Oceanic Exploration (OCEX) 10QSB 2007 Q1 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 March 31, 2007

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

For the transition period from                    to                    

Commission file number 001-08521.

Oceanic Exploration Company

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

Delaware
(State or other jurisdiction of
incorporation or organization) 84-0591071
(I.R.S. Employer
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
May 7, 2007
59,688,881	Common $.0625 Par Value
Transitional Small Business Disclosure Format (Check One)	Yeso     Noþ

TABLE OF CONTENTS

	Condensed Consolidated Balance Sheets
	Condensed Consolidated Statements of Operations
	Condensed Consolidated Statements of Cash Flows
	Condensed Consolidated Statements of Stockholders’ Equity
	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. CONTROLS AND PROCEDURES
PART II — OTHER INFORMATION
	ITEM 1. LEGAL PROCEEDINGS
	ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
Rule 13a4-14(a) Certification
Rule 13a4-14(a) Certification
Rule 13a4-14(b) Certification

OCEANIC EXPLORATION COMPANY
AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

	March 31,			December 31,
	2007			2006
Assets	(unaudited)			(audited)
Cash, unrestricted	$	2,072,390		$	2,985,985
Due from affiliates		4,564			14,674
Prepaid expenses and other		8,485			8,485
Total current assets		2,085,439			3,009,144
Oil and gas property interests (note 7)		—			—
Furniture, fixtures, and equipment		62,887			59,173
Less accumulated depreciation		(40,935	)		(39,490	)
		21,952			19,683
Total assets	$	2,107,391		$	3,028,827
Liabilities and Stockholders’ Equity
Accounts payable	$	68,076		$	436,487
Accrued expenses		603,164			491,381
Accrued expenses — security for legal costs (note 3)		287,876			282,325
Total current liabilities		959,116			1,210,193
United Kingdom taxes payable, including accrued interest		801,624			793,859
Other non-current liabilities		11,992			12,569
Total non-current liabilities		813,616			806,428
Total liabilities		1,772,732			2,016,621
Commitments and contingencies (notes 2, 3 and 5)
Stockholders’ equity (note 4)
Preferred stock, $10 par value. Authorized 600,000 shares; no shares issued		—			—
Common stock, $.0625 par value. Authorized 100,000,000 shares; 59,688,881 shares issued and outstanding		3,730,555			3,730,555
Capital in excess of par value		8,165,609			8,165,609
Retained deficit		(11,561,505	)		(10,883,958	)
Total stockholders’ equity		334,659			1,012,206
Total liabilities and stockholders’ equity	$	2,107,391		$	3,028,827

See accompanying notes to condensed consolidated financial statements.

OCEANIC EXPLORATION COMPANY
AND SUBSIDIARIES

Condensed Consolidated Statements of Operations
(Unaudited)

	Three Months Ended March 31,
	2007			2006
Revenue:
Management revenue — related parties	$	228,540		$	264,945
Costs and expenses:
Exploration expenses (note 3)		499,616			280,775
Amortization and depreciation		1,445			1,074
General and administrative		435,401			420,562
		936,462			702,411
Operating loss		(707,922	)		(437,466	)
Other income (expense):
Interest income and realized gains		30,545			3,506
Interest expense and financing costs (note 5)		(6,786	)		(41,705	)
Foreign currency gains (losses)		6,616			(13,906	)
		30,375			(52,105	)
Loss before income taxes		(677,547	)		(489,571	)
Income tax expense (note 6)		—			—
Net loss	$	(677,547	)	$	(489,571	)
Basic and diluted loss per common share	$	(0.01	)	$	(0.01	)
Weighted average number of common shares outstanding		59,688,881			40,688,881

See accompanying notes to condensed consolidated financial statements.

OCEANIC EXPLORATION COMPANY
AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows
(Unaudited)

	Three months ended
	March 31,
	2007			2006
Cash flows from operating activities:
Net loss	$	(677,547	)	$	(489,571	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		1,445			1,074
Changes in operating assets and liabilities:
(Decrease) increase in due from affiliates		10,110			(31,460	)
Increase in prepaid expenses and other assets		—			(925	)
Decrease (increase) in accounts payable		(368,411	)		45,990
Increase (decrease) in accrued expenses		111,783			(43,933	)
Increase (decrease) in security for legal costs		5,551			(9,617	)
Increase in United Kingdom taxes payable, including accrued interest payable		7,765			13,113
Decease in other non-current liabilities		(577	)		(1,064	)
Net cash used in operating activities		(909,881	)		(516,393	)
Cash used in investing activities:
Purchase of fixed assets		(3,714	)		—
Cash flows from financing activities:
Increase in NWO Resources, Inc. note payable including accrued interest payable		—			510,916
Net decrease in cash		(913,595	)		(5,477	)
Cash at beginning of period		2,985,985			79,706
Cash at end of period	$	2,072,390		$	74,229

See accompanying notes to condensed consolidated financial statements.

