Oceanic Exploration (OCEX) 10QSB 2006 Q2 Quarterly report (small business)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB

(Mark One)

þ Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2006

o Transition Report Under Section 13 or 15(d) of the Exchange Act

For the transition period from                    to                    

Commission file number 0-6540.

Oceanic Exploration Company

(Exact name of small business issuer as specified in its charter)

Delaware	84-0591071
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

7800 East Dorado Place, Suite 250, Englewood, CO 80111
(Address of principal executive offices)

(303) 220-8330
(Issuer’s telephone number)

(Former name, former address and former fiscal year,
if changed since last report)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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. Yesþ Noo

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

Shares outstanding at
August 3, 2006
59,688,881	Common $.0625 Par Value

Transitional Small Business Disclosure Format (Check One) YESo NOþ

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

31 Certification of Principal Executive Officer and Principal Financial Officer

32 Certification Pursuant to 18 U.S.C. Section 1350

 Certificate of Amendment to the Amended and Restated Certificate of Incorporation

 Rule 13a4-14(a) Certification of CEO

 Rule 13a4-14(a) Certification of CFO

 Rule 13a4-14(b) Certification of Officers

OCEANIC EXPLORATION COMPANY
AND SUBSIDIARIES

Condensed Consolidated Balance Sheets
(Unaudited)

	June 30,			December 31,
	2006			2005
Assets
Cash, unrestricted	$	85,714		$	79,706
Due from affiliates		8,053			18,694
Prepaid expenses and other		48,805			7,485
Total current assets		142,572			105,885
Oil and gas property interests (note 7)		—			—
Furniture, fixtures, and equipment		61,237			61,003
Less accumulated depreciation		(49,410	)		(49,401	)
		11,827			11,602
Total assets	$	154,399		$	117,487
Liabilities and Stockholders’ Deficit
Accounts payable	$	76,349		$	92,133
Accrued expenses		212,918			209,129
Accrued expenses — security for legal costs (note 3)		267,907			273,108
Other current liabilities		1,911			4,058
Note payable related party — NWO Resources, Inc. (note 5)		2,404,701			1,392,177
Total current liabilities		2,963,786			1,970,605
United Kingdom taxes payable, including accrued interest		724,145			674,866
Total liabilities		3,687,931			2,645,471
Commitments and contingencies (notes 2 and 3)
Stockholders’ deficit (note 4)
Preferred stock, $10 par value. Authorized 600,000 shares; no shares issued		—			—
Common stock, $.0625 par value. Authorized 100,000,000 shares and 50,000,000 shares at June 30, 2006 and December 31, 2005, respectively; 40,688,881 shares issued and outstanding		2,543,055			2,543,055
Capital in excess of par value		3,323,410			3,323,410
Retained deficit		(9,399,997	)		(8,394,449	)
Total stockholders’ deficit		(3,533,532	)		(2,527,984	)
Total liabilities and stockholders’ deficit	$	154,399		$	117,487

See accompanying notes to condensed consolidated financial statements.

OCEANIC EXPLORATION COMPANY
AND SUBSIDIARIES

Consolidated Statements of Operations
(Unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
Revenue:
Management revenue — related parties	$	264,900		$	232,770		$	529,845		$	465,540
Costs and expenses:
Exploration expenses (note 3)		315,677			502,394			596,452			855,609
Amortization and depreciation		1,115			1,235			2,189			2,470
General and administrative		389,083			373,614			809,645			810,291
		705,875			877,243			1,408,286			1,668,370
Operating loss		(440,975	)		(644,473	)		(878,441	)		(1,202,830	)
Other income (expense):
Interest income		4,017			3,362			7,523			11,459
Interest and financing costs		(57,626	)		(8,917	)		(99,331	)		(15,306	)
Foreign currency gains (losses)		(21,393	)		21,825			(35,299	)		33,072
		(75,002	)		16,270			(127,107	)		29,225
Loss before income taxes		(515,977	)		(628,203	)		(1,005,548	)		(1,173,605	)
Income tax expense (note 6)		—			—			—			—
Net loss	$	(515,977	)	$	(628,203	)	$	(1,005,548	)	$	(1,173,605	)
Basic and diluted loss per common share	$	(0.01	)	$	(0.02	)	$	(0.02	)	$	(0.03	)
Weighted average number of common shares outstanding		40,688,881			40,688,881			40,688,881			40,688,881

See accompanying notes to condensed consolidated financial statements.

