OAKRIDGE ENERGY, INC.
Notes to Condensed Financial Statements
(Unaudited)
The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements and with the instructions to Form 10-QSB of Regulation S-B for the three and six month periods ended August 31, 2006 and 2005 and reflect, in the opinion of management, all adjustments, which are of a normal and recurring nature, necessary for a fair presentation of the results for such periods. The foregoing financial statements do not include all information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. However, except as disclosed herein, there has been no material change in the information disclosed in the notes to the financial statements for the year ended February 28, 2006 included in the Company’s Annual Report on Form 10-KSB filed with the Securities and Exchange Commission. The interim unaudited financial statements should be read in conjunction with the annual financial statements and accompanying notes. Operating results for the three and six months ended August 31, 2006 are not necessarily indicative of the results that may be expected for the year ending February 28, 2007. The Company’s operating segments are set forth in the annual financial statements and accompanying notes for the fiscal year ended February 28, 2006.
Information regarding operations and assets by segment is as follows:
| | For the Three Months Ended August 31, 2006 | | For the Three Months Ended August 31, 2005 | | For the Six Months Ended August 31, 2006 | | For the Six Months Ended August 31, 2005 | |
Business segment revenue: | | | | | | | | | |
Oil and gas | | $ | 399,174 | | $ | 382,306 | | $ | 746,491 | | $ | 745,330 | |
Gravel | | — | | 7,500 | | — | | 20,000 | |
| | $ | 399,174 | | $ | 389,806 | | $ | 746,491 | | $ | 765,330 | |
| | | | | | | | | |
Business segment profit (loss): | | | | | | | | | |
Oil and gas | | $ | 126,108 | | $ | 181,110 | | $ | 236,352 | | $ | 347,464 | |
Coal and gravel | | (28,132 | ) | (6,219 | ) | (40,369 | ) | (9,436 | ) |
Real estate development | | (62,838 | ) | 1 | | (134,857 | ) | (23 | ) |
General corporate | | (138,649 | ) | (221,157 | ) | (290,431 | ) | (356,000 | ) |
Loss from operations | | (103,511 | ) | (46,265 | ) | (229,305 | ) | (17,995 | ) |
Interest and other, net | | 90,283 | | 472,424 | | 136,137 | | 494,072 | |
Income (loss) before income taxes | | $ | (13,228 | ) | $ | 426,159 | | $ | (93,168 | ) | $ | 476,077 | |
| | As of August 31, 2006 | | As of February 28, 2006 | |
Total assets: | | | | | |
Oil and gas | | $ | 4,104,228 | | $ | 4,591,890 | |
Coal and gravel | | 260,488 | | 260,488 | |
Real estate development | | 3,074,857 | | 3,077,648 | |
General corporate | | 950,302 | | 952,252 | |
| | $ | 8,389,875 | | $ | 8,882,278 | |
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion should be read in conjunction with Items 6 and 7 of the Company’s Annual Report on Form 10-KSB for the fiscal year ended February 28, 2006 and the Notes to Condensed Financial Statements contained in this report.
Results of Operations
The Company had a net loss of $8,337 ($.00 per share) in the three months ended August 31, 2006 compared to net income of $268,608 ($.06 per share) in the three months ended August 31, 2005. In the six-month 2006 period, the Company had a net loss of $58,724 ($.01 per share) compared to net income of $300,071 ($.07 per share) in the 2005 six-month period. Increased oil revenues contributed to higher total revenues in the three month periods in 2006, however; increased oil and gas expenses, coal reclamation supervision expenses and real estate expenses related to the efforts to sell the Durango, Colorado property resulted in a loss. In the six-month 2006 period, the same expense items resulted in a loss.
Combined oil and gas revenues for the 2006 second quarter were $399,174 compared to $382,806 for the 2005 second quarter, representing an increase of $16,870 (4.4%). Combined oil and gas revenues for the six-months ended August 31, 2006 were $746,491 compared to $745,330 for the six-months ended August 31, 2005, representing an increase of $1,160 (0.2%). The increases for the three-month periods and the six-month comparable periods were due to an increase in the Company’s average oil price received even though the gas sales price and the oil and gas sales volumes declined in each of the 2006 periods as compared to the comparable 2005 periods.
