Oceanic Exploration 10QSB 2004 Q3 Quarterly report (small business)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB

(Mark One)


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

		For the quarterly period ended September 30, 2004

[ ]		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 (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)


Shares outstanding at
November 9, 2004
40,688,881		Common $.0625 Par Value
Transitional Small Business Disclosure Format (Check One)		YES [ ] NO [X]

TABLE OF CONTENTS


PART I – FINANCIAL INFORMATION
ITEM 1.		FINANCIAL STATEMENTS
		Consolidated Balance Sheets (Unaudited)
		Consolidated Statements of Operations (Unaudited)
		Consolidated Statements of Cash Flows (Unaudited)
		Consolidated Statements of Stockholders’ Equity (Unaudited)
		Notes To 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 4.		EXHIBITS AND REPORTS ON FORM 8-K
		31 Certification of Principal Executive Officer and Principal Financial Officer
		32 Certification Pursuant to 18 U.S.C Section 1350
SIGNATURES
Rule 13a4-14(a) Certification of CEO & CFO
Rule 13a4-14(b) Certification of Officers

OCEANIC EXPLORATION COMPANY
AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)


	September 30,			December 31,
	2004			2003
Assets
Cash and cash equivalents, unrestricted	$	1,299,078		$	1,364,240
Accounts receivable		7,600			—
Due from affiliates		28,686			63,265
Prepaid expenses and other		7,835			32,983

Total current assets		1,343,199			1,460,488

Oil and gas property interests, full-cost method of accounting		39,000,000			39,000,000
Less accumulated amortization, depreciation, and impairment allowance		(39,000,000	)		(39,000,000	)

		—			—

Furniture, fixtures, and equipment		81,217			79,728
Less accumulated depreciation		(63,352	)		(54,520	)

		17,865			25,208
Restricted cash (note 4)		—			—

Total assets	$	1,361,064		$	1,485,696

Liabilities and Stockholders’ Equity
Accounts payable	$	134,700		$	66,265
United Kingdom taxes payable, including accrued interest		678,246			650,946
Accrued expenses		307,763			434,190

Total current liabilities		1,120,709			1,151,401
Other non-current liabilities		8,792			11,252

Total liabilities		1,129,501			1,162,653

Stockholders’ equity: (note 3)
Preferred stock, $10 par value. Authorized 600,000 shares; no shares issued		—			—
Common stock, $.0625 par value. Authorized 50,000,000 shares; 40,688,881 and 30,916,154 shares issued and outstanding, respectively		2,543,055			1,932,259
Capital in excess of par value		3,323,552			1,847,241
Retained deficit		(5,635,044	)		(3,456,457	)

Total stockholders’ equity		231,563			323,043

Commitments and contingencies (notes 2 and 4)
Total liabilities and stockholders’ equity	$	1,361,064		$	1,485,696

See accompanying notes to consolidated financial statements.

OCEANIC EXPLORATION COMPANY
AND SUBSIDIARIES

Consolidated Statements of Operations

(Unaudited)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2004			2003			2004			2003
Revenue:
Management revenue — related parties	$	208,178		$	158,056		$	624,533		$	378,296

		208,178			158,056			624,533			378,296

Costs and expenses:
Exploration expenses (note 4)		305,368			725,036			1,576,987			1,092,245
Amortization and depreciation		2,904			3,018			8,832			9,054
General and administrative		416,159			302,770			1,202,598			858,240

		724,431			1,030,824			2,788,417			1,959,539

Operating loss		(516,253	)		(872,768	)		(2,163,884	)		(1,581,243	)

Other income (expense):
Interest income		5,694			6,819			4,115			40,541
Interest and financing costs		(6,200	)		(5,949	)		(18,875	)		(17,703	)
Other		29			472			57			53

		(477	)		1,342			(14,703	)		22,891

Loss before income taxes		(516,730	)		(871,426	)		(2,178,587	)		(1,558,352	)