OCEANIC EXPLORATION COMPANY
AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows
(Unaudited)

	Six Months Ended June 30,
	2006			2005
Cash flows from operating activities:
Net loss	$	(1,005,548	)	$	(1,173,605	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		2,189			2,470
Changes in operating assets and liabilities:
Decrease in due from affiliates		10,641			53,879
(Increase) in prepaid expenses and other assets		(41,320	)		—
Decrease in accounts payable		(15,784	)		(39,487	)
Increase (decrease) in accrued expenses		3,789			(30,636	)
Decrease in other current liabilities		(2,147	)		(1,863	)
Decrease in security for legal costs		(5,201	)		(7,746	)
Increase (decrease) in United Kingdom taxes payable, including accrued interest payable		49,279			(34,427	)
Net cash used in operating activities		(1,004,102	)		(1,231,415	)
Cash used in investing activities:
Purchase of fixed assets		(2,414	)		—
Cash flows from financing activities:
Use of short-term investments and cash equivalents		—			409,576
Increase in note payable, related party — NWO Resources, Inc. including accrued interest payable		1,012,524			527,800
Net cash provided by financing activities		1,012,524			937,376
Net increase (decrease) in cash		6,008			(294,039	)
Cash at beginning of period		79,706			382,436
Cash at end of period	$	85,714		$	88,397

See accompanying notes to condensed consolidated financial statements.

OCEANIC EXPLORATION COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2006

(1)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The condensed consolidated balance sheet as of December 31, 2005 that has been derived from audited financial statements, and the unaudited interim condensed consolidated financial statements included herein, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements, prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to those rules and regulations, although Oceanic Exploration Company (Oceanic or the Company) believes that the disclosures made are adequate to make the information presented not misleading. In the opinion of management, all adjustments consisting of normal recurring accruals have been made which are necessary for the fair presentation of the periods included. Certain amounts recorded in prior periods have been reclassified to conform to current presentation. Interim results are not necessarily indicative of results for a full year. The information included herein should be read in conjunction with the financial statements and notes thereto included in the December 31, 2005 Form 10-KSB.

Certain prior year amounts on the balance sheet have been reclassified to conform to the current year presentation.

All of the Company’s revenue is derived from management contracts with related parties. The Company operates as one segment.

(2)PENDING LITIGATION

On March 1, 2004, Oceanic and Petrotimor filed a Complaint in the United States District Court for the District of Columbia. Oceanic and Petrotimor, as plaintiffs, brought this action to redress the harm caused by the defendants’ (collectively including ConocoPhillips, Inc. and designated subsidiaries, the Timor Sea Designated Authority for the Joint Petroleum Development Area, the Timor Gap Joint Authority for the Zone of Cooperation, PT Pertamina and BP Migas) theft, misappropriation and conversion of oil and gas resources within the Company’s 14.8 million-acre Timor Gap concession. On March 1, 2005, the Complaint was amended to reflect claims that the misdeeds of the defendants effectively prevented the Company from competing for concessions granted by the Designated Authority.

The Complaint describes violations of the following United States statutes: Racketeer Influenced Corrupt Organizations Act (RICO), the Lanham Act and the Robinson-Patman Act. The Complaint seeks damages of at least $10.5 billion from the defendants, and cites unjust enrichment, unfair competition, and intentional interference with the contract and prospective economic advantage. Based upon the RICO and anti-trust claims, Oceanic and Petrotimor seek to recover treble damages, reasonable attorneys’ fees and punitive damages.

