc.(incorporated by reference from our Annual Report on Form 10-KSB filed on August 29, 2008)

10.21

Assignment of Oil, Gas and Mineral Leases dated May 6, 2008 by Southern Star Operating, Inc.

10.22

Stock Option and Subscription Agreement dated June 4, 2008 with William David Gibbs (incorporated by reference from our Current Report on Form 8-K filed on June 23, 2008)

10.23

Agreement dated June 16, 2008 with Douglas M. Harwell (incorporated by reference from our Current Report on Form 8-K filed on July 8, 2008)

10.24

Stock Option and Subscription Agreement dated June 16, 2008 with Douglas M. Harwell (incorporated by reference from our Current Report on Form 8-K filed on July 8, 2008)

10.25

Amended and Restated $25,000,000 Senior First Lien Secured Credit Agreement with Macquarie Bank Limited and the various Lenders dated July 11, 2008 (incorporated by reference from our Current Report on Form 8-K filed on July 18, 2008)

10.26

Warrant No. 1A to Purchase Common Shares of Southern Star Energy Inc. (incorporated by reference from our Current Report on Form 8-K filed on July 18, 2008)

10.27	Warrant No. 2 to Purchase Common Shares of Southern Star Energy Inc. (incorporated by reference from our Current Report on Form 8-K filed on July 18, 2008)
10.28	Agreement dated August 8, 2008, with Imperial Capital, LLC (incorporated by reference from our Annual Report on Form 10-KSB filed on August 29, 2008)
10.29	Warrant No. 3 to Purchase Common Shares of Southern Star Energy Inc. (incorporated by reference from our Annual Report on Form 10-KSB filed on August 29, 2008)

(23)

Consents

23.2	H.J. Gruy and Associates, Inc.

(31)

Rule 13a-14(a)/15d-14(a) Certifications

31.1	Certification of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Principal Financial and Accounting Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

(32)

Section 1350 Certifications

32.1	Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Principal Financial and Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the date indicated.

SOUTHERN STAR ENERGY INC.

By: /s/ William David Gibbs

August 31, 2009	William David Gibbs President, Chief Executive Officer, Secretary, and Director

By: /s/Christopher H. Taylor

August 31, 2009

Christopher H. Taylor

Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the date indicated.

Signature		Title	Date

	/s/ William David Gibbs	CEO, President, and Director	August 31, 2009
	William David Gibbs	(Principal Executive Officer)

	/s/ Christopher H. Taylor	Chief Financial Officer	August 31, 2009
	Christopher H. Taylor	(Principal Financial and Accounting Officer)

	/s/ Bruce L. Ganer	VP Exploration, Development, Director	August 31, 2009
	Bruce L. Ganer

	/s/ Eric Boehnke	Director	August 31, 2009
	Eric Boehnke

	/s/ Michael Aldridge	Director	August 31, 2009
	Michael Aldridge

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	H.S. freshman Avg

A gross well is a well in which a working interest is owned.

A net well is deemed to exist when the sum of fractional ownership working interest in gross wells equals one. The number of net wells is the sum of the fractional working interests owned in gross wells.

A non-productive well is a well found to be incapable of producing either oil or natural gas in sufficient quantities to justify completion as an oil or natural gas well; also known as a dry well or dry hole.

Rendall 7-1 – Drilled to a depth of approximately 5,000 feet to test several shallow horizons. After evaluating several hydrocarbon shows, the Rendall 7-1 was plugged and abandoned in December 2007.