Income tax expense (note 5)		—			—			—			—

Net loss from continuing operations	$	(516,730	)	$	(871,426	)	$	(2,178,587	)	$	(1,558,352	)

Discontinued operations (note 6)
Loss from operations and sale of discontinued temporary employment services division		—			(374	)		—			(302,566	)

Net Loss	$	(516,730	)	$	(871,800	)	$	(2,178,587	)	$	(1,860,918	)

Basic and diluted loss per common share from continuing operations	$	(0.01	)	$	(0.03	)	$	(0.06	)	$	(0.05	)
Basic and diluted loss per common share from discontinued operations	$	—		$	—		$	—		$	(0.01	)
Basic and diluted loss per common share	$	(0.01	)	$	(0.03	)	$	(0.06	)	$	(0.06	)
Weighted average number of common shares outstanding		40,688,881			30,916,154			34,233,174			30,916,154

See accompanying notes to consolidated financial statements.

OCEANIC EXPLORATION COMPANY
AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)


	Nine Months Ended
	September 30,
	2004			2003
Cash flows from operating activities:
Net loss from continuing operations	$	(2,178,587	)	$	(1,558,352	)

Adjustments to reconcile net loss to cash used in operating activities:
Amortization and depreciation		8,832			9,054
Changes in operating assets and liabilities:
Decrease in due from affiliates and accounts receivable		26,979			184,681
Prepaid expenses and other assets		25,148			(2,570	)
Other noncurrent assets, restricted cash		—			(48,212	)
Increase (decrease) in accounts payable		68,435			(101,986	)
Increase (decrease) in United Kingdom taxes payable, including accrued interest payable		27,300			36,265
Increase (decrease) in accrued expenses		(126,427	)		522,690
Decrease in other non-current liabilities		(2,460	)		(2,137	)

Net decrease in cash from continuing operations	$	(2,150,780	)	$	(960,567	)

Cash used in investing activities:
Purchase of fixed assets		(1,489	)		—

Cash flows from financing activities:
Proceeds from rights offering, net		2,087,107			—

Proceeds from operations and sale of discontinued temporary employment division, net		—			450,050

Net decrease in cash		(65,162	)		(510,517	)

Cash at beginning of period		1,364,240			2,662,281

Cash at end of period	$	1,299,078		$	2,151,764

See accompanying notes to consolidated financial statements.

OCEANIC EXPLORATION COMPANY
AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

(Unaudited)


	September 30,			December 31,
	2004			2003
Common stock:
Balance, beginning of year	$	1,932,259		$	1,932,259
Common stock issued in connection with rights offering		610,796			—

Balance, end of period	$	2,543,055		$	1,932,259

Capital in excess of par value:
Balance, beginning of year	$	1,847,241		$	1,847,241
Additional paid in capital from rights offering net of offering costs of $62,893		1,476,311			—

Balance, end of period	$	3,323,552		$	1,847,241

Retained earnings:
Balance, beginning of year	$	(3,456,457	)	$	(741,490	)
Net loss for the nine months ended September 30, 2004 and the twelve months ended December 31, 2003, respectively		(2,178,587	)		(2,714,967	)

Balance, end of period	$	(5,635,044	)	$	(3,456,457	)


Total stockholders’ equity	$	231,563		$	323,043

See accompanying notes to consolidated financial statements.

OCEANIC EXPLORATION COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2004

(1)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The consolidated balance sheet as of December 31, 2003 that has been derived from audited financial statements, and the unaudited interim 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 with 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, 2003 Form 10-KSB.

All of the Company’s revenue is derived from management contracts with related parties.

(2)

PENDING LITIGATION

In 2003, Oceanic, after an extensive search for specialized United States counsel, retained the law firm of Quinn Emmanuel Urquhart Oliver and Hedges, LLP located in Los Angeles, California to assist in bringing potential claims relating to East Timor in the United States courts. On March 1, 2004, Oceanic and its 99% owned subsidiary, Petrotimor Companhia de Petroléos, S.A.R.L. (“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) bribery of government officials and the theft and conversion of oil and gas resources within the disputed 14.8 million-acre Timor Gap concession. See note (4) for additional information on the Timor Gap concession.