The Company’s principal producing oil and gas property in Madison County, Texas is in the process of being waterflooded. Revenues from the property increased in both the 2006 and 2005 periods primarily due to the increase in the Company’s average oil price received from the property. Sales volumes for oil were at slightly lower levels in the three months ended August 31, 2006 with gas volumes being slightly higher in the three month period than in each of the preceding four fiscal quarters lending further encouragement to the Company that production volumes from the property are
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stabilizing. The operator has begun to see an upturn in the production in wells nearest the injection wells. Any significant increase in oil production volumes from the property is not expected to occur until fiscal 2008 due to the substantial lag time for the buildup of sufficient water volumes to replace the volume of oil and gas which has been removed from the formation and push the incremental secondary oil and gas reserves to producing wells for production of the incremental reserves.
The Company received no gravel revenues for the 2006 periods, compared to $7,500 and $20,000 for the three and six 2005 periods, respectively, which was for surface rental only. A dispute developed in fiscal 2004 between the Company and Four Corners Materials, which at the time was conducting gravel mining operations on the Company’s Colorado property. The dispute was detailed in the Company’s Annual Report on Form 10-KSB for the fiscal year ended February 28, 2004. Four Corners Materials is no longer mining the property and has reclaimed its permitted area. The Company would consider leasing the property again for gravel operations but has no intention of conducting any operations itself.
The expenses of the Company’s oil and gas operations for the three-months ended August 31, 2006 were $273,066 compared to $201,196 for the three-months ended August 31, 2005, representing an increase of $71,870 (35.7%). The expenses of the Company’s oil and gas operations for the six-months ended August 31, 2006 were $510,139 compared to $397,866 for the six-months ended August 31, 2005, representing an increase of $112,270 (28.2%). Depletion and depreciation expense for the three-months ended August 31, 2006 was $6,964 compared to $19,315 for the three-months ended August 31, 2005, representing a decrease of $12,350 (64.0%). Depletion and depreciation expense for the six-months ended August 31, 2006 was $11,430 compared to $39,770 for the six-months ended August 31, 2005, representing a decrease of $28,340 (71.3%). Such decline was primarily attributable to the Madison County, Texas property and was due to lower production volumes than in the 2005 period and a reduced per barrel amortization rate resulting from the higher quantity of proven oil and gas reserves for the property at the fiscal 2006 year end as compared to the prior year. The decrease in depletion expense was offset by a large increase in lease operating expense. Lease operating expense was approximately $220,400 and $137,480 in the three months ended
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August 31, 2006 and 2005, respectively, representing an increase of $82,920 (60.3%). In the six-month 2006 period lease operating expense was approximately $409,660 compared to approximately $270,100 for the 2005 six-month period, representing an increase of 139,590 (51.7%). In both periods, expenses increased primarily as a result of workovers on properties in Madison County, Panola County, and North Texas. Production taxes for the three-months ended August 31, 2006 were $18,384 compared to $17,694 for the three-months ended August 31, 2005, representing an increase of approximately $690 (3.9%). Production taxes for the six-months ended August 31, 2006 were $34,409 compared to $34,630 for the six-months ended August 31, 2005, representing a decrease of approximately $220 (0.6%). The Company did not incur any exploration expense, dry hole expense or leasehold abandonment charges during any of the 2006 or 2005 periods.