On February 8, 2005, the Court heard oral arguments on the defendants’ motions to dismiss. The Court denied the defendants’ motions to dismiss as moot. However, the Court also dismissed the plaintiffs’ First Amended Complaint without prejudice to the filing of a Second Amended Complaint, as described below, to more fully reflect the plaintiffs’ case. The Complaint was amended to reflect claims that the Company was effectively prevented from obtaining concessions granted by the Designated Authority due to the misdeeds of the defendants. The Court directed the plaintiffs to precisely respond to each and every argument raised by the defendants’ “compelling motions to dismiss.” The Second Amended Complaint was filed with the Court on March 1, 2005. The defendants filed new motions to dismiss with the Court on March 28, 2005. The Company’s opposition to defendants’ motions to dismiss was filed with the Court on April 18, 2005. A final response by the defendants to the Company’s revised complaint was filed on April 28, 2005. No communication has been received from the Court since the last filing with the Court.

The Company awaits the decision of the Court on the defendants’ motion to dismiss. The Company is unable to predict when the Court will reach a decision on this motion, nor can the Company predict the Court’s decision on the merits of this motion. As stated in the Second Amended Complaint, the Company has consistently proposed to locate liquefied natural gas facilities in East Timor which would significantly benefit the people of East Timor, yet the Company has not been given an opportunity to bid on production sharing contracts granted by the Designated Authority due to bribes and corruption. Under these circumstances, the Company believes it is entitled to prove its case, and if given the opportunity by the Court, intends to do so. The Company continues to believe that it has a persuasive case against the defendants based on the evidence.

The Company anticipates that the defendants will continue to deny the allegations of the Second Amended Complaint and will otherwise vigorously defend against the Company’s claims. If the motions to dismiss are denied, we anticipate that the defense will raise additional defenses. We understand that pursuing this lawsuit fully in 2006 could take substantial time by our personnel, and that we could incur substantial expense. The current litigation has been pending for over two years and is still at a preliminary stage. If the motions to dismiss are denied, the litigation may extend over many years. Certain of the defendants are well-capitalized and are financially able to bear substantial legal costs. The Company may require additional resources in connection with this litigation if it continues indefinitely. We believe that the financial opportunity justifies this substantial commitment of time and expense. However, we cannot predict the outcome of the litigation and there is a possibility that the Company will not recover the damages it is seeking.

(3)EXPLORATION EXPENSES

On August 21, 2001, Oceanic and Petrotimor issued a Statement of Claim (as amended) out of the Federal Court of Australia against the Commonwealth of Australia, the Joint Authority established under the Timor Gap Treaty and the Phillips Petroleum companies operating within the Timor Gap area (the Respondents). Oceanic and Petrotimor claimed that the Timor Gap Treaty and the related legislation of the Australian Parliament was void or invalid for a number of reasons including (i) the Timor Gap Treaty and the legislation sought to claim significant portions of the continental shelf over which it had no sovereign rights for Australia, which the Company believes under international law belonged to East Timor, and (ii) the Timor Gap Treaty and the legislation attempted to extinguish the property interest and rights granted by the then legitimate power, Portugal, to Oceanic and Petrotimor, without providing for just compensation as required by Australian law. On February 3, 2003, the Federal Court of Australia issued an adverse decision in Petrotimor v. Commonwealth of Australia. The Federal Court ruled that it lacked the jurisdiction to hear the claims made by Oceanic and Petrotimor. The Company sought special leave in 2003 to appeal to the High Court. These appeals were discontinued on February 6, 2004 when the Company determined that the most appropriate venue, under the circumstances, would be in the United States courts.

As part of the Australian litigation, Oceanic was required to provide Bank Guarantees as security for costs. The Australia and New Zealand Banking Group (ANZ Bank) in Sydney, Australia provided the necessary guarantees. As of June 30, 2006 and December 31, 2005, the Company had $279,676 and $274,459, respectively, on deposit with ANZ Bank as collateral for the guarantees. The change in the balance is due to the exchange rate fluctuation between the U.S. and Australian dollars offset by interest earned on the account. The Company believes that the deposit will be forfeited to pay for the defendants’ legal expenses. At the present time, the Company is unable to quantify the total costs and expenses that may be assessed against it by the Court.

During the six months ended June 30, 2006 and 2005, the Company incurred expenses of $582,070 and $849,284, respectively, specifically related to legal, consulting and commercial activities in Australia and the Timor Gap area. These expenses have been recorded as exploration expenses in the accompanying statements.