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. The Company may not recover the damages claimed in the complaint. If the Company is successful, its actual recovery will be reduced by the expenses of pursuing its claims, including legal fees, except to the extent fees and expenses are specifically awarded by the Court.

In response to the complaint, all the defendants filed motions to dismiss based upon jurisdictional and other legal grounds, and the Company requested that oral hearings be set by the Court. On June 25, 2004 and November 5, 2004, the Company and Petrotimor filed their Memorandum of Points and Authorities in opposition to the defendants’ motions. A status conference was held on October 13, 2004 at which time the Court set the date of December 14, 2004 for an oral hearing on the defendants’ motions to dismiss. The Court later continued that hearing date to January 28, 2005. Although it is impossible to predict the Court’s decision as to the motions to dismiss, the Company continues to believe that it has a persuasive case against the defendants based upon the evidence.

Pursuing this lawsuit to its fullest extent in 2004 is taking a substantial amount of time by Oceanic’s staff and substantial expense on the part of the Company. See the Liquidity and Capital Resources comments under Item 2. Oceanic management believes the financial opportunity justifies this substantial commitment of resources.

On June 7, 2004, Jack Grynberg filed a complaint against the Company and Petrotimor in the District Court for the City and County of Denver alleging breach of contract and other related claims in connection with the Timor Gap concession. The Company has filed a motion to dismiss which has yet to be ruled upon by the Court. The Company believes that Grynberg’s claims are without merit and intends to vigorously defend against them.

(3)

CAPITAL STOCK

On April 21, 2004, Oceanic filed a Registration Statement on Form SB-2 with the Securities and Exchange Commission (SEC), seeking to register 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 $.22 per share on the basis of 0.3161043 shares of common stock for each share held as of May 28, 2004. A total of 9,772,728 shares of common stock were offered to all stockholders. The Registration Statement was declared effective on June 1, 2004.

The rights to purchase common stock expired on July 1, 2004 and the stock certificates were issued in July 2004. The following subscriptions were accepted by the Company, resulting in gross proceeds of $2,150,000:

•

8,986,643 shares of common stock, at an aggregate purchase price of $1,977,061, pursuant to the basic subscription rights, and

•

786,084 shares of common stock, at an aggregate purchase price of $172,939, pursuant to the over-subscription privilege.

The proceeds of the offering will be used to 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.

(4)

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 claim 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 September 30, 2004 and December 31, 2003, the Company had $256,758 and $250,065, respectively, on deposit with ANZ Bank as collateral for the guarantees. The change in the balance is due solely to the exchange rate fluctuation between the U.S. and Australian dollars. These funds are designated as restricted cash. The Company believes that this deposit will be forfeited to pay for the defendants’ legal expenses. Accordingly, this balance has been fully reserved against those legal charges. At the present time, the Company is unable to quantify the total costs and expenses that may be assessed against it by the Court. The Company estimates that the amount should not exceed $500,000 in Australian dollars ($358,405 in U.S. dollars). Accordingly, the Company reserved an additional amount to cover the estimated full liability.

During the nine months ended September 30, 2004 and 2003, respectively, the Company incurred expenses of $1,576,987 and $1,092,245, respectively, 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, and will continue to be recorded in the same manner in 2004.

(5)

INCOME TAXES

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.

On April 2, 2003, Cordillera sold 2,547,000 shares of Oceanic stock to NWO. This sale of stock increased NWO’s ownership to 25,472,489 shares of Oceanic stock, resulting in 82.39% of total ownership in Oceanic. NWO purchased additional Oceanic stock during the rights offering, increasing its ownership to 34,265,713 shares or 84.21% of total ownership in Oceanic. Because NWO owns more than 80% of Oceanic stock, Oceanic became includable in NWO’s consolidated tax return. NWO maintains tax-sharing agreements with the same provisions applicable to all subsidiaries included in NWO’s consolidated return.