OCEANIC EXPLORATION COMPANY
AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Equity

	March 31,			December 31,
	2007			2006
	(unaudited)			(audited)
Common stock:
Balance, beginning of year	$	3,730,555		$	2,543,055
Common stock issued in connection with rights offering		—			1,187,500
Balance, end of period	$	3,730,555		$	3,730,555
Capital in excess of par value:
Balance, beginning of year	$	8,165,609		$	3,323,410
Additional paid in capital from rights offering net of related costs of $50,301 (note 4)		—			4,842,199
Balance, end of period	$	8,165,609		$	8,165,609
Retained earnings:
Balance, beginning of year	$	(10,883,958	)	$	(8,394,449	)
Net loss for the three months ended March 31, 2007 and the twelve months ended December 31, 2006, respectively		(677,547	)		(2,489,509	)
Balance, end of period	$	(11,561,505	)	$	(10,883,958	)
Total stockholders’ equity	$	334,659		$	1,012,206

See accompanying notes to consolidated financial statements.

OCEANIC EXPLORATION COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2007

(1)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The condensed consolidated balance sheet as of December 31, 2006 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, 2006 Form 10-KSB.

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.

The Company filed a Second Amended Complaint with the Court on March 1, 2005. The defendants filed motions to dismiss with the Court on March 28, 2005.

On September 21, 2006, the Court issued an Order and Memorandum Opinion deciding these motions. The Court denied the motions of defendants ConocoPhillips, Inc. and ConocoPhillips Company (ConocoPhillips) with respect to Oceanic’s claims under RICO, the Robinson-Patman Act and under common law theories of intentional interference with prospective economic advantage and unfair competition. Since the Court found that Oceanic had stated legally cognizable claims against ConocoPhillips, these two defendants were ordered and did file an answer to the Second Amended Complaint on October 10, 2006. The other defendants and claims were dismissed. The two defendants filed a motion for reconsideration or in the alternative to certify the Order and Memorandum Opinion for interlocutory appeal. On November 17, 2006, the Court denied the defendants’ motions for reconsideration and interlocutory appeal. On February 5, 2007, the Court granted the defendants’ motion to transfer the case to the United States District Court for the Southern District of Texas.

On April 5, 2007, a hearing was held before the new presiding judge in the United States District Court in Houston, Texas. In advance of such hearing, ConocoPhillips filed a motion for a stay of discovery and a motion for a judgment on the pleadings. Based upon the judge’s ruling at the hearing, discovery awaits the judge’s determination on the ConocoPhillips’ motion for judgment on the pleadings.

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. The Company understands that pursuing this lawsuit to its fullest extent in 2007 could take substantial time by Company personnel, and the Company could incur substantial expense. Additional resources may be required in connection with this litigation. The Company believes that the financial opportunity justifies this substantial commitment of time and expense.

(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 ConocoPhillips 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 believed 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.

There were several procedural challenges by the Respondents. A hearing by the full court on the question of whether the court had jurisdiction over this claim was held on May 16 and 17, 2002. On February 3, 2003, the Federal Court of Australia issued an adverse decision in Petrotimor v. Commonwealth of Australia, ruling that it lacked the jurisdiction to hear the claims made by Oceanic and Petrotimor. On May 6, 2003, the Federal Court ruled that it lacked jurisdiction relating to claims of misuse of confidential information.

The Company sought special leave in 2003 to appeal to the Australian High Court. That appeal was discontinued on February 6, 2004 when the Company determined that the most appropriate venue would be in the United States.

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 March 31, 2007 and December 31, 2006, the Company had $318,109 and $309,673, 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. In September 2005 the Australian Government Solicitor accepted the Company’s offer of $250,000 AU ($201,995 in U.S. dollars at March 31, 2007) in full and final settlement of their outstanding costs. We expect this amount to be withdrawn from this bank account in the near future. 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 three months ended March 31, 2007 and 2006, the Company incurred expenses of $489,983 and $270,880, 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 2006 or 2005. 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 2007.