Although Oceanic is not currently directly involved in any other oil and gas exploration or production activities, the Company continues to evaluate potential exploration and production activities elsewhere in the world. The Company did not receive any revenue from oil and gas properties in 2005 or 2004. Other than the potential recovery of damages from the pending litigation, the Company is not currently conducting any activities that would result in material oil and gas revenue in 2006.

(4)CAPITAL STOCK

On March 6, 2006, the Board of Directors unanimously voted to increase the authorized common stock from 50,000,000 shares to 100,000,000 shares. This was adopted by written consent on May 8, 2006 by holders entitled to vote a majority of the outstanding shares of the Company’s common stock. The Company filed a Certificate of Amendment to its Amended and Restated Certificate of Incorporation, effecting this increase with the Secretary of State of the State of Delaware on July 13, 2006.

On May 18, 2006, the Company filed a Registration Statement on Form SB-2 with the Securities and Exchange Commission registering shares of common stock to be issued to stockholders pursuant to a rights offering. Under the terms of the rights offering, the Company offered the holders of its common stock the rights to subscribe for additional shares at a purchase price of $.32 per share on the basis of 0.466958 shares of common stock for each share held as of June 19, 2006. A total of 19,000,000 shares of common stock where offered to all stockholders. The Registration Statement was declared effective on

June 19, 2006 and copies of the corresponding prospectus and subscription documents were subsequently mailed to stockholders.

The rights to purchase common stock expired on July 21, 2006. The following subscriptions were accepted by the Company, resulting in gross proceeds of $6,080,000:

• 16,050,851 shares of common stock, at an aggregate purchase price of $5,136,272, pursuant to the basic subscription rights, and

• 2,949,149 shares of common stock, at an aggregate purchase price of $943,728, pursuant to the over-subscription privilege.

The Company also received, but did not accept, subscriptions for an additional 43,337 shares of common stock pursuant to the over-subscription privilege. The $13,868 received by the Company as a result of these unaccepted subscriptions was returned to the subscribing shareholders immediately after the expiration date of the rights offering.

NWO Resources, Inc. (NWO) purchased 18,949,116 shares of common stock in the rights offering pursuant to its basic subscription rights and over-subscription privilege. At the completion of the rights offering, NWO’s ownership increased from 84.2% to 89.2%.

The following table sets forth summary financial data at June 30, 2006 as adjusted to give effect to the sale of 19,000,000 shares of common stock at the offering price of $.32 and the application of the proceeds.

	June 30, 2006
Balance Sheet Data	Actual			As Adjusted
Cash	$	85,714		$	3,761,013
Total current assets		142,572			3,777,476
Total assets		154,399			3,789,303
Note payable related party – NWO Resources Inc., including accrued interest		2,404,701			0
Total current liabilities		2,961,875			557,174
Total liabilities		3,687,931			1,283,230
Common stock, $.0625 par value		2,543,055			3,730,555
Capital in excess of par value		3,323,410			8,175,515
Retained deficit		(9,399,997	)		(9,399,997	)
Total stockholders’ (deficit) equity		(3,533,532	)		2,506,073

The proceeds of the rights offering will be used to pay off the note and accrued interest with NWO, fund the cost of the rights offering, pay for the legal and professional expenses associated with the Petrotimor lawsuit and to cover the cost of operations.

(5)NOTE PAYABLE — RELATED PARTY

In 2005, the Company established a line of credit with NWO Resources, Inc. (NWO), Oceanic’s principal shareholder, evidenced by a promissory note in the amount of $2,000,000 at an interest rate of 2% over the prime rate with repayment due on or before March 6, 2006. In addition, NWO committed to increase the line of credit to $4,000,000 under certain circumstances. These circumstances occurred and the promissory note was increased to $4,000,000 with a due date of March 6, 2007. As of June 30, 2006, $2,340,856 was outstanding under the line of credit. An additional $63,845 was accrued for interest calculated on the outstanding balance at 2% over the U.S. Bank prime-lending rate in effect on the date of each draw against the line of credit. The line of credit is evidenced by an unsecured promissory note that is due upon the earlier of the following: (i) obtaining alternative financing in an amount not less than $4,000,000, or (ii) resolution of the East Timor suit to the benefit of Oceanic for an amount not less than $4,000,000, or (iii) payment within one year of the loan date. On July 24, 2006, after the termination of the rights offering, the Company paid the note and accrued interest in full, paying NWO $2,569,456 in principal and interest as of that date. The line of credit was then terminated.