Oceanic and NWO executed that same tax-sharing agreement. Oceanic’s tax provision will be calculated using then-current statutory rates, on a stand-alone basis, and specifically estimating the book-tax differences, including the share of any difference applied ratably to all subsidiaries. It will include 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.

The foreign tax credit carryforwards of Oceanic from taxable periods prior to April 2, 2003 can only be used to reduce the taxes on the Company’s foreign source income. Because it cannot be accurately determined when Oceanic will have foreign source taxable income, a valuation allowance was provided against the entire deferred income tax asset attributable to the foreign tax credit carryforward from years prior to April 2, 2003.

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 nine months ended September 30, 2004 and 2003.

(6)

DISCONTINUED OPERATIONS — SALE OF ALLIANCE EMPLOYMENT SERVICES DIVISION

On June 30, 2003, Oceanic sold the assets comprising its Alliance Staffing Division, dba Alliance Employment Solutions (“Alliance”) to Cordillera Corporation (“Cordillera”).

Cordillera is a related company having some common elements of control with Oceanic. Mr. James N. Blue is Chairman of the Board of Directors and President of NWO. Mr. Blue is also Chairman of the Board of Directors, President and indirect beneficial owner of a majority of the common stock of Cordillera, the major stockholder of NWO. In addition, Mr. Blue serves as Chairman of the Board of Directors of Oceanic and was an “interested director” with respect to the sale of assets from Oceanic to Cordillera. Other Oceanic Board members who may be deemed to be “interested directors” due to their relations with Mr. Blue and Mr. Blue’s affiliates are Mr. Charles N. Haas and Dr. John L. Redmond.

Oceanic has accounted for the sale of the employment operations as discontinued operations under the provisions of Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” The loss on the sale included closing costs from the transaction. The consolidated financial statements at December 31, 2003 and June 30, 2003 have been restated to reflect the Alliance employment operations as a discontinued operation. There are no operations for Alliance to report in the first nine months ended September 30, 2004. Operating results of discontinued operations were as follows:

Alliance Employment Solutions
Statement of Operations
(Unaudited)


	Nine months ended
	September 30, 2003
Staffing Revenue	$	912,349
Cost of labor sold		(780,315	)

Gross Profit		132,034


	Nine months ended
	September 30, 2003
Costs and Expenses
General and administrative		(402,884	)
Amortization and depreciation		(23,239	)
Other income/expense		523

		(425,600	)

Net Loss	$	(293,566	)

(7)

INFORMATION CONCERNING BUSINESS SEGMENTS

As a result of the disposition of the employment operations, the Company’s continuing operations consist of one operating segment. Accordingly, no segment information has been presented for the nine months ended September 30, 2004 and 2003.


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 volatility and level of oil and natural gas prices, production rates and reserve replacement, reserve estimates, drilling and operating risks, competition, litigation, environmental matters, the potential impact of government regulations, 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 consolidated financial statements and notes thereto as of December 31, 2003 and September 30, 2004 and 2003 and 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 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 collectibility of accounts receivable, the realizability of goodwill, and income taxes. 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 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.

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.

Rights Offering.On April 21, 2004, Oceanic filed a Registration Statement on Form SB-2 with the Securities and Exchange Commission (SEC), seeking to register 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 $.22 per share on the basis of 0.3161043 shares of common stock for each share held as of May 28, 2004. A total of 9,772,728 shares of common stock was offered to all stockholders. The Registration Statement was declared effective on June 1, 2004 and the offering expired on July 1, 2004. A total of $2,150,000 was collected through the rights offering.

The proceeds from the rights offering are being used to 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.

Promissory Note. On March 9, 2004, Oceanic established a line of credit with NWO to fund operations prior to the completion of the rights offering. As of September 30, 2004, no amounts were outstanding under the line of credit. The line of credit provided for interest 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 was evidenced by an unsecured promissory note that was due upon the earlier of the following: (i) obtaining alternative financing in an amount not less than $2,000,000, or (ii) resolution of the East Timor suit to the benefit of Oceanic for an amount not less than $2,000,000, or (iii) March 8, 2005. No cash was borrowed under this line of credit and it expired on July 1 at the conclusion of the rights offering.