(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 were offered to all stockholders. The Registration Statement was declared effective on June 19, 2006.

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 proceeds of the rights offering were and will continue to be used to pay off the note and accrued interest with NWO, fund the cost of the rights offering, to 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, 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. 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 2005 line of credit was then terminated.

On March 7, 2007, the Company established a new line of credit with NWO, evidenced by a promissory note in the amount of $4,000,000 at an interest rate of 2% over prime rate with repayment due on or before March 7, 2008. In addition, NWO committed to increase the line of credit to $6,000,000 under certain circumstances. As of March 31, 2007, the Company had not borrowed any funds under this line of credit.

The Company believes that the cash on hand at March 31, 2007, plus cash generated from 2007 revenues and the proceeds from the 2007 line of credit from NWO will be sufficient to fund operations beyond December 31, 2007. The status of Oceanic’s current litigation may substantially affect the 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 three months ended March 31, 2007 and 2006.

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, 2006 Form 10-KSB. Costs for these oil and 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, 2006 and March 31, 2007 and 2006, 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 $909,881 for the first three months of 2007, compared to $516,393 for the first three months of 2006. The first three months of 2006 ended with a net decrease in total cash of $5,477, the difference between cash used in operations and cash provided by the NWO borrowings. The first three months of 2007 ended with a net decrease in total cash of $913,595, including the purchase of fixed assets totaling $3,714. During the three months ended March 31, 2007 and 2006, Oceanic made actual cash payments of $425,260 and $156,844, respectively, related to legal and professional activities in Australia and the Timor Gap area. An additional $475,816 of expenses were accrued and remained unpaid as of March 31, 2007. These costs are included in exploration expenses. Exploration expenses have increased in 2007 compared to the same period in 2006, primarily because of the increased court activity after September 2006. Until a final judgment is obtained or settlement of the lawsuit occurs, exploration expenses will continue to be high and will consume most of Oceanic’s cash resources.

Oceanic had $2,072,390 in cash at March 31, 2007 compared with $2,985,985 in cash and cash equivalents at December 31, 2006. The Company had a positive working capital of $1,126,323 at March 31, 2007 compared to $1,798,951 at December 31, 2006. This decrease of $672,628 in working capital from December 31, 2006 to March 31, 2007 was primarily a result of paying expenses associated with the lawsuit.

On March 7, 2007, the Company established a new line of credit with NWO, Oceanic’s principal shareholder, evidenced by a promissory note in the amount of $4,000,000 at an interest rate of 2% over the prime rate with repayment due on or before March 7, 2008. In addition, NWO committed to increase the line of credit to $6,000,000 under certain circumstances. As of March 31, 2007, the Company had not borrowed any funds under the line of credit.

The Company believes that the cash on hand at March 31, 2007, plus cash generated from 2007 revenues and the proceeds from the 2007 line of credit from NWO will be sufficient to fund operations beyond December 31, 2007. The Company is also evaluating other potential financing sources for long-term capital. At this time, the Company has no firm commitments for the provision of long-term capital. The status of Oceanic’s current litigation may substantially affect the need for and the ability to raise capital in the long-term.

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 three months ended March 31, 2007 and 2006.

Management Fee Revenue
(Unaudited)

	Three months ended March 31,
Company	2007				2006
Cordillera Corporation	$	73,740	32	%	$	109,515	41	%
San Miguel Valley Corporation		146,850	65	%		147,930	56	%
Harvard International Resources, Ltd.		7,950	3	%		7,500	3	%
Total management fee revenue	$	228,540			$	264,945

Except for the contract with HIRL, all labor services are provided at payroll cost plus benefits and include a 5% markup 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 three months ended March 31, 2007 decreased $36,405 or 14%, compared to the three months ended March 31, 2006. Monthly fees decreased for Cordillera by $11,925 and for San Miguel by $360, totaling a decrease in monthly revenue from those two sources of $12,285. 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 the United States. The Company did not receive any revenue from oil and gas properties in 2006 or 2005. Other than the potential recovery of damages from the pending litigation, the Company is not currently conducting any activities that would result in oil and gas revenue in 2007.