The Company believes that the cash on hand at June 30, 2006, plus cash generated from 2006 revenues and the rights offering, will be sufficient to fund operations beyond December 31, 2006. The status of Oceanic’s current litigation may substantially affect our need for and the ability to raise capital in the long-term.

(6) INCOME TAXES

Oceanic and NWO maintain a tax-sharing agreement with the same provisions applicable to all subsidiaries included in NWO’s consolidated return. Oceanic’s tax provision is calculated using the then-current statutory rates, on a stand-alone basis, and specifically estimating the book-tax differences, including the share of any differences applied ratably to all subsidiaries. Oceanic includes a tax benefit from losses to the extent of the previous profits, but only to the extent such profits were included in the NWO consolidated return. To the extent a tax benefit for a loss has not been previously allowed, and Oceanic has profits in a future year which falls within the period to which, on a stand-alone basis, the prior tax loss could be carried forward under United States tax rules, the benefit of the loss will be included in the provision to the extent the loss would provide a tax benefit on a stand-alone basis.

In evaluating the realizability of the net deferred tax assets, the Company takes into account a number of factors, primarily relating to the ability to generate taxable income. Where it is determined that it is likely that the Company will be unable to realize deferred tax assets, a valuation allowance is established against the portion of the deferred tax asset.

Because it cannot be accurately determined when the Company will become profitable, a valuation allowance was provided against the entire deferred income tax asset attributable to the net operating loss incurred during the six months ended June 30, 2006 and 2005.

The foreign tax credit carryforwards of Oceanic from taxable periods prior to April 2, 2003 expired in 2005.

(7)OIL AND GAS INTERESTS

Oceanic holds various interests in concessions or leases for oil and gas exploration around the world as described in the December 31, 2005 Form 10-KSB. Costs for these oil an gas property interests have been charged to expense in prior years so no amounts are reflected on the balance sheet. The Company is not currently conducting any direct exploration activities other than pursuing legal claims relating to the disputed oil and gas concession existing in the Timor Gap between East Timor and Australia.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Any statements that are contained in this Form 10-QSB that are not statements of historical fact are forward-looking statements. Readers can identify these statements by words such as ‘may,’ ‘will,’ ‘expect,’ ‘anticipate,’ ‘estimate,’ ‘continue’ or other similar words. These statements discuss future expectations, contain projections of results of operations or financial condition or state other forward-looking information and are based on certain assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions, expected future developments and other factors it believes are appropriate in the circumstances. Such statements are subject to a number of assumptions, risks and uncertainties, including such factors as uncertainties in cash flow, expected costs of litigation, the outcome of litigation, the potential impact of government regulations and rulings, fluctuations in the economic environment and other such matters, many of which are beyond the control of the Company. Readers are cautioned that forward-looking statements are not guarantees of future performance and that actual results or developments may differ materially from those expressed or implied in the forward-looking statements.

The following discussion and analysis should be read in conjunction with Oceanic’s condensed consolidated financial statements and notes thereto as of December 31, 2005 and June 30, 2006 and 2005, for the respective periods then ended.

Critical Accounting Policies

The discussion and analysis of financial condition and results of operations is based on the Company’s condensed

consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities and the reported amounts of revenues and expenses. On an on-going basis, management evaluates the estimates including those related to the realizability of income tax assets and the provision for loss contingencies. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates. Management believes the following critical accounting policies affect the significant judgments and estimates used in the preparation of the Company’s condensed consolidated financial statements.