Cash Flow.Despite the receipt of the proceeds of the rights offering during the nine months ended September 30, 2004, cash used for operating activities resulted in a net decrease of available cash of $65,612. A total of $2,150,000 in gross proceeds was received from the rights offering. Cash used in continuing operations for the nine months ended September 30, 2004 and 2003 was $2,150,780 and $960,567, respectively. Ongoing legal and professional fees associated with the litigation regarding the East Timor disputed concession have required substantial expenditures. During the nine months ended September 30, 2004 and 2003, Oceanic paid expenses of $1,437,168 and $671,712, respectively, related to legal and commercial activities in Australia and the Timor Gap area. An additional $139,819 of expenses were accrued and remained unpaid as of September 30, 2004. These costs are included in exploration expenses resulting in an increase over what exploration expenses have been historically.

Until a final judgment is obtained or settlement of the suit occurs, exploration expenses will continue to be high and will consume a majority of our cash resources.

Oceanic had $1,299,078 in cash and cash equivalents at September 30, 2004 compared with $1,364,240 in cash and cash equivalents at December 31, 2003. The Company had working capital of $222,490 at September 30, 2004 compared to working capital of $309,087 at December 31, 2003. This drop in working capital was a result of the payment of exploration expenses as discussed above, offset by proceeds of the rights offering. The Company believes that the cash on hand at September 30, 2004 plus cash generated from operations during the year and proceeds generated from the rights offering will be sufficient to fund operations beyond March 31, 2005.

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 substantially all of Oceanic’s total revenue for the nine months ended September 30, 2004 and September 30, 2003, as restated for the disposal of Alliance.

Management Fee Revenue
(Unaudited)


	Nine months ended September 30,
	2004				2003
San Miguel Valley Corporation	$	334,419	54	%	$	189,000	50	%
Cordillera Corporation		267,613	43	%		189,000	50	%
Points Four World Travel, Inc.		0	0	%		296	0	%
Harvard International Resources, Ltd.		22,500	3	%		0	0	%

Total management fee revenue	$	624,533			$	378,296

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

The Company’s consolidated financial statements and related notes have been presented to reflect the disposition of the Company’s Alliance Staffing Division and discontinuance of its operations as discontinued operations for all periods. As such, management’s discussion and analysis excludes discontinued operations and focuses on the results of the Company’s continuing operation and the legal suit surrounding the East Timor concession.

Revenue.Management fee revenue for the nine months ended September 30, 2004 increased 65% compared to the nine months ended September 30, 2003. The increase is due to an overall increase in fees charged to Cordillera Corporation and San Miguel Valley Corporation plus the new contract with Harvard International Resources Ltd. 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.

Exploration Expenses.The Company continues to have ongoing legal and professional fees associated with the litigation in the US District Court and the pursuit of commercial opportunities in East Timor. During the nine months ended September 30, 2004 and 2003, the Company incurred expenses of $1,576,987 and $1,092,245, respectively. These related primarily to legal and professional fees associated with the litigation in the US court and the pursuit of commercial opportunities in East Timor. These expenses have been recorded as exploration expenses in the past, and will continue to be recorded as exploration expenses in 2004.

In 1974, Petrotimor was granted an exclusive offshore concession by Portugal to explore for and develop oil and gas in an approximately 14.8 million-acre area between East Timor and Australia in an area known as the “Timor Gap.” At that time Portugal had administrative control over East Timor. On January 5, 1976, following Indonesia’s unlawful invasion and occupation of East Timor, Petrotimor applied for and obtained on April 14, 1976 Portugal’s consent to a suspension of performance under the concession agreement based upon force majeure. This force majeure status remained in effect until at least October 25, 1999.