The Company’s coal and gravel operating expenses for the 2006 second quarter were $28,132 compared to $13,719 for the 2005 second quarter, representing an increase of approximately $14,413 (105.1%). The Company’s coal and gravel operating expenses for the 2006 six-month period were approximately $40,370 compared to approximately $29,440 for the 2005 period, representing an increase of approximately $10,930 (37.1%). A $20,060 increase in reclamation expenses in the 2006 six-month period resulted from the Company’s supervision of the coal mine’s reclamation which was in addition to the fixed price contract that was expensed in prior periods. This expense was partially offset by a decrease in the engineering, testing and permitting expenses for both periods. The Company entered into a fixed price contract agreement in the amount of $567,000 with a third party contractor to reclaim its disturbed coal lands with the expense being recognized in prior periods. Reclamation activities in the three months ending August 31, 2006 resulted in total payment of this contract which reduced the Company’s cash and cash equivalents by this amount. The Company has applied for a decrease in its reclamation liability for its Carbon Junction Coal Mine in the amount of $114,473 which has been approved by the Colorado Division of Minerals and Geology (“CDMG”), but requires public notice, a comment period and no objections before final approval by the CDMG. The Company expects no objections and the reduction to receive final approval in the Company’s next fiscal quarter. The Company now maintains a coal mine reclamation bond with the State of Colorado in the amount of $816,526. After approval of the reduction in the amount of
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$114,473, the remaining amount of the bond required will be $702,053. In addition, on August 25, 2006, the Company applied for a Phase I release of 60% of the total remaining liability for coal reclamation which will result in an additional reduction in the coal mine reclamation bond in the amount of approximately $421,230 leaving a liability of approximately $280,820. Phase II and Phase III releases will be subject to approvals by CDMG confirming that environmental response, vegetation and re-growth has stabilized which could require a period of a couple of years. Liability reductions will provide a corresponding increase to cash and cash equivalents as releases of liability are issued.
Real estate development expenses were approximately $62,840 and $134,870 in the three and six-month 2006 periods compared to immaterial expense in the 2005 periods. The increase in real estate development expenses was the result of a change in financial reporting pursuant to the decision to sell the Durango, Colorado property. Payroll and engineering fees previously capitalized were expensed in the 2006 periods. Legal expense related to our efforts to sell the Durango, Colorado property was $36,010 and $68,635 in the three and six month 2006 periods with only $23 expensed in the 2005 six-month period.
General and administrative expenses for the three-months ended August 31, 2006 were $138,649 compared to $221,157 for the three-months ended August 31, 2005, representing a decrease of approximately $82,510 (37.3%). General and administrative expenses for the six-months ended August 31, 2006 were $290,431 compared to $356,000 for the three-months ended August 31, 2005, representing a decrease of approximately $65,570 (18.4%). In the 2006 periods there were decreases in legal, auditing and Security Exchange Commission (“SEC”) filings expenses as no amendments of prior period “SEC” returns were required. There was a decrease in payroll expense due to a change in office personnel.
Other income for the three-months ended August 31, 2006 was $90,283 compared to $472,424 for the three-months ended August 31, 2005, representing a decrease of $382,140 (80.9%). Other income for the six-months ended August 31, 2006 was $136,137 compared to $494,072 for the six-months ended August 31, 2005, representing a decrease of 357,940 (72.4%). The decrease was due to the sale of a portion of the Company’s investments available for sale in 2005 with no such sale in the
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2006 periods. For the six-months ended August 31, 2006 compared to the six-months ended August 31, 2005, interest and dividend income increased approximately $32,800 (67%) due to increase in interest rates.
The Company did not purchase any shares of its stock during the 2006 three-month period, but purchased 4,500 shares in the 2006 six-month period. All of such purchases were from unrelated parties.
Financial Condition and Liquidity
During the first half of fiscal 2007, the Company’s investing activity was a net provider of funds with the operating and financing activities being net users of funds. As a consequence, the Company’s cash and cash equivalents decreased by approximately $575,000. The Company did not participate in any exploratory or development drilling during the period. The Company’s operating activities used approximately $554,970 of funds as reclamation expenditures incurred during the period ending August 31, 2006 resulted in a significant decrease in cash and cash equivalents. However; the Company has requested an approximate $535,700 combined reduction in its reclamation bond liability as explained in its Results of Operations section of this report. As those releases are approved, the Company will receive corresponding increases in cash and cash equivalents. The Company’s investing activities provided approximately $5,836, primarily due to the sale of a portion of the Company’s other property and equipment during the period. The Company’s financing activities used approximately $25,880, all on purchases of the Company’s common stock. At August 31, 2006, the Company had no indebtedness and cash and cash equivalents totaled approximately $2,792,350. As explained above, reductions in cash and cash equivalents during this period resulting from the reclamation of the Company’s coal mine will be replaced as portions of its reclamation bond liability to the State of Colorado are released.
The Company expects to fund its operations and any purchases of the Company’s stock it makes during the remainder of fiscal 2007 from its cash and cash equivalents and any cash flow from its operations. Given the Company’s decision to sell its Durango, Colorado property, the Company currently does not
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expect to make any material expenditure on such property for the remainder of fiscal 2007.