To record income tax expense, the Company is required to estimate income taxes in each of the jurisdictions in which it operates. This involves estimating actual current tax exposure together with assessing temporary differences that result in deferred tax assets and liabilities and expected future tax rates. The Company records a valuation allowance to reduce the deferred tax assets to an amount that management believes is more likely than not to be realized. Management considers future taxable income and prudent and feasible tax planning strategies in assessing the need for a valuation allowance. If management subsequently determines that the Company will realize more or less of the net deferred tax assets in the future, such adjustment would be recorded as an increase or reduction of income tax expense in the period such determination is made.

In evaluating the need to provide for contingent liabilities, the Company takes into account a number of factors, including the expected likelihood of an unfavorable outcome and the ability to reasonably estimate the financial impact of an unfavorable outcome and management’s intentions with respect to the contingency.

Liquidity and Capital Resources

Oceanic has historically addressed long-term liquidity needs for oil and gas exploration and development through the use of farm-out agreements. Under such agreements, the Company sells a portion of its ownership interest in the concession to an outside party who is then responsible for the exploration activities. This is a strategy that management intends to continue in the event it becomes feasible to begin further exploration in any of the areas where the Company currently owns concessions.

Cash Flow.Cash used in operating activities was $1,004,102 for the first six months of 2006, compared to $1,231,415 in the first six months of 2005. Financing activities, including borrowings from the note payable from NWO, generated positive cash flows in the first six months of 2006 of $1,012,524 compared to the 2005 borrowings of $527,800 and proceeds from the sale of short-term investments of $409,576. The first six months of 2006 ended with a net increase in total cash of $6,008, the difference between cash used in operations and cash provided by the NWO borrowings. During the six months ended June 30, 2006 and 2005, Oceanic made actual cash payments of $566,241 and $787,453, respectively, related to legal and professional activities in Australia and the Timor Gap area. An additional $30,211 of expenses were accrued and remained unpaid as of June 30, 2006. These costs are included in exploration expenses. Exploration expenses have decreased in 2006 compared to the same period in 2005, primarily because of the lack of court activity. Until a final judgment is obtained or settlement of the lawsuit occurs, exploration expenses will continue to be high and will consume a majority of Oceanic’s cash resources.

Oceanic had $85,714 in cash at June 30, 2006 compared with $79,706 in cash and cash equivalents at December 31, 2005. The Company had a negative working capital of $2,821,214, where current liabilities exceeded cash and other current assets, at June 30, 2006, compared to a negative working capital of $1,864,720 at December 31, 2005. This decrease in working capital was a result of the payment of legal and investigatory expenses charged to exploration expenses as discussed above.

Subsequent to the end of the quarter, on July 21, 2006 the Company received proceeds from its rights offering, net of offering costs, of $6,039,605. The Company used $2,569,456 of this to pay the principal and interest outstanding on the NWO note. The balance of the net proceeds will be used to pay for the legal and professional expenses associated with the Petrotimor lawsuit and to cover the cost of operations.

Revenue.Oceanic provides management services to various entities with which our Chairman of the Board of Directors and Chief Executive Officer is affiliated. Services provided are:

• Management, administrative and bookkeeping services to San Miguel Valley Corporation (San Miguel),

• Management, administrative and professional services to Cordillera Corporation (Cordillera), and

• Consulting services, including monitoring exploration and production activities on a worldwide basis to identify potential investment opportunities for Harvard International Resources Ltd. (HIRL).

Together, these management services provided all of Oceanic’s total revenue for the six months ended June 30, 2006 and 2005.

Management Fee Revenue
(Unaudited)

	Six Months Ended June 30,
Company	2006				2005
Cordillera	$	219,030	41	%	$	236,820	51	%
San Miguel Valley Corporation		295,860	56	%		213,720	46	%
Harvard International Resources, Ltd.		14,955	3	%		15,000	3	%
Total management fee revenue	$	529,845			$	465,540

Except for the contract with HIRL, all labor services are provided at payroll cost plus benefits and include a 5% mark up on that total to cover the administrative expense. This charge is calculated annually and readjusted at year-end. All expenses are billed at cost. The purpose of the management agreements is to avoid duplication of functions and costs for the economic benefit of all of the companies involved.