On December 11, 1989, Australia and Indonesia, ignoring Petrotimor’s rights under its concession from Portugal, signed the Timor Gap Treaty, purporting to create a joint zone of cooperation whereby these two countries could control the exploration and development of hydrocarbons in an area over which both countries claimed rights. A portion of this area, designated as Zone A, falls largely within the area where Petrotimor holds rights under its concession agreement with Portugal.

The treaty created a Joint Authority that purported to grant and enter into production sharing contracts with various companies who have subsequently carried out exploration activities in the joint zone of cooperation. According to the 2003 Annual Report of ConocoPhillips Petroleum Company, ConocoPhillips and other participants in the production sharing contracts discovered gas and gas condensate in the Timor Gap area that is claimed by the Company. Their drilling in 1995 confirmed that the discovery extended across two production sharing contract areas designated as the Bayu-Undan field. ConocoPhillips and other participants are developing this field in two phases. As reported by ConocoPhillips in their

December 31, 2003 Form 10-K, the first phase is a gas-recycle project, where condensate and natural gas liquids will be separated and removed and the dry gas re-injected into the reservoir. This phase began production in February 2004, and is expected to average a net rate of 23,000 barrels of liquids per day from proven reserves. The second phase would involve the production, export and sale of the natural gas from the field, which would be transported by pipeline to Australia for domestic markets or liquefied for shipment elsewhere. Based on an article in Platts Oilgram News dated February 17, 2004, the second phase of the project is scheduled to start production in 2006.

According to the 2000 Annual Report of Petroz N.L., which was acquired by ConocoPhillips in December 2000, there are proven reserves of 297 million barrels of condensate and natural gas liquids and 2.7 trillion cubic feet of gas in the Bayu-Undan field alone, with another 107 million barrels and .7 trillion cubic feet possible.

A portion of the area known as Greater Sunrise, which includes the Sunrise, Sunset and Troubadour areas, is also within the Timor Gap area claimed by Petrotimor and has substantial potential gas reserves. Woodside Energy Limited estimated reserves of 9.16 trillion cubic feet of gas in the Greater Sunrise Fields in November 2000. However, there can be no assurance that such amounts can be produced or recovered at an economical price. Oceanic estimates that approximately twenty percent (20%) of these reserves are located on its Timor Gap concession.

On March 6, 2003 the Australian Parliament ratified the Timor Sea Treaty governing oil and gas projects in the Joint Development Area between Australia and East Timor. In addition, an Australian senior official and Timorese ministers in Dili initialed the Sunrise International Unitization Agreement (“IUA”) and a related memorandum of understanding on fiscal issues. Published reports indicate that the IUA states that Australia and East Timor have overlapping maritime claims in the Timor Sea, and that the current boundaries are not permanent. It is uncertain when, if ever, these overlapping maritime claims will be resolved.

Commercial Opportunity in East Timor.The Company submitted an application for an Expansion of Seabed Concession to the transitional government of East Timor in October 2001 requesting that Petrotimor’s 1974 concession area be expanded to include the additional maritime areas within the properly determined seabed delimitation of East Timor. The Company believes that East Timor is entitled, under international law, to exercise sovereign jurisdiction over its seabed and to have an Exclusive Economic Zone as codified in the 1982 United Nations Convention on the Law of the Sea. Oceanic believes that by so doing, East Timor could acquire jurisdiction over hydrocarbon reserves containing approximately 12 trillion cubic feet of natural gas and associated condensate based upon the Petroz N. L. and Woodside information discussed above.

Neither the transitional government, nor the new East Timor government that took effect on May 20, 2002 has recognized the Company’s concession in East Timor. The Company submitted an application for an Expansion of Seabed Concession to the transitional government in East Timor and received no formal response acknowledging the application. An article carried on the Dow Jones Newswires on September 26, 2002 quotes a “senior East Timor government official” stating that the government does not recognize this concession. Oceanic has not been officially advised of the status of the application or if the new East Timor government is even considering it. A formal response may never be issued, or the Company could receive an unfavorable response. Unless there is a change in the current government in East Timor, it is unlikely that the Company will pursue the application further.