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 three months ended March 31, 2007 and 2006, the Company incurred total exploration expenses of $499,616 and $280,775, 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 March 31, 2007 and December 31, 2006, the Company had $318,109 and $309,673, 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. In September, 2005 the Australian Government Solicitor accepted the Company’s offer of $250,000 AU ($201,995 in U.S. dollars at March 31, 2007) in full and final settlement of their outstanding costs. We expect this amount to be withdrawn from this bank account in the near future. 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.

     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.

The Company filed a Second Amended Complaint with the Court on March 1, 2005. The defendants filed motions to dismiss with the Court on March 28, 2005.

On September 21, 2006, the Court issued an Order and Memorandum Opinion deciding these motions. The Court denied the motions of defendants ConocoPhillips, Inc. and ConocoPhillips Company (ConocoPhillips) with respect to Oceanic’s claims under RICO, the Robinson-Patman Act and under common law theories of intentional interference with prospective economic advantage and unfair competition. Since the Court found that Oceanic had stated legally cognizable claims against ConocoPhillips, these two defendants were ordered and did file an answer to the Second Amended Complaint on October 10, 2006. The other defendants and claims were dismissed. The two defendants filed a motion for reconsideration or in the alternative to certify the Order and Memorandum Opinion for interlocutory appeal. On November 17, 2006, the Court denied the defendants’ motions for reconsideration and interlocutory appeal. On February 5, 2007, the Court granted the defendants’ motion to transfer the case to the United States District Court for the Southern District of Texas.

On April 5, 2007, a hearing was held before the new presiding judge in the United States District Court in Houston, Texas. In advance of such hearing, ConocoPhillips filed a motion for a stay of discovery and a motion for a judgment on the pleadings. Based upon the judge’s ruling at the hearing, discovery awaits pending the judge’s determination on the ConocoPhillips’ motion for judgment on the pleadings.

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. The Company understands that pursuing this lawsuit to its fullest extent in 2007 could take substantial time by Company personnel, and the Company could incur substantial expense. Additional resources may be required in connection with this litigation. The Company believes that the financial opportunity justifies this substantial commitment of time and expense.

General and Administrative Expenses.Total general and administrative costs and expenses for the three months ended March 31, 2007 increased by $14,839 from the same period in 2006. While total expenses remained very similar between the two years, the most significant differences in expenses were:

• Salaries and employee benefits increased by approximately 3% or $10,600.

• Audit fees increased by approximately $5,000 for an additional review of the Company’s internal controls in anticipation of the application of certain sections of the Sarbanes Oxley legislation to non-accelerated filers.

Other Income and Expense.Interest income for the three months ended March 31, 2007 is $30,545 which is $27,039 higher than the amount for the same period last year. This is because the Company did not have available cash to invest early in 2006. In the quarter ending March 31, 2007, the Company earned interest on the remaining proceeds resulting from the proceeds of the 2006 rights offering.

Interest expense of $6,786 is primarily from the United Kingdom estimated tax liability, which is compounded on both static principal and the increasing accrued interest payable compared to $5,666 for the same period last year. Interest expense for the quarter ending March 31, 2006 was substantially higher because of interest accrued on the note payable to NWO in the amount of $35,916. This note and related interest were paid in full in July 2006.

Non-cash foreign exchange gains of $6,616 at March 31, 2007 versus losses of $13,906 at March 31, 2006 resulted from the fluctuations in exchange rates in 2007 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, 2006 Form 10-KSB. See the ‘Pending Litigation’ sections in Management’s Discussion and Analysis above for activity through May 7, 2007.

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
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

(b) On March 9, 2007, the Company filed a Form 8-K dated the same day to report the appointment of a new board member, Steven Duncan.

(c) On May 7, 2007, the Company filed a Form 8-K dated the same day to report the resignation of the President, Charles N. Haas, effective May 31, 2007.

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:	May 11, 2007	/s/ Charles N. Haas
		Charles N. Haas — President
Date:	May 11, 2007	/s/ Courtney Cowgill
		Courtney Cowgill — Chief Financial Officer

EXHIBIT INDEX

Exhibit Number	Name of Exhibit
31.1	Rule 13a4-14(a) Certification of Principal Executive Officer
31.2	Rule 13a4-14(a) Certification of Chief Financial Officer
32.1	Rule 13a4-14(b) Certification of Officers