Results of Operations

Revenue.Management fee revenue for the six months ended June 30, 2006 increased $64,305, or 14%, compared to the six months ended June 30, 2005. The total increase is due to a decrease in fees charged to Cordillera, offset by a larger increase in the fees charged to San Miguel. Because the level of service is dependent upon the needs of the applicable corporations and available employees, it is normal to see fluctuations in management fee rates from year to year.

Although Oceanic is not currently directly involved in any other oil and gas exploration or production activities, the Company continues to evaluate potential exploration and production activities elsewhere in the world, including Indonesia and Libya. The Company did not receive any revenue from oil and gas properties in 2005 or 2004. Other than the potential recovery of damages from the pending litigation, the Company is not currently conducting any activities that would result in material oil and gas revenue in 2006.

Exploration Expenses.The Company continues to have ongoing legal and professional fees associated with the litigation in the U.S. District Court and the pursuit of commercial opportunities in East Timor. During the six months ended June 30, 2006 and 2005, the Company incurred total exploration expenses of $596,452 and $855,609, respectively. These related primarily to legal and professional fees associated with the litigation in the U.S. court and the pursuit of commercial opportunities in East Timor. These expenses have been recorded as exploration expenses.

As part of the Australian litigation, Oceanic was required to provide Bank Guarantees as security for costs. The Australia and New Zealand Banking Group (ANZ Bank) in Sydney, Australia provided the necessary guarantees. As of June 30, 2006 and December 31, 2005, the Company had $279,676 and $274,459, respectively, on deposit with ANZ Bank as collateral for the guarantees. The change in the balance is due to the exchange rate fluctuation between the U.S. and Australian dollars offset by interest earned on the account. The Company believes that this deposit will be forfeited to pay for the defendants’ legal expenses. At the present time, the Company is unable to quantify the total costs and expenses that may be assessed against it by the Court.

Pending Litigation.On March 1, 2004, Oceanic and Petrotimor filed a Complaint in the United States District Court for the District of Columbia. Oceanic and Petrotimor, as plaintiffs, brought this action to redress the harm caused by the defendants’ (collectively including ConocoPhillips, Inc. and designated subsidiaries, the Timor Sea Designated Authority for the Joint Petroleum Development Area, the Timor Gap Joint Authority for the Zone of Cooperation, PT Pertamina and BP Migas) theft, misappropriation and conversion of oil and gas resources within our 14.8 million-acre Timor Gap concession. On March 1, 2005, the Complaint was amended to reflect claims that the misdeeds of the defendants effectively prevented the Company from competing for concessions granted by the Designated Authority.

The Complaint describes violations of the following United States statutes: Racketeer Influenced Corrupt Organizations Act (RICO), the Lanham Act and the Robinson-Patman Act. The Complaint seeks damages of at least $10.5 billion from the defendants, also citing unjust enrichment, unfair competition, and intentional interference with the contract and with prospective economic advantage. Based upon the RICO and anti-trust claims, Oceanic and Petrotimor seek to recover treble damages, reasonable attorneys’ fees and punitive damages.

On February 8, 2005, the Court heard oral arguments on the defendants’ motions to dismiss. The Court denied the defendants’ motions to dismiss as moot. However, the Court also dismissed the plaintiffs’ First Amended Complaint without prejudice to the filing of a Second Amended Complaint, as described above, to more fully reflect the plaintiffs’ case. The Complaint was amended to reflect claims that the Company was effectively prevented from obtaining concessions granted by the Designated Authority due to the misdeeds of other defendants. The Court directed the plaintiffs to precisely respond to each and every argument raised by the defendants’ “compelling motions to dismiss.” The Second Amended Complaint was filed with the Court on March 1, 2005. The defendants filed new motions to dismiss with the Court on March 28, 2005. The Company’s opposition to defendants’ motions to dismiss was filed with the Court on April 18, 2005. A final response, by the defendants, to the Company’s revised complaint was filed on April 28, 2005. No communication has been received from the Court since the last filing with the Court.

The Company awaits the decision of the Court on the defendants’ motion to dismiss. The Company is unable to predict when the Court will reach a decision on this motion, nor can the Company predict the Court’s decision on the merits of this motion. As stated in the Second Amended Complaint, the Company has consistently proposed to locate liquefied natural gas facilities in East Timor which would significantly benefit the people of East Timor, yet the Company has not been given an opportunity to bid on production sharing contracts granted by the Designated Authority due to bribes and corruption. Under these circumstances, the Company believes it is entitled to prove its case, and if given the opportunity by the Court, intends to do so. The Company continues to believe that it has a persuasive case against the defendants based on the evidence.