Critical Accounting Policies and Estimates
The foregoing discussion and analysis of the Company’s results of operations and financial condition and liquidity is based upon the financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. In response to Securities and Exchange Commission (the “Commission”) Release No. 33-8040, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies,” the Company has identified certain of its accounting policies as being of particular importance to the portrayal of the Company’s results of operations and financial position and which require the application of significant judgment by management. The Company analyzes its estimates, including those related to oil and gas revenues, oil and gas properties, income taxes, contingencies and litigation, and bases its estimates on historical experience and various other assumptions that the Company believes to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of the Company’s financial statements:
SUCCESSFUL EFFORTS METHOD OF ACCOUNTING: The Company accounts for its natural gas and crude oil exploration and development activities utilizing the successful efforts method of accounting. Under this method, costs of productive exploratory wells, development dry holes and productive wells, costs to acquire mineral interests and three-dimensional (3-D) seismic costs are capitalized. Exploration costs, including personnel costs, certain geological and geophysical expenses including two-dimensional (2-D) seismic costs and delay rentals for oil and gas leases, are charged to expense as incurred. Exploratory drilling costs are initially capitalized, but charged to expense if and when the well is determined not to have found reserves in commercial quantities. The sale of a partial interest in a proved property is accounted for as a cost recovery and no gain or loss is recognized.
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The application of the successful efforts method of accounting requires managerial judgment to determine the proper classification of wells designated as developmental or exploratory which will ultimately determine the proper accounting treatment of the costs incurred. The results from a drilling operation can take considerable time to analyze and the determination that commercial reserves have been discovered requires both judgment and industry experience. Wells may be completed that are assumed to be productive but actually deliver oil and gas in quantities insufficient to be economic, which may result in the abandonment of the wells at a later date. Wells may be drilled that target geologic structures that are both developmental and exploratory in nature and an allocation of costs is required to properly account for the results. The evaluation of oil and gas leasehold acquisition costs requires managerial judgment to estimate the fair value of these costs with reference to drilling activity in a given area. Drilling activities in an area by other companies may also effectively condemn leasehold positions.
The successful efforts method of accounting can have a significant impact on the operational results reported when the Company is entering a new exploratory area in hopes of funding an oil and gas field that will be the focus of future development drilling activity. The initial exploratory wells may be unsuccessful and will be expensed.
RESERVE ESTIMATES: The Company’s estimates of oil and gas reserves, by necessity, are projections based on geologic and engineering data, and there are uncertainties inherent in the interpretation of such data as well as the projection of future rates of production and the timing of development expenditures. Reserve engineering is a subjective process of estimating underground accumulations of oil and gas that are difficult to measure. The accuracy of any reserve estimate is a function of the quality of available data, engineering and geological interpretation and judgment. Estimates of economically recoverable oil and gas reserves and future net cash flows necessarily depend upon a number of variable factors and assumptions, such as historical production from the area compared with production from other producing areas, the assumed effects of regulations by governmental agencies and assumptions governing future oil and gas prices, future operating costs, severance taxes, development costs and workover gas costs, all of which may in fact vary considerably from actual results. The
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future drilling costs associated with reserves assigned to proved undeveloped locations may ultimately increase to an extent that these reserves may be later determined to be uneconomic. For these reasons, estimates of the economically recoverable quantities of oil and gas attributable to any particular group of properties, classifications of such reserves based on risk of recovery and estimates of the future net cash flows expected there from may vary substantially. Any significant variance in the assumptions could materially affect the estimated quantity and value of the reserves, which could affect the carrying value of the Company’s oil and gas properties and/or the rate of depletion of the oil and gas properties. Actual production, revenues and expenditures with respect to the Company’s reserves will likely vary from estimates and such variances may be material.