If the government were to recognize the concession and grant the application, it would expand the 1974 Petrotimor concession to correspond with the offshore area over which East Timor is entitled to claim sovereign rights under international law. The Company sponsored a seminar in East Timor in 2001 for the purpose of explaining appropriate maritime boundaries under applicable international law and the resulting benefits to East Timor if such boundaries are enforced.

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, other than those relating to misuse of confidential information. The joint decision determined that, although the claims appeared arguable, the 1906 decision of the High Court inPotter v The Broken Hill Proprietary Company Pty Ltd(1906) 3 CLR 479 bound the Federal Court to uphold the principal that an Australian Court could not determine litigation where a relevant issue was the validity of an act of a foreign sovereign government, in this case said to be the grant by Portugal of the concession to Petrotimor. On May 6, 2003, the Federal Court also ruled that it lacked jurisdiction relating to claims of misuse of confidential information.

The High Court of Australia previously suggested (as late as March 2002) that the Court, in an appropriate case, could reconsider the decision inPotter. Accordingly, 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. The Federal Court’s decisions to dismiss the underlying actions without prejudice were therefore allowed to stand.

Pending Litigation.In 2003, Oceanic, after an extensive search for specialized United States counsel, retained the law firm of Quinn Emmanuel Urquhart Oliver and Hedges, LLP located in Los Angeles, California to assist in bringing potential claims relating to East Timor in the United States courts. 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) bribery of government officials and the theft and conversion of oil and gas resources within the disputed 14.8 million-acre Timor Gap concession.

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. The Company may not recover the damages claimed in the complaint. If the Company is successful, the expenses of pursuing its claims, including legal fees, will reduce its actual recovery except to the extent the court specifically awards fees and expenses.

General and Administrative Expenses.Total general and administrative costs and expenses for the nine months ended September 30, 2004 increased by $344,358 from the same period of the prior year. Part of this increase can be attributed to adding another employee plus general salary increases. Legal and professional fees increased because of the line of credit with NWO, compliance with Sarbanes Oxley legislation, development of an Ethics and Stock Trading policy and additional public filings associated with the litigation. The Company has also incurred substantial legal expenses in the defense of the lawsuit filed by Grynberg. An additional $4,911 was paid out for European Union VAT taxes and for Texas ad valorem property taxes.

Other Income and Expense.Other income and expense for the nine months ended September 30, 2004 is $37,594 lower than the amount for the same period last year. Interest income decreased from the prior year, primarily due to lower cash balances available for investment. Interest expense increased only because of unfavorable foreign currency rates with the UK. The category “Other” consists of foreign exchange rate gains and losses. The increase is a result of fluctuating exchange rates between the US dollar, the British pound, the Euro and the Australian dollar.

ITEM 3. CONTROLS AND PROCEDURES

Within the 90 days prior to the date of this report, the Company’s management, including the President and the Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon the evaluation, the Company’s President and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them

to material information required to be included in the Company’s periodic SEC filings. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the date the Company’s management carried out its evaluation.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Legal proceeding developments in the first quarter of 2004 were reported in the December 31, 2003 Form 10-KSB. See Pending Litigation sections above for activity through November 9, 2004.

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		Rule 13a4-14(a) Certification of Chief Executive Officer and Chief Financial Officer

32		Rule 13a4-14(b) Certification of Officers

(b)

On July 9, 2004, the Company filed a Form 8-K dated July 1 to report the results from the rights offering.

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: November 9, 2004		/s/ Charles N. Haas

		Charles N. Haas — President

Date: November 9, 2004		/s/ Courtney Cowgill

		Courtney Cowgill — Chief Financial Officer

EXHIBIT INDEX


Exhibit Number		Name of Exhibit
31		Rule 13a4-14(a) Certification of Chief Executive Officer and Chief Financial Officer

32		Rule 13a4-14(b) Certifications of Officers

Oceanic Exploration (OCEX) Inactive 10QSB2004 Q3 Quarterly report (small business)

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