The Company anticipates that the defendants will continue to deny the allegations of the Second Amended Complaint and will otherwise vigorously defend against the Company’s claims. If the motions to dismiss are denied, we anticipate that the defense will raise additional defenses. These could include factual defenses to the allegations in the Complaint as well as additional legal arguments. We understand that pursuing this lawsuit fully in 2006 could take substantial time by our personnel, and that we could incur substantial expense. The current litigation has been pending for over two years and is still at a very preliminary stage. If the motions to dismiss are denied, the litigation may extend over many years. Certain of the defendants are well-capitalized and could bear substantial legal costs over an extended period. The Company will require additional resources in connection with this litigation if it continues after the proceeds from the rights offering have been spent. We believe that the financial opportunity currently justifies this substantial commitment of time and expense. However, management cannot predict the outcome of the litigation and there is a possibility that the Company will not recover the damages it is seeking.

General and Administrative Expenses.Total general and administrative costs and expenses for the six months ended June 30, 2006 decreased by $646 from the same period in 2005. While these totals remained very similar, differences in expenses are:

• Legal fees decreased approximately $28,400 from amounts spent in 2005, due to the resolution of legal issues and less use of outside attorneys;

• The Company’s lease was renegotiated in November 2005, reducing the monthly rent by $1,041 or $6,200 year to date;

• Group insurance increased by approximately $15,000 for the first six months of 2006 compared to the same time period in 2005, because of an increase in rates.

• Salaries and taxes have increased by about 4% or about $20,000 when compared to the previous year.

Other Income and Expense.Interest income for the six months ended June 30, 2006 is $7,523, which is $8,236 lower than the amount for the same period last year. This is because the Company did not have available cash to invest in 2006. Interest expense of $11,580 is from the United Kingdom estimated tax liability, which is compounded on both static principal and the increasing accrued interest payable. Additional interest of $87,524 is accrued on the note payable to NWO. Non-cash foreign exchange losses of $35,299 resulted from the fluctuations in exchange rates in 2005 and 2006 between the U.S. dollar, the British pound, the Euro and the Australian dollar.

ITEM 3. CONTROLS AND PROCEDURES

At the end of the period covered by this report, the President and the Chief Financial Officer carried out an evaluation, which included inquiries made to certain other of our employees, of the Company’s disclosure controls and procedures (as defined in Rules 13a—15(e) and 15d—15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report.

Based upon that evaluation, the President and Chief Financial Officer have concluded that the design and operation of the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time period specified in SEC rules and forms.

There have been no changes in the Company’s internal controls over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

PART II — OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

Legal proceeding developments in 2006 were reported in the December 31, 2005 Form 10-KSB. See ‘Pending Litigation’ sections above for activity through August 9, 2006.

ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits filed herewith are listed below and attached to this report. The ‘Exhibit Number’ refers to the Exhibit Table in Item 601 of Regulation S-B.

Exhibit Number	Name of Exhibit
3.4	Certificate of Amendment to the Amended and Restated Certificate of Incorporation
31.1	Rule 13a4-14(a) Certification of Chief Executive Officer
31.2	Rule 13a4-14(a) Certification of Chief Financial Officer
32.1	Rule 13a4-14(b) Certification of Officers

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.

	Oceanic Exploration Company
Date:August 9, 2006	/s/ Charles N. Haas
	Charles N. Haas — President

Date:August 9, 2006	/s/ Courtney Cowgill
	Courtney Cowgill — Chief Financial Officer

EXHIBIT INDEX

Exhibit Number	Name of Exhibit
3.4	Certificate of Amendment to the Amended and Restated Certificate of Incorporation
31.1	Rule 13a4-14(a) Certification of Chief Executive Officer
31.2	Rule 13a4-14(a) Certification of Chief Financial Officer
32.1	Rule 13a4-14(b) Certification of Officers