IMPAIRMENT OF OIL AND GAS PROPERTIES: The Company reviews its oil and gas properties for impairment at least annually and whenever events and circumstances indicate a decline in the recoverability of their carrying value. The Company estimates the expected future cash flows of its oil and gas properties and compares such future cash flows to the carrying amount of the properties to determine if the carrying amount is recoverable. If the carrying amount exceeds the estimated undiscounted future cash flows, the Company will adjust the carrying amount of the oil and gas properties to their fair value. The factors used to determine fair value include, but are not limited to, estimates of proved reserves, future commodity pricing, future production estimates, anticipated capital expenditures and a discount rate commensurate with the risk associated with realizing the expected cash flows projected.
Given the complexities associated with oil and gas reserve estimates and the history of price volatility in the oil and gas markets, events may arise that would require the Company to record an impairment of the recorded book values associated with oil and gas properties. The Company has not recognized any impairment this year or in the prior year, but there can be no assurance that impairments will not be recognized in the future.
ASSET RETIREMENT OBLIGATIONS: Effective March 1, 2003, the Company adopted Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations. The asset retirement obligations represent the estimated present value of
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the amounts expected to be incurred to plug, abandon, and remediate the producing properties at the end of their productive lives, in accordance with state laws, as well as the estimated costs associated with the reclamation of the property surrounding and including the Company’s previous coal mining operations. The Company determines the asset retirement obligations by calculating the present value of estimated cash flows related to the liability. The asset retirement obligations are recorded as a liability at the estimated present value as of the asset’s inception, with an offsetting increase to producing properties. Periodic accretion of the discount related to the estimated liability is recorded as an expense in the statement of operations.
The estimated liability is determined using significant assumptions, including current estimates of plugging and abandonment costs, annual inflation of these costs, the productive lives of wells, and a risk-adjusted interest rate. Changes in any of these assumptions can result in significant revisions to the estimated asset retirement obligations. Revisions to the asset retirement obligations are recorded with an offsetting change to producing properties, resulting in prospective changes to depletion and depreciation expense and accretion of the discount. Because of the subjectivity of assumptions and the relatively long lives of most of the wells, the costs to ultimately retire the Company’s wells may vary significantly from prior estimates.
Forward-Looking Statements
Certain information included in this Quarterly Report on Form 10-QSB and other materials filed by the Company with the Commission contain forward-looking statements relating to the Company’s operations and the oil and gas industry. Such forward-looking statements are based on management’s current projections and estimates and are identified by words such as “expects,” “intends,” “plans,” “believes,” “estimates,” “anticipates” and similar words. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially from what is expressed in such forward-looking statements.
Among the factors that could cause actual results to differ materially are crude oil and natural gas price fluctuations, failure to achieve expected production and the
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timing of receipt of revenues from existing and future exploration and development projects (including, particularly, the secondary recovery project on the Madison County, Texas property), higher than estimated oil and gas and coal reclamation costs and delays with respect to, or failure to obtain, governmental permits and approvals necessary to proceed with real estate development. In addition, these forward-looking statements may be affected by general domestic and international economic and political conditions.
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ITEM 3. CONTROLS AND PROCEDURES.
The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, or the Exchange Act. This term refers to the controls and procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Commission. Our management, including our Principal Executive Officer and Principal Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-QSB. Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-QSB.
There were no changes to our internal control over financial reporting during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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ITEM 6. EXHIBITS
(31) | | Rule 13a-14(a)/Rule 15d-14(a) Certifications: |
| (i) | Certification of Sandra Pautsky, Principal Executive Officer of the Company, filed herewith. |
| | |
| (ii) | Certification of Carol J. Cooper, Principal Financial Officer of the Company, filed herewith. |
(32) | | Section 1350 Certifications – Certifications of Sandra Pautsky, Principal Executive Officer of the Company, and Carol J. Cooper, Principal Financial Officer of the Company, filed herewith. |
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | OAKRIDGE ENERGY, INC. | | |
| | (Registrant) | | |
| | | |
| | | |
Date: October 16, 2006 | | By | /s/ Sandra Pautsky | | |
| | Sandra Pautsky, President and Principal Executive Officer | |
| | | |
| | | |
Date: October 16, 2006 | | By | /s/ Carol J. Cooper | | |
| | Carol J. Cooper, Principal Financial Officer | |
| | | | | | |
The foregoing certification is being furnished as an exhibit to the Form 10-QSB pursuant to Item 601(b)(32) of Regulation S-B and Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and accordingly, is not being filed as part of the Form 10-QSB